NICMAR ASSIGNMENT PUBLIC PRIVATE PARTNERSHIP IDM-12

ASSIGNMENT ON 1. Course No

:

IDM 12

2. Course Title

:

“Management of PPPs”

3. Assignment No.

:

1

4. Date of Dispatch

:

5. Last Date of receipt of Assignment at SODE Office

:

SUBMITTED TO: NATIONAL INSTITUTE OF CONTRUCTION MANAGEMENT & RESEARCH (NICMAR) PUNE. SCHOOL OF DISTANCE EDUCATION (SODE)

SUBMITTED BY:

Page 1

Management of PPPs

Page 2

CONTENTS SR.NO. 1 2

DESCRIPTION Different Public Private schemes Parties involved in Public Private

PAGE NO. 5-13 14-16

3

participation and their roles. Financial structuring of Public-Private

17-25

4

Partnership projects. Do you think this system is ideal for

26-31

5

infrastructure development? Discuss Bibliography / Readings

32-32

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ASSIGNMENT: The term “public-private partnership” describes a range of possible relationships among public private entities in the context of infrastructure and other services. Other terms used for this type of activity include private sector participation (PSP) and pritivisation. Under PPP principle, a private entrepreneur is given a concession (by a contract) to build, operate (or own /lease/ rent/ manage) for an agreed duration and then transfer the asset to the Govt. / Govt organization. Based on the study material supplied to you explain: 1. Different Public Private Schemes. 2. Parties involved in Public Private participation and their roles. 3. Financial structuring of Public-Private Partnership projects. 4. Do you think this system is ideal for infrastructure development? Discuss.

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1. Different Public Private schemes Public Private Partnerships refers to arrangements, typically medium to long term, between the public and private sectors whereby some of the services that fall under the responsibilities of the public sector are provided by the private sector, with clear agreement on shared objectives for delivery of public infrastructure and/ or public services. A PPP is generally a contract or agreement to outline the responsibilities of each Party and clearly allocate risk. In a BOT arrangement, the private sector designs and builds the infrastructure, finances its construction and owns, operates and maintains it over a period, often as long as 20 or 30 years. This period is referred to as the "Concession" period. Such projects provide for the infrastructure to be transferred to the Government at the end of the concession period. There are a number of major parties to any BOT project, all of whom have particular reasons to be involved in the project. The Contractual arrangements between those parties, and the allocation of risks, can be Complex and should be discussed in detailed structuring of BOT projects. PUBLIC PRIVATE PARTNERSHIP: A business relationship between a private-sector company and a government agency for the purpose of completing a project that will serve the public. Public-private partnerships can be used to finance, build and operate projects such as public transportation networks, parks and convention centers. Financing a project through a public-private partnership can allow a project to be completed sooner or make it a possibility in the first place. The private sector is playing an increasingly crucial role in the financing and provision of services that were traditionally the domain of the public sector. One of the key reasons is that governments are unable to cope with the ever-increasing demands on their budgets. Most infrastructure expenditures in developing countries have been funded directly from fiscal budgets but several factors such as macroeconomic instability and growing investment requirements have shown that public financing is volatile and, in many countries, rarely meet crucial infrastructure expenditure requirements in a timely and adequate manner. Page 5

Furthermore, there are efficiency gains arising from innovation, management and marketing skills offered by the private sector and greater incentives for the control of construction, operating and maintenance costs. More so, the provision of additional finance for infrastructure projects enables projects to be brought forward in time, thus generating earlier economic benefits. The diagram below illustrates the options for involving the private sector in the provision of infrastructure delivery. Diagram 1: Range of Private Sector Options

At the left are supply and service contracts, which tend to be of short duration and require less private commitment than the options higher in the continuum. The private Contractor is not directly responsible for providing the service, but instead for performing specified tasks, such as supplying inputs, constructing works, maintaining facilities, or billing customers. At the left are the longer term arrangements which require significant private sector commitment.

