Guidelines

For

Public Private Partnership

(PPP)

In

Haryana

PPP Cell

Finance Department

Government of Haryana

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GUIDELINES ON PPP IN HARYANA

1. BACKGROUND 1.1 Haryana is amongst the richest States in India and one of the preferred investment destinations in the country. It is a leading centre for the manufacture of automobiles and its components, the preferred investment destination in IT and IT enabled. It has been attracting handsome investments mainly in construction sectors, electricity, manufacturing and services. Haryana aspires to be the number one State in the country in terms of investments and in the quality of life of its people. To achieve this, the State would need to bring about substantial improvement in its physical and social infrastructure so as to bring about further improvements. 1.2 State would require huge financial resources, managerial capabilities and manpower in bringing about the substantial improvement in delivery system of physical and social infrastructure. Private Sector can play a significant role in augmenting the efforts of the Government. Government of India has been seeking, increased private sector investments in infrastructure to cover the deficit in infrastructure services. It has taken a number of steps to create enabling and conducive environment to attract private investment through a mutually beneficial arrangement under Public Private Partnership (PPP) approach (Appendix I). 1.3 State Governments have also recognized the benefits of PPP and have adopted this as preferred mode of delivery of pubic services. There are around 300 projects on PPP in various sectors in different States. Road sector accounts for major share at 64%, followed by Ports at 13%, Urban Development at 10%, Energy at 10%, Airports at 2% and Railways at 1%. 1.4 Government of Haryana (GoH) recognizes that a partnership approach under Public Private Partnership (PPP) should be one of the tools to deliver public services to improve the assets and services. The stated policy of Haryana Government (official website: haryana.gov.in), implicitly and explicitly, recognizes the role of private sectors in physical and social infrastructure sectors such as IT, Education, Industries and Tourism etc. Government has also brought out the Policy for Public Private Partnership (PPP) in Haryana as enabling measure.

2. DEFINITIONS OF PUBLIC-PRIVATE PARTNERSHIP (PPP)

2.1 A Public-Private Partnership (PPP) is a long term contractual agreement between a public agency (federal, state or local) and a private sector entity for providing a public asset or service in which the private party bears significant risk and management responsibility.

2.2 PPP has been defined by various institutions as given below:- • Government of India:

‘PPP means an arrangement between a government or statutory entity or government owned entity on one side and a private sector entity on the other, for the provision of public assets and/ or related services for public benefit, through investments being made by and/or management undertaken by the

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private sector entity for a specified time period, where there is a substantial risk sharing with the private sector and the private sector receives performance linked payments that conform (or are benchmarked) to specified, pre-determined and measurable performance standards.’ (Department of Economic Affairs, Ministry of Finance, Government of India, 2010). The earlier definition was ‘A partnership between a public sector entity (sponsoring authority) and a private sector entity (a legal entity in which 51% or more of equity is with the private partner/s) for the creation and/or management of infrastructure for public purpose for a specified period of time (concession period) on commercial terms and in which the private partner has been procured through a transport and open procurement system’.

• The International Monetary Fund (IMF): ‘Public-private partnerships (PPPs) refer to arrangements where the private sector supplies infrastructure assets and services that traditionally have been provided by the government.’ (IMF 2004,)

• The World Bank: ‘PPP programs are projects that are for services traditionally provided by the public sector, combine investment and service provision, see significant risks being borne by the private sector, and also see a major role for the public sector in either purchasing services or bearing substantial risks under the project.’ (World Bank 2006, p13)

• The Asian Development Bank (ADB): ‘PPPs broadly refer to long-term, contractual partnerships between the public and private sector agencies, specifically targeted towards financing, designing, implementing, and operating infrastructure facilities and services that were traditionally provided by the public sector (ADB 2006, p15)

• The European Union: ‘A PPP is the transfer to the private sector of investment projects that traditionally have been executed or financed by the public sector’ (European Commission 2003, p96)

3. MAIN FEATURES OF PPPS 3.1 Cooperative and Complementary Relationship: PPPs represent the cooperation between government and private sector. Most successful partnership arrangements draw on the strengths of both the public and private sector in order to establish complementary relationships between them. PPP arrangements are long term in nature, typically extending over a 15 to 30 year period. This factor helps to establish productive and lasting relations built around the expertise and capacity of both the partners based on contractual agreement which ensures appropriate and mutually agreed allocation of resources, risks and returns.

3.2 Shared Responsibilities: The responsibilities in a PPP project are shared between the public body and private enterprise. However the Government still remains accountable and responsible for the provision of high quality services that meet the public needs.

3.3 Risk Transfer: A key element of PPPs is their potential to deliver public services in more economically efficient manner. At the beginning of the relationship,

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potential risks associated with the project are identified and each party adopts those which it is best equipped to manage. The public sector can therefore transfer appropriate risks to the private partner, who has the necessary skills and experience to manage them. The delegation of risks depends on the type of mode adopted for PPP as depicted in Fig. 1.

Fig. 1: Delegation of Risk in PPP

Concessions

Build-Operate-Transfer

(back to Government)

Leases

Management Contracts

Service contracts

5 10 15 20 30

years

Delegation of risk to private sector, level of commitment required

Ownership

100% private

100% public

Enabler/

regulator

Role of Government

Provider

Build-

Operate-

Own

Divestitures

3.4 Flexible ownership: PPPs enable flexible arrangements between public and private bodies, where the public body may or may not retain ownership of the project or facility that is produced. In some cases, the private organisation may be contracted only to construct facilities or supply equipment, leaving the public body as owners, operators and maintainers of the service. Alternatively, the public sector may decide it is more cost-effective not to own directly and operate assets, but to purchase these instead from the private entity. Services may be purchased for use by the government itself, as an input to provide another service, or on behalf of the end user. 3.5 The information given on ‘historical background to PPP’ in Appendix II, on ‘lessons learnt from PPP programmes’ in Appendix III, on ‘some facts about PPP’ in Appendix IV, on ‘strength and weakness on PPP’ in Appendix V, on ‘common misconceptions on PPP’ in Appendix VI, on ‘PPP and conventional procurement’ in Appendix VII, on ‘enabling environment for PPP’ in Appendix VIIII, on ‘project financing’ in Appendix IX may be referred for further details. Various models of PPP, generally in practice, are given in Appendix X which may provide guidance in selection of appropriate model.

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3.6 The main players in a PPP project are : Ø public sector Ø private sector Ø financial players Ø insurance and export credit agencies Ø international institutions Ø Users

4. PPP IS NOT

• Simple outsourcing where substantial financial, technical and operational risks retained by the Institutions

• Donation by Private Party for Public good • Privatisation or Divesture of State assets and/or liabilities • Commercialistion of a public function by creation of a state owned enterprise • Constitute borrowing by the state

5. DEVELOPMENT OF PPP PROGRAMME Follow specific guidelines should be considered before launching PPP program: 5.1 When starting from a low base of PPP development, the aim should be to incorporate key principles of good governance but not necessarily to have a complete PPP framework in place. A complete PPP framework can be worked towards while some projects are being developed and experience gained. 5.2 Develop a proper PPP policy and consult widely on it. Take into account views where they do not ultimately endanger the key concepts of transparency/ competition and benefits. 5.3 Build capacity in the public sector institutions and help develop capacity in the private sector. Convince the private sector that doing PPPs well means more and better business for them. 5.4 The policy should encompass a flexible approach that fits the political, financial, economic social situation/conditions in each country. A comprehensive and rigid approach from day one is neither desirable nor essential. 5.5 If, in the initial stages, a pipeline of PPP projects is difficult to prepare, ring fence several ‘good’ projects and develop as PPPs, flexibly, but incorporating key minimum conditions for PPP. 5.6 Work towards a pipeline of good i.e. bankable PPP projects. 5.7 Develop ‘good’ projects, with help of multilaterals/good advisors, with the basic PPP principles of; Ø Good project preparation including sound draft tender documents

incorporating the principles of competition and transparency. Ø Consider a range of highway projects; bridges, tunnels, new motorways,

Brown field upgrading, maintenance, rural roads, port and airport accesses. Ø Consider a range of PPP modalities PBC, Concessions, BOT, Annuities etc.

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Ø Select projects that are reasonably large but not too complex or risky and if possible those that need little or no government financial support.

Ø Understand and integrate risk management (identification, allocation and mitigation) principles in the selected projects.

5.8 Obtain commitment at all levels, starting at the most senior across the board and within the line Departments/ Local Bodies/ Public Undertakings. 5.9 Prepare projects on a realistic schedule-keep up pressure but not cutting corners to fast track. 5.10 Work towards, have a view to the development of, in the medium-term a more comprehensive framework of laws, regulations and regulatory bodies. Regulate by contract initially. 5.11 Appropriately and effectively address the major concerns of concessionaires and investors, which are:

• Cost, time, and quality of the PPP bid process. • Availability of required land and environmental clearances • Clarity and stability of the legal and regulatory framework • Criteria for evaluating bids • Quality of the public sector project team, its advisers and decision making • Security of the project’s income stream (demand, bankability of public

sector obligations) • Deliverables and assessment of performance: What are they expected to

deliver, and how will their performance be measured? • Status and availability of connecting infrastructure and availability of

inputs and terms of supply • Effectiveness and enforceability of the PPP contract and related

agreements • Wider operating environment for private capital • Returns commensurate with the risks they are asked to assume • Effectiveness with which the public sector will manage the contract and

make decisions • Opportunities to refinance the debt or sell the investment.

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6. PPP PROJECT IMPLEMENTATION PROCEDURE 6.1 Figure 2 gives main steps to be followed for the implementation of PPP projects in the State

Fig. 2: Main Steps in PPP Project Implementation

Identification of Sector for Focus and Preparation of Long List of Possible Projects

Engagement of Transition Advisor

Feasibility Study and Bid Documents

PQ of Bidders

Issue RFP

Pre Bid Meeting

Final RFP for Bidders

Bid Evaluation

Agreement Signing

Project Identification and Prioritization based on Pre-feasibility Study

•Consultation with client and marketing

•Approval of CoSI for PQ documents•Approval of CoSI for RFP document•Constitution of Evaluation Committee•Approval of CoSI or CCI, depending Upon the size of project•Appointment of Independent Consultant if required

•Bidders attend and seek clarification

•Bidders Submit Proposal

•Bidders Apply for PQ

•Possible Investors Conference

• Committee under FCF in consultation with concerned Departments and assisted by PPP Cell

• FD may engage consultant for above exercise

• Sector Focused Units• Action on LA etc• Standardization of

documents

Public SectorPrivate Sector

6.2 Procedure for Approval of PPP projects Following procedure shall be followed for implementation and approval of PPP projects: • A Committee under Financial Commissioner & Principal Secretary, Finance shall

identify the infrastructural (physical and social) Sector(s)/ areas of focus. This Committee shall be assisted by the PPP Cell in Finance Department. Finance Department may engage consultant (either on retainer basis or sector specific) to assist in identification of projects and their prioritisation based on pre-feasibility study. The concerned Administrative Departments or State Public Sector Undertaking(s) or Municipalities or Urban Local Bodies or other Government statutory authorities or other entities under their administrative control (Authority) shall be consulted in this exercise. The prioritised list for sectors shall be brought

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before CoSI for approval, to be taken up on PPP. A meeting of the CoSI will be convened within one month to consider the proposal(s) for 'in principle' approval.

• Prioritised list of possible PPP projects shall then be sent to the concerned Administrative Departments or State Public Sector Undertaking(s) or Municipalities or Urban Local Bodies or other Government statutory authorities or other entities under their administrative control (Authority) for taking forward the process of implementation of project(s) on PPP in accordance with the Policy.

• Authority shall identify an officer or team for implementing the identified project(s).

• Authority would engage a Transaction Advisor (TA) through competitive selection process and with the approval of the concerned Administrative Secretary. The Template of the RFP for engagement of TA as available on the web site: pppinharyana.gov.in should be used with modifications done to meet the sector specific requirements.

• The TA shall prepare Feasibility Study (also including project structuring, financial analysis, bid process), RFQ, RFP and Concession Agreement, and assist the Authority in procurement of private partner. For initiating the procurement, RFQ document shall be submitted by the sponsoring Authority, to the PPP Cell, for seeking approval of CoSI. The meeting of CoSI would be fixed within a month time, on submission of the document to PPP Cell. The Authority would then circulate the agenda and memoranda (giving brief of the project particulars) to the members of CoSI. CoSI will either approve or request the Authority to make necessary changes for further consideration of CoSI.

• After the requisite approval, the Authority would invite applications for Qualification (RFQ) for two stage bid process. Prequalification would involve pre-proposal conference for any clarification etc, issue of response to them, receipt of RFQ application, and their evaluation and due intimation to prequalified applicants. TA shall assist the Authority in these exercises. The Authority shall constitute an Evaluation Committee with members, keeping in view the requirements of the project. It would be advisable to have at least one sector expert as one of the members.

• The TA shall also prepare RFP with draft Agreement. The Authority shall submit these bid documents to the PPP Cell for seeking approval of CoSI. The meeting of CoSI shall be convened within one month. On approval, these documents, Authority shall issue them to the qualified applicants for bid submission. For single stage bid process, RFP with draft Agreement shall be submitted to CoSI, through PPP Cell, and got approved as above and bids invited through open invitation

• After evaluation and selection of bidders the final proposals with finalized bid shall be submitted to PPP Cell for seeking approval of CoSI/ CCI ( as the case may be, depending upon the project cost and period of concession, according to the provisions of PPP Policy).

• The Authority shall take further action to award the work, shall sign the Agreement and implement the project.

