ASSIGNMENT ON

1. Course No

IDM 12

2. Course Title

Management of PPPs

3. Assignment No.

4. Date of Dispatch

5. Last Date of receipt

of Assignment at SODE Office

SUBMITTED TO:
NATIONAL INSTITUTE OF CONTRUCTION MANAGEMENT
& RESEARCH (NICMAR) PUNE.
SCHOOL OF DISTANCE EDUCATION (SODE)

SUBMITTED BY:

Page 1

Management of PPPs

Page 2

CONTENTS
SR.NO.
1
2

DESCRIPTION
Different Public Private schemes
Parties involved in Public Private

PAGE NO.
5-13
14-16

participation and their roles.

Financial structuring of Public-Private

17-25

Partnership projects.
Do you think this system is ideal for

26-31

infrastructure development? Discuss

Bibliography / Readings

32-32

Page 3

ASSIGNMENT:
The term public-private partnership describes a range of possible relationships among
public private entities in the context of infrastructure and other services. Other terms
used for this type of activity include private sector participation (PSP) and pritivisation.
Under PPP principle, a private entrepreneur is given a concession (by a contract) to
build, operate (or own /lease/ rent/ manage) for an agreed duration and then transfer
the asset to the Govt. / Govt organization. Based on the study material supplied to you
explain:
1. Different Public Private Schemes.
2. Parties involved in Public Private participation and their roles.
3. Financial structuring of Public-Private Partnership projects.
4. Do you think this system is ideal for infrastructure development? Discuss.

Page 4

1. Different Public Private schemes

Public Private Partnerships refers to arrangements, typically medium to long term,
between the public and private sectors whereby some of the services that fall under the
responsibilities of the public sector are provided by the private sector, with clear
agreement on shared objectives for delivery of public infrastructure and/ or public
services. A PPP is generally a contract or agreement to outline the responsibilities of
each Party and clearly allocate risk. In a BOT arrangement, the private sector designs
and builds the infrastructure, finances its construction and owns, operates and
maintains it over a period, often as long as 20 or 30 years. This period is referred to as
the "Concession" period. Such projects provide for the infrastructure to be transferred to
the Government at the end of the concession period. There are a number of major
parties to any BOT project, all of whom have particular reasons to be involved in the
project. The Contractual arrangements between those parties, and the allocation of
risks, can be Complex and should be discussed in detailed structuring of BOT projects.
PUBLIC PRIVATE PARTNERSHIP: A business relationship between a private-sector
company and a government agency for the purpose of completing a project that will
serve the public. Public-private partnerships can be used to finance, build and operate
projects such as public transportation networks, parks and convention centers.
Financing a project through a public-private partnership can allow a project to be
completed sooner or make it a possibility in the first place.
The private sector is playing an increasingly crucial role in the financing and provision of
services that were traditionally the domain of the public sector. One of the key reasons
is that governments are unable to cope with the ever-increasing demands on their
budgets. Most infrastructure expenditures in developing countries have been funded
directly from fiscal budgets but several factors such as macroeconomic instability and
growing investment requirements have shown that public financing is volatile and, in
many countries, rarely meet crucial infrastructure expenditure requirements in a timely
and adequate manner.
Page 5

Furthermore, there are efficiency gains arising from innovation, management and
marketing skills offered by the private sector and greater incentives for the control of
construction, operating and maintenance costs. More so, the provision of additional
finance for infrastructure projects enables projects to be brought forward in time, thus
generating earlier economic benefits.
The diagram below illustrates the options for involving the private sector in the provision
of infrastructure delivery.
Diagram 1: Range of Private Sector Options

At the left are supply and service contracts, which tend to be of short duration and
require less private commitment than the options higher in the continuum. The private
Contractor is not directly responsible for providing the service, but instead for
performing specified tasks, such as supplying inputs, constructing works, maintaining
facilities, or billing customers. At the left are the longer term arrangements which require
significant private sector commitment.

