Regulatory Framework for India
1.1 India has taken up a massive programme for infrastructure development and an investment of around US dollar one trillion (about Rs. 5,00,000 cr) is expected to be made in the 12th Plan (2012 2017) period, in order to achieve a growth rate of 9 to 10 percent. Around 50 percent of the required investment is likely to come from the private sector. Traditionally the Government institutions have been developing the infrastructure and playing the role of policymakers, implementer and regulators with virtual monopoly. Now with greater involvement of private sector and the people /users becoming more aware and demanding, the concept of value for money has become more significant for the Government as well as for the people.
1.2 With the present approach of the Government to involve more and more private sectors in delivery of the public services and utility, so that the benefits of progress reach to the poorest of the poor, following issues gain importance:
– Government/Policymakers changing role of the State from implementer / operator to facilitator harmonising the interests of various stakeholders and by addressing the issues of monopoly, competition, safety, benefits to the users and user charges.
– Facilitation of making Indian industry globally competitive.
– The benefits of progress and development reaching to all sections of society.
– People as consumers getting the services which are of the required and desired quality which provides value for their money.
1.3 In this scenario, it becomes imperative that an effective and independent regulatory mechanism is put in position, to address above issues and to the provide consumer protection.
2. International Practices
2.1 More than 200 infrastructure regulatory bodies have emerged in the last 15 years for improving the needs of consumers and investors and also to create institutions which would encourage and support stable and sustainable long term economic and legal commitment by Government as well as investors. Countries like USA, UK and Australia have been having
infrastructure regulatory mechanism for a long time. A brief on them is as below:
2.1.1 USA have multi sectors regulator like Federal Communication Commission and sector specific regulators like Electrical Commission, Transmission Infrastructure Regulator, US Foods and Drug Administration, US Securities and Exchange Commission, National Highway Traffic Safety Administration etc. The regulatory agencies are empowered to create and enforce rules with the backing of the law whereby individuals, business and public private organisations can be fined, sanctioned, forced to close and even imprisoned for violation of federal regulations.
2.1.2 UK in the last two decades has created regulators, governmental bodies and non-governmental organisations in many sectors to carry out the states roles. They have regulatory mechanism in privatised infrastructure industry sectors of gas, energy, water and sewerage etc. such as Office of telecommunication (Oftel), Office of gas and electricity markets (Ofgem), consolidated regulator for the communications and broadcasting sectors (Ofcom), protection of the interests of water customers (Ofwat), Office of rail regulator (ORR). UK regulators are not necessarily backed by law for their functions and autonomy. However the convention and tradition in UK are so strong that they take care of such shortcomings and have achieved consolidation and maturity.
2.1.3 Australia has three tier regulatory structures. The Commonwealth or Central Government has control over competition policy for essential infrastructure with regulation to National Networks in all sectors as well as in sectors of telecommunication, airports and national roads. The states regulate water, urban, transport, electricity, gas distribution and retail supply. Local Government regulates water services and local roads. Each regulator is established under its own legislation which set out the objective institutional framework and procedure. Australian practice has been able to develop the coordination between the Centre and State and common regulatory approach in some sectors.
2.1.4 Many countries in Europe, South America and Asia have sector regulators with responsibility for promoting competition.
2.2 Most of the East Asia and Pacific (EAP) countries are in the process of reforming their infrastructure sectors , focusing on strengthening the regulatory framework and making the investment climate more predictable. In this context assessing the status of consumer participation in infrastructure regulation is also necessary to ascertain whether regulatory reforms in the region are supported by adequate mechanisms to safeguard consumer interests.
3. Regulatory System
3.1 Regulatory mechanism has to act as the fourth arm of governance for intervention for controlling market and industry, facilitate competition, promote investment, stabilise market and prices, market structure procurement process, quality and protect consumer interest. It is defined by the combination of institution, laws and processes that give Government control over the operating and investment decision of enterprises that supply the infrastructure services.
3.2 Regulatory governance involves decision on:
– Autonomy, independence and accountability of the regulator.
– Relationship between the regulator and policymakers.
– Processes (formal and informal) by which decisions are made.
– Transparency of decision making by the regulator or other entities making regulatory decisions.
– Quality- of service standards.
– Handling of consumer complaints.
– Social obligations.
– Evaluating the effectiveness of Regulatory Systems.