6.3 Project Identification The starting point in originating PPP project ideas should be the broader infrastructure or sector planning process, or a strategic assessment of where PPPs may add most value. The Committee under FCF would first identify sectors requiring attention; and reference may be useful to the study Report on ‘Haryana Infrastructure Vision 2030’

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for sectors of water supply, sanitation, solid waste management, urban transport, rural infrastructure got done by the State with assistance from Department of Economic Affairs (DEA) Ministry of Finance, Government of India and Asian Development Bank (ADB). The PPP Toolkit for Improving Decision Making Process developed by the PPP Cell in DEA, (pppinindia) provides guidance for project identification and can be utilised. The project identification would also depend on the priority that the specific sector requires and possible candidate PPP projects based on an assessment of viability, affordability and provision of value for money compared to other options. It may be advisable to have a pre-feasibility study/ assessment got done, for the availability of some of the necessary requirements such as land, shifting of utilities if any, possibility of getting environmental clearances etc. It would be desirable that shelf of projects are created which could be offered on PPP. A committee under FCF shall identify sectors for focus and possible projects on PPP. These shall be brought before CoSI for approval and for taking further actions. The list of such projects then shall be passed on to the Administrative Departments or State Public Sector Undertaking(s) or Municipalities or Urban Local Bodies or other Government statutory authorities or other entities under their administrative control (Authority) for taking forward the process of implementation of project(s) on PPP in accordance with the Policy. 6.4 Setting up the project team PPP projects generally need complex skills and therefore it is advisable to have a team base management approach. The team may not necessarily be a large one. The Authority should identify an officer at middle level for project handling and implementation. This action should also be accompanied by capacity building efforts in the Authority. System should be developed whereby officers regularly participate in trainings, seminars and workshops etc so that nuances of the PPP project are well appreciated in the Authority for smooth and speedy project implementation 6.5 Mistakes to be Avoided While developing a project on PPP, following common mistakes should be avoided • Lack of clarity by the Authority regarding what it wants from the project • Lack of project ownership and leadership • Poorly resourced project (and programme) teams • Selection of advisers on the basis of cost rather than quality and experience • Lack of effective engagement with stakeholders • Lack of understanding of and contact with the private sector at senior levels

and poorly conducted market sounding • Expectations that the private sector will deal with issues, such as the

acquisition of land, that are better handled by the public sector • Lack of clarity about the public authority’s legal powers to enter into the

public-private partnership contract • Conflict between the procurement process and procurement regulations • Overly ambitious project preparation timetables • Release of incomplete project information. 6.6 Engagement of Transaction Advisor (TA) Having identified the project to be taken up on PPP and setting up the project implementation team or officer, the next steps are the project structuring (type of PPP mode) and preparation of bid documents for inviting proposals and selection of

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private partner. This can be done either ‘in-house’ or outsourced. PPP projects require inputs and expertise in the disciplines of finance, legal and sector specific technical. Since such skills may not necessarily be available within the Authority, it would be advisable to engage a consultancy firm as Transaction Advisor (TA). The Authority would undertake the procurement of services of TA in a transparent manner through competitive bidding process with the approval of the Administrative Head. The advertisement for this should be published in at least one National and one Regional newspaper. A Template of the RFP for engagement of TA is available on the website; pppinharyana.gov.in, which should be used after doing the project specific modifications. The composition of core team or key personnel from TA would depend upon project specific requirements (The Key Personnel and their respective maximum marks may be suitably modified to address project-specific requirements). Since the composition of the team and its key members is crucial for successful implementation of the project, the quality-cum-cost base selection (QCBS) should be adopted where by a weight age of 70/30 or 80/20 (where the intellectual and design content is comparatively higher). should be given. The TA is expected to perform/ assist the client in, main activities in project implementation as discussed in succeeding paragraphs. 6.7 Preparation of Feasibility Report TA would produce a comprehensive Feasibility Study Report, in close liaison with the Authority. For most of the PPP projects, Feasibility Report should meet the requirements (it also provides window for innovation and application of new concepts and technologies); however, depending upon the project requirement, venturing into altogether new area and its complexity, Authority may choose to have a Detailed Project Report (DPR) to fine tune the spelling out of the core requirements of the project. The Feasibility Report should provide answer to following key questions:

• Is the project affordable? • What of the key risks and their managements strategy. • Would the project offer value for money. • What would be financing sources? • Is the project viable on PPP. The viability of a PPP project depends on

revenue generation along with expected growth, user fee rates and on estimated project cost which normally includes cost of civil works, interest during construction, financing charges, contingencies, expenses on operation, maintenance and management etc. (excluding cost of land, as, cost of land and other pre-construction activities are to be borne by the Implementing Agency), operation & maintenance cost and VGF.

The Feasible Report would essentially indicate project structuring, mode of PPP to be adopted, cost estimation, risk allocations, commercial and financial analyses, optimal procurement methodology. Value for Money (VfM) assessment, and identification of the issues to be addressed by the Authority. The feasible study prepared by TA would be appropriately considered by the Authority and accepted for taking further procurement steps. It may be helpful to have power point presentation of the main features of the Report and issues for consideration of Authority in order to facilitate process. The Feasibility Report should either be provided along with the RFP or at least 45 days prior to the Bid Due Date.

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6.8 Stake Holders Consultation The TA would be required to maintain close liaison with the Authority. Various stake holders shall be formally and informally consulted, in the process of preparing feasibility report and project structuring so that their concerns get adequately addressed and project runs without objections. TA would also undertake market survey to identify potential partners and to ‘sell’ the project. 6.9 Preparation of Request for Qualification (RFQ). The TA shall prepare the Request for Qualification (RFQ) and assist the Authority in: • Conduct of pre-application meeting, • Evaluation of qualification applications and • Short-listing eligible applicants. Bidding documents shall be issued, against the prescribed fee, to all those firms who request for the same. The cost of RFQ may be determined at the rate of Rs. 10,000 for every Rs. 100 crore or part thereof comprising the estimated Project Cost. Thus the cost of an RFQ document for a project of Rs. 500 crore shall be Rs. 50,000. The technical qualification threshold to be prescribed should be that the bidder has done in the last 5 years, relevant Project(s) and other core sector (physical or social, as the case may be) of sum total of more than equivalent to twice the Estimated Cost of the Project for which bids are being invited. Where deemed necessary, for example sector is new for PPP and participation could be low, the Authority may increase/decrease this amount by one half of the Estimated Project Cost. The Financial capability threshold should be:

Parameter Value Net Worth in the preceding year Minimum 25% of project cost Average Turnover for last 5 years Minimum 100% of project cost

The document would also give the time schedule as below: Stage Date 1. Last date for receiving queries [25 days from date of RFQ] 2. Pre-Application Conference [30 days from date of RFQ] 3. Authority response to queries latest by [35 days from date of RFQ] 4. Application Due Date [45 days from date of RFQ] 5. Announcement of short-list Within 30 days of Application Due Date A model document of RFQ is available on the website; http://infrastructure.gov.in/pdf/PreQualif_bidders.pdf, which may need modifications to meet the project specific requirements. The pre application meeting would be held where prospective applicant can seek clarifications. Based on the discussions in this meeting, the Request for Proposal can be modified, if considered necessary. The Authority shall constitute a Bid Evaluation Committee for evaluation of qualification applications and the bids. The Authority would seek CoSI approval for RFQ document through PPP Cell. 6.10 Preparation of Request for Proposal (RFP) TA shall prepare the RFP document including the Concession Agreement which shall be issued to the qualified applicants for two stage bid process and to all for single stage bid process. The model document for RFP document for bidders is available on the website: http://infrastructure.gov.in/pdf/Model_REQ.pdf which may need modifications to meet the project specific requirements. The RFP document mainly

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comprises: • Instruction to Bidders • Draft Concession Agreement (DCA) • Schedules to DCA

In deciding on the bid parameter in the RFP, it needs to appreciate that three factors are important; one is the period of Concession (Agreement, based on financial analysis of the project), the other is return on investment through user fee through directly or through user based payment (shadow fee); the third factor is the financial support that the project requires to make it finically viable and implementable. The bidding parameter for financial bid should be one of these factors for simplicity of evaluation. Normally it is either financial support (grant from the Government; there could be a premium also offered by bidder to the Government in case revenue returns are very healthy) or period of Concession. In case of Annuity projects, the bid parameter is the Annuity amount quoted by bidders. The RFP document would invariably make provision for pre-bid conference which would provide an opportunity to the client to make assessment of the market response and to the prospective bidders any clarification or possible suggestive modification. The out come of this bidder’s conference would be the necessary written clarifications. It would also specify the date of submission and bidding schedule; as suggested below:

Event Description Date 1. Last date for receiving queries [25 days from the date of RFP] 2. Pre-Bid meeting-1 [To be specified] 3. Client response to queries latest by [35 days from the date of RFP] 4. Bid Due Date [To be specified] 6. Opening of Bids On Bid Due Date [at least 45 days from the date of RFP] 7. Letter of Award (LOA) Within 30 days of Bid Due Date 8. Validity of Bids 120 days of Bid Due Date 9. Signing of Concession Agreement Within 30 days of award of LOA

The Concession Agreement has to be carefully drafted so that all financial, legal and project specific technical requirements are addressed in the manner that disputes could be eliminated. The Draft Agreement should cover the following topics at the minimum:

• scope of the project • rights and obligations of the parties; • risk allocation, right to some compensation, breaches, events of defaults and

penalties; • grant of concession • Operation & Maintenance (O&M) requirements • Standards and Specifications • service performance standards and targets, which need to be objective and

measurable; • procedure for permitted modifications, as well as their scope and nature;

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• payment mechanisms (e.g. tariffs, subsidies, grants/ premium ) and adjustments to payments in response to various contingencies;

• penalties (and possibly bonuses) which have financial consequences or give rise to warning notifications (eventually leading to termination of the PPP contract);

• security and performance bonds; • project insurances; • terms of the PPP contract; • provision of escrow account and agreement, as per project requirement • the conditions for termination (categorised by party and type of event) and

compensation upon termination (for each type); • step-in rights (both for lenders and, in emergency situations, the Authority); • the definition and impact of force majeure and changes in law; and • the dispute resolution procedure. • schedules describing in detail some of these requirements

The RFP document shall be taken to CoSI, through PPP Cell, for its approval before the same is duly issued. Any modification in the RFP either consequent to pre- bid conference or otherwise shall also be got approved by CoSI. 6.11 Pre-bid conference In PPP projects, pre- bid conference is desirable as it play a very useful role in providing opportunity for clarifying the queries that prospective bidders may like to seek in regard to the provisions of bidding documents and other details. It should normally be held one month prior to deadline for submission of Bids. Queries raised by various firms/ bidders shall be discussed in the Pre-Bid Conference/Clarification. Based on those discussions, the Authority shall issue clarifications and or modify the RFP if considered necessary. If modified RFP is issued then Authority may consider revising the bid due date. The concerned Authority would keep on consulting PPP Cell in the process. 6.12 Authority web site The Authority should also host all its project advertisements, documents for RFQ, RFP, clarifications, modifications and any project related information on bid process on the Authority’s web site for wide dissemination and transparency. For realising the document/ bid processing fee etc. guidance can be provided that the same shall be payable while submitting the document, if downloaded from the website. 6.13 Award of Concession On receipt of bids (single stage or two stage bid process), they would be evaluated by an Evaluation Committee, constituted by the Authority, duly assisted by the TA, if appointed. One or combination of one or more of the following criteria should be considered for selection through competitive bidding depending upon the bid parameter

• Lowest bid in terms of the present value of user fees; • Highest revenue share to the Government • Highest up front fee offered by bidder • Shortest concession period • Lowest present value of the subsidy

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• Lowest capital cost and Operation & Management cost for Projects having a definite scope;

• Highest equity premium • Quantum of State Support solicited in present value • Such other suitable selection criteria as the CoSI/ CCI may allow or

determine. Based on the evaluation done and got approved by Administrative Secretary/ Competent Authority, the proposal shall be put up to CoSI (through PPP Cell, the Secretariat for CoSI) for approval which shall consider the same to be placed before CCI, depending upon project cost and period of concession as per the Policy. After the final approval, Authority shall issue the Letter of Acceptance (LAO) to the successful bidder. The LAO should include the requirements to be fulfilled including any securities/ performance guarantees etc to be furnished before signing of the Agreement. 6.14 Signing of Concession/ Contract Agreement The Concession/ Contract Agreement shall then be signed by the authorised signatories of the bidder (depending upon their legal status, ie. consortium, SPC, JV etc.) and the Authority. The role of TA should normally end at this stage unless the Authority wants their services till financial closure for the project. 6.15 Treatment of Sole Bid In case of the competitive bidding process resulting into a Sole Bid, the Authority shall decide the matter only with the approval of CoSI. 6.16 Treatment of Limited Response In case the competitive bidding process does not generate sufficient of response and if even a sole bid is not received, then the Authority shall, with the approval of CoSI, either modify the pre-qualification criteria and / or the risk sharing provisions and restart the bid process; or may cancel the competitive bid process. 6.17 Monitoring of the Projects CoSI will monitor the progress of PPP projects. All the Departments/Agencies (Authority) carrying out PPP projects will keep the PPP Cell informed regarding the latest development. The Nodal of the Authority shall update the status of the project(s) every month on the window of www.pppinharyana.gov.in. The Nodal officer shall periodically review the progress/ status of PPP project under implementation, in pipeline. 6.18 Unsolicited Proposals Unsolicited proposals for infrastructure projects from private investors can introduce innovative ideas but is fraught with risks. It can introduce the element of lack of transparency and the loss of cost benifits of competitve bidding process. There is also risk that the fairness of the contract award could be challanged at a later stage by dissappointed potantial bidder. In many cases, unsolicited proposals may require Government gaurenties and land grants. Two ways have been generally tried to address transparency and competitiveness issues; one is to buy the project concept and adopt competitive bidding (known as Swiss Challange) and the other is to give advantage (eg. Bonus) to the origianl project proponent in bidding. But it is not easy

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to find the right balance between incentives to propose benificial projects and incentives for third parties to submit counter proposals. One way to reduce public sector corruption and opportunistic behaviour by private proponents of projects is to forbid all unsolicited proposals. Considering the risks involved in considering unsolicited proposals and doubtful benefits as brought out above and the possibility of more time taken (resulting in avoidable delays), to address the issues of transparency and competitiveness, it would not be prudent to entertain unsolicited proposals till the situation gets matured. 7. MAIN FEATURES OF PPP PROJECT REQUIRING ATTENTION 7.1 Main Features of a PPP Project PPP Project is a project based on a contract or Concession Agreement between a Government or statutory entity and a private sector company, with the following essential elements: • Fixed Concession period • Pre-determined user charges/tariff • Pre-determined scope of work for the Concessionaire • Pre-determined bidding parameters, i.e., VGF/ Premium/Revenue Sharing/ Lease

Rent • All conditions, specifications, and project agreements frozen prior to inviting final

bids • Key Performance Indicators and measurable parameters • Mechanism for return on investment • Dispute resolution mechanism • Independent agency for ensuring of project implementation in accordance with

agreed terms and conditions • Land required for the project available with the Implementing Agency 7.2 Implementing Agency (Authority) Support 7.2.1 Implementing Agency (Authority) will meet the cost of following items :- • Feasibility Study and preparation of Project Report, either ‘in-house’ or through

TA. • Land for the project requirement (Right of Way) and en-route facilities. • Environmental Clearances. • Clearance of the Right of Way (land):

Ø relocation of utility services Ø cutting of trees Ø resettlement/rehabilitation of affected establishments

Authority may, however, involve the private sector in these activities to minimize delay in their completion. 7.2.2 Authority may provide Grant/Subsidy to the Concessionaire, depending on the financial viability of a project, the amount of which will be determined solely on the basis of competitive bidding. Depending on viability of the project, there may be a negative grant /premium to be paid by the Concessionaire to the Implementing Agency, which shall be decided on the basis of competitive bidding.

