PUBLIC PRIVATE PARTNERSHIP PROJECT

What are Public Private Partnerships

According to the Secretariat for the Committee on Infrastructure,
Government of India, a “Public Private Partnership (PPP) project
means a project based on a contract or concession agreement between a
Government or statutory entity on the one side and a private sector
company on the other side, for delivering an infrastructure service on
payment of user charges.

The concept of PPPs is of recent origin and started with the initiative of
the Conservative Government in the United Kingdom under Prime
Minister Margaret Thatcher, who actively promoted what is known as
‘Private Finance Initiative’ (PFI). The idea was to make private
contractors meet the cost of constructions awarded to them in return for
the public authorities agreeing to rent back the finished projects to
provide public services.
 Types of PPPs
Build, Operate and Transfer (BOT)

Lease, Operate and Transfer (LOT)

Build, Own, Operate (BOO) or Build, Own, Operate and

Transfer (BOOT)

Design, Build, Finance and Operate (DBFO) or Design, Build, Finance,

Operate and Maintain (DBFOM)

Operations Concession

Joint Ventures
 Build, Operate and Transfer (BOT)
The private sector partner is expected to bring the finance for
the project and take the responsibility to construct and maintain
it. The public sector will either pay a rent for using the facility
or allow it to collect revenue from the users. The national
highway projects contracted out by NHAI under PPP mode is
an example.
 Lease, Operate and Transfer (LOT)
This type of PPPs, a facility Transfer (LOT) which already exists and is
under operation, is entrusted to the private sector partner for efficient operation,
subject to the terms and conditions decided by mutual agreement. The contract
will be for a given but sufficiently long period and the asset will be transferred
back to the government at the end of the contract. Leasing a school building or a
hospital to the private sector along with the staff and all facilities by entrusting
the management and control, subject to pre-determined conditions could come
under this category.
Build, Own, Operate (BOO) or Build, Own, Operate and
Transfer (BOOT)
This is a variation of the BOT model, except that the ownership of the
newly built facility will rest with the private party during the period of
contract. This will result in the transfer of most of the risks related to
planning, design, construction and operation of the project to the private
partner. The public sector partner will however contract to ‘purchase’ the
goods and services produced by the project on mutually agreed terms and
conditions. In the latter case (BOOT), however, the facility / project
built under PPP will be transferred back to the government department or
agency at the end of the contract period, generally at the residual value
and after the private partner recovers its investment and reasonable return
agreed to as per the contract.
Design, Build, Finance and Operate (DBFO) or Design, Build, Finance,
Operate and Maintain (DBFOM)

These are other variations of PPP and as the nomenclatures highlight, the private
party assumes the entire responsibility for the design, construct, finance, and
operate or operate and or maintain the project for the period of concession. These
are also referred to as “Concessions”. The private participant to the project will
recover its investment and return on investments (ROI) through the concessions
granted or through annuity payments etc. It may be noted that most of the project
risks related to the design, financing and construction would stand transferred to
the private partner. The public sector may provide guarantees to financing
agencies, help with the acquisition of land and assist to obtain statutory and
environmental clearances and approvals and also assure a reasonable return as
per established norms or industry practice etc., throughout the period of
concession
 Concessions/Operations Concessions
This is a generic term, used to clarify the essential features of PPP arrangements. The
PPP agreements which authorize the private partner to recover its investments and
expected returns on investments through concessions granted for a certain period,
computed on the basis of demand projections and growth, are called operations
concession (OC). In these cases, the public sector (department or agency) which is
responsible to provide the service to the public and collect revenue by way of user
charges, toll, tariff etc., assigns its legal or statutory right to the private partner in return
for the latter undertaking the responsibility to implement the project and maintain the
required quality. The concession may be by collecting tolls and user charges or by the
public sector making periodical payments of annuities or monthly / quarterly/ half-
yearly charges on certain assumed basis, like shadow tolls etc.
 Joint Ventures
In a PPP arrangement commonly followed in our country (such as for airport
development), the private sector body is encouraged to form a joint venture company
(JVC) along with the participating public sector agency with the latter holding only
minority shares. The private sector body will be responsible for the design, construction
and management of the operations targeted for the PPP and will also bring in most of the
investment requirements. The public sector partner’s contribution will be by way of
fixed assets at a pre-determined value, whether it is land, buildings or facilities and /or it
may contribute to the shareholding capital. It may also provide assurances and
guarantees required by the private partner to raise funds and to ensure smooth
construction and operation. The public service for which the joint venture is established
will be provided by the entity on certain pre-set conditions and subject to the required
quality parameters and specifications. Examples are international airports (Hyderabad
and Bangalore), ports etc.
Difference between Public Private Partnerships and
Privatization

