Managing Public Private Partnerships

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commentary sanitation, particularly in case of the villages which have not been awarded the Nirmal Gram Puraskar. Hence, as a longterm perspective, people’s behavioural/ attitudinal trigger should be the fulcrum in this context. (3) It is critical to remember that the motivators, animators, and campaigners are the key agents in this campaign. This campaign may be retained for at least five years or more so that the new practice of hygiene/sanitation becomes part and parcel of normal life. (4) T
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  commentary  Economic & Political Weekly   EPW august 16, 2008 23 sanitation, particularly in case o the vil-lages which have not been awarded theNirmal Gram Puraskar. Hence, as a long-term perspective, people’s behavioural/attitudinal trigger should be the ulcrumin this context. (3) It is critical to remem-ber that the motivators, animators, andcampaigners are the key agents in thiscampaign. This campaign may be retainedor at least ve years or more so that thenew practice o hygiene/sanitation becomespart and parcel o normal lie. (4) Theopen deecation-ree villages should be in-centivised in terms o giving them priority in taking up various developmental activi-ties under various rural development andother schemes o development. 4 Conclusions The campaign could succeed basically be-cause o the motivators and the supporto the local bureaucracy who could createsustainable demand and action or sani-tation through properly engineered socialmarketing and attitudinal-behaviouraltransormation o the villagers. The study reutes the myth that poor people willconstruct toilets only i they get nancialassistance rom the government. The Bhi- wani experiment has, indeed, been an eye-opener that poor people opted or loans toconstruct their toilets once they had beeneducated and motivated.It is hoped that much can be learntrom the Bhiwani model which can bereplicated elsewhere. For this, naturalleaders have to be properly identied andnurtured. Equally signicant, the govern-ment agencies/ocials have to act moreas managers and team leaders and have tocast o their bureaucratic styles. Notes  1 CLTS is an approach which acilitates a process o empowering local communities to end open de-ecation and to build and use latrines without thesupport o any external subsidy. This approach was rst pioneered in 1999 by Kamal Kar working with the Village Education Resource Centre andsupported by Water Aid, in a small community o Rajshahi district in Bangladesh.2 Nirmal Gram Puraskar, an award scheme orachieving an environment completely ree o open deecation was launched by the governmento India on October 2, 2003 or PRIs, individualsand organisations, or promotion o sanitation.3 One o the state coordinators told the research teamthat they had been designated as “Tatti wala”,   i e,those who are dealing with aeces, in some villages.4 Generally in every term, the panchayat’s electionscreated enough jealousy and animosity betweenand among dierent sections o rural community.The animosity still persists in the villages eventhough the elections were held two years ago andit is very dicult to handle villagers belonging todierent groups.5 There is a concentration o SCs in this village.There are a ew Jat amilies in this village. A sar-panch (woman) happened to be rom this caste.The husband o the sarpanch said he had givenloans to a number o SC amilies to construct theirtoilets as ater participating in various workshopsand meetings on the issue o sanitation, he decidedto make Siwana an open deecation ree village. References Kar Kamal and Katherine Pasteur (2005): ‘Subsidy orSel-respect? Community Led Total Sanitation, An Update on Recent Developments’, Institute o Development Studies, Sussex.GoI (2002): Guidelines o the Central Rural SanitationProgramme (TSC), Department o Drinking WaterSupply, Government o India, May.Census o India (2001): Series-7 Haryana, Tables onHouses, Household Amenities and Assets. Managing Public PrivatePartnerships Satish Bagal Bridging the inrastructure gapby promoting public privatepartnerships has becomethe preerred mode or theexecution o public projects. Thegovernment needs to develop thenecessary capability to handlethe large number o  PPP projectsthat are to be taken up during theEleventh Plan. T he drat Eleventh Five-Year Plansets a very high target or invest-ment in the inrastructure sector. According to the Planning Commission’sestimates investments in road, rail, watersupply, irrigation, power generation,transmission and distribution would needto increase rom 4.6 per cent o grossdomestic product ( GDP ) to between 7 and8 per cent during the Eleventh Planperiod. And i one looks careully into theplan document, investment in the inra-structure sector is supposed to contributeat least 50 per cent o the proposedincrease in the growth rate o the economy.Translated in sheer numbers it wouldmean that in next our to ve years theinvestment