Public Private Partnership (PPP) on Infrastructure
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Transcript of Public Private Partnership (PPP) on Infrastructure
LEGAL ASPECTS OF BUSINESS
A case assignment on the topic “Public Private Partnership (PPP) – A Boon for providing Infrastructure”
Submitted to Prof I.Sridhar
By
Senthilkumaar D 2014PGPM047
towards partial fulfillment of the Legal Aspects of Business Course,PGP Mumbai, IIM Indore, 2014-16.
INTRODUCTION:Public Private Partnership (PPP) is a partnership contract between a government authority and a private entity through which the private party provides a public service or undertakes a public project and assumes substantial financial, technical and operational risk in the project.
CONCEPTUAL DISCUSSION: The Planning Commission of India categorizes infrastructure into the following 10 sectors: • Electricity • Roads and Bridges • Telecommunications • Railways • Irrigation • Water supply and Sanitation • Ports • Airports • Storage• Oil and Gas pipelines
The PPP model is enumerated to all the infrastructural sections. PPP includes from a short term management contract to a long-term contract that includes funding, planning, building, operation, maintenance.
DEFINITION OF KEY TERMS IN PPP (definitive terms cannot be modified and hence reproduced as same as in the source)Concession contract is a contract signed by the concession grantor on one hand and the concessionaire on the other hand, and which includes provisions on the mutual rights and obligations connected with the use of the concession.Concession fee is the fee which the concessionaire pays pursuant to the concession contract.Concession grantor is a body or legal person which is competent to grant a concession under the Concessions Act.
Concessionaire is any natural or legal person with whom the concession grantor signs a concession contract.Contractual public-private partnership is a PPP model where the mutual relationship between a public and a private partner is regulated by a contract on public private partnership as a concession model or as an operative lease model.Cost-benefit analysis is an economic analysis method which is used to compare and evaluate all advantages and all disadvantages of an economic undertaking or project through an analysis of all costs and benefits.Decision on the selection of the most economically advantageous tenderer is an administrative act passed by the concession grantor on the proposal of an expert commission for concessions, following an evaluation of the tenders submitted for the award of concession and in accordance with the tender documents and the criteria for the selection of the most economically advantageous tender.Depreciation is a gradual decrease in the value of an undertaking's assets.Discount factor or present value factor is a mathematical expression for calculating the discounted (present) value of an amount. It is also called the decumulation factor. It is the reciprocal value of the interest factor. Feasibility study is a document which helps the investor decide on an investment by answering the question whether a particular project is feasible in terms of the situation on the market and financially.Fiscal risk is a risk that the public sector will not be able to timely fulfill the obligations assumed.Institutionalized public private partnership is a PPP model based on the membership relationship between a public and a private partner in a jointly owned undertaking which is the competent authority responsible for the implementation of the PPP project.Internal rate of return is the discount rate which reduces pure cash flows over the entire lifespan of effectuating an investment to the value of the initial cost of investment. It is also called the internal rate of profitability. It is the discount rate where the pure present value of an investment value equals zero. PPP contract is a basic contract concluded between a public and a private partner, or a public partner and a Special Purpose Vehicle (hereinafter: SPV) which, for the purpose of implementation of the PPP project, regulates the rights and obligations of the parties to the contract.PPP project is a project carried out in accordance with one of the PPP models