The main difference between PPP and privatization is that in the former there is
no permanent transfer of ownership of the assets to the private partner and
moreover, the public sector agency remains accountable for providing
services of the required quality. Thus, the responsibility and accountability to
deliver the goods and services efficiently remains with the public sector, which
is not diluted because of the PPP arrangement. On the other hand, in
privatization, not only the ownership is transferred to the private sector, but the
accountability is also shifted totally to the purchaser, though the government
may set standards and retain price / quality control by establishing appropriate
regulatory mechanism, as per the relevant legislation.
Organizational Structure for the Appraisal and Approval of Public Private
Partnership Projects
The institutional arrangement for the appraisal and the approval of Public
Private Partnership (PPP) Projects sponsored by various Ministries is centralized
in the Ministry of Finance (MOF). Guidelines for formulation, appraisal and
approval of PPP Projects were issued vide Ministry of Finance O.M.No.1/52005
dated 12th January, 2006.

The highest authority which lays down the PPP policy and procedures and
considers and approves individual PPP projects
The Committee on Infrastructure constituted under the chairmanship of the
Prime Minister. The Committee includes the Finance Minister, the Deputy
Chairman of the Planning Commission, Ministers in charge of the respective
infrastructure Ministries, and two members of the Planning Commission.
 Public Private Partnership Appraisal Committee” (PPPAC)

The broad-based “Public Private Partnership Appraisal Committee” (PPPAC)

established for the purpose comprise of the following members:

Secretary, Department of Economic Affairs – Chairperson.

Secretary, Planning Commission.
Secretary, Department of Expenditure.
Secretary, Department of Legal affairs.
Secretary, Department sponsoring the Proposal.
 Roll of PPPAC/Ministries/Committees
•The Committee will be serviced by a Special Cell set up for the purpose in the
Department of Economic Affairs (DEA).
•Moreover, the Ministry of Finance (MOF) will be the nodal ministry to examine
concession agreements from the financial angle and the guarantees to be extended,
and to assess the risk allocation from the investment and banking perspectives.
•MOF is also responsible to ensure that PPP projects are scrutinized from the
perspective of government expenditure.
•In the Planning Commission, a PPP Appraisal Unit (PPPAU) has been established to
evaluate PPP project proposals and to prepare appraisal notes for the PPPAC on all
relevant issues including on the concession terms. Ministry of Finance and the
Planning Commission may engage experts in related areas to undertake the due
diligence, as considered necessary.
 Financial Powers of PPPAC
•Under the initial guidelines of the MOF, all Public Private Partnership (PPP) Projects where
the capital cost or the underlying value of assets are more than Rs.100 crores were to be
brought up before the PPPAC.
•By a subsequent decision, projects costing more than Rs.100 crores but less than Rs.250
crores will be appraised by a Committee comprising Secretary, DEA and the Secretary of the
Department sponsoring the project, so much so, only projects in excess of this limit will be
appraised by the PPPAC.
•For appraisal of individual projects under the National Highway Development Authority
(NHDA) which are of Rs.250 crores or more but less than Rs.500 crores and fulfill certain
established criteria, another committee with Secretary, DEA and the Secretary, Department of
Road Transport and Highways (DRTH) has also been set up.
•Projects costing below the limit of Rs.100 crores will be considered and approved by the
Expenditure Finance Committee / Standing Finance Committee (EFC/SFC) of the Ministry
concerned. Detailed guidelines have been issued by the Department of Expenditure (DOE) in
this regard.
•After the clearance of the relevant committee, the sponsored projects would be submitted to
the Committee on Infrastructure for final approval.
 Procedure for Formulation and Appraisal of PPP Projects
•Under the guidelines of the Finance Ministry, the sponsoring Ministry may
develop individual project proposals with the help of experts in relevant areas, or by
availing the benefit of inter-ministerial consultative groups for the “in-principle”
clearance of the PPPAC before inviting Expressions of Interest (EOI) from prospective
investors.
•After getting the ‘in-principle’ clearance, the sponsoring Ministry may invite EOI,
develop the required documents and carry out inter-ministerial consultations, pre-bid
conferences etc.
•The concession agreements finalized for the purpose of inviting financial bids
should be cleared by the PPPAC before technical and financial bids are invited.
• However, ‘in-principle’ approval of the PPPAC will not be required where a project is
based entirely on a duly approved Model Concession Agreement (MCA).
 Model Concession Agreements (MCA)

