Indian Securities Market
Chapter
12
10
PUBLIC-PRIVATE
PARTNERSHIP (PPP) IN
INFRASTRUCTURE
DEVELOPMENT
Learning Contents
/Public-Private Partnership (PPP) in Infrastructure Development in
India : Introduction
/ Public-Private Partnership : Meaning
Definitions of Public-Private Partnership
Features or Characteristics of PPPProjects
Types of Public-Private Projects
PUBLIC-PRIVATE PARTNERSHIP (PPP) IN INFRASTRUCTURE
DEVELOPMENT IN INDIA :INTRODUCTION
Teation and maintenance of high quality infrastructure in country needs huge capital. Huge
capital investment is needed to develop and improve the infrastructure and to meet the challenges of
new era of
sole globalisation. After independence, the growth and development of infrastructure was the
Sectorresponsibility
realised that public
alone cannot ofmeetthethegovernment. inputs offortime,
required fundWithandtheotherpassage government
the growth of infrastructural facilities.
The
Government had started a PPP cell under the Department of Economic Affairs in year 2004 to
Public-Private Partnership (PPP) in
Page 10.2 | Infrastructure
promote the Public-Private Partnership. The main objective of this cell was tto remove the
the way of PPP in developing infrastructure like framing supportive policies and to
Deobsveltoapcmleesnt in
private sector to participate in infrastructure development. enocourage the
PUBLIC-PRIVATE PARTNERSHIP : MEANING
Public-Private Partnership refers to alegal agreement between public and private
that provides the delivery of physical infrastructure and
services to the society in sector entity
duration. PPP projects develop a high quality physical infrastructure projects like
specific time
ports, airports, metro and other sectors and in service
roads, highways,
sectors, health, education, child
skill development, sanitation etc. All PPP projects improve the quality of life for the citizen. The
continued development of national economy depends upon the availability of qualitative, sustained
development,
infrastructure and basic services. In PPP projects, both public and private sectors have a
role in offering services to most of the projects with regard to strategy formulation and significant
implementation.
DEFINITIONS OF PUBLIC-PRIVATE PARTNERSHIP
"PPP is apartnership between a public sector entity (sponsoring authority) and aprivate sector
entity for the creation and/or management of infrastructure for public purpose for aspecified
period of time on commercial terms and in which the private partrner has been procured through a
transparent and open procurement system." -Government of India
"Public Private Partnership is a cooperative venture between public and private sector, built on
the expertise of each partner that best meets clearly defined public needs through common
-World Bank
resources, shared risks and rewards."
"PPP is a mode of implementing government programmes or schemes in partnership with the
private sector. It provides an opportunity for private sector participation in financing, designing,
construction, operation and maintenance of public sector programme and projects."
-Planning Commission of India
FEATURES OR CHARACTERISTICS OF PUBLIC-PRIVATE
PARTNERSHIP PR0JECTS
facilitation of
deals with the
1. long-term
Service Oriented : The public-private partnership approach
public services. It involves construction of roads for transportation, ans
electricity and water supply and street lights for lighting
PPP [Link]
2. Whole Life Costing : The project cost is calculated for its whole life period in
expenst
includes initial capital expenditure, repair and maintenance expenses, modification
and eventual disposition cost.
Publc-Private Partnership(PPP) in Infrastructure Development Page 10.3
Service Oriented
Whole Life Costing
Involvement of Both Public Private Sectors
Innovation
Participation
Features or Risk Allocation
Characteristics
of PPP Projects
Long Term Relationship
Resource Sharing
Levy of User Charges
Mega Projects
Different Types
3. Involvement of both Public and Private Sectors : Both public and private sectors
participate in financing the PPP projects.
4. Innovation :PPP approach initiates the implications of creativity and latest technology to
the infrastructure projects with the involvement of private firms.
5. Participants : Two parties are involved in the public-private partnership e.g. the
government and the respective private company.
6. Risk Allocation :Infrastructure projects involve high risk. PPP assists the
government to
share this risk with private company. It helps to reduce the risk burden of government.
