Public Private Partnership

Definition of PPP-

According to widely accepted definition PPP “is a partnership between the public and private sector for the purpose of delivering a project or service traditionally provided by the public sector. PPP recognises that both the public sector and the private sector have certain advantages relative to the other in the performance of specific tasks. By allowing each sector to do what it does best, public services and infrastructure can be provided in the most economically efficient manner.” We should not get confused by sophisticated definitions and keep in mind that PPP is in fact just a specific type of public procurement, primarily used for large infrastructure projects.

United Nations defines public private partnerships as

“innovative methods used by the public sector to contract with the private sector who bring their capital and their ability to deliver projects on time and to budget, while the public sector retains the responsibility to provide these services to the public in a way that benefits the public and delivers economic development and improvement in the quality of life”.

According to the UN, Public Private Partnerships which aim at financing, designing, implementing and operating public sector facilities and services will have three main characteristics, namely,

a) Long term (sometimes up to 30 years) service provisions;

b) The transfer of risks to the private sector; and,

c) Different forms of long-term contracts drawn up between legal entities and public authorities.

World Bank describes PPPs as

“long-term arrangements in which the governments purchases services under a contract either directly or by subsidizing supplies to consumers. In other PPPs, the government bears substantial risks - for example, by guaranteeing revenue or returns, - on projects that sell directly to consumers”.

Features of PPP-

1      Cooperative and contractual relationships-

PPPs represent cooperation between government and private sector. PPP are not same as privatization in that both public sponsors and private providers function as partners throughout the project development and delivery, and often in operation and maintenance. The most successful partnership arrangements draw on the relative strengths of both the public and private sectors in order to establish complimentary relationships between them.

PPP arrangements are long term in nature, typically extending over a 15 to 30 years period. This is a factor which helps to establish productive and lasting relations between the public and private sector.  Demonstrating and enduring public sector commitment to the provision of quality services to consumers, under terms and conditions agreeable to both government and private sector, PPP are used to develop and operate public utilities and infrastructure. The collaborative ventures are built around the expertise and capacity of the projects partners and are based on a contractual agreement, which ensures appropriate and mutually agreed allocation of resources, risk and returns.

2.      Shared responsibilities-

While the specific responsibilities for delivery will vary according to each project, a key feature of PPP that these responsibilities will be shared between the public body and private consortium. In some initiatives, this might require the private sector co. to play a significant role in all aspects of delivery of service, while in others its function may be more limited. However, unlike instances of privatization, the overall role of government remains unchanged in a PPP; it is the government which remains ultimately accountable and responsible for the provision of high quality services that meet the public need.

3.      Method of procurement-

PPP are instruments for government bodies to deliver desired outcomes to the public sector , by making use of private sector capital to finance the necessary assets or infra. The private co. is rewarded for its investment in the form of either service charges from public body, revenues from the project or a combination of both. This renders affordable those projects that might not otherwise would have been feasible because the public body was unwilling or unable to borrow the requisite capital. PPP allows the private sector to play a greater role in the planning, finance, design, operation and maintenance of public infra and services than under traditional public procurement models. moreover , where traditional procurement models begin with the question of what assets the public body has as its disposal and how these might be  used to deliver the required services, PPP arrangements plays the emphasis on the desired service or outcome as identified by the public organization and how the private sector might help to make this happen.

4.      Risk factor-

A key element of PPP is their potential to deliver public projects and services in a more economically efficient manner. At the beginning of the relationship potential risks associated with the projects are identified and each party adopts those which it is best equipped to manage. The public sector can therefore transfer appropriate risk to the private partner, who has the necessary skills and experience to manage them. For example, overall risk to the public sector can be reduced by transferring those associated with design, construction and operation to the private partner. The incentive for the private body comes in the form of higher rates of return related to high standards of performance.

5.      Flexible ownership-

PPPs enable flexible arrangements between public and private bodies, where the public body may or may not retain ownership of the project or facility that is produced. In some cases, the private organization may be contracted only to construct facilities or supply equipment, leaving the public body as owners, operators and maintainers of the service. Alternatively, the public sector may decide it is more cost effective not to own directly and operate assets, but to purchase these instead from the private entity. Services may be purchased for use by the government itself, as an input to provide another service, or on behalf of the end user.

