A Report on

Need Of Public-Private Partnerships in India.

In partial fulfillment of the course

Public Administration HUM C 351

Under the guidance of:

Mr. Umesh Dhyani

Prepared by:

Varun Chandra 2006B5A2545

ACKNOWLEDGEMENTS
I would like to express my gratitude to Mr Umesh Dhyani for his sincere advice and guidance which went a long way in completing this report successfully. I would also like to thank my colleagues for their support and advice. This report really turned out to be an enjoyable and learning experience.

Table Of Contents
Acknowledgements
A)

Introduction Public Private Partnership: A Brief Review

1.

B)

Understanding PPP.
1. 2. 3. 4. 5. 6. 7.

Govt. Of India's Definition What is Meant By PPP? Roles and Responsibilities Fundamental Qualities Of A PPP Project Salient Features Of PPP Key Considerations in PPP's Key Lessons From Global Experience With PPP

2.

Various Forms and Formats of PPP.

1.

New Project Formats

1. 2. 3.

Design-Build Design-Build-Maintain Design-Build-Operate

3

4. 5. 6. 7. 2.

Design-Build-Operate-Maintain Build-Own-Operate-Transfer Build-Own-Operate Design-Build-Finance-Operate

PPP's in Existing Services And Facilities

1. 2. 3. 4. 5.

Service Contracts Management Contract Lease Concession Divestiture

C)

Why PPP's?
1. 2. 3. 4. 5. 6.

Growing Popularity Limitations Of Government Resources Need For New Financing And Institutional Mechanisms Benefits And Strengths Access To Crucial Financing Rigorous Risk Appraisal And Optimum Allocation

D)

Need Of PPP's In India

1.

Relevance Of PPP's in India

1.

Massive deficit In Infrastructure Services

1. 2. 3.

Water Power Roads And Ports

2. 3. 4. 5. 6. 2.

Deficient Infrastructure as a Binding Constraint Global Competitiveness Inclusive Growth And Poverty Reduction Growing Government Emphasis On Infrastructure Spending Growing Emphasis On Private Sector Participation

The Case For Public-Private Partnerships

1. 2. 3. 4.

Bringing Development Forward On-Time And On-Budget Delivery Shifting Construction And Maintenance Risk To The Private Sector Cost Savings
1. 2.

Construction Savings Reduced life-cycle costs

5. 6.

Strong Customer Service Orientation Enabling The Public Sector To Focus On Outcomes And Core Business

E)Conclusion References

A) INTRODUCTION
The new buzzword in development planning circles in the country is 'Public Private Partnerships' (PPPs). The 11th Five Year Plan (20072012) document mentionsthetermatleast249times,advocatingitinsectorsrangingfromwater management, forestry, education and health to protection of monuments and sustenanceofartsandcrafts.However,itskeyroleisseenininfrastructure. Infrastructurebottlenecksareoftenpresentedasthemajorhurdlesrestrictingthe boomingIndianeconomyfromachieving8percentplusGDPgrowthrates.The Preface to the 11th Five Year Plan document says that "Poor quality of infrastructureseriouslylimitsIndia'sgrowthpotentialinthemediumtermandthe EleventhPlanoutlinesacomprehensivestrategyfordevelopmentofboth rural andurbaninfrastructure."The11thPlanestimatesthattomaintainanaverage annual growthrateof9%,theinvestmentin infrastructure would havetorise fromRs.259,839croresin200708toRs.574,096croresin201112atconstant 200607price,aggregatingtoRs.2,011,521croresoverfiveyears.Intheterminal year,thisworksouttobe9percentoftheGDP ,upfrom5percentoftheGDPin 200607. This is a huge amount, and the Government claims that it can't mobilize this withoutincreasedcontributionsfromtheprivatesector.Moreover,itarguesthat itsfirstpriorityisexpenditureonsocialsectorandlivelihoodsupportprogrammes forthepoor,"thestrategyforinfrastructuredevelopmenthasbeendesignedtorely asmuchaspossibleonprivatesectorinvestmentthroughvariousformsofPPPs." The Government of India's Committee on Infrastructure which monitors PPPs notesthat244PPPprojectsareongoingandanother76areinthepipelineinthe country.Theseprojectsareinvarioussectorslikeroads,ports,power,waterand urbaninfrastructure.

B) PPP: A BRIEF REVIEW

1.UnderstandingPPP
GovernmentofIndiasDefinition : PublicPrivatePartnership(PPP)Projectmeansaprojectbasedonacontract orconcessionagreement,betweenaGovernmentorstatutoryentityonthe onesideandaprivatesectorcompanyontheotherside,fordeliveringan infrastructureserviceonpaymentofusercharges.PrivateSectorCompany means a company in which 51% or more of the subscribed and paid up equityisownedandcontrolledbyaprivateentity. WhatismeantbyPPP? : WhilethereisnosingledefinitionofPPPs,theybroadlyrefertolongterm, contractual partnerships between the public and private sector agencies, specifically targeted towards financing, designing, implementing, and operating infrastructure facilities and services that were traditionally providedbythepublicsector.Thesecollaborativeventuresarebuiltaround the expertise and capacity of the project partners and are based on a contractual agreement, which ensures appropriate and mutually agreed allocationofresources,risks,andreturns.Thisapproachofdevelopingand operatingpublicutilitiesandinfrastructurebytheprivatesectorunderterms andconditionsagreeabletoboththegovernmentandtheprivatesectoris calledPPPorP3orprivatesectorparticipation(PSP).