which, based on the procedure specified in the Act on Public Private Partnerships, is approved by the Agency.Private partner is an economic operator selected based on the completed public procurement procedure or the procedure for the selection of a concessionaire which is awarded a PPP contract by the public partner, or which establishes an SPV for that purpose, or which establishes a membership relationship in a joint undertaking with the public partner.Procedure for the selection of a private partner is the public procurement procedure laid down in the regulations governing the public procurement procedure or the concession award procedure laid down in the regulations governing concessions.Project consists of a series of interconnected activities performed in a particular order with a view to achieving clear objectives within a given period of time and with resources assigned for the purpose.Public body is anybody which is the contracting authority within the meaning of the regulations governing public procurement.Public partner is one or more public bodies concluding a PPP contract with an SPV or a private part undertaking.Public private partnership is a model of long-term contractual partner relationship between a public and a private partner which may involve financing, design, construction, operation and/or maintenance of infrastructure and/or provision of services by the private partner, which are traditionally procured and provided by the public partner.Public Sector Comparator (PSC) is a comparison of the planned costs of the application of the public private partnership model versus the classic (budgetary) model of funding of all costs of the implementation of the project over the whole proposed term of the contract.Public services concession means a contractually regulated legal relationship the subject-matter of which is the performance of one or more services which are in general interest and which are laid down by law regulating a specific concession or listed in Annex II of the legislation regulating public procurement, if the consideration for the provision of services consists either solely in the right to exploit the service or in this right together with payment.Public works concession means a contractually regulated legal relationship the subject matter of which is the performance of works or design, or both, and which
relate to one or more of the activities laid down by law regulating a specific concession or listed in Annex I of the legislation regulating public procurement, if the consideration for the works to be carried out consists either solely in the right to exploit the work or in this right together with payment.Return on assets (ROA) is a return on invested capital, an indicator of the profitability of assets. It is calculated by using one of the values which shows the return in the numerator and dividing it by its total assets, and then multiplying it by 100.Special purpose vehicle (SPV) is an undertaking which may be founded by a private partner for the purpose of concluding a PPP contract and/or implementing a PPP project.The most economically advantageous tenderer is a tenderer who was selected as the most economically advantageous in the selection process according to the selection criteria stated in the invitation to tender or in the tender documents.Time value of money is a concept where money at present time is worth more and is preferred more than nominally the same amount of money at some future time. It is based on the possibility to invest money at present time to be increased in the future.Value for money (VfM) is an index of the relationship between the price of a particular product of service and its usability for the user.
TYPES OF PPP MODEL:There are different types of PPP model relationship between the government and the private entity namely:
Design-Build (DB): The private entity designs and builds the infrastructure to meet the specifications of the government for a fixed price assuming all the risks.
Operation & Maintenance Contract (O & M): The private entity operates the government assets for a specific time period under contract and thereby the government retains ownership of the assets.
Design-Build-Finance-Operate (DBFO): The private entity designs, finances and constructs, operates and maintains a new infrastructure under a long-term
lease. The private entity then transfers the infrastructure to the government when the lease is up.
Build-Own-Operate: The private entity finances, builds, owns and operates the infrastructure indefinitely under the constraints of the government that are stated in the original agreement and through on-going regulatory authority.
Build-Own-Operate-Transfer: The private entity is granted authorization to finance, design, build, operate, maintain and charge user fees for an infrastructure for a specific time period after which ownership is transferred back to the government.
Buy-Build-Operate (BBO): The government owned assets are legally transferred to a private entity for a designated time period under the contract between them.
Build-lease-operate-transfer: The private entity designs, finances, builds and operates an infrastructure on leased government land for the duration of the land lease. When the lease expires, assets are transferred to the government.
Operation License: The private entity is granted a license to operate a public service for a specified term. This model is often used in IT projects.
Finance Only: The private entity funds the infrastructure and charges the government an interest for use of the funds.