PPP models –

Broadly, PPPs could be categorized into Institutionalized PPPs and Contractual PPPs. Institutional PPPs are usually a joint venture (JV) between public and private sector stakeholders to carry out PPP projects by sharing the risks and to provide public services on a long term basis. The Noida Toll Bridge Company (NTBC) and the Bangalore International Airport Limited (BIAL) are examples of this kind. On the other hand, contractual PPPs fall under the concession model, in which case a facility is given by the public sector unit concerned to a private sector partner which usually designs, constructs and operates the PPP project for a given period of time. In some cases, the operation of a facility may be contracted out to another private party. Under both the categories the users pay for the facility availed and such charges accrue to the JV or the private sector partner.

The usually adopted PPP models are-

Build, Operate and Transfer (BOT) –

Under this category, the private partner is responsible to design, build, operate (during the contracted period) and transfer back the facility to the public sector. The private sector partner is expected to bring the finance for the project and take the responsibility to construct and maintain it. The public sector will either pay a rent for using the facility or allow it to collect revenue from the users. The national highway projects contracted out by NHAI under PPP mode is an example.

Lease, Operate and Transfer (LOT) –

As the name indicates, under this type of PPPs, a facility which already exists and is under operation, is entrusted to the private sector partner for efficient operation, subject to the terms and conditions decided by mutual agreement. The contract will be for a given but sufficiently long period and the asset will be transferred back to the government at the end of the contract. Leasing a school building or a hospital to the private sector along with the staff and all facilities by entrusting the management and control, subject to pre-determined conditions could come under this category.

Build, Own, Operate (BOO) or Build, Own, Operate and Transfer (BOOT) –

This is a variation of the BOT model, except that the ownership of the newly built facility will rest with the private party during the period of contract. This will result in the transfer of most of the risks related to planning, design, construction and operation of the project to the private partner. The public sector partner will however contract to ‘purchase’ the goods and services produced by the project on mutually agreed terms and conditions. In the latter case (BOOT), however, the facility / project built under PPP will be transferred back to the government department or agency at the end of the contract period, generally at the residual value and after the private partner recovers its investment and reasonable return agreed to as per the contract.

Design, Build, Finance and Operate (DBFO) or Design, Build, Finance, Operate and Maintain (DBFOM)-

These are other variations of PPP and as the nomenclatures highlight, the private party assumes the entire responsibility for the design, construct, finance, and operate or operate and maintain the project for the period of concession. These are also referred to as “Concessions”. The private participant to the project will recover its investment and return on investments (ROI) through the concessions granted or through annuity payments etc. It may be noted that most of the project risks related to the design, financing and construction would stand transferred to the private partner. The public sector may provide guarantees to financing agencies, help with the acquisition of land and assist to obtain statutory and environmental clearances and approvals and also assure a reasonable return as per established norms or industry practice etc., throughout the period of concession.

Operations Concession - This is a generic term, used to clarify the essential features of PPP arrangements. The PPP agreements which authorize the private partner to recover its investments and expected returns on investments through concessions granted for a certain period, computed on the basis of demand projections and growth, and are called operations concession (OC). In these cases, the public sector (department or agency) which is responsible to provide the service to the public and collect revenue by way of user charges, toll, tariff etc., assigns its legal or statutory right to the private partner in return for the latter undertaking the responsibility to implement the project and maintain the required quality. The concession may be by collecting tolls and user charges or by the public sector making periodical payments of annuities or monthly / quarterly/ half-yearly charges on certain assumed basis, like shadow tolls etc.

Joint Ventures -  In a PPP arrangement commonly followed in our country (such as for airport development), the private sector body is encouraged to form a joint venture company (JVC) along with the participating public sector agency with the latter holding only minority shares. The private sector body will be responsible for the design; construction and management of the operations targeted for the PPP and will also bring in most of the investment requirements. The public sector partner’s contribution will be by way of fixed assets at a pre-determined value, whether it is land, buildings or facilities and /or it may contribute to the shareholding capital. It may also provide assurances and guarantees required by the private partner to raise funds and to ensure smooth construction and operation. The public service for which the joint venture is established will be provided by the entity on certain pre-set conditions and subject to the required quality parameters and specifications. Examples are international airports (Hyderabad and Bangalore), ports etc.