need will be to the tune o $ 275-300 billion.Structurally it is not possible or thepublic sector to contribute substantially tosuch massive requirement and thereorethe Planning Commission is bankingon nalising a large number o publicprivate partnerships ( PPP s) to meet theinvestment needs.The problem o the Planning Commis-sion and the government o India, however,appears to be that there is shortageo viable and bankable projects thatcan be taken up as PPP projects. Further,the investments that have come duringthe last ve years or so have come mainly in the telecom sector; not much has comein the power sector or other sectors suchas urban utilities or water supply sector where it is required urgently. Andalthough the government has introducedairly reasonable guidelines together with an attractive scheme or granting viability gap unding, there are dicul-ties in implementing the scheme asproject sponsors have to either adhere tothe Model Concession Agreement ( MCA )or get their concession agreement vettedby the Planning Commission. On the wholethere is a general eeling in the govern-ments, especially with the implementingagencies and some decision-makers thatthe PPP s are dicult to orge and takeconsiderable time to conclude. This wouldlead us to ask two questions. Would the Satish Bagal (  satish_bagal@hotmail.com )is currently with the Mumbai MetropolitanRegional Development Authority.  commentary   august 16, 2008 EPW   Economic & Political Weekly 24 condence posed by the Planning Com-mission in the PPP as a vehicle o growthand investments in inrastructure sectorbe justied? And what needs to be done tobring in more and more investmentsthrough the PPP route?Broadly speaking, nurturing and imple-menting PPP projects is ar more challeng-ing than structuring and implementingconventional projects. Further, there is anurgent need that the governments espe-cially at the state and the local levels makeserious eorts to build necessary capa-bility to accept this challenge without which the investments being envisagedby the Planning Commission may not materialise. 1 The Evolving Model o PPPs PPP s are cooperative arrangements be-tween private and public sector organi-sations or providing inrastructureservices and products to the public where the parties agree to share duties,responsibilities, costs, prots and risks.This is attained through various agree-ments and covenants and involves alarge number o participants such asproject sponsors, investors, operators,insurers, suppliers, contractors andsub-contractors.The concession agreement is the mainagreement that lays down in detail thelegal, nancial and operational arrange-ments o the project and denes the rela-tionship between the main parties as alsoother important details such as servicelevels stipulated, aordable tari duringthe project period and other main projectparameters that have a bearing on out-comes o the projects including theprots and rates o return. Most o theprojects under the PPP use either build-operate transer ( BOT ), build-own-operate-transer ( BOOT ) or build-own-operate( BOO ) route or their variants dependingon the requirements o the project.The PPP seeks to allocate the projectrisks among the partners in an optimalmanner. The optimum rule o risk allocation is that the partner who is mostsuited to assume a particular type o risk is assigned that risk. Assuming and miti-gating a risk carries a cost thereto. Theprivate partners assume the risks andcharge a premium which is built into thetari and pricing structure and isultimately passed on to the consumer. Thegovernments assume the risks relating toplanning and structuring the projects, de-termining the taris, issuing noticationsthereo, acquiring the lands and so on.They also bear the risks arising out o political events.The private parties bear the risksrelating to demand, revenue, nance,operations and other business risks.Under the concessions the governmentsalso undertake to compensate the opera-tor i the demand in the system (and con-sequently the revenue) is altered to theoperator’s disadvantage as a result o cre-ation o a parallel acility such as a road,etc. The exercise o addressing risks inthe context o the project, allocatingthem to partners and mitigating them iscentral to the success o the project asalso in the matter o creating condencein the parties.Capital costs, demand, aordable tari,(oten pre-determined) and the conces-sion period are the parameters thatdetermine nancial sustainability and viability o the project. I the demand inthe proposed project is very high at theaordable tari, costs can be recovered within a reasonable concession period.However, i the capital costs are very high and cannot be recovered at theaordable tari over a reasonable con-cession period, the project may not bebankable. In such cases the operatorsare compensated, i the occasions soarise and demand, through an increasedor additional concession period. Thereare, however, limitations to this methodas unduly long concession period brings with it uncertainty making the investor,operator and the lenders uncomortable.Today, a concession period o about 20to 22 years is considered normal or struc-turing projects and any longer period thanthis, though acceptable, is considered asan exception. As the operators, investorsand lenders come to the project withexpected rates o return there would bemany projects that may not meet theexpected rate o return and the mecha-nism o viability gap unding (  VGF ) seeksto ll this gap through a capital grant andensures a reasonable rate o return orthe project. 