1. INTRODUCTION:
1.1 Definition: The Government of India defines a Public Private
Partnership as "a partnership between a public sector entity (sponsoring
authority) and a private sector entity (a legal entity in which 51% or more of
equity is with the private partner/s) for the creation and/or management of
infrastructure for public purpose for a specified period of time (concession
period) on commercial terms and in which the private partner has been procured
through a transparent and open procurement system.
As per India PPP policy, Public Private
Partnership means an arrangement between a government / statutory entity /
government owned entity on one side and a private sector entity on the other,
for the provision of public assets and/or public services, through investments
being made and/or management being undertaken by the private sector entity, for
a specified period of time, where there is well defined allocation of risk
between the private sector and the public entity and the private entity
receives performance linked payments that conform (or are benchmarked) to
specified and pre-determined performance standards, measurable by the public
entity or its representative. In PPP, the cost of using the service is borne
exclusively by the users of the service and not by the taxpayer
1.2 Meaning - The expression “Public Private
Partnership” concept is of recent origin. It has a significant meaning. Public
Private Partnership conveys a definite idea and philosophy. The word “Public”
has been defined in many dictionaries. According to Oxford Dictionary, “Public”
means “concerning the pubic as a whole”, “relating to public”, “belonging to
public”, etc. Different dictionaries have given varied meanings. In other
words, in the context of Public Private Partnership, the expression “Public”
implies relating to or pertaining to the Government of a particular country.
The reason being that the Government of a country represents the public and it
deals with public money.
The expression
“Private” means reverse of Public, somebody who is not public. That “somebody”
may be any entity. It may be an individual, a partnership firm, a company, a
body corporate, an industry, etc. Such a Pubic entity could be from within the
country or from outside the country. It could be any body so long as it is not
associated, related or dependent on the Government. In the subsequent
discussion, the said “somebody” may be referred to as a “Private entity”. Thus,
a Public Private Partnership projects means a project which have been envisaged
or has been undertaken for implementation by the Government of a country in
collaboration with private entity, domestic or international. Public Private
Partnership is more common or popular in developing countries for various
reasons; nevertheless it is also not unknown in the developed countries.
1.3 Area of Relationship - There may be numerous reasons
leading to the formation of a Partnership between a Government of a country and
a private entity. The Governments of any countries have to undertake numerous
projects for the development, progress and prosperity of the country and for
the improvement of standards of living of its citizens. Such projects are in
various different segments of the society. Generally, they are in the field of
infrastructure and industrial segments. Such segments may include, but are not
limited to highways, roads, land, air and water transportation, electricity
generation and transmission, power plants (whether thermal, hydro or biomass
based), sea and air ports, passenger and cargo shipping, supply of drinking and
industrial water, etc. and in technical and sophisticated industries. The
implementation of such projects requires considerably huge investment and
technical knowhow.
1.4 Need for Such Relationship – The need for such a
relationship varies from country to country. It also depends on various
internal and external factors. Generally, the absence of adequate resources
with the Government of the country for the completion of a project of public
importance is the prime reason for such Public Private Partnership. To put it
negatively, the availability of funds necessary for the completion of a project
of public utility or the capacity of the private entities to arrange funds and
technical now how for a project of such a nature and magnitude is the main
reason for a Public Private Partnership. However, other reasons, such as, technical
capacity, availability of necessary manpower and equipment, capacity to
organize and execute a project effectively and efficiently is not insignificant
reasons.
1.5 Global Interest in PPP - The role of Public Private
Partnership projects has increased considerably in the recent years. The
relationship of Public Private Partnership is generally created by an agreement
between the parties. In Public Private Partnership, generally and subject to
the agreement between the parties, the government provides certain facilities
only which are within the administrative capacity or domain of the government,
such as, land, concessions from certain taxes and duties, exemption from
applicability of certain industrial laws, etc. In some cases, depending on the nature
of the project, funds to a limited extent may also be provided by the
government. However, the ultimate responsibility for the arrangement of
necessary funds required for the implementation of the projects and for the
implementation of the project remains that of the Private entity. Further, the
Private entity also arranges for the construction of the project. In some cases
based on the mutual agreement, the Project entity also undertakes to run or
operate the project for a certain period of time. The earnings received from
the project may either be shared between the Government and the Private entity
or the Private party may exclusively retain them for the agreed period. Some
agreements require the transfer of such projects to the government after a
certain period of time or on the recovery of the investment made by the private
entity.