STEPS TO INITIATE PUBLIC PRIVATE PARTNERSHIP (PPP):
STEP 1: STRATEGIC PLANNING1. Strategies adaptation to select a good project2. Design and implementation of the strategy
STEP 2: DETERMINING AND SELECTING THE MOST APPROPRIATE IMPLEMENTATION SOLUTION
1. Determining the implementation goal
2. Choosing the solution3. Project team formation
STEP 3: DECISION ON USING THE PPP MODEL1. Approval of the PPP model usage2. Market research on the potential investors’ interests
STEP 4: DRAWING UP AND APPROVING TENDER DOCUMENTS1. Drawing up contract papers2. Checking and approval of tender documents
STEP 5: IMPLEMENTING THE PUBLIC TENDER PROCEDURE, SELECTING THE PRIVATE PARTNER AND CONTRACTING
1. General remarks on the contract2. Negotiated procedure with prior publication of the contract notice3. The dialogue competition
STEP 6: IMPLEMENTATION OF THE CONTRACT1. Obligations after contract signing2. Contract implementation3. Resolving disputes4. Company’s rights and obligations
STEP 7: THE END OF A CONTRACT (BY TERMINATION OR EXPIRY)1. Time expiration2. Performance inability3. Contract termination4. Termination by the parties will5. Contract termination by mutual agreement6. Unilateral termination pursuant to the contract7. Termination on the law basis8. Unilateral termination
a) Termination by default reasonb) Termination by changed circumstances reasonc) Termination by law force
9. Termination effects
IMPLEMENTATION OF EXISITING SYSTEM IN INDIA
ELIGIBILITY OF A STATE OR CENTRAL TO PROMOTE PPP:
Department of Economic Affairs is facilitating Public Private Partnerships through Technical Assistance from Asian Development Bank. The primary objective is effective implementation of the PPP cells to the selected entities at the Center and State level. The States wishing to avail this Technical Assistance are required to enter into an MOU with DEA detailing steps that would be taken to promote PPPs in the State.
The MOU requires the State Government to:
1. Set up a PPP Cell as the nodal agency for processing all PPP projects in the State with a PPP Nodal Officer and defined scope of work.
2. Develop a robust shelf of PPP projects and adhere to the set of target levels of PPPs in the State.
3. Establishing policies, regulatory and governance frameworks in the identified infrastructure sectors to enable transparent and effective private sector participation.
4. Prepare a "Plan of PPP projects" in accordance with the Annual Plan.5. Commit to
(i) adopt standard concession agreements for PPP projects in defined infrastructure sectors;
(ii) adopt competitive bidding procedures for bidding and awarding of infrastructure projects under defined rules and procedures according to best international commercial practices and GOI guidelines;
(iii) designate a State-level dispute resolution mechanism for the speedy resolution of disputes relating to PPP projects; and
(iv) Adopt formal State policies on environment, resettlement and social safeguards with respect to the implementation of infrastructure projects, according to best international commercial practices.
INDIAN STATE FRAMEWORKS FOR PPP:
State Framework for PPP
Andhra Pradesh The Andhra Pradesh Infrastructure Development Enabling Act, 2001 is to facilitate greater private sector participation in infrastructure projects.
Assam The Assam Policy on Public Private Partnership in Infrastructure development proposes to bring in private sector investment with the PPP mode as the preferred approach for infrastructure projects.
Bihar The Bihar Infrastructure Development Enabling Act, 2006 is for the rapid Development of Physical and Social infrastructure in the State and to attract private sector participation in the designing, financing, construction, operation and maintenance of infrastructure projects in the State and provide a comprehensive legislation for reducing administrative and procedural delays, identifying generic project risks.
Goa The Goa Policy on Public Private Partnership applies to all PPP projects sponsored by the Government or PSUs or Statutory Authorities.
Gujarat Gujarat Infrastructure Development Act (1999) amended in 2006 to facilitate greater private sector participation in financing, construction, maintenance and operation of infrastructure projects.
Karnataka The Karnataka Infrastructure Policy, 2007 has been evolved with a view to augment and expedites infrastructure development through active private sector participation.
Orissa The Orissa PPP Policy, 2007 is to create a conducive environment to utilize the efficiencies, innovativeness and flexibility of the private sector to provide better infrastructure and service at an optimal cost.
Punjab The Punjab Infrastructure Development and Regulation Act, 2002 provides for the partnership of private sector and public sector, in the development, operation and maintenance of infrastructure facilities and development and maintenance of infrastructure facilities through financial sources other than those provided by the State budget.
Rajasthan Has set up the Rajasthan Infrastructure Development Fund with an initial corpus of US $ 500,000, contributed by the financial institutions and the State government.
West Bengal The West Bengal Policy on Infrastructure Development through Public Private Partnership, 2003 was notified to address the need to mobilize private sector investment in infrastructure development and evolve policy guidelines for the purpose.