3.3 For an effective regulatory governance, following key principles should be taken into consideration:
3.3.1 Independence Infrastructure regulators should, by law, is free to make decisions within their scope of authority without having to obtain prior approval from other officials or agencies of the government. They need to be adequately insulated from short-term political pressure. Independence for infrastructure regulators consists mainly of two elements:
– An arm’s-length relationship with regulated service providers, consumers and political authorities and
– The organisational autonomy necessary to attract the required expertise to perform regulatory functions effectively. The level of independence of a regulatory agency depends on the types of safeguards in place to promote its autonomy. Following main safeguards are key to achieving regulatory independence.
– Providing regulator with a distinct legal mandate, free of ministerial control;
– Right selection of right people with right professional knowledge and for fixed terms and protection from arbitrary removal;
– Involving both executive and legislative branches in the appointment process;
– Exempting the regulating agency from civil service salary rules that make it difficult to
attract and retain well-qualified staff;
– Providing the agency with reliable source of funding usually earmarked levies on regulated
Regulators need to be held accountable for their actions. The mechanisms for ensuring accountability include the following:
– Appeal rights for parties believing their interest harmed by regulatory agency decisions that
have been make against the requirements in the law either on process or on substance.
– Extensive transparency obligations (for example, or regulatory decisions and their justification).
– Setting up of benchmarks with substantive reporting and audit obligations.
3.3.3 Transparency and public participation
The entire regulatory process must be fair and impartial and open to opportunity for public participation. This can be achieved by following actions with very limited exceptions.
– All documents and information’s used for decision making should be available for public inspection.
– All procedures by which and criteria upon which decisions are made should be known in advance and made publicly available.
– No major decision should be made without being set down in a publicly available written document.
Predictability The regulatory system should provide reasonable principles and rules that will be followed within the overall framework:
– Changes should occur only after extensive public notice and consultation so that stakeholders have a meaningful opportunity to provide feedback to decision makers before the change is implemented.
– Regulatory decisions and policy determinations, including laws and governing regulatory decisions, should apply prospectively and never retroactively.
– Consistent approach under similar conditions.
3.3.5 Clarity of Roles
The role of the regulatory agency and that of other sector agencies should be carefully defined in law to avoid:
– Duplication of functions.
– Inter-agency conflicts.
– Policy confusion.
3.3.6 Completeness and Clarity in Rules
The regulatory system, through laws and agency rules, should provide all stakeholders with clear and complete timely advance notice of the principles, guidelines,expectations, responsibilities, consequences of misbehaviour, and objectives that will be pursued in carrying out regulatory activities.
Regulatory intervention in the sector should be proportionate to the challenges that the regulators are addressing:
– Intervention should be minimum necessary to remedy the problem being addressed and should be undertaken only if the likely benefits outweigh the expected economic and social costs.
– Regulators should have an array of powers and remedies at their disposal in order to ensure that they possess the ability to calibrate their actions to the circumstances faced.
3.3.8 Appropriate Institutional Characteristic
Regulatory agencies must be able to consistently perform professionally, competently, and thoroughly, which requires the following:
– A reliable, adequate, and independent source of revenue and adequate budgets.
– The ability to retain outside consultants when needed.
– Members who are appropriately insulated from short-term political repercussion.
– All regulatory decisions should be subject to final appeal to a single, impartial or independent, legally designated court or tribunal.
3.3.9 Requisite Powers
Regulatory agencies should, under the law, possess all powers required to perform their mission, with the authority to:
– Set tariffs for regulated entities.
– Establish, modify, and monitor market and service quality rules.
– Investigate, as well as adjudicate or mediate, consumer complaints.
– Provide dispute resolution facilities for the regulated entities.
– Compel the provision of needed information.• Monitor and enforce its decisions, and to remedy problems
– Prohibition against bribes and gratuities of any kind, conflicts of interest and any form of preferential treatment
– Reasonable disclosure of financial interest.
– Prohibition of use of inside information for personal gain.
Strict rules governing the behaviour of decision makers should be in place so as to preclude improprieties or any conduct appearing to be improper. The rules governing behaviour should be fully, fairly, and vigorously enforced by ethical rules. These should be:
– Prohibition against bribes and gratuities of any kind, conflicts of interest and any form of preferential treatment
– Reasonable disclosure of financial interest.
– Prohibition of use of inside information for personal gain.