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OPTION OF PPP:
There is a range of options for involving private sector participation that vary with
regards to ownership, operations and maintenance, financing, risk allocation and
duration. A summary of these options can be viewed in Table 1.
Table 1: Allocation of key responsibilities under the main private sector participation
options
Option

Asset

Operations

Capital

Commer

Ownership

and

Investment

cial Risk

Duration

Maintenan
Service

Public

ce
Public

and Public

Public

1-2 years

Public

Private
Private

Public

Public

3-5 years

contract
Lease

Public

Private

Public

Shared

8-15

Concession

Public

Private

Private

Private

years
25-30

Build

Private and

Private

Private

Private

years
20-30

Operate

public

Transfer
Divestiture

Private or

contract
Manageme
nt

years
Private

Private

Private

Indefinite

private and

(may be

public

limited by
license)

Service contract

Page 7

Under this option, the private sector performs a specific operational service for a fee, for
example meter reading, billing and collection.
Management contract
In this option, the private sector is paid a fee for operating and maintaining a
government-owned business and making management decisions.
Lease
Under the lease option, the private sector leases facilities and is responsible for
operation and maintenance.
Concession
Under concessions, the private sector finances the project and also has full
responsibility for operations and maintenance. The government owns the asset and all
full use rights must revert to the government after the specified period of time.
BOT
BOT is the terminology for a model or structure that uses private investment to
undertake the infrastructure development that has historically been undertaken by the
public sector. In a BOT project, a private company is given a concession to build and
operate a facility that would normally be built and operated by the government. The
private company is also responsible for financing and designing the project. At the end
of the concession period, the private company returns ownership of the project to the
government (although this need not be the case). The concession period is determined
primarily by the length of time needed for the facilitys revenue stream to pay off the
companys debt and provide a reasonable rate of return for its effort and risk.
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The table provided below reviews the BOT option and its variants, describes some
characteristics of these different procurement arrangements and depicts the relationship
between these different procurement methods and the financing of the project.
BOT PROJECT PROCUREMENT STRUCTURES
BOT Project Type
Build Own Operate Transfer (BOOT)

Characteristics
The service provider is responsible
for design and construction, finance,
operations,

maintenance

and

commercial risks associated with the

project.
The service provider owns the
project throughout the concession
period
The asset is transferred back to the
government at the end of the term,
often at no cost.
Build Own Operate (BOO)
Similar to BOOT projects, but the
service provider retains ownership of
the asset in perpetuity.
The government only agrees to
purchase the services produced for a
fixed length of time
Design Build Operate (DBO)
A design and construction contract
linked
Page 9

to

an

operation

and

maintenance contract.
The service provider is usually
responsible for financing the project
during construction.
The government purchases the asset
from the developer for a pre-agreed
price prior to (or immediately after)
commissioning

and

takes

all

ownership risks from that time.

Lease Own Operate (LOO)
Similar to a BOO project but an
existing asset is leased from the
government for a specified time.

Some other schemes in PPP are:BOT-Toll (Build Operate Transfer Toll) - The private entity meets the upfront
cost of design, construction and recurring cost on operation and maintenance.
The Private entity recovers the entire cost along with the interest from collection
of user utilization during the agreed concession period. Capital infusion is
available from the public entity. A risk sharing model is predominant in this model.

BOOT (Build Operate Own Transfer) - This engagement model is similar to the
Build Operate Transfer model except that the private entity has to transfer the
facility back to the public sector. In BOOT model the government grants a private
entity to finance, design, build and operate a facility for a specific period of time
before the transfer. This is a variation of the BOT model, except that the
ownership of the newly built facility will rest with the private party and during the
period of contract. This will result in the transfer of most of the risks related to
planning, design, construction and operation of the project to the private entity.
The public sector entity will however contract to purchase the goods and States
and their area of development in PPPs services produced by the project on
mutually agreed terms and conditions.. The facility built under PPP will be
Page 10

