This article is written by Rida Zaidi, a law student of the Faculty of Law, Aligarh Muslim University. The author tries to analyze the concept of public-private partnerships in India in detail.
It has been published by Rachit Garg.
A public-private partnership is a collaboration between the government and a private entity for financing the economic infrastructures such as airports, highways, railways, etc. by the private sector, which was traditionally controlled by the government. It is a contractual agreement. The allocation of resources, risks, etc. involved is predetermined. It is a win-win agreement for both the government and the private entity, as the government needs investment in its projects and the private entity requires profits for the same. Private entities combine their technology and innovation with the government’s ability to complete a project within a given time frame and limited budget. The Indian economy during these past one and a half decades have shown a tremendous increase in public-private partnerships in all sectors of the economy. The Central and various state governments have taken measures to frame policies in order to promote and increase the scope of public-private partnerships. The government has set up a public-private partnership appraisal committee for the approval of such projects and transparent bidding competition amongst the private companies. The government, in its Draft of National Public-Private Policy (2011) has laid emphasis on creating a broader framework for inclusive and sustainable growth of these partnerships. The impugned draft has laid down the principles that govern public-private partnerships; the different models of public-private partnerships; the institutional and governance mechanisms etc. The public-private partnership also involves certain advantages and disadvantages. This article tries to observe concepts of public-private partnerships in India.
Public-private partnership meaning
Public-private partnership is an arrangement of a government or statutory entity or government-owned entity on one side and a private entity on the other side, for furnishing public assets or public services. Public-private partnership is invested and maintained by the private entity for a specified period of time for which the private entity is provided with a performance-based remission that is either fixed or performance-based. In a public-private partnership, the facility or service is provided by the private entity to the people at large. The allocation of risks is maintained in an optimal manner so that the party best suited, must bear the risk. The purpose of public-private partnerships is to improve performance rather than to just provide services. As it is based on a contractual agreement, it is constituted for a predetermined period after which the partnership terminates. Such a partnership utilizes the private sector’s efficiency in supplying quality services. In a public-private partnership, the private entity engages itself in designing, managing, operating, implementing, etc. On one hand, the government benefits from the efficient services of a private entity whereas, the private entity receives profit for the same. An example of a public-private partnership is that In 2017, the Union Cabinet approved a new Metro Rail Policy according to which the public-private partnership (PPP) model is now mandatory for availing metro rail projects.
Models of public-private partnership
There are a number of models of public-private partnership on the basis of the degree of investment, technical collaboration, duration, etc. Some of them are as follows:
Build-Operate-Transfer Model (BOT)
Under this model, the government enters into a contract with a private company to design, build and facilitate. The private entity is entitled to collect the revenue and maintain it. After the contractual period is over, the private entity transfers the facility back to the government, and the government then maintains and operates the facility by itself. For example, the National Highways are an example of the BOT Model of Public-Private Partnership.
Build Own Operate (BOO) Model
Under this model, the government assigns a private entity to design, build, facilitate, and operate a facility. After the facility is designed, the private entity retains the ownership rights of the concerned service.
Build Own Operate Transfer (BOOT) Model
Under this model, the government grants a franchise to a private entity to build, design, and operate a service for a specified time. After the specified time the facility is retransferred to the government.
Build Own Lease Transfer (BOLT) Model
Under this model, the government grants a concession to a private entity to own the facility and lease it to the government sector. After the lease period, the facility is retransferred to the government.
Design-Build Finance Operate (DBFO) Model
Under this model, the private entity is responsible for the design, construction, finance, operation, etc. for a long term lease. After the lease period, the facility is retransferred to the government.
Lease Develop Operate (LDO) Model
Under this model, the government continues to hold the ownership rights of the facility and receive remission for the lease agreement from the private entity.
Analyzing the draft of National Public-Private Partnership (2011)
In 2011, the Ministry of Economic Affairs published a draft regarding the National Public-Private Partnership on its website for persuading comments from the stakeholders. There has been a lot of debate concerning the particular draft on the grounds of its transparency and accountability. The impugned draft was a good step taken by the government of India, as through this draft people as well as stakeholders could raise their concerns and suggest reforms for the same. The draft of the National Public-Private Partnership incorporates the principles governing the implementation of public-private partnership, enabling frameworks, public-private partnership process, governing mechanisms etc.
