13.05.2016 Public-Private Partnership[PPP] Valalmawia MCS Joint Secretary, UD&PA/GAD
Why PPP….? • For economic growth and development, we need a lot of investments. Government could not provide enough funds for investments in public goods (infrastructures & services) - Private Sector has a lot of capital for investments. If a system can be developed whereby private players can invest in public goods, they can help create investments, and also earn profits. • Thus, to develop infrastructures for development, the government needs to work out a system where private players can come in towards creation of public infrastructures which are traditionally provided by the government.
There are various services which could not sufficiently be managed by government agencies due to various inherent institutional weaknesses. But such services are required to be provided to the citizens. - Private Sector has expertise, managerial capability and institutional strengths to manage various services and utilities efficiently. If a framework is developed whereby private players can come in, it will result in good management of services, better services, etc. • It is with the realization of these advantages, and the possibility of leveraging private capitals and management expertise, that the public authorities have now introduced the concept of Public-Private Partnership
India spends just 6 percent of its GDP on infrastructure, compared to China’s 20 percent.12 To achieve its targeted GDP growth rates, the country will need to invest approximately $250 billion in infrastructure over the next five years. • “The importance of infrastructure for rapid economic development cannot be overstated,” explains P. Chidambaram, then India’s Finance Minister. (Budget Speech 2005-06) • “The most glaring deficit in India is the infrastructure deficit.” • The resultant effect is retardation of economic growth
Let us look at PPP … • Definitions • Essence of PPP • Parties in PPP • Financial & Economic Viability • Models of PPP • PPP in Infrastructures • PPP in Services • PPP in India • PPP Policy of Mizoram • PPP & Future Economy?
PPP-Definitions 1) Definition 1: A simple, though not universally acknowledged definition of PPP refers to arrangements in which the private sector supplies infrastructure assets and services traditionally provided by governments (in collaboration with the government). 2) Definition 2: The term “Public–Private Partnership” describes a range of possible relationships among public and private entities in the context of infrastructure and other services. 3) Definition 3: PPP is a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project.
Standard & Poor’s Definition – A PPP is any medium – long term relationship between the public and private sectors, involving the sharing of risks and rewards of multi-sector skills, expertise and finance to deliver desired policy outcomes. • European Commission’ Definition – A PPP is a partnership between the public sector and the private sector for the purpose of delivering a project or service traditionally provided by the public sector. It recognizes both sides have certain advantages and by allowing each to do what is does best, public services and infrastructure can be provided in the most efficient manner.
Thus – PPP means an arrangement between government (or statutory entity or government owned entity) on one side and a private sector entity on the other, for the provision of - public assets and/or - related services for public benefit, through investments being made by and/or management undertaken by the private sector entity for a specified period of time, where - there is a substantial risk sharing with the private sector and - the private sector receives performance linked payments that conform (or are benchmarked) to specified, pre-determined and measurable performance standards.
Essence of PPP • PPP Arrangement addresses the financing requirement for infrastructure and services • PPP are long term contracts of the public authority with private entities • It lays down a level playing field for participation of private sector for investments under regulatory arm of the Government • It utilizes Expertise in private sector for building up of infrastructures, operation & maintenance • It serves the dual purpose of- • Creating public infrastructures on the initiative of the government • Business interest of the private sector protected
A strong PPP allocates the Tasks, Obligations, and Risks among the public and private partners in an optimal way. • PPP presents a framework – while engaging private sector, acknowledge the structure and role of government for ensuring that social obligations are met and successful sector reforms and public investments achieved • Effective PPP recognises that the public and private sectors each have certain advantages, relative to the other, in performing specific tasks. Risks and Tasks are allocated to the party that can best handle them.