transferred back to the government department or agency at the end of the

contract period, generally at the residual value and after the private entity
recovers its investment and reasonable return agreed to as per the contract.
Joint Venture (JV) - In a PPP arrangement commonly followed in our country
(such as for airport development), the private sector body is encouraged to form
a joint venture company (JVC) along with the participating public sector agency
with the latter holding only minority shares. The private sector body will be
responsible for the design; construction and management of the operations
targeted for the PPP and will also bring in most of the investment requirements.
The public sector partners contribution will be by way of fixed assets at a predetermined value, whether it is land, buildings or facilities or it may contribute to
the shareholding capital. It may also provide assurances and guarantees
required by the private partner to raise funds and to ensure smooth construction
and operation. The public service for which the joint venture is established will be
provided by the entity on certain pre-set conditions and subject to the required
quality parameters and specifications. Examples are international airports
(Hyderabad and Bangalore), ports etc.

Management Contract (MC) - A management contract is a contractual

arrangement for the management of a part or whole of a public enterprise by the
private sector. Management contracts allow private sector skills to be brought
into service design and delivery, operational control, labour management and
equipment procurement. However, the public sector retains the ownership of
facility and equipment. The private sector is provided specified responsibilities
concerning a service and is generally not asked to assume commercial risk. The
private contractor is paid a fee to manage and operate services. Normally,
payment of such fees is performance-based. Usually, the contract period is short,
typically two to five years. But longer period may be used for large and complex
operational facilities such as a port or airport.
BOT (Build Operate Transfer) - The private business builds and operates the
public facility for an agreed period of time. Once the facility is operational as
agreed, or at the end of the time period, the private entity transfers the facility
ownership to the public, here it may be construed as Government. Under this
category, the private partner is responsible to design, build, operate (during the
contracted period) and transfer back the facility to the public sector. The private
sector partner is expected to bring the finance for the project and take the
responsibility to construct and maintain it. The public sector will either pay a rent
for using the facility or allow it to collect revenue from the users. The national
highway projects contracted out by NHAI under PPP mode is an example. This
model is a classic example for IT industry
Page 11

BOT Annuity (Build Operate Transfer Annuity) This model though is globally
accepted one does not have the favour of the Planning Commission of India. In
case of annuity model, the cost of building the entity is paid to the private entity
or the developer annually after the starting commercial operations of the facility
DBFOT (Design Build Finance Operate Transfer) - These are other variations of
PPP and as the nomenclatures highlight, the private party assumes the entire
responsibility for the design, construct, finance, and operate or operate and
maintain the project for the period of concession. These are also referred to as
Concessions. The project will recover its investments (ROI) through
concessions granted or through annuity payments etc. It may be noted that most
of the project risks related to the design, financing and construction would stand
transferred to the private partner. The public sector may provide guarantees to
financing agencies, help with the acquisition of land and assist to obtain statutory
and environmental clearances and approvals and also assure a reasonable
return as per established norms or industry practice etc., throughout the period of
concession.
BOO (Build Own Operate) - In a BOO project, ownership of the project usually
remains with the Private entity. The government grants the rights to design,
finance, build, operate and maintain the project to a private entity, which retains
ownership of the project. In BOO the private entity is usually not required to
transfer the facility back to the government
BOOST (Build Operate Own Share Transfer) This model is very similar to the
BOOT model, except that there exists an arrangement or sharing the revenue to
the private entity for a longer time even after the rights of the private entity is
transferred to the public entity.

BOT projects, when properly designed, offer significant potential for technology transfer
and local capacity building as well as helping develop national capital markets.
Advantages and Challenges of the BOT Approach
The BOT approach has many potential advantages, some of which have been alluded
to above, and is a visible alternative in most countries to the more traditional approach
using sovereign borrowings or budgetary resources

Page 12

Some challenges that should be taken into consideration include the length of time
required to develop and negotiate BOT schemes, the need for a suitable political and
economic climate, and a defined regulatory environment. In short, the BOT approach
requires an environment that is conducive to private sector investment.
The economic costs associated with BOT projects include the following:
Costs due to imbalance in experience. Governments with little experience in BOT
contracts are advised to initiate BOT projects on a manageable scale and seek
professional advice to compensate the often greater experience of the private
sector.
User costs imposed for the first time or increased to match market rates. The
economic costs of public services, once covered by the Government, and then
become financial costs for the user.
Overpriced supplies. Potential conflicts of interest on pricing among the project
sponsors must be monitored. Care must be taken to ensure that sponsors who
supply goods or services to the project do so on a fully competitive basis.
High financing costs. Financing costs for BOT projects tend to be high, as the legal
fees associated with their contractual arrangements are much higher than those
of standard commercial contracts. The complexity of the credit means that
lenders need more time than usual to assess a projects merits and will tend to
charge higher fees.