7. Long Term Relationship : PPP projects are generally for long period. The
government
authority and private business corporation remain associated for a specifictime period.
8. Resource Sharing :The government and private firm share their capital,
financial, design
and other resources for the successful accomplished of infrastructural projects.
9. Levy of User Charges : Theprivate partner is authorized to levy toll tax
on ultimate users of
the projects under PPP projects. The rate of user charges are regulated by the government.
10. Mega Projects : PPP approach is mainly used for mega infrastructural projects like
roads,
airports, ports, irrigation, etc.
. Different Types :Public private partnership projects can be of different types. The share of
involvement of private firm may differ from one project to other. The different forms of PPP
projects are : BOOT, BOT,BOLT, BOOST etc.
Public-Private Partnership (PPP) in
Page 10.4| Infrastructure
TYPES OF PUBLICPRIVATE PARTNERSHIP
MODEL
Development
Build-Operate
Transfer (BOT)
Build Own
Operate Transfer
Design Build
(BOOT)
Finance
Build Own
Lease Transfer
Design Build (BOLT)
Finance Maintain) Types of PPP
(DBFM) Models
Build Own
Operate (BOO)
Design Build
Finance Operate
(DBFO)
DesignBuild
(DB)
Design Build
Operate
1. Build Operate Transfer (BOT) :BOT is a popular model of public private partnership. In
this model,private firm builds, operates and maintains the project for the contract period as
per the performance standards set by the governments and then return the facility to
gOvernment as per agreed term. The private firm may be permitted to charge user fee from
the beneficiaries of the project to recover the project cost and to earn reasonable proit. The
toll road construction projects are illustrated under this conventional model of PPP.
The following parties are involved in BOTprojects.
(a) Government : The government is the initiator of the infrastructure project and deciaes
that BOT model is appropriate to meet its requirements. Government provides
normally support for the project in form of provision of land or changed law.
(b) Concessionaire : Concessionaire is the project sponsors who act as concessionaue
create a special purpose entity which is capitalized through their financial
contributions.
(c) Other Lenders : The special purpose entity might have other lenders such as national
or regional development banks.
PublPiiate
Partnership(PPP)in Infrastructure Development Page 10.5|
Contractor: Contractor is entrusted the task of construction of facility. Contractor is
(d) appointedby concessionaire.
Operator:Operator is alsoin the service of concessionaire. He manages the operational
(e) facility.
stageofthe
ThenationalIhighway projects contracted by NHAI under PPP mode is a major example for
theBOTModel.
Build Own Operate Transfer (BOOT) : Under this model, the private company builds,
2. OWnsandl operates the project for aspecified period of time. During the concession period,
of the project remains with the private firm. After the expiry of this
the ownership
concession period, the ownership, operation, management and maintenance are
transferredto the public sector. The private firm is allowed to charge toll tax from the
ultimate users for a specified time period. This type of PPP is very popular for the
construction of projects like airports, ports and dams etc. It is a project delivery model that
pan be used for large projects developed. The private partner accepts most of the risk in this
typee of project. It is often seen as a way to develop alarge public infrastructure project with
privatefunding.
BuildOwn Lease Transfer (BOLT) :BOLT is apublic private partnership project model in
which a private firm designs, finances and builds a facility on leased public land. The
private firm operates the facility for the duration of the lease and then transfers ownership
to the publicorganisation. The government grants the right to finance and build a project
which is then leased back to the government for an agreed term and fee. The facility is
operated by government. The government will pay lease rent in the form of monthly or
annual payments to the private partner.
4. Build Own Operate (BOO) : The government grants the right to finance, design, build,
operate and maintain a project to aprivate firm. The private party is not required to transfer
the facility back to the government.
5. Design-Build (DB) :Under this agreement, a private party is contracted by the government
to design and build the facility based on the requirements performed by the government.
Government will state the responsibilities along with agreement in order to perform the
operation and the maintenance of the facility.
6. Design Build Operate (DBO) : Asingle contract is awarded under DB0 toa private party
which designs, builds and operates the public facility, but public retains legalownership.
