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| A n a l y s i s o f P P P s i n I n d i a : L e s s o n s f o r S o c i a l S e c t o r s

Public Private Partnerships in India

Lessons from Experiences

I | P u b l i c P r i v a t e P a r t n e r s h i p s : L e s s o n s f r o m E x p e r i e n c e s

April 2012

© All Rights Reserved, Athena Infonomics

The information contained in this report prepared by Athena Infonomics India Pvt.

Ltd. is furnished for information purposes only. While every effort has been made to

ensure the accuracy of information presented in the report, Athena Infonomics India

Pvt. Ltd. makes no representations or warranties regarding the accuracy or

completeness of such information and expressly disclaims any liabilities based on such

information or on omissions there from. The material presented in the report can be

used in academic or professional work with appropriate citation.

II | P u b l i c P r i v a t e P a r t n e r s h i p s : L e s s o n s f r o m E x p e r i e n c e s

This report has been prepared with support from the British High Commission,

through its Prosperity Fund India Programme

III | P u b l i c P r i v a t e P a r t n e r s h i p s : L e s s o n s f r o m E x p e r i e n c e s

IV | P u b l i c P r i v a t e P a r t n e r s h i p s : L e s s o n s f r o m E x p e r i e n c e s



Public Policy Team, Athena Infonomics

April 2012

V | P u b l i c P r i v a t e P a r t n e r s h i p s : L e s s o n s f r o m E x p e r i e n c e s

VI | P u b l i c P r i v a t e P a r t n e r s h i p s : L e s s o n s f r o m E x p e r i e n c e s

Contents

Abbreviations ................................................................................................. VII

List of Exhibits ............................................................................................ IX

List of Figures .............................................................................................. IX

Preface ............................................................................................................ XIII

Executive Summary ................................................................................ XV

Section I

Need for Private Sector Participation in Creation of Public Assets and Provision of Public Services ............................................ 3 Section II

Public Private Partnerships as an Important Mechanism to Facilitate Private Sector Investment ............................................................. 9

Section III

Seven Key Success Factors for Effective PPPs ......................................... 14

Section IV

Conclusion and Measures for the Future ................................................ 44

Appendix .......................................................................................................... 45

References ........................................................................................................ 59

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Abbreviations

AAI Airport Authority of India ALM Asset-Liability Mismatch AP Andhra Pradesh BHC British High Commission BOT Build Operate Transfer BOO Build Own Operate BOOT Build Own Operate Transfer BWSL Bandra Worli Sea Link CA Concession Agreement CO2 Carbon Dioxide CSR Corporate Social Responsibility DBFOT Design, Build, Finance, Operate & Transfer DFC Dedicated Freight Corridor DIPP Department of Industrial Policy & Promotion DPR Detailed Project Report DEA Department of Economic Affairs EAC Environment Appraisal Committee EIA Environmental Impact Assessment EIRR Economic Internal Rate of Return EMP Environment Management Plan EPC Engineering & Procurement Contract EGoM Empowered Group of Ministers FAO Food and Agricultural Organisation FIRR Financial Internal Rate of Return GDP Gross Domestic Product GOI Government of India ICICI Industrial Credit and Investment Corporation of India IDBI Industrial Development Bank of India ICT Information & Communication Technology IFC International Finance Corporation IIFCL India Infrastructure Finance Corporation Limited JICA Japanese International Cooperation Agency MCA Model Concession Agreement MoEF Ministry of Environment & Forest NGO Non-Governmental Organization NO2 Nitrogen Dioxide NH National Highway NHAI National Highway Authority of India NOIDA New Okhla Industrial Development Authority NSICT Nhava Sheva International Container Terminal O&M Operations & Management/Maintenance PPP Public Private Partnerships PRIs Panchayati Raj Institutions PURA Provision of Urban Amenities in Rural Areas R&R Relief & Rehabilitation RFP Request for Proposal SO2 Sulphur Dioxide RFQ Request for Qualification SPV Special Purpose Vehicle SSA State Support Agreement TAMP Tariff Authority for Major Ports ToR Terms of Reference UK United Kingdom ULB Urban Local Bodies

VIII | P u b l i c P r i v a t e P a r t n e r s h i p s : L e s s o n s f r o m E x p e r i e n c e s

UMPP Ultra Mega Power Projects UNEP United Nations Environment Programme USA United States of America USD United States Dollar VGF Viability Gap Funding WUA Water Users Association WFSL Western Freeway Sea Link

IX | P u b l i c P r i v a t e P a r t n e r s h i p s : L e s s o n s f r o m E x p e r i e n c e s

List of Exhibits Page

Exhibit 1.1: Growth Drivers and Bottlenecks of the Indian Economy 4

Exhibit 2.1: Types of Private Sector Participation 9

Exhibit 2.2: Comparative Analysis of Features of Different PPP Definitions 11

Exhibit 2.3: Comparison of Costs, Risks, Returns and Incentives of Different 12 Stakeholders

Exhibit.2.4: State-Wise PPP Intensity 13

Exhibit 3.1: Seven Success Factors for PPP Projects 15

Exhibit 3.2: Foreign Participation in PPP Projects in India 23

Exhibit 3.3: Allocation of Risk and Mitigation Measures in PPP Projects 33

Exhibit 3.4: Status of Provision of Basic Amenities to Public in India 37

Exhibit 3.5: Taxonomy of Provision of Public Services 38

Exhibit 3.6: Environmental Acts by MoEF 40

Exhibit 3.7: Impact of Development of Different Infrastructure Projects on 41 Environment

List of Figures

Fig. 1.1: Trend GDP Growth Rates of Select Developing Countries and 3 the World

Fig. 1.2: Projected Trend Growth Rates in Key Economies 4

Fig. 1.3: Human Development Index (Trends from 1980 to Present) 5

Fig. 1.4: Annual Number of Mobile Subscriptions (In thousands) 6

Fig. 1.5: Annual Air Passenger Traffic in India (In thousands) 7

Fig. 1.6: Infrastructure Spending during the 11th and 12th Plan Period 8

Fig. 2.1: Sector-wise PPP Maturity – Number of Projects 12

Fig. 3.1: Debt Requirement for the 11th Plan Period 29

Fig. 3.2: Region–wise CO2 Emissions by Power Sector in India 43 (In million tonnes)

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List of Boxes

Page

Box 3.1 Mumbai & Delhi International Airport 17

Box 3.2 Nhava Sheva International Container Terminal 21

Box 3.3 Vizhinjam International Container Terminal 24

Box 3.4 Mundra Ultra Mega Power Project 26

Box 3.5 Delhi Noida Toll Bridge (DND Flyway) 28

Box 3.6 Byrraju 4P Model of Drinking Water Supply 39

Box 3.7 Navi Mumbai Airport 42

XI | P u b l i c P r i v a t e P a r t n e r s h i p s : L e s s o n s f r o m E x p e r i e n c e s

XII | P u b l i c P r i v a t e P a r t n e r s h i p s : L e s s o n s f r o m E x p e r i e n c e s

Foreword

The approach paper to the Twelfth Five Year plan clearly spells out the enlargement in the role

of Public Private Partnerships (PPP) in development. Until the end of the Eleventh Plan, these

initiatives had been focused on building infrastructure, on the argument that private sector

management, expertise and project development skills could be leveraged through Government

concessions to achieve a more rapid development of infrastructure. The results have been

mixed, yet the experience gained has given sufficient confidence to move the concept to the

social sectors as well. This is being attempted in the Twelfth Plan. There are two reasons for

this. First, there is genuine apprehension that public expenditure for capital works will be

constrained by the state of finances at the centre as well as the states. Second, in areas like water

supply, education and health, the private sector is already playing an important role, although

entirely for commercial benefits. It therefore appears relevant to merge the twin reasons of

need and availability into a national programme of using PPPs for enlarging the pace of

development in the social sectors.

However, the social sectors are not easily amenable to standardisation in terms of financing,

execution and revenue recovery. The current paper is part of a project to develop some

guidelines for implementing PPPs in three selected sectors—water, waste management and skill

development. This paper is an analysis of the experience in infrastructure sectors, to draw

lessons and to develop suggestions for the social sectors. The outputs would feed into further

work on development of feasible models for the selected sectors.

This is the output of painstaking and diligent research work, interviews and analysis, by the

team consisting of Arslan, Deepa, Ankit and Saloni of the Public Policy team at Athena.

Dr. S. Narayan, IAS (retd.)

President, Athena Infonomics

Former Finance Secretary, Govt. of India

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XIV | P u b l i c P r i v a t e P a r t n e r s h i p s : L e s s o n s f r o m E x p e r i e n c e s

Preface

This report is the outcome of a six-month-long research activity undertaken by the Public

Policy Team at Athena Infonomics, supported by the British High Commission. This

represents the first phase of a larger research plan with the objective of identifying bottlenecks

in the Public Private Partnerships (PPP) implemented across social sectors and arriving at

policy recommendations to catalyze activities that can create social impact.

India now stands at a major crossroad in its journey towards economic and social development.

The last two decades of economic liberalization has resulted in improved infrastructure,

standard of living and social indicators. However, these gains are heavily distorted. PPPs have

now become the preferred mode of investment especially in infrastructure, which is one of the

primary requirements of our economy. This report analyzes the public private partnerships

undertaken in four commercial infrastructure sectors, i.e., roads, airports, ports and power, to

draw out 7 key factors for a successful PPP project.

Methodology

We began with an extensive review of existing literature on issues and experiences of PPPs at

both national and international level. We also collected data on several national PPP projects in

the commercial infrastructure sectors. From this, our team identified 40 projects for further

analysis. In order to conduct an in-depth investigation, key features of the PPP were identified

Next, the different stakeholders and their respective roles and responsibilities, incentives, costs,

risks and returns were mapped out.

Brief case studies were created for eight PPP projects, two each in road, airport, ports and

power sectors. A Round Table discussion on issues and challenges faced by PPPs was

conducted on 10th November, 2011 at Chennai, Tamil Nadu which was attended by twenty-five

experienced stakeholders and experts. The meeting included financiers, developers, consultants,

bureaucrats and academicians. Issues that occur while executing PPP projects were discussed

and possible solutions were identified.

Our team handed out questionnaires to the Round Table participants and other experts and we

received 25 detailed responses. In order to get a detailed perspective on the issues involved in

PPP projects, several expert interviews were conducted. This report documents the outcome of

the above mentioned activities that we have used to create a framework for identifying the

formulae for a successful PPP project.

Public Policy Team

Arslan Aziz

Deepa Karthykeyan

Ankit Kumar Chatri

Saloni Ketan Shah

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Acknowledgements

This report would not have been possible without the cooperation of the experts and

practitioners of the various Public Private Partnerships in India. Their willingness to share their

experiences and opinions has helped us ground this report in practical insights.

In particular we would like to thank Mr. V. Ravichandar, Chairman, Feedback Consulting; Mr.

B.S. Sudhanvan, Vice President -Technical Services, GVK Power & Infrastructure Ltd.; Mr. R.

Raghuttama Rao, Managing Director, ICRA Management Consulting Services Ltd.; Mr.

Karthikeyan T.V., Vice President-Development Projects, Larsen & Toubro Ltd.; Dr. G.

Raghuram, Indian Railways Chair Professor, IIM Ahmedabad; Mr. B.S. Chakravarthy,

Executive Director, Capital Fortunes Private Ltd.; Mr. Prashant Gupta, Associate Vice

President – Transaction Advisory Services, E&Y; Mr. Harsh Agarwal, Executive Director,

Morgan Stanley; Mr. Anumolu Rajasekhar, Executive Director, International Infrastructure

Consultants Ltd.; Mr. Madhu Krishnamoorthy, General Manager, Water Health India; Mr.,

Arvind Sagar, President- Corporate Initiatives and Planning, Marg Ltd.; Mr. R. Narayan,

Regional Head – Investment Banking, HDFC Bank; Ms. Thangam S., Chairperson, NTADCL;

Mr. Selvaraj, Former Chairperson, Madras Port Trust; Mr. K. Rajivan, Former Chairperson

TNUDF; and Commodore R. S. Vasan, Head - Strategy & Security Studies, Centre for Asia

Studies.

We thank our Director, Dr. S. Narayan for his constant advice and support in our work. We

would also like to thank our advisors, Mr. S. Parthasarathy, former Director ICRISAT, Ms.

Revathy Ashok, CEO and Founder, Iris Consulting, and Dr. A. Mahalingam, Assistant

Professor, Department of Civil Engineering, IIT Madras for their guidance.

We would also like to thank the British High Commission for their financial support for

carrying out this study. In particular we thank Ms. Aarti Kapoor, Programme Manager, BHC,

New Delhi for her constant encouragement and guidance during the project.

XVI | A n a l y s i s o f P P P s i n I n d i a : L e s s o n s f o r S o c i a l S e c t o r s

Executive Summary

Section – I: Need for Private Sector

Participation in creation of public

assets and provision of public services.

Rapid economic growth

High and sustained pace of economic

growth is estimated for the foreseeable

future. Key drivers of economic growth

would be strong demand fuelled by a young

demography with rising incomes. Supply

side constraints like inadequate

infrastructure, governance and slow pace of

economic reforms are critical bottlenecks.

Inclusion

Poverty alleviation and provision of basic

services to the poor remain high on the

government’s agenda. India has a dismal

position in most human development and

quality of life indicators. Progress on social

indicators has been poor. Private sector

participation to address the issues of access,

efficiency and quality are essential.

To meet the dual objectives of fast and

inclusive growth, investments of USD 1

trillion in infrastructure are envisaged

in the 12th five year plan.

Section – II: Public Private Partnerships

are an important mechanism to

facilitate private sector investment.

Different models of Private Sector

Participation

Several different models of private sector

participation are possible for the provision

of public infrastructure. It is important to

understand the specifics of PPP

arrangements in the Indian context in

comparison with global practices. Features

of PPP that distinguish it from other forms

of private sector participation are (i) private

sector investment, (ii) risk sharing, (iii)

performance linked returns, (iv) asset

transfer back to government, (v) public

nature of service, (vi) partnership tenure

and (vii) outcome specifications.

Analyzing Public Private Partnerships

Comparison of costs, risks and returns of

different stakeholders in a PPP reveals a

complex web of interactions and incentives

that must be carefully managed to ensure

smooth coordination and functioning of

the project. Risks must be allocated to the

stakeholder who is best able to manage that

particular risk and returns must be

commensurate with the investment and risk

undertaken by the stakeholder.