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OPTION OF PPP: There is a range of options for involving private sector participation that vary with regards to ownership, operations and maintenance, financing, risk allocation and duration. A summary of these options can be viewed in Table 1. Table 1: Allocation of key responsibilities under the main private sector participation options Option

Asset

Operations

Capital

Commer

Ownership

and

Investment

cial Risk

Duration

Maintenan Service

Public

ce Public

and Public

Public

1-2 years

Public

Private Private

Public

Public

3-5 years

contract Lease

Public

Private

Public

Shared

8-15

Concession

Public

Private

Private

Private

years 25-30

Build

Private and

Private

Private

Private

years 20-30

Operate

public

Transfer Divestiture

Private or

contract Manageme nt

years Private

Private

Private

Indefinite

private and

(may be

public

limited by license)

Service contract

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Under this option, the private sector performs a specific operational service for a fee, for example meter reading, billing and collection. Management contract In this option, the private sector is paid a fee for operating and maintaining a government-owned business and making management decisions. Lease Under the lease option, the private sector leases facilities and is responsible for operation and maintenance. Concession Under concessions, the private sector finances the project and also has full responsibility for operations and maintenance. The government owns the asset and all full use rights must revert to the government after the specified period of time. BOT BOT is the terminology for a model or structure that uses private investment to undertake the infrastructure development that has historically been undertaken by the public sector. In a BOT project, a private company is given a concession to build and operate a facility that would normally be built and operated by the government. The private company is also responsible for financing and designing the project. At the end of the concession period, the private company returns ownership of the project to the government (although this need not be the case). The concession period is determined primarily by the length of time needed for the facility’s revenue stream to pay off the company’s debt and provide a reasonable rate of return for its effort and risk. Page 8

The table provided below reviews the BOT option and its variants, describes some characteristics of these different procurement arrangements and depicts the relationship between these different procurement methods and the financing of the project. BOT PROJECT PROCUREMENT STRUCTURES BOT Project Type Build Own Operate Transfer (BOOT)

Characteristics • The service provider is responsible for design and construction, finance, operations,

maintenance

and

commercial risks associated with the project. • The service provider owns the project throughout the concession period • The asset is transferred back to the government at the end of the term, often at no cost. Build Own Operate (BOO) • Similar to BOOT projects, but the service provider retains ownership of the asset in perpetuity. • The government only agrees to purchase the services produced for a fixed length of time Design Build Operate (DBO) • A design and construction contract linked Page 9

to

an

operation

and

maintenance contract. • The service provider is usually responsible for financing the project during construction. • The government purchases the asset from the developer for a pre-agreed price prior to (or immediately after) commissioning

and

takes

all

ownership risks from that time. Lease Own Operate (LOO) • Similar to a BOO project but an existing asset is leased from the government for a specified time.

Some other schemes in PPP are:BOT-Toll (Build Operate Transfer – Toll) - The private entity meets the upfront cost of design, construction and recurring cost on operation and maintenance. The Private entity recovers the entire cost along with the interest from collection of user utilization during the agreed concession period. Capital infusion is available from the public entity. A risk sharing model is predominant in this model.

BOOT (Build Operate Own Transfer) - This engagement model is similar to the “Build Operate Transfer” model except that the private entity has to transfer the facility back to the public sector. In BOOT model the government grants a private entity to finance, design, build and operate a facility for a specific period of time before the transfer. This is a variation of the BOT model, except that the ownership of the newly built facility will rest with the private party and 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 entity. The public sector entity will however contract to ‘purchase’ the goods and States and their area of development in PPPs services produced by the project on mutually agreed terms and conditions.. The facility built under PPP will be Page 10

transferred back to the government department or agency at the end of the contract period, generally at the residual value and after the private entity recovers its investment and reasonable return agreed to as per the contract. Joint Venture (JV) - 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 predetermined value, whether it is land, buildings or facilities 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.

Management Contract (MC) - A management contract is a contractual arrangement for the management of a part or whole of a public enterprise by the private sector. Management contracts allow private sector skills to be brought into service design and delivery, operational control, labour management and equipment procurement. However, the public sector retains the ownership of facility and equipment. The private sector is provided specified responsibilities concerning a service and is generally not asked to assume commercial risk. The private contractor is paid a fee to manage and operate services. Normally, payment of such fees is performance-based. Usually, the contract period is short, typically two to five years. But longer period may be used for large and complex operational facilities such as a port or airport. BOT (Build Operate Transfer) - The private business builds and operates the public facility for an agreed period of time. Once the facility is operational as agreed, or at the end of the time period, the private entity transfers the facility ownership to the public, here it may be construed as Government. Under this category, the private partner is responsible to design, build, operate (during the contracted period) and transfer back the facility to the public sector. 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. This model is a classic example for IT industry Page 11