PPP represent partnership in action with huge stakes for both the public sector and private sector agencies to succeed collectively. PPP is not about finance alone, but are also about improving the quality and efficiency of public services. • The interests of stakeholders taken into consideration and Cost-Benefit duly taken care of • Collection of optimal user fees ensure long run sustainability • Collection of user fees ensure provision of quality services to the users • It results in re-allocation of roles, incentives and accountability • It is a catalyst for broader reforms • It results in overall economic growth
An economy requires huge investment for building up of infrastructures for economic development, and for various other activities. The government alone cannot undertake investments, nor does it have sufficient funds for investments. • The government does not have the expertise to take up some complex projects, and for management of specialised assets and services. The expertise in private sector could be pulled in for such purposes through PPP. • Role of government in economic activities have become a facilitator and regulator. PPP arrangement provides a role for investment by private sector through an arrangement with the government.
PPP may apply in both Service Sector and Infrastructure Sector • PPP creates the rooms for expansion of activities with participation of private parties in areas that hitherto are taken up solely by the Government • PPP is the preferred mode of providing infrastructure and services in modern economy • ‘Value for Money’ gives higher satisfaction to tax payers’ • PPP have enabled the government to engage private sector in various activities related to infrastructures and services. • The financial viability (bankability) of projects attracts private sectors for investments
Processes in PPP Projects[PPP Toolkit, Govt. of India] • Phase 1 – Identification • Phase 2 - Full feasibility • Phase 3 – Procurement • Phase 4 - Operation
Phase 1 – Identification • Phase 1 takes place before entry to the PPP development pipeline. Its purpose is to identify and test projects so that the quality of the PPP pipeline is increased. At the completion of this Phase the Sponsoring Agency will have identified a project that is suitable for further development as a PPP. This project then enters the PPP pipeline, which starts in Phase 2, where it undergoes more detailed study and preparation. • Responsibility for Phase 1 will be with the Sponsoring Authority (eg ministry(s) for Central-level projects, sponsoring department(s), Urban Local Body, or other statutory or public sector corporate entity as appropriate to the case). Support might be provided by dedicated PPP agencies, such as a PPP Cell or Project Development Agency, and the Sponsor may wish to engage external advisors.
Strategic planning to identify and prioritise infrastructure service needs and identify a set of potential projects. • Project pre-feasibility analysis to assess specific needs and consider service delivery options, and to test if an identified project is feasible and worth developing further. • PPP suitability checks of the identified project to test suitability for development as a PPP. • The first Readiness Check, based on the results and outputs of the suitability and mode tools and the pre-feasibility study. An internal clearance should take place within the Sponsoring Agency before projects are allowed to enter the PPP pipeline. If this Readiness Check is favourable the project is given Internal Clearance to move to Phase 2.
Phase 2 - Full feasibility • Planning and preparing for PPP project management • Carrying out a detailed feasibility study including PPP due diligence of the project, including: • Updating the Financial Viability Indicator model and using it to reassess the impact of changing parts of the project design and verify the feasibility study model results • Using the VFM Indicator Tool to test the likelihood of achieving Value for Money, based on the results of the feasibility study and the experience and knowledge of the analytical team • Deciding on the best-suited procurement method for the project • Preparing first drafts of the key project documents • Carrying out Readiness Check, to check that the project is ready to proceed to the clearance stage • Applying for In-principle Clearance from the appropriate Appraisal / Clearance Authority. If In-principle Clearance is granted then the project is able to proceed to PPP procurement.
Phase 3 – Procurement • Important activities that should be carried out to prepare for procurement are described • The EOI and the EOI process are described • The qualifying process, covering the RFQ and shortlisting, is described • Final drafts of key bidding documents are discussed, including the contents of the RFP • The requirements and process for Readiness check 3 and the application for Final Approval are outlined • The bidding process, covering RFP and bid evaluation, is described • Finally, contract finalisation and award are covered.