Section – III: Seven key success factors

for effective Public Private

Partnerships.

Seven key success factors have emerged for

the effective functioning of a PPP project.

1. Strong public sector capacity to

identify, structure and monitor PPP

projects.

This would include - a mature rationale

that focuses on private sector bringing in

efficiency rather than implementing a

project through PPP simply because of a

lack of public funds; sustained and strong

political and bureaucratic commitment;

clarity of role and coordination between

different government authorities; technical

competence for project identification,

enlisting appropriate consultants and

experts to conduct techno-economic

feasibility studies and manage the bidding

process efficiently, monitor progress and

settle disputes; and consensus building

across users, affected communities and civil

society.

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2. Private sector capacity

For private sector developers, technical

competence and financial ability to design,

construct and operate projects is essential.

Efficiency of operations, commitment to

take the project to its completion and

ensuring adequate service delivery, focus

on innovation and consensus building to

partner with government and NGOs to

enable buy-in from different stakeholders

are other requirements.

For technical consultants, technical

competence to structure PPP projects

efficiently is the most important

requirement. Objectivity of the evaluation

committees and alignment of incentives

to include consultants as partners in the

eventual success of the projects are also

essential.

3. Community participation

Panchayats and Urban Local Bodies

(ULBs) must be involved in the planning

and budgeting of the projects, while public

opinion must be sought for identifying

models and appropriate service standards.1

Adequate compensation must be provided

to project affected people and end-users

must be consulted before setting user

tariffs.

4. Financing & Commercial viability

Availability of adequate equity and long

term debt to finance infrastructure projects

is an essential requirement. Commercial

viability of different sectors varies, and the

government’s budgetary support must be

commensurate to the commercial viability

of the sector.

1 Panchayats refer to a system of governance prevalent in rural India since ancient times. The 73rd Constitutional Amendment Act, 1992 conferred constitutional status to Panchayats. It is the third tier of government below the state government.

5. Risk sharing

The long gestation period of infrastructure

projects makes management of risks

especially challenging. Exhaustive

identification of risks throughout the

project lifecycle, allocation to appropriate

entity, pricing of risks and mitigation

mechanisms are necessary.

6. Social inclusion

Universal access to drinking water,

sanitation, primary education & public

health that is affordable to people of all

economic strata is necessary. While this is

less of a concern for commercial

infrastructure projects, past experiences

have emphasized the importance of

incorporating social inclusion in a project’s

planning and implementation especially for

projects in the social sector.

7. Sustainability

While provision of adequate infrastructure

is essential, it is also important that this

provision is done in a sustainable manner,

without compromising the environment for

the current population or future

generations.

Section – IV: Conclusion and Next

Steps.

While evidence of the success of PPPs is

mixed, they still have the potential to play

an important role in delivering much

needed public infrastructure and services.

Realised results vary from potential due to

structural and institutional inefficiencies

that need to be addressed. Potential of PPP

in addressing the issues of access, quality

and equity for social services needs to be

evaluated.

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Section – I

Need for Private Sector Participation in the Creation

of Public Assets and Provision of Public Services

India embarked upon major economic reforms in 1991 following the balance-of-payments

crisis that was the result of decades of Protectionism, License Raj, Import Substitution, State

intervention and Central Planning. The solution adopted for the balance-of-payment crisis was

to start a long-term process of fundamentally restructuring the economy, i.e. opening sectors

for international trade and investment, deregulation, initiating privatization, tax reforms and

inflation-controlling measures.

Rapid Economic Growth

As a consequence of the economic reforms, India witnessed a period of sustained economic

growth. Since the turn of the century, India’s GDP growth rate has been varying between 6.5 to

8.5 %, consistently outpacing the world average, and thus elevating itself to the 9th position in

terms of absolute GDP and 4th position in Purchasing Power Parity terms.

Fig. 1.1: Trend GDP Growth Rates of Select Developing Countries and the World

Source: GDP growth (annual %) from 2000 to 2010, World Bank national Accounts data, and OECD National Accounts data files,

World Development Indicators, World Bank Data, World Bank.

The targeted GDP growth for the Eleventh Plan (2007-08 to 2010-11) was 9 %, but in the first

four years of the Eleventh Plan, the GDP growth averaged 8.2 %. This drop in the expected

growth has been explained as the impact of the global recession in 2009. However, compared

to other countries, the impact of the recession was much lower in India. This suggests that

India’s GDP growth is fuelled by the domestic consumption of a large and growing workforce

and one of lowest dependency rates in the world.2

This growth is expected to continue for the next couple of decades if backed by strong

macroeconomic fundamentals. Continued economic reforms, development of a dynamic

private sector and development of skills for the young and growing population are other factors

2 The Government of India aims to reduce dependency ratio to 0.59 by 2011, from 0.73 in 2001. Please

refer to http://www.financialexpress.com/news/lower-dependency-ratio-more-jobs-for-one-and-all/278352/ for further details.

-4

-2

0

2

4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

India Brazil China World


that would ensure this trend growth. According to studies conducted by experts, India is stated

to be the world’s 3rd largest economy by 2025.3

Fig. 1.2: Projected Trend Growth Rates in Key Economies

% R

eal G

DP G

row

th

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

IndiaChinaBrazilRussiaUSUK Japan

Source: Hawksworth, John &Gordon Cookson, Fig. 3- Projected Trend Growth Rates in Key Economies, P. 10, The World in 2050 – Beyond the BRICs: a broader look at emerging market growth prospects

Exhibit 1.1: Growth Drivers and Bottlenecks of the Indian Economy

Inclusive Growth

While performance in terms of the pace of growth has been satisfactory in the last decade, it

has been weak at best in terms of inclusiveness. The difficulty begins with defining

inclusiveness itself. Inclusiveness has many components and it is hard to have a single number

3 Please see, http://articles.economictimes.indiatimes.com/2011-08-22/news/29915163_1_gdp-largest-economy-growth-target.

Growth Drivers

- Strong Macroeconomic Fundamentals

- Impact of economic reforms

- Growth of a vibrant private sector

- Development of human resources

Bottlenecks

- Availability of energy

- Slow improvement of farm output

- Lack of sufficient infrastructure for industry and public

- Land acquisiton difficulties for infrastructure and industry

- Lack of governance, transparency and political will


that measures it. At the very least, it consists of the alleviation of poverty, access to adequate

healthcare and education, employment opportunities and access to basic amenities like

electricity, water, sanitation and housing. Other dimensions of inclusiveness would include

socio-economic integration of historically deprived castes and communities with the

mainstream, gender equality for women and respect for rights of children, senior citizens and

the differently-abled.

Comparing India’s performance on the Human Development Index4 (HDI) demonstrates two

features – the size of the gap between India’s score and the world average, and the persistence

of this gap. India has made little progress in catching up with the rest of the world in terms of

human development.

Fig.1.3: Human Development Index (Trends from 1980 to Present)

Source: HDI Report, UNDP (2011)

There are several factors responsible for the continued poor performance of India in the

human development indicators. One of the main reasons would be the inherent beliefs,

customs and cultural traditions of the people that have evolved and survived through centuries

and hence are usually resistant to modernity or else take a long time to change. It is sometimes

uncertain whether the amount of money spent by the government on creating social

programmes, schemes and initiatives for levelling the playing field for all citizens, irrespective of

caste, gender and socio-economic status really brings about the expected changes in the society.

Yet there are other aspects of inclusiveness that are more easily addressable and amenable to

change, such as creation of social infrastructure to provide access to electricity, water,

sanitation, healthcare and education. However, even these services have seen a great level of

disparity - with the economically well-off sections of the society having more access to such

amenities while people at the base of the economic pyramid struggle to survive without these

basic necessities. For example, while private schools and hospitals provide excellent services to

4 HDI is a composite index that measures average achievement by an individual in three basic dimensions

of human development – a long and healthy life, knowledge, and a decent standard of living. See, HDI Report 2011, UNDP, for further details.

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011

India Medium human development World


those who are able to pay for them, the government-run schools and hospitals, upon which a

very large section of the population depend, are characterized by rampant absenteeism and lack

of accountability.

Role for Private Sector

The argument against the participation of private sector in providing basic services such as

water, sanitation, healthcare and education is that they would charge high prices for such

services because they are profit-driven. This would make them unaffordable to a large segment

of the population.

Experience, however, has been different in some cases, e.g., opening up the aviation and

telecom sector to the private sector. Earlier, both airlines and telecom were state monopolies

and were characterized by limited capacity, poor services and high prices.

But with the entry of private sector operators, there has been an unprecedented growth in

mobile coverage and penetration across economic and geographic strata. Competition within

private sector operators for price sensitive customers has resulted in cost efficiencies being

created and passed on to customers with the result that India has one of the lowest call rates in

the world.

Fig. 1.4: Annual Number of Mobile Subscriptions (In thousands)

Source: ‘Number of Mobile Subscriptions from 2000 to 2009,’ International Telecommunication Union, World Telecommunication/ICT Development Report and database, World Development Indicators, World Bank Data, The World Bank.

0

1,00,000

2,00,000

3,00,000

4,00,000

5,00,000

6,00,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


The aviation sector has seen a similar growth in reach and increase in affordability. Domestic

carriers have multiplied and witnessed competition for attracting customers by offering better

services and cheaper fares.

Fig. 1.5: Annual Air Passenger Traffic in India (in Thousands)5

Source: Air Transport (Passengers Carried) from 2000 to 2009, Civil Aviation Statistics of the world and ICAO staff estimates, World Development Indicators, World Bank Data, The World Bank.

The cases of the telecom and aviation sector clearly illustrate that contrary to popular

perception, the private sector can deliver substantial improvement in reach, affordability and

quality of service if they are properly organized. Yet there are caveats to expecting such

performance in the delivery of public services. Both telecom and aviation are characterized by a

high degree of competition and low switching costs for the consumers. Also, the nature of

competition for providing public services is substantially different. Competition can occur

amongst various private developers for winning different projects by offering services at the

lowest cost, but once a project is won, the private developer has a monopoly over the public

asset for the duration of the concession period.

Need for Private Sector Investment

The government has recognized the importance of private sector investment in infrastructure

and social sectors. This is reflected in two significant changes in the 12th Five Year Plan from

the 11th Five Year Plan – (i) the total outlay for infrastructure in the 12th Five Year Plan is twice

that of the outlay in the 11th Five Year Plan, and (ii) the percentage share of private sector

investment is expected to grow to 50 % in the 12th Plan compared to 30 % in the 11th Plan.

5 Air Passengers carried include both domestic and international aircraft passengers of air carriers registered in the country.

0

10,000

20,000

30,000

40,000

50,000

60,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


Fig. 1.6: Infrastructure Spending during 11th and 12th Plan Period

Source: 11th Five Year Plan and Draft 12th Five Year Plan documents, Planning Commission, GOI.

There is, thus, a growing acceptance of the need for private sector participation in

infrastructure and social sectors. In the next section of the report, we will discuss the features

and advantages of PPP that makes them an attractive mode for private sector participation.

11th plan

INR Lakh Crore

6.7

Private

.

Total Central State

20.6

7.7

Sector-wise breakup

666,525

956,510

12th plan

INR Lakh Crore

21

State

9.7

Central

12

Total

42.7

Private

Sector-wise breakup

2,265,3071,289,946

6.2

Roads

Airport

Ports

Power

Railways

Water, Sanitation & Irrigation

Telecommu-

nications

Gas

Telecommu-

nication

Power

Ports

AirportRoads

Gas

RailwaysWater, Sani-

tation & Irrigation


Section – II

Public Private Partnerships : A Crucial

Mechanism to Aid Private Sector investment

Different models of PPP

Private sector participation in public services can take many forms. Each form differs in the

degree of responsibilities shared by the private and the public sector. They vary from service

contracts where the private operator is assured of a fixed payment on providing a service, to

full-fledged divestitures where erstwhile public sector companies have been privatized.

Some of the many parameters on which such modes of participation vary are design, build,

finance, own, operate and tenure. In Exhibit 2.1, we plot the different models of private sector

participation on two parameters – ownership and operation between public and private sector.

Exhibit 2.1: Types of Private Sector Participation

Public Private Partnerships Features: – Comparison with Global Practices

A survey of different definitions and policies regarding PPP shows that although there are

several common features in most of the definitions, some of them are customized to fit certain

constraints and objectives of the entity formulating the definition. In this section, we have listed

seven features of the Indian definition of PPP drawing attention to the particular nuances that

are distinct or receive special attention in policy documents. At the end of the section, we have

compared the emphasis on these seven features in other international definitions of PPP.


Private Sector Investment

The most compelling feature of PPP is its potential to mobilize private capital to overcome the

shortage of public funds and meet the investment needs in commercial infrastructure and social

sectors. The Indian definition, however, does not require that the private sector investment be

necessarily financial. Non-financial investments, through management expertise or intellectual

property are also viewed as investments, and hence fall within the ambit of PPPs. This opens

up a range of PPP modes, with varying degrees of private sector participation, and this

flexibility makes PPPs applicable and viable for a variety of sectors.

For example, providing drinking water supply to the poor, either urban or rural, is not a

commercially viable scheme, if the cost of sourcing, treating and distributing water, are to be

recovered from the public. Instead, in such cases, a PPP annuity model can be implemented,

where the government selects and transfers this responsibility of providing drinking water to a

private operator at a free or subsidized rate. The government then provides the operator a fixed

annual payment for this service. The private operator uses his own resources – financial,

managerial, technical and human - which can be viewed as investments, to provide water.

Risk Sharing

Transfer of risk to the private sector is another important feature of PPPs that makes it

attractive for public sector entities. Yet, the focus should be on risk sharing instead of

transferring risk, with risks being allocated to the entity best able to manage or mitigate that

risk. While policies and definitions emphasize the importance of efficient and effective risk

sharing, the gap between these policies and its implementation remains particularly large.

Effective risk sharing is one of the factors for the success of a PPP project. This aspect is

covered in detail in the next chapter.

Performance-Linked Returns

The difference between a service being contracted out to a private contractor and a PPP is the

aspect of performance-linked returns in PPPs. A fixed service contract prevents the private

contractor from exceeding the minimum performance benchmarks specified in the contract.

On the other hand, a contract that links returns to performance incentivizes the private

contractor to exceed minimum benchmarks and get rewarded for additional value generated.

Transfer of Asset Back to the Government

A PPP project is characterized by a fixed tenure for which the rights to develop a particular

public asset and provide public services are assigned to a private developer. At the end of this

tenure, known as the concession period, the private developer must necessarily transfer the

ownership of the asset back to the public sector entity.