3.4 Role and responsibility of stakeholders besides regulatory institutions, the other important stakeholders are the government, utilities agencies and consumers. Each needs to play their roles to make the system effective and successful. Their main roles are :
– Respect Regulatory independence
– Right and timely selection of regulators
– Competent and multi member Regulatory Commission
3.4.2 Utilities Agencies
– Regulatory Compliance.
– Regulatory information system.
– Transparency in dealing with Regulators.
– Active participation (Right to Information-RTI could be potent and effective tool)
– Feedback on the performance of the players
4. Regulatory Institutions
4.1 Regulatory agencies should be set up with the mandate to protect customers’ interests, to minimise regulatory costs so as to lower the overall cost of service, and make it more affordable for the poor.
4.2 Regulatory agencies are expected to be professionally competent, effective, a-political, and publicly credible, with transparent procedures which are subject to judicial review. However, in most countries – even the most developed-regulation lacks some of these desirable attributes.
4.3 Consumer protection especially from Monopoly, unreasonable and non-affordable tariff and sub standard performance, should be the main objective and concern on infrastructure Regulator. For this, regulators must insure effective consumer participation through :
– Informing consumers and there by raising awareness
– Resolving consumers complaints and follow up to ensure consumer satisfaction
– Soliciting consumer inputs through consultation and public meetings
– Strengthening consumer bodies
– Training and workshops for raising awareness
4.4 The issue as to whether there should separate regulator for each sector or a joint one for the combination of many sectors needs to be carefully considered. The main argument in favour of a separate regulator for each industry is the ability to focus in depth on the specific attributes of the industry and, consequently, to adopt the most suitable “menu” of regulatory policy instruments. At the same time, many infrastructure industries share a common concern with certain economic issues (e.g., the telecommunications and electricity industries are both concerned with access pricing of bottleneck services), and therefore there could be one joint regulatory agency for electricity, gas, and perhaps also water, and a separate agency for telecommunications, which undergoes particularly rapid technological change. In either case,multiplicity of regulators should be avoided and synergy among sectors be optimised.Development of Regulatory Mechanism for India
5. Development of Regulatory Mechanism for India
5.1 Traditionally the public services and utilities have been provided by the Government agencies responsible for that sector and the regulation has been mostly through contract and or governmental notifications. There has been not much separation between the policy maker and implementer. Presently only a few sectors such as ports, power, and telecommunication have broad regulatory institutional framework.
5.2 An effective an efficient infrastructure development in the country, requires adoption of appropriate public policies and it s implementation as also a regulatory mechanism that provides stability, protect consumer interest and guards against political interference for consumers and operators, provide incentives to the investors for efficient operation and needed investments. The important challenge for regulators is that the state agencies often do Not operate on a commercial basis and have to manage the conflicting situation of short term social interest and the long term viability of the enterprise. The situation is not different in many developed countries as well. India needs to evolve a consistent and coherent approach towards independent regulatory mechanism.
5.3 Government should start acting as facilitator rather than implementer. Issues relating to regulator vis-à-vis Competition Commission and speedier dispute resolution mechanism are addressed for enhancing the confidence. Following steps may facilitate creating the enabling regulatory regime:
5.3.1 Create enabling appropriate legislation for infrastructure regulatory regime with
– Clearly defined roles, powers, responsibilities for Government and Regulator and enforcement mechanism
– Clearly defined dispute resolution mechanism with judicial and appellate review
– Defined sources of funding possibly through
– Budgetary sources (allocation), annual grant
– Fee to be recovered from stakeholders such as service providers, consumers.
5.3.2 Identify Sector s requiring independent regulators. Challenge would be for social sectors where consumer interests/ protection require special attention. Considering the present situation where regulatory mechanism is in evolving stage, it would be prudent to have sector specific approach restrict the number of regulatory bodies, whereby one regulatory body could be for entire sector, such as,
– Energy to include electricity, coal, gas,petroleum, non renewable energy
– Communication to include telecommunication, cable, TV, print
– Transport to include road, rail, shipping, ports, aviation
– Urban roads, mass transport (rail and bus based), water, sanitation, solid waste and other city infrastructure
– Social health, education, housing,
– Rural roads, water, sanitation, waste management, irrigation, agro, tourism, industry
5.3.3 Selection of Regulators
– The Regulatory Body should be compact with multi disciplinary composition of professionals having impeccable track record.