Page 13

2. Parties involved in Public Private participation and their roles.

(i)

The Government:
The government is represented either through a ministry or a government
body (such as State Government or a Municipal Body) with its own body
of authorized personnel empowered to negotiate and take decisions
regarding the implementation of the project. The main interest of the
government in relation to the implementation of the infrastructure projects
by a private entity should be to ensure that only necessary and required
projects are authorized and the projects that are authorized are indeed
implemented within the time frame and at the costs that ensure their
viability not only at a commercial level but also at a social / public level.
This would entail that an adequate and balanced frame work is provided to
ensure the speedy implementation of the projects. This also ensures that
the facility is built to the required standards and within the reasonable
costs estimated at the time of authorization of the projects.

(ii)

Sponsors:
The concerned group from the non-government sector that is seeking or
that has been selected to implement the project are commonly referred to
as the sponsors or developers.

(iii)

Lenders Financing Agency. He is not a share holder:

The group of legal entities, institutions, companies and other persons that
provide the debt financing for the development of the project are referred
to as the lenders.

(iv)

Investors:
The persons who invest money into the development of the project are
referred to as investors. The main difference between lenders and
investors is that lenders do not look towards acquiring a participatory
interest in the implementation of the project and its consequent returns,
but only seek to lend money on commercial terms in order to ensure an
adequate increase in the amounts lent through the payment of periodic
interest on the amount till the complete repayment of the amount
Page 14

borrowed. This difference in the nature of their interests in financing the

implementation of the project distinguishes the amount of risk that the
lenders are willing to accept regarding the project. It is common to find the
same entity being a lender with the regard to another amount. The
differentiating factor between the two is the risk the entity is undertaking in
relation to the specified sums and the manner in which its interests in
relation to the sums forwarded are protected.
(v)

Contractors:
As an infrastructure project involves expertise that is seldom present
within the capability of any single sponsor or contractor, there are various
groups of contractor selected by the sponsors to implement the various
segments of the project. The contractors are commonly identified by the
nature of the responsibilities they undertake. Generally the main
contractor undertaking to construct the infrastructure facility. This
contractor is identified on the basis of the scope of work actually being
sought to be contracted out.
One of the prevalent methods os to contract out the entire scope of work
relating to Engineering, procurement and construction of an infrastructure
facility to one contract who is referred as the EPC contractor. Another
method is to contract out the work of formulating the design of the facility.
This method is not preferred as it causes complication regarding the
allocation of responsibility for any defeat detected in the facility at a later
stage.
The operation and maintenance of the facility upon completion of
construction is contracted out to contractors specializing in the operation
and maintenance of the particular facility (referred as the O&M) contractor.

(vi)

Project Vehicle Special purpose vehicle

The particular entity vested with the right to implement the project is
commonly referred to as the project vehicle or the special purpose vehicle.
Sponsors generally seek to implement a project through a specific legal
entity formed by them. The reason for such structuring is to transfer the
Page 15

risks to SPV rather than take it themselves. The documentation relating to

the implementation of the project is entered by the project vehicle. The
extent to which the sponsors succeed in isolating the risks relating to
implementation of the project is ultimately decided only after an analysis of
the project documents and the finance documents.
(vii)

Users / Consumers
The user of an infrastructure facility or consumers of the infrastructure
facility service are generally members of the common public and may be
at times be represented by a public interest forum or a consumer body. In
India, generally the user of the facility is generally represented by the
government itself. However, it is not uncommon to find that at times, an
infrastructure facility is designed for use for a clearly identified and defined
set of users or even a single user. In such circumstances the facility is
referred to as a single user. In such circumstances the facility is referred to
as a single user.