The length of the concession period is a parameter that is usually prescribed by the project

sponsoring authority, and is usually range-bound for a particular sector. For example, longer

concession periods are typical of assets that have a long life e.g., roads, so that the recovery of

the project costs can be spread over a longer period.

Public Nature of Service

PPPs are typically limited to sectors and services that are defined as public goods. In the Indian

context, goods and services that have traditionally been supplied by the government, or are

expected to be supplied by the government, are included within the ambit of PPPs. However,

there have been experiences of public sector support in the creation of assets and provision for


services that are primarily for private use – examples include captive power plants, IT parks and

tourism projects that are owned and operated by private companies.

Exhibit 2.2: Comparative Analysis of Features of Different PPP Definitions

Source: Compiled from ‘Approach Paper on Defining Public Private Partnerships- Discussion Note,’ MoF, DEA, GOI, (2010), ‘Promoting Infrastructure Development through PPPs: A Compendium of State Initiatives,’ MoF, DEA, GOI.

Analyzing Public Private Partnerships

An important issue in PPPs is the multitude of stakeholders with often differing incentives that

need to collaborate and coordinate their actions to ensure the success of the project. A lack of

commitment, absence of clarity of role or a lack of technical competence of any one of the

stakeholders can jeopardize the project, and adversely affect all the other stakeholders.

The government, while being a partner in the project, must play a more central role than the

other stakeholders. This additional burden of duty falls on the government due to the fact that

the responsibility of providing public goods resides traditionally with the government. It is the

government’s duty to ensure that if this responsibility is shared with other agents then the

outcomes achieved should be beneficial for the public. The government also has the ability to

regulate and govern the other stakeholders by its law-making authority.


Exhibit 2.3: Comparison of Costs, Risks, Returns and Incentives of Different Stakeholders

Current Status of Public Private Partnerships

India has seen varied traction in developing projects through PPP modes. In some sectors, such

as roads, PPPs have been established as the preferred mode of development, and several

projects are in the pipeline.

Fig. 2.1: Sector-Wise PPP Maturity – Number of Projects

Source: Compiled from data available in “Status of implementation of PPP projects in India as of July

2011”.

Public Sector

Cost Incurred Return/Benefit

Risk Borne

▪ Project Identif ication

▪ Monitoring

▪ Political Risk?

▪ Regulatory Risk?

▪ Residual Asset value

risk

▪ Fulf ilment of mandate

to provide public

inf rastructure

Public/User


Risk Borne

▪ Tax

▪ User charges

▪ Displacement

▪ Usage of quality

inf rastructure

▪ Time and cost savings

▪ Employment

opportunities

▪ Improved living

standard

Private developer


Risk Borne

▪ Opportunity cost of investment

▪ Debt repayments▪ Technical & human

resources

▪ Financial risk

▪ Development risk

▪ Operation risk

▪ Technology risk

▪ Non-political force majeure

risk

▪ Return on investment

▪ Increased technical

competence

▪ Enhanced brand equity

Lenders


Risk

▪ Cost of capital

▪ Opportunity Cost

▪ Financial viability risk

▪ Currency Risk?

▪ Asset – liability tenure

mismatch

▪ Return on investment

VGF

Debt RepaymentsTax

Access

User charges▪ Environmental/ social

impact

▪ Exclusion

Debt Protection


Geographically too, there has been a wide disparity between PPP investments. Mapping the

PPP Investment Per Capita (which measures the PPP intensity), shows that the southern and

western regions have greater investments in PPPs. North eastern states of India have low PPP

intensity, although Sikkim is an exception due to the existence of a large number of micro-hydel

power projects.

Low-income states have a PPP investment per capita of ` 3,907 which is almost half of the

average for the rest of India.

Exhibit 2.4: State-Wise PPP Intensity

Source: Compiled from data available in “Status of implementation of PPP projects in India as of July

2011”.

This disparity among PPP investments is due to several factors that are required for successful

development of projects in the PPP mode. In the next section, we have listed seven key success

factors of successful PPP projects.


Section – III

Seven Success Factors For Effective PPPs

Even though we have established that the private sector participation in commercial and social

infrastructure is necessary and that the PPPs are an important mechanism of structuring such

participation, it is essential to recognize that PPPs are not the only solution for India’s

infrastructure woes. The responsibility of providing infrastructure lies primarily with the

government and PPPs must not be viewed as a mechanism for transferring that responsibility

to the private sector.

PPPs, by their very nature, involve cooperation and coordination among several entities whose

interests and objectives often diverge. PPP projects themselves are highly challenging as they

include long gestation period and project life with numerous risks involved that keep changing

over the project’s lifecycle. PPPs also involve multiple dependencies across stakeholders and

uncertainty in forecasting demand, which makes the management and execution of a successful

PPP project very demanding.

A committed government, an informed and active community and a competent private sector

with financial and managerial capability are the primary ingredients for a successful partnership

program. Availability of long-term funds, exhaustive identification and optimal allocation of

risks and appropriate pricing are essential for smooth coordination amongst stakeholders.

Finally, the social and environmental impact of the project must be carefully managed.

The key success factors identified and presented in this section are categorized into three types:

1. Stakeholders’ Roles – responsibilities, competencies and commitment of the public

sector, private sector, financiers, consultants, end-users, community and civil society.

2. Interaction – financing, revenue generation and risk-sharing among stakeholders.

3. Project Impact – social inclusion and environmental sustainability.


Exhibit 3.1: Seven Success Factors for PPP Projects


1. Strong Public Sector Capacity and Commitment to Identifying, Structuring

and Governing of PPP Projects

The responsibility of providing public infrastructure and services is entrusted primarily to the

government. With the emergence of a strong and vibrant private sector over the past two

decades, there is a need for a strategic shift in the role of the government in implementing PPP

projects. Instead of being driven by financial constraints, the government should position itself

as a partner as well as an overseer of the activities being undertaken. For such a role, the

government needs to strengthen its governance capabilities which include accurate

identification, proper structuring and vigilant monitoring of the projects.

We have listed out five features that characterize strong public sector capacity:

(i) Mature Rationale

The initial need for implementing PPPs was due to the lack of public funds for investment in

infrastructure. PPPs presented an attractive, and in many cases, the only route for raising

money for public infrastructure. External support was given by funds received from multilateral

agencies that were conditional on the involvement of private sector through a partnership

model. Since then, commercial infrastructure sectors have matured considerably. Though the

main reason for implementing PPPs is still the shortage of public funds, there is now an

additional motive, which is to enhance the quality being delivered through implementing a

project through the PPP mode. This is also to gain a footing among policy makers and

bureaucrats. A focus on efficiency, quality of service and appropriate allocation of risk can

deliver value for money.

Private sector participation, however, is more expensive compared to the government’s as

government can raise funds from markets at a lower cost compared to private sector due to the

absence of any associated risk with government’s borrowings. This means that the higher cost

of private sector participation must be compensated by harnessing the operational and

managerial efficiency of the private sector in order to improve the quality of the product or

service created for the public.

The inclusive growth objective of the government calls for providing quality services to the

most economically and socially deprived sections of the country. Social sectors, like water

supply and sanitation, public health, solid waste management, and education are plagued by

poor infrastructure facilities and services.6 PPPs can be harnessed to improve access and quality

of basic amenities and other services. It must nevertheless be noted that the involvement of

PPPs in the social sector is still at a nascent stage.7

Implementing projects in the PPP mode for social sectors must be done for two reasons – first

to provide widespread access and second, to improving the quality of services. Given the

essential nature of these services and the vast discrepancies in the purchasing power of different

6 The country faces a shortage of around 2,433 doctors of 23,673 required for total; 6148 positions were lying vacant as on 31st March, 2010. Please see ‘State-wise Number of Allopathic Doctors at Primary Health Centres (PHCs) in India,’ Ministry of Health & Family Welfare, GOI, (2010). The teacher-student ratio in lower primary schools and middle schools was 42 and 34 respectively in 2005. Please see ‘Access to Elementary Education in India: Country analytical Review,’ R. Govinda et al. NUEPA, (2008). 7 As on 31st July, 2011, only 17 and 8 projects were awarded on PPP mode in education and health care,

respectively with a combined total project cost of ` 3,683 crore. See ‘PPP Projects Status Report,’ on PPPs in India, DEA, Ministry of Finance, GoI, 2011.


socio-economic segments, it is essential that the government play a more prominent role in

financing these projects through budgetary support8. The current expenditure of these services

is expected to increase significantly in the forthcoming period of the 12th plan. As discussed

before, PPPs should be seen as a mechanism to increase the efficiency and effectiveness of this

expenditure by leveraging private sector’s technical and managerial expertise.9

(ii) Sustained Political and Bureaucratic Commitment

Infrastructure projects are complex owing to the long project life and different kinds of risks

involved in the different phases of a project. Even the period from the announcement of a

project to its approval can take several months. It has been observed that any political regime

change can cause severe delays or even termination of projects. Hence, a sustained commitment

from the government is necessary to ensure that the projects are not put at risk due to the

difference in political ideologies of different ruling parties. The Airport Authority of India

(AAI) board approved the modernization of Delhi International Airport in 2003, but change in

the Central government delayed the implementation of this project as the Empowered Group

of Ministers (EGoM) was reconstituted in 2004. The project was finally approved only in 2006.

See Box 3.1.

8 The draft National PPP Policy, 2011 states that annuity models would be undertaken in social sectors. Please see p.6 of the ‘Draft National PPP Policy,’ 2011, DEA, Ministry of Finance, GoI. 9 Please see, http://www.thehindu.com/opinion/Readers-Editor/article2311139.ece

Box 3.1 Mumbai & Delhi International Airport

Privatisation and modernization of the Mumbai and Delhi International Airports was being

discussed by the government since 1996. In 2003, Airport Authority of India finally agreed

to modernize them, following which the bidding process was initiated. This project is one

of the initial steps undertaken by the government towards the privatisation of the airport

sector. Earlier the Cochin International Airport was developed in 1991. However, in the

case of Delhi and Mumbai, the lack of experience in this sector resulted in issues during the

bidding phase. A greater emphasis was laid on the financial parameters of the bidders

instead of the technical expertise.

Moreover, the RFP and other bid documents were not clear on several aspects. This

resulted in multiple pre-bid meetings, though carrying out several meetings with bidder is

helpful as it reduces occurrence of disputes in future like the different interpretation of

legal terms by contracting parties. Further, bias of the ‘Evaluation Committee’ towards

some private sector companies was also reported in the media. However, some curative

measures were taken later, and a model RFP was provided and procedures for selection of

Evaluation Committee were undertaken.

2003 2004 2005 2006

July - AAI

Amendment Bill for

modernisation of

Airports was

passed

Dec – Appointment

of ABN Amro as a

Financial Consultant

Sep .-

Approval by

GoI for a Joint

Venture to be

formed

Feb –

Invitation to

register for

Expression of

Interest (EoI)

June – 4th as the last

submission date for EoI On 15th, the new Govt made policy

changes (FDI of 49% within 74%)

Appointment of Global Transaction

Advisor, Legal Consultant and

Accounts & Tax Advisor

Jul y-

Extended

dates of

submission

April –Request for

Proposal and

Transaction

Documents issued to

Pre-Qualified Bidders

June –

Final Bids

to be

submitted

Sept –

Bid Date

extended

Aug –

Transaction

Documents

finalised

Nov - Evaluation

Committee

reported the Plan-

ning Commission

Dec.–Revised Evaluation

Constitution of

Committee of

Secretaries and Group

of Eminent Technical Experts (GETE)

Jan –

Submission

of reports by

GETE

Feb –Allegations

against AAI and

Union of India by

Reliance Airport

Developers PvtLtd.


Infrastructure should be built based on a robust and well-planned vision document. This will

help to adopt a coherent and comprehensive action plan for the integrated development of

infrastructure across all sectors. Gujarat has a vision documents titled ‘Big 2020’ which attempts

to put together a comprehensive view of programmes and projects which are aimed to raise the

state to a new level of development. The document goes beyond the five year planning process

and links individual projects of each department into an integrated program for the state. It also

schedules projects in line with the state’s priorities.10 If such vision documents could be

prepared for each state and for the centre, it could help in creating an infrastructure agenda for

the entire country that is to some extent predictable by the stakeholders.

Several state governments and the central government have been putting appropriate

institutional and regulatory framework towards this end. The draft National PPP Policy aims to

create a comprehensive framework for formalizing PPPs as the preferred form in sectors like

roads, airports, power, etc. where such partnerships have earlier been successful.

At the state level, varying degrees of commitment towards PPPs can be observed. The disparity

in the presence of PPP policy/guidelines, financial support to PPP projects by governments

and in the presence of operational PPP projects in different states show the different levels of

commitment that the different state governments have towards PPPs.

Some states, like Gujarat, Maharashtra and Andhra Pradesh have both PPP acts/policies and

several PPP projects that are either in the implementation or in the operational stage. A few

states like Uttar Pradesh do not have a PPP Act or Policy but still have PPP projects. Other

states like Mizoram have neither a PPP law nor a state PPP project.

Some of the delays faced while executing PPP projects include, land acquisition delays, delay in

obtaining environmental and other clearances and delays in the release of funds.11 These issues

can be solved if there is a consistent, sustained, political and bureaucratic commitment from the

government.

There has been a trend of increasing commitment from the central government towards PPPs.

This can be determined from the fact that the central government has set a progressively

increasing target of financing total infrastructure needs through private participation including

PPPs during each subsequent Five Year Plan. The 10th Plan had targeted 20 % of the

investment in infrastructure projects to be mobilized by the private sector which grew to 30 %

in the 11th Plan and 50 % in the 12th Plan.

(iii) Capability

It is necessary that the strong commitment of the government is supported by its strong

implementation capability. This should be duly reflected in its ability to identify the project, its

technical expertise to rightly structure the project, and put in place suitable governance and

monitoring mechanisms.

10 Please refer to ‘Review of Blueprint for Infrastructure in Gujarat (BIG 2020) – Final Report, GIDB, (2009). 11 For example, Sasan Ultra Mega Power Project was delayed as the captive mines allotted to it were under the MoEF ‘No-Go’ zone. Similarly, progress on Navi Mumbai International Airport was delayed as construction of an airport in Navi Mumbai was not a permissible activity under Coastal Regulation Zone notification of 1991. Further, the construction of the airport would have resulted in a loss of 98 hectares of mangroves.