•The MCA is a document prepared by the Planning Commission, at the instance of the
Committee on Infrastructure, to ensure that the complex problems relating to PPP projects
and the conflicting interests of the partners of such arrangements are adequately addressed
up front. The MCA also seeks to achieve an appropriate balance of risks and obligations
shared between the partners.
•Apart from spelling out the policy and the regulatory framework of the infrastructure
sector concerned, the MCA also deals with aspects such as the mode of financing the
projects, mitigating and unbundling of risks, allocation of risks and rewards, reduction of
transaction costs, force majeure and termination etc.
•The MCA also aims at cost-effectiveness in designs, phasing of the investment
requirements, fixing the concession periods, and establishing technical parameters based on
output specifications etc.

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• An important clause in the MCA provides for the forfeiture of the bid security if the
concessionaire fails to achieve financial close within the stipulated (six months) period.
• The MCA is a carefully drafted legal document which helps the partners of the project to
define and spell out mutual rights and obligations clearly and in specific contractual
terms. Material or substantive deviations from the MCA will require specific approval
of the authority which approved the MCA (Committee on Infrastructure) whereas those
which are not material will require the clearance of the PPPAC and the Finance Minister.
• Planning Commission has brought out separate MCAs for PPP in National Highways,
State Highways, Operation and Maintenance of Highways, and Ports.
• In addition, Planning Commission has also issued Manuals of Specifications and
Standards for Four-laning of Highways to be used along with the MCA concerned.
• Public auditors are encouraged to familiarize themselves with all MCAs published by
the Planning Commission and refer to the relevant ones to verify the compliance by the
PPP partners, as part of the audit scrutiny during assignments.
 Appraisal by / Approval of PPPAC
•Request for Proposal (RFP) or invitation to submit financial bids should be accompanied
by all agreements that are proposed to be entered into with the successful bidder.
•After formulating the draft RFP, the sponsoring ministry will seek the clearance of the
PPPAC before inviting the financial bids.
•These will be reviewed by the PPP Cell, PPPAU and Ministries concerned and their
observations will be conveyed to the sponsoring Ministry for responses.
•The PPPAC will take a view on the Appraisal Note and other comments and responses
etc. duly circulated to the members and in appropriate cases, recommend the proposal for
the approval of the Committee on Infrastructure under the Prime Minister.
•Details to be included in the Memorandum for PPPAC, Term Sheet for the proposed
Concession Agreement etc. are available as part of the MOF Guidelines on Formulation,
Appraisal and Approval of PPP Projects.
 Financial Support to PPP Projects in Infrastructure
•Ministry of finance has notified the guidelines for Financial Support to PPP projects in
Infrastructure (Viability Gap Funding) vide its OM No. 1/5/2005-PPP dated 12 th January
2006.
•The scheme provides for financial support to roads and bridges, railways and sea ports,
airports and waterways, power, urban transport, water supply and sewerage, solid waste
management, tourism projects etc.
•In order to operate the scheme, the Government has set up an Empowered Committee,
supported by an Empowered Institution. The Committee / Institution are authorized to
approve financial assistance to PPP projects which satisfy the eligibility criteria specified in
the scheme. The Committee is chaired by the Secretary of the Department of Economic
Affairs and has the Secretaries of Planning Commission, Department of Expenditure and
the sponsoring Ministry as members.
•The Committee is empowered to sanction Viability Gap Funding (VGF) of up to Rs.200
Crores for each project subject to the budgetary ceiling indicated by the Finance
Ministry. Amounts in excess of the above ceiling will require the approval of the Finance
Minister.
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 The Empowered Institution is competent to sanction financial support up to
Rs.100 Crores for eligible projects subject to budgetary ceilings and has the
Additional Secretaries of DEA and Expenditure and the Joint Secretaries of
DEA, Planning Commission, and the sponsoring Ministry as members.
 The scheme is applicable to PPP Projects proposed by the Central Ministries, State
Governments and statutory authorities which own the underlying assets of the
projects.
 The benefits under the scheme will be available only if the concession is awarded to
a private sector company in which 51% shares or more of the subscribed and paid
equity are owned and controlled by a private company and has been selected on
the basis of competitive bidding, with responsibility for financing, construction,
maintenance and operation of the project during the entire period of the concession .
 The financial support available under the VGF will be in the form of a capital grant
at the stage of project construction. The amount of VGF will be equivalent to the
lowest bid for capital subsidy, subject to a maximum of 20% of the total project cost
(TPC).
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 In case the sponsoring Ministry or the State Government or the statutory
authority proposes to provide any assistance over and above the VGF, it
will be restricted to a further 20% of the TPC.
 Within the prescribed period of three months of the award of the assistance or any
permitted extended period, the Lead Financial Institution (LFI) which will be the
approved funding agency for the project will send its appraisal of the project to the
Empowered Committee / Institution along with its recommendations for final
approval.
 VGF will be disbursed only after the private sector participant has subscribed and
expended the equity contribution for the project and will be releasable in
proportion to debt disbursements remaining to be given thereafter.
 The LFI will be responsible for the regular monitoring and periodic evaluation of
project compliance with agreed milestones and performance levels under a
tripartite agreement to be signed for the purpose.
 VGF: VGF as a ‘grant one time or deferred, provided under this scheme with
the objective of making a project commercially viable.
 Institutional arrangements in State Governments

•Various State Governments have made specific institutional arrangements to encourage