BOT – Annuity (Build Operate Transfer – Annuity) This model though is globally accepted one does not have the favour of the Planning Commission of India. In case of annuity model, the cost of building the entity is paid to the private entity or the developer annually after the starting commercial operations of the facility DBFOT (Design Build Finance Operate Transfer) - 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 maintain the project for the period of concession. These are also referred to as “Concessions”. The project will recover its investments (ROI) through 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. BOO (Build Own Operate) - In a BOO project, ownership of the project usually remains with the Private entity. The government grants the rights to design, finance, build, operate and maintain the project to a private entity, which retains ownership of the project. In BOO the private entity is usually not required to transfer the facility back to the government BOOST (Build Operate Own Share Transfer) This model is very similar to the BOOT model, except that there exists an arrangement or sharing the revenue to the private entity for a longer time even after the rights of the private entity is transferred to the public entity.

BOT projects, when properly designed, offer significant potential for technology transfer and local capacity building as well as helping develop national capital markets. Advantages and Challenges of the BOT Approach The BOT approach has many potential advantages, some of which have been alluded to above, and is a visible alternative in most countries to the more traditional approach using sovereign borrowings or budgetary resources

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Some challenges that should be taken into consideration include the length of time required to develop and negotiate BOT schemes, the need for a suitable political and economic climate, and a defined regulatory environment. In short, the BOT approach requires an environment that is conducive to private sector investment. The economic costs associated with BOT projects include the following: • Costs due to imbalance in experience. Governments with little experience in BOT contracts are advised to initiate BOT projects on a manageable scale and seek professional advice to compensate the often greater experience of the private sector. • User costs imposed for the first time or increased to match market rates. The economic costs of public services, once covered by the Government, and then become financial costs for the user. • Overpriced supplies. Potential conflicts of interest on pricing among the project sponsors must be monitored. Care must be taken to ensure that sponsors who supply goods or services to the project do so on a fully competitive basis. • High financing costs. Financing costs for BOT projects tend to be high, as the legal fees associated with their contractual arrangements are much higher than those of standard commercial contracts. The complexity of the credit means that lenders need more time than usual to assess a project’s merits and will tend to charge higher fees.

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2. Parties involved in Public Private participation and their roles. (i)

The Government: The government is represented either through a ministry or a government body (such as State Government or a Municipal Body) with its own body of authorized personnel empowered to negotiate and take decisions regarding the implementation of the project. The main interest of the government in relation to the implementation of the infrastructure projects by a private entity should be to ensure that only necessary and required projects are authorized and the projects that are authorized are indeed implemented within the time frame and at the costs that ensure their viability not only at a commercial level but also at a social / public level. This would entail that an adequate and balanced frame work is provided to ensure the speedy implementation of the projects. This also ensures that the facility is built to the required standards and within the reasonable costs estimated at the time of authorization of the projects.

(ii)

Sponsors: The concerned group from the non-government sector that is seeking or that has been selected to implement the project are commonly referred to as the ‘sponsors’ or ‘developers’.

(iii)

Lenders – Financing Agency. He is not a share holder: The group of legal entities, institutions, companies and other persons that provide the debt financing for the development of the project are referred to as the ‘lenders’.

(iv)

Investors: The persons who invest money into the development of the project are referred to as ‘investors’. The main difference between lenders and investors is that lenders do not look towards acquiring a participatory interest in the implementation of the project and its consequent returns, but only seek to lend money on commercial terms in order to ensure an adequate increase in the amounts lent through the payment of periodic interest on the amount till the complete repayment of the amount Page 14

borrowed. This difference in the nature of their interests in financing the implementation of the project distinguishes the amount of risk that the lenders are willing to accept regarding the project. It is common to find the same entity being a lender with the regard to another amount. The differentiating factor between the two is the risk the entity is undertaking in relation to the specified sums and the manner in which its interests in relation to the sums forwarded are protected. (v)

Contractors: As an infrastructure project involves expertise that is seldom present within the capability of any single sponsor or contractor, there are various groups of contractor selected by the sponsors to implement the various segments of the project. The contractors are commonly identified by the nature of the responsibilities they undertake. Generally the main contractor undertaking to construct the infrastructure facility. This contractor is identified on the basis of the scope of work actually being sought to be contracted out. One of the prevalent methods os to contract out the entire scope of work relating to Engineering, procurement and construction of an infrastructure facility to one contract who is referred as the EPC contractor. Another method is to contract out the work of formulating the design of the facility. This method is not preferred as it causes complication regarding the allocation of responsibility for any defeat detected in the facility at a later stage. The operation and maintenance of the facility upon completion of construction is contracted out to contractors specializing in the operation and maintenance of the particular facility (referred as the O&M) contractor.