The major
application of Public Private Partnership projects has been in the areas of
heavy investment with slow or delayed regeneration of capital. For development
of such projects in the country, the governments of developing countries have
two options.
(a)
The first
option is that they may go for borrowing money from international lending
institutions. However, the cost of such borrowing is quite high these days. Further,
the projects in which the
(b) Borrowed capital is proposed to
be invested generally do not generate money so fast. Therefore, the borrowing
governments have to divert funds from other sources in order to be able to pay
the interest and repay the loan amount. In this process, the burden falls on
other resources or other projects suffer. That frustrates the very purpose of
borrowing.
(c)
The second
option is to go for Public Private Partnership. In this process the governments
do not undertake much financial liability and therefore, they are not required
to borrow money. Generally, in the Public Private Partnership, most of the
responsibilities, including the finance, implementation or development of the
project, maintenance and running, are shared by the Private entity.
The PPP may take
any form depending upon the nature of the project, utility or service provided
to the community, the finance required, the technical capabilities, location of
the project, the capacity of the project to generate funds after its
completion, viability, etc. As has been stated above, generally, the Public
Private Partnership is created by an agreement between the parties. In
different countries and organizations, this agreement is known by different
names, such as, project agreement, concession agreement, etc.
The parties may
create their own terms and conditions for the purposes of an agreement for
Public Private Partnership project. However, some standard formats of these
agreements are also available in the commercial world. But they are meant only
for the purpose of providing guidance. Agreements with specific conditions
have to be prepared and provided for the specific projects.
2. Comparative Analysis of Traditional
Procurement and PPP
Input / Output:
Conventional public
procurement are specifies the inputs. In conventional procurement the
Government specifies what inputs he requires in order to deliver a particular
service such as materials, accessories, fittings, and infrastructure. These
required inputs are included in the bid/tender documents.
Once the contract
is awarded, the government has to closely supervise whether construction and
installation of the assets are according to tender specifications. Government
is responsible for designing, implementation and timely execution of the
project. Government will also responsible for all statutory requirements and
permission and any costs that may arise due to unforeseen circumstances or
elements that were omitted from the tender. The private contractor is only responsible
for what is covered by the tender specifications, including anything that could
reasonably have been foreseen. Specifying inputs generally excludes the
possibility for alternative, innovative solutions which bidders could come up
with, and may inhibit innovation.
PPP procurement
specifies the outputs. In PPP, Government only defines the output in terms of
type of infrastructure and service levels that need to be delivered. The public
institution does not need to give the design of the infrastructure required,
specification of material or accessories. He should also not to specify the
technology, schedule of implementation and estimation. However the Government
can advised in the RFP that finalization of design and charges to be collected
from the users shall be decided by the private partner after consultation of
public department. The PPP format hence thus able to ensure the quality
infrastructure and best service delivery and also gives greater value for money
for the public institution.
3. Difference between Privatization and PPP
Privatization is
the introduction and use of market-based competition by government for the
delivery of public services or goods by the private sector. P3 is a project in
which there is cooperation between the public and private sectors in one or
more areas of the design, development, construction, operation, ownership or
financing of infrastructure assets, or in the provision of services. (As per
California debt and investment advisory commission)
PPP structures do
not equate to privatization. Under a privatization, the government sells its
ownership stake to private owner who would have freedom to deal with the assets
as it pleases. As a result, the government retains significantly less power and
influence over the use of assets and the quality of services provided by the
private sector.
Under Public
Private Partnership, the contract provided to the private sector is for a fixed
term as per the agreement between both of parties, thereafter the public asset
normally returns to public ownership. The PPP payment mechanism provides the
government with the power to withhold or deduct payments if the service quality
provided by the private sector is lower than agreed. The government also
normally reserves the right to step in and regain direct control in the event
of a repeated default in service provision by the private sector operator.