Phase 4 – Operation (Project management & Monitoring) • Phase 4 begins once the project reaches technical closure with the signing of the Concession Agreement. The life of the PPP during Phase 4 involves: • Implementation and operation of the project by the concessionaire and • Performance monitoring and contract enforcement by the Sponsor. • When the contract is signed the Sponsor goes from preparing the PPP to managing its implementation and ongoing operation according to the terms set out in the Concession Agreement. The Sponsor remains engaged with the PPP in this new role until the end of the contract’s life. • Contract management and monitoring is an especially important part of a PPP. • The responsibilities and obligations for contract management will be specified in advance in the Concession Agreement. • Responsibility for Phase 4 will typically be with a Contract Management Team within the Sponsor.
Parties in PPP Arrangement • The public partners in a PPP are government entities, including ministries, departments, municipalities, or state-owned enterprises/ agencies. • The private partners can be local or international and may include businesses or investors with technical or financial expertise relevant to the projects or services. • The Government’s contribution includes capital for investment (gap funding), transfer of assets and other commitments that support the partnership. Besides the government provides social responsibility, environmental awareness, local knowledge and ability to mobilise political support. • Private sector’s role includes the required capital for investments and the expertise in commerce, management, operations and innovations to run the business efficiently.
Economic Viability • Economic Viability Projects must be economically feasible and able to secure financing – whether from public, commercial, or concessional sources – while having a positive impact on society and the environment. • Financial Viability Financial viability can be defined as a business' ability to generate sufficient income to meet its operating expenses and financialobligations, as well as providing the potential for future growth. In short, a financially viable project is a bankable project. • A PPP Project needs to be economically and financially viable.
Within the scarcity of resources, the key consideration would be to address the scarcity of resources by pulling resources from the private agencies for building infrastructure, or for meeting O&M Costs of services • A project should contribute towards laying down economic infrastructure or in the case of service, economic service should be rendered
Financial Viability • Financial viability may be termed as the long term financial returns that can be generated in the formation of infrastructure or service if the same is taken up on business considerations • The total surplus generated by the project over its entire life has to be averaged to find out yearly return. This yearly return, when calculated on the total investment needed for the project, tells us about the Return on Investment (RoI). This ratio tells us the surplus-generating capacity of the investment. One must know how much RoI a viable project must generate. This is an important question that needs to be answered to know the financial viability. The simple rule to assess the viability is that the RoI must be greater than the cost of investment.
Financial viability depends to a great extent on the level of fees/tariff levied from the users • The level of fees/tariff is determined by the market forces and availability of substitutes • With the optimum level of fees/services, many projects/services are financially viable • The financial viability again depends on the possibility of providing services at reasonable costs • The readiness to pay user fees needs to be duly considered and carefully projected • In the arrangement where the government is a party, the prevailing political atmosphere needs to be reckoned with • Assessment of revenues needs to be realistic and take into account all relevant issues
Financial Viability Gap • A project or service is said to have a viability gap if there is a mismatch in the costs vis-à-vis the long term profits generated by a project or service • Financial viability gap is a relevant consideration when the project or service is economically justified, but is not profitable enough to justify the project/service on financial considerations • In such cases, intervention of the government is justified to make the project/service financially viable • The extent of viability gap is a relevant issue in taking up such projects or services
Types and Models of PPP • Infrastructures - Concessions - Build-operate-transfer (BOT) and similar arrangements (BOO, BOOT, etc.) - Design-Build-Operate (DBO) • Services - Management/Service Contracts
PPP in Infrastructures • Public sector traditionally provides public infrastructures • It is very difficult to provide all public infrastructures by the public authority alone, due to scarcity of resources, and due to complexities of various projects. • PPP helps in development of infrastructures. Such forms of project development include ‘Concession, BOT, DBO, etc.’ • The huge gap in investment could partly be met through leveraging PPP mode • PPP provides a useful instrument for infrastructure development due to competitiveness of pricing and value-for-money considerations.
Concessions – A Concessiongives a concessionaire the long term right to use all utility assets conferred on the concessionaire, including responsibility for operations and some investment. Asset ownership remains with the authority and the authority is typically responsible for replacement of larger assets. Assets revert to the authority at the end of the concession period, including assets purchased by the concessionaire. In a concession the concessionaire typically obtains most of its revenues directly from the consumer and so it has a direct relationship with the consumer. A concession covers an entire infrastructure system (so may include the concessionaire taking over existing assets as well as building and operating new assets). The concessionaire will pay a concession fee to the authority which will usually be ring-fenced and put towards asset replacement and expansion.