The projects identified should fit the country’s overall sectoral strategy and policy framework. It

is also important to identify the need for a particular project rather than identify the project itself,

especially when it involves the social sector. A large number of projects, mostly in the

commercial infrastructure sectors are identified through a top-down approach where the state

identifies projects and implements them with limited consideration of the needs and aspirations

of the people. In order to prevent this, a bottom-up approach could be adopted, where the

demand for projects comes from the people and government executes them with the

involvement of the people. For example, the people can decide if a metro rail or a fleet of high-

capacity buses would be more helpful in addressing their transportation problem. A holistic

plan would be a combination of both the top-down and the bottom-up approach which could

be connected to the national/state level master plan.

In order to prevent and eliminate unplanned and impractical plans, the project identification

process should be properly structured. This could also prevent the haste in awarding projects

for political gains. A list of identified projects should be made public so that people themselves

can agree upon the kind of approach required to undertake the project. Moreover, it would also

enable the private sector to assess the potential market.

The PPP arena in the country has witnessed a mix of successful and failed projects which has

raised concerns about the usefulness of such projects. There are successful projects that could

be emulated like the Bhiwandi Electricity Distribution Franchise, Alandur Sewerage Project,

Amritsar Inter-City Bus Terminal etc. However, projects like Delhi-Noida Tollway, Delhi-

Gurgaon Expressway, Vadodara-Halol Toll Road Yamuna Expressway, Nhava-Sheva

International Container Terminal, Gangavaram Port, Vizhinjam Port etc., encountered

problems during project preparation and development phases.12 This is primarily because the

government adopted a ‘project-based’ approach towards PPPs. The lack of planning and

integration of the project plan with the regional plan and other plans have resulted in a mixture

of both successful and failed projects. It is always good to look at the big picture and formulate

projects using a programmatic approach. For instance, power generation projects often face

operational delays because of delays in supplying the required transmission and distribution

mechanisms or establishment of appropriate fuel linkages. Another example would be the

Bangalore International Airport where the road connecting Bangalore city to the airport was

not ready even though the airport was ready for operations.

Poor structuring of a project is one of the primary reasons for its failure. The current method

of structuring projects is based on the preparation of a Detailed Project Reports (DPRs) by

consultants selected and appointed by the government. It is therefore, crucial that the

government maintains objectivity and transparency in selecting consultants who have the

required sectoral expertise. While selecting consultants it is important to see if the consultants

have a track record of successfully structuring projects. The financial bid should be of

secondary importance. In India, the project development cost is much lower compared to

global standards. In India, only 2 % of the project cost is spent on the Detailed Project Report

whereas it is around 5 % and between 6-9 % in UK and USA respectively.13 This cost should be

increased to ensure that the project does not suffer due to cost-cutting in the project structuring

phase.

12 See, toolkit.pppinindia.com/highways/module3-roiewp-intro.php?links=roiewp1&links1=roiewp2. 13 Please refer to ‘Building India: Accelerating Infrastructure Projects,’ McKinsey & Company, 2009, for further details.


Government should also be capable enough to evaluate the inputs provided by the appointed

consultants. It should have adequate technical expertise in appropriately structuring the legal

documents pertaining to the project. This would ensure that the government officials

successfully negotiate the terms of the concession agreement with their counterparts in the

private sector. Standardization of contracts at the national and state level based on international

standards would allow interpretations of the contracts in a consistent way thereby leading to

lesser occurrences of disputes. Rigorous training of government officials at all levels who are

associated with PPP projects is important.

Monitoring & Governance

For effective governance, the regulators should be empowered sufficiently. If the regulatory

authorities only have the power to determine tariff rates and no power to set and enforce

performance standards or other measures in order to protect the users’ interest, then their role

is limited and of little help to the society. Please refer to Box 3.2 for an illustration. Thus the

government also has the responsibility of establishing strong regulatory bodies. Though there

are regulators in the commercial infrastructure sectors, their independence is often questioned,

as the government is both the stakeholder and the regulator. There have been suggestions that

the government should not be part of the governance mechanism to prevent a conflict of

interests. In social sector projects, there is no regulatory body at the apex level. If PPPs are to

be adopted at an increasing rate in these sectors, there is a need to establish independent

regulatory bodies at the apex level to standardize the development of projects.

Proper monitoring mechanisms ensure accountability of both the private and public sector. At

present, the monitoring of projects, in many cases is entrusted to different agencies and it is not

clear what aspect of the monitoring is done by which agency. For example, in a state sponsored

project, where some component of the Viability Gap Funding (VGF) is also supported by the

central government, the monitoring is done by the PPP cell at both the central and state level.

However, the division of monitoring responsibility is not very clear to the stakeholders.

Normally, an Independent Engineer (a consultancy firm) is the monitoring authority entrusted

with the responsibility of a fair, amicable and quick settlement of disputes. The selection of an

independent engineer should also be based on a transparent and competitive process. The

responsiveness of the monitoring authority in the social sector projects is even more critical

than that in the commercial sectors. Also, wherever possible, community or civil society

representatives like the ‘Resident Welfare Organizations’ or Aanchal Samities, should be

encouraged to be a part of the monitoring process.14

14 Aanchal Samiti also called as Intermediate Panchayat is the second tier of Panchayati Raj System in India. Its members are elected members of the public. For further details see, http://arunachalpradesh.nic.in/panchayat/html/pachayat.htm


(iv) Clarity of Role

Very often, different bodies from different levels of the government are involved in the various

stages of a project. This necessitates exact specification of the roles of the involved bodies,

especially their roles in legislative and other powers. Delays in getting regulatory approvals are

often caused due to the lack of adequate information among the departments. The construction

of the Yamuna Expressway faced substantial delays in obtaining regulatory clearances as the

three government bodies, the government of Delhi, the government of Uttar Pradesh and New

Okhla Industrial Development Authority (NOIDA), a local authority, involved in this project

lacked proper co-ordination. The Provision of Urban Amenities in Rural Areas (PURA)

program for rural development that has been re-launched during the 11th Plan also requires

effective coordination among the government bodies involved.15 This program is a converging

point for the schemes proposed by the Ministry of Rural Development, and other ministries

like the Ministry of Renewable Energy, Ministry of Panchayati Raj etc. For successful operation

of PURA, it is essential that each ministry and department is aware of its role and responsibility.

(v) Consensus Building

While there is a broad consensus on the need for PPPs in commercial infrastructure sectors, the

appropriateness of PPPs in social sectors, like water supply, solid waste management, and

public health are still a point of debate in public perception. Even if a PPP project is

implemented, it is the responsibility of the government to bring the issues involved with the

project in a public forum. Most of the projects are identified by the ministries concerned at

15 The PURA program was initially launched by Central Government in 2003 in 7 villages as pilot projects.

Box 3.2 Nhava Sheva International Container Terminal

The Nhava Sheva International Container Terminal, a major container handling facility on the

western coast of India is the first private container terminal of the country. The events that

unfolded during the development of the landmark project highlighted the need for a strong

regulator. The Tariff Authority for Major Ports (TAMP) — the apex body for major ports failed

to review port tariff and was not able to monitor the private consortium’s revenue flow that

resulted in accrual of monopoly rents to the latter.

The private player enjoyed benefits by passing the burden to the users. TAMP was seen to be a

weak regulator as its role was restricted to setting tariffs and revising them. It was not entrusted

with the task of assessing performance of the private player and securing interests of the users.


both central and state level and are evaluated by an apex body constituted for the purpose.

Currently, the government starts interaction with the public only at the onset of land acquisition

process by way of issuing notices to the landowners.

It would be more appropriate if the government first interact with the users about the projects,

and dispel the doubts of the people regarding the potential loss of land and livelihood. It is

important to share the plan with the public, seek suggestions and incorporate changes if

necessary. ICT has greatly enhanced the scope of interaction between the government and the

public. Apart from reducing the time and cost of interaction, it is also user friendly. Now the

government can make increasing use of this medium to seek suggestions, feedback and

grievances from different stakeholders and take the required decisions based on this

information. A very contemporary example is of the NHAI using Facebook as a platform to

address the concerns of users by giving an opportunity for developer-user interaction. The

Planning Commission has also initiated an online forum to invite suggestions and opinions

from common people on planning priorities.

2. Private Sector Capacity

Infrastructure development in India has demonstrated the competence of the private sector

over the last two decades. Though capacity building is a continuous process, the private sector

has displayed its ability in sectors like road, airports, power and ports. Despite this, there have

been instances of failure and the underlying causes need to be addressed to prevent such cases.

The government has initiated several steps to provide a conducive environment to the private

sector in these areas. For instance, the government has adopted the competitive bidding

process to give equal opportunity to all companies in the private sector. It has also attempted to

standardize the PPP procurement framework by issuing Model Concession Agreements

(MCAs) for the commercial infrastructure sectors that serves as guidelines for sharing of

responsibilities between the government and the private sector. India Infrastructure Finance

Corporation Limited (IIFCL) has been set up to look after the financial needs of the PPP

projects.

Private sectors must convert these opportunities to benefit themselves and the users. Moreover,

their involvement in infrastructure development should not just be for the bottom-line but

should also focus on the socio-economic development of the country in a sustainable and

inclusive manner.


a) Private Developers

i. Technical Competence:

The scale of investment is usually very large in infrastructure projects, with returns spread over

a long horizon. The private sector should have the ability to manage the financial risks arising

out of the long gestation period of projects. At present, the competence of the private

developers varies across sectors. In the roads sector, domestic competence has been established

to an extent, but airports and ports also involve participation of foreign companies for either

technical or financial reasons. Some such examples are the Hyderabad Airport, Ganagavaram

Port and Jegurupadu Phase I Power Project.

Exhibit 3.2: Foreign Participation in PPP Projects in India

S/N Project Foreign Partner Primary Reason

1. Delhi International Airport (P) Ltd.

Frankfurt Airport Services Worldwide Malaysia Airport Holdings Behrad

Technical

2. NSICT P&O Australia Ports Konsotium Perlapalan Behrad DBC Group of Companies

Technical

3. Gangavaram Port Warburg Pincus (30%) Financial

4. DND Flyway Asian Infrastructure Mezzanine Capital Fund

Financial

Source: Compiled from various reports, case studies, and newspaper articles.

ii. Engineering Efficiency

An increasing number of complex projects are being undertaken in the PPP mode. Apart from the enormous budget required to execute these projects, there is also a need for sophisticated and state-of-the-art technology. Some of the complex projects undertaken by PPP include the Metro Rail projects, International Airports, Ultra Mega Power Projects (UMPP), etc.

Compared to the international standards, Indian private developers have weak skill set in risk management, engineering, procurement and construction. Also, the application of value engineering and lean construction principles is very low in India.16

iii. Social Commitment

Commitment of the private sector towards the project is vital for establishing a reliable long-term partnership. The commitment of the developer needs to be an all-inclusive one – from efficient delivery of the project within stipulated cost and time to adequate R&R measures for both natural and human resources. In the case of Vizhinjam Port Development project, the private developer backed out of the project at a very late stage which led to re-starting of the entire bidding process resulting in loss of both time and money. See Box 3.3.

16 ‘Building India – Accelerating Infrastructure Projects’ – McKinsey & Company, 2009.


iv. Consensus Building

Private players have an important role to play in building a favorable opinion of the project

among the users and the project affected people. Especially in social sector projects, the

support of the community is critical to the success of a project. It is therefore important for

the developers to engage in a comprehensive dialogue process with the various segments of

the public and inform them of the positive as well negative aspects of the project and about

the measures that would be undertaken to mitigate the negative aspects.

So far the project developers, especially in the port and power sector, have made very little

efforts to engage the public in their plans. On many occasions exhaustive mapping of the

people affected by the project or a detailed environment assessment was not undertaken. For

instance, in the Coastal Gujarat Power Ltd. UMPP, the fishing community was excluded

from the list of project-affected people. See Box 3.4 for an illustration. This was a violation

of the Performance Standard — Social and Environmental Assessment and Management

System. Landowners are often informed about a particular project by way of notices or

advertisements only after the project has been decided. In the Krishnapatnam Port project,

the livelihood of the ‘Yandis,’ (a local community in the Krishnapatnam area) was severely

impacted due to the project and they did not even receive any compensation or rehabilitation

for this.

(b) Consultants

Consultants are responsible in guiding the government in identifying the right project as well

as the right bidder. The objectivity of the consultants is essential during the entire life of a

project. The selection of a right consultant that has sound knowledge and experience in the

sector concerned paves the way for the selection of the right projects. Here adequate

emphasis should be placed on the technical expertise of the consultant in a particular sector.

Compromising on the quality of consultants can result in poor structuring of the project. For

Box 3.3 Vizhinjam International Container Terminal

Vizhinjam International Seaport was a major project initiated by the Government of Kerala.

The project was important because of its strategic location and its capacity to boost India's

trade and commercial activities. The government made several efforts since 2006 to select a

suitable private developer. Despite the potential of the project, it attracted interest from only a

few bidders although bidding was undertaken three times. It was finally in 2008, that Lanco

was selected to undertake this project. However, the company later backed out of the project

claiming that the project was facing legal issues although some sources state that the developer

backed out due to the lack of financial capability to implement the project. This further

delayed the project. Even the government had difficulty in arranging funds for the project,

which was an additional problem that caused further delay. The government later explored

various options to fund the project. It also considered various MoUs, but has been

unsuccessful till now.

.

2006 2007 2008 2009 2011April – Pre bid

meeting with 40

Private sector

developers.

July- Strategic

Advisor and

Technical

Consultant

appointed.

June – Consortium

led by Lanco won

the bid.

2010

Aug – An Indo-Chinese firm

which won the bid was denied

security clearance by Central

Govt.

Oct – 18th was the last

day to submit bids.

Extended to 15th Dec.

Further extended to 31st

Jan.

June / July – Consortium

led by Zoom Developers

challenged Govt’s

decision

Lanco backs out of

the project.

Govt considered various options :

• MoU with Spanish Govt

•SCI Expressed Interest

•SBT to fund the project .

Bidding process extended to

carry out Environmental

Impact Study .

Central Govt refused to aid

the State – owned Major Port.


example, in the Delhi-Gurgaon Expressway, the original scope of the project was changed

substantially and the final scope was issued to the concessionaire just days before the original

scheduled completion date of the project. In the case of the Vadodara-Halol Toll road, the

actual level of traffic did not match the expected traffic levels as per the traffic study because

the traffic estimates were based on the assumption that incentives for industrial development

in Halol area would continue over the long term. However, the incentives were withdrawn by

the government in later years. A high-level committee on National Highway Development

Program (NHDP), set up by government, stated that several road projects resulted in

disputes, as the DPRs were not carefully prepared.17 These examples show that engaging

consultants with sound knowledge and experience is essential in preparing DPRs.