(viii)

Regulator (Like TRAI)

The body vested with the authority and powers to regulate the
development and provision of the related infrastructure services, would
also be a participant in the development of an infrasturere project. Ideally,
prior to opening of any infrastructure sector to private participation, a
regulator body for that sector should be first constituted in order to
regulate the conflict of interests from the various participants, so involved
in the development of the project. In India, however there has no such
planned opening of infrastructure sectors. The existing infrastructure
regulatory bodies are TRAI constituted by an act of parliament.

(ix)

Other Authorities (NHAI, AAI etc)

Apart from the regulatory authorities there are certain other authorities that
have been established for the purpose s of providing specific infrastructure
services.

Page 16

3. Financial structuring of Public-Private Partnership projects.

The Public-Private Partnerships (PPP) scheme has become popular in India as an
innovative approach for the development of roads etc with the involvement of the private
sector. The financial structuring of PPP projects is quite complex.
Capital for PPP Projects
The capital mobilized for a PPP project essentially consists of Equity and Debt. Some
projects may attract Mezzanine capital and Grant from government. Each component
serves a specific role in financing, with its attendant risks and returns. Timely
mobilization of funds is critical for the prompt completion and success of a PPP project.
The SPV should have the capability to raise the necessary finance at the right time, with
flexibility to manage possible cost overruns.
Equity Capital
Equity is subscribed by the parent companies sponsoring the SPV and by the
shareholders, who view the project as an attractive investment opportunity. Contractors
for construction, maintenance, operations and supply of equipment are also normally
persuaded to participate in the equity.
Equity is the lowest ranked capital in terms of its claims on the assets of the project.
Equity holders get their returns only after all other project obligations are met. Thus the
equity holders may gain a profit or lose their expected return, depending on the success
or failure of the project. Equity holders carry the highest risk, and it is natural that they
expect high returns (about 20%).
Debt Capital
Debt capital is necessary for most PPP projects as the concessionaire may not be able
to provide the entire investment in the form of equity. The sources of debt are the
commercial banks, financial institutions and multi-lateral organizations. Commercial
banks in the past have been providing debt instruments with short tenure of less than
seven years, to be in tune with the normal deposit tenures.
Mezzanine Capital
Page 17

Mezzanine capital is investment with some qualities of debt and equity, and so it carries
a risk profile intermediate between debt and equity. This may take the form of
subordinated debt or preference shares with regular interest. Mezzanine capital ranks
below the senior debt, and carries a higher rate of interest than senior debt. It is normal
to persuade the contractors/suppliers to subscribe to mezzanine capital. The
concessionaire may be able to secure a larger senior debt on favorable terms in view of
the mobilized mezzanine capital.
Financial Closure
When a SPV successfully negotiates a legally binding commitment of the equity holders
and the debt financiers to provide or mobilize the required funding on agreed terms, the
stage in the progress of the project is referred as the financial closure. This is a critical
mile-stone, denoting the preparedness of the project to commence construction. The
financial closure will be facilitated if the lenders perceive the project as 'bankable' and
view the projected cash flows realistic and adequate to cover the debt service
obligations.

4. Do you think this system is ideal for infrastructure development? Discuss

PPP or Public-Private-Partnership is a unique concept which involves coming together

of public and private sector with a purpose to develop public assets or for provision of
public services. It is an elaborate arrangement between a state body and a privately
owned entity which serves to promote private capital investment in public projects,
especially those connected with infrastructure development. The agreement also
includes sharing of assets and skills between state and privately owned bodies to be
able to achieve the best possible outcome. The private entity receives performance
linked payments based on a specific set of criteria.

