Informative note on Public Private Partnership (PPP)

PPP involves 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

The Department of Economic Affairs (DEA) defines PPPs as:

“PPP means an arrangement between a 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 time period, 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.”

Background
The most significant criteria for a continued growth rate of an economy rest on the provision of a
quality infrastructure. According to the Planning Commission, an approximation of 8 percent of
the GDP needs to be invested. This would help in acquiring a prospective economy as stated in
the 11th Five Year Plan. Fund investment of over US $ 494 billion has been conceived of
according to the 11th Five Year Plan with effective from 2007 to 2012.
In order to meet such demands, various Public Private Partnerships or PPPs are being
promoted for implementation of infrastructure projects. PPP is often described as a private
business investment where 2 parties comprising government as well as a private sector
undertaking form a partnership. The deficit can be overcome by ensuring much more private
capital investment. 

Constraints 
 Sufficient instruments as well as the ability to undertake long-term equity cannot be
provided by the market in the present financial scenario. Also financial liability required
by infrastructure projects would not be sufficed.
 Most sectors face a lot of hindrance in enabling a regulatory framework as well as a
consolidated policy. So its important to convert such policies into PPP friendly. To
achieve the desires results, active participation of various state projects are essential.
  Lack of ability of private sectors to fit into the risk of investing in diversified projects also
needs to be overcome. Modernization of new airports, transmission systems and
building power generating plants are some of the avenues which required skilled
manpower.
 Ability of public institutions to manage the PPP process should also be subdued.
Maximizing the return of the stakeholders needs to be managed due to the involvement
of long term deals including the life cycle of the asset infrastructure.
 Lack of credibility of bankable infrastructure projects used for financing the private sector
should also be overcome. Inconsistency is still visible in the limitations of PPP projects,
despite of continued initiatives by States and Central ministries.
 Inadequate support to enable greater acceptance of PPPs by the stakeholders forms
another source of constraint.

Steps Taken
Several initiatives have been undertaken by Government of India to enable a greater PPP
framework in order to eradicate the above mentioned constraints. Various foreign as well as
private investments by waving off charges are encouraged. Framing of standardized contractual
documents for laying down the terminologies related to risks, liabilities and performance
standards have been devised. Approval schemes for PPPs in the central sector has been
streamlined through Public Private Partnership Appraisal Committee or PPPAC. A website has
been launched for the purpose of virtual PPP market serves as an online database for PPP
projects.
Further, The Department of Economic Affairs, Ministry of Finance, Government of India (DEA)
with funding support from the World Bank, AusAID South Asia Region Infrastructure for Growth
Initiative and the Public Private Infrastructure Advisory Facility (PPIAF) has prepared a toolkit to
facilitate identification, assessment, development, procurement and monitoring of PPP projects.
The PPP Toolkit is a web-based resource that has been designed to help improve decision-
making for infrastructure PPPs in India and to improve the quality of the infrastructure PPPs that
are implemented in India.

Characteristics of PPPs
A PPP typically has the following characteristics:
  the private sector is responsible for carrying out or operating the project and takes on a
substantial portion of the associated project risks
 during the operational life of the project the public sector’s role is to monitor the
performance of the private partner and enforce the terms of the contract
 the private sector’s costs may be recovered in whole or in part from charges related to
the use of the services provided by the project, and may be recovered through payments
from the public sector
 public sector payments are based on performance standards set out in the contract
 often the private sector will contribute the majority of the project’s capital costs, although
this is not always the case

Risk – a key focus of PPP design

Allocating risk to achieve added efficiency is what makes PPP a potentially powerful way of
reducing project-related costs and achieving improved value for money for the public sector.
The level of risk can be changed by allocating responsibility for individual risks to those who are
best able to manage them. On their own both the public and private sectors are weaker in their
ability to control certain risks. One of the goals of a well-designed PPP is to pick out the
strengths and combine them together. The result should be that a partnership of public and
private parties is stronger and more efficient than either party by itself.

Approval Committees for PPP

1. Public Private Partnership Approval Committee (PPPAC)

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. Pursuant to
this decision, a Public Private Partnership Approval Committee (PPPAC) was set up comprising
of the following:
 Secretary, Department of Economic Affairs (in the Chair)
 Secretary, Planning Commission
 Secretary, Department of Expenditure;
 Secretary, Department of Legal Affairs ; and
 Secretary of the Department sponsoring a project.
The Committee would be serviced by the Department of Economic Affairs, who has set-up a
special cell for servicing such proposals. The Committee may co-opt experts as necessary

2. Committees constituted pursuant to CCEA's decision dated 22.03.07 regarding

Modification of  Appraisal Procedure for PPPs

The Cabinet Committee on Economic Affairs (CCEA) in its meeting of 22nd March, 2007
approved modification in approval procedure for Public Private Partnership (PPP) projects.
Pursuant to the decision of the CCEA, a Committee for appraisal of PPP projects of all sectors
of cost greater than Rs.100 crore but less than Rs.250 crore is being set up comprising of the
following:
a. Secretary, Department of Economic Affairs
b. Secretary of the Ministry/Department sponsoring the project.

For appraisal of individual projects under NHDP which are of Rs.250 crore or more but less than
Rs.500 crore and which fulfill certain specified conditions, a Committee comprising of the
following is being set up:
a. Secretary, Department of Economic Affairs
b. Secretary, Department of road Transport and Highways

3. Viability Gap Funding (VGF)

Cabinet Committee on Economic Affairs in its meeting of 25th July, 2005 approved the Scheme
for support to Public Private Partnerships in Infrastructure. In pursuance of the decision of the
Cabinet, it has been decided to constitute an Empowered Committee and Empowered
Institution for approving financial assistance to such projects which satisfies all the eligibility
criteria as prescribed in the scheme.

The composition of Empowered Committee will be as follows:

i. Secretary {Economic Affairs)
ii. Secretary (Planning Commission)
iii. Secretary (Expenditure)
iv. Secretary of the line Ministry dealing with the subject
Guidelines for approval of PPP
Different guidelines for different categories of central sector PPP projects have been issued by
the government from time to time. 
These are:

 Guidelines for formulation, appraisal and approval of Public Private Partnership (PPP)
Projects costing less than Rs.100 Crore
 Guidelines for formulation, appraisal and approval of Public Private Partnership (PPP)
Projects
(i) of all sectors costing more than Rs.100 crore and less than Rs.250 crore
(ii) Under NHDP costing Rs.250 crore or more and less than Rs.500 crore
 Procedure for approval of PPP Projects and Guideline for formulation, appraisal and
approval of Public Private Partnership (PPP) Projects in Central Sector

Conclusion
Provision of public services and infrastructure has traditionally been the exclusive domain of the
government. However, with increasing population pressures, urbanisation and other
developmental trends, government’s ability to adequately address the public needs through
traditional means has been severally constrained. This has led the Government’s across the
world to increasingly look at the private sector to supplement public investments and provide
public services through Public Private Partnerships.
So far 195 PPP projects have been granted approval in India with an aggregate Project Cost of
Rs. 198,417.51 crores.