Public Private Partnerships in India

After becoming popular with Noida Toll Bridge, Public Private Partnerships are now one of the most crucial aspects of development in India. Whether it is infrastructure, education, healthcare, waste water / sewage facilities or water supply, PPP concept has become an indispensible means of making India a developed nation.

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The article aims to introduce readers with the concept of Public Private Partnership (PPP) and why is it important for infrastructure development in India.
The break-up of article is as follows:

1. Meaning of PPP
2. Problems of Public Sector
3. Strengths of Private Sector
4. Merging of both – public and private

Meaning of PPP –
As per Ministry of Finance, Department Of Economic Affairs, PPP project means “a project based on a contract or concession agreement, between a Government or statutory entity on the one side and a private sector company on the other side, for delivering an infrastructure service on payment of user charges.” While John Laing PLC (UK) defines PPPs as – “long term partnerships to deliver assets and services underpinning public services and community outcomes. Optimal structuring links private sector profitability to sustained performance over the long-term, yielding robust and attractive cash-flows for investors in return for delivering better value for money to the taxpayer”. Now, it is important to understand that PPPs are not government projects completed by private players but a project which has to be completed with private participation and government support. The skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.
A PPP project should essentially have the following characteristics:
1. Involve a clearly defined project – in terms of cost, time, responsibilities, etc.
2. Involve the sharing of risks with the private sector.
3. Contractual relationship between parties – public and private

Problems of Public Sector
Traditionally, public services have been sole domain of governments and private sector participation has been limited to separate planning, design or construction contracts on a fee for service basis – based on the public agency’s specifications.
Some of the problems/shortcomings of public sector that nudged governments towards PPP are sited below:

1. Limited Capacity: The needs of infrastructure are now greater than ever, both in emerging and developing countries. And governments are already burdened with costs of civic amenities and social infrastructure like schools, hospitals, etc. Also loss-making PSUs and government agencies/departments have reduced their capacities to shell out huge chunks of money into the infrastructure pool.
2. Delays in projects: The timelines decided in the very beginning of the project and revised countless times during the life of project are seldom adhered to. This not only results in blockage of capital but also increases the cost of project several times.
3. Project cost savings: In order to have transparency in the system and get the best deal, bid procedures are a mandatory part of government Projects. However, still these projects cost exchequer a fortune because of lack of accountability and rare application of financial propriety. The result is wasteful expenditure and unviable projects which at the time of development stage were very much viable. (Many in the industry believe that the ratio of government budget on a project to what a private would spend is 5 i.e. if government cost is Rs 100 for a project, a private would do that project in approximately Rs 20 only.

Strengths of Private Sector
Private sector has more often than not demonstrated better results than public sector. Whether it is small service contracts or complete privatisation, private sector has always been able to bring profitability, growth and of course, better standards. How the private sector does this magic has several answers. Some of these are sited below:
1. Expedited completion compared to conventional project delivery methods;
2. Improved quality and system performance from the use of innovative materials and management techniques;
3. Access to new sources of private capital.
4. Innovative technologies used by private players not only yield better benefits/services but also unexampled designs.
5. Incentive for governments to use PPPs to move investments off budget, and to shift liabilities to the future.

Merging of both – public and private
Despite the myriad benefits provided by private players, there are some fields where public sector plays a pivotal role:

1. Legal Authority: Do undertake any activity in any country, one has to abide by the law, follow procedures and take required permissions. Now these are tasks which can take almost double the time required for completing the project. Such procedures/permissions are best performed by public sector.
2. Protection of Public Policies: Though facilities/services are required but who will decide who gets what, in the sense that there has to be equity in distribution of resources. Given to private sectors, they will give a larger piece of cake to the one who gives them a bigger price i.e. Haves. Here, public sector takes the responsibility and provides services/facilities to the Have-nots.
3. Social Infrastructure: There are some sectors which the private sector refrains from like rural transport, sanitation, primary education, etc. These are actually sectors which have long gestation period and less or absolutely no return but are pertinent for nation’s growth.
   
   To overcome the weaknesses of the two sectors and make the best out of their pluses, concept of PPP has been developed. Among many, some of the benefits of PPPs are as follows:
   1. PPPs make projects affordable by pooling public and private monies
   2. PPPs maximise the use of private sector skills, technology and experience
   3. Risks are allocated to the party best able to manage or absorb each particular risk – for e.g. regulatory/governmental risk retained by public sector and financial risk transferred to private
   4. PPPs force the public sector to focus on outputs and benefits from the start as peoples’ money is at stake
   5. The quality of service has to be maintained for the life of the PPP

Key challenges in using PPP procurement:
1. Insufficient private sector expertise in handling PPP projects
2. Incapability of the public sector, in terms of skills and personnel, to handle the PPP mandates
3. Partial loss of management control by the public sector
4. PPP procurement can be lengthy and costly
5. The private sector has a higher cost of finance