(vi)

Project Vehicle – Special purpose vehicle The particular entity vested with the right to implement the project is commonly referred to as the project vehicle or the special purpose vehicle. Sponsors generally seek to implement a project through a specific legal entity formed by them. The reason for such structuring is to transfer the Page 15

risks to SPV rather than take it themselves. The documentation relating to the implementation of the project is entered by the project vehicle. The extent to which the sponsors succeed in isolating the risks relating to implementation of the project is ultimately decided only after an analysis of the project documents and the finance documents. (vii)

Users / Consumers The user of an infrastructure facility or consumers of the infrastructure facility service are generally members of the common public and may be at times be represented by a public interest forum or a consumer body. In India, generally the user of the facility is generally represented by the government itself. However, it is not uncommon to find that at times, an infrastructure facility is designed for use for a clearly identified and defined set of users or even a single user. In such circumstances the facility is referred to as a single user. In such circumstances the facility is referred to as a single user.

(viii)

Regulator (Like TRAI) The body vested with the authority and powers to regulate the development and provision of the related infrastructure services, would also be a participant in the development of an infrasturere project. Ideally, prior to opening of any infrastructure sector to private participation, a regulator body for that sector should be first constituted in order to regulate the conflict of interests from the various participants, so involved in the development of the project. In India, however there has no such planned opening of infrastructure sectors. The existing infrastructure regulatory bodies are TRAI constituted by an act of parliament.

(ix)

Other Authorities (NHAI, AAI etc) Apart from the regulatory authorities there are certain other authorities that have been established for the purpose s of providing specific infrastructure services.

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3. Financial structuring of Public-Private Partnership projects. The Public-Private Partnerships (PPP) scheme has become popular in India as an innovative approach for the development of roads etc with the involvement of the private sector. The financial structuring of PPP projects is quite complex. Capital for PPP Projects The capital mobilized for a PPP project essentially consists of Equity and Debt. Some projects may attract Mezzanine capital and Grant from government. Each component serves a specific role in financing, with its attendant risks and returns. Timely mobilization of funds is critical for the prompt completion and success of a PPP project. The SPV should have the capability to raise the necessary finance at the right time, with flexibility to manage possible cost overruns. Equity Capital Equity is subscribed by the parent companies sponsoring the SPV and by the shareholders, who view the project as an attractive investment opportunity. Contractors for construction, maintenance, operations and supply of equipment are also normally persuaded to participate in the equity. Equity is the lowest ranked capital in terms of its claims on the assets of the project. Equity holders get their returns only after all other project obligations are met. Thus the equity holders may gain a profit or lose their expected return, depending on the success or failure of the project. Equity holders carry the highest risk, and it is natural that they expect high returns (about 20%). Debt Capital Debt capital is necessary for most PPP projects as the concessionaire may not be able to provide the entire investment in the form of equity. The sources of debt are the commercial banks, financial institutions and multi-lateral organizations. Commercial banks in the past have been providing debt instruments with short tenure of less than seven years, to be in tune with the normal deposit tenures. Mezzanine Capital Page 17

Mezzanine capital is investment with some qualities of debt and equity, and so it carries a risk profile intermediate between debt and equity. This may take the form of subordinated debt or preference shares with regular interest. Mezzanine capital ranks below the senior debt, and carries a higher rate of interest than senior debt. It is normal to persuade the contractors/suppliers to subscribe to mezzanine capital. The concessionaire may be able to secure a larger senior debt on favorable terms in view of the mobilized mezzanine capital. Financial Closure When a SPV successfully negotiates a legally binding commitment of the equity holders and the debt financiers to provide or mobilize the required funding on agreed terms, the stage in the progress of the project is referred as the financial closure. This is a critical mile-stone, denoting the preparedness of the project to commence construction. The financial closure will be facilitated if the lenders perceive the project as 'bankable' and view the projected cash flows realistic and adequate to cover the debt service obligations.