The service
delivery through a PPP changes the means of delivering services but it does not
change the authority which is accountable for the provision of the services. It
is still a government entity’s obligation to provide the service. The only
change in the mechanism is the change in the role of the government entity. It
assumes a managerial role instead of engaging in actual operations. In other
words the government entity is now entrusted with the responsibility of being
an overseer of operations rather than a resource manager.
4. Kinds of Public Private Partnership
There are various
methods for the formation of a Public Private Partnership. Some such
illustrations are as follows. This is not an exhaustive list. There may be more
such categories depending on the nature of the project.
(a)
BOT – It
means, “Built, operate and Transfer”. This is the most commonly adopted method
of Public Private Partnership.
(b) BOOT – This is an abbreviation
of “Built, Own, Operate and Transfer”.
(c)
BOO – In
BOO, the Private entity “Builds, Owns and Operates” the project. In this case,
the Private entity is not required to transfer the project to the Government.
(d) BLT or BRT – It means, “Build,
Lease and Transfer” or “Build Rent and Transfer”.
(e)
BTO – In
this kind of agreement, the Private entity builds the project and thereafter
transfers it immediately to the government. However, the government requires
that it should be operated by the Private entity for a certain period of time.
(f)
DBFO – It
means design, build, finance and operate. In such kind of cases, after
completion, the project can continue to be operated by the Private entity for
indefinite period. It need not be transferred to the government.
(g) MOT – Modernization, Operation
or Ownership and if required transfer to the government.
(h) ROT – Rehabilitate, Operate and
transfer are the main characteristics of this kind of projects.
5. Structuring PPP Project
5.1. Project
Identification:
The identification of projects for which the government may enter into a Public
Private Partnership is an important aspect. The Governments do not prefer to go
for Public Private Partnership for every project undertaken by them. Thus, for
a decision to go for Public Private Partnership, public institution has to
identify the project to be undertaken under PPP.
5.2
Appointment of Transaction Advisor: Public Institution has to first hire a PPP
consultant or Transaction Advisor (TA). TA/ PPP Consultants are engaged to
prepare a PPP project’s feasibility study, including the revenue model and
proposed “Business Case” consists of how the PPP project should be structured.
PPP transaction advisors are firms or individual engaged to prepare the PPP
project bid and tender documents and concession agreement, and to advice and to
support the information and analytical needs of the Government’s, bid process
system and financial closer of the project. Worldwide, nearly all Governments engage
experienced outside consultants to conduct and to complete their PPP
feasibility studies and advice till completion of the project.
Transaction
Advisor will also advise on raising or borrowing of funds for the projects,
their legal, financial and economic aspects, the division of responsibility
between the Government and the PPP Partner and consequences of defaults in
repayment. It will also include risk identification and management of the
Public Private Partnership projects.
5.3
Feasibility Study: If it has been determined that a PPP would be desirable, the next
step will be to conduct a detailed feasibility study and to determine how the
PPP project’s risks and responsibilities should be structured through
Transaction Advisor.
5.4 Bidding
Process: Further,
the bidding process and the procedure for entering into contracts for such
projects is equally important.
5.5. Selection
of Successful Bidder and Signing of Agreement: As per the bid parameter in bid document
the final selection of private partner has been made.
5.6.
Dispute Resolutions: Though disputes are not an essential part of a project,
nevertheless, disputes do arise in certain cases. The reasons for such disputes
may be any. In most cases, the contracts provide for the resolution of disputes
either through the courts of the country or through the process of arbitration
under the Arbitration Laws.
6. Legal Framework in India
When
it is proposed to go for a Public Private Partnership, the applicability of
laws has also to be considered by the appropriate agencies. This chapter will
contain a summary of the relevant constitutional provisions and provisions of
other laws (including various decisions of the Supreme Court and different High
Courts on the subject) for entering into contracts for Public Private
Partnership in India.
Government has extensive commercial law and
constitutional power to make commercial contract and contract under public
private partnership. The provisions of the Constitution and other laws important
from the point of view of the Public Private Partnership projects are as
follows:
(a)
Articles 12,
14, and 19 of the Constitution;
(b) Articles 298, 299 and 300 of the
Constitution;
(c)
The
provisions of the Indian Contract Act, 1872;
(d) The provisions of the Indian
Sale of Goods Act, 1930;
(e)
Other
relevant laws, such as Partnership Act, 1932, Companies Act, 1956, Negotiable
Instruments Act, Land Acquisition Act, etc.