Principles conducting the implementation of Public-Private Partnership
- The first principle is to provide a fair and transparent mode of scheme for the public-private partnership that would encourage and promote it.
- The second principle is to provide an equal and fair opportunity to the contesting private entities so that fair governance can be maintained over the project.
- The third principle is that the purpose of the public-private partnership must be related to the maximum satisfaction of the consumers, and similarly, the maximum interest of the stakeholders should be met.
- The fourth principle is to provide quality services with the best innovative ideas possible, skills, knowledge, and the efficiency of the private entity to the users.
- The fifth principle is to provide a broad framework so as to include greater participation of private entities, which would help in greater investments and greater public-private partnerships. It would also help in creating long-term relations for the creation of public assets and public services in the future.
- The last principle is recognising the ultimate development aim of such partnerships, which would aid the government in formulating the policies and programmes accordingly. It would also help the government in bringing the required changes in the legislation if required in the interest of public-private partnerships.
Public-private partnership (PPP) process
The public-private partnership process involves the following stages: identification, development, procurement, contract management and monitoring stage.
In order to make the existing assets and the new assets that would be formed, conducive, the government frames a broad vision or plan regarding the public-private partnership. Every agency would assess the role of every project that is planned for each financial year. The risk of being bored is always kept in mind while envisioning the framework for the same. The private investment which would be impacted by the project and the revenue that it would generate is also analysed. The choice of approach for money assessment needs to be analysed carefully, as to whether it is the best approach for the acquisition of the value of money and whether it would be a good value of money for the public sector. Before framing the body of any public-private partnership, it is checked as to whether the concerned project is permitted to be executed as per the legislation, and if it is not, but it is prudent to execute it, the government shall make the necessary amendments in the concerned legislation. The assessment of every project is carried out by considering the interests of the stakeholders and the development of the impugned project. If the project does not align with the above-mentioned criteria, the agency dealing with the particular project can consider any other alternative for the same.
The development stage of the public-private partnership involves the preparation stage. The Preparation Stage comprises the technical practicality assessment and financial potential assessment to be made regarding every project undertaken. This stage also comprises the preparation of contractual documents, obtaining clearance and approval for the concerned projects. The objectives of these activities are:
- Determining the scope of the projects and the requirements of the concerned agency. The roles and responsibilities of the parties need to be decided well.
- Determining the revenue system as to whether it is firm and sustainable to operate the projects.
- Optimally allocating the risks.
- Ensuring that the contractual documents include all the necessary clauses regarding the obligations of the parties, consideration for the contract, termination clause, arbitration clause, etc.
Economic, financial and affordability assessment
The agencies would evaluate the project in terms of the value that it would provide to the consumers and the benefit that would be received by the private entity. The agencies would also engage with experts regarding financial, technical, and legal assistance that would be needed while undergoing the designing and building of the impugned project.
The economic assessment involves the evaluation of the project regarding the satisfaction it would provide to the users, the cost assessment, the interests of the stakeholders, and the benefits arising from the future assets that would be created. Moreover, it will also be assessed whether the public-private partnership is the best model available compared to the conventional mode of procurement of revenues.
The financial assessment involves the evaluation of the revenues and whether there are sufficient revenues to provide an acceptable return of revenues.
The affordability assessment is analysed considering both the perspectives of the stakeholders as well as the users. Moreover, loans, guarantees, and other fiscal liabilities should also be taken into consideration while assessing the public-private partnership model.
The government analyses the kinds and degree of risks involved in every project. The objective of the public-private partnership is to allocate the risks in an optimal manner and to weaken the risks as much as possible. The genuine concerns of the stakeholders are kept in mind while determining which entity is best suited to bear the concerned risks. The government does not bear those risks that the private entity is accustomed to bearing. The contractual agreement envisages the allocation of risks and protects both parties from the undue advantage that might be taken. The government prescribes certain guidelines for the approval and formulation of central sector public-private partnerships. All such partnerships have to adhere to these guidelines. The state governments are also directed to formulate their guidelines for such projects accordingly. The government can also review and revise its guidelines regarding the allocation of risks involved in public-private partnerships.