Low investment in planning and engineering aspects often results in higher implementation

costs in the form of transaction costs and settlement of financial claims arising due to

disputes. Such disputes involve a lot of time and money jeopardizing the benefits of PPPs.

There are instances where commercially unviable projects were tendered initially and later

terminated. Significant differences in the total project costs estimates by National Highways

Authority of India (NHAI) and the private developers have also been reported.18

There is also a need to increase the number of Transaction Advisors (TA) empanelled by the

Central government for PPP projects. At present, there are only 11 TAs available for central

government projects. Now that an increasing number of projects are being planned, it is

important to expand the list of empanelled consultants.

3. Community Participation

The end-users of any public infrastructure are the common public, who also ultimately bear the

cost of developing that infrastructure, either directly, through user charges, or indirectly,

through taxes. There is hence a need for involving representatives of the local community. This

could be done either through Non-Governmental Organizations (NGOs), civil societies, or

through members of Gram Panchayat/Zilla Parishad etc.19 A forum should be created for the

community to communicate their needs to the government through channels like small group

meetings, Round Tables, Kisan Mahapanchayats, online public forums, etc.20 Such a forum

shall address the concerns, apprehensions and acceptability of the various categories of

stakeholders and the government on its part should endeavor to consider these issues while

preparing the project.

However, current efforts in this direction have been less than satisfactory. There have been

cases where projects have created an adverse impact on the local community. Apart from

environmental issues, there has been insufficient rehabilitation of people during the land

acquisition phase in many cases. The Sasan Ultra Mega Power Project in Madhya Pradesh has

displaced 6000 people in the region and has reduced them to extreme poverty. As a

consequence of such incidents, projects such as Girye Ultra Mega Power Project have

17 Please refer to ‘Second Report on Faster Implementation of NHDP,’ B. K. Chaturvedi, Member, Planning Commission, (2010) for further details. 18 Please refer to the ‘Times of India’, 28.11.2011. 19 Gram Panchayat, Intermediate Panchayat and Zilla Parishad are lowest, intermediate and highest tiers of the Panchayat system in India, respectively. 20 Kisan is the Hindi word for a farmer.


prompted mango farmers and others to conduct marches and hunger strikes to prevent the

Government from acquiring their agricultural lands and setting up a power plant.21

For projects in commercial infrastructure sectors, the government can initiate projects,

distribute information, and then seek public opinion especially on matters like alternative site

locations, R&R packages, etc. Here, the role of the community is limited to the project

identification phase as it may be difficult to involve them during the governance or monitoring

of the projects. Lately, some regulators like the Tariff Authority for Major Ports (TAMP) have

initiated involvement of users in determination of port tariff. This is a healthy development as it

would help protect the users’ interests.

In social sector projects, the involvement of the users/community is even more crucial. The

public must be a part of the entire project governance instead of just being involved during the

identification stage. For instance, municipal schools adopted by NGOs under the PPP mode

have representatives of the Parents-Teacher Association (PTA) as members of the School

Management Committee. Similarly, members of the Intermediate Panchayat represent the

community who are also members of the management committee of Primary Health Centres in

Arunachal Pradesh. Such an inclusive approach, centered on mobilizing communities as active

agents of their own development, is essential to the larger development process.

4. Financing and Commercial Viability

(i) Commercial Viability

It is crucial to ensure that projects offer returns that are attractive enough to the private sector.

Robust and reliable traffic estimates, appropriate and acceptable user fee, commercialization of

supplementary assets like the development and usage rights of real estate and government

21 Please refer to http://www.grist.org/coal/2011-05-27-down-with-coal-the-grassroots-anti-coal-movement-goes-global. See also - http://www.powermin.nic.in/whats_new/pdf/ultra%20mega%20project.pdf / http://pacificenvironment.org/downloads/Sasan%20Power%20Project%20FactsheetFinal.pdf

Box 3.4 Mundra Ultra Mega Power Project

Mundra Ultra Mega Power Project is one of the 16 UMPPs envisaged by the Government

of India to address the growing need for power in the country. The project has

demonstrated some positive aspects of PPPs as it had been scheduled to commission ahead

of its time and the bidding process was completed within 10 months.

However, violation of Ministry of Environment & Forests (MoEF) regulations e.g., use of

potable water for construction activities was reported in the media. The developer did not

undertake a comprehensive assessment of all the project-affected people. The fishing

community, an important group that was severely affected by the power project, was

excluded from the list of directly affected people.

Jan. 2006 Dec. 2006 June 2012Sep. 2011

Ministry of Power

proposes

UMPPs

Successful bidder identif ied

Letter of Intent issuedScheduled date for

Commercial Operation of

Unit I as per CA

Invitation for EOI

Feb. 2006

Revised date for

Commercial Operation of

Unit I as per CA

Financial Closure achieved

Apr. 2008


grants in the form of VGF, are important in ensuring commercial viability of the projects.

There have been instances where projects offered for bidding were not found economically

viable. For example, a bypass road proposed around Coimbatore through Build-Operate-

Transfer (BOT) arrangement did not attract any private sector developer to bid for the project.

Similarly, in Chennai a solid waste management project did not attract bidders during the initial

round of bidding as the waste generated from the associated zones was not enough to generate

profit from the project.22 Many projects, especially those in the transportation sector, have

dedicated traffic and a uniform fee structure regime, which leave little leeway for adjustments.

Further, the concession period cannot be extended indefinitely to allow recoupment of

investments made. Under such circumstances, awarding projects on a competitive basis reduces

the quantum of VGF sought by the developers. Instilling competition, in turn, compels the

private sector players to be efficient and innovative so that the project margins do not fall

below their desired level. The shift towards output specification of the projects instead of the

traditional input specification approach has been aimed at inducing the private developers to

use the best management practices e.g., applying lean construction principles, etc. to reduce

project cost and improve margin.

[Traffic * User Fee]* Concession Period ± VGF = Total Cost + Return

In recent times, a large number of projects in the road sector have been awarded on negative

grant basis, where the private developer offers to pay the sponsoring authority in return for the

right to develop and operate the project for the concession period.

Providing other assets for commercial exploitation to the concessionaire, in the form of

development rights for real estate near the project site, has been one approach to ensure the

commercial viability of projects that do not break-even based on traffic estimates. Appropriate

bundling of project features is therefore important to such projects. Integrating an upcoming

project with an existing project to increase traffic can be yet another way to improve

attractiveness of the project for the developer. For example, integrating Bandra-Worli Sea Link

(BWSL) with the Western Freeway Sea Link (WFSL) was recommended as one of the measures

to make the project commercially viable. In the Hyderabad Metro Rail project, a plan was set up

to have feeder buses along the metro route apart from integrating bus routes of state road

transport.

At present, the emphasis is typically on the FIRR (Financial Internal Rate of Return) rather than

on the Economic Internal Rate of Return (EIRR). Some international lending agencies like the

Japan International Cooperation Agency (JICA) require establishment of EIRR as a necessary

pre-condition for going ahead with projects. There is a need to make EIRR mandatory for large

scale projects if not for all projects.

22 Please refer to ‘PPP Experience in Indian States: Bottlenecks, Enablers and Key Issues,’ by Mahalingam, A., Indian Institute of Technology Madras, 2008.


(ii) Availability of Finance

Budgetary Support

Well-structured and important projects should not be delayed due to the lack of availability of

adequate finance. The support of the government in the form of VGF can make a large

number of commercially unviable projects feasible. The government should be capable of

generating adequate resources through both budgetary and extra-budgetary measures for

meeting the requirements of the infrastructure sector. In the Krishna Water Supply project in

Andhra Pradesh, the government failed to meet the funding gap, which caused the project to

experience several glitches. Further, within the infrastructure sector, there should be efficient

allocation and utilization of funds based on certain pre-specified priorities.

The Finance Ministry should provide project-wise, ministry-wise and sector-wise information

on PPPs in supplementary documents to the annual budget. Currently, there is no consolidated

information on financial support to the PPPs by the government made available to the public.

At present the maximum support from the government in terms of VGF is 40 % of the total

project cost. Such threshold limits may work for projects in commercial infrastructure sector

where the commercial viability can be established by assigning other rights to the developer,

like development rights of real estate near the project site23, conferring advertisement rights

23 In the Hyderabad Metro Rail project, the concessionaire was allowed to develop real estate around the metro rail facilities at three depots and above the parking areas at about 33 stations.

Box 3.5 Delhi-Noida Toll Bridge (DND Flyway)

The Delhi NOIDA Toll Bridge was awarded through direct negotiation. Being one of the

early PPP projects, the Concession Agreement was poorly structured. The concession

agreement provided for extending the concession period on a recurrent basis till the project

cost and a pre-determined return on investment made by the concessionaire was recovered

completely. Further, revenue projects were not undertaken robustly as during the

operational phase, proportion of heavy commercial vehicles was very low. This affected the

commercial viability of the project. To compensate for the loss, the concession period is

now slated to be for around 70 years.

Such poor structuring of contracts, results in inadequate sharing of risks. With poor realized

demand and an indefinite concession period, the burden has been ultimately passed on to

the road users with the concessionaire bearing no risk at all.

The project is also affected due to disputes between the government and concessionaire

over determination of toll. The concession agreement provided the concessionaire with the

‘right to determine toll’ which can potentially jeopardize the interest of users.

1998

2005 2011

Memorandum of

Understanding

signed

Financial

Closure

Achieved

Concession

Agreement

Executed

Project Commissioned

(construction time: 25

months -

4 months ahead)

Company undergoes

debt-restructuring

Losses incurred due

to revenue shortfall

during initial years

(2001-2005)

Toll hike uncertainty

(10 % vs. 25 %)

1992

1997 2001 2006


along the highways to the developer etc.24 However, in social sectors, where establishing

commercial viability is difficult, bulk of the financial support would have to come from the

government. In the early years of the development of PPPs in these sectors, BOT annuity

would be preferred model as stated in the draft National PPP Policy.

Equity

The government has allowed 100 % Foreign Direct Investment (FDI) in several infrastructure

sectors like roads to attract foreign capital. Despite this, the level of FDI received has been low;

around 11 % of the total investments in 2008. Promoter’s equity is the main source of equity

for projects in the country. However, given the enormity of finance required to fund

infrastructure projects in the coming years, promoters’ equity is going to be limited. Hence,

there is a need to ensure availability of institutional equity or development capital for

infrastructure projects.

Debt

Commercial banks in India, especially those in the public sector have been the main source of

debt for PPP projects.25 The conversion of erstwhile long-term lending financial institutions

like Industrial Development Bank of India (IDBI), Industrial Credit and Investment

Corporation of India (ICICI), into commercial banks has led to the problem of availability of

long-tenure debt for the infrastructure projects. At present, two-third of the total debt

requirement of the PPP infrastructure projects is financed by the public sector banks. These

banks are faced with the problem of Asset-Liability Mismatch (ALM) and most of them are

already operating at their exposure ceilings for the infrastructure sector. The absence of a

developed corporate bond market in the country has made it difficult for the developers to raise

the required debt. We require a deep, liquid bond market with a wide array of sophisticated

investors and products to provide long-term finance and distribution of risks at a much wider

level. Further, pre-emption of funds by the infrastructure sector may limit the availability of

banking funds to other important sectors.

Fig. 3.1: Debt Requirement for the 11th Plan Period

Source: Projections for Investment in Infrastructure during the 11th Plan, Planning Commission, 2008

24 IL&FS, the developer of the DND Flyway was conferred the ‘advertisement rights’ along the toll road as a part of the concession agreement. 25 Commercial Banks fund around 80 % of the debt requirement of the PPP projects in India. See, ‘Discussion Paper On Financing Requirements Of Infrastructure and Industry,’ DIPP, GOI, 2011.


Fig. 3.2 points to the inadequate availability of debt requirement during the 11th plan period. A

total of ` 8,25,539 crore would be available as debt against the total requirement of ` 9,88,035

crore implying a gap of ` 1,62,496 crore (20 %). As can be observed, domestic bank credit is the

major source of debt followed by Non-Banking Financial Companies (NBFCs) and pension

funds. Further, debt constitutes around 50 % of the total investment required in infrastructure.

However, the normal capital structure of a project is 30 % equity and 70 % debt. This

aggravates the shortage of finance for infrastructure projects in the coming years.

5. Risk Management

(A) Risk Identification and Allocation It is important that all risks associated with the projects are thoroughly identified. Several

projects have faced disruptions at later stages because the possible occurrences of many glitches

that were not taken into consideration while framing the concession agreements. In order to

minimize any uncertainty involved in the long gestation of PPP projects, a whole-life cycle

approach needs to be pursued. This will help to identify the entire gamut of financial and other

risks that may jeopardize the viability of the project. Further, strong measures for risk

alleviation should be inbuilt into concession agreements so that even disputes during the course

of the projects are resolved amicably. This will also reduce the number of litigations.

Risks are critical to PPP projects as they indicate the probable occurrence of events that may

cause changes in socio-economic, political and natural environment faced by the projects.26

Allocation of risks is important to increase efficiency, reduce project-related costs and achieve

improved value for money. The parties involved in a project can affect the amount of risk by:

The level of information they have about the present and future which will help them

avoid or tackle unforeseen events

The level of influence they have over events which will enable them to take actions and

determine outcomes

The MCAs (Model Concession Agreements) for different sectors, attempt to address the

unbundling and allocation of risks and propose associated risk mitigation measures based on

the above mentioned parameters. MCAs mention that ‘as an underlying principle, risks have

been allocated to the parties best suited to manage them.’27 Technical risks such as

construction, operation and maintenance are allocated to private sector developers as transfer

of such risks is likely to increase the scope of adoption of the best available technology and

spur innovative practices, which in turn would bring in cost efficiency and better service

delivery. Commercial risks such as the demand risks are also allocated to the concessionaire

under BOT Toll projects whereas direct and indirect political risks are allocated to the

government agency or the contracting authority implementing the project. A detailed table of

the different types of risks that have been identified in a PPP project development phase, as

provided in MCA is given in Exhibit 3.2. However, the following features of risk allocation are

observed in practice:

26 Please see, ‘Risk – A critical focus of PPP Design,’ PPP Toolkit for Improving PPP Decision Making Processes, Public Private Partnerships in India, Ministry of Finance, Government of India as retrieved from http://toolkit.pppinindia.com/ 27 Model Concession Agreement for National Highways, Secretariat for Infrastructure, Indian Planning Commission, Government of India as retrieved from http://infrastructure.gov.in/pdf/OverviewMCA.pdf


(i) Risks are often allocated to stakeholders not best suited to manage them

In many cases, the social and environmental risks and those associated with land acquisition are

directly or indirectly borne by the concessionaire. Such responsibilities, if given to the private

sector either cause delays in the project implementation and / or create negative impact on the

biodiversity.