Rolesandresponsibilities. PPPs do not mean reduced responsibility and accountability of the government. They still remain public infrastructure projects committed to
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meeting the critical service needs of citizens. The government remains accountableforservicequality,pricecertainty,andcosteffectiveness(value for money) of the partnership. Government remains actively involved throughouttheprojectslifecycle.UnderthePPPformat,thegovernment rolegetsredefinedasoneoffacilitatorandenabler,whiletheprivatepartner playstheroleoffinancier,builder,andoperatoroftheserviceorfacility.PPPs aimtocombinetheskills,expertise,andexperienceofboththepublicand privatesectorstodeliverhigherstandardofservicestocustomersorcitizens. The public sector contributes assurance in terms of stable governance, citizens support, financing, and also assumes social, environmental, and political risks. The private sector brings along operational efficiencies, innovative technologies, managerial effectiveness, access to additional finances,andconstructionandcommercialrisksharing.

FundamentalqualitiesofaPPPproject : Highpriority,governmentplannedproject:Theprojectmusthaveemerged fromagovernmentled planningand prioritizationprocess. Theproject mustbesuchthat,regardlessofthesourceofpublicorprivatecapital,the governmentwouldstillwanttheprojecttobeimplementedquickly. Genuineriskallocation: Sharedriskallocationisaprincipalfeatureofa PPPproject.Theprivatesectormustgenuinelyassumesomerisk. Mutually valuable: Value should be for both sides, which means governmentshouldalsogenuinelyacceptsomerisksandnottransferthe entirerisktotheprivatesector,andviceversa.

WhatarethesalientfeaturesofaPPP? NotallprojectswithprivatesectorparticipationarePPPprojects.Essentially, PPPsarethoseventuresinwhichtheresourcesrequiredbytheprojectin

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totality,alongwiththeaccompanyingrisksandrewards/returns,areshared on the basis of a predetermined, agreed formula, which is formalized throughacontract.PPPsaredifferentfromprivatization.WhilePPPsinvolve privatemanagementofpublicservicethroughalongtermcontractbetween anoperatorandapublicauthority,privatizationinvolvesoutrightsaleofa publicserviceorfacilitytotheprivatesector.AtypicalPPPexamplewould beatollexpresswayprojectfinancedandconstructedbyaprivatedeveloper. APPPprojectisessentiallybasedonasignificantopportunityfortheprivate sectortoinnovateindesign,construction,servicedelivery,oruseofanasset. To be viable, PPPs need to have clearly defined outputs, avenues for generatingnongovernmentalrevenue,andsufficientcapacityintheprivate sectortosuccessfullydeliverprojectobjectives. WhatarethekeyconsiderationsinPPPs? PPPs often involve complex planning and sustained facilitation. Infrastructureprojectssuchasroadsandbridges,watersupply,sewerageand drainageinvolvelargeinvestment,longgestationperiod,poorcostrecovery, and construction, social, and environmental risks. When infrastructure is developedasPPPs,theprocessisoftencharacterizedbydetailedriskand costappraisal,complexandlongbiddingprocedures,difficultstakeholder management,andlongdrawnnegotiationstofinancialclosure.Thismeans thatPPPsarecriticallydependentonsustainedandexplicitsupportofthe sponsoring government. To deal with these procedural complexities and potential pitfalls of PPPs, governments need to be clear, committed, and technicallycapabletohandlethelegal,regulatory,policy,andgovernance issues. KeyLessonsFromGlobalExperiencewithPPP: DetailedpolicyforimplementingPPP ProperPlanningbygovernment Projectdevelopmentbygovernment
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 FullSupportbygovernment Proactivepubliccommunication TransparentBiddingProcess ClearPolicyOnUnsolicitedproposals DefinedSourcesOfRevenue ProperAllocationOfRisk AdequateProtectionForLenders

2.WhatarethevariousPPPformsandformats?
InaPPP ,theprivatepartnercouldbeaprivatecompany,aconsortium,ora nongovernmentalorganization(NGO).Typically,aPPPprojectinvolvesa public sector agency and a private sector consortium which comprises contractors,maintenancecompanies,privateinvestors,andconsultingfirms. Theconsortiumoftenformsaspecialcompanyoraspecialpurposevehicle (SPV). The SPV signs a contract with the government and with the subcontractors to build the facility and then maintain it. The PPP is operationalized through a contractual relationship between a public body (theconcedingauthority)andaprivatecompany(theconcessionaire).This partnership could take many contractual forms, which progressively vary with increasing risk, responsibility, and financing for the private sector. However,themostcommonpartnershipoptionsare: NewProjects: DesignBuild(DB) Underthismodel,thegovernmentcontractswithaprivatepartnertodesign and build a facility in accordance with the requirements set by the government. After completing the facility, the government assumes
11

responsibility for operating and maintaining the facility. This method of procurementisalsoreferredtoasBuildTransfer(BT) DesignBuildMaintain(DBM) This model is similar to DesignBuild except that the private sector also maintainsthefacility.Thepublicsectorretainsresponsibilityforoperations. DesignBuildOperate(DBO) Underthismodel,theprivatesectordesignsandbuildsafacility.Oncethe facilityiscompleted,thetitleforthenewfacilityistransferredtothepublic sector,whiletheprivatesectoroperatesthefacilityforaspecifiedperiod. ThisprocurementmodelisalsoreferredtoasBuildTransferOperate(BTO) DesignBuildOperateMaintain(DBOM) Thismodelcombinestheresponsibilitiesofdesignbuildprocurementswith the operations and maintenance of a facility for a specified period by a privatesectorpartner.Attheendofthatperiod,theoperationofthefacility istransferredbacktothepublicsector.Thismethodofprocurementisalso referredtoasBuildOperateTransfer(BOT). BuildOwnOperateTransfer(BOOT) Thegovernmentgrantsafranchisetoaprivatepartnertofinance,design, buildandoperateafacilityforaspecificperiodoftime.Ownershipofthe facilityistransferredbacktothepublicsectorattheendofthatperiod. BuildOwnOperate(BOO) The government grants the right to finance, design, build, operate and maintainaprojecttoaprivateentity,whichretainsownershipoftheproject. The private entity is not required to transfer the facility back to the government. DesignBuildFinanceOperate/Maintain(DBFO,DBFMorDBFO/M)