entrepreneurs to invest in PPP projects and to process and appraise PPP project proposals
received by public agencies in the respective States.
•For instance, Andhra Pradesh and Gujarat have passed laws to promote and regulate PPP
projects while some others have established their own rules and regulations and issued
related notifications.
•In some States like Karnataka, special or dedicated cells have been constituted in the
Secretariat to deal with PPP policy and project proposals whereas in some others like
Tamil Nadu, State Infrastructure Corporations undertake most duties and responsibilities
regarding the promotion of PPP in those States.
•Details of the State PPP organizations could be accessed from respective State
Government websites.
 Audit of Public Private Partnership Projects
Mandates for Public Audit of PPP Project
•Under the Comptroller & Auditor General’s (DPC) Act, 1971, and as incorporated in the
Regulations of Audit and Accounts (2020), the audit mandate of the CAG of India will
extend to all types of (promoting) public institutions, namely, government departments (as
the sole auditor of the accounts of the Union and States), PSUs (in terms of the Companies
Act), and to bodies and authorities etc. (as provided under the DPC Act).
•The DPC Act however does not directly contemplate the audit of PPP projects or
joint ventures with only minority participation by the government agency since these are
recent innovations under the development strategy
•Under the circumstances, the public auditor shall have to confine his audit to the data,
records and documents in the possession of the government department, PSU or autonomous
body which is the public sector partner of the PPP arrangement, and rely on it for additional
information, as is required to fulfill his tasks.
 Scope of audit by the CAG
•The government or the public sector partner is usually only a
minority partner /shareholder or will have only minority participation in the
PPP arrangement, with the private sector partner controlling the majority
stake.
•Most of the funds are brought in by the private sector partner.
•The construction, management and operational risks are transferred to the
private sector partner.
•The work culture and the decision making processes of the private sector
partner which may be alien to and contra-distinct from those of the public
sector institutions.
•The emphasis of PPP projects is usually on the end results of the PPP
arrangements and not on the means to achieve them.
Broad considerations would support the intervention of public audit in
PPP Projects.
•The authority of the government / public entity to provide the goods and services to the
public at affordable cost stands transferred to the private sector partner.
•The right to levy tolls / user charges also gets shifted to the private sector partner.
•The cost of executing the project directly by the government or its agency may be
relatively lower since they are able to raise funds (either from revenue or by
borrowing) at a cheaper cost.
•The government / public agency concerned will continue to retain accountability for
the provision of the service to the public at a reasonable cost.
•The contracts / concessions granted are usually for a long term and thereby alienates the
statutory right involved for a very long period.
•The transfer of the public assets to the private body for the duration of the contract requires
audit involvement.
Contd…….
• The most important factor that would weigh with the SAI to conduct the
audit of PPP projects is to ensure the value for money aspects of such
transactions.

• The main purpose of the audit, and based on which the scope could be defined,
would thus be to provide a reasonable assurance to all stakeholders including the
government, parliament/ legislatures, and the public that the PPP arrangement
subjected to the audit has yielded value for money and that public interests have
been adequately protected.

• However, the question arises about extending the audit scrutiny to the records of
the PPP entity since these would be in the control of the private sector partner,
Broadly the audit of PPPs by the CAG may cover the aspects of the project
indicated hereunder :
•The data, records, analysis and the decision process of the government
department / public sector agency to prefer the PPP route to execute the project
instead of undertaking it directly.
•Documents and files leading to the formulation, appraisal and approval of the
project.
•The process of identifying the private sector partner, requests for
proposals (RIP), bidding and tendering process of the contract with due
diligence to fairness, transparency and objectivity.
•In-depth analysis of the project documents including the shareholders’
agreement, concession agreement, operation and maintenance agreement etc.,
total project cost, financing arrangements, justification for the viability gap
funding, contract period etc.
•Accounts documents, bills, records and schedules relating to the construction,
and oversight arrangements.
Condi…..
• Value for money considerations and safeguarding the public interest.

• Operation and maintenance of the assets, tariff / toll / user-charges

collection and accounting and revenue sharing arrangements, escrow accounts.

• Quality and standards of the service, customer protection, dispute

resolution and asset transfer arrangements etc.

• End of the project operations including valuation of residual assets,

decommissioning, dispute resolution mechanism, etc.
 The scope of audit will also extend to the following:
• Actual volume of demand (viz., traffic) and revenue generation (including from
commercial developments) against the projected flow and the arrangements to monitor the
trend periodically.

•System to verify the accuracy and reliability of reporting the results.

•Economy in the cost of operations and avoiding “padding” of costs, revenue sharing
arrangements.

•Need to re-adjust the contract period in case the Rate of Return (ROR) is higher than what
was projected.

•Quality and consistency of service at affordable cost to the users at large etc.

•Any other related issues which may be project specific.

 Objectives of the PPP Audit
•The basic objective of public audit is to ‘provide unbiased, objective assessment of
whether public resources are responsibly and effectively managed to achieve the intended
results.
•Auditors, through their evaluation, (should) help the government organizations achieve
accountability and integrity, improve operations, and instill confidence among citizens and
stakeholders.
•Public auditors’ role supports the governance responsibilities of oversight, insight, and
foresight.
•Oversight addresses whether government entities are doing what they are supposed to do
and serves to detect and deter public corruption.
•Insight assists decision makers by providing an independent assessment of government
programmes, policies, operations and results.
•Foresight identifies trends and emerging challenges.