In essence, the concession arrangement is that the private sector (concessionaire) is responsible for full delivery of the services including operation & maintenance, collection, management, construction and rehabilitation of the system • Assets are owned by the government (including the concession period) • The government establish standards and ensure that the concessionaire meet them • The concessionaire collects tariffs from the users as determined in the concession contract • Thus, the role of the government shifts from provider of service to regulator
BOT and Similar Arrangements (BOT, BOO, DBFO, etc.) A Build Operate Transfer (BOT) Project is typically used to develop a discrete asset rather than a whole network and is generally entirely new or greenfield in nature (although refurbishment may be involved). In a BOT Project the project company or operator generally obtains its revenues through a fee charged to the utility/ government rather than tariffs charged to consumers.
BOT is a specialised nature of concession. Hence, distinction between Concession and BOT is quite narrow, and mainly in its usage of the terms. • In BOT, the private partner provides the capital required for investment • The private partner owns the assets, sufficient enough to recover investment costs through user charges • The private party collects user charges • The public sector agrees to purchase a minimum level of output produced by the facility • At the end of the contract, the ownership of asset reverts back to the government.
BOOT • Build-Own-Operate-Transfer (BOOT) is a form of project financing, wherein a private entity receives a concession from the private or public sector to finance, design, construct, and operate a facility stated in the concession contract. This enables the project proponent to recover its investment, operating and maintenance expenses in the project. Due to the long-term nature of the arrangement, the fees are usually raised during the concession period. The rate of increase is often tied to a combination of internal and external variables, allowing the proponent to reach a satisfactory internal rate of return for its investment. (www.wikipedia.com)
Design-Build-Operate (DBO) In DBO Projectthe public sector owns and finances the construction of new assets. The private sector designs, builds and operates the assets to meet certain agreed outputs. The documentation for a DBO is typically simpler than a BOT or Concession as there are no financing documents and will typically consist of a turnkey construction contract plus an operating contract, or a section added to the turnkey contract covering operations. The Operator is taking no or minimal financing risk on the capital and will typically be paid a sum for the design-build of the plant, payable in instalments on completion of construction milestones, and then an operating fee for the operating period. The operator is responsible for the design and the construction as well as operations.
PPP in Services • Various activities of the public sector can be entrusted to private authorities under agreed agreement • Private sector takes up management of assetes and provision of services – user fees are regulated through the mechanism which form part of the agreement. • Private sector is paid either by the public authority, and or, through user fees. • Public sector is relieved of the job of managing the services, and at the same time, the public sector authority with the same level of expenditure, can provide better quality services
Management Contract - • It is the arrangement whereby the government contracts out operation & maintenance of public service (utility, hospital, port, water supply etc.) • The required infrastructure already created and the private parties provide working capital for daily maintenance • The Government retains the assets, continue major capital investments and sets tariff • Private parties is responsible for management, and is paid for the costs of labour and operating costs and incentives • Potential Strengths- • Operational gains from private sector management • Assets remain with the government and continue major investments • Contracts are easy to develop
PPP in India • Realizing the huge potential offered by PPP, the Government of India have taken up PPP on a big scale • PPP Policy was drawn up and PPP Policy Guidelines was drawn up in 2005. • PPP-Viability Gap Funding Guidelines was also drawn up and notified in January, 2006. • A dedicated website, pppinindia.com was developed for dissemination of information on PPP and knowledge sharing • Various PPP Documents like Model RFP, Model Concession Agreement, etc. were drawn up and are in place. • Technical Assistance from ADB to provide handholding support to 12 States in India. • Such States now have PPP Policies and Institutional frameworks. • PPP have now started showing a sizeable share in investments in infrastructures and services.
