[Economy] Public Private Partnership (PPP): Definition, Benefits, Pre requisites and Demerits

Infrastructure is the lifeline of an economy and the major sectors that comprise of infrastructure are transportation, power, energy and communication.

So when we say good infrastructure we mean :

Efficient public transport – that links all cities of the nation.  Ensures safe, affordable and quick
commute; Availability of adequate power and energy for all industrial and domestic use etc.

For building an excellent infrastructure , we require:
a. Massive investment
b. Managerial efficiency
c. Technological competency etc

And the above mixture could be rightfully gained by encouraging both public and private players work mutually. The ppp model was started in oecd  countries. Reliance on ppp rose in 1990s and UK had the maximum no of  projects under this. Ppp have been include in the legislation of UK, USA and industrial policies of France, Italy, Netherlands etc.

PPP’s can be distinguished on the basis of the stages in which partnership can be entered into:
1. BOT: Build, operate, transfer
2. BOO: Build, own, operate
3. BOOT: Build, own, operate and transfer
4. DBFO: Design, build, finance and operate

Looking at the benefits,  India opened the doors for private participation in infrastructure in the early 1990s, as part of a wider economic liberalisation effort. 
But ppp has to be clearly defined because just by saying it is  a collaboration of public and private there is a lot of ambiguity. Ppps need to be given relaxations and financial support in order to make it prosper. Thus a definition is vital.

The official definition of PPP can be broken into the following essential parts :
1. Arrangement of govt entity with Private Sector Entity  to provide
2. Public asset or service for public benefit through
3. Investments being made by and/or management undertaken by the private sector entity (this  allows projects of both with investment and without investment)
4. Operations or management for a specified period (this means the agreement with the pvt entity comes to an end after a period)
5. Substantial risk sharing with the private sector (this differentiates it from mere outsourcing contracts)
6. Performance linked payments
7. Conformance to performance standards.

How does the Govt extend support ?
  •  The Cabinet Committee on Economic Affairs (CCEA) in its meeting of 27th October, 2005 approved the procedure for approval of public private partnership (PPP) projects, a Public Private Partnership Approval Committee (PPPAC) was set up.
  • The Committee would be serviced by the Department of Economic Affairs, who has set-up a special cell for servicing such proposals
  • But many a times providing public services become commercially unviable and unattractive to pvt players thus The Scheme for Financial Support to Public Private Partnerships (PPPs) in Infrastructure. (Viability Gap Funding Scheme) of the Government of India provides financial support in the form of  grants, one time or deferred, to infrastructure projects undertaken through public private partnerships with a view to make them commercially viable. 
  • Then there is ‘India Infrastructure Project Development Fund’ (IIPDF), have been notified The IIPDF would assist ordinarily up to 75% of the project development expenses. On successful completion of the bidding process, the project development expenditure would be recovered from the successful bidder.
  • The total Viability Gap Funding under this scheme will not exceed twenty percent of the Total Project Cost; provided that the Government or statutory entity that owns the project may, if it so decides, provide additional grants out of its budget, but not exceeding a further twenty percent of the Total Project Cost.
VGF under this scheme will normally be in the form of a capital grant at the stage of project construction.

Implementation comes with Constraints:
  • Financial liability of the projects. ( our financial markets cannot undertake such long term equity)
  • Hindrances during the life of a project due to bottlenecks in procedures.
  • Diversified projects require skilled man power in various diverse fields
  • Lack of credibility of bankable infrastructure projects used for financing the private sector.
  • Managing all the stakeholders of the projects
Despite constraints we have world-class facilities and ambience that greet us when we go through airports at Delhi, Mumbai, Bangalore or Hyderabad.  Several goods and services are now being delivered more cost-effectively, thanks to better infrastructure networks or gateways, having a substantial degree of private participation.

Pre requisites
In order to provide to come with successful projects several initiatives have been undertaken by Government of India:

1. It created  PPP framework in order to eradicate the above mentioned constraints.
2. Various foreign as well as private investments by waving off charges are encouraged.
3. Framing of standardized contractual documents for laying down the terminologies related to risks, liabilities and performance standards have been devised.
4. Approval schemes for PPPs in the central sector has been streamlined through Public private partnership appraisal committee or PPPAC.
5. A website has been launched for the purpose of virtual PPP market serves as an online database for PPP projects.

The below given diagram depicts the workflow of PPP in India.
1. The left hand side blocks refer to the process of the ppp projects which start with project identification, moves to screening report, getting an approval from the authority, scanning internal and external environment, developing a contractual agreement and the bidding process. At the end of bidding a pvt entity is selected and the agreement signed. Thereafter execution of project and financing.
2. The right hand side indicated the involvement of ministry of finance at different stages of the process.

It is not just a success story everywhere, there are grave failures as such :
1. The Vadodara-Halol Toll project suffered due to mistaken traffic projections, due to which proposed government incentives were stripped off from the project, thereby raising both policy and revenue risks for the involved parties.
2. The Delhi-Gurgaon expressway was a victim of mammoth red-tapism where the lack of coordination of more than 15 civic bodies whose approvals were necessary came out in the open in the shabbiest manner possible.
3. In the same lines, the Karnataka Urban Water Supply Improvements project suffered due to continued lack of proper coordination between three bodies associated with the project. 
4. The Delhi Airport Metro Express was shutdown for 6 months when its operator Reliance Infrastructure pointed out cracks that had developed on its metro pillar structures. Then followed the typical blame game with the involved parties blaming each other for the faults. So much so that Reliance even went on to claim damages for losses incurred due to the closure of the project. Delhi Metro authorities also claimed that they had had to ‘reject’ an offer from Reliance to quit the whole project due to “financial non-viability

Demerits/ challenges:
The reasons for above failures can be stated as red tapism, corruption, non transparent processes etc.
Apart from these there are certain challenges that the ministry feels it is facing:
1. Our ppps are basically built for those who can pay for the services. Ex; airports, national highways but our ppps have to become responsive and successful in sectors such as education, health, skill development, rural infrastructure and job creation, mass housing and so on.
2. Deteriorating infrastructure after service. Our urban services such as roads are in poor condition due to increasing population and usage.

1 comment:

  1. Corruption can be seen everywhere especially when it comes to creating project for the infrastructure industry where bidding is present. Even the paper writing service such as top paper writing service are not safe from corruption, people will always find ways to sustain their bad deeds.