Page 18

A basic feature of any PPP scheme is that the project under consideration is usually a
high priority one and is well-planned by the government. Another essential aspect is that
both the sides assume some amount of risk and mutual value for the project. Some of
the infrastructure projects usually covered under PPP model include building of
highways, ports, airports, developing railways infrastructure, telecom facilities, power
generation projects, and sanitation, water and waste management projects.
In India, the PPP model was introduced by UPA Government at the Centre for
developing some of the major facilities including airports and metros. The main issues
faced with proper implementation of this model is that infrastructure projects are usually
long-term ones and a number of factors including cost of materials, policies and even
economic conditions can change while the project is underway. If the initiative to set up
a sophisticated mechanism for resolving such issues in implementation of PPP model is
successful, it can attract big investments from private sector and lead to fast-paced
development of infrastructure.
The status of the PPP in the infrastructure development in India, both in the Central
Government schemes as well as State sponsored schemes, is not encouraging, stable
macroeconomic framework, sound regulatory structure, investor friendly policies,
sustainable project revenues, transparency and consistency of policies, effective
regulation and liberalization of labor laws, and good corporate governance are the basic
requirements, which define the success of the PPP model. The PPP model in the road
sector has experienced with enthusiastic response with the introduction of massive
NHDP with structured MCA. However, many of the road projects are faced with cost and
time overruns on account of prolonging disputes in land acquisition, hurdles in the
material movements, law and order problems, etc.
Power shortage is a serious concern and the quality of the power supply is generally
poor, especially in rural and semi-urban areas, which has affected the micro and small
enterprises severely. Further, private sector participation in power generation is not
forthcoming due to specific issues such as delays in finalizing power purchase
agreements, high aggregated technical and commercial losses, and age-old
Page 19

transmission networks, shortage of fuel supply and policy and procedural barriers while
exploring renewable energy sources.
The progress in the development of many of the port projects under private participation
is at a sluggish pace, which requires conducive policy environment. Efficiency in cargo
handling needs to be enhanced through modernization of port facilities to facilitate the
trade. The PPP model projects in the airport sector are in slow progress and also
restricted to major airports. Modernization of airports like Chennai and Kolkata is yet to
take-off due to procedural hassles and land acquisition problems. This brings to the
fore a need for constructive and stable policy environment towards land
acquisition for public utilities. The urban infrastructure bottlenecks need to be
addressed through a development strategy, which encompasses efficient planning and
organization of the project, balancing the public-private interest, reinvigoration of
electricity, water supply and transportation system and integration of finance and
technology.
International experience suggests that the success of PPP projects requires a single
objective of better services for the public at a reasonable cost. This is achievable
through realistic and reasonable risk transfer while addressing the public concerns. The
Indian PPP model should adhere to such objectives and best practices to march
forward on the success path. In this pursuit, easy availability of long-term private capital
is an essential requirement. Fostering the Greenfield investments in the public
infrastructure with appropriate user charges, transparent revenue and risk sharing
agreements would transform the international capital inflows into productive ventures.
Above all, selection of right PPP model for a right project at a right time through
realistic planning would go a long way in providing meaningful and hassle free
infrastructure development, which ultimately would increase the infrastructure
standards and thereby sustain the overall macroeconomic developments of the
country.
A planning commission working group on urban transport for the 12th five year plan has
outright rejected thePPP model for developing core urban infrastructure projects, like
Page 20

metro-rails, and bus procurement and transit systems. The working group, headed by
former managing director of Delhi Metro Rail Corporation E Sreedharan, has
particularly opposed PPPs for metro rail projects in the country. "It has been
proposed that urban rail transit system should be taken up with primarily government
funding except rare cases of high density metro cities where PPP can be attempted for
some elevated corridors," the group said. The cost of completion of the Delhi metro
Phase 1 network was Rs 10,571 crore while that of the Phase 2 is estimated to be more
than Rs 13, 338 crore. The average cost per km of rail network laid for Delhi metro
comes to around Rs 175 crore. The Airport Expressway, which is the part of the Delhi
Metro attempted in a PPP mode with Reliance Infrastructure was built at a cost of Rs
5,700 crore of which Reliance Infra paid Rs 2880 crore. The entire cost of the project is
enough to purchase around 20 full bodied Boeing 747s or build 2390 kms of high quality
4 lane national highway. The group observed that internationally also private investment
has not been successful in urban transport projects because the usually unstable
revenues of these projects make them commercially unviable.