7. Design Build Finance Operate (DBFO) : In this model of PPP, the private firm is
responsible for planning the project layout, facility construction, arranging the required
captal and operating it till the grant period. The facility operations revenue meets the cost
incurred and generates profit to the company.
8. Design Build Finance maintain (DBFM): The mode is also known as management
contract. The public sector entity remains associated with the project from the beginning to
the end. The process starts right from designing of the layout to construction, funding and
Public-Private Partnership(PPP))in
Infrastructure
sharespevprloopmfietn and
Page10.6|
facility. The firm either charges a fixed sum or
lifetime maintenance of the process of management of project
italso involved in the decision making
Finance (DBF) : In this type of model, the private sector party
9. Design Build
project to design the layout,
designing and construction.
build the facility and meet the capital cost involved
in undertakessuch a
PARTNERSHIP
BENEFITS OF PUBLIC-PRIVATE
Arrangement of Capital for Mega Projects
Cut Downs Tax
Project Completion Efficiency
Project Feasibility
Superior Quality Standard
Excellent Infrastructure Solutions
Benefits or Better Return on Investment
Advantages of
Public Private
Partnership Transfer of Risk
Reduces Budget Deficits
Eficient Use of Government Investment
Early Completion Bonus
Better Service Delivery
Promotes Efficiency
Better Maintenance
Faster Development
1. Arangement of Capital for Mega Projects : Huge amount of capital is required for the
mega infrastructure projects. Government alone cannot make the arrangement of fund tor
all types of mega projects. Infrastructure is very weak in India. There is a big gap between
PPartnership(PPP).in Infrastructure Development Page 10.7l
PublePrivate
demandand supply of infrastructural facilities like energy, roads, transport, irrigation
the assist the government in overcoming the problem of shortage of
on. PPP projects
and so
funds. These
mega infrastrucutral projects can be started and completed successful with the
partnership.
helpofpublicprivate
Cut Downs
Tax : The cost efficient infrastructure projects facilitate the government to save
burden.
2.
[Link] helpsto reduce the tax rates and
Completion Efficiency : When the standard time for completing a project is
3. Project
estimated,its execution and fulfillment become more competent.
Feasibility:: Public-Private partnership ensures the project feasibility. The chances of
Project
reduces remarkably as the risk involvement and practical implementation
failure ofproject analysed.
well
oftheprojectare
Superior Quality Standard::Public private partnership approach initiates benchmarking for
5. ensuring the same during thelife cycle of project.
desiredquality ofthe project and
Infrastrucutre Solutions : Excellent infrastructure solutions are possible as the
6. Excellent function in collaboration with the government, where each of
proficient private companies
them contributes their best.
Better Return on Investment : PPP approach ensres better return on investment. The
-
long run.
reasonably high in the
return on investment in PPP infrastructure projects may be
mega infrastructural projects like
8. Transfer of Risk: Huge risks are involved in the
associated risk along with
construction of dams, bridge etc. The government hands over the
experience and knowledge in the
the project to the private companies who have relevant
area.
to reduce the budget
9. Reduces Budget Deficits : Public private partnership models help
PPP
deficits. The private firms determine the cost and performs the capital budgeting in the
approach to avoid any shortage of funds in future.
capital and finance
10. Efficient use of Government Investment : The government can use its
for socio-economic welfare activities to uplift the standard of living of people as the private
firms invest their furnds in the infrastructure projects.
11. Early Completion Bonus : The private firms are encouraged through bonus to improve
efficiency. It helps to complete the project before standard time.
12. Better Service Delivery : Better services can be provided to the ultimate consumer with PPP
approach. People can access the good quality infrastructure due to faster growth of PPP
projects.
13. Promotes Efficiency: Public private partnership promotes efficiency in the smooth
functioning of infrastructure projects. It ensures the use of technical expertise, managerial
expertise and competitive spirit of private sector. It results in overall improvement in the
efficiency of infrastructure project.