Given the enormity of the investment requirements and the limited availability of public resources for investment in physical infrastructure, it is imperative to explore avenues for increasing investment in infrastructure through a combination of public investment, Public Private Partnerships (PPPs) and occasionally, exclusive private investment wherever feasible. The use of PPP an as instrument of procurement for creation of infrastructure assets and delivery of public services has been recognized globally. Apart from bridging the deficit in financing of public projects, PPPs also brings new and cost effective technology for creation of infrastructure assets, managerial efficiency, competency for operation and maintenance of the created assets and the contractual accountability on the private party to ensure timely and quality infrastructure service to the end users. • Source : www.pppinindia.gov.in
VGF Scheme • About the Scheme - • To make infrastructure projects financially viable in order to attract private capital • Revolving fund within Ministry of Finance • Specified process for obtaining VGF • Project gets the fund during implementation • In the form of grant - subject to a maximum of 40% of Total Project Cost – with Central Government grant not exceeding 20% and State Government component not exceeding a further 20% • Utilization - monitored by Ministry of Finance
Criteria for availing Grant under VGF- • PPP projects only • Project implementation by Private Sector Company • Private Sector Company to be selected through open competitive bidding • Bid criteria: Amount of VGF required by Private Sector Company • Project based on contract or concession agreement • Service to be rendered on payment at a pre-determined tariff or user charge
PPP in States of India • Many States in India already have PPP Framework • They have PPP & Infrastructure Policy • They Established PPP Cell, with institutional framework like PPP Apex Authority, etc. • 19 States in India have been shown as having PPP system in place (www.pppinindia.com) • Govt. of India availed Technical Assistance from Asian Development Bank for assisting 12 States for setting up PPP Framework during 2009-2016 • Many States have now taken up projects on PPP mode. Convergence of projects of Central Government with part PPP has become a common feature of project implementation.
PPP and Mizoram • The Mizoram New Economic Development Policy clearly recognises the importance of private sector in infrastructure development. Para 39 provides - “However, the economic reality of modern times clearly shows that the task of developing infrastructural facilities can no longer be left to the Government alone. It is incumbent upon policy makers to come up with strategies and mechanisms to encourage private sector participation in all aspects of infrastructure development. Such mechanisms should provide practical ways of turning tangible projects through the provision of adequate finance, as far as possible, by adopting a business approach to infrastructure services provision. …. The win-win situation for both the Government and private service providers ensures elimination of corruption to a significant degree also, when transactions are made transparent.
Para 40: The economic rationale for private investment in infrastructure has to be grounded in the expectation that private sector suppliers, operating within a competitive framework, will reduce costs to the economy and thus promote efficiency. It is important to distinguish between here between costs to the economy and costs to the consumer. Public sector supply of infrastructure services may appear cheaper for the consumer if the service is provided at highly subsidized rates or, as in the case of roads, even free of charge. However, low user charges in these cases are less a reflection of economic efficiency than of hidden subsidies, usually in the form of tolerance of large losses. Consumers pay for these subsidies either directly in the form of higher taxes or indirectly in the form of other government expenditure forgone, but these costs are not always recognized. … it is logical to devise infrastructure strategies which encourage private investment in infrastructure.
Mizoram PPP Policy • The Government of Mizoram has now a PPP Policy. It was approved by the Council of Ministers in April, 2016 • Nodal Department is “Planning & Programme Implementation Department” • It was notified by the Government on 20.04.2016 • A PPP Cell is to be created which will take up various activities in implementation of PPP Policy in the State. • The Policy aims at facilitating and promoting role of PPP in the creation of new infrastructure assets and for the management of existing assets through PPP. • The Policy lays down a broad framework for implementation of PPP in the State.
Objectives- • Leverage resources of State and Central Governments to invite private sector investments in provision of infrastructures and services • Protection of the interests of users and sercuring Value-for-Money • Setting up efficient administrative mechanism for selection of private developers • Prepare a shelf of projects to be offered for PPP • To provide Viability Gap Funding • Scope: It covers various infrastructure sectors like Roads & Bridges, Inland Water Transport, etc. • Service Delivery through PPP: This PPP Policy aims at service delivery through PPP within a framework to be developed under this Policy.