2 Difcult to Structure Inrastructure projects under the PPP  model can be meaningully groupedunder three heads. The rst group may consist o simple greeneld projects withsturdy demand and a sustainable revenuestream and which can be easily taken upunder a BOT  / BOOT (or a simple BOO ),arrangement over a reasonable concessionperiod without any burden on the govern-ment and which can be truly describedas a simple vanilla PPP . The secondgroup would consist o projects o similarparameters but which all just short o the reasonable and necessary rate o return and thereore would need aninusion o moderate  VGF to make themacceptable and bankable. Third group would consist o other complex projectsthat are highly capital intensive, nan-cially or operationally airly risky and/orthat exhibit high debt equity ratio andrisks such as demand or revenue risks,and/or may require large inusion o   VGF .Investors generally keep away romsuch projects because such projects donot become viable even with very longconcession periods.Projects that all in the rst two groupsare not very dicult to negotiate, thoughthey may require considerable eort orstructuring and implementing. It is thethird category o projects which may beproblematic and which may pose ques-tions as to whether they should be takenup purely as government projects orunder PPP ormats with large doses o   VGF or equity.There are also PPP projects in the thirdcategory where the governments havebeen oering equity in the special pur-pose vehicle ( SPV ). It is argued that suchequity participation is necessary as thenancial stakes are very high and the available at  Akshara-The Executive Partner   8/3/1089, Plot No 46,Srinagar ColonyHyderabad 500 034Andhra PradeshPh: 23736262  commentary  Economic & Political Weekly   EPW august 16, 2008 25 government’s presence is necessary toensure that the operator perorms well.The PPP projects aim at transerringmore risks to the private operator/partneror an appropriate rate o return and may seem to be a technique o reducing thegovernment’s work. In reality, however,the process o orging PPP projects is very painul and requires more skill, exper-tise, diligence and patience. Understand-ing the concession agreement, its nitty-gritty, ner points that have signicantnancial implications, especially in thedistant uture requires attention and timethat a bureaucrat can rarely aord to give.The MCA lay down precisely and minutely the responsibilities o the governmentunctionaries and contain penal provi-sion or not adhering to deadlines, com-pensations or ailure to do things intime and exacting milestones both orthe concessionaire as also the grantoro the concession. The private party thatassumes many risks is ever alert to exer-cise its rights as provided in the conces-sion. Moreover, the government unc-tionaries need to do considerable home- work in identiying risks, incorporatingthem in the agreements and watch com-pliance. All this requires more specialisedknowledge and more dedication thanperhaps in handling the traditionally structured projects.Let alone PPP projects, most o theurban bodies and government departmentsand organisations do not possess even ex-pertise and skills o handling conventionalsimple projects which are nothing butsimple cash contracts. Especially, thegovernment organisations and urbanbodies cannot ully appreciate the nancialand commercial aspects o the PPP projects which have a capacity o releasing more value and which have to be very careully handled. The PPP projects also require adierent mindset. While the project men-tors have to be very businesslike andunderstand various aspects such asdemand, tari/pricing, etc, and theireect on the project outcome, they havealso to treat the partners as true partnersand not as contractors who can be loaded with only risks. Moreover, the initialstages o the project are very crucial andthe government unctionaries have to doconsiderable ground work such as landacquisition, preparing the site and xingtaris and issuing notications.The initial success stories o the BOT  projects indicate that each project had adhoc mechanisms and inormal structureto deal with resolution o day-to-day prob-lems. In complex PPP projects structuringthe projects optimally is a great challengeand requires creative insights as alsoinnovative approaches. I governmentsare to handle a large number o  PPP  projects, then they have to start develop-ing the necessary manpower and groupso skilled, knowledgeable and