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Under this model, the private sector designs, builds, finances, operates and/ormaintainsanewfacilityunderalongtermlease.Attheendofthe leaseterm,thefacilityistransferredtothepublicsector.Insomecountries, DBFO/McoversbothBOOandBOOT. ExistingServicesAndFacilities: PPPscanalsobeusedforexistingservicesandfacilitiesinadditiontonew ones.Someofthesemodelsaredescribedbelow.

ServiceContract: Thegovernmentcontractswithaprivateentitytoprovideservicesthe governmentpreviouslyperformed.

ManagementContract: Amanagementcontractdiffersfromaservicecontractinthattheprivate entity is responsible for all aspects of operations and maintenance of the facilityundercontract.

Lease Thegovernmentgrantsaprivateentityaleaseholdinterestinanasset.The private partner operates and maintains the asset in accordance with the termsofthelease. Concession Thegovernmentgrantsaprivateentityexclusiverightstoprovideoperate and maintain an asset over a long period of time in accordance with performance requirements set forth by the government. The public sector retains ownership of the original asset, while the private operator retains ownershipoveranyimprovementsmadeduringtheconcessionperiod. Divestiture Thegovernmenttransfersanasset,eitherinpartorinfull,totheprivate sector.Generallythegovernmentwillincludecertainconditionswiththesale
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oftheassettoensurethatimprovementsaremadeandcitizenscontinueto beserved. ThepublicsponsorofthePPPdecidesthedegreeofprivateparticipationrequired for the particular project. This decision is usually based on the governments objectives of undertaking the project, the degree of control it desires, and the abilityofthePPPconsortiumtodelivertherequiredservice.Itisalsoinfluenced bytheprovisionsoftheexistinglegalandregulatoryframework,thestructuring oftheprojecttoattractprivateresources,andthepotentialtogeneratefuturecash flows.

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C) WHY PPP's?
1.GrowingPopularity
Since the 1990s, there has been a rapid rise of PPPs across the world. Governments in developing as well as developed countries are using PPP arrangementsforimproveddeliveryofinfrastructureservices.Governmentsare building transport (roads, railways, toll bridges), education (schools and universities), healthcare (hospitals and clinics), waste management (collection, wastetoenergy plants), and water (collection, treatment, and distribution) infrastructure through PPP PPP is becoming the preferred method for public . procurementofinfrastructureandinfrastructureservicesprojectsthroughoutthe world.

2.LimitationsOfGovernmentResources
Globally, governments are increasingly constrained in mobilizing the required financialandtechnicalresourcesandtheexecutivecapacitytocopewiththerising demandforwatersupply,sewerage,drainage,electricitysupply,andsolidwaste management. Rapid economic growth, growing urban population, increasing ruralurban migration, and allround social and economic development have compounded the pressure on the existing infrastructure, and increased the demandsupplygapinmostofthedevelopingworld.Countriesandgovernments, especiallyinthedevelopingworld,areexperiencingincreasingpressurefromtheir citizens, civil society organizations, and the media to provide accessible and affordableinfrastructureandbasicservices.Whiletheinfrastructuregapisrising, government budgetary resources are increasingly constrained in financing this deficit.ThepressurehasalsocomefromtheinternationalcompactonMillennium DevelopmentGoals(MDGs),underwhichcountryprogressintermsofaccessto safe drinking water, sanitation, health, etc. is being monitored. Rising costs of
15

maintainingandoperatingexistingassets,inabilitytoincreaserevenueandcut costsandwaste,andrisingconstraintsonbudgetsandborrowing,donotallow governmentstomaketherequiredinvestmentsinupgradingorrehabilitatingthe existinginfrastructureorcreatingnewinfrastructure.

3.NeedForNewFinancing
The political economy of infrastructure shortages, constrained public resources, and risingpressurefromcitizensandcivilsocietyhavecombinedtopushgovernmentsand policymakers to explore new ways of financing and managing these services. Governmentshavebeenpushedtoexploringnewandinnovativefinancingmethodsin which private sector investment can be attracted through a mutually beneficial arrangement. Since neither the public sector nor the private sector can meet the financial requirements for infrastructure in isolation, the PPP model has come to representalogical,viable,andnecessaryoptionforthemtoworktogether.

4.BenefitsAndStrengths
The emergence of PPPs is seen as a sustainable financing and institutional mechanismwiththepotentialofbridgingtheinfrastructuregap.PPPsprimarily representvalueformoneyinpublicprocurementandefficientoperation.Apart from enabling private investment flows, PPPs also deliver efficiency gains and enhancedimpactoftheinvestments.Theefficientuseofresources,availabilityof modern technology, better project design and implementation, and improved operations combine to deliver efficiency and effectiveness gains which are not readily produced in a public sector project. PPP projects also lead to faster implementation, reduced life cycle costs, and optimal risk allocation. Private management also increases accountability and increases performance and maintenance of required service standards. Finally, PPPs result in improved deliveryofpublicservicesandpromotepublicsectorreforms. PPPStrengthsandEffectiveness:
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 RobustandDynamicStructure Governmentinanenablerrole Governmentownershipishigh Governancestructureensuresconsumerandpublicinterestsaresafeguarded Commercialinterestsareprotected Domicileriskstopartiesthatarewellequippedtodealwiththem Transparentandwellconceivedcontracts Documentationrecognizesrightsandresponsibilitiesofallprojectrelated parties ConcernsOfAllStakeholdersaddressed InvolvesParticipationofalargenumberofinstitutions:governments, politicians,banks,financialinstitutions,investors,contractors,consumers, NGO's,etc.