The Procurement Stage involves the process of fair, transparent, accountable, and non-discriminatory procurement of a private entity. The government has prescribed certain guidelines for the procurement process. The Government tries to enable maximum participation of the private sector so as to obtain the best possible proposal for the project. The necessary documents for the bidding process include the test of interest, qualification, technical support that will be provided, etc. The agencies take all the necessary steps to get the approval and to proceed with the project as prescribed by the norms of the government. A timeline is provided for the completion of the projects in order to prevent any delays and to provide the services on time to their users. The government prescribes its guidelines by issuing them in the form of notifications from time to time.
Contract management and monitoring stage
The contract regarding a public-private partnership is an active process and not a passive one. The conditions during the completion of the project keep changing so it requires an authority that could monitor and keep control over the ongoing activities of the concerned project. The contract manager must be functioning as an effective and responsible authority. The authority must be appropriate, so as to carry out any action in the cases of any default in the performance of the service, delay in completion, etc. The timely and smooth implementation of any project involving a public-private partnership is one of the essential elements of the project. The concerned agency establishes monitoring units to coordinate among different departments for the effective implementation of the service. The database of every project is recorded in the form of tabular data regarding the ongoing projects and the status of the concerned projects of the public-private partnership for improving and delivering quality services to the users.
Key sections of the Public-Private Partnership Agreement in India
A public-private partnership agreement in India comprises sections and chapters. When some detailed information regarding a specific issue is required, it is provided in the form of annexes or schedules. The public-private partnership agreement in India varies according to the nature of the agreement, mode, risks, responsibilities etc, but there are certain key sections that are common in all public-private partnership agreements in India:
The introductory section of a public-private partnership identifies the parties involved, the scope, description, objectives, language, date and place of agreement etc.
This section of the agreement provides all the definitions and their interpretations that are necessary for the understanding of the impugned agreement. It also lays down the solutions which could be adopted by the parties in case there are any ambiguities in the text.
Obligations of the parties
This section sets forth the rights, privileges, mutual obligations, and expectations of both the parties involved in the agreement.
Allocation of risk
This section involves information concerning the allocation of risks. When a private company is under an obligation to perform a task as per the impugned agreement, all the risks and expenses associated with such tasks are on the shoulders of the project company.
Engagement of sub-contractors
This section involves the rights, obligations, duties, etc. of the sub-contractors and agents.
This section includes the necessary information regarding the project site, its title, possession, maintenance, and the licenses that are needed to be collected by the private company.
This section includes the architectural design of the physical infrastructure, its monitoring, supervision, etc. and the approval and review of the construction design. The terms of the initiation and completion of the project design, its repair and maintenance, etc.
Commencement and duration
This part of the agreement involves the information concerning the starting date of the project work and the duration, which is fixed regarding the expected period in which it would come to an end.
Changes if any
This section involves the process and procedure in case any changes take place after the commencement of the project work.
This section involves information concerning the fixation, payment, adjustment of finances and bonuses, the mode and time of payment, performance security, VAT, taxes, charges of the supervising authority, etc.
This section includes information regarding the management of waste disposal, its transportation from the site to the treatment centre, and then the final stage of recycling.
Change in law
This section involves the terms of the agreement in case any changes are made in law after the parties have entered into a contract.
This part includes the provision concerning such circumstances which prevent the happening of the performance of a contract and the legal remedy for the same.
Termination of contract
This section includes the terms of the termination of the contract, the renewal of the contract, and if any new operator takes over the impugned project.
This section includes the procedures and formalities concerning the handover of the project by the private company upon its completion within the predetermined period.
Functioning as an auditor
The appointment, obligations and discharge of the duties of the auditor are laid down in this section.
Dispute resolution mechanism
This section involves the procedure of alternation dispute resolution, the rights and obligations of the parties involved, etc.
Representations and warranties
This section involves the representations and warranties of the private company, and if any change is made, it has to be notified in this section.
This section includes indemnity, liability, governing laws, etc.
The government has a financial support system for public-private partnerships to fill the financial gap. The government plans to intervene more in such partnerships and recognises new sectors, such as the health and education sectors where these projects would have a significant impact. The government, in order to mobilise a greater number of financial resources and new financial instruments for public-private partnerships, should have a regular interface with banks, financial institutions, etc. The government determines the need for consistent and clear communication during the completion of the projects. It gives an opportunity to the stakeholders to raise their concerns, and the legal framework would protect the interests of the public, specifically those who would use those services that would be provided by the impugned project.