dedicatedunctionaries. Local bodies and otherparastatles also need considerable guid-ance and support rom state governmentsin the matter o approaching the govern-ment o India and the Planning Commis-sion or  VGF wherever necessary. Risk-prone Projects  Although greeneld projects such as high- way projects with substantial demand arerelatively easy to do and or which thecountry has learnt suciently in the last10 years, the PPP projects in other areasare dicult to nalise as the listing o  various kinds o risks and structuringthem optimally in the projects takeconsiderable time.This scenario however changes whenone encounters somewhat dicult projectssuch as those in the urban areas whichinvolve risks that cannot all be perceivedimmediately and encompassed somethodically and where situation continueto be very fuid and risk and costs bothrise with time very ast making it impos-sible or the parties to see things clearly.These include urban mass transit systemssuch as metros, water supply systemsand sewerage systems and other urbaninrastructure. The projects whichinvolve considerable preparations andare contingent on such crucial activitiesas land acquisition, obtaining “right o  way” through thickly populated urbanareas, various permissions, etc, becomerisky and investors can claim huge risk premium. In addition these projects be-come dicult and risk-prone becausethey involve shiting o a number o utili-ties such as electric connections, watersupply pipes and sewerage systems. Inaddition, working in dense trac systemscreate considerable diculties and addto costs.In large cities and metropolises anumber o agencies operate separately and proper coordination amongst them isa prerequisite to successul implement-ation o projects. Especially in densely populated metropolises, land acquisitionor the projects or obtaining right o wayscould be very exasperating, complex andlong drawn process. In many urbanprojects the actual costs involved in pre-liminaries and preparations constitutesubstantial part o the total project cost. I one adds to this the cost o removal o un-authorised constructions and rehabilita-tion o the project aected amilies thenthe preliminary costs to the governmentcould be substantial and the governmentsmay start thinking o  PPP as the rightapproach. This initial phase o the projectis very crucial and the private partnercannot do much at this stage. It is thisstage where the governments have to be very diligent, assuring and orthcoming. I this time is lost and preliminaries aredelayed it is likely that the private partnermay lose condence and may start lookingor an early exit. 3 PPP or Joint Venture? There are also some PPP projects wherethe governments are entering into joint- venture-like arrangements with the con-cessionaires, in addition to granting con-cession and assuming the responsibility o land acquisition, etc. Modernisation o airports is a case in point, but there areother PPP projects being ormatted onthese lines. It is argued that in totality considering the government’s contribu-tions such as land acquisition costs, otherpreliminary and preparatory costs and  VGF the government’s stakes are very highand hence the governments should obtaina substantial equity to saeguard theinvestments. Direct equity participation inthe entity, however, may create complexi-ties as governments start sharing all therisks and responsibilities o the entity.This undermines the very spirit o the PPP ,or PPP projects are premised on privatepartner assuming substantial businessand revenue risks. By holding equity in theentity the grantor o the concession issimply trying to assume all the risks in the  commentary   august 16, 2008 EPW   Economic & Political Weekly 26 Open Review Several international journals are movingaway from closed Peer Review of research papers, towards an Open Review process. In open reviews anyone cancomment on a paper submitted for publi-cation. This will increase transparency inreviews as well as enhance participation andinvolvement of the research community. epw occasionally posts a submission on itsweb site and invites comments. Visitors tothe epw web site and readers of the journalare encouraged to offer detailed comments. epw will discuss the comments with theauthor and a revised version will be processedfor publication.Please visit the Open Review section on ourweb site (www.epw.in) to read and commenton the paper currently submitted for OpenReview. project, and trying to convert the PPP  project into a joint venture. The prelimi-nary costs o the project are substantialand they have oten to be borne by thegovernment. Under these circumstances itmakes little sense to contribute 30 percent equity to the project thereby increas-ing unnecessarily the government’s expo-sure and liabilities. Through government’sequity participation in the SPV the privateparty gets o, de-risking its investmentsand dilutes the risk-taking spirit o capital.What in essence was to be a simple andeective PPP ultimately turns into a joint- venture with a great possibility