Public-Private Partnership(PPP) in Infrastructure
Page10.8|
14. Better Maintenance : Under public
private partnership approach, the private firm
maintenance of the project for a particular period
Development
responsible for the repair and
ensures better maintenance of
projects. [Link]
infrastructure projects have been undertaken with
15. Faster Development : Many ports, airports,
approach in the areas of road, bridge, metro, such irrigation, energy and so PPP
developmental projects. All
Newjob opportunities have been
in the process of economicgrowth.
generated by
these resulon.t
SHORTCOMINGS/LIMITATIONS OF PUBLIC-PRIVATE
PARTNERSHIP
Dependency on
Private Sector
Varying Profitability
Heavy User Charges
Lack of Responsibility
Shortcomings
or Limitation Ignorance of Quality
of PPP
Complex Procedure
Political Obstacle
Long Gestation Period
Opposition of Public
Corruption Practices
1. Dependency on Private Sector :The most significant shortcoming of PPP approach is tnat
the government majorly relies on the private sector for project undertaking and
accomplishment.
2. Varying Profitability : The complexity, competition level, associated risk, nature, size and
impact of the project determines its profitability.
(PPP)in,Infrastructure Development Page 10.9
Partnership
PublcPrivate
are charged from
User Charges : In most of the cases, heavy toll tax or user charge
Heavy
3. under PPP approach.
consumers
he ultimate shared by both public and private sectors in PPP
Responsibility: Responsibility is not taken
4.
Lack of
start blame each otherin case of failure of project. Responsibility is
projects. 1hey
failure
anyone incaseof
by
is ignored by private partyin PPP projects. Many times
Ignorance of Quality : The quality reduces the life span of
5. material is used in the construction work. It
inferior quality increases the risk of loss.,
infrastructural work and long list
Procedure :It is very much complex to enter into PPP projects. There is a and
6.
Complex
clearances from different government departments
and
of getting approvals, permits delays. Excessive delay leads to increase the cost.
agencies. It results in unnecessary partrnership due to different
Obstacle : There is political obstacle in public-private
7 Political
political parties. Some parties favour it, some are against it.
jdeology of toward public to provide
the responsibility of government
8. Opposition of Public : It is transfers this responsibility to the private
sector in PPP
infrastructure facilities. Government promote social
Private sector only works to maximise their profit and does not
model.
welfare.
levels.
Corruption Practices :Corruption practices are promoted by PPP projects at different The
9. sanction of projects.
The private party may bribesthe government officials to get
working of PPP projects.
political interference also negatively influence the
Gestation Period :Generally the preparation of individual PPP projects may take upto
10. Long with its attendant uncertainties are a
big
along
2-3 years. This long gestation period
dampener for private party enthusiasm.
PUBLIC-PRIVATE PARTNERSHIP PROCESS
Planning
Financing
Public-Private
Maintaining Partnership in
Infrastructure
Designing
Operating Building
Public-Private Partnership(PPP) in Infrastructure
Pago 10.1o|
1. Planning : The government
initiates the basic plan of the new
private party providing the best offer to
select a suitable
infrastructural
undertake the project.
Defacivleitlioepsment
and
analyse the whole life costing of
2. Financing : The private firm properly recovered from the
the government project
accordingly finances the projects. This cost can be
later and
then prepare the final layout of the
on.
3. Designing : The experts and engineers
facility. Both public and private parties provide their inputs for
the purpose.
4. Building : The private firm engages on experienced contractor and the labourers to infrastructure
completes efficiently within the
construct the infrastucture. The project estimated time
period.
infrastructure facility is opened for publicto use after
5. Operating : The constructed proper
testing and quality check.
6. Maintaining : Maintenance cost is borne by the private firm which has undertaken the
project if required.
GOVERNMENT INITIATIVES TO PROMOTE PPP
PPP Appraisal Committee Viability Gap Funding Scheme
India Infrastructure Finance
Company Limited
Indian Infrastructure Project
Development Fund
Government
Initiatives to PPP Cell
Promote PPP
Web Based Tool Kits
Technical Training and Guidance
Model Concession Agreements
Empowered Committee
1. PPP Appraisal Committee : The Government has set up the Public Private Partnership
PPP
Appraisal Committee (PPPAC). The committee stands responsible for the appraisal of
projects in the central sector.
