UNIT 4

PUBLIC PRIVATE PARTNERSHIP

 In17th, 18th, 19th centuries, the infrastructure was managed by the private players, for e.g.,
railroads and power networks in the U.S.
The reason behind this was that the governments did not have much money, especially pre-
industrial revolution.
The Suez Canal which was built in 1969 is a good example for a PPP mode
In 1854 and 1856, Ferdinand de Lesseps obtained a concession from Sa'id Pasha, the
Khedive of Egypt and Sudan, to create a company to construct a canal open to ships of
all nations.
The company was to operate the canal for 99 years from its opening
PPP – NATIONALIZATION WHEEL
 A large amount of initial private activity in
infrastructure was in the form of wholly owned
private entrepreneurial enterprise (e.g., railroads
in the US)
This was then succeeded by a large scale
nationalization of infrastructure around the world,
based on rational, scale models
Starting from the 1970s there has been yet
another gradual change to PrivatePublic
Partnerships with mixed responsibilities and
adequate contractual governance, for the
provision of infrastructure.
PPP OPTIONS
 CONT…
The government can start by corporatizing a public sector entity so that it acts as an autonomous
corporation
The next stage is for the government to give out Operations and Maintenance Contracts to the private
sector on a performance based contracting mode
Further down the spectrum is the popular BOT or Build-operate transfer approach where the private
sector entity (known as the concessionaire) builds and operates infrastructure for a specified period of
time (known as a concession period), and then transfers the infrastructure back to the government.
During this period the private sector can recoup its investment either through user charges or through
payments made by the government
Finally, the government could turn over the ownership of the asset to the private sector and allow the
private sector to build, operate and maintain the infrastructure
 HOW TO PRIVATIZE
First the government needs to decide whether the situation merits privatization
i) Are there public sector ills and private sector benefits that can be identified

Second the government should determine the kind of PPP arrangement to be used
i) One factor is the potential revenue that can be generated
ii) Social issues and the voice of society can also be considered

The government can then ask private players to bid to own and operate a project.
i) The project should not be over-engineered - the private sector should be allowed to bring its creativity to the
table.
ii) The private players should bid on a “bid variable” such as the amount of tariff they will charge

The government can then monitor to ensure that the private operator meets societal needs
GOVERNMENT TASKS
Planning
Create and monitor a Masterplan
Land Acquisition, formation of shell companies

Competition
Prices
Contracts, Legal Frameworks
Regulation
Social Issues
Increasing Acceptability for the PPP project through conducting stakeholder participation events
BENEFITS OF PRIVATIZATION
The Public sector often has some shortcomings
Finance - in some cases the public sector does not have financial resources to build
infrastructure
Projects are often heavily subsidized leading to an increasing burden on the exchequer
There is sometimes a lack of expertise in the Public sector when it comes to executing
large and complex projects
Public sector projects are sometimes characterized by poor quality of work, frequent
service disruptions, low levels of motivation and incentives, corruption, leakage and theft,
selection bias, vested interests and power politics
CONT…
Finance – can mobilize private funds or funds from capital markets (larger source)
Reducing National debt and expenses
Allows the public sector to channel more funds to healthcare, education etc
Increases state cash inflows due to taxes on the private infrastructure

The private sector is often motivated by profit.