Contd…..
• The main objective of the audit of PPP projects is to provide a reasonable assurance to
all stakeholders about the wisdom, faithfulness, integrity, economy, efficiency and
effectiveness of the PPP arrangement and to ensure that the infusion of the private sector
agency into the project has resulted in improving the value for money for the
government.
• The aim is to cover all aspects of the project contracting and execution, but without
impacting the freedom and innovations built into the arrangement.
• Unlike in the case of audit of government departments and entities, the relevance of
regularity and compliance audit will be limited since the focus of PPP audit will be on
contract audit, validity of total project cost, economy and efficiency of operations of the
entity as seen from the public participant’s point of view and most of all on achieving the
objectives (results) of the partnership rather than on how the private sector partner
secures goods and services for the project.
• These subtle points have to be borne in mind while planning and conducting the PPP
audit.
 Types of Documents to be Audited
•A question uppermost in the mind of public auditors when they plan the audit of PPPs
would be the type of documents to be subjected for the scrutiny.
•Since the majority stakeholder in terms of financing, construction, operation and
maintenance of the project would be the private sector partner, (and since these and
associated risks would stand transferred to it), the question will have significant relevance.
This is also closely related to the issue of “audit evidence”, which refers to data, information
and documents relied upon to arrive at audit findings and conclusions.
As we discussed earlier the following document should audited:
•Documents regarding the project formulation, appraisal and approval, available with
the nodal ministry, promoting agency.
•Data and documents relating to the contract documents and concession award
originated by and available with the public sector partner.
•Data and documents furnished to the public sector partner by the private contractor and
available with the former for verification.
•Reports submitted by the Independent Engineers and Independent Auditors
Accessing the Documents and Records of the Private Partner by
Auditors

•A question which requires to be addressed in this regard is whether the auditors are
required to access the documents of the private partner for the purpose of their audit. It
could be assumed that the private sector partners are likely to resist the move on the plea
of commercial confidentiality.

•In the normal course, all documents and data required by the public auditors are likely to
be available with the government department and the public sector agency which
promoted the PPP project. However, in case any additional information is essential
for the purpose of verifying facts and for audit evidence, in that case:-
Contd…….
• The form, type and extent of data, information and documents required for audit tests
and evidence shall be determined by the audit officer. Audit shall have access to such
data, information and documents subject to any law in force at the time. Data,
information and documents would also include those obtained by the auditable entity
from a third party and relied upon by it in performance of its functions. If such third
party evidence as relied upon by the audited entity is found to be insufficient in audit,
additional information may be requisitioned by Audit from the auditable entity with
prior approval of the Accountant General (Audit). On receipt of such requisition, the
same shall be obtained by the auditable entity from the third party and provided to
Audit”.
• The above procedure may be adequate to meet the requirements of public audit under
most circumstances. However, if the audit is being undertaken under Section 20 (1) or
(2) of the DPC Act, and the body to be audited is either a joint venture with minority
participation by the public sector agency (e. g. Delhi / Mumbai/Hyderabad / Bangalore
International Airport Limited), the sanction issued by the President or the Governor, as
may be, shall include a clause requiring the body to make available all data and
documents requisitioned by the public auditors.
When Should a PPP Project Be Subjected to Public Audit?
•In respect of large projects, the audit by SAI is always planned and undertaken at different
stages of the project.
•large project with heavy investment commitments and a long time-frame is under
execution, audit may be planned and executed even before the completion of the project.
•Audit of projects and programmes of smaller magnitude, may be taken up after the
completion of the project.
•The decision as to when the audit of an ongoing PPP project should be programmed will
depend on several factors, mainly, the quantum, magnitude (especially the volume of the
concession and the financial commitments of the public sector partner) and the time frame
for the completion/ concession period of the project, as also all other risk assessments.
•In a PPP project, since there is a balanced sharing of risks between the public and private
sector partners, it is necessary to identify these risks and determine the schedule of the audit
having regard to the risks attached to the former. The decision in this regard will
appropriately be taken by the head of the audit office, depending on the circumstances of
each case, as also taking into account the availability of audit resources.