PPPs offer the public sector potential cost, quality and scale advantages in achieving
infrastructure service targets. However, PPPs are different to the traditional public
sector route and these differences require adaptation of approach and capabilities in the
public sector. There are also some new costs associated with PPPs.
The advantages and challenges of PPPs are outlined below. In general, in a welldesigned and supported PPP the advantages will outweigh the disadvantages.
Advantages of PPP
The advantages of PPP include:
Page 21

Access to private sector finance

Efficiency advantages from using private sector skills and from transferring risk to
the private sector

Potentially increased transparency

Enlargement of focus from only creating an asset to delivery of a service,

including maintenance of the infrastructure asset during its operating lifetime

This broadened focus creates incentives to reduce the full life-cycle costs (ie,
construction costs and operating costs)
All of these provide strong reasons in favour of using PPPs in India and elsewhere.
Access

to

private

sector

finance

India has a very large infrastructure need and an associated funding gap. PPPs can
help both to meet the need and to fill the funding gap. PPP projects often involve the
private sector arranging and providing finance. This frees the public sector from the
need to meet financing requirements from its own revenues (taxes) or through
borrowing. This is an advantage where the public sector is facing limits on how much
capital it can raise, as in India. By shifting the responsibility for finance away from the
public sector PPPs can enable more investment in infrastructure and increased access
to infrastructure services.

Using private sector finance also allows the public sector to move large capital
expenditure programmes off balance sheet. This has been a motivating factor for PPPs
in countries where the constraint on finance is a government commitment to a
borrowing (ie. public debt) cap.
Higher

efficiency

in

the

private

sector

A well designed and managed PPP should take advantage of the potential for efficiency
gains from using the private sector.
Page 22

Increased efficiency is driven by three features of well designed PPPs:

The allocation of risk and the associated performance rewards and penalties
create incentives in the PPP contract that encourage the private partner to achieve
efficiency at each stage of the project and to introduce efficiency improvements where
possible. By shifting risk onto private partners the public sector is able to limit its own
exposure to cost escalation.

PPPs can be structured so as to create a whole-of-life focus in which the

private partner designs the project to take account of the link between construction and
operation so that the cost will be minimized over the projects lifetime. A private partner
who in addition to designing and building the project will also provide the ongoing
operations and maintenance management has an incentive to ensure that the design
and construction facilitate efficient O&M. By contrast, if one set of contractors is
employed for design and construction and other unrelated contractors for O&M they will
each take a narrow perspective, considering only the point efficiencies in their
component and not taking account of the interactions between the two.

Competition is introduced during the bidding stage, thereby bringing the benefits
of market procurement (this is a kind of competition for the market). As long as the
project is well specified in terms of the output requirements (rather than specifying the
inputs) then each private sector bidder has an incentive to produce an innovative
response and to minimize cost.
Complex

procurement

process

with

associated

high

transaction

costs

The PPP project must be clearly specified, including allocation of risk and clear
statement of the service output requirements. The long-term nature of PPP contracts
requires greater consideration and specification of contingencies in advance.
The tendering and negotiation process is a costly exercise. Transactions advisors and
legal experts will typically be required.

Page 23

Contract

uncertainties

PPPs often cover a long-term period of service provision (eg. 15-30 years, or life of the
asset). Any agreement covering such a long period into the future is naturally subject to
uncertainty. If the requirements of the public sponsor or the conditions facing the private
sector change during the lifetime of the PPP the contract may need to be modified to
reflect the changes. This can entail large costs to the public sector and the benefit of
competitive tendering to determine these costs is usually not available.
This issue can be mitigated by selecting relatively stable projects as PPPs and by
specifying in the original contract terms how future contract variations will be handled
and priced.

BIBLOGRAPHY/ READINGS
IDM 12. Management of PPPs
Reserve Bank of India Database on PPP
The Economic times
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