5.AccessToCrucialFinancing
The foremost benefit of adopting the PPP route is the ability to access capital fundingfromtheprivatesector,consideringthatfundingisgettingincreasingly limitedfrompublicsectorbudgets.Thus,PPPsallowgovernmentstoovercome their budgetary and borrowing constraints and raise finance for highpriority public infrastructure projects. Essentially, governments are able to use private financethroughPPPstobuildinfrastructureprojectsthatwouldpreviouslyhave been built by the public sector using public sector finance. PPP projects also leverageavailablepubliccapitalbyconvertingcapitalexpenditureintoflowof servicepayments.

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6.RigorousRiskAppraisalAndOptimumAllocation
The high degree of economic extendability of public infrastructure, and the commercialandsocioeconomicrisksinvolvedindevelopingandoperatingthem, havemadeitdifficulttoappropriatereturnsfrominfrastructureinvestments.The longgestationperiodofinfrastructureprojectsalsorequiressustainablefinancial and operational capacity. Therefore, there is increasing reluctance in both the public and private sectors to absorb all the costs and assume all the risks of buildingandoperatingtheseassetsalone.Sincetheprivatesectorassumestherisk ofnonperformanceofassetsandrealizesitsreturnsiftheassetsperform,thePPP processinvolvesafullscaleriskappraisal.Thisresultsinbettercostestimation andbetterinvestmentdecisions.