4. Do you think this system is ideal for infrastructure development? Discuss

PPP or Public-Private-Partnership is a unique concept which involves coming together of public and private sector with a purpose to develop public assets or for provision of public services. It is an elaborate arrangement between a state body and a privately owned entity which serves to promote private capital investment in public projects, especially those connected with infrastructure development. The agreement also includes sharing of assets and skills between state and privately owned bodies to be able to achieve the best possible outcome. The private entity receives performance linked payments based on a specific set of criteria.

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A basic feature of any PPP scheme is that the project under consideration is usually a high priority one and is well-planned by the government. Another essential aspect is that both the sides assume some amount of risk and mutual value for the project. Some of the infrastructure projects usually covered under PPP model include building of highways, ports, airports, developing railways infrastructure, telecom facilities, power generation projects, and sanitation, water and waste management projects. In India, the PPP model was introduced by UPA Government at the Centre for developing some of the major facilities including airports and metros. The main issues faced with proper implementation of this model is that infrastructure projects are usually long-term ones and a number of factors including cost of materials, policies and even economic conditions can change while the project is underway. If the initiative to set up a sophisticated mechanism for resolving such issues in implementation of PPP model is successful, it can attract big investments from private sector and lead to fast-paced development of infrastructure. The status of the PPP in the infrastructure development in India, both in the Central Government schemes as well as State sponsored schemes, is not encouraging, stable macroeconomic framework, sound regulatory structure, investor friendly policies, sustainable project revenues, transparency and consistency of policies, effective regulation and liberalization of labor laws, and good corporate governance are the basic requirements, which define the success of the PPP model. The PPP model in the road sector has experienced with enthusiastic response with the introduction of massive NHDP with structured MCA. However, many of the road projects are faced with cost and time overruns on account of prolonging disputes in land acquisition, hurdles in the material movements, law and order problems, etc. Power shortage is a serious concern and the quality of the power supply is generally poor, especially in rural and semi-urban areas, which has affected the micro and small enterprises severely. Further, private sector participation in power generation is not forthcoming due to specific issues such as delays in finalizing power purchase agreements, high aggregated technical and commercial losses, and age-old Page 19

transmission networks, shortage of fuel supply and policy and procedural barriers while exploring renewable energy sources. The progress in the development of many of the port projects under private participation is at a sluggish pace, which requires conducive policy environment. Efficiency in cargo handling needs to be enhanced through modernization of port facilities to facilitate the trade. The PPP model projects in the airport sector are in slow progress and also restricted to major airports. Modernization of airports like Chennai and Kolkata is yet to take-off due to procedural hassles and land acquisition problems. This brings to the fore a need for constructive and stable policy environment towards land acquisition for public utilities. The urban infrastructure bottlenecks need to be addressed through a development strategy, which encompasses efficient planning and organization of the project, balancing the public-private interest, reinvigoration of electricity, water supply and transportation system and integration of finance and technology. International experience suggests that the success of PPP projects requires a single objective of better services for the public at a reasonable cost. This is achievable through realistic and reasonable risk transfer while addressing the public concerns. The Indian PPP model should adhere to such objectives and best practices to march forward on the success path. In this pursuit, easy availability of long-term private capital is an essential requirement. Fostering the Greenfield investments in the public infrastructure with appropriate user charges, transparent revenue and risk sharing agreements would transform the international capital inflows into productive ventures. Above all, selection of right PPP model for a right project at a right time through realistic planning would go a long way in providing meaningful and hassle free infrastructure development, which ultimately would increase the infrastructure standards and thereby sustain the overall macroeconomic developments of the country. A planning commission working group on urban transport for the 12th five year plan has outright rejected thePPP model for developing core urban infrastructure projects, like Page 20

metro-rails, and bus procurement and transit systems. The working group, headed by former managing director of Delhi Metro Rail Corporation E Sreedharan, has particularly opposed PPPs for metro rail projects in the country. "It has been proposed that urban rail transit system should be taken up with primarily government funding except rare cases of high density metro cities where PPP can be attempted for some elevated corridors," the group said. The cost of completion of the Delhi metro Phase 1 network was Rs 10,571 crore while that of the Phase 2 is estimated to be more than Rs 13, 338 crore. The average cost per km of rail network laid for Delhi metro comes to around Rs 175 crore. The Airport Expressway, which is the part of the Delhi Metro attempted in a PPP mode with Reliance Infrastructure was built at a cost of Rs 5,700 crore of which Reliance Infra paid Rs 2880 crore. The entire cost of the project is enough to purchase around 20 full bodied Boeing 747s or build 2390 kms of high quality 4 lane national highway. The group observed that internationally also private investment has not been successful in urban transport projects because the usually unstable revenues of these projects make them commercially unviable.