Contd…….
• Since the PPP projects go through several stages such as finalization of the contracts,
financial closure, construction, maintenance and operation etc, it would be
appropriate to conduct the first audit soon after the partnership comes into being. The
subsequent audits could be programmed during construction, towards the completion
of the project, and when the service operations are in progress.

• Depending on the circumstances, it may be useful to club a number of identical

PPP projects and subject them to a combined audit rather than testing them
individually. This will not only help to economize scarce audit resources, but will
also provide comparators for audit purposes and will give a broader picture of the
PPP exercises carried out under the same umbrella.
 RISK ASSOCIATED WITH PPP PROJECTS:
• Feasibility/ Organizational Risk
 This may relate to the selection of the right type of PPP arrangement suitable for the
project. In Audit it have to verify the feasibility study carried out by the promoter including
demand projections, cash flow, rate of return etc., and review the analysis carried out
before reaching a conclusion on the type of partnership selected for the programme. The
risk associated with this aspect will remain with the government agency.
• Condition Precedent Risks
 The public sector partner will have to fulfill several conditions precedent to enable the
private sector partner to start work on the project, including making available the
required land and assets etc. and environmental and other statutory clearances. These will
constitute as red flags for the auditors to verify.
• Financing Risk
 A major risk for the project will indeed be the financing risk. This involves two issues, one
regarding the ease with which the required finance could be raised for the project, and the
other is about the abatement of interest charges and repayment of the principal.
• Construction Risk
 Construction risk is assumed in the PPP arrangement by the private sector party
which will have to bear the consequences of the delays and variations caused due its
inefficiency. The focus of audit will be on whether the PPP project has achieved its
end results and not necessarily on how it was achieved.
• Operation and Maintenance Risk