– It should have a chairman and eight members with fixed tenure of 5-6 years and selected trough pre-defined transparent process.
– At least half of them from non- governmental sector and one third of members should be from consumer protection, field specialist and academician.
– In order to attract the best available talent, remuneration/ compensation should be comparable to the market. Facilities of house and car are part of package
6. Capacity Building
Capacity building for the regulators, its staff and other stakeholders, on regulatory aspects would be the crucial aspect for effectiveness of the system. The present capacity is quite inadequate. There is dire need of learning from experiences of other countries to take care of possible pitfalls. Capacity building could be done through existing institutions of repute till a dedicated institution on Regulation is established. Capacity building is an ongoing exercise and should be initiated with :
• Facilitating and organising structured training programmes for skill development of Government functionaries, regulators, utilities agencies and consumer protection groups.
• Discussions on past experiences and best practices
• Institutionalise regular interaction amongst stakeholders and sector experts and mechanism for independent expert views.
Institutionalisation of PPP Process in The Government
Secretary, Economic Affairs, Ministry of Finance
“Whereas the initiatives have gone a long way in creating greater awareness about PPPs within the central ministries and state governments, there is still a long way to go before Public Private Partnerships (PPPs) get mainstreamed in the public spending process”
Globally, infrastructure spending is being seen as the major driver for economic turnaround. National governments are taking steps to increase liquidity in the financial sector for increased lending that, it is expected, would increase infrastructure spending, and in turn infuse the economies with some confidence.
Even though Indian economy is likely to record a growth rate of over seven percent in the current fiscal and above six percent in the next,there is considerable diffidence in the financial institutions and despite several rounds of packages by the Reserve Bank of India (RBI) and the government, requisite liquidity is not being injected in the economy. Infrastructure projects are also facing the crunch.
It is estimated that Rs 20,01,776 crore (at 2006-07 prices) or US $ 488bn would be required for investment in the infrastructure sectors during the next five years. Although significant share of this investment is expected from the public sector, around 30 percent of the investment must come from the private sector. Provided the process issues can be resolved by the different arms of the government, PPPs present the most viable option for attracting private capital.
What prevents the private sector to invest and the Financial Institutions (FIs) to lend to PPP projects?
The Government of India has identified six constraints:
A. Policy and regulatory gaps, specially relating to specific sector policies and regulations;
B. Inadequate availability of long term finance both equity and debt;
C. Inadequate capacity in public institutions and public officials to manage PPP processes;
D. Inadequate capacity in the private sector both in the form of developer/investor and technical manpower;
E. Inadequate shelf of bankable infrastructure projects that can be bid out to the private sector; and
F. Inadequate advocacy to create greater acceptance of PPPs by the public at large.
To address these constraints and create an enabling framework for PPPs, several initiatives have been taken by the government related to the policy and regulatory environment. To address the financing needs of these projects, various steps have been taken like the setting up of India Infrastructure Finance Company and launching of a Scheme for Viability Gap Funding (VGF) of PPP projects.
Setting up of infrastructure funds is also being encouraged and multilateral agencies such as Asian Development Bank (ADB) and International Finance Corporation (IFC) have been permitted to raise Rupee bonds and carry out currency swaps to provide long term debt to PPP projects. Recently, India Infrastructure Finance Company Limited (IIFCL) has also been empowered to provide refinance to FIs for infrastructure lending.
To meet the capacity building requirements in the sector, necessary measures are being taken, with technical assistance from the World Bank and the ADB, to provide experts to the state governments and central ministries who are working as part of the teams of the PPP nodal officers. The Department of Economic Affairs (DEA) has also notified a panel of technically qualified transaction advisers to assist in PPP transaction management. In addition, manuals on PPPs to guide the users are being developed and training programmes for public officials undertaken.
While quality advisory services are fundamental to procuring affordable, value-for-money PPPs, the costs of PPP transactions, and particularly the costs of transaction advisers, are significant. Considering the risk of failure of the bid, in which case the entire cost of project development is to be written off, the sponsoring authorities either depend on grossly inadequate internal resources to manage the transaction, including preparing of legal documents, or try to save on cost by hiring sub-standard consultants.
For providing financial support for quality project development activities ‘India Infrastructure Project Development Fund’ (IIPDF), with an initial contribution of Rs 100 crore has been created in the DEA.