Private Partnership (PPP) in
Publlc Infrastructure Development
Viability Gap Funding Scheme: The Page 10.11
Scheme for PPP projects. It Government created a Viability Gap
offers financial has
infrastructure projects support in the form of grants toFunding
private sector partner. commercial y viable. Capital subsidy is
offered by governmentmaketo
3. India Infrastructure Finance
Infrastructure Finance CompanyCompany
LimitedLimited:
with
The Government has
the mandate to grant established India
financing infrastructure projects.
Infrastructure
long-term debt for
4. Indian Project Development Fund : The
Project Development Fund' (IPDF) scheme for India
towards development of PPP projects.
has been
IPDF introduced to finance the Infrastructure
cost incurred
expenses. These expenses supports up to 75% of the
include consultant fee, feasibility project development
studies, projecttdocumerntation, technical
services and So studies, environment impact
on.
5. Public Private Partnership Cell : PPP cell is set up
matters concerned with policy, by the
Government. It is responsible for
schemes, programmes and capacity
6
Web Based Tool Kits :
Web-based tool kits are available to
building.
infrastructure PPPs in India. An improve decision-making for
key information on the status of infrastructure projects database was developed to provide
7
infrastructure projects.
Techaical Training and Guidance :PPP cell also offers
to guide the private technical guidance and consultancy
entrepreneurs.
project documentation, entering into The training helps in conducting feasibility study,
8. Model Concession
technological collaboration etc.
Agreements : Model
highways, transport, urban and others to Concession Agreements have been set up for
make sponsors and officials more
with PPP projects. comfortable
9. Empowered Committee : Government has been set up an
speeding up the approval mechanism and process for PPP empowered committee for
projects.
/FACTORS RESPONSIBLE FOR FAILURE OF PPP PROJECTS
Factors Responsible for Failure. of PPP Projects
Design Risk
Lack of Clarity
of Responsibility
Delays in Land Approvals Problems
Acquisition External Linkages Financing Risks
L. Delays in Land Acquisition :Land is not available to be used within required time due to
claims of owner on the land.
Page 10.12| Public-Private Partnership (PPP) in
Infrastructure
2. External Linkages : Adequate and timely connectivity to the project site is not
has a negativeimpact on the commencement of i construction and overall
Daevvealiolpambleen.t
pace of project. It
3. Financing Risks : Sufficiernt finance is not available at reasonable interest rate
in market conditions and credit availability. due to
4. Approvals Problems: Risk of delays in approvals causing delay in construction as
change
construction schedule. Such delays in getting approvals may lead to cost
overruns. per the
5. Lack of Clarity of Responsibility : There may be lack of clarity of
public sector and private sector. responsibility betwe n
6. Design Risk : The proposed design will be unable to meet the
requirements resulting in extra costs for modification and redesign. performance and service
QUESTIONS
Questions Carry 5 marks
1. Define Public Private Partnership.
2. "BOT" model of development has played wonderful role in development of infrastructure
in the country. Explain in brief. (PU2015 Nov.)
3. "Public Private Partnership (PPP) has really proved as a boom for the growth of various
economicsectors in India." Justify this statement. (PU2017 Nov.)
Questions Carry 15 marks
1. Explain the various models for public-private partnership for the development of
infrastructure in the country. (PU 2016 Nov)
2. What doyou mean by PPP? Explain its main benefits and shortcomings. (PU2018 Nov.)
3. What initiatives have been taken by Government for promoting public private partnership
in infrastructure projects? Also explain factors responsible for failure of PPP projects.
(PU2019 Nov)
4. Define PPP, Explain the different models of PPP approach in infrastructure.
5. What is meant by Public Private Partnership Model ? Explain the following variants o
Concessional contacts:
) Built Operate Transfer (BOT)
(ii) Built Own Lease Transfer (BOLT) (PU2021 Nov)