 The public sector partner has to ensure the quality of maintenance and the
standard of the service to the public. The reports to be submitted by the
Independent Engineers will provide detailed information on the quality and
standard being followed by the private partners. The agreements between the
private sector partner and the operation and maintenance contractor would come
within the scope of audit while assessing the risk to the public authority.
• Demand Risk
 This is a major risk which is usually shared by both parties to the contract. since these are contracts for long periods
and demands for services would also depend on the state of the economy among other factors, it may happen that there
are variations between the projections and actuals. The contracts will provide for readjustments of the concessions/
period of concessions to take care of such eventualities. It must be especially noted that if financial support through
Viability Gap Funding (VGF) is provided, the question of increasing the tariff / user charges or the concession period
so as to reduce the viability gap does not arise, and is prohibited
• Revenue Risk
 Shortfall in demand and consequentially the revenue has the potential of destabilizing the
PPP arrangement because the private sector partner may be forced at some stage to opt
out. Shortfall in revenue generation will hurt both parties. While the public authority
loses the prospect of providing better and early service to the public, the private sector
partner will stand to lose potential income. Such variations can also entail higher amounts
of annuity being paid to the private sector partner where the public authority is committed
to do so under the PPP arrangement. Shortfall in demand and revenue can result from
unrealistically higher level of user charges allowed and fixed under the PPP arrangement.
It has, therefore, to be seen whether the formula for tariff fixation or user charges is
worked out correctly and takes into account the best interest of the user community
as well as the investors.
Contd….
• Risk from unforeseen developments
 Generally, unforeseen developments such as natural disasters are covered under
contractual clauses relating to force majeure. However, there could be other
developments which may relate to political and business environment,
technological changes or any other factor that proves to be a game changer
invalidating all the assumptions on the basis of which the business model of a PPP
arrangement rests. Such undefinable risks have to be envisaged under the PPP
arrangements and suitable provisions built in to allow all the parties particularly the
public authority to extricate itself from such situations with minimal damage and to
facilitate a movement forward out of a potential stalemate. The agreement
between various parties may provide ‘step in’ and/or ‘buy out’ mechanisms to
facilitate exit of one party and its substitution by another party to facilitate
continuity of the project.
• Termination Risk
 This risk will arise if the private sector partner fails in the project because of its
management failure, bankruptcy, dismal performance, indebtedness etc. This
risk is borne by the promoting public sector partner. The auditor will have to
consider various aspects relating to the selection of the partner, qualifying
procedures, reporting and oversight system etc., before coming to conclusions. It is
important to examine whether the public agency has considered the possibility of
such events and worked out a suitable strategy to face such risks. The Request for
Proposal (RFP) issued by the promoter may be scrutinized to check whether all
conceivable eventualities were taken into consideration to anticipate the termination
risks and to cope with such situations, in case they arose.
• Residual Value Risk