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D) NEED OF PPP'S IN INDIA

1.RelevanceOfPPP'sInIndia
MassiveDeficitInInfrastructureServices: Despite becoming the second fastest growing and the fourth largest1 economyoftheworld,Indiacontinuestofacelargegapsinthedemandand supplyofessentialsocialandeconomicinfrastructureandservices.Rapidly growing economy, increased industrial activity, burgeoning population pressure,andallroundeconomicandsocialdevelopmenthaveledtogreater demand for better quality and coverage of water and sanitation services, sewerage and drainage systems, solidwaste management, roads and seaports, and power supply. Increased demand has put the existing infrastructureundertremendouspressureandfaroutstrippeditssupply. Water: While90%oftheurbanpopulationhasaccesstopotablewatersupply,the actualavailabilityofwaterinthecitiesisonly56hoursaday.Lessthan 60%ofthehouseholdshavesanitationandlessthanhalfhavetapwater ontheirpremises.About40millionpeopleareestimatedtobelivingin slums.Poorurbandevelopmentisnotonlyunderminingthequalityoflife forIndiasurbancitizensbutalsoconstraininglocalandnationalgrowth. Asmuchas70%ofirrigationand80%ofdomesticwaterrequirementis met from groundwater, which has meant haphazard and unsustainable useofaquifersanddepletingwatertable. Power: Over 40% of Indias population, mostly rural, does not have access to electricity.Despitetheincreaseininstalledgenerationcapacity,shortages innormalandpeakenergydemandhavebeenaround8%and12%onan
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averagebetween2000and2004.Indiasaverageelectricityconsumption of359kWhin19962000wasfarbehindothercountriessuchasChina (717kWh)andMalaysia(2378kWh).Lessthan20%ofIndiasenormous hydroelectric potential has been tapped. Transmission and distribution lossesinIndiaremainveryhigh,ataround2830%,ascomparedtoother developingcountries,wheretheyarelessthan10%. RoadsAndPorts: Indiasroadnetworkcontinuestosufferfromlowcapacity,lowcoverage, andlowquality.40%ofvillagesdonothaveaccesstoallweatherroads. Only12%ofthenationalhighwaysarefourlaned.Thetrafficsituationin thecitieshasworsenedduetoamassiveincreaseinpersonalvehicles, inadequatecityroads,andpoorqualityofpublictransport.Airportand seaport infrastructure and train corridors are strained under capacity constraints. DeficientInfrastructureAsABindingConstraint Theinfrastructureshortagesareprovingtobetheleadingbindingconstraint in sustaining, deepening, and expanding Indias economic growth and competitiveness.2Thishasalsobeenemphasizedinthemidtermappraisal oftheTenthFiveYearPlan.Itiswidelybelievedthatlackofgoodquality infrastructureiscostingIndia12%growthingrossdomesticproduct(GDP) everyyear.Goodqualityinfrastructurehasbeenthemainenablerofhigher levelofeconomicgrowthindevelopedaswellasdevelopingcountrieslike USA,Russia,Malaysia,andChina.TheExpertGrouponCommercialization of Infrastructure estimated the loss due to poor roads and congestion at aroundRs200billionperannum.TheEconomicSurveyofIndia,200506, estimatesthatpowershortagesof12%atpeaklevelsand8%atnonpeak levelsareequivalenttoaround$3.4billionofforgonegenerationcapacityor an approximate GDP loss of around $68 billion. The annual cost of environmentaldegradation,onaccountoflackofsewerageandsolidwaste management systemsandsurfacewaterharvesting is4.5%ofGDP .Water
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pollution accounts for 6% of the economic cost of environmental degradation. GlobalCompetitiveness Indiasglobalcompetitivenessremainsconstrainedandisadverselyaffected bylackofinfrastructure,whichiscriticalforimprovedproductivityacrossall sectorsoftheeconomy.Poorinfrastructureisalsoamajorbarriertoforeign direct investment (FDI). Recent surveys have shown that Indias poor infrastructure(roadnetwork,ports,distributionnetworks,andinparticular power supply) is a cause for concern and a major barrier to investment. Upgradationoftransport(roads,railways,airports,andports),power,and urban infrastructure is therefore seen as critical for sustaining Indias economic growth, along with improved quality of life, increase in employmentopportunities,andprogresstowardstheeliminationofpoverty. InclusiveGrowthAndPovertyReduction Lackofinfrastructureispreventingthesectoral,regional,andsocioeconomic broadeningoftheeconomyanditsbenefits,andisaffectinginclusivegrowth inIndia.Thebenefitsofacceleratedgrowthofthelastdecadehavenotbeen sharedbylargesectionsofthepopulationwhicharelabordependent,low skilled,ruralbased,andworkinginagricultureandmanufacturingsectors. Infrastructureshortageshaveslowedthegrowthofmanufacturingindustries andagriculture,whicharethelaborabsorbingmarketsforthelowskilled. Povertylevelsremainsignificant, with about onefourth ofthe population livinginpoverty.Infrastructureisnowseenasthenecessaryconditionfor growth and poverty alleviation. Studies by the ADB and others have confirmed a strong linkage between infrastructure investments, economic growth, and reduction of poverty. Rural roads, rural electrification and irrigationnetworks,powergrids,andnationalhighwayshavethepotential tolinkpoorruralproducerstotheirpowersourcesandmarketsintowns, cities,andports.Greaterinvestmentsininfrastructurearetheanswer. GrowingGovernmentEmphasisoninfrastructureSpending
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Growingrecognition oftheprevailing infrastructure deficitinthecountry anditsimpedingimpactonsustainingeconomicgrowthaswellaspoverty reduction has made development of social and economic infrastructure amongthehighestprioritiesoftheGovernmentofIndia(GOI).TheGOIhas recognizedthatwithbetterinfrastructureIndiasgrowthcanbehigher,with the benefits reaching a much larger section of the population. It has increased its spending on infrastructure through a series of national programs such as the National Highway Development Program (NHDP), BharatNirman,ProvidingUrbanServicesinRuralAreas(PURA),Jawaharlal Nehru National Urban Renewal Mission (JNNURM), the Prime Ministers Rural Roads Program, National Rail Vikas Yojana, National Maritime Development Program (NMDP), airport expansion programs, etc. The governmentacknowledgesthatinvestmentininfrastructurewillhavetobe atthe same rate as the economic growth thatisbeingtargeted. Inother words,grosscapitalformationininfrastructure(GCFI),whichhasremained around 4% of GDP during 199798 up to 20034, needs to be increased progressivelyandrapidly. However, estimated investment requirements far exceed government resources. Themassivegapbetweentheexistinginfrastructureinvestment and the projected requirement in India has come into sharper focus. The Tenth Five Year Plan projection on the total investment required for infrastructure(at20012prices)isoverRs11,00,000crore(US$250billion). TheIndiaInfrastructureReport,1996,hadprojectedtheneedforincreasing infrastructureinvestmentfromunder5%toabout8%ofGDPby20056.In 1999, public investment in infrastructure was 2.8% of GDP while private investmentwasmerely0.9%ofGDP .Attheendofthe1990s,however,actual investment(publicandprivate)ininfrastructureremainedatunder4%of GDPperannum,accordingtotheWorldBank.Inotherwords,investmentin road, rail, air, and water transport, power generation, transmission and distribution,telecommunication,watersupply,irrigation,andwaterstorage willneedtoincreasefrom4.6%ofGDPto78%duringtheEleventhPlan. Private sector estimates for investment requirements are much higher.
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Accordingtooneestimate,4Indianeedstoincreaseinfrastructurespending gradually to US$100 billion per annum (8% of GDP) by2010, to realize sustainedgrowthof89%.Someotheragenciesestimatetheinvestment requirementoverthenextfiveyearstobearound$330billion. GrowingEmphasisOnPrivateSectorParticipation Theseprojectedinvestmentrequirementscannotbemetfromgovernments budgetaryresources.Thescopeformakingimprovementsislimitedbythe state of public finances. The combined deficit of the Union and state governments is around 10% of GDP Governments can also not borrow . arbitrarily, since their borrowing has been capped through the Fiscal ResponsibilityandBudgetaryManagementAct.TheApproachPapertothe EleventhPlanstatesthatOnehastoreachouttotheprivatesector,and privatesavings,andtotheothermechanismsavailableinthemarkettoday to raise funds (Planning Commission, June 2006, An Approach to the Eleventh Five Year Plan). The National Development Council (NDC) has passedaresolutionwhichmentionsthatincreasedprivateparticipationhas nowbecomeanecessitytomobilizetheresourcesneededforinfrastructure expansionandupgradation. Given the large resource requirements and the budgetary and borrowing constraints, GOI has been encouraging private sector investment and participation in all sectors of infrastructure. It has recognized that while public investment in infrastructure would continue to increase, private participationneedstoexpandsignificantlytoaddresstheexistingdeficitin infrastructureservices.