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7.3 Concession Period The Concession Period is the duration for which the agreement has been signed and comprises the construction period which will be project specific, and the period during which the private partner is permitted to levy fee and is liable for operating, maintaining and managing the facility, which will be determined on the basis of viability of a project and may be up to a maximum of 30 years as prescribed by Government of India. However, in cases where the returns might take a long time, a longer concession period may be considered to make the project viable subject to approval by CCI. On expiry of the concession period, the Concessionaire has to hand over the property created under the project to the Agency/Government in its original condition/shape as when it was constructed. The concession period may be extended suitably, to cover any Force Majeure Conditions. If the Concessionaire completes construction of project before expiry of the period specified in the contract, it will be entitled to collect user fee for the period saved in construction, in addition to the normal operation period. In case of delay in construction beyond the specified time-limit, the fee collection period will get reduced correspondingly, along with damages payable by the Concessionaire. This may be seen as the returns on investments to be made by the Concessionaire. For this calculation, estimated project cost and future revenue will be taken into consideration. Concession Period is decided based on reasonable profit expected, IRR (should be more than 13% depending upon bank interest rates on debt) and on the return on equity investment made which should be in the range of 15-20%. Based on the above, Profitability Statement, Cash Flow, Return on Equity, IRR, Payback period etc. are to be calculated with different concession periods and different percentage amounts of VGF. 7.4 Viability Gap Funding (VGF) Some projects may need financial support to make them finically viable. To offer proper financial support to such projects, GoI has devised a scheme known as VGF (Viability Gap Funding). Under this, a grant of 20% of the total project cost is made available by GoI and the balance grant up to 20% grant (of the total 40% grant limit prescribed by GoI) shall be given by Government of Haryana as prescribed in PPP Policy for Haryana. Thus, through VGF, a seemingly unviable project can become financially viable and attractive to the private sector. The procedure for seeking VGF from GoI is given in paragraph 3.2 of Appendix I. VGF is normally in the form of a capital grant at the stage of project construction. For projects involving VGF, the Concessionaire needs to be selected through a transparent and open competitive bidding process. The criteria for bidding will be the amount of VGF required by the bidder, when all of the other parameters are comparable. 7.5 Financial Closure For PPP projects, Financial Closure is an important milestone which refers to the tie-up and fulfilment of all condition precedent to the initial availability of the funds for the Project from Lenders, Banks, Fls, etc. under the financing arrangements.

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7.6 Bidding Process The bid process for PPP projects should be fair, efficient, effective, competitive and transparent. Though, there are various processes for procurement of goods and works, but for PPP projects, either of the two process are generally adopted. These are ‘Single Stage – two cover system’ and ‘Two Stage- two cover system. 7.6.1 Single Stage – Two Cover System In cases where the project size is small (less than Rs. 50 crores), project requirements/ configuration is simple, practices/ technologies for the sector have matured and/ or there is some urgency for procurement, single stage bid process can be adopted, where Qualification Proposal (Technical and Financial capability of the bidder) and Financial Proposal are invited simultaneously but in two separate covers through open invitation by advertisement, in at least one National and one Regional news paper and by hosting on the related web site. Request for Proposal (RFP) need to clearly prescribe the criteria for Technical and Financial capability of bidders and the bidding parameters for Financial Proposal. Firstly the Technical and Financial capability of the bidder is evaluated as the prescribed criteria. The Financial Proposals of only those bidders are opened who possess Technical and Financial capability as per the Bid Document. Generally, the Technical capability reflects the project experience in last five years, equal to twice of the estimated project cost. Financial capability is assessed in terms of :

Parameter Value Net Worth in preceding year Minimum 25% of project cost Average Turnover for last 5 years Minimum 100% of project cost

These are indicative threshold conditions and may be decided on project specific case. The Financial proposal is then evaluated on least cost basis as mentioned in the bid documents. 7.6.2 Two Stage – Two Cover System In the case of contracts for large complex facilities or works of a special nature or turnkey contracts or complex information and communication technology, it may be undesirable or impractical to prepare complete technical specifications in advance. In such cases, a two-stage bidding procedure may be used, under which first un priced technical proposals on the basis of a conceptual design or performance specifications are invited, subject to technical as well as commercial clarifications and adjustments, to be followed by amended bidding documents and the submission of final technical proposals and priced bids in the second stage. A two stage bidding process shall broadly comprise of the following two stages: (i) 1st Stage Bidding (Technical and financial capability assessment, without prices) (ii) 2nd Stage Bidding (Price Bids) In the first Stage, proposals would be invited for prequalification of bidders. Proposals shall generally be invited through publication of the Invitation of Bids in newspaper, at least in one National and one Regional and by hosting on relevant web site. The Request for Qualification (RFQ) document prepared either ‘in-house’ or by engaging Transaction Advisor shall give the background of the project, bid process, criteria for evaluation and general instructions. In the second stage, the RFP document including the draft Concession Agreement shall be issued to those who had qualified in the first stage.

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7.7 Bid Security/Performance Security Bids for the project shall be accompanied by a Bid Security/Earnest Money in the form of Demand Draft or Bank Guarantee of amount specified in the RFQ/Bid Documents. Normally, Bid Security shall be an amount equivalent to 1% of the Estimated Project Cost. However, the Authority may, in its discretion, prescribe a higher Bid Security not exceeding 2% of the Estimated Project Cost. In case of a project having an Estimated Project Cost of Rs. 2,000 cr. or above, the Bid Security, amount could be reduced but not less than 0.5% of the Estimated Project Cost in any case. The selected bidder (Concessionaire) will furnish Performance Security in the form of Bank Guarantee. Performance Security shall be for an amount equal to 5% of the Estimated Project Cost. 7.8 Procurement of projects through PPP mode involves some changed steps and some additional steps from those for procurement through traditional method as indicated in flow chart shown in Fig. 3.

Fig. 3: Flow Chart Showing change in some steps in PPP Project Procurement

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Project Identification

Assessment of PPP Suitability

Project Appraisal

PPP Assessment

Statutory Process Assessment

Procurement Procedure Selection

Project Management

Stakeholders Consultation

Statutory process risk with contracting authority

Statutory Process Elements of Statutory Process Retained by

Public Sector

Preparation of Contract Documentation Preparation of Contract

Documentation

Tendering Process

Tendering Process

Contract and Performance Management of Construction and Operation

Contract Management of Planning Phase

Elements of Statutory Process Transferred to Private Sector

Contract and Performance Management of Construction and Operation

Statutory process risk with private sector

Key

No Change to Existing process Changes to Existing process

New Stage for PPP projects

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8. ENABLING PROVISIONS BY GOVERNMENT OF HARYANA 8.1 The Government of Haryana has been taking up projects on PPP in various sectors such as roads, industry, education, power, agri- business, solid waste management, tourism etc. The stated policies of sectors such industry, IT, Tourism, education and special economic zones include PPP as mode of delivery of infrastructure and services. 8.2 The Government of Haryana has notified the ‘Policy for PPP in Haryana’ to facilitate more and more projects to be taken up on PPP. Full policy document can be seen on the web site: www.pppinharyana.gov.in. Main features are given in succeeding paragraphs. One of the main provisions of the Policy is the constitution of institutional mechanism with two levels of approvals for implementation of PPP projects. 8.2.1 Cabinet Committee on Infrastructure (CCI): The projects under PPP mode having concession period of more than 10 years and / or involving investment of more than Rs. 25 crore, shall be considered by the Cabinet Committee on Infrastructure (CCI) and approved on the basis of recommendations of the Committee of Secretaries on Infrastructure (CoSI). 8.2.2 A Committee of Secretaries on Infrastructure (CoSI), consisting of a group of Secretaries under the Chairmanship of the Chief Secretary, Government of Haryana for facilitating infrastructure development in the State under PPP. The other members of CoSI are the Principal Secretary to Chief Minister (CM), Administrative Secretaries of Finance & Planning, Revenue, Law & Justice, Town & Country Planning, Industries, Building & Roads, Forest and the concerned Department. Principal Secretary, Finance is the convener of this Committee. The Chairman of CoSI may co-opt / invite any other officer / expert to be a member of CoSl and/ or to participate in its meeting. The powers and functions of CoSI are to: • consider and formulate policy directives for facilitation and acceleration of PPP

mode of delivery of public services in the State. • consider and provide in principle approval for project to be taken up on PPP.P • determine most preferred and optimal method, based on the detailed analysis

presented on alternatives for procuring the public services / utilities. Wherever, Govt. of India has prescribed specific procedures for sector / scheme or projects, the same would be followed and in case of any gap, the provisions of this Policy would be adopted. The key issue would be as to which method of procurement would provide the best Value for Money (VfM), while determining the most appropriate method of delivery,

• consider and approve projects under PPP mode having concession period up to 10 years and/or involving investment up to Rs. 25 crore.

• consider and recommend PPP projects (including those requiring VGF), to the Cabinet Committee on Infrastructure.

• approve sectoral policies and model contract principles, bid documents, risk sharing principles, dispute resolution mechanism and bid processes.

• resolve issues relating to project approval process.

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• approve to prepare road map for project development. • identify inter-sectoral linkages and provide enablers for projects. • exercise authority for accepting or rejecting sole bid if received and/ or limited

bids, for any project • prescribe time limits for clearances for any project. • decide issues pertaining to user levies including but not limiting to prescribing

mechanism and procedure for setting, revising, collecting and/or regulating user levies and to decide and settle disputes relating to user levies.

• recommend en-actment of special legislation for formation of appropriate regulatory mechanism / robust grievance redressal mechanism as may be required.

• inspect, review and monitor implementation, execution, operation and management of PPP Projects.

8.2.3 PPP Cell The Finance Department, Haryana shall be the Nodal Department dealing with all policy matters relating to PPP, in the State. Financial Commissioner and Principal Secretary Finance would act as the State PPP Nodal Officer. Haryana Bureau of Public Enterprises (HBPE) in the Finance Department shall act as the PPP Cell under the State Nodal Officer. The PPP Cell shall act as the Secretariat of CoSI and has following functions:- • Serve as the repository of knowledge and information relating to PPP including

best practices, guidelines, schemes etc. • Identify and prioritize sectors and sub sectors for PPP projects and seek in

principle approvals if required. • Assist various Government Departments in preparation of feasibility / project

report by themselves or through consultant. • Standardise procedures and bid documents. • Advise, if required, Departments in their recommendations of final bids of the

projects for approval of the CoSI, keeping in view the considerations of Public Sector Comparator (PSC) and Value for Money (VfM).

• Coordinate with GoI and line Departments of the State on all issues related to private investment in the infrastructure sectors, including PPP. Relevant Departments/Ministries in the State will coordinate with PPP Cell at all stages of project and the PPP Cell would keep itself informed of the status of the PPP proposals.

• Assess fund requirements for the development of projects, Viability Gap Funding (VGF) and any other related purpose for furthering the objectives of this policy.

• Organize trainings, workshops, seminar and conduct / recommend exposure visits for capacity building.

8.2.4 A PPP Nodal Officer shall be designated in each infrastructure-centric Ministry/ Department/ Govt. Entity of the State (Authority), to interact / coordinate with PPP Cell and to act as the contact point for PPP projects. 8.3 A web site on PPP in the State has been hosted on the internet, having the address as: pppinharyana.gov.in.

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It has web based Management Information System (MIS) software which allows the user Department (Authority) to capture various aspects of data at each step of project lifecycle and generates reports which help in decision making. The overall goal of this comprehensive Management Information System is to enable decision support system through complete management of information. The key features of the computerized system, being covered by this software are mentioned below. • Online and Real Time: All transactions are updated instantly in all pertinent data files as soon as the data is entered by the end user. This integrated software eliminates the need for error prone and times consuming clerical work, as all necessary reports are available online. • Total Integration: This software utilizes a single consolidated database serving as a core of the system. As a result, the management is provided with an updated view of information related with PPP projects under various sectors facilitating in management’s analytical and planning functions. • Data Security: This software has been developed using MS-SQL Database. The entire application and database resides on the server placed in NIC Data Center with complete security features and ensures that right person has access to right information. • Flexibility in implementation: This software has a total of eight entry modules. The end user is not required to feed information in all eight modules at a single instance. The end user can feed information module by module as is convenient to him. This helps in planned and smooth implementation. • Openness: These software enables various query handling reports as desired by the user. It also allows user to take the reports in word or excel software. This website provides information on policies and acts, PPP projects in Haryana. PPP Toolkit etc. The web site also provides guidance on the use of MIS. For that, the user should click on ‘core user group’ option given on the top right corner of the home page. The opened window would ask for User ID and Password. User ID to be given as ‘admin’ and password is ‘minda123’. The opened window shall give an option of ‘help’ at its top right corner. Clicking on ‘help’ shall give ‘User Manual’, which can be used to obtain the guidance on MIS. 9. KEYS TO SUCCESSFUL PPPS There are some critical components of any successful Public-Private Partnership: 9.1 Statutory and Political Environment

A successful partnership can result only if there is commitment from "the top". The most senior public officials must be willing to be actively involved and taking a leadership role in supporting the concept of PPPs. A well-informed political leader can play a critical role 9.2 Public Sector’s Organized Structure

Once a partnership has been established, the public-sector must remain actively involved in the project or program. On-going monitoring (on daily, weekly, monthly or quarterly basis) of the performance of the partnership is important in assuring its success.

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9.3 Detailed Contract A carefully developed plan (often done with the assistance of an outside expert in

this field) will substantially increase the probability of success of the partnership. This plan most often will take the form of an extensive, detailed contract, clearly describing the responsibilities of both the public and private partners. In addition to attempting to foresee areas of respective responsibilities, a good plan or contract will include a clearly defined method of dispute resolution (because not all contingencies can be foreseen). 9.4 Guaranteed Revenue Stream

While the private partner may provide the initial funding for capital improvements, there must be a means of repayment of this investment over the long term of the partnership. The income stream can be generated by a variety and combination of sources (fees, tolls, shadow tolls, tax increment financing, or a wide range of additional options), but must be assured for the length of the partnership. 9.5 Stakeholder Support

More people will be affected by a partnership than just the public officials and the private-sector partner. These would be affected employees, the portions of the public receiving the service, the press, appropriate labour unions and relevant interest groups. It is important to communicate openly and candidly with these stakeholders to minimize potential resistance to establishing a partnership. 9.6 Careful Partner Selection

The "lowest bid" is not always the best choice for selecting a partner. The "best value" in a partner is critical in a long-term relationship that is central to a successful partnership. The experience in the specific area of partnerships being considered is an important factor in identifying the right partner. (PPP). While there is not a set formula or an absolute foolproof technique in crafting a successful PPP, each of these keys is involved in varying degrees 9.7 Optimal Risk Allocation

Infrastructure projects have inherent risk and management of risks is the key to the success of PPP project. There must be a well thought & thorough definition of risks and structure for risk allocation. Risks should be allocated to the party best able to manage them. Fig. 4 shows the process of risk management.

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Fig. 4: Risk Management in PPP

n Identify all relevant risks to the project

n Assess consequences and financial impact

n Undertake Quantitative and Qualitative analysis

n Share risks between partiesn Focus on Optimal risk transfer

n Actions to reduce risk occurrences

n Monitor and manage risks during the project life cycle

Risk Identification

Risk Assessment

Risk Allocation

Risk Mitigation

Review & Monitoring

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Appendix I

PUBLIC PRIVATE PARTNERSHIP (PPP) IN INDIA

1 Government in India embarked upon the route of economic progress in early Nineties and infrastructural deficiencies were recognised as major constraint. Development and improvement of infrastructure therefore became a priority. The level of efforts and investment required was quite huge and it was not possible to be met from the normally available resources of the Government. Estimate by various agencies had indicated the investment requirement of the order of US$ 500 (Rs. 25,00,000 cr) in XI Plan period which is expected to increase to the requirement of US$ 1 trillion (Rs 50,00,000 cr) during XII Plan period, in order to sustain the targeted growth rate of 9% to 10%. It was and is, therefore, necessary to involve private sector to supplement the efforts of the Government in provision of improved infrastructure. 2 The PPP mode of delivery public utilities and services has matured to a great extent in India. A recent study commissioned by ADB has given fourth rank to India (Fig. 5) after Australia,UK and Korea in South – Pacific Region, in readiness and capacity to implement and sustain PPP projects for infrastructure improvements.