PPPs offer the public sector potential cost, quality and scale advantages in achieving infrastructure service targets. However, PPPs are different to the traditional public sector route and these differences require adaptation of approach and capabilities in the public sector. There are also some new costs associated with PPPs. The advantages and challenges of PPPs are outlined below. In general, in a welldesigned and supported PPP the advantages will outweigh the disadvantages. Advantages of PPP The advantages of PPP include: Page 21



Access to private sector finance



Efficiency advantages from using private sector skills and from transferring risk to the private sector



Potentially increased transparency



Enlargement of focus from only creating an asset to delivery of a service, including maintenance of the infrastructure asset during its operating lifetime



This broadened focus creates incentives to reduce the full life-cycle costs (ie, construction costs and operating costs) All of these provide strong reasons in favour of using PPPs in India and elsewhere. Access

to

private

sector

finance

India has a very large infrastructure need and an associated funding gap. PPPs can help both to meet the need and to fill the funding gap. PPP projects often involve the private sector arranging and providing finance. This frees the public sector from the need to meet financing requirements from its own revenues (taxes) or through borrowing. This is an advantage where the public sector is facing limits on how much capital it can raise, as in India. By shifting the responsibility for finance away from the public sector PPPs can enable more investment in infrastructure and increased access to infrastructure services.

Using private sector finance also allows the public sector to move large capital expenditure programmes ‘off balance sheet’. This has been a motivating factor for PPPs in countries where the constraint on finance is a government commitment to a borrowing (ie. public debt) cap. Higher

efficiency

in

the

private

sector

A well designed and managed PPP should take advantage of the potential for efficiency gains from using the private sector. Page 22

Increased efficiency is driven by three features of well designed PPPs: 

The allocation of risk and the associated performance rewards and penalties create incentives in the PPP contract that encourage the private partner to achieve efficiency at each stage of the project and to introduce efficiency improvements where possible. By shifting risk onto private partners the public sector is able to limit its own exposure to cost escalation.



PPPs can be structured so as to create a whole-of-life focus in which the private partner designs the project to take account of the link between construction and operation so that the cost will be minimized over the project’s lifetime. A private partner who in addition to designing and building the project will also provide the ongoing operations and maintenance management has an incentive to ensure that the design and construction facilitate efficient O&M. By contrast, if one set of contractors is employed for design and construction and other unrelated contractors for O&M they will each take a narrow perspective, considering only the point efficiencies in their component and not taking account of the interactions between the two.



Competition is introduced during the bidding stage, thereby bringing the benefits of market procurement (this is a kind of “competition for the market”). As long as the project is well specified in terms of the output requirements (rather than specifying the inputs) then each private sector bidder has an incentive to produce an innovative response and to minimize cost. Complex

procurement

process

with

associated

high

transaction

costs

The PPP project must be clearly specified, including allocation of risk and clear statement of the service output requirements. The long-term nature of PPP contracts requires greater consideration and specification of contingencies in advance. The tendering and negotiation process is a costly exercise. Transactions advisors and legal experts will typically be required.

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Contract

uncertainties

PPPs often cover a long-term period of service provision (eg. 15-30 years, or life of the asset). Any agreement covering such a long period into the future is naturally subject to uncertainty. If the requirements of the public sponsor or the conditions facing the private sector change during the lifetime of the PPP the contract may need to be modified to reflect the changes. This can entail large costs to the public sector and the benefit of competitive tendering to determine these costs is usually not available. This issue can be mitigated by selecting relatively stable projects as PPPs and by specifying in the original contract terms how future contract variations will be handled and priced.

BIBLOGRAPHY/ READINGS IDM 12. Management of PPPs Reserve Bank of India Database on PPP The Economic times Page 24

Internet (United Nations ESCAP)

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