2. Case For PPP's

Publicprivate partnerships are unlikely to entirely replace traditional infrastructurefinancinganddevelopmentanytimesoon,ifever.PPPsarejustone tool among many. Governments typically have a number of objectives when
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building infrastructure: getting good value for money, timely delivery, meeting public needs and so on. The procurement model that best addresses these objectivesistheonethatshouldbechosenineachindividualcircumstance. PPPshaveshowntheirpotentialasanimportantwaytomeettheseobjectivesand addressinfrastructureshortages.Forexample,theyprovidenewsourcesofcapital forpublicinfrastructureprojects.Privateequity,pensionfundsandothersources of private financing must still be repaid, but shifting the responsibility for arrangingthefinancingtotheprivatepartnercanhelpdeliverinfrastructureifa publicentityisunwillingorunabletoshoulderthefulldebtortheassociatedrisk oftheprojectatacertainpointintime. WhilePPPsholdsignificantbenefitsasaninfrastructuredeliverytool,themodelis notwithoutitscritics.Someofthecriticismsarewellgroundedandmeritcareful consideration when evaluating the relative pros and cons of delivery method alternatives.Others,however,aredrivenbyamisunderstandingofPPPsorare basedonoutdatedorincompleteinformation.Forthosewhowouldlikeafuller understandingoftheseissues,themostcommonobjectionstoPPPsaretakenup intheappendix.PPPsalsopresentformidablechallenges,bothatearlierandlater stagesofmarketdevelopment.Addressingthesechallengesandmaximizingthe benefitsofPPPsrequiregovernmentstooperateinanewway. SixadditionalbenefitshelptoexplainthestronggrowthofPPPs. BringingConstructionForward Conventional procurements typically require the public sector to provide significantupfrontcapitaleventhoughthebenefitsoftheprojectmaybe delayedoruncertain.MostformsofPPPenablethepublicsectortospread thepublicscostofinfrastructureinvestmentoverthelifetimeoftheasset, muchashomeownersdowhentheytakeouthomemortgages.Asaresult, infrastructureprojectscanbebroughtforwardbyyears,allowingusersto benefitfromtheinvestmentmuchsoonerthanistypicalunderpayasyougo financing.Forexample,thecreativefinancingapproachusedfortheVirginia PocahontasParkwayPPPprojecteliminatedwhatmighthavebeena15year
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delayinconstructionwhilefinancingwasassembled.22Inmanycases,the private contractor also has a strong incentive to complete the project as quickly as possible because it needs the stream of revenues to repay the capitalcosts. OnTimeAndOnBudgetDelivery Withpaymentsbetteralignedtothedeliveryofprojectobjectives,public privatepartnershipsalsohaveasolidtrackrecordofcompletingconstruction ontimeorevenaheadofschedule.InCanada,forexample,Terminal3atthe TorontoPearsonAirportwascompleted18monthsaheadofscheduleunder aPPPcontract. TheUnitedKingdomsNationalAuditOfficereportedin2003that73percent of nonPFI construction projects were over budget and 70 percent were deliveredlate.Incontrast,only22percentofthePFIprojectscameinover budgetand24percentwerelate. ShiftingConstructionAndMaintenanceRisktoThePrivateSector Politicsandbudgetpressuresplayhavocwithpropermaintenanceofexisting infrastructure. There always seems to be another, higher priority: some programorcrisisrequiresmoreurgentfundingthanrehabilitatinganaging road or school. Or a budget deficit may push funding for infrastructure maintenancefurther down the prioritylist. Oranupcoming electionmay leadpoliticianstodelayfundingforrehabilitatingawastewatertreatment planttomakewayforasexierprogramorproject.Moreover,theeffectof reducingspendingonmaintenanceisrarelyimmediate;politicianswhoopt tocutbacksuchspendingmayhaveleftofficelongbeforesocietybeginsto complain loudly about crumbling roadbeds or overburdened electricity networks. Theresult:maintenanceisoftendeferred.Insomecountries,only10percent of the road network is being maintained. California currently carries

25

approximately$12.5billionindeferredtransportationmaintenanceatthe stateleveland$10.5billionlocally. Such deferred maintenance imposes huge costs in the long runfor example, earlyinterventioncosts about20percentlessthanmaintenance postponed to the latter quarter of a roads life. Continual deferral results moresafetyproblemsinashorterinfrastructurelifespan,reducedqualityof services,andgenerallyworsefinancialoutcomes.
Well-designed PPPs can ameliorate these problems by transferring certain construction and maintenance risks to the private partner. Among the risks that can be assumed by the private partner are:

Designrisk Meetingrequiredstandardsofdelivery Incurringexcessivecostoverrunsduringconstruction Completingthefacilityontime Underlying costs to the service delivery operator, and the future costs associatedwiththeasset Industrialactionagainstorphysicaldamagetotheasset Certainmarketrisksassociatedwiththeproject The ability to shift some or all of these risks to the private sector is an importantbenefitofPPPs.Paymentstructuresrequiretheassetsbeavailable andproperlymaintainedovertime.Thepublicsectortherebygainsgreater confidenceinthelevelofitsspendingcommitmentsoverthelifetimeofthe asset.Greatercosttransparency,inturn,supportsmoreeffectiveplanning and helps to avoid cuts in other service areas as a result of unexpected infrastructurecosts. CostSavings