The Hyderabad Outer Ring Road Project had faced delays because the private

developer had difficulties in acquiring land due to objections by the surrounding

community, especially farmers.

In the Gangavaram Port project, the risk of social impact was allocated to the private

sector developer. The port authorities had promised the fishing community in the

village nearby that they would provide the fishermen with jobs since the construction

of the port would affect their livelihood. However, the fishing community alleged that

the port authorities gave them only 292 jobs out of the 600 jobs promised. Several

people were denied jobs. Allocating the responsibility of providing employment to the

private developer might leave the community vulnerable to risk.

The Dhamra Port Project is located to the north of Gahirmatha Marine Sanctuary,

where around 2 to 5 lakh female Olive Ridley turtles nest every year. Although the port

site is not a nesting area, environmentalists are worried that the regular dredging

activities and industrial pollution could ruin the habitat of these turtles. Greenpeace

activists are also demanding the private developer to stop construction of the port.

These examples prove that the risks involved in land acquisition and other social and

environmental risks should be assessed and solved by the government.

(ii) Stakeholders fail to handle risks that are appropriately allocated to them.

Although concession agreements outline the allocation of risks to a specific partner, there are

cases where the partner fails to handle the allocated risk.

In Vizhinjam Port, the private developer (a foreign company) was responsible to get

statutory clearance from the Central Government for developing the project. However,

when it failed to get approval, the State Government attempted to get the necessary

statutory clearance for the private developer but was not successful.

The Concession Agreement for the Yamuna Expressway was executed in February

2003, but there was a 5-year delay in land acquisition. There was also failure on the part

of the state government to provide the private developer with project land on time.

In several Greenfield ports, traffic growth is often over-estimated. Private developers

face a high-demand risk due to lack of hinterland port connectivity. In some instances,

demand shortfall had to be compensated by further undertaking last mile connectivity

through feeder links in form of road and rail connectivity projects.28

(iii) Lack of uniformity among state governments in allocation of risks.

Initiatives taken by the state governments to build capacities for PPP, in the form of an act,

policy or a set of guidelines should also include identification of various project risks. The

28 Please see, ‘Background Paper on Port Connectivity in Gujarat,’ Deloitte Touche Tohmatsu India Pvt. Ltd., (2009)


details of the risks undertaken by state governments or the local authorities of various states are

given in Appendix I. Some inferences are based on these are given below:

(a) Some of the major risks are identified and borne directly by the state governments. These

include:

Facilitating the developer to obtain the clearances (statutory and environmental) from

state and central government as per the requirement of the project.

Provisions for rehabilitation and resettlement of the affected families.

Facilitating water and power requirements at the project site.

Facilitating land acquisition (wherever required).

(b) Though there is lack of uniformity among state governments in the allocation of risks, the

Karnataka Infrastructure Policy 2007 is an exception. It provides a detailed identification of

risks involved during project life cycle (of a BOT model), its allocation to parties best able to

handle them and the respective mitigation measures. It specifically emphasizes that the

government would acquire the land required for the project in case the private investors could

not obtain it. There is a clear distinction in the role of the Karnataka Government, compared to

the other state governments where the risk of land acquisition is initially transferred to private

developers. It is only when a private developer is not able to acquire the required land that the

government steps in to undertake the responsibility of land acquisitions and hence bear the

associated risks.

(c) A provision has been made by the Andhra Pradesh and Bihar government to assist the

developer to securitize the project asset and project receipts/revenue in favor of lenders to

safeguard the completion of the projects. Such a provision to identify debt risk is not included

in the policies, act or guidelines formulated by the other state governments.


Exhibit 3.3: Allocation of Risk and Mitigation Measures in PPP Projects

Source: Compiled from Modal Contract Agreements, Manuals and Guidelines on different sectors, DEA, Planning Commission, (GOI); various issues Note: EPC: Engineering, Procurement & Construction; O&M: Operations & Management; CA: Concession Agreement

S/N Risks Examples Risk Assigned/Risk

Bearer Risk Mitigation Measures

1. Project

Development Risk

Selection of right bidder

Statutory Clearance

Land Acquisition

Right of Way (Associated delay)

Risk of Inadequacy

[Error in the Request For Quotation (RFQ)]

Government/ Concessionaire

Selection of developer and transaction advisors through international/domestic competitive bidding

Consulting Professional Experts for preparing bid documents.

Encumbrance free land and Right of Way provided by government

2. Construction Period Risk

Project Design Risk

Risk of Innovation

Contractor Default

Damages to 3rd Party

Cost & Time Overrun

Change in Scope

Engineering Procurement Construction (EPC)

Contractor/ Concessionaire

Output specification instead of input specification

Sub-contracting individual components of project

3.

Operation Risk

Demand Risk

Revenue Risk

Concessionaire

Revision of user charges

Extension of concession period

Moratorium on construction/operation of competing projects by government or implementing agency.

Developer provided with the ‘right to first refusal’

Maintenance Standards

Injuries to Users

Operation & Maintenance (O&M)

Contractor/Contractor/ Insurance Company

Environmental Risks Government/Public

Termination Risks

Concession Agreement (CA)/Concessionaire/ Lead

Financial Institution

4. Financial Risk

Equity Sponsoring Authority/Investors

Project monitoring by lenders.

Lenders provided with the right to substitute the developer

Termination payment by the government/implementing agency

Debt Lead Financial Institution

Interest Rate/ Currency Risk/

Inflation

Concessionaire

VGF Disbursement Concessionaire, Lead Financial Institution,

Government

5. Regulatory

Risk

Direct Political Force Majeure

Termination of Concession by the Government.

Government/CA

State Support Agreement signed between implementing agency, concerned state government and private developer.


(B) Risk Mitigation

As discussed above, identification of risks and allocation of risk alleviation in an appropriate

manner is the first step to mitigate project risks. A robust concession agreement is required to

provide measures that will manage and lessen risks involved at each stage of a project. For

instance, upward or downward revision of user charges and/or extension of concession period

by a certain number of years if actual traffic growth happens to be less than the expected

growth in traffic. Such steps assure either party some degree of certainty in recovery of costs

incurred and initiation of steps to rectify shortfalls, if any. Thus, the private sector is protected,

as the extension of concession period would allow it to recover its investments along with

returns. Also, the government need not explore alternative measures to bail out the failed

projects. It is therefore important that adequate measures are inbuilt into the concession

agreements that balance risks to all stakeholders. However, it is equally necessary that the risk-

mitigating measures do not conflict with the basic features of a project and concession

agreement. For example, in a road project, if a concession agreement provides for an indefinite

extension of concession period and if the total project cost and returns is not recovered, then

the entire financial burden of the project is shifted to the users. It also defers the transfer of

project asset back to government at the end of concession period. More importantly, it dis-

incentivizes efficiency and cost management, which should be the primary benefits to accrue

due to a PPP.

Exhibit 3.3 classifies overall project risks into five broad categories, namely project

development, construction, operations, financial and regulatory risks and associated risk

mitigation measures.

Project development risks are normally shared between government, developers and the

consultants. Government bears the risk of identifying an appropriate project and selecting the

right bidder. Competitive bidding and consulting professional experts while preparing the bid

documents will minimize risks associated with poor structuring. Developers must bear the risks

of designing projects in line with the projected demand and other user requirements like service

quality and change in the scope of the project during later stages. Consultants will assist

government in preparing the project, the feasibility reports and also in scrutinizing detailed

project reports (DPRs) submitted by developers. They should also highlight the merits and

demerits of each proposal. Consultants face risk of penalty if they do not exercise adequate

diligence while preparing DPRs.

By assigning construction risks to private developers, the risks associated with time and cost

overruns are moved away from the government. The developers in turn lessen the construction

risks by sub-contracting part of the construction work to other private contractors. It is the

government’s duty to transfer the encumbrance-free land including ‘right of way’ to developers

before the construction due date. The risk of construction delay due to delay in transfer of land

by government is mitigated by providing monetary compensation to the developers. Further,

the SSA (State Support Agreement) between an implementing agency like NHAI, the state

government and the developer addresses the regulatory risks associated with the projects.

Government or the implementing agency also assists developers in obtaining all the necessary

infrastructure facilities and utilities, including water, electricity and telecommunication facilities.

The operational phase of a project covers the maximum length of the concession period and

hence involves a lot of uncertainty. A shortfall in demand is often a primary concern for

developers and there have been instances where actual demand fell short of the projected

levels. Two popular examples for this are the Tirupur Water Supply Project and the Vadodara-

Halol Expressway. If government decides to build a competing project, the concession


agreement stipulates compensation to the concessionaire of the existing project in case of

revenue loss. For example, the Concession Agreement of National Highway (NH) 45 Padalpur

Road Project, states that any additional toll way that is envisaged by government in future shall

not be opened for traffic before expiry of 8 years from the appointment date of current project.

It further specifies that, if additional toll way is commissioned after 8 years from the

appointment date, then the concession period shall be increased by half the number of years by

which such commissioning precedes the expiry of the concession period.29

Successful operation of a project by developer is crucial for safeguarding the interest of the

lending institutions. In order to protect lenders against the failure of developers to successfully

operate projects, concession agreements provide lenders with a right to substitute the

developer. Further, monitoring rights assigned to lenders enable smooth functioning of

projects. There are provisions for the termination of payment to lenders in the event of default

by government or due to force majeure like a non-political event or an indirect political event.

However no termination payment is made by government to the lenders in the event of default

by concessionaire.30

From studying the experiences in risk identification, allocation and mitigation in the

PPPs of commercial sectors, the following lessons can be drawn:

In the early stages of PPP projects in these sectors, government should be willing to

undertake major responsibilities in terms of budgetary support and other assistance.

The identification of risks should be made by taking into consideration the impact of

the project on all the stakeholders involved.

The allocation of the risks to the party best suited to manage them should be made

explicit in the DPR. This will allow the private and public sector to recognize their

roles and responsibilities before entering into a concession agreement. They will

further be able to decide upon their ability to influence the events of the project and

make provisions for alleviate unforeseen events.

The risk of land acquisition and statutory clearances should be taken by the

government. It should also take care of the risks of social and environment impact and

its clearance. This will lower the time delays and cost overruns.

User charges should be determined in a manner that balances the issue of access to

weaker sections of the society and the profit motives of the private developer. Further,

revision of user charges should be undertaken in a manner that protects the most

vulnerable sections of the society.

In case of the inability of the respective party to mitigate the risk, alternative measures

should be identified in consultation with the other involved stakeholders.

29 Please refer to Concession Agreement for Design, Engineering, Construction, Development, Finance, Operation and Maintenance of 4 Laning of Existing 2 Lane Section from KM. 285 (Near Padalpur) to KM 325 (Near Trichy) on NH-45 in the State of Tamil Nadu on Build Operate Transfer Basis,’ NHAI, Government of India, (2006).


6. Social Inclusion

True development must be inclusive of all vulnerable groups. The state has to keep in mind the

principles of justice - social, economic and political that is enshrined in the Constitution, if it is

to deliver the people’s rights and entitlements. The Planning Commission, in the 11th Five Year

Plan stated that a person’s individual endowment in the form of capital, labour and skill, along

with the access to public resources has a direct bearing on his/her current welfare in the short

run while determining his/her economic opportunities in the long run. In India, 25.7 % and

41.8 % of the population live below the poverty line in the urban and rural areas, respectively.31

The incidence of poverty is high among certain marginalized groups, e.g. scheduled castes and

tribes. With a significant proportion of people surviving at below subsistence level, there is an

urgent need to provide minimum needs to the poorest of the people.

Exhibit 3.4 describes the condition of the people, especially those who are socially and

economically marginalized in terms of access to basic amenities. There is an urgent need to

accelerate efforts to create an all-inclusive development strategy. As mentioned earlier, the

Planning Commission explicitly emphasized the need for ‘inclusiveness’ in the country’s growth

strategy in its 11th Five Year Plan document. Inclusiveness was meant to mobilize the marginalized

and make them active agents of their own development. They could play a key role in the very

design of the development process and can assist in bringing people in the mainstream of

development strategy. Expenditure by the government in areas like public health, water supply

and sanitation, and education has been increasing over the years but it is still not sufficient

compared to actual requirements.32 Even in these sectors the government’s current resources

may not be adequate to finance the overall requirement; hence additional resources may have to

be obtained from private participation through PPPs. Water and health within the social

sectors are sensitive issues as they are associated with an individual’s survival and hence require

a differential approach. Water being essentially a public and social good; every human being has

a right to water. Treating water as a commodity and pricing it based on market principles can

potentially jeopardize the basic human right to life especially of the most vulnerable sections of

the society. In order to ensure full realization of these human rights and guarantee welfare of all

citizens, the state obligation in necessary in delivering services in water and other social sectors.

Dwindling water resources in the country also call for the efficient use of water that may

require effective management of water resources through private initiatives. Hence, there is a

need to balance the cost recovery principle and profit motives with human rights. PPPs when

undertaken based on holistic perspective can possibly play an important role in addressing

issues concerning access, equity and quality of services.

PPPs in social sectors can enhance access to basic public amenities. Such partnerships should

be aimed primarily at efficient delivery of services from the existing government infrastructure

facilities. In order to make a long-term impact on the lives of the people, PPPs should be

undertaken through models that are sustainable as well as scalable. At present a large number of

NGOs are working in social sectors to enhance access to basic services by the people.

However, most of them are charity/donor based models and hence have limited scope for mass

implementation.

31 Please refer to ‘Report of the Expert Group to Review the Methodology for Estimation of Poverty,’ Planning Commission, GOI, 2009, for further details. 32 Government Expenditure on Higher Education has been projected to increase from 1.12 % during the 11th Plan period to around 1.5 % of GDP during the 12th Plan period. Similarly, govt. expenditure on Public Health is expected to increase from around 1.2 % during 11th Plan period to around 2.5 % of GDP during the 12th Plan period. Government expenditure on Water Supply & Sanitation has been

targeted to increase from ` 1,43,730 Crore to ` 1,73,730 Crore during the same period. Please see 11th & 12th Five Year Plan document, GoI.