Fig. 5: PPP Projects in Countries

3 Government of India (GOI) has launched several institutional initiatives for facilitating private sector participation in infrastructure improvement through PPPs. These include:

3.1 Setting up a Committee on Infrastructure (CoI), chaired by the Prime Minister in August 2004. Its functions were to initiate policies, develop structures for PPPs,

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and oversee the progress of key infrastructure projects. This has now been substituted, in July 2009, by the Cabinet Committee on Infrastructure (CCI), under the Chairmanship of the Prime Minister. The CCI approves and reviews policies and monitors implementation of programmes and projects across infrastructure sectors. Besides various innovative schemes have been initiated to promote PPP mode of delivery of public services/ utilities. 3.2 Financial support to PPP in infrastructure under the Viability Gap Funding Scheme (VGF) Scheme 3.2.1 In order to make infrastructure projects commercially viable, Government of India has the Viability Gap Funding Scheme for providing financial support in the form of grants, one time or deferred. The Scheme is administered by the Ministry of Finance.

3.2.2. Government has constituted an Empowered Committee and Empowered Institution for approving financial assistance to such projects which satisfies all the eligibility criteria indicated in the Scheme.

The composition of Empowered Committee will be as follows:

i. Secretary {Economic Affairs) ii. Secretary (Planning Commission)

iii. Secretary (Expenditure) iv. Secretary of the line Ministry dealing with the subject

The Empowered Committee will:

• Sanction Viability Gap Funding up to Rs. 200 crore (Rs. Two hundred crore) for each project subject to the budgetary ceilings indicated by the Finance Ministry. Amounts exceeding Rs. 200 crore may be sanctioned by the Empowered Committee with the approval of Finance Minister;

• Determine the appropriate formula that balances needs across sectors in a manner that broad bases the sect oral coverage and avoids pre empting, of funds by a few large projects;

• Determine the inter-se allocation between any on-going Plan Scheme providing viability gap funding and this Scheme; and,

• Provide clarifications or instructions relating to eligibility of a project for such support as and when requested by Empowered Institution.

The Composition of the Empowered Institution is as follows:

i. Additional Secretary (Economic Affairs) ii. Additional Secretary (Expenditure)

iii. Representative of Planning Commission not below the rank of Joint Secretary iv. Joint Secretary in the line Ministry dealing with the subject (v) Joint Secretary

(FT), DEA -- Member Secretary

The Empowered Institution will sanction projects for Viability Gap Funding upto Rs. 100 crore (Rs. One hundred crore) for each eligible project subject to

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the budgetary ceiling indicated by the Finance Ministry. Empowered Institution will also consider other proposals and place them before the Empowered Committee.

3.2.3 The total VGF under the Scheme shall not exceed 20% of the total project cost. The (State) Government or statuary entity owning the project may, if it so decides, provide additional grants out of its budget up to further 20% of the total project cost. VGF under the Scheme is normally in the form of a capital grant at the stage of project construction. Proposals for any other form of assistance can be considered by Empowered Committee along with approval of Finance Minister on a case to case basis.

3.2.4 In order to be eligible for funding under this scheme, a PPP project shall meet following criteria:

(a) The project shall be implemented ie. Developed, financed, constructed, maintained and operated for the Project Term by a Private Sector Company to be selected by the Government or a statutory entity through a open competitive bidding.

(b) The PPP Project should be from one of the following sectors:

(i) Roads and bridges, railways, seaports, airports, inland waterways;

(ii) Power;

(iii) Urban transport, water supply, sewerage, solid waste management and other physical infrastructure in urban areas;

(iv) Infrastructure projects in Special Economic Zones; and

(v) International convention centres and other tourism infrastructure projects;

(vi) Modern storage capacity including cold chains and post harvest sorage

Provided that the Empowered Committee may, with approval of the Finance Minister, add or delete sectors/sub-sectors from the aforesaid list.

(c) The project should provide a service against payment of a predetermined tariff or user charge.

(d) The concerned Government/statutory entity should certify, with reasons that;

(i) the tariff/user charge cannot be increased to eliminate \ or reduce the viability gap of the PPP;

(ii) the Project Term cannot be increased for reducing the viability gap; and

(iii) the capital costs are reasonable and based on the standards and specifications normally applicable to such projects and that the capital costs cannot be further restricted for reducing the viability gap.

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3.3 India Infrastructure Finance Company Limited (IIFCL) is the company floated by Ministry of Finance to provide long-term capital to help finance PPPs, as well capacity building and other forms of assistance. IIFCL renders financial assistance through:

§ Direct lending to eligible projects § Refinance to banks and Financial Institutions for loans with tenor of five years

or more § Any other method approved by GOI

Some other salient features of financing and development include:

§ Loans assistance from SPV ordinarily shall not exceed 20 percent of the project cost; the Company shall also syndicate loans, in addition to its assistance

§ A project awarded to a private sector company for development, financing and construction through PPP shall have overriding priority.

3.4 India Infrastructure Project Development Fund (IIPDF) within the Department of Economic Affairs (DEA) is to provide financial support for quality project development activities. Its role is to promote the development of credible and bankable PPP projects. The proposals for assistance under the scheme would be sponsored by Central Government Ministries/ Departments, State Governments, Municipal or Local Bodies or any other statuary authority. IIPDF will ordinarily fund up to 75% of the project development expenses as an interest free loan. Balance 25% will be co-funded by the Sponsoring Authority. On successful completion of the bidding process, the project development expenditure would be recovered from the successful bidder. The IIPDF will be administered by the Empowered Institution. The composition of the Empowered Institution will be as under:

a. Additional Secretary, DEA- Chairperson b. Additional Secretary (Expenditure) c. Representative of Planning Commission not below the rank of Joint Secretary d. Joint Secretary in the line Ministry dealing with the subject e. Joint Secretary, DEA – Member Secretary The Public Private Partnership (PPP) Cell of the Department of Economic Affairs (DEA), Government of India will provide support functions to the Empowered Institution to examine the applications received for assistance under IIPDF. To seek financial assistance from the IIPDF it would be necessary for the Sponsoring Authority to create and empower a PPP Cell to undertake PPP project development activities and to address policy and regulatory issues. Assistance under IIPDF funding will require co-funding by the Sponsoring Authority generally to the extent of 25 percent of the total project development cost, which would include the cost of pre-feasibility study to determine whether a project is amenable to PPP. The assistance from the IIPDF would ordinarily be released after the share of the Sponsoring Authority has been released. Only in exceptional circumstances, the Empowered Institution (EI) may relax this condition of co-funding by the Sponsoring Authority.

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The web site: www.pppinindia.com should be referred for detailed guidelines, in order to avail this facility. Annexes I,II and III give the guidelines, application form contents of the preliminary report to be furnished for availing this facility. 3.5 Pilot Projects Initiative and IIPDF The Pilot Projects Initiative – Under the Initiative, an innovative project development funding scheme has been jointly established between the GOI's IIPDF scheme and ADB TA funds. This is aimed at developing projects in especially challenging sectors and providing hand-holding from the central DEA and ADB PPP units to project sponsors from concept development to bid award. Project sponsors are thus able to access funds for engagement of transaction advisors for developing projects and undertaking bid processes. The facility has had a significant impact on the development of the challenging sectors' project pipeline at the states and uptake for especially challenging projects has been growing over the last year since its establishment. 3.6 PPP Cell within the Department of Economic Affairs (DEA) in the Ministry of Finance, whose tasks are to organise activities promoting the use of PPPs, and administer proposals; and to act an inter-ministerial secretarial assistance for Public Private Partnership Appraisal Committee (PPPAC). 3.6.1 Panel of Transaction Advisors for PPP Projects Government had prequalified a Panel of firms through International Competitive Bidding (ICB) as Transaction Advisors (TAs), so as to meet the needs of State Governments and its agencies for the assistance in creation of shelf of projects and to prevent hiring of TAs on nomination basis. The Panel was intended to § Streamline the tendering process for the engagement of Transaction Advisors

for PPPs § Enable fast access to the firms that have pre qualified against relevant criteria § Ensure transparency and accountability through clear definition of the process

and the role and responsibilities of the agencies and the private sector. Following steps were to be taken for using the Panel of TAs § Confirm proposed project is eligible § Develop specific terms of reference (TOR) and request for proposal (RFP)

for the assignment § Seek proposals from panel members in accordance with RFP § Evaluate proposals from Panel members § Sign contract for provision of transaction services with selected Panel

members § Service commences § Evaluate and report to DEA on performance of selected Panel member This panel is no longer valid.

3.6.2 PPP Toolkit The Government of India in the Department of Economic Affairs, Ministry of Finance has designed the PPP Toolkit, a web-based resource, to help improve decision making for infrastructure PPPs in India. Toolkit covers five infrastructure sectors, namely, State highways, Water and Sanitation, Ports, Solid Waste Management, and Urban

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Transport (Bus Rapid Transport Systems). The Toolkit may be accessed at http://toolkit. pppinindia.com. The web site also provides guidance to use the toolkit.

Annex I

Memorandum for Consideration

Under Guidelines for IIPDF 1. Introduction The MFC is an application to be made by the Sponsoring Authority to seek project development funding from the India Infrastructure Project Development Fund set up by the Department of Economic Affairs, Ministry of Finance. The information sought in the MFC and the rationale is given below. Annexure II includes an Application Form to be completed for the MFC and Annexure III provides a typical Table of Contents for the Preliminary Report to accompany the MFC. 2. Project Proposal The Sponsoring Authority, with the aid of the PPP Cell or otherwise, will highlight the broad contours of the project and issues related to its implementation framework in the proposed PPP option. The proposed project development\ activities, budget and time lines will form a part of the report. a. Technical Information: The technical information will include the need for the

project, the components, their preliminary capacity/sizing and block cost estimates for investment sought through PPP options. In case of PPP options like Service, Management or Lease Contracts, the investment required for rehabilitation or efficiency improvement measures need to be stated, the absence of which will hinder structuring performance based contracts.

b. Environmental and Social Aspects: On one hand, the information must list the

applicable steps required to obtain environmental clearance under the Environmental Rules and Regulations issued by competent authority from time to time. On other hand, the information should also bring out if there are any environmental or social risks that can impact/delay/ hinder the project deliverables from considerations of efficient use of assets created under a PPP framework. This should be addressed from an investment risk perspective.

c. Financial Analysis: Financial analysis of the investment proposed for the landed

cost of the project (see definitions given in the guidelines, the project cost to include cost of project development funding and returns thereon) must highlight the sources of investment, drawdown period, the revenues over the project contract period (due to tariffs for services and/or due to savings arising out of efficiency gains) and Internal Rate of Return (IRR) on Economic/Project/Equity IRR considerations. In case of non-revenue generating projects, the Economic IRR must be mentioned.

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d. Legal Aspects: This must bring out the provisions under the relevant Acts/Rules that grant authority to the Sponsoring Agency for developing and implementing the project under the proposed PPP option and the proposed decision-making steps to award the PPP contract. The objective is to ensure that the Sponsoring Authority by itself or through an identified Competent Authority has the necessary authority to approve the proposed project development and implementation framework. In case of any need to amend the legal framework, the same must be mentioned.

e. Risk Identification: A preliminary assessment of the project risks during different phases of the project-development, construction and implementation-must be summarized. This will form the basis for structuring possible mitigation measures/structures in detail during project development, hence an indicative summary is considered adequate at the preliminary stage. This is to ensure that the cost of capital/investment sought from the private sector investor is minimal and based on informed risk mitigation structures rather than perceived risks with mitigation measures not mentioned.

f. Proposed PPP Implementation Structure: Typically, the intent of systematic project

development with funding support is to seek private sector investment and management skills so that the Sponsoring Authority can structure performance based service delivery, while allowing the private sector to recover the investment with appropriate returns. In case of Greenfield projects, options such as Build, Own, Operate & Transfer (BOOT), BOT and its variants or Concession or Lease Contracts are possible. However, in case of existing projects, where significant rehabilitation or replacement of assets is necessary for asset performance improvement, management or service contracts (that bring in private sector efficiency and management skills with investment mostly by the public sector) may be the first step toward establishing efficient asset base and operational systems for the project assets for subsequently enabling larger investments through BOOT type contracts. Hence, the financiability of the proposed PPP option must be highlighted.

g. Regulatory Aspects: The preliminary report accompanying the MFC must mention

the existing regulatory mechanism, as applicable, in case tariffs are to be structured in the PPP options. In the absence of regulatory mechanism, proposed steps for regulation by contract must be indicated.

h. Project Development Cycle: The information will include the proposed project

development activities and time lines starting from the appointment of consultants and advisors culminating in the selection of the private sector partner through a transparent and competitive procurement process. The role of different government agencies, role of consultants and advisors should be briefly included.

3. Budget for Project Development The budget for project development should include an estimate of:

• Surveys and investigation expenses. • Consultant fees covering technical, environmental & social, legal,

financial studies and project documentation, as may be needed. • Fee for grading of projects, if any. • Transaction Advisor fees. • Consultant fees covering risk assessment/identification.

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• Out of pocket expenses for procurement process documentation, advertising, marketing road shows/investor meetings, etc.

• It would not include expenses incurred by the Sponsoring Authority on its own staff, etc.

4. Duration of Funding and Drawdown Requirements An indicative quarterly budget with milestone-linked payments for each project activity should be indicated. 5. Plan for Recovery Plan for Recovery of Project Development funding with Returns should be indicated.