Indian Contract Act, 1872
SECTION 10.- All agreements are contracts
if they are made by the free consent of the parties competent to contract, for
a lawful consideration and with a lawful object, and are not hereby expressly
declared to be void.
“All agreements are contracts” Agreement –
Offer (proposal) and acceptance “Section 2(h)”– An agreement enforceable by law
is a contract”
SECTION 10.-All agreements are contracts if
they are made by the free consent of the parties competent to contract, for a
lawful consideration and with a lawful object, and are not hereby expressly
declared to be void.
All agreements are contracts if they are
made by the
(1)
Free consent
of the parties,
(2)
Competent to
contract,
(3)
For a lawful
consideration,
(4)
With a
lawful object,
(5)
Are not
hereby expressly declared to be void.
(6) Competent
to contract
SECTION 11 –
Every person is competent to contract who is of the Age of Majority according
to the law to which he is subject, and who is of Sound Mind, and is not
disqualified from contracting by any law to which he is subject.
Indian Majority Act, 1875
SECTION 3. A person shall be deemed to have
attained majority when he shall have completed his age of Eighteen Years and
not before.”
Provision under Constitution of India
Article 12 – In this part, unless the context otherwise
requires, “the state” includes the government and parliament of India and the
government and the legislate of each of the states and all local or other
authorities within the territory of India or under the control of the
government of India.
A corporation may be created in one of two
way, it may be either established by statute or incorporated under a law such
as the companies act, 1956 or the societies registration act, 1860. where a
corporation is wholly controlled by government not only in its policy making
but also in carrying out the functions entrusted to it by the law establishing
it or by the charter of its incorporation, there can be no doubt that it would
be an instrumentality or agency of government.
Article 14 – The state shall not deny to
any person equality before the law or the equal protection of the laws within
the territory of India.
Article 19 – All citizens shall have the right: To
practice any profession, or to carry on any occupation, trade or business.
“There is no discrimination, because it is perfectly open to the government,
even as it is to a private party, to choose a person to their liking, to
fulfill contracts which they wish to be performed. When one person is chosen
rather than another, the aggrieved party cannot claim the protection of article
14, because the choice of the person to fulfill a contract must be left to the
government.”
7. Benefit of PPP
7.1 Fast Infra Development: Acceleration of infrastructure provision through
mobilisation of private sector capital, more public services can be provided by
the government through using PPPs in development.
7.2 Reduce Cost of Project: PPP can reduced whole-life costs, because
of private sector expertise, efficiencies and innovation and better allocation
of risk, because the private sector has experience and capable in handling
commercial risks well, while government typically does not.
7.3 Quality Service: Better incentives to perform, because a failure to
perform means that payment is not received and improved quality of service,
because quality of service is a measurable key performance indicator upon which
recovery from project are based.
7.4 Govt. can focus on Good Governess: Enhanced public management, because
government now has the time to plan good governess and reach development goals,
rather than be involve in business, operational and service provision
requirements.
7.5 Curbing Corruption: In traditional public sector
procurement model funds are provided by the Government or Public Organisation
and the responsibility of the contractor is end after completion of contraction
whereas in Public Private Partnership the same private partner has to operate/
manage the project and hence he will have to deliver quality construction and
also assure quality service delivery. Private partner is know that the investment
in project will be recovered by him through operation of the project and hence
he will not only make quality construction but deliver better service system
to.
7.6 Solve Public Resistance: In many infrastructure project
substantial public resistance posses’ significant challenges to any country
striving to either complete any infrastructure project in their areas or trying
to set up any facilities over there. Public Private Partnership can be simply
defined as development through community partnership and hence there is
solution of this issue if this model is opted for development. For
implementation PPP in these area local participation in development phase
should be assured by government and inputs from various stakeholder such as
local resident, prospective users, affected person, interactions with
independent professional and relevant people has to be made to develop an
understanding. In addition Government/Public Institution shall have to take a
more proactive approach towards communicating with stakeholders, managing their
expectations, and developing effective mitigation measures to protect affected
stakeholders.