Since they can be replaced, and thereby lose revenue, if they do not provide
good quality service, the private sectors likely to be motivated to bring about
improvements in efficiency and quality of service
The private sector has to potential to provide fair (reduced) price of services
Private sector efficiency can lead to high customer satisfaction and higher volumes
of service, since reaching out to more people can mean greater profitability
CONT…
Construction can be fast and of high quality
Innovation in selecting, designing and developing projects is likely
More resources – external manpower and experience are often brought in
PITFALLS WITH PRIVATIZATION
The following two figures graphically describe the recent worldwide trends with respect
to PPPs
As the graphs indicate the number of PPPs gradually increased but have been falling in
recent times.
CONT…
CONT…
Unemployment - The private sector often operates with a reduced but more efficient
workforce, leading to a loss of jobs.
Unequal Access to the Poor - Since the poor are often not capable of paying for services, the
private sector may not see the value in including them
Ideological issues - Citizens often perceive the responsibility of delivering infrastructure to be
with the government and therefore ideologically oppose privatization of infrastructure
Due to a lack of indigenous expertise, several foreign firms are often called on to help build
infrastructure in several developing countries.
PPP contracts are often spread over 20-30 years and several political, economic and social
shocks arise over this period.
CONT…
In some cases, political expropriation wherein a government agency breaches on a
contract and expropriates a privately built asset has also led to a loss in confidence on
the part of private investors
A study of over 1000 infrastructure privatizations in Latin America and the Caribbean
between 1982 and 2000 found that 75% of all W&S and 55% of Transportation
projects had to be renegotiated within a few months
Investor interest has reduced due to failures in the past, poor performance of
previous projects, pessimism, political and other risks that they have to consider
CHALLENGES IN VARIOUS SECTORS – WATER &
SANITATION
Risks Related to Availability of Information - Insufficient or inaccurate data makes it difficult
for a private operator to make a realistic assumption of capital, O&M costs, and revenues for
a project
Payments to Operator - a suitable payment guarantee mechanism needs to be created to
increase the comfort level of the developer and the lenders. One of the primary risks, which
the private sector perceives today relates to the security of project returns, in turn linked to
tariff increases and adequate connection charges
Framework for Fixing and Collection of Water Rates - usually municipal laws do not have
specific provisions giving rights to the commissioner or chief municipal officer to delegate the
collection responsibility to private contractors.
 For instance, there was strong opposition when the Tiruppur Municipality increased water rates from Rs 4
per kilolitre to Rs 6 per kilolitre for residential consumers
Capital Risk - With a growth in population, extension of the municipal area over a period of
time, and the addition of different categories of consumers, there will be need for lumpy
investments during the contract period
CONT…
Revenue Risk - Typically, the operator likes to know whether the ULB will provide a payment
guarantee with a minimum amount for new work in a pre-estimated timely manner as well as
any financial support for undertaking such additional work (capital investments) during the
contract period.
 Regarding illegal use and unauthorized connections, the contract needs to clearly set out the administrative
support that would be provided to the operator.

Private Operator’s Right to Disconnect Nonpaying Customers and Powers to Re-connect

Opportunity to Negotiate during Bid Process: Typically, tenders floated by ULBs for PPP
arrangements do not allow bidders the option of marking up or otherwise submitting comments
on the draft contract, except during pre-bid meetings.
Performance Security:It is common practice to seek a performance security from the operator
so as to ensure that in case of default or delays, certain deductions could be made towards
liquidated damages. Secondly, the value of the security should be kept as low as possible.
CHALLENGES IN POWER SECTOR IN INDIA
The new entrants having no prior experience in this sectors, face several difficulties
like land acquisition, environmental clearance, fuel supply, financial closure, power
equipment supply, project execution, human resources constraint, etc.
In FY 2011-12, planned target of domestic coal production was 554 million metric
tons (MMT), whereas only 539 MMT were achieved. This is due to the slow
development of captive coal mines, which were allocated to many developers.
Land acquisition appears to be an increasingly significant challenge for power
projects in India.
Delays in acquiring land and obtaining environmental and other requisite clearances
cause significant delay in different projects.
CONT..
Equipment shortages were a significant reason for India missing its capacity addition
targets in 10th Five Year Plan (April 2002 – March 2007).
During the 10th Five Year Plan, various reasons have been identified like inadequate
preparedness of projects, shortage of equipment supply, financial closure, etc
More collaboration is required between industry, institute and government to attract
more talent to these industries to keep the growth momentum
CASE STUDY ON PPP
Prepare your own PPP