PPP PROCESS IN INDIA:
PHASE 1Phase 1 takes place before entry to the PPP development pipeline. Identification and projects testing are the main objective of phase 1 in order to increase the quality of the PPP pipeline. The suitable project for the PPP cell is identified at the end of phase 1. RESPONSIBILITIES:
Sponsoring Supporting the PPP cell as the external advisor
ACTIVITIES: Strategic planning to identify and prioritize infrastructure service needs and
identify a set of potential projects.
Project pre-feasibility analysis to assess and to test if an identified project is feasible and worth developing further.
The Financial Viability Indicator model can be used to analyze the financial viability of the project, including any requirements for public sector support, and to assess ‘what-if?’ scenarios.
An internal clearance should take place within the PPP cell before projects are allowed to enter the PPP pipeline. If Internal Clearance given this is favorable the project then it moves to Phase2.
TOOLS USED:A set of tools has been developed to assist the analysis and decision making. These tools are:
PPP Financial Viability Indicator model, PPP family indicator tool PPP Mode Validation tool PPP Suitability Filter Readiness Filter
PROCESS FLOW MAPPHASE 2:
Phase 2 is the start of the PPP development pipeline. The cleared projects from phase 1 have been chosen for development as PPPs. Phase 2 generally deals with the project feasibility .This phase also deals with best method for procurement and best methods for the bidding process of the PPP.
RESPONSIBILITIES:Support to the project development with PPP Cell.
ACTIVITIES:Phase 2 involves the following analytical and procedural activities for an individual project:
Planning and preparing for PPP project management Carrying out a detailed feasibility Updating the Financial Viability Indicator model and using it to reassess the
impact of changing parts of the project design and verify the feasibility study model results
Using the VFM Indicator Tool to test the likelihood of achieving Value for Money, based on the results of the feasibility study and the experience and knowledge of the analytical team
Deciding on the best-suited procurement method for the project Preparing first drafts of the key project documents Using the Readiness Filter the project is checked and made ready to proceed
to the clearance stage Applying for In-principle Clearance from the appropriate Appraisal /
Clearance Authority
TOOLS USED:A set of tools has been developed to assist the analysis and decision making. These tools are:
PPP Financial Viability Indicator model VFM Indicator tool Readiness filter
PROCESS FLOW MAP
PHASE 3:
The purpose of the PPP procurement Phase is to select the best qualified private sector partner for the PPP and to conclude contracting with that partner.
RESPONSIBILITIES: Assisting PPP cell
ACTIVITIES:Phase 3 involves the following specific activities:
Preparing for procurement Market sounding – preparing and issuing an EOI Qualifying - Issuing RFQ and shortlisting bidders Preparing final drafts of key project documents Readiness Check Applying for Final Approval to procure the project as a PPP Bidding - RFP and bid evaluation Contract finalization
TOOLS USED: PPP Financial Viability Indicator model Readiness filter VFM indicator tool
PROCESS FLOW MAP
PHASE 4:Phase 4 begins once the project reaches technical closure with the signing of the Concession Agreement.
RESPONSIBILITIES: Supporting as a Contract Management Team to monitor and carry out the
contract agreement to the PPP cell
ACTIVITIES: Implementation and operation of the project and performance monitoring
and contract enforcement by the cell.
TOOLS USED: Readiness filter
PROCESS FLOW MAP
DATA ANALYSIS AND INTERPRETATION:Inadequate infrastructure was recognised as a major constraint for rapid growth in the Eleventh Plan. It therefore emphasised the need for massive expansion on investment in infrastructure based on a combination of public and private investment, the latter through various forms of PPPs. The total investment in infrastructure, which includes roads, railways, ports, electricity and telecommunication, oil gas pipelines, and irrigation, is estimated to have increased from 5.7 percent of GDP in the base year of the Eleventh Plan to around 8 percent in the last year of the Plan.