Annex II

Memorandum For Consideration (MFC) Application Form Nature of Assistance : Project Development funding for Rs. ______

Is Viability Gap Fund (VGF) also sought separately? Yes/No

Project Name : Sector : Sponsoring Authority : Location/ (State/District/Town) : Implementing agency (if different from above as in case of SPV)) : Need for the Project : Brief Project Description :

PPP structure for Project : BOOT/BOT (its variants)/Concession/Lease Implementation Management/Service/EPC along with Performance based O&M Contract Project Implementation Milestones : List key milestones Likely impact(s) of the Project : Project Financial Structure : A) Details of Project Cost

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Item Rs. Lakhs Land Building Equipments Any other (Specify) Total Project Cost B) Proposed means of financing Source Rs. lakhs Private Sector State Government Sponsoring Authority Govt. of India (VGF) Any Other (Specify) Total IRR Estimations (as applicable) : Economic IRR Project IRR Equity IRR Estimated Project Development Expenses Item Rs. lakhs Surveys and Investigations Consultancy fees: Technical Environmental & Social Legal Financial Any other Total Consultancy Fees Transaction Advisory Fees Marketing and Procurement Related Expenses Any other Total Estimated Project Development Expenses IIPDF contribution @75% Enclosures :

Signatures and Name of the Authorised Signatory of the

Sponsoring Authority

34

Annex III

Table of Contents of the Preliminary

Report accompanying the MFC 1. Introduction 2. Existing Project Scenario (including need for rehabilitation, up gradation, improvement and/or incremental investments-to bring out the need of the project) 3. Project Proposal (covering broad project concept and components, block cost estimates, revenue structures, etc.-See Annexure I) 4. Preliminary Project Assessment 4.1 Technical feasibility 4.2 Environment and social acceptability 4.3 Financial & commercial viability 4.4 Legal framework 4.5 Risks (during development, construction and operation implementation) 4.6 Contractual & implementation structures1 5 5. Project Development Activities 5.1 Project development cycle 5.2 Timelines 5.3 Surveys and investigations 5.4 Technical/Environmental & Social/Financial/Legal consultants, their scope of

work 5.5 Transaction Advisors, their scope of work 5.6 Marketing 5.7 Procurement process 5.8 Others (Please specify) 6. Funding Requirements for Project Development 6.1 Budget for Project Development expenses 6.2 Drawdown (indicative quarterly budget and estimated milestone linked payment

for each activity) 7. Plan for Recovery Plan for Recovery of the Project Development funding with Returns 8. Recommendations BOT= build-operate-transfer, O&M= Operation and maintenance

Source: ADB, Public-Private-Partnership Handbook; Heather Skilling and Kathleen Booth 2007.

35

Appendix II

HISTORICAL BACKGROUND

The beginnings of partnership between private and public sectors can be traced as far back as the Roman Empire two thousand years ago in Europe. A network of postal stations was developed to accompany the vast expansion of the highway system under the Roman legions. During the 16th and 17th centuries, European sovereigns, particularly France, began much more expansive public works concession programs in canal construction, road paving, waste collection, public lighting, mail distribution and public transportation. In early 20th. prior to 1982 there was very limited private financing of transport infrastructure in developing or transition countries. Throughout the industrialized and developing world, there has been a renewed move to liberalization and privatization of infrastructure activities which increased dramatically into the 1990s forging a systematic Public Private Partnership (PPP).

The United Kingdom's Private Finance Initiative (PFI), which began in 1992, had projects in most key infrastructure areas. Other countries with significant PPP programs include Australia, Ireland, United States, France, Italy, Spain, Finland, Germany, Greece, the Netherlands and Portugal. Reflecting a need for infrastructure investment on a large scale, but weak fiscal positions, a number of countries in Central and Eastern Europe, including the Czech Republic, Hungary, and Poland, have embarked on PPPs. There are also fledgling PPP programs in Canada and Japan. PPPs in most of these countries are dominated by road projects. In Latin America, Chile, Colombia, and Mexico have used PPPs to promote private sector participation in public investment projects. In Africa, South Africa has embarked upon developing PPPs in a number of sectors. In Asia, the use of PPPs is continuing to develop with a well established program in South Korea, an extensive investment program in China, although with varying degrees of implementation and success, in Indonesia, the Philippines and Singapore. In India, PPP is now being used widely in improvement of physical and social infrastructure.

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Appendix III

LESSONS LEARNT FROM PPP PROGRAMS

The establishment and implementation of PPP programs worldwide has provided several lessons, particularly from the poor performing PPP programs. Such lessons include: 1 Countries without a proper policy and full commitment across the Ministries/ Departments involved, (Finance and Development, Planning), fail to instil confidence in the private sector. The result is that either the private sector is not interested or prefers to use unsolicited tenders to avoid a competitive and transparent framework. 2 Projects are often insufficiently prepared, sometimes for financial reasons, sometimes for time reasons. Ultimately, poorly prepared projects either fail or take much longer, sometimes years longer than the advocated PPP process or result in financial (and political) liabilities for governments in later years. 3 Inconsistent laws and regulations can be worse than limited or no laws, where regulation by contract can operate at least initially. 4 Even where projects are well developed and frameworks are in place, relatively minor defects in concession contracts can lead to weak and uncompetitive tenders. 5 Without clear policy regarding unsolicited bids, the private sector may prefer this approach, which could result in poorer deals for the government and longer time taken to implement than the standard PPP route. 6 Ad hoc projects, rather than a properly developed pipeline of projects, may result in difficult projects which either fail to be implemented or take years to be developed. ‘Difficult’ projects are generally those that require large subsidies, are risky, often not ready and have too many negative impacts. 7 Consultation and explanation of PPPs is often insufficient to convince/inform public sector officials, senior staff and general public of their advantages and how they work, generating a lot of misunderstanding and opposition to PPPs. Many of these lessons provide the basis for the policy and strategy development in the present section. 8 PPP is not the only method to deliver project financing and realisation. It does not provide a ‘miracle’ solution nor a quick fix and should only be used where appropriate and where it is able to deliver clear advantages and benefits. 9 Each type of PPP has inherent strengths and weaknesses which need to be recognized and integrated into project design. 10 One of the fundamental causes of project failure, for both traditional public sector procurement and PPPs, is often a lack of clarity on the part of the public authority regarding the exact scope and requirements of the project. The other reasons are revenue or market forecasts being wrong, failure of technology, insolvency of subcontractors, or excessive exchange rate fluctuations.

37

11 PPP seems likely to be appropriate if: • Service outcomes can be clearly specified and measured • There exists the potential, and the incentives to introduce, design innovations and operational changes that can raise efficiency • Payment mechanisms are devised that give the operators the motivation to maintain service quality • Value for money is able to be demonstrated, after allowing for costs of project development and costs of monitoring the contract

• An integrated service can be provided with close working relationships and good communication between service providers

• There are transparent accountability procedures and a due regard for the public 12 The review of international best practice in PPPs suggests a number of core issues that public authorities must address when considering the use of PPPs for producing public infrastructure projects. These include:

• Whether PPP arrangements will result in better value for money than conventional procurement methods;

• Whether the project is affordable in the long term, given overall budgetary constraints.

• How willing the private sector is to be involved in public service provision; • What type of PPP arrangement is most appropriate to the particular project.

12.1 Value for money Public bodies should utilize PPPs if they have the potential to offer better value for money in comparison with traditional ways of procuring infrastructural development PPPs should be used if they provide the best value-for-money outcome, taking into account all of the benefits, costs and risks over the whole life of the project. This value for money may take the form of the delivery of the service at a lower cost; less exposure to risk and hence a more certain financial outcome; or increased benefits to 12.2 Affordability Before engaging in PPPs, the public sector must ensure that the capital costs of the project are affordable within its budgetary constraints. This is determined by public expenditure commitments as well as the potential for the private sector partner to make a return on its investment. It is important that the public agency closely examines the budgets of proposed projects and makes certain that these are compatible with its capital investment allocation and targets over the given time period. 12.3 Stability It is vital that the project’s future demand is sustainable over the long term. Due to the 15-30 year nature of most PPP contracts, the private sector partner needs to formulate an integrated, long-term approach to addressing the needs of the public sector. However, there are risks inherent in this long term arrangement. 12.4 Risk transfer All projects contain an element of risk which has the potential to significantly affect the financial position of the public authority. A primary reason for major projects overrunning their budgets and/or schedules is the inadequate identification and management of risk. A key benefit in the use of PPPs is the possibility for the public

38

sector to transfer a portion of the risks associated with the project to a private sector company, which will, it is assumed, have the skills and experience needed to manage these more effectively and at a lower cost. 12.5 Legal and regulatory environment Increasingly many countries have amended ( or are currently amending) their existing legislation in order to clearly specify the powers of public bodies to contract out services under PPPs. Legislation addressing PPP arrangements should identify which sectors may make use of PPPs, how PPP tariffs are set and adjusted, the role played by different institutions in making PPPs happen, how PPPs should be procured, and methods for the resolution of any disputes that may arise between contracting partners. 13 Another element of international best practice suggests that public authorities engaged in broad based PPP programmes are increasingly making use of cross-sectoral pools of expertise in dedicated PPP units. These units play a wide variety of roles including:

• Developing PPP policies and legislation; • Providing guidance about best practice and disseminating information on

PPPs; • Clearing and approving PPPs; • Providing expertise in one or more areas of PPP procurement and

management; • Assessing the direct and contingent financial costs of PPPs, and approving

PPPs developed by other government agencies. 14 Creating the Dedicated PPP Units There are four general approaches to establishing PPP units and identifying their core functions: 14.1 Create a unit within a ministry / department. For example PPP unit in Department of Economic Affairs, Government of India, PPP unit in Treasury in South Africa 14.2 Set up the unit as an autonomous entity attached to but not fully part of government bureaucracy. For example Philippines BOT Centre 14.3 Establish a government owned company to collaborate with departments and other agencies to indentify and procure PPPs. For example Partnerships British Columbia in Canada. 14.4 Create a joint venture company owned in part by private sector shareholders and acting as bridge between the public and private sectors. For example Partnership UK 14.5 The authorities engaged in PPP programmes have established dedicated PPP units for using cross – sectoral pools of expertise. These units perform following main functions • Developing PPP policies and legislation

39

• Providing guidance on best practices and dissemination information on PPPs • Providing expertise in one or more areas of PPP procurement and management • Assessing the direct and contingent financial cost of PPPs and reviewing /

approving PPPs developed by other government agencies 15 Using Advisors As with any commercial contract, there are several stages involved in the negotiation of a successful PPP arrangement. As the full range of required experience is often not found within an individual public authority, it can be necessary to make use of inputs from technical, financial and legal experts. In addition, external advisors are often brought in to assist public authorities with the PPP process. 15.1 Financial expertise The experience of financial experts can assist public agencies in finding potential investors for a PPP project, as well as identifying their particular attitudes towards risk and structuring the contract in a way that is acceptable to private financiers. Input from those with a good understanding of financial markets and project financing will enable the public body to locate appropriate sources of capital which can meet the public sector’s needs at the lowest possible cost. Broadly speaking, financial experts on project teams are used to:

Ø Develop a strong business case for the PPP project; Ø Clarify the risks and responsibilities assumed by both public and private

sectors, and identify the financial implications of these; Ø Produce payment mechanisms which offer the optimum balance of risk,

responsibility and reward to both partners; Ø Prepare and review tender proposals, evaluating the accuracy of the

financial models proposed by the private entity, and the impact of this for the public body;

Ø Identify the financial implications of all clauses of the contract, such as step-in rights and termination clauses;

15.2 Legal Expertise Legal experts have a vital role to play in drawing up the PPP contract. They help public agency negotiators to identify the implications of the terms of the contract, especially potential deal-breakers such as payment mechanism, termination clauses and step-in rights. Their specific functions are to:

Ø Structure and draft the tender documents, PPP contract and land lease agreements;

Ø Provide advice on the best procurement or bidding; Ø Offer general legal information on taxation, property, planning,

environmental considerations, banking, competition and intellectual property laws.

15.3 Technical Expertise Public agencies require knowledge of the technical requirements for the services under PPP arrangements. Depending on the specific project, a wide range of technical advisors may be required, including surveyors, engineers, architects,

40

contractors, project managers, actuaries and other technical professionals. They carry out the following functions:

Ø Define output and outcome specifications and service standards to be provided under the PPP contract;

Ø Evaluate proposals and bids, including the capability of the private sector tenderers;

Ø Conduct quality assurance during construction, ensuring contractor compliance and assessing technical risk;

Ø Value assets that may be sold or transferred from the public sector to the private entity;

Ø Develop systems for monitoring and measuring performance.

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Appendix IV

TOP TEN FACTS ABOUT PPPS

1 Public-private partnerships are just what the name implies. Public-private partnerships are a contractual arrangement whereby the resources, risks and rewards of both the public agency and private company are combined to provide greater efficiency, better access to capital, and improved improved service delivery with a range of government regulations. The public's interests are fully assured through provisions in the contracts that provide for on-going monitoring and oversight of the operation of a service or development of a facility. In this way, everyone wins -- the government entity, the private company and the general public.

2 Public-private partnerships are more common than one may think and have been in use in many countries. These contractual arrangements between government entities and private companies for the delivery of services or facilities is used for infrastructure such as roads, water/ wastewater, transportation, urban development, and delivery of social services, to name only a few areas of application. The use of partnerships is increasing because they provide an effective tool in meeting public needs, maintaining a high level of public control, improving the quality of services, and are more cost effective than traditional delivery methods.

3 They are essential tools in challenging economic times. Even in the best of times, governments at all levels are challenged to keep pace with the demands of their constituencies. During periods of slow growth, government revenues are frequently not sufficient to meet spending demands, necessitating painful spending cuts or tax increases. Partnerships can provide a continued or improved level of service, at reduced costs. And equally important, partnerships can also provide the capital needed for construction of major facilities. By developing partnerships with private-sector entities, governments can maintain quality services despite budget limitations.

4 Successful partnerships can lead to happy employees. In many partnerships created today, public employees are retained and usually at equal or improved benefits. One of the greatest areas of improvement for employees is with opportunities for career growth -- private companies spend more on training and personnel development than their public-sector counterparts, as a way of gaining the maximum efficiency out of every person, and the maximum amount of job satisfaction.

5 Successful partnerships can lead to better public safety. For example, many mundane activities in Police department such as processing of crime reports can be passed on to private-sector partners, whereby police officers can spend more time on the streets doing the jobs for which they are trained. This has been done in USA.

6 Partnerships give many children better educational opportunities. Public-Private Partnerships could be instrumental in constructing new school buildings. In US and UK, by working with a private real estate development

42

company, city and county school systems were able to build state-of-the-art facilities with a modern computer lab, gym and library.

7 Private-sector companies are working with central, state and local governments to build roads, making it possible to finance construction and upkeep without having to impose general tax increases. While tolling is one of the means of generating the revenue to cover the investment, other methods such as annuity and shadow tolling have been successfully tried.

8 Clean, safe water is achieved through public-private partnerships. Public-private partnerships have enabled the construction of state-of-the-art water management facilities, while using efficient operations to hold down costs to ratepayers and provide a way of meeting those "un-funded mandates". Many States have successfully implemented projects for supplying 24x7 water supply with taking care of weaker sections of society as well.

9 Partnerships make the information revolution accessible to more people. This is the age of information technologies, but there can be a hefty cost of getting a system operating. Through public-private partnerships, many governments are now able to fully participate in "E-government" with their constituents, or effectively coordinate government activities and budgets. Better service, improved tools and saving money are exactly what public-private partnerships are all about.

10 Governments themselves are the biggest supporters of public-private partnerships. While there can be substantial misperceptions about the value of partnerships, a look at who endorses them should clarify the picture. Government of India, as in other countries, has been promoting PPP for the last three decades. Numerous surveys indicate why -- governments traditionally realize cost savings of 20 to 50 percent when the private-sector is involved in providing services.

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Appendix V

STRENGTHS AND WEAKNESSES OF PPP 1 Strength One of the main strength of PPPs is their ability to deliver value for money in public service procurement and operation by utilizing the skills, resources and experience of each partner. Public sector provides its strength and expertise in identifying public needs, service requirements and desired outcomes with strength of governance and citizen support where as private sector brings in its capacity to effectively utilize assets through better operational efficiency, innovative technology, managerial effectiveness for better management of the construction and operation of services.