PPP Apex Authority • Chief Minister, Mizoram - Chairman • Minister, Planning - Vice Chairman • Minister, Finance - Member • Minister, Law & Judicial - Member • Minister, Industries - Member • Minister, PWD - Member • Minister of Line Deptt. - Member • Chief Secretary - Member Secretary • Apex Committee will grant in-principle approval for all projects proposed to be developed in PPP mode. In all PPP projects having investment exceeds Rs. 100 crore, the Apex Authority shall accord investment approval and selection of developer.
Empowered Committee for PPP • Chief Secretary - Chairman • Secretary, Planning - Member Secretary • Finance Commissioner - Member • Secretary, PWD - Member • Secretary, Industries - Member • Secretary, Law & Judicial - Member • Secretary of Line Deptt. - Member k • Empowered Committee on PPP shall be the Nodal Agency to achieve the policy goals and co-ordinate with various authorities of the State and Central Governments to facilitate private sector investments in infrastructure and provision of various services on PPP mode.
The Policy recognises the following contracts: • For existing infrastructures • Management of assets by private operators • Partial dis-investiture of the undertaking • For new infrastructures: • Service Contracts • Management Contracts • Lease Contracts • Concessions • BOT • Joint Ventures • Mizoram Infrastructure Development Fund is to be established. Initial corpus fund of Rs. 20.00 crore to be provided by Planning Department.
Tasks Ahead • We need to develop a Model Concession Agreement for different sectors of Infrastructures (Roads, Water Supplies, Power, Urban Sector, etc.) and various Services • We need to develop Model RFP (Request for Proposals) • We need to work out a Viability Gap Funding Scheme/Guidelines for projects which require such support • We need to appoint Transaction Adviser (s). Role of the transaction advisor: “The transaction advisor does all the detailed financial, technical and legal work required to prepare the Project Sponsor to implement the proposed project. The transaction advisor will complete a feasibility study to a standard that will enable the institution to establish the commercial attractiveness and bankability of the project. During the procurement phase, the transaction advisor will advise the Project Sponsor on optimum risk allocation and the resultant contract structure including preparation of all necessary documentation and requisite approvals. (pppinindia.com) • A PPP Cell is to be established in Planning Department, as provided in our Policy. We also need to institutionalize PPP in Departments. Nodal Officers to be mapped, and provide basic trainings.
Some Initiatives • Even though the State Government has not formally started implementation of PPP in infrastructures and services, there are various activities which have semblance of PPP nature; • Handing over of management of Teirei SHP • Handing over of management of Mizoram House at Vellore to Presbyterian Church • PPP in Solid Waste Management in Aizawl City, and arrangement of Composting of Waste with Vermizo • Construction of Mizoram House in Mumbai, in partnership with M/s U.S. Roofs, and similar other proposals • Outsourcing Management of Mizoram House at Chanakyapuri • Outsourcing of Security at Mizoram House, Rajarhat, Kolkata • Proposal for vertical extension of Millenium Centre through PPP • Even though these activities are not executed through PPP Agreements, they can all clubbed together as initiatives taken up with private players. • There are many such other activities that may be considered for PPP.
Conclusion • PPP activity is yet to make a meaningful dent in Government of Mizoram • Absence of policy on Infrastructure or Service Delivery in the State Government had been one major hindrance. Other institutional delivery mechanism are yet to be put in place. • In view of the sparse population and difficult geographical setting, it may not be possible to take up many of the projects on PPP Mode. However, we need to explore avenues. Urban Sector projects, Power Sector, IT Sector, etc. could qualify for PPP Projects. • The announcement of the new PPP Policy may kick-start the process in this direction. • Let us all think of projects and services where the concept of PPP could be fit in so that we may attain the objectives of leveraging private resources and expertise.