Exhibit 3.4: Status of Provision of Basic Amenities to Public in India

Sector Status

Water Supply & Sanitation

Only 14.44 % of the rural habitations have pipe water supply facility.33

Only 30 % of the total sewage generated in the country is actually treated before being dumped into available water bodies.34

55 % of households have no access to toilet facilities (74 % in rural areas and 17 % in urban areas).35

Public Health

The Central and State governments together spend just 1.2 % of the GDP on public health with a target to increase it to around 2.5 % of the GDP during the 12th Five Year Plan period and gradually increase it to 3 % of the GDP by 2022.36

The availability of allopathic doctors, nurses and midwives is a mere 1.29 per 1,000 persons.37

There is a shortage of 19,590 sub centres, 4,252 PHCs and 2,115 CHCs.38

Infant mortality rate is as high as 50 per 1,000 live births.39

Education

Combined expenditure of the centre and state governments on education is only around 3.6 % of the GDP.40

Exhibit 3.5 attempts to classify provisioning of infrastructural services to the people on three

broad categories. The first category refers to the non-subsidized services that are priced to

cover the total cost of providing such services. Examples include telecom services, toll roads,

etc. End users are the source of revenue for such services. The second category includes

partially subsidized services with funds sourced from government, users and private sector.

Such cross-subsidized services are largely provided in sectors like health and education. Private

hospitals, where services to those who can afford it are provided at full-cost recovery pricing

whereas services to poor are provided at a subsidized rate with government compensating

private hospital for its loss of revenue. Lastly, completely subsidized services fall in the third

category wherein public health, primary education, waste collection services, etc. are provided

free of cost to people. Services in the third category are financed chiefly by government,

philanthropic and Corporate Social Responsibility (CSR) activities of private sector.

33 See, Results Framework Document, Department of Drinking water and Sanitation, Ministry of Rural Development, 2011-12. 34 Please see, ‘Draft 12th Five Year Plan Document,’ Planning Commission, GOI. 35 Please refer to State Environment Report, MoEF, GoI, 2009. 36 See, p.14, of ‘High Level Expert Group Report on Universal Health Coverage for India,’ Planning Commission, GOI, 2011. 37 See, ‘High Level Expert Group Report on Universal Health Coverage for India,’ Planning Commission, GOI, 2011. 38 Please refer to ‘Draft 12th Five Year Plan Document,’ Planning Commission, GOI. 39 See, http://planningcommission.nic.in/data/datatable/0211/data%20112.pdf 40 See, 11th Five Year Plan Document, Planning Commission, GOI.


Exhibit 3.5: Taxonomy of Provision of Public Services

With reference to Exhibit 3.5, the challenge is to identify existing as well as conceptual models

of PPP that can help the government to focus on the most deprived sections of society and

provide them basic services that are of good quality, within their reach and also affordable.

One model that can be potentially scalable is the Byrraju Foundation’s 4P (Panchayat Public-

Private Partnership) model of drinking water supply. With the 73rd and 74th amendments,

drinking water and sanitation are included in the list of subjects to be devolved to Panchayats.

Box 3.6 makes an attempt to map the stakeholders, their responsibilities and participation and

the functioning of the model.

The 4P model is a step ahead of the normal PPP model as Gram Panchayats (local village self-

governments) are involved in this partnership. The contribution from government is in the

form of provisions for free land, permission to draw raw water, subsidized power connection

and other regulatory approvals. The Byrraju Foundation bears around 50 % (sometimes 100 %)

of the cost for the equipments used for water treatment. It also trains the local people to

operate the plant. Technological aspects of the equipment are modified to allow the community

to operate the plant. Gram Vikas Samiti (Village Development Committee), comprising of 9

volunteers representing different sections of the society, monitors the activities of the project

on behalf of the community at the village level. (Purified water is provided to people at around

20-30 paise per liter.41 Hence, sustainability is ensured by collection of user charges for

operations and maintenance of the project.

41 One paise is the hundredth part of Indian Rupee.

I

I, II

II, III

Type Description Source of funds Sectors

I Non-

subsidized Paid by the end user

Transport, Utilities

II Partially

subsidized

Other users

Government

Private sector

Health, Education

III Fully

subsidized

Government

Private sector – philanthropists, donor foundations, CSR etc

Primary Health, Primary

Education, Waste

collection


With limited financial powers and with local bodies to raise resources through taxation or other

means, such models can be useful in addressing the basic needs of the public like drinking

water. There is a need to provide support and environment for PRIs or local communities to

manage their own drinking water sources and systems, and sanitation in their villages.

Box 3.6: The 4P Byrraju Model of Drinking Water Supply

The 4P model is a step ahead of the normal PPP model as Gram Panchayats (local village self-

governments) are involved in this partnership. The contribution from government is in form of

provision of free land, permission to draw raw water, subsidized power connection and other

regulatory approvals. The Byrraju Foundation bears around 50 % (sometimes 100 %) of the cost of

equipment for water treatment and also trains the local people to operate the plant. Technological

aspects of the equipment are modified to allow the community to operate the plant. Gram Vikas

Samiti (Village Development Committee), comprising of 9 volunteers representing different sections

of the society monitors activities of the project on behalf of community at the village level. (Purified

water is provided to people at around 20-30 paise per liter. Hence, sustainability is ensured by

collection of user charges for operations and maintenance of the project.

With limited financial powers with local bodies to raise resources through taxation or other means,

such models can be useful in addressing the basic needs of the public like drinking water. There is a

need to provide enabling support and environment for Panchayati Raj Institutions (PRIs)/ local

communities to manage their own drinking water sources and systems, and sanitation in their villages.


7. Sustainability

The Eleventh Plan followed a strategy to meet the infrastructure needs by supplementing the

public sector resources with that of the private sector in the form of PPPs. The Twelfth Plan

continues to implement the strategy and also emphasises the need to further explore the scope

of PPPs in the development of the social sectors. While infrastructure has its benefits of rapid

and inclusive growth, it also has another facet of creating pressures on environment. Exhibit 3.6

lists the Acts that govern the environmental impact of projects.

Exhibit 3.6: Environmental Acts by MoEF

The Air (Prevention and Control of Pollution) Act 1981,amended 1987

Forest (Conservation) Act 1980, amended 1988

The Environment (Protection) Act 1986, amended 1991

The Public Liability Insurance Act 1991, amended 1992

The National Environment Tribunal Act, 1995

The National Environment Appellate Authority Act, 1997

The Wild Life (Protection) Amendment Act, 2002

Biological Diversity Act, 2002

(i) Details of EIA and the Process of Environmental Clearance

In 1994, Environment Impact Assessment (EIA) notification imposed “restrictions and

prohibitions on the expansion and modernization of any activity or new projects being

undertaken in any part of India unless environmental clearance has been accorded by the

Central Government or the State Government in accordance with the procedure specified in

that notification.42”

EIA is an important tool to ensure the optimal use of natural resources for infrastructure

projects. Its purpose is to identify, examine, evaluate and lessen the adverse impacts of a

proposed project on the environment and carry out remedial activities.

The general format of an EIA in the infrastructure sector is as follows:

1) Scoping of the Project: Where the Environment Assessment Committee (EAC)

addresses a detailed Terms of Reference (ToR) providing all the relevant environmental

concerns that a project may face based on its scope, which is categorized as

modernization, expansion or Greenfield. All these concerns are broadly realized, sector-

wise, by the EIA Guide. A brief of these have been detailed in Exhibit 3.7.

2) Public Consultation: It refers to the process by which the concerns of the people

affected by the project and others who have a plausible stake in the environmental impact

of the project are consulted to understand their existing and future concerns.

3) Appraisal: It includes detailed scrutiny by the EAC of the application of the project and

other related documents submitted for the grant of environmental clearance.

Appendix III gives further details regarding the contents of an EIA report.

42 Environment Impact Assessment Notification, Ministry of Environment and Forest, the 27th January 1994, New Delhi - http://moef.nic.in/divisions/iass/notif/notif.htm

http://moef.nic.in/divisions/iass/notif/notif.htm


Exhibit 3.7: Impact of Development of Different Infrastructure Projects on Environment

Sector Air Water Land Biodiversity

Airports

Growing aircraft traffic

associated with growing

emissions of CO2.

Not Available (NA) NA Growing air traffic,

growing amount of noise pollution

Ports43

Emissions from

construction equipment,

work vessels, trucks and

other vehicles used cause

air pollution.

Ships are a possible

source of airborne

emissions such as gases,

smoke, soot and fumes.

NO2 and SO2 are typical

pollutants generated by

ships while both

maneuvering and berthing

and may affect air in the

hinterland.

Deposition of

construction work

causes an increase

in the level of

suspended solids

and reduces the

sunlight penetration

for the organisms.

Discharges and

spills from Ships

such as oils,

lubricants, fuels,

sewage and garbage.

Sand erosion

Discharges from the

ships cause damage to

the marine and

coastal ecology.

Dust dispersion on

land due to

construction may

change the terrestrial

habitat, affect the

health of the port

workers and the local

people engaged.

Roads44

GHG emissions across

sectors (comparison

between road and rail).

Hence, use of low carbon

transport. Shift from

passenger vehicles to

public transport.

NA NA NA

Power

CO2 emissions by the

power sector. Its

percentage compared to

the total CO2 emissions.

Use of potable

water for power

projects (Mundra

and Barmar)

NA NA

Water

Supply NA

Availability of water

in India

Use of water for

different purposes

– Domestic,

Industrial, Irrigation

and Others.

Growing

population and

growing demands

for drinking water

supply.

NA NA

SWM45

Percent of total GHG

emissions by waste – p.

24 of IPC CC Report

Waste water

generation.

Different categories

of wastes dumped

on land.

Solid waste

generated in major

cities of India

associated with

growing population.

NA

43 Please refer to (http://www.unescap.org/ttdw/Publications/TFS_pubs/Pub_1234/pub_1234_ch2.pdf). 44 Please refer to (http://planningcommission.nic.in/reports/genrep/Inter_Exp.pdf). 45 Please refer to (http://moef.nic.in/soer/2009/SoE%20Report_2009.pdf).


Even though, a comprehensive framework has been laid down by the state and central

government as per the outline provided by the MoEF to provide environmental clearances,

there have been some projects which cannot be considered to be environmentally sustainable.

For instance, the Tirupur Water Supply and Sewerage Project did not pay adequate attention

towards environmental concerns. The project did not integrate the effluent treatment of

industrial discharge that is fundamental to prevent further damage to water bodies and

environment. Used water from textile units with high salt content was discharged directly into

River Noyyal, which adversely impacted the agricultural lands in the surrounding areas.

Effluents were also discharged into River Nallar that stagnated in the riverbeds and percolated

into the groundwater. Moreover, Orthupalayam Dam that used to irrigate around 500 acres of

agricultural land has now been reduced to storing industrial waste from textile units.46

(ii) Water

There have been instances where potable water is used for construction purposes. This has

caused ground water to deplete by 4 cm/year between 2002 and 2008 in the Northern States of

India. There is lack of coordination between the competing uses of water and there is no

regulation on ground water use. Absence of rational pricing of water has increased its misuse.

Also, the Water Users Associations (WUA) members are not adequately involved in solving

matters relating to the use of water.

46 Please see, ‘Tirupur Water Supply and Sanitation Project: An Impediment to Sustainable water Management?’ R. Madhav, IELRC Working Paper 2008-01. One international acre is equal to 4046.85 square metres.

Box 3.7 Navi Mumbai Airport

The Navi Mumbai Airport suffered primarily due to environmental issues and lack of clarity in

the scope of the project. The airport took more than three years to get environment clearance.

The project was stalled as potential environmental losses were substantial. Destruction of

mangroves, threat to the recourse of the Ulwe River and noise pollution affecting avian

population of the Karnala and Matheran Hills, were the prominent concerns.

Amendments were made in the Coastal Regulation Zone’s notifications to accommodate the

implementation of the airport accompanied by the mitigation of environmental risks faced by the

surrounding ecosystems. Amending existing environmental laws are certainly not the best way to

mitigate threats to environment. Several visits were made by the MoEF and the Expert Appraisal

Committee to get detailed insights into the impact of noise pollution on the aviation habitat of

the Karnala and Matheran hills, on the recourse of the Ulwe River, mangrove forests and the

revised quality of water and ecology.

However, attempts were made to incorporate the needs of the public addressed in a public

hearing conducted on the development of the port. Since their livelihood was going to be

affected, attempts were made to resettle them.

1997 2000 2006 2009

Technical Economic

Feasibility Study carried

out

MoCA examined the

locations

•CIDCO submitted

the report

• Asked to carry out

the simulation study

to establish conflict free operation of the

two airports

2001 2007 2008 2010

The Union Cabinet granted ‘in

principal’ for development of

Greenfield airport at Navi Mumbai

on PPP

Made application to Ministry of environment and forest (MoEF)

for environmental clearance

Fresh application of

ToR to carry out

EIA was done

Simulation Study

carried out by

Technical Co-

operation Bureau

(TCB)

Committee

recommended for

international airport

with two runways

Sept. - CIDCO revised its proposal

GoM approved

CIDCO as the

nodal agency

Nov. – EAC and

CRZ clearance

granted


(iii) Air

The State of Environment Report, 2009 issued by the MoEF has emphasized the further rise of

Carbon Dioxide emissions in India which would continue over the next few decades. The

major cause of these emissions is the power sector and its large dependence on coal (about 78

% of country’s total production). Nearly 70 % of the electricity produced in India is via thermal

units and coal continues to be the main fuel source.

In 2006-07 India emitted 492.53 million tonnes of Carbon Dioxide compared to 382.32 million

tonnes in 2000-01. Although, India’s share in global CO2 emissions was 5 % in 2007, which is

minimal as per her population size, there is still a need to explore alternative sources of energy

generation.

Fig. 3.2: Region–wise CO2 Emissions by Power Sector in India (in million tonnes

Source: Table 2.2.3: Total Absolute Emissions of Co2 (Million Tonnes/ Year) From the Power Sector by

Region for 200-01 to 2006-07, State of Environment Report - India, 2009, MoEF

(iv) Forest

According to The Food & Agricultural Organization (FAO), the annual rate of deforestation in

India in the past decade (2001-10) has fallen to 5.2 million hectares, compared to 8.3 million

hectares in 1991-2000. Some countries like China, Norway and India and have increased the

area under forest cover at an annual rate of 1.6 %, 0.8 % and 0.5 %, respectively.47

Mangroves are important for the country’s ecology as they form not only a habitat for diverse

marine and terrestrial flora and fauna, but also in a socio economic context that is by

provisioning timber wood, fodder, medicines and honey to people. However, the area under

mangroves cover reduced from 4737 sq. km in 1997 to 4581 sq. km in 2005.