o combin-ing the worst o both the worlds. Another major issue that comes as a risk and a great hurdle in implementation o the inrastructure projects and which may create uncertainty, especially in the denseurban areas, is rehabilitation o the projectaected people. Normally there is reluc-tance on the part o the government asalso the private party to acknowledge theissue openly. The issue can be tackled only i it is acknowledged and included as acost component in the project. There isalso need or a uniorm and crediblepolicy or rehabilitation o the projectaected persons and an adequate andrealistic budget or this activity.Ultimately an important test or the PPP  project is whether the private party assumes genuine risks proportionate torewards. Even while exhorting the partiesto make people-riendly philosophy aounding stone o the PPP , one cannotoverlook the act that the private capital will come to earn a return on the capitalemployed and that the partnership mustagree to give a reasonable rate o returnon the capital and remove all the ambigui-ties in the underlying arrangements. Inreality it is not always possible to maintainbalance between the public and the pri- vate and the private partner may try topass on as many risks to the governmentas is possible. Where the process o ensur-ing that all the stipulations in the conces-sion agreements are complied with rests with the third party private consultantsand where government agencies’ contractmanagement perormance is not very spectacular, the perormance and out-come o the PPP projects may have tobe watched careully. Moreover, as thegovernment itsel is admitting that thereis a lack o bankable PPP projects in vari-ous inrastructure sectors, care has to betaken to see that only those projects thatare really useul to people come up via the PPP route. While, thereore, encouragingand inducting private investment in inra-structure through the PPP route it isnecessary to examine critically what truebenets it brings to the people and at what cost. 4 Role o Regulatory Authority  Privatisation and private investments ininrastructure presume and presupposethat there is an independent regulator toensure that the monopolies do not exploitthe consumer and that the stipulatedservice levels and quality is maintained.In the transport and road sector the role o regulator is still being carried out by theNational Highway Authority o India( NHAI ) and no one really knows whetherprivate operators are discharging theirresponsibilities as per the concessionagreement. The perormance o the newutilities and expressways especially asregards the saety measures incorporatedin the service levels expected have neverbeen measured or made public. Further,the amount o toll and tari structure islargely determined with reerence to thelength o the road and the capital cost o the project. What happens when oneencounters a series o toll roads whiletravelling rom one destination to another?The amount o total toll that one may have to pay also assumes signicanceespecially when these days even parallelacilities may also attract toll, as in case o Mumbai-Pune expressway, where boththe roads are toll-roads. What is oten irk-some is that tollable roads and bridgeshave become so popular that between twodestinations one may encounter a largenumber o toll plazas collecting usercharges. Further, this issue gets com-pounded as most o the toll rates werexed in the period o high infation andhigh interest rates in the past and go onincreasing at an annual rate as per theprovisions o the concession agreements.There are many such issues that are aris-ing in the transport sector. A missing link here is the independent regulator whichcan help resolve many o these issues. Inthe power sector the independent regula-tory authorities have done considerable work o not only disciplining the serviceproviders but also o initiating new stud-ies and exploring hitherto neglected butimportant subjects such as transmissionand distribution losses which are socentral to understanding issues in powersector. Similarly the transport sector would also see considerable advancementin our understanding o issues. I moreinvestments are to come via the PPP  route in water supply, urban transportand other inrastructure sectors, thereneeds to be independent regulatory oversight o the sector.I the targets set by the government orinvestment in inrastructure sector are tobe realised, the governments at the stateand the local level will have to develop thenecessary capability to handle a largenumber o  PPP projects. PPP does not meanless work or less responsibility or thegovernment. It is oten a complex arrange-ment and requires det handling and moreskills. The target set by the PlanningCommission may still remain ar o but inthe process projects that have the poten-tial o being taken up in the PPP ormatmay come up expeditiously complement-ing the governments’ investments ininrastructure and on the terms that areacceptable to people.
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