Public-Private Partnership Cell
The Public-Private Partnership Cell in the Ministry of Economic Affairs would provide expertise and technical support for public-private partnerships. The cell would comprise of experts from various fields such as law, finance, science, etc. Those experts would be experienced in both public and private sector duties. They will aid in the discharge of the projects by providing technical and financial support. Moreover, they shall also engage in coordinating, developing, constructing etc. The public-private cell will also review the projects at various stages of their progress, along with the Ministry controlling and evaluating the audit of the projects.
Institutional and governance mechanism
The Cabinet Committee of the Ministry of Economic Affairs in order to promote and encourage public-private partnership has constituted a Public-Private Partnership Appraisal Committee (PPPAC). It comprises of the following:
- Secretary, Department of Economic Affairs (Chairman)
- Secretary, Planning Commission
- Secretary, Department of Expenditure
- Secretary, Department of Legal Affairs
- The Secretary of the Department is sponsoring the project
Every public-private partnership requires clearance from the appraisal committee. The purpose of obtaining clearance is to make sure that the project is commercially well built. The contract of the partnership safeguards both the interests of the users and the public. Moreover, the commercial liabilities of the government are also covered by it. The Public-Private Partnership Appraisal Committee encourages structured contractual documents that adhere to the norms, such as including the allocation of risks, contingent liabilities, providing quality services, providing standard performance, etc. The government in order to enhance fairness and transparency would take measures to strengthen the processes and institutions of the government that are accountable to the stakeholders.
Role of Public-Private Partnerships in infrastructure deficit
The physical infrastructure of any country plays a key role in determining its economic development. India, owing to its geographic and economic size, does not adhere to the standard of infrastructure required. Congested roads, airports, inadequate healthcare and education facilities etc, are a result of infrastructure deficiency in the country. The infrastructure deficiency generates a lack of productivity, constraints on growth, unemployment, etc. The issue of lack of infrastructure in India is highlighted by the World Economic Forum, according to which the global requirement for infrastructure spending over the next 20 years is at least USD 40 trillion, i.e. USD 2 trillion per annum. Before 1991, infrastructure projects were controlled and handled by the government, but after the initiation of new economic reforms and the Industrial policies of 1991, private participation was encouraged and emphasised. The meaning of the term ‘Infrastructure’ was also reformed from time to time to enable the private sector to avail of the financial inducements and concession duties during the completion of the project. Public-private partnerships are working towards filling these infrastructural gaps. The government has somewhat succeeded in attracting the private sector to fill such gaps. The Ministry of Economic Affairs has invited recommendations from the World Bank regarding the steps which it could take to procure, identify, and develop public-private partnerships. The focus of these projects is the role of the central government in promoting such partnerships in the country. The infrastructural deficiency could not be worked upon merely by the efforts of the government alone, as the government is already facing monetary restrictions and is seized by increasing liabilities. Public-private partnerships aid in the execution of the projects in a better way as they now utilise the efficiency and technology of the private sector, while allocating the risks and resources in an organised and judicious manner. Recently, India has become the third-largest public-private partnership in the country. India, now has the experience of around ten years in dealing with public-private partnerships, though the degree of success achieved in the projects varies from state to state. In some states, the projects have a sound framework whereas, in other states, the projects are poorly conceptualised and fail to provide the standard performance. Public-private partnerships have gained success in the telecommunication industry, followed by airports and roads. Road projects of public-private partnerships account for 36% and ports account for 56% of the total percentage of public-private partnerships. The states which have shown success in these projects are Madhya Pradesh, Tamil Nadu, Karnataka, Gujarat, etc.
Need for Public-Private Partnerships
Public-private partnerships have shown diverse results in terms of the degree of success they have achieved. There have been a number of problems that arose from errors in balance sheets, issues of land acquisition, obtaining regulatory approvals etc. However, the government, from the very beginning, has encouraged and promoted public-private partnerships and is confident that they will achieve success in the future as well. The following are the concerns that still need to be addressed by the government:
Land which is required for a project is owned both by the central and the state governments. Though the land is awarded by the government or any statutory entity of the government, the state government retains jurisdiction over the same. The main concern that arises is the process of obtaining approvals, clearances, land acquisition financial closures, etc. In some cases, it takes almost 9-15 months from the date of awarding the project to the date of beginning the course of work for the concerned project. It is the responsibility of the government to hand over the land and right of way to the dealer, failing which would lead to increased costs and undue delays. Sometimes, after the handing over of land by the government, the state governments do not make efforts to resolve the land disputes, which also causes delays in the process of obtaining approvals. Projects worth Rs 1000 crores or upwards require the sanction of the Union Cabinet, which also causes hurdles in the course of work.