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CostsavingsfromPPPstypicallymaterializeinseveraldifferentforms:lower constructioncosts,reducedlifecyclemaintenancecosts,andlowercostsof associatedrisks. Constructionsavings: Experiencefromseveralcountrieshasdemonstrated that PPPs cost comparatively less during the construction phase of the contract.Thesavingstypicallyresultfrominnovationindesignandbetter asset requirements. A report commissioned by the UK Treasury found in 2000 that among a sample of 29 PFI projects for which public sector comparisonswereavailable,theaveragesavingswerecloseto17percent.25 IntheUnitedStates,thecostsofcompletingconstructionforsegmentsofthe DenverE470tollroadthatusedaPPPapproachcamein$189millionbelow theoriginalcostestimateof$597million.26InAustralia,eightPartnerships Victoriaprojectswereonaverage9percentlessexpensivethanunderthe typicalprocurementprocess. Ontheotherhand,thecapitalcostscanalsobehigherincertaincasesasthe privatesectortendstotakealongertermviewofalllifecyclecostsrather thananarrowviewofthelowestindividualcosts. Reducedlifecyclecosts:Intraditionalcontracting,theprivatesectorsrole is typically limited to immediate construction. This can create a perverse incentive to economize on elements of construction today even though maintenance costs might be higher in the long run. Shifting longterm operation and maintenance responsibilities to the private sector creates a strongerincentivetoensurelongtermconstructionqualitybecausethefirm willberesponsibleformaintenancecostsmanyyearsdowntheroad.This createsastrongincentivetodopreventativemaintenanceandreducesthe riskoffuturefluctuationsinoperationscosts.Thiswaythepublicbenefits fromthislifecycleefficiency.AUKstudyofbenefitsflowingfromoperating PFIprojectsfoundthat,onaverage,thegovernmentexpectstoachievea savingof17percentoverthewholelifecostofservicesbyusingthePPP approach,withsavingsashighas45percentinoneofthecases.
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 StrongCustomerServiceOrientation Private sector infrastructure providers, often relying on user fees from customersforrevenue,haveastrongincentivetofocusonprovidingsuperior customerservice.Moreover,astheassetisnolongermanagedbythepublic sector,thepublicsectorisabletoconcentratemoreonensuringtheprovider maintainscertaincustomerservicelevels. In the case of accommodation PPPs, such as schools or defense facilities, customersatisfactionmetricscanbebuiltintothecontracttoensureastrong customerorientation.IntheUnitedKingdom,morethanthreequartersof endusersreportedtheirpublicprivatepartnershipprojectswereperforming asexpectedorbetterthanexpected;onequartersaidthatthefacilitieswere farsurpassingexpectations. Innovation in customer service delivery helps to account for such high satisfactionlevels.MotoristsusingtheCitylinkprivatetollwayinMelbourne, Australia,forexample,receivealertswhentheiraccountislowandcantop uptheiraccountsfromtheirmobilephone.Amobilecustomerserviceunit traversesthecityaroundtheclock,visitingcustomersatworkandathome, helpingtoinstalltagsandansweraccountquestions.Dissatisfiedcustomers canfilecomplaintswiththeCityLinkOmbudsman,anindependentdispute resolutionservicethatinvestigatescomplaintsandproposeswaystoresolve theissues.Theprivateoperatorhasalsointroducedacustomercharterand customer performance scorecard; by measuring City Link's performance against charter targets and making the results public, the process has increasedtransparencyandaccountability. In the United States, the owners of the 91 express lanes in southern Californiaholdfocusgroupstolearnmoreabouthowtopleasecustomers. EnablingThePublicSectorToFocusonOutcomesandCoreBusiness When they are properly structured, publicprivate partnerships enable governmentstofocusonoutcomesinsteadofinputs.Governmentscanfocus
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leadershipattentionontheoutcomebasedpublicvaluetheyaretryingto create.Thedestination,notthepath,becomestheorganizingthemearound whichtheprojectisbuilt.SchoolPPPsprovideapowerfulexampleofhow partnershipsenableschoolofficialstoshifttheirfocustothecorebusinessof learning.WhenschoolofficialsattheMontaignesecondaryschoolnearThe HagueintheNetherlandsneededadditionalschoolcapacity,theycouldhave justchosentheusualrouteofgettingbidsfromseveralcontractorstobuilda school.Instead,theyconcludedthatwhattheyreallywantedtobuywasa qualitylearningenvironmentandnotjustaphysicalassetinthiscasea schoolbuilding.Tothatend,theyenteredaPPPwithaconsortiumofprivate firmsthatprovidecleaning,caretaking,security,groundsmaintenanceand informationtechnology,leavingschoolteachersandofficialsfreetospendall theirtimeonthecoremission,teachingchildren.