• Benefits to the Public Sector : The Government i.e. the public sector derives fiscal, economic, technological and social benefits from PPP. The foremost is that it allows to raise capital for higher priority work that might otherwise not be possible due to budgetary constraints. This also enables the optimal allocation of public resources for infrastructure development. It entails accurate costing of the project and optimal allocation of risks. The economic benefits are derived by way of speedy reliable and efficient delivery of the facilities. The infrastructure development catalyses the other developmental activities in the region there by creating a virtuous circle leading to enhance quality of life of the people. It also provides new role for the Government and opportunities for innovation, capacity building and technological enhancement. Additionally, it allows public sector to realise value for money for the entire life of project or service rather than just initial construction phase as is the case in traditional model of public procurement. Figure 6 shows the main advantage of cost and time overrun cost risks getting transferred to private sector in PPP.

Fig. 6: Risk Transfer Advantage in PPP Project from Conventional Procurement

44

Conventional Project Procurement PPP Project Procurement

• Benefits to the Private Sector: The benefits to the private sector accrues as a wide range of business opportunities are available which otherwise were previously confined to public sector. It also offers opportunities to them in the designing and delivering innovative solutions. • Benefits to the Public: The public and the user is benefited to get the services in a more efficient and cost effective manner. Appropriately designed and implemented PPP projects can yield better quality services without compromising public policy objective. 2 Weaknesses Like in any service delivery mechanism, PPPs also have draw backs and risks. This needs to be recognized so as to minimize or eliminate them. The main draw backs could be identified as;

• As the management of out puts in PPP projects is transferred to the private sector, the public sector has very limited role to intervene as long as the services are delivered. The public body have no day to day control over the management of the project thereby may not be able to utilize its own expertise in the area.

• That the process of PPP procurement can be time consuming and some what expensive. It is, therefore, essential that a PPP project is structured in a detailed and clear cut manner for the desired out put for its successful realization. Although this is important to the development of projects that are affordable and appropriate value for money, it has the potential to make procurement lengthy and costly procedure.

Tim

e O

verr

un Running Cost

Overruns

Estimated Running Cost

Construction Phase

Operation and Maintenance Phase

Payment Based on Availability

Payment based on Usage

No

Paym

ent U

ntil

the

faci

lity

is R

eady

0 5 10 15 20 yrs Construction Operation and Maintenance Phase Phase

Cost Overrun

0 5 10 15 20 yrs.

Estimated Capital Cost

45

• The cost of finance in the private sector including both debt and equity is typically between 1% and 3% higher than the public sector cost debt on a non risk adjusted basis. This has effect of increasing the over all cost of PPP in comparison to the traditional procurement method.

• PPPs can some times be rather inflexible instruments specially given the long term nature of most PPP contracts. There is limited potential for modifying services or flexible spending.

• Under PPP arrangements lines of accountability can be less straight forward and transparent than under traditional methods of procurement where accountability is more direct. This assumes more significance in these areas of public service provision which may require greater public demand for accountability and responsiveness than any others. This may also some times result in public criticism and scepticism or even hostility towards PPP arrangements.

Appendix VI

COMMON MISCONCEPTION ABOUT PPP A few of the most common misconceptions about PPPs are as below:- 1. They are the same as privatization: The key motivation for the PPP arrangements is to introduce competition in public service provision. This directly contrasts for privatization which transforms a public monopoly into a private one and does not achieve the benefits of partnership between public and private sectors which are available under PPP. 2. Public Authorities loose control over service provision. PPPs do not entail the loss of Public Authorities ability to implement policies or regulate service provision. Done well, PPPs can be shaped by public authorities to integrate with their existing objectives, policies and regulations. Through well defined PPP contracts the public sector can ensure retention of control over its assets and services. 3. PPPs only apply to infrastructure projects. PPP can also be used to deliver a wide range of public services (which may not necessarily be large infrastructure projects) in an effective and innovative manner. For example they can be utilized in the delivery of service that do not involve major capital projects such as data service provision, refuse collection or maintenance of existing public facilities. 4. End users of the service will be ultimately responsible for servicing the debt one way or another. Therefore PPPs should not be entered into just to keep the debt of the balance sheet of the public agency 5. Service quality will decline ;

46

There is no obvious relationship between the manner of service delivery, whether PPP or more traditional methods, and the quality of the service. In fact, through contractual provisions concerning quality control, the public body has the ability to specify the standard of performance required, and the character of PPP arrangements suggest that service quality would be enhanced as a result. Given their financial interest in the project’s success, private partners have a strong incentive to improve the quality of the service. 6. Public sector staff will lose out There is often anxiety among public sector staff that PPPs invariably lead to job losses or to a worsening in employment terms and conditions. However any PPP contract must conform to local labour legislation and existing collective agreements. Any changes in staffing levels must be consistent with existing labour contracts, and should preferably come about through attrition rather than through redundancy. 7. The cost of the service will increase to facilitate private profit Public authorities may be wary of entering into PPPs because they fear that the costs of provision (whether met through user charges or through public subsidy) will be higher than those of publicly provided services that are by nature, non-profit. However, PPPs only make sense in regard to value for money if they can provide services at a price lower than, or at least commensurate with, existing public provision. Under the terms of a PPP, any profits must arise through increased productivity and expanded services, not increased fees. 8. The public sector can finance services at a lower cost than the private sector. While the public sector may sometimes be able to finance projects at a lower cost than the private sector by borrowing through the public fund, this will not always apply. Moreover, it is crucial that public sector agencies focus on the overall benefits to be gained from PPP arrangements, rather than simply lower upfront costs. The principal reason to follow a PPP route is to avoid public sector debt. The primary motivation for entering into PPP relationship is to bring about greater efficiency, motivation and value for money. The public sector and the private sector should forge the partnership for a win- win situation.

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Appendix VII

PPP AND CONVENTIONAL PROCUREMENT 1 The major difference between the conventional procurement method of public services and through PPP is that, in the former, the cost to community in initial stages is quite high since the investment for creation of the facility has to come from public funds as compared to PPP method where private sector makes the investment. However, during the stage of operating the facility, the community would be incurring some cost by way of payment of user fee, in PPP mode, besides deriving benefits ( for example savings on vehicle operating cost, on travel time and on accidents in case of road sector), whereas the community would not be paying any user fee in conventional procurement but benefits would accrue to them ( Fig. 7).

Fig.7: Cost and Benefit under Public versus Private Financed Project

Cost and Benefit Flows to Community under Cost and Benefit Flows to Community under Public Versus Private Financed ProjectPublic Versus Private Financed Project

Source; World Bank Toolkit for Highways 2 It is generally recognized that the proportion of investment procured through PPP within mature PPP markets is around 15% of total investment. As a result, 85% of public sector procurement would continue to be procured through conventional methods. If we look at road funding, the picture is similar. Worldwide, government budgets currently finance 95% of investment in the road network, while less than 5% is financed directly through tolls (ie direct charges by the user). In the USA, the picture is similar with tolls currently providing only 8% of all U.S. highway revenue. China, with the most extensive toll network in the world (20,000 km) and the largest PPP market in developing countries until 2006 applies PPP procurement for an estimated 6-9% of its total highway investments (estimate from the late 1990s, World Bank, A Decade of Action in Transport; 2007).

48

In Africa, the picture is similar. PPP investments are estimated to have provided 10-15% of total infrastructure investment over the past twenty years in African countries. Moreover, whilst significant increased investments are planned in the highways sector, the emphasis on private sector funding in the 1980s and 1990s has been criticized as being a policy mistake. Some countries however suggest a higher rate of PPP investments, notably India and Chile, which may suggest that a higher role for PPP is possible to fund major highway investment programs subject to a suitable enabling environment. PPP programs should be seen as complementing and not replacing conventional procurement methods.

Appendix VIII

ENABLING ENVIRONMENT FOR PPP

1 Drivers of PPP The development of a successful PPP program requires two key drivers: political will and bankable projects. The subsequent implementation of such projects necessitates that an enabling environment for PPP be established for finance to be mobilized and the partnership to work effectively and to the benefit of both parties. 1.1 Political will to introduce PPP: A state considering the launch of a PPP policy for the provision of infrastructure facilities and/or public services must announce firmly its intention to do so in an unequivocal manner. The government should demonstrate strong commitment to pursue policy objectives within an evolving political environment. Private sector partners need to understand the involvement of the public authorities knowing what framework has been set up: strategy, means, management process and principles are all important elements in the private investor’s evaluation. 1.2 Bankable projects suitable for funding by the private sector : The key issues that need to be examined in the PPP process are: the strategic justification for the project, whether the project represents value for money, whether the project is affordable, whether the project is commercially viable or bankable, and whether the authority has the right resources, skills, and organization to manage the process. The fundamental for the identification of PPP procurement options is to have projects with sound economic and financial credentials. A thorough project preparation and the identification of suitable procurement routes under PPP is necessary to be ensured. The private sector should also perform rigorous project analysis and estimate the project parameters independently. Initially, the best projects should be selected which are of sufficient size to attract the private sector, not too complex or risky and which

49

need little government support. This reduces the exposure of the project to inconsistent public commitment and inadequate fiscal space/financial support. 2 PPP Policy Framework 2.1 The route to an enabling environment passes through the PPP policy framework which comprises a number of interlocking structures including legal and regulatory, risk management, institutional, financial, private sector and other aspects. However, this framework is established in the context of a number of constraints, the nature and extent of which shall depend on the particular economic, social and political conditions prevalent in the country. These constraints such as political instability or lack of political will, underdeveloped financial markets or economic instability, lack of transparency, weak public institutions, lack of PPP experience or low PPP skills. Experience with PPP worldwide, suggests that it is useful, if not essential, to have a PPP policy framework in place, to facilitate planning and implementation and instil confidence and understanding in all participants in the PPP process. This includes both public and private partners. Generally all countries have embarked on the PPP process in that way. This framework provides a set of rules that gives confidence to both the public sector which has to implement the rules and also the private sector which has to invest time and money and aims to ensure that both will achieve, within acceptable bounds, their objectives. A PPP policy framework is an evolving tool; it should not be viewed as an ideal or even something to be aimed at in total at once. Required changes will take time to agree and implement and will only be felt in the medium- to long-term. It should thus be developed with a long-term process in mind which would allow its progressive adaptation and improvement in line with the experience from implementation of the PPP program. 2.2 Constraints Constraints to PPP policy are reflective of the specific environment and which have a determining impact on the development and success of PPP programs. They may hinder, delay or even prevent the establishment of the required components of the PPP policy framework: • Political Instability • Economic Instability • Under-developed financial markets • Less number of users • Low capacity or unwillingness to pay • Popular resistance to levying of user charges • Lack of PPP experience / low PPP skills • Weak public institutions (low traffic enforcement/overloading) • Lack of transparency 2.3 Addressing the constraints Setting up a PPP policy requires redefining the role of Government. The changing focus should reduce the Government’s functions as supplier, but increases its functions as regulator - the enabler of competition. This means that governments need to create the proper institutional framework for competition, set economically efficient charges for the use of publicly provided infrastructure, carefully appraise the allocation of scarce public resources and increase community participation in decision

50

making. Constraints limiting private sector involvement can only be removed through long-term and in-depth reforms. Long-term reform aiming at developing and structuring the construction industry would be appropriately required (Table 1).

Table 1: Constraints and Reform for PPP Table below gives a gist of actions to address the cons

Types of constraints

Particular constraints

Type of reform needed

Specific actions

Political constraints

Political instability Lack of transparency Weak public institutions

Good governance principles Ensure and demonstrate commitment to PPP policy and projects.

Legal and Regulatory Constraints

Weak public institutions

Adjust the legal framework to facilitate PPP Set up regulatory body Clarify procurement procedures

Training for improved contract management and regulation

Economic and financial constraints

Economic instability Under-developed financial markets Less number of users Low incomes

Economic development Secure revenues from dedicated funds Develop financial markets (reform banking system, set up infrastructure investment Develop methodologies for public risk assessment

Use Financial Institutions for risk mitigation, facilitation of regulatory dialogue and provision of technical assistance Stable economic management Support development of domestic financial markets and integration into regional initiatives

Economic and financial constraints

Economic instability Under-developed financial markets Less number of users Low incomes

Economic development Secure revenues from dedicated funds Develop financial markets (reform banking system, set up infrastructure investment Develop methodologies for public risk assessment

Use Financial Institutions for risk mitigation, facilitation of regulatory dialogue and provision of technical assistance Stable economic management Support development of domestic financial markets and integration into regional initiatives

Social and cultural constraints

Popular resistance to payment of user charges

Coherent strategy at national level for levy of user charges

Assess sensitivity of the public on levy of user charges Viability gap funding to subsidize/support poorest user

Public sector

Lack of PPP experience/ low

Creation of a businesslike agency with clear

Define standards Use technical assistance

51

constraints

PPP skills, weak public institutions (poor traffic enforcement/ overloading)

assignment of responsibilities over the various parts of the network. Build up progressive experience on PPPs from maintenance contracts to concessions.

Training and sensitization on PPP and in legal and financial issues

Private sector constraints

Lack of PPP experience/ low PPP skills

Develop capacity of the private sector (local contractors and consultants) Move from input (quantity) to output (performance) type of contracts.

Involve users at all stages of the project Define performance indicators for maintenance Conduct sufficient preliminary studies

Appendix IX

PROJECT FINANCING

1 Infrastructure PPP’s typically require financing; that is, external funds are required for the initial investment costs that are recovered over time from future revenue streams. The funds may be sourced from the public sector or the private sector. Regardless of the source of finance, such funds have a cost and, therefore, impact the project’s economics and required tariffs (and thus affordability). A government’s cost of funding is typically lower than that of a private operator. Private financing may therefore increase the financial costs of PPP. However, the efficiency gains from PPP are expected to outweigh this additional cost and result in net savings and efficiency gains, with an ultimate benefit to consumers. In addition, public sector financing is usually scarce, creating one of the initial drivers for PPP. The operator will typically establish a project company for implementing the contract, often called special purpose vehicle (SPV). The company owners may be a consortium of companies or a single large company. The company owners will not usually finance all project requirements; instead, they will provide a proportion as equity and borrow the remainder of the required financing from financial institutions or place debt securities in the capital market. The creditworthiness (“bankability”) of a project depends on a number of factors, some of which are within the control of the government when designing PPP. They include commercially attractive project design and tariffs (shorter payback and, hence, financing periods) as well as strong off-take arrangements to reduce market/revenue risk (predictability of cash flows), together with the level of certainty and transparency of regulatory settings, which affect future cash flows. Infrastructure project financing in general, whether from banks or bond markets, faces a number of challenges including (i) long-term debt maturities to match project cash flows, (ii) limits to the availability of debt financing to match revenue steams, (iii) limited available equity and resulting high degree of leverage, and (iv) no security/ guarantee except for project assets available (“nonrecourse financing”). Project finance, is a specialized activity and, depends on prevailing market conditions. To make financing possible or to secure better borrowing rates, the operator may seek

52

credit enhancement through insurance or guarantees. These might include (partial) credit guarantees (e.g., from the government itself or from a development finance institution) or political risk guarantees (from insurers or development finance institution) against the government or regulator not adhering to agreements (e.g., take-or-pay off-take agreement, concession agreement, etc.). To determine the amount of debt finance the project can sustain, lenders perform their own calculations related to project performance and cash flow. These include debt service cover ratios, loan life coverage ratios, and project life coverage ratios. Project financing requires a very thorough appraisal process because of the sole reliance on project cash flows. Lenders will undertake due diligence exercises to get comfort that the project assumptions and risks are reasonable. Bidders may not fully know the prospective financing arrangements until the last stage of the contracting process. The final arrangements and risk allocations will only be put in place when the contract is near certain. That is why, the stage of ‘Financial Closure’ is very crucial in projects taken up on PPP, since that is the stage when the financial arrangements and commitments get tied up . 2 Tariff Design 2.1 Tariffs need to balance a number of objectives: (i) stipulated service standard and associated costs, (ii) customers’ willingness and ability to pay, (iii) resulting cost recovery, (iv) required economics (return on investment) for private operator, and (v) need for/availability of subsidies. The right combination of factors must be determined through an iterative optimization process using the project model ( Fig. 8).