7.7 Inflation Control:
Food
Asia especially the region’s two largest
economies, China and India, continue to pose a serious challenge due to
reigning of inflation in food grains. Food inflation is highest in India at 6%
whereas in China it is 3%. In India it has been noticed that public and private
investment in agriculture sector has been decline from 1980 onwards. The share
of Foreign Direct Investment (FDI) in food as has also remained low as compared
to total FDI inflow. This consistent short-fall in investments in the sector
needs reform through introducing Public Private Partnership in Production,
Processing and Storage.
Other Product
In traditional procurement system
Government uses the public money in order to deliver public sector
infrastructure and/or delivery of services. In public private partnership,
government using private money for building of infrastructure or setting up
service delivery services, in this situation government need not to collect
more money in account of taxation and can reduce fiscal deficit. Government
funds can be used to address more important and critical issues of public
policy.
7.8 Poverty Reduction: In all countries of Asia, there
is a massive need to expand infrastructure networks so as to extend vital
public services to the public who are currently not receiving them, and to
improve the efficiency, reliability, and quality of public services throughout
the economy.
Through innovative strategic plan, support
and financial services, the live of villagers and poor can be changed
introducing private investment because private sector is now responsible for
the majority of employment and income-generating opportunities, and has become
the driving force for poverty reduction.
There is the need of engage as much as
possible the private sector and encourage them through many projects and
programmes. This strategy can be organized through carry out detail study
regarding immerging business opportunity from the local public, dialogue with
local public for private-sector development, find out amount of investment to
support local private-sector development and making partnership with the private
sector to leverage additional investments and bring knowledge to rural areas.
8. PPP Risk Assessment
Risk is a key concept in PPP contracts and
it is important to determinant/identify all material risk associated with the
PPP project at initial stage so that steps to mitigate such risk should be done
at initial level and then structure the PPP project accordingly. The sharing of
risk should be made between public and private in proper manner. The best PPPs
are those that transfer a degree of risk from the public to the private sector,
however in structuring risk sharing arrangements, careful attention must be
given to ensuring that each party is allocated those risks that it is best able
to manage.
It is necessary to categorize these risks
into either areas of “Commercial Risks” or “Political Risks.” Political risks
are those risks that are the result of governmental actions, policies, and
which governments have the greatest ability to control and to determine.
Political risk can be mitigate while drafting contract agreement covering all
legal issues, legal structuring to ensure that responsibilities of both parties
are clearly mentioned and protecting right and interest of private partner in
PPP arrangement. Commercial risks are those events that business managers
typically have the greatest ability to control and determine. However prior to
entering in to PPP, private entity should understand all the commercial risk
associated to project and ensure that future revenue realization is adequate to
cover all unforeseen future expenses. It is important that private participant
involved in the PPP project are sufficiently competent and financially capable
of delivering services to the predetermined specifications.
The identification and allocation of these
and other relevant risks should have done during the feasibility study stage,
and they must be specified quite clearly in all of the PPP procurement
documents, so that the private sector can price those risks into its bid.
9. Global PPP Experience
There has been strong and increasing level
of global interest in PPPs since 1990. Number of government related entities
from many countries has expressed genuine interest in PPP as valuable tools for
development of quality infrastructure and to public sector service provision
which can be only possible through introducing private sector management
techniques, expertise, investment and/or efficiency into a public enterprise.
PPP originally arose in the United Kingdom
(UK) in the late 1980’s and early 1990’s and has been adopted principally in
Australia, Europe, Canada and many other countries. Public Private Partnerships
are a key form of procurement for the delivery of major infrastructure projects
in Australia. The Sydney Harbour Tunnel project was developed on PPP in the mid
1980s.
National Audit Office (NAO) in the UK
carries out Value for Money (VFM) audit into the administration of public
policy has carried a census on PPP projects and reported that average cost
savings of 17% and noticeably improved service quality levels have been
recorded. It also found that of 37 projects surveyed, 29 were delivering price
certainty and resulted in no construction related price increases to the
government after contract award.
Many Years Experience
First or few Projects Signed /recent experience Projects in
planning stage No experience