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E)CONCLUSION
Theinfrastructurechallengebeforegovernmentstodaymayseemoverwhelming. The historical boomandbust spending cycle has created huge infrastructure deficits around the world, the consequences of which are significant for both citizens who have to deal with decrepit facilities or long delays before new infrastructureisdelivered,andgovernmentsfightingtostaycompetitiveintodays flatworld.Slowlygovernmentsarerealizingthatinactionissimplynotanoption. PPPsalonearenotapanacea.Rather,theyareonetoolgovernmentshaveattheir disposal for facilitating infrastructure deliverya tool that requires careful application.Bymakingthebestuseofthefullrangeofdeliverymodelsthatare availableandcontinuingtoinnovatelearningfromfailureinsteadofretreating from it the public sector can maximize the likelihood of meeting its infrastructureobjectivesandtakePPPstothenextstageoftheirdevelopment.This development,inturn,willenablethisrelativelynewdeliverymodeltoplayafar largerroleinclosingtheinfrastructuregapsbedevilinggovernmentsacrossthe world. Ever since India embarked on its first phase of Reform in early 1990s, infrastructure development has remained the top priority of the Government. Unfortunately the infrastructure growth has not been commensurate with the demandsmadeonitbyaneconomythatwasgrowingatmorethan6%p.a.This period also witnessed a consistent move towards fiscal discipline that further curtailed room for accommodating increasing government funding of major infrastructure projects. The pressures of globalization further accentuate the infrastructuregapinthecountry. Withtheeconomynowclockingagrowthrateofover8%,itisestimatedthatUS$ 320billionwouldberequiredbytheinfrastructuresectorsputtogetheroverthe next5years.Asignificantpercentageofthisinvestmentshouldcomefromthe privatesector.PublicPrivatePartnerships(PPP)presentthemostattractiveoption ofmeetingtheabovetargets,notonlyinprovidingresourcestoanextentbutalso inupgradingthestandardsofdeliverythroughgreaterefficiency.
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Government has attempted to bring out several innovative schemes aimed at leveragingitspositiontothefullestgivenitsvariouscommitments,whichattimes could seem mutually conflicting. Whereas to attract the private sector commerciallyviableprojectsshouldbeonofferandtoinculcatethedisciplineof user pay principle provision of these services should be based on payment of tariff,Governmentmustfulfillitscommitmenttoinclusivegrowthwhichmakesit obligatorytofixthetariffsbasedonthecapacityofthecommonmantopay.Due diligence is also essential given the substantial contingent liability that could devolveontheStateinsuchprojects. WhileencouragingPPPs,thegovt.clearlyperceivesbroadlyfourconstraints: a)Weaknessinenablingpolicyandregulatoryframework.Substantialworkneed tobedoneinmakingsectorpoliciesandregulationsPPPfriendly.Alargenumber oftheseprojectsareintheStatesandwithouttheactiveparticipationoftheStates itwouldnotbepossibletoachievesatisfactoryresults.thelongtermequityand debtfinancingneededbyinfrastructureprojects. b)Themarketpresentlydoesnothaveadequateinstrumentsandcapacitytomeet c)Thereisalsoalackofshelfofcredible,bankableinfrastructureprojects,which couldbeofferedforfinancingtotheprivatesector.Someinitiativeshavebeen takenbothatthecentralaswellasthestatesleveltodevelopPPPprojectsthese tendtobeisolatedcasesandhavedemonstratedamarkedlackofconsistency. d)Thereisalsolackofcapacityinpublicinstitutionsandofficialstomanagethe PPP process. Since these projects involve long term contracts covering the life cycle of the infrastructure asset being created, it is necessary to manage this processtomaximizereturnstoallthestakeholders. Government has taken measures to create enabling framework for PPPs by addressing issues relating to policy and regulatory environment. Progressively moresectorshavebeenopenedtoprivateandforeigninvestment,levyofuser charges is being promoted, regulatory institutions are being set up and strengthened,fiscalincentivesare giventoinfrastructureprojects,standardized contractual documents including the Model Concession Agreement are being
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notified,approvalmechanismforPPPsintheCentralsectorhadbeenstreamlined throughsettingupofPPPACandawebsiteexclusivelydevotedtoPPPshasbeen launchedtoserveasavirtualmarketplaceforPPPprojects.Toaddressfinancing needsof these projects, various steps have been taken like setting up of India InfrastructureFinanceCompanyandlaunchingofanewSchemetomeetViability GapFunding(VGF)ofPPPprojects.Settingupofinfrastructurefundsarealso beingencouragedandmultilateralagenciessuchasADBhavebeenpermittedto raiseRupeebondsandcarryoutcurrencyswapstoprovidelongtermdebttoPPP projects. Recently, Citigroup and IDFChavejoinedtogethertolaunchaUS$2 billion infrastructure equity fund and I am assured that it would be fully subscribedbefore31March2007.AninfrastructuredebtFundofUS$3billionis alsounderconsiderationofthesamecombine.Blackstonehasalsoshowninterest in putting together another large infrastructure Fund for India and are in discussion with the officials of the Ministry of Finance. Merchant Bankers and multilateral agencies are also being encouraged to provide creditenhancement servicesforraisingcheapermoneyfrommarket,ECBnormshavebeeneasedand the overall limit raised to $22 billion annually. Indian FIs are also being encouraged to develop an appetite for financing instruments such as takeout finance. To meet the capacity building requirements in the sector, Technical AssistancefromWorldBankandADBhasbeenreceivedandnecessarymeasures are being taken to implement various schemes like assisting the State GovernmentsandCentralMinistriesinhiringconsultants,preparationofamanual onPPPstoguidetheusersandundertaketrainingprogrammesforpublicofficials. Theopportunitiesforprivateinvestmentininfrastructureprojectsareimmense.As thereachofPPPincreasesacrossthesectors,thecapacityintheprivatesectorto managetheseprojectsovertheirentirelifecycleof20to30yearswouldalsohave to be enhanced. Government of India now permits FDI in most infrastructure sectorstotheextentof100%.Itistimethattheforeignstrategicinvestorsbeginto takegreaterinterestinprojectdevelopmentandmanagementactivityinIndia.I amhappytonotethatinthisinternationalconferenceorganizedbytheWorld Bank in collaboration with the Finance Ministry, several major private sector playersfromabroadarealsotakingpart.Theywould,inadditiontosharingwith
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theparticipantsthebestpracticesfromaroundtheworldtheywillalsotakeback with them a sense of what is happening in India and the excitement of an economyontheupswing.

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F)REFERENCES
DepartmentOfEconomicAffairs(DEA) MinistryOfFinanceGOI AsianDevelopmentBank(ADB) DeloitteResearchStudy TheWorldBank InternationalFinanceCorporation PPIAFPublicPrivateInfrastructureAdvisoryFacility PriceWaterhouseCooper(PWC)Research www.infrastructure.gov.in www.pppinindia.com DepartmentOfPlanningandPlanningCommission

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