Changes that may occur during the course of the project
When a contractual agreement is entered into for a public-private partnership, the terms and conditions are laid down in different clauses as per the needs and requirements of the parties. In some cases, there may be unpredictable happenings that might not have been expected by the parties owing to their uncertainty. But there is always a possibility of such things, as in some cases, the contract might be terminated before the agreed period, changes in government policies, or failure to perform the obligations by any of the parties that are either the private entity or the government. For example, in road projects, the actual traffic is usually less than the predicted traffic by the government.
Authority on pricing
The government is responsible for the utility of the services provided, and the private sector does as much as it is paid for and nothing more, as per the World Bank. As the private sector desires, it should also retain a certain amount of control over the service as it incurs certain risks as well. Private entities are also subject to certain tariffs as levied by different state governments.
Advantages of Public-Private Partnerships
- Public-private partnerships prove to be the best alternative as both the parties, that is, the government and the private entity, do what they are best at doing.
- Public-private partnerships provide efficiency and transparency as the skills and expertise of the private sector are involved.
- Public-private partnerships reduce the overall cost of the government as it is only to implement the service after it has been delivered to it by the private sector.
- Public-private partnerships provide timely completion of projects and standard performance, as well as within the budget expected by the other party.
- The Public-Private Partnership’s return on investment is greater than the traditional way of procuring a project by the government.
- Public-private partnerships allow the government to access the private sector’s finance.
- Public-private partnerships enable the government to transfer the allocation of risks to a private sector entity.
- Public-private partnerships aid the government not just by increasing the efficiency of the project by the timely completion of the project in which the private sector has invested, but the government can also redirect those residue funds for other socio-economic causes.
- Public-private partnerships furnish efficiency in the projects through which the government can reduce government budgets and budget deficits.
- Public-private partnerships enable the private sector to keep a check so that the government does not make any unrealistic promises or expectations.
Disadvantages of Public-Private Partnerships
- The private sector invests a huge sum of money in public-private partnerships and, as the private sector bears the risks and is expected to be compensated by the government in such a situation, the costs of the government increase.
- When competition among private entities is limited, that is, only certain entities are capable enough to procure a particular project, it restricts the competitiveness of a cost-effective partnership.
- Profits that are expected to come from projects vary in terms of risks, competitiveness, complexity, scope, etc.
- If the expertise required comes under the ambit of private sector duties, then the government may be at a disadvantage, as it may not be able to evaluate it.
- Public-private partnerships are most of the time facing issues such as not obtaining regulatory approvals, issues of land acquisitions, undue delays etc.
- The outcome of the degree of success of public-private partnerships is somewhat mixed and does not always succeed as predicted.
- In some sectors of public-private partnerships, many projects act as channels of capitalism.
- Some public-private partnerships are well connected with certain private firms, which easily renders an opportunity for such private entities to win contracts and procure particular projects.
- Public-private partnerships furnish all the work to the private sector, which reduces the employment opportunities that were earlier available in the public sector.
- The government of India does not have a good track record of performance in all the sectors of public-private partnerships.
Public-private partnerships are collaborations between the public and private sectors for the designing, financing, and procuring of projects that were earlier handled by the government. These partnerships are effective as they are more efficient, transparent, timely, etc. Public-private partnerships are not exactly privatisation but are somewhere between nationalised or centralised and privatised. The private sector and the government are bound by a contractual agreement to comply with their obligations, which are agreed upon by them. All the necessary clauses such as obligations of the parties, termination, allocation of risks, penalty etc are laid down in it. There are various models of public-private partnerships such as Build Own OperateTransfer, Build Own Transfer etc. Public-private partnerships have shown success in recent times, and the government has taken measures to promote and encourage these partnerships and to strengthen the institutional and governing mechanisms that control and monitors them. It has also encouraged the private sector to increase its participation in public-private partnerships. Public-private partnerships have their merits as well as demerits.
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