Other Initiatives

The National Urban Transport Policy, 2006 emphasizes on the different modes of transport,

mainly public transport (and the use of electrical transport) developed through cleaner

technologies to reduce the vehicular pollution. The policy has also been stressed on in the State

of Environment Report 2009 by the MoEF. United Nations Environment Program (UNEP)

has named India as the second largest contributor of CO2 emissions from the transport system.

An initiative is being made by UNEP, keeping into account the country’s goals on Climate

Change to promote low carbon transport in India.

47 The Economist Online, ‘The State of the World’s Forests’, February 11th 2011, GMT 11:01 - http://www.economist.com/blogs/dailychart/2011/02/worlds_forests

0

20

40

60

80

100

120

140

160

180

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

North East South West North-East

http://www.economist.com/blogs/dailychart/2011/02/worlds_forests


Section – IV

Conclusion and Future Measures

India has come a long way from its earliest attempts at bringing in private participation in

infrastructure and public services. As discussed in this report, the first PPPs were instituted

primarily to bring in funds from the private sector to finance much needed infrastructure. This

experience has enabled a gradual maturing of the rationale of PPPs as a mode to leverage

private sector capacity to innovate and deliver higher quality of service, especially in social

sectors like health and education that desperately need an injection of quality in delivery.

Evidence of success of PPP projects is mixed at best – both within India and at an international

level. Yet it is important to realize that PPPs still have the potential to play an important role in

delivering much needed public infrastructure and services. Results vary in potential due to the

structural and institutional inefficiencies that needs to be addressed. This report attempts to

capture the lessons that can be drawn from existing experiences in commercial infrastructure

sectors. This is the first phase of our larger research projects that attempts to build guidelines

for enhancing the quality and efficiency of the next wave of PPPs – one that is likely to address

more complex sectors, involve greater stakeholder participation, more scrutiny and greater

impact.

The next phase of our research project by Athena Infonomics involves identifying the potential

for PPP in select social sectors – skill development, water and solid waste management.

Through a mix of detailed case studies mapping different models, interviews, conferences,

workshops and secondary research, a set of issues and challenges faced by these sectors would

be identified. Next, we intend to use the principles and success factors developed in this report

and apply them to solve the challenges that have been identified for each sector. We are

cognizant that some of the problems facing these sectors – pricing for water, for example – are

entrenched in the sector specific context that is perhaps not amenable to a solution through

only a PPP approach. The key point is that PPPs are not a panacea for all ills facing a variety of

sectors, but instead, simply a tool, albeit a powerful one, to unlock critical bottlenecks that have

caused a chronic deficit in the quality of service delivery in these sectors.


Appendix I

Issues and Challenges faced by Public Private Partnerships

Public Private Partnerships have increasingly emerged as a preferred and viable mode for building much needed infrastructure in the country. As part of our study on understanding the issues and challenges faced by Public Private Partnerships and identifying lessons that can be drawn from existing experiences, we would appreciate if you could fill in the following brief questionnaire

Respondent’s Profile

Name

Designation

Company/Organization

Email

Mobile

Section A: Common Questions

1) Please score the stages of a PPP Project based on the criticality of the issues faced. (From 1 to 5, 1 being the most critical and 5 being the least critical)

1 2 3 4 5

Project Identification

Bidding

Financial Closure

Construction

Operations & Management/ Maintenance

2) Please tick the top five critical issues faced by you during a PPP Project lifecycle

Obtaining clarification on bidding parameters

Output specification of the project

Coordinating with the Government

Poor coordination among the central and state agencies

Securing finance for the projects

Availability of foreign currency denomination funds

Determination of user free/ tariff

Poor project governance

Land acquisition and other obtaining mandatory clearances

Dispute settlement mechanism

Lack of independent regulatory authorities in some sectors

Slow progress of ancillary set – ups

Others : __________


3) Please rate the sectors on a scale of 1 to 5 based on their commercial viability.

(A score of 1 implying least viability and 5 being highly viable)

S/N Sector Score S/N Sector Score

i. Roads vii. Tourism

ii. Ports viii. Water Supply & Sanitation

iii. Airports ix. Waste Management

iv. Power x. Education

v. Railways xi. Health Care

vi. Telecom

4) Please assign a score to the following states based on their investment attractiveness for

PPPs (A score of 1 implying least attractive and 5 being most attractive)

5) Please identify the different roles/ initiatives of carried out by the government during a PPP project that needs improvement to make the PPP environment more private-sector friendly:

Draft National Public Private Partnership Policy

Broader shelf of projects across sectors/ states

Provision of Model Concession Agreements for all sectors

Provision of Guidelines to select Consultants

Provision of Bid Documents – Request for Qualification / Proposal

Enhanced Role of PPP Appraisal Committee

Access/ Timely Disbursement of VGF

Monitoring & Evaluation 6) How useful do you find the MCA in drafting the actual terms of contract?

Very Useful

Useful

Neutral

Not Useful

No Opinion

7) Is fast track approval accorded to projects that adhere to the MCA as promised by the Government?

Yes

No

Don’t Know

States Score States Score

Andhra Pradesh Maharashtra

Gujarat Rajasthan

Karnataka Sikkim

Kerala Uttar Pradesh

Madhya Pradesh Tamil Nadu


8) Should the Swiss Challenge Approach (SCA) restriction be relaxed by the Central

Government for certain sectors?

Yes

No

No Opinion

9) Have output based specifications enabled better delivery of service?

Yes

No

Don’t Know

10) How satisfied are you with the handling of disputes by the government?

Very Satisfied

Satisfied

Neutral

Dissatisfied

Strongly Dissatisfied

11) In the Water Sector, which areas are most likely to attract private sector investments?

Bulk water supply in industrial and city areas

Water supply in rural areas

Water supply on user charge basis

Water supply on annuity basis

Others 12) In the Education sector, which areas are most likely to attract private sector investments?

Primary Education

Higher Education

Research and Development

Skill Development

Others

13) In the Health Sector, which areas are most likely to attract private sector investment?

Primary Health Centres

Managed Hospitals

Diagnostic Services

Others

14) Do you consider that the Draft National PPP Policy recognizes the different nature of PPP Projects in the social sectors?

Yes

No

No Opinion

15) Is the VGF criterion of 40 % sufficient to attract private sector in Social Sectors?

Yes

No

No Opinion


Section B: For Financial Institutions

1) Which is the most severe constraint faced by the banks when it comes to lending for infrastructure projects under the PPP mode?

Information Asymmetry

Collateral requirement

Exposure ceilings stipulated by the RBI

Repayment risk

Asset Liability Mismatch

Lack of developed bond market

Other : _____________

2) How timely is the disbursement of VGF from the government?

On time

Usually on time

Sometimes delayed

Delayed

No opinion

3) In the event of a default by the concessionaire, is it easy to revoke the ‘right of substitution’?

Yes

No

Don’t know

4) In the event of a default by the concessionaire, is it easy to revoke the ‘right of substitution’

Yes

No

Don’t know

5) Do you prefer projects with VGF funding?

Yes

No

No opinion


Fig 1: Criticality of Issues Faced during different Stages of a PPP Project

Fig 2: Attractiveness of Private Investments towards various areas of Health

Sector

Project Identification

Bidding Financial Closure

Construction Operations & Maintenance / Management)

Not critical

Less Critical

Neutral

Critical

Most Critical

0% 10% 20% 30% 40% 50% 60% 70% 80%

Others

Primary Health Centres

Diagnostic Services

Managed Hospitals


Fig 3: Attractiveness of Private Investments towards Various Areas of Water Sector

Fig 4: Attractiveness of Private Investments towards Various Areas of Education Sector

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Others

Water supply in Rural Areas

Distribution of Water

Treatment of Water

Bulk Water Supply in Industrial & City Areas

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Others

Research & development

Primary Education

Skill Development & Training

Higher Education


Fig 5: Investment Attractiveness towards Various States

Fig 6: Usefulness of the MCAs

0 1 2 3 4 5

Kerala

Sikkim

Uttar Pradesh

Madhya Pradesh

Andhra Pradesh

Rajasthan

Maharashtra

Karnataka

Tamil Nadu

Gujarat


Fig 7: Impact of Output based Specifications on Better Delivery of Services

Fig 8: Fast Track Approval to Projects


Fig 9: Relaxation of Swiss Challenge Approach

Fig 10: Experiences of Private Sector in Handling Disputes with Government


Fig. 11: Recognition of the Social Sectors in Draft PPP Policy

Fig. 12: Sufficiency of 40 % as VGF to Attract Private Investments in Social Sectors


Fig. 13: Commercial Viability of various Sectors

Fig. 14: Most Critical Issues Faced by PPP Projects

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

Waste Management

Water Supply & Sanitation

Education

Health Care

Railways

Airports

Tourism

Power

Ports

Telecom

Roads

0% 50% 100%

Availability of foreign currency denomination …

Others

Poor project governance

Determination of user fee/ tariff

Obtaining clarification on bidding parameters

Poor coordination among the central and …

Land acquisition and other obtaining …


Fig. 15: Initiatives Taken by the Government that Needs Improvement

Fig. 16: Difficulties in Financing Social Sector Projects

0% 10% 20% 30% 40% 50% 60% 70% 80%

Provision of Guidelines to select …

Others

Enhanced role of PPP Appraisel …

Access/ timely disbursement of VGF

Enchanced Monitoring & Evaluation

Broader shelf of projects across sectors/ …

Provision of Model Concession …

Draft National Public Private …

Greater clarification of bid documents - …

0% 10% 20% 30% 40% 50% 60% 70% 80%

Commercial Viability

Sensitivity of the sectors

Sustainability issues

Lack of prior exposure/ experience

Availability of appropriate financial instruments


Appendix II

Risk Sharing Mechanism – A Review of Select States

State Governments’ Act/ Policy/

Guideline

Identification of Risk, Allocation & Mitigation

Andhra Pradesh Infrastructure

Development Enabling Act, 2001

(Clause 28-31) The State Government Agency or the local authority would provide all facilities to the developer in obtaining statutory clearances, water and power required; and provides best effort support to obtain central government clearances and assistance in rehabilitation and resettlement activities. Disclosure of Generic risks and allocation will be provided in the concession agreement. The State Government may facilitate the developer to securitize project revenues and assets in favor of lenders to safeguard successful completion of the project The lenders will be given the right to cover dues from the developer in the form of user charges and upon default by the developer, can substitute the developer upon consent from the government.

Assam Policy on Public Private Partnership in

Infrastructure Development

(Clause 8 – State Support Agreement) Political Support/ commitment from the government that the project and its assets will not be nationalized during the concession period. Facilitate acquiring of the land necessary for project. Assistance in R&R of affected families. Facilitate in obtaining state and central government clearances. Facilitate provision of supply of power and water at project site.

Bihar Infrastructure Development Enabling

Act,2006

Same as that of Andhra Pradesh

Karnataka Infrastructure Policy, 2007

(Schedule I & II) The policy very comprehensively identifies the risks for each of these stages of a PPP Project, to whom this risk is allocated and ways to mitigate the following: Project Development Period, Construction Period, Operations Period, Financing Risks &Other Risks. The role and responsibilities of each institution has been outlaid very specifically, namely

Government of Karnataka (GoK)

Infrastructure Development Department, GoK

High Level Committee

Single Window Agency

PPP Cell & District PPP Cell

Infrastructure Development Corporation (Karnataka) Limited

Guidelines for Public Private Partnership

Projects in the State of Madhya Pradesh

(Clause 9) Implementing Agency will meet the cost of the following items – Feasibility Study and preparation of Project Report Land for Right of Way and enroute facilities Clearance of the Right of Way: Relocation of utility services, R&R and affected establishments Environmental Clearances

Orissa Public Private Partnership Policy 2007

(Clause 7.2) State Government shall offer necessary administrative support – Facilitate obtaining state and central government clearances Facilitate R&R Provision of supply of power and water at projects Facilitate acquiring land


Appendix III

Generic Structure of the Environmental Impact Assessment Document

Category Features

Project Description

Location of the project with various geographical aspects

(latitudes, district, natural resources, etc )

Activities to be undertaken for development of the project

Existing traffic and future predictions

Details of the SPV, project cost &PPP type

Status of land Acquisition

Facilities or services to be provided

Rehabilitation and resettlement of the existing community

and wildlife

Analysis of

Alternatives

Evaluation of the alternative use of natural resources,

technology and site

Description of

Environment

Existing quality of land, water and air

He used to have a beautiful biological environment (Eco

system and the respective habitat)

Socio-economic environment

Waste management

Impact Analysis

and Mitigation

Measures

Prediction of the impact during construction and operational

phase and risk analysis

Avoid/ mitigate/ control adverse environmental impact

Provide remedies and disaster management plans

Environmental

Monitoring

Program

Technical aspects of monitoring the mitigation measures-

Parameters of monitoring

Frequency of measurement

Analysis of environmental impact

Submission of the environmental statement semi-annually

Socio – Economic

Project Benefits

Provision for additional employment and revenue generation

Triggering growth in the region and improvement in the

quality of life

Development of ancillary industries and trade centers

Safety awareness

Environmental

Management Plan

A separate environmental cell to oversee implementation of the

EMP-

Monitor the effectiveness of mitigation measures

Ensure efficient operation of mitigation measures

Establish systems and procedures for this purpose

Take any necessary action when unforeseen impact occurs


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Case Study: India,’ (2010).

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Gujarat,’ (2009).

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Rural Development, Government of India, (2011).

Department of Economic Affairs, Ministry of Finance, Government of India

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McKinsey & Company, ‘Building India: Accelerating Infrastructure Projects,’ (2009).

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P. Pangotra, ‘Case Study of Delhi – Mumbai Freight Corridor (IIMA),’ National Strategy for

Promoting Low Carbon Transport in India, (2011).

R. Govinda et al., ‘Access to Elementary Education in India: Country Analytical Review,’

NUEPA, (2008)

State of Environment Report – India 2009, Ministry of Environment & Forests, Government

of India, (2009)

The State of Environment – India 2001, Ministry of Environment and Forests, Government of

India, (2001)

World Bank, ‘The Nexus between Infrastructure and Environment,’ (2007)


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