 This risk arises at the end of the PPP contract when the asset is to be transferred back
to the government or its agency concerned, who will be holding the risk. The contract
between the parties should include suitable provisions regarding the health of the
assets, its valuation method and other aspects to avoid disputes and losses arising
from poor maintenance of the assets and the assurance for their return in the desired
conditions
 Sequential Approach for audit of PPP Projects:
•Audit of Project Formulation and approval
 Strategic Plan.
 Feasibility Report.
 Detailed Project Report.
 Shareholders’ Agreement.
 State Support Agreement
 Operation, Maintenance and Development (OMD) Agreement.
 Concession Agreement.
 Technical Operation Agreement (where required.)
 Lease Agreement.
 Substitution Agreements.
 Independent Engineer’s / Auditor’s Agreement
 Escrow Account Agreement.
 Other
•Audit of Concession and Concession Period
•Audit of Risk Allocation
•Audit of Financing Risk
•Audit of Viability Gap Funding (VGF)
•Audit of Tariff/Toll/User Charges
•Audit of Total Project
•Audit of Bidding and Evaluation
 Request for Qualification (RFQ)
 Request for proposals (RFP)
 Pre bid conference
 Copies of Agreement
 Audit of construction of the Project & Monitoring of the Project Construction
Activities
• Public auditors are conversant with the audit of construction of projects since PWD audit has been a mainstay
of conventional auditing. In PPPs, since the construction risk is transferred to the private participant who is
usually responsible for the design, construction, specification and quality thereof, the emphasis of the audit
scrutiny may not of that of compliance, but that of the end product
• The concession Agreements would provide for the appointment of “Independent Engineers” (IE) and
“Independent Auditors” (IA) by the public sector partners to enable them to monitor the project activities, and
to act on their behalf to accord sanctions and to coordinate the construction, technical and commercial
activities. The IE is responsible to ensure the timely completion of the project by watching the milestones,
quality of construction and adherence to the standards and specifications of the project by the implementing
partner.
 Audit of Commercial Development
• The Concession Agreements usually allow the JVC or the private participant to
exploit these commercial openings and raise revenue which must go to abate the
TPC and to reduce the burden of toll / user charges on the consumers.
 Audit of Operation, Maintenance & Development and the collection of
Revenue
 Auditing PPP for Value for Money Evaluation
 Audit of Valuation of Assets
 Audit recommendations
Substantial care must be taken in framing the audit recommendations to be included in
PPP audit reports. Recommendations, if included in the report, should be specific and
precise and to the point. The effort should be to report on the lessons learnt rather
than fault findings. The fact is that there is very little scope for amendments to
the contract once they are signed and are in operation, even if the auditors point
out omissions and deficiencies, unless they are patent violations to the terms of
the agreements or erroneous interpretations or management failures.
Nevertheless, the audit findings will bring out the deficiencies for future guidance as
“lessons learnt”, apart from helping to make the officials who processed the
agreements accountable. They may also be helpful for the public sector partners to
negotiate for better terms in implementation of the agreements depending on the
nature of such findings. Hence, sufficient care must be taken in drafting the
recommendations for inclusion in the audit reports; they should not be routine and
must help the government department / public sector agency concerned to
implement the project in the best public interest
The END