Fig. 8: Tariff Design Process

Cost Recovery

Service Standard

Willingness/

Ability to Pay

Tariff StructureSubsidy

(Source: Heather Skilling and Nils Janson. 2006). 2.2 The Iterative Process of Designing Tariffs The following objectives provide an appropriate starting point for designing tariffs: • cost recovery/return on investment, • incentives for efficiency, • fairness and equity, • simplicity and comprehensibility.

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• balancing the objectives • tariff adjustments • stakeholder involvement 2.2.1 Cost recovery/return on investment The combination of service standards (costs) and tariffs (revenues) determines the commercial viability of a project. Beyond that, the private operator has the chance to improve the ultimate financial outcome by being particularly efficient in investment and operations. Therefore, a private operator will only get involved in a project if it sees a fair chance to make a profit given a predetermined set of service standards and tariffs. The internal rate of return (IRR) and return on equity (RoE) are the most commonly used measures to assess the financial attractiveness from a private operator’s perspective. A private operator will assess the potential IRR of a project against its own cost of equity, adjusted for the perceived risk of the project. Revenues are considered adequate if they enable an operator to maintain, replace, modernize, and expand its services and assets. 2.2.2 Incentives for efficiency Tariffs should give incentives to private operators and investors to achieve efficiency in operations (supply-side efficiency) and make necessary and/or desired investments. A “cost-plus” pricing regime, which guarantees the operator recovery of all costs plus a profit, does not provide an incentive for efficiency and too low a tariff may not be sufficient to entice new investment. Prices also need to send the correct signal to customers to use the service with appropriate economy as a scarce resource (demand management or demand-side efficiency). Price–demand elasticity should also be taken into account and optimized (e.g., for toll road usage). Pricing structures should also reflect variations of marginal costs (investment, operation) by location, customer type, period, etc. This can be achieved by effectively charging different rates to different customers or by prescribing coverage and service levels and allowing overall tariffs to cross-subsidize more costly customers. 2.2.3 Fairness As a starting point for determining fairness, tariffs should reflect costs and different customer groups/classes should observe tariffs that reflect the cost of supplying them and should be affordable. For example, people in similar circumstances pay similar amounts or people accepting lower quality of services should have their bills lowered. However, some services, like water and wastewater services, are often considered a public service, and no customer should be denied access to water on the grounds of poverty. Specific subsidies or cross-subsidies built into the tariff system can address this situation. Government subsidies can be used to make a project commercially viable from the perspective of the private operator even if the desired combination of service and tariff levels does not result in sufficient cost recovery. This will only make sense if the aggregate cost to the government under PPP (including subsidy) is lower than the cost to the government of operating the service fully under the public sector or the cost of not providing the service at the required service levels. Government subsidies can be “general”, i.e., applying to the overall project, or “specific”, in which case they are tied to service provision to deserving (low-income) consumer segments. Some subsidies are designed as community service obligations and mandated in regulatory or license standards or paid for by direct and indirect public sector transfers to beneficiaries. Governments typically provide subsidies to

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reduce tariff levels for the purposes of helping the poor, addressing public health issues, addressing environmental issues, and/or because of political constraints on raising tariffs. 2.2.4 Simplicity and comprehensibility The objective of simplicity and comprehensibility means that tariffs should be easily accessible and understandable to employees and consumers of the utility. For example, if a tariff structure is too complex, customers may not understand the implication of changes in consumption for their bills or the range of options available to them. However, over simplification may result in incentives being lost or a negative impact on fairness. 2.2.5 Balancing the objectives There is a need to balance these above objectives against one another. For example, the objective of incentives may conflict with the objective of simplicity at times because on cost grounds it may make sense to have a very complex tariff structure. A similar conflict could arise with the fairness objective. There is a further requirement that certain fundamentals be in place including a definition of a reasonable rate of return, an understanding of how assets will be valued, and whether any additional returns are to be allowed. After evaluating these factors and determining the appropriate allocation of risks in PPP, the initial tariff rates and tariff structure are set in place until an adjustment is warranted. 2.2.6 Tariff Adjustments To expect one set of tariffs, or even a tariff structure or regime, to remain viable and appropriate over the typical life of a PPP project is unrealistic. It is therefore essential to define practical rules for adjustments. This requires defining: • The triggers or drivers for a price adjustment, such as changes in raw material prices (such as oil prices), inflation, and exchange rate fluctuations); • The mechanisms by which the adjustment will be made, including cost plus and price cap regulation; and • The frequency of adjustments including cost pass-through, tariff indexation, tariff resets, and extraordinary tariff adjustments. 2.2.7 Stakeholder Involvement The early involvement of all stakeholders in the PPP process helps develop an enabling environment. The stakeholders provide valuable information on the points of concern, the performance expectations, and potential risks. This input is also critical to assess whether key business assumptions of the proposed PPP (in particular tariffs/fees) are realistic and enforceable. Avoiding consultation invites the risk of later opposition, which slows or derails the process. Ongoing consultation with stakeholders is important at every stage. Consultation with potential bidders and partners is also critical to ensure that the proposed PPP design meets their requirements. Otherwise, there is a risk that the PPP design includes an unrealistic combination of (politically) desirable features (high-level service, low prices, no redundancies, no subsidies, and short concession periods) that will make the project unattractive to bidders or unsustainable. Collecting informal feedback from the market during the preparation stage is therefore critical.

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Appendix X

PUBLIC PRIVATE PARTNERSHIP (PPP) MODELS

1 Forms of PPP The forms of PPP and the extent of Private Sector participation is depicted in following Figure 9.

Fig. 9: Public and Private Sector Participation in Various Forms of PPP

Design

Finance

Construct

O&M

Ownership

Service

Contract

Management

Contract

Lease Concession BOT/BOO Divest

Private Sector Public Sector

Source : The World Bank Toolkit 2 The PPP models vary from short-term simple management contracts (with or without investment requirements) to long-term and very complex BOT form, to divestiture. These models vary mainly by:

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• Ownership of capital assets • Responsibility for investment • Assumption of risks, and • Duration of contract

The PPP models can be classified into five broad categories in order of generally (but not always) increased involvement and assumption of risks by the private sector. These are:

• Supply and Management contracts • Turnkey projects • Lease • Concessions • Private ownership of assets.

3 Management Contracts: 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 enterprise 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. There are several variants under the management contract including: Ø Supply or service contract Ø Maintenance management Ø Operational management

3.1 Supply or Service Contract: Supply of equipment, raw materials, energy and power, and labour are typical examples of supply or service contract. A private concessionaire can itself enter into a number of supply or service contracts with other entities/ providers for the supply of equipment, materials, power and energy, and labour. Non-core activities of an organization (public or private) such as catering, cleaning, medical, luggage handling, security, and transport services for staff can be undertaken by private sector service providers. Such an arrangement is also known as outsourcing. Some form of licensing or operating agreement is used if the private sector is to provide services directly to users of the infrastructure facility. Examples of such an arrangement include, catering services for passengers on railway systems (the Indian Railways, for example). The main purpose of such licensing is to ensure the supply of the relevant service at the desired level of quantity and quality. 3.2 Maintenance management A public partner (Centre, state, or local government agency or authority) contracts with a private partner to operate, maintain, and manage a facility or system providing a service. Under this contract option, the public partner retains ownership of the public facility or system, but the private party may invest its own capital in the facility

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or system. Any private investment is carefully calculated in relation to its contributions to operational efficiencies and savings over the term of the contract. Generally, the longer the contract term, the greater the opportunity for increased private investment because there is more time available in which to recoup any investment and earn a reasonable return. Many local governments use this contractual partnership to provide wastewater treatment services. Assets maintenance contracts are very popular with transport operators. Sometimes equipment vendors/suppliers can also be engaged for the maintenance of assets procured from them. 3.3 Operational management A public partner (Centre, state, or local government agency or authority) contracts with a private partner to provide and/or maintain a specific service. Under the private operation and maintenance option, the public partner retains ownership and overall management of the public facility or system. Management contracts of major transport facilities such as a port or airport may be useful when local manpower or expertise in running the facility is limited. Management contracts are also quite common in the transport sector for providing some of the non-transport elements of transport operations such as the ticketing system of public transport and reservation systems. Operational management of urban transport services can also be contracted out to the private sector. In the simplest type of contract, the private operator is paid a fixed fee for performing managerial tasks. More complex contracts may offer greater incentives for efficiency improvement by defining performance targets and the fee is based in part on their fulfilment. 4 Turnkey Turnkey is a traditional public sector procurement model for infrastructure facilities. Generally, a private contractor is selected through a bidding process. The private contractor designs and builds a facility for a fixed fee, rate or total cost, which is one of the key criteria in selecting the winning bid. The contractor assumes risks involved in the design and construction phases. The scale of investment by the private sector is generally low and for a short-term. Generally, in a turnkey transaction, the private partners use fast-track construction techniques (such as design-build) and are not bound by traditional public sector procurement regulations. This combination often enables the private partner to complete the facility in significantly less time and for less cost than could be accomplished under traditional construction techniques. This type of private sector participation is also known as Design-Build. 5 Affermage/ Lease In this category of arrangement an operator (the leaseholder) is responsible for operating and maintaining the infrastructure facility and services, but generally the operator is not required to make any large investment. The arrangements in an affermage and a lease are very similar. The difference between them is technical. Under a lease, the operator retains revenue collected from customers/users of the facility and makes a specified lease fee payment to the contracting authority. Under an affermage, the operator and the contracting authority share revenue from customers/users. Following In the affermage/lease types of arrangements, the operator takes lease of both infrastructure and equipment from the government for an agreed period of time. Generally, the government maintains the responsibility for investment and thus bears investment risks. The operational risks are transferred to the operator. However, as part of lease, some assets may be transferred on a permanent basis for a

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period which extends over the economic life of assets. Fixed facilities and land are leased out for a longer period than for mobile assets. Land to be developed by the leaseholder is usually transferred for a period of 15-30 years. It may be noted here that if the assets transferred to the private sector under a lease agreement are constrained in their use to a specific function or service, the value of assets is dependent upon the revenue potential of that function or service. If assets are transferred to the private sector without restrictions of use, the asset value is associated with the optimum use of the assets and the revenues that they can generate. Its variants are: 5.1 Lease/Purchase A lease/purchase is an instalment-purchase contract. Under this model, the private sector finances and builds a new facility, which it then leases to a public agency. The public agency makes scheduled lease payments to the private party. The public agency accrues equity in the facility with each payment. At the end of the lease term, the public agency owns the facility or purchases it at the cost of any remaining unpaid balance in the lease. Under this arrangement, the facility may be operated by either the public agency or the private developer during the term of the lease. Lease/purchase arrangements have been used by the General Services Administration for building federal office buildings and by a number of states to build prisons and other correctional facilities. 5.2 Sale/Leaseback This is a financial arrangement in which the owner of a facility sells it to another entity, and subsequently leases it back from the new owner. Both public and private entities may enter into sale/leaseback arrangements for a variety of reasons. An innovative application of the sale/leaseback technique is the sale of a public facility to a public or private holding company for the purposes of limiting governmental liability under certain statues. Under this arrangement, the government that sold the facility leases it back and continues to operate it. 5.3 Tax-Exempt Lease A public partner finances capital assets or facilities by borrowing funds from a private investor or financial institution. The private partner generally acquires title to the asset, but then transfers it to the public partner either at the beginning or end of the lease term. The portion of the lease payment used to pay interest on the capital investment is tax exempt under state and federal laws. Tax-exempt leases have been used to finance a wide variety of capital assets, ranging from computers to telecommunication systems and municipal vehicle fleets. 5.4 LDO or BDO: Lease-Develop-Operate or Build-Develop-Operate Under these partnerships arrangements, the private party leases or buys an existing facility from a public agency; invests its own capital to renovate, modernize, and/or expand the facility; and then operates it under a contract with the public agency. A number of different types of municipal transit facilities have been leased and developed under LDO and BDO arrangements. 6 Concessions In this form of PPP, the Government defines and grants specific rights to an entity (usually a private company) to build and operate a facility for a fixed period of time. The Government may retain the ultimate ownership of the facility and/or right to

59

supply the services. In concessions, payments can take place both ways: concessionaire pays to government for the concession rights and the government may also pay the concessionaire, which it provides under the agreement to meet certain specific conditions. Usually such payments by government may be necessary to make projects commercially\ viable and/or reduce the level of commercial risk taken by the private sector, particularly in the initial years of a PPP programme in a country when the private sector may not have enough confidence in undertaking such a commercial venture. Typical concession periods range between 5 to 50 years. It may be noted that in a concession model of PPP, an SPV may not always be necessary. Concessions may be awarded to a concessionaire under two types of contractual arrangements:

• Franchise • BOT type of contracts

6.1 Franchise Under a franchise arrangement the concessionaire provide services that are fully specified by the franchising authority. The private sector carries commercial risks and may be required to make investments. This form of private sector participation is historically popular in providing urban bus or rail services. Franchise can be used for routes or groups of routes over a contiguous area. 6.2 Build-Operate-Transfer (BOT) In a Build-Operate-Transfer or its other variants type of arrangement, the concessionaire undertakes investments and operates the facility for a fixed period of time after which the ownership reverts back to the public sector. In this type of arrangement, operating and investment risks are substantially transferred to the concessionaire. However, in a BOT type of model the government has explicit and implicit contingent liabilities that may arise due to loan guarantees provided and default of a sub-sovereign government and public or private entity on non-guaranteed loans. By retaining ultimate ownership, the government controls policy and can allocate risks to those parties best suited to bear them or remove them. In a BOT concession, often the concessionaire may be required to establish a special purpose vehicle (SPV) for implementing and operating the project. The SPV may be formed as a joint venture company with equity participation from multiple private sector parties and the public sector. In addition to equity participation, the government may also provide capital grants or other financial incentives to a BOT project. BOT is a common form of PPP in most of sectors in India and other Asian countries. A key distinction between a franchise and BOT type of concession is that, in a franchise the authority is in the lead in specifying the level of service and is prepared to make payments for doing so, whilst in the BOT type the authority imposes a few basic requirements and may have no direct financial responsibility. A typical structure for BOT project is indicated in Fig. 10.