The Twelfth Plan intends to continue increasing the pace of investment in infrastructure as this is critical for sustaining and accelerating growth. The Planning Commission in its Twelfth Five Year Plan Document (2012-17) expects investments in infrastructure projects to be worth US$ 1 trillion over the five years of the Plan. Total investment as a percentage of GDP is expected to be in the range of 7-9 per cent While public investments in infrastructure have been the dominant form of infrastructure financing in India, investment from the
private sector is expected to increase in the coming years.PUBLIC-PRIVATE SHARE IN PPPs
As per the Twelfth Plan, the Planning Commission has set targets to achieve 50 per cent private and PPP funding in total infrastructure investments, comparedto a little more than 30 per cent in the Eleventh Plan.It is evident that there is a greater emphasis on initiating PPP projects in the Twelfth Plan.
INVESTMENTS IN PPP OVER THE YEARS
PPP PROJECTS IN INDIA
STATE AND CENTRAL WISE PPP PROJECTS
These data clearly indicate that the need for infrastrucutral development in the forcoming years the PPP projects will a vital role in building the nation’s infrastructure both State and Central wise.
ALTERNATE SYSTEM PREVAILING IN OTHER COUNTRIES:
UNITED KINGDOM:PPP activities in the UK started gaining momentum in the 1980s, in a bid by the UK Government to reduce the economy’s dependence on public sector financing.With the support of various initiatives over the years, the PPP model has evolved from a channel to offset the constraints on public sector expenditure, to the preferred model to deliver superior quality services.According to the UK treasury
data, 698 private finance initiative (PFI) projects have been signed to be delivered through the PPP route, in various sectors such as education, health, defense, public-housing, IT and transport.The PPPs in the UK have been highly successful, with several countries around the world trying to emulate the UK model. According to British National Audit Office (NAO) an assessment of the UK PPP policy in 2009 shows that 65% of the contracts were delivered on time and within the agreed budget.
AUSTRALIA:The Australian PPP market is one of the most well developed markets for PPP. The initial phase of PPP pertained to infrastructure projects that were modeled on the BOT and BOOT types. However, the focus of PPP shifted to social infrastructure in 2000s. The projects are diverse and relate to hospitals and schools. The market for social infrastructure is expected to continue to develop as there is need for water and energy infrastructure to meet Australia’s future sustainability requirements. Australia is witnessing significant growth in infrastructure. The infrastructure market is estimated to procure investments worth US$101 billion by 2016. In addition, the devastation caused by the floods in northern Australia exacerbates the massive task of rebuilding damaged infrastructure. Thus, there is requirement of private investment in the country.
BRAZIL:Private investment to build infrastructure has existed in Brazil for a long time. In fact, it was the main form in which majority of the country’s original infrastructure were developed. The first railroads of the country were built by private players under the state licenses. Brazil has one of the longest highway network under private concessions in the world indicating co-existence of public and private entities.PPP activities are regulated under the Concessions Law (1995) and the Public Private Partnerships Law (2004). The main drawback of the concession law has been that the users (especially drivers on toll roads) are unwilling to pay for the use of a previously free road. Under the law the contract duration can vary between 5 to 35 years and the contract value should be at least US$11 million.
The adoption of the two model structure in the PPP law has proven to be effective because:
The PPP law allows the payments to be partly or totally funded by the Government. This has helped in attracting private investments in projects that cannot be sustained by the fees charged from the users.
The Government has to establish a fund to provide warranty of its obligations under the agreement.
The law also provides for the use of alternative mechanisms for disputes resolution, including arbitration.
CONCLUSION:Lack of proper infrastructure pulls down India's GDP growth by 1-2 per cent every year. Physical infrastructure has a direct impact on the growth and overall development of an economy. While strategies to accelerate economic growth did anticipate the need for faster development of infrastructure as well, the fast growth of the Indian economy in recent years has placed increasing stress on physical infrastructure. Sectors such as electricity, railways, roads, ports, airports, irrigation, and urban and rural water supply and sanitation, continue to experience the pressure of rising demand for services even as they suffer from a substantial initial deficit. The public sector is expected to continue to play an important role in building transport infrastructure. However, the resources needed are much larger than the public sector can provide and public investment will therefore have to be supplemented by private sector investments, in PPP. This strategy was followed in the Eleventh Plan and it has begun to show results. PPPs are still a relatively new phenomenon in India and in a nascent stage compared to the experience of a number of other countries.
BIBILIOGRAPHY:
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