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Fig. 10: Typical BOT Structure

Govt./ Municipal Entity

Concessionaire’s

Special Purpose

Company

(SPC)

Users/

Customers

Shareholders

Lenders

Designer, Contractor

And Supplier

Operator and

Maintenance Holder

Concession

AgreementShareholders

Agreement

Loan

Agreement

Turnkey

Contract

Operation & maintenance Agreement

BOT has following variants: 6.2.1 DBFOM: Design-Build-Finance-Operate With the Design-Build-Finance-Operate (DBFO) approach, the responsibilities for designing, building, financing, operating and maintaining are bundled together and transferred to private sector partners. There is a great deal of variety in DBFO arrangements especially the degree to which financial responsibilities is actually transferred to the private sector. One commonality that cuts across all DBFO projects is that they are either partly or wholly financed by debt leveraging revenue streams dedicated to the project. Direct user fees (tolls) are the most common revenue source. However, others ranging from lease payments to shadow tolls and vehicle registration fees. Future revenues are leveraged to issue bonds or other debt that provide funds for capital and project development costs. They are also often supplemented by public sector grants in the form of money or contributions in kind, such as right-of-way. In certain cases, private partners may be required to make equity investments as well. Value for money can be attained through life-cycle costing. 6.2.2 Design-Build-Finance-Operate-Maintain-Transfer (DBFOMT) The Design-Build-Finance-Operate-Maintain-Transfer partnership model is the same as a DBFO except that the private sector owns the asset until the end of the contract when the ownership is transferred to the public sector. 6.2.3 BROT : Build-Rehabilitate-Operate-Transfer The arrangement, where a private developer builds an add-on to an existing facility or completes a partially built facility and rehabilitates existing assets, then operates and maintains the facility at its own risk for the contract period. BROT is a popular form of PPP in the water sector.

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6.2.4 DBO: Design-Build-Operate A single contract is awarded for the design, construction, and operation of a capital improvement. Title to the facility remains with the public sector unless the project is a design/build/operate/ transfer or design/build/own/operate project. This method involves one contract for design with an architect or engineer, followed by a different contract with a builder for project construction, followed by the owner's taking over the project and operating it. A simple design-build approach creates a single point of responsibility for design and construction and can speed project completion by facilitating the overlap of the design and construction phases of the project. On a public project, the operations phase is normally handled by the public sector under a separate operations and maintenance agreement. Combining all three passes into a DBO approach maintains the continuity of private sector involvement and can facilitate private-sector financing of public projects supported by user fees generated during the operations phase. 6.2.5 DBOM: Design-Build-Operate-Maintain The design-build-operate-maintain (DBOM) model is an integrated partnership that combines the design and construction responsibilities of design-build procurements with operations and maintenance. These project components are procured from the private section in a single contract with financing secured by the public sector. The public agency maintains ownership and retains a significant level of oversight of the operations through terms defined in the contract. 6.2.6 BBO: Buy-Build-Operate A BBO is a form of asset sale that includes a rehabilitation or expansion of an existing facility. The government sells the asset to the private sector entity, which then makes the improvements necessary to operate the facility in a profitable manner.

6.2.7 BOOT: Build-Own-Operate-and-Transfer

BOOT is based on the granting of a Concession by a Principal (the Union or Government or a local authority) to the Concessionaire, who is responsible for the construction, financing, operation and maintenance of a facility over the period of the Concession before finally transferring the facility, at no cost to the Principal, a fully operational facility. During the Concession period the Promoter owns and operates the facility and collects revenue in order to repay the financing and investment costs, maintain and operate the facility and make a margin of profit.

6.2.8 BTO: Build-Transfer-and-Operate

BTO is a contractual arrangement whereby the public sector contracts out the building of an infrastructure facility to a private entity such that the Concessionaire builds the facility on a turn-key basis, assuming cost overrun, delay and specified performance risks. Once the facility is commissioned satisfactorily, title is transferred to the implementing agency. The private entity however, operates the facility on behalf of the implementing agency under an agreement.

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6.2.9 BT: Build-and-Transfer

BT is a contractual arrangement whereby the Concessionaire undertakes the financing and construction of a given infrastructure or development facility and after its completion turns it over to the Government Agency or Local Government unit concerned, which shall pay the proponent on an agreed Schedule its total investments expended on the project, plus a reasonable rate of return thereon. This arrangement may be employed in the construction of any infrastructure or development project, including critical facilities which, for security or strategic reasons, must be operated directly by the Government.

6.2.10 BOT – Annuity

BOT Annuity is the contractual arrangement quite similar to BOT but return on investment is not through the levy and collection of user fee directly from the users. Instead the owner/ Government pays to the Concessionaire an amount annually or bi-annually (Annuity) which he bids. In this type of arrangement, Concessionaire does not take risks associated with investment and operating risks.

6.2..11 BLT: Build-Lease-and-Transfer

BLT is a contractual arrangement whereby a Concessionaire is authorized to finance and construct an infrastructure or development facility and upon its completion turns it over to the government agency or local government unit concerned on a lease arrangement for a fixed period after which ownership of the facility is automatically transferred to the government agency or local government unit concerned.

6.2.12 ROT: Rehabilitate-Operate-and-Transfer

ROT is a contractual arrangement whereby an existing facility is turned over to the private sector to refurbish, operate and maintain for a franchise period, at the expiry of which the legal title to the facility is turned over to the government. The term is also used to describe the purchase of an existing facility from abroad, importing, refurbishing, erecting and consuming it within the host country.

6.2.13 ROO: Rehabilitate-Own-and-Operate

ROO is a contractual arrangement whereby an existing facility is turned over to the private sector to refurbish and operate with no time limitation imposed on ownership. As long as the operator is not in violation of its franchise, it can continue to operate the facility in perpetuity.

6.2.14 Developer Finance

The private party finances the construction or expansion of a public facility in exchange for the right to build residential housing, commercial stores, and/or industrial facilities at the site. The private developer contributes capital and may

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operate the facility under the oversight of the government. The developer gains the right to use the facility and may receive future income from user fees.

While developers may in rare cases build a facility, more typically they are charged a fee or required to purchase capacity in an existing facility. This payment is used to expand or upgrade the facility. Developer financing arrangements are often called capacity credits, impact fees, or extractions. Developer financing may be voluntary or involuntary depending on the specific local circumstances

6.3 Private Ownership of Assets In this form of participation, the private sector remains responsible for design, construction and operation of an infrastructure facility and in some cases the public sector may relinquish the right of ownership of assets to the private sector. It is argued that by aggregating design, construction and operation of infrastructure services into one contract, important benefits could be achieved through creation of synergies. As the same entity builds and operates the services, and is only paid for the successful supply of services at a pre-defined standard, it has no incentive to reduce the quality or quantity of services. Compared with the traditional public sector procurement model, where design, construction and operation aspects are usually separated, this form of contractual agreement reduces the risks of cost overruns during the design and construction phases or of choosing an inefficient technology, since the operator’s future earnings depend on controlling costs. The public sector’s main advantages lie in the relief from bearing the costs of design and construction, the transfer of certain risks to the private sector and the promise of better project design, construction and operation. There can be three main types under this form:

• Build-Own-Operate type of arrangement • Private Finance Initiative (a more recent innovation) • Divestiture by license or sale

6.3.1 Build-Own-Operate In the Build-Own-Operate (BOO) type, the private sector builds, owns and operates a facility, and sells the product/service to its users or beneficiaries. This is the most common form of private participation in the power sector in many countries. For a BOO power project, the Government (or a power distribution company) may or may not have a long-term power purchase agreement (commonly known as off-take agreement) at an agreed price from the project operator. In many respects, licensing may be considered as a variant of the BOO model of private participation. The Government grants licences to private undertakings to provide services such as fixed line and mobile telephony, Internet service, television and radio broadcast, public transport, and catering services on the railways. However, licensing may also be considered as a form of “concession” with private ownership of assets. Licensing allows competitive pressure in the market by allowing multiple operators, such as in mobile telephony, to provide competing services. There are two types of licensing: quantity licensing and quality licensing. By setting limits through quantity licensing, the government is able to moderate competition between service providers and adjust supply between one area and other. Quality licensing however, does not place any restriction on number of providers or the amount of service produced but specifies the

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quality of service that needs to be provided. The government may get a fee and a small share of the revenue earned by the private sector under the licensing arrangement. 6.3.2 Private Finance Initiative In the Private Finance Initiative (PFI) model, the private sector similar to the BOO model builds, owns and operates a facility. However, the public sector (unlike the users in a BOO model) purchases the services from the private sector through a long-term agreement. PFI projects therefore, bear direct financial obligations to government in any event. In addition, explicit and implicit contingent liabilities may also arise due to loan guarantees provided to lenders and default of a public or private entity on non-guaranteed loans. In the PFI model, asset ownership at the end of the contract period may or may not be transferred to the public sector. The PFI model also has many variants. The annuity model for financing of national highways in India is an example of the PFI model. Under this arrangement a selected private bidder is awarded a contract to develop a section of the highway and to maintain it over the whole contract period. The private bidder is compensated with fixed semi-annual payments for his investments in the project. In this approach the concessionaire does not need to bear the commercial risks involved with project operation. Apart from building economic infrastructure, the PFI model has been used also for developing social infrastructure such as school and hospital buildings, which do not generate direct “revenues”. 6.3.3 Divestiture This third type of privatization is clear from its very name. In this form a private entity buys an equity stake in a state-owned enterprise. However, the private stake may or may not imply private management of the enterprise. True privatization, however, involves a transfer of deed of title from the public sector to a private undertaking. This may be done either through outright sale or through public floatation of shares of a previously corporatised state enterprise. Full divestiture of existing infrastructure assets is not very common. However, there are many examples of partial divestiture. 6.4 Joint Venture Joint ventures are alternatives to full privatization in which the infrastructure is co-owned and operated by the public sector and private operators. Under a joint venture, the public and private sector partners can either form a new company or assume joint ownership of an existing company through a sale of shares to one or several private investors. The company may also be listed on the stock exchange. A key requirement of this structure is good corporate governance, in particular the ability of the company to maintain independence from the government. This is important because the government is both part owner and regulator, and officials may be tempted to meddle in the company’s business to achieve political goals. From its position as shareholder, however, the government has an interest in the profitability and sustainability of the company and can work to smooth political hurdles. The private partner assumes the operational role and a board of directors generally reflects the shareholding composition or expert representation. Requirements of PPP Partners under Different PPP Arrangements are given in following Table 2.

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Table 2: Requirements of PPP Partners for PPP Arrangements

Private Sector Requirements

Service Contracts

Management Contracts

Leases BOT Agreements

DBFO Concessions

Partial Divestiture

Full Divestiture

Fair Profit

Required Required Required Required Required Required Required

Reward for Risk Mitigation

- - Desirable Desirable Required Required Automatic

Clear Legal / Regulatory Structure

- - Required Required Required Required Required

Growth Potential

- - Desirable - Desirable Desirable Desirable

Political Support

- - - Desirable Required Required Required

Political Stability

- - - Desirable Desirable Desirable Desirable

Government Requirements

Leveraging Funding

– – – Yes Important Important Important

Accelerating Project Implementation

– – – Important Important Important Important

Improving Service Levels

Yes Yes Yes Yes Yes Yes Yes

Improving Service Coverage

– – – Important Yes Yes Yes

Efficiency Gains Important Important Important Important Important Important Important Ease of Implementation

– – Desirable Desirable Desirable Desirable Desirable

Maximizing Societal Benefits

Relevant Relevant Relevant Important Important Important Important

Transparency / Open Competition

Relevant Relevant Relevant Important Important Important Important

Reasonable Control of Grant Funds

- - - Required Required Required Required

Avoiding Undue Private Profit

- - - Required Required Required Required

Efficiency Gains

Desirable Desirable Desirable Important Important Important Important

Leveraging Private Funds

- - - Yes Yes Yes Yes

Lender Requirements

Rigorous - - - - Required Required Required

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Financial Analysis Conservative Cost/Revenue Assumptions

- - - - Required Required Required

Certainty of Grant and State funding

- - - - Required

Required Required

Clear Legal regulator structure

- - - - Required Required Required

Technical Ability of Owner/ Operator

- - - - Required Required Required

Political Stability - - - - Desirable Desirable Desirable Source: Guidelines For Successful Public – Private Partnerships, 2003 , European Commission, Directorate-General Regional Policy 6.5 Objectives of Various Forms of PPP Table 3 illustrates the main objectives of various forms of PPP

Table 3: Main Objectives of PPP Forms Govt. Objectives

Forms of PPP Service Contract

Management Contract

Lease Contract

Concessions Contract

Build Operate Transfer

Divesture

Improve efficiency

p p p n n n

Transferring Risk

# # # n p or n n

Improving Service Quality

p p n n n n

Maintaining control of service provision

n n p p # #

Legends : n - to a large extent, p - to a limited extent, # - not usually

Source : The World Bank Toolkit for Highways 6.6 The key features of main forms of PPP are given in Annex IV

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Summary of Key Features of Main Modes of PPP Annex IV

SERVICE CONTRACT

MANAGEMENT CONTRACTS

LEASE CONTRACTS

CONCESSIONS BUILD-OPERATE-TRANSFER (BOT)

Scope Multiple contracts for a variety of support services such as meter reading, billing etc.

Management of entire operation of a major component

Responsibility for management, operations and specific renewals

Responsibility for all operations and for financing and execution of specific\investments

Investment in and operations of a specific major component, such as a treatment plant

Asset Ownership Public Public Public Public/Private Public/Private

Duration 1-3 years 2-5 years 10-15 years 25-30 years Varies Operation & Maintenance Responsibility

Public

Private Private Private Private

Capital Investment Public Public Public Private Private Commercial Risk Public Public Shared Private Private Overall Level of Risk Assumed by Private Sector

Minimal Minimal/moderate Moderate High High

Compensation Terms

Unit prices Fixed fee, preferably with performance incentives

Portion of tariff revenues

All on part of tariff revenues

High

Competition Intense and ongoing

One time only, contracts no usually renewed

Initial contract only, sub-sequent contracts usually negotiated

Initial contract only; sub-sequent contracts usually negotiated

One time only; often negotiated without direct competition

Special Features Useful as part of strategy for improving efficiency of public company; Promotes local private sector development

Interim solution during preparation for more intense private participation

Improve operational and commercial efficiency; Develops local staff

Improves operational and commercial efficiency; Mobilizes investment finance; Develops local staff

Mobilizes investment finance; Develops local staff

Problems and Challenges

Requires ability to administer multiple contracts and strong enforcement of contract laws

Management may not have adequate control over key elements, such as budgetary resources, staff policy, etc.

Potential conflicts between public body which does investments and the private operator

How to compensate investments and ensure good maintenance during last 5-10 years of contract

Does not necessarily improve efficiency of ongoing operations; May require guarantees

Source: ADB, Public-Private-Partnership Handbook; Heather Skilling and Kathleen Booth 2007.