Whereas, all these initiatives have gone a long way in creating greater awareness about PPPs within the central ministries and the state governments, there is still a long way to go before PPPs get mainstreamed in the public spending process. The work being done by the DEA and by other agencies, such as the Planning Commission has only scratched the surface, considering that PPPs need to be internalised not only at the Central and the State level but also by Municipal Governments.
Public resistance to PPPs seen as another form of privatisation and the fear that the “profit motive” would drive up the cost of delivery of services has also slowed down the main streaming of PPPs.
There is, therefore, need to provide focused attention to some of the following activities.
There is need for sustained policy advocacy for creating environment conducive for PPPs through policy research and advocacy. This would be necessary not only at the Central government level but also at the state and the local level. This would include area of legal and regulatory reform and policy setting. This would also include developing new accounting practices to factor PPPs in public accounting.
It is also imperative that a sustained and intensive campaign be undertaken to create awareness about PPPs and its benefits for the stakeholders, including the consumers and the public at large. An effective communication strategy is needed for a greater acceptance of PPPs as part of public advocacy.
One of the methods for implementing communication strategy is to organise conferences and seminars where policies related to PPPs in specific sectors can be discussed and debated. As for wider communication with the public, content must be developed for dissemination with the help of media.
2. Capacity building
There is need for managing the entire gamut of capacity building activities that include training needs Assessment, content development, training of trainers, working with state level and central training institutions, and promoting autonomous organisations to develop capacities in this area. The expertise developed in Indian Institute of Managements (IIMs), Indian Institute of Technologies (IITs) and other institutions, such as the PPP Capacity Building Trust set up by the Infrastructure Development Finance Company (IDFC) should be leveraged. Given India’s access to grant funding from multilateral organisations, expertise can also be accessed from different research institutes and universities.
3. Investment promotion
Attracting private developers to bid for PPP projects from within the country and abroad would be a major challenge, especially when the deal flow increases considerably. There is need to develop a focused investment promotion strategy for PPP projects and for this the outreach of various apex industries associations, and bilateral and multilateral platforms should be leveraged for marketing projects in ports, roads, power, airports, urban infrastructure and other sectors.
4. Project implementation assistance
Once the deal has been done and the private developer has been given the projects, the process of getting statutory and other approvals from different government agencies at the central and the state level is complex, time consuming and cumbersome. Recently, an excellent report has been prepared by DEA on statutory clearances required for PPP projects.
It is revealing how time consuming it still is to get the approvals from the government agencies even though most of the Model Concession Agreements (MCAs) put the onus to getting these clearances on the sponsoring authorities). There is need for also considering institutional arrangement on lines of the Public Private Partnership Appraisal Committee (PPPAC) that can help the private sector partners through different ministries and governments.
5. PPP Statistics Cell
There is a need to collect and monitor data relating to PPP projects in a systematic and useful manner. Although the web enabled PPP database created by DEA captures data on more than 40 parameters, there is need for more comprehensive management of PPP data.
There is a massive task cut out for the Government of India, and more specifically for the Finance Ministry as PPPs entail contingent liabilities that need to be identified and capped. Risk management over the concession period is the essence of PPPs as an element of public finance. Without a more defined strategy and time bound implementation programme, it may be difficult to achieve the targets that the government has set out for itself.
Framework for PPP in Indian Ports – issues and emerging lessons
Senior Director, IDFC is a lawyer and a financier with extensive experience in PPP and infrastructure.
1. The Evolution of port legislation in India
Ports were harbours providing safe havens for ships visiting sea ports for leisure or trade and there was a need to conserve the ports so as to ensure safe navigation and pilot-age. Indian ports Act, 1908 was conceived and enacted to ensure these arrangements. Over a period of time, some of the harbours including in Madras, Calcutta and Bombay were developed into ports and passengers and each of these had separate legislation ( Bombay Port Trust Act, 1879, Calcutta Ports Act, 1890 and Madras Port Trust Act 1905) providing the framework for their governance where the port trusts administer the ports subject to the control of the central Government (Government of India namely GoI) in certain specified matters. Later the GoI set up the major ports in Cochin, Visakhapatnam and Kandla under their direct administration. Since decisions could not be taken locally except by reference to GoI and also as trade interests wanted a direct voice in the administration of ports, a new legislation Major Port Trust Act 1963 (MPTA) was enacted and made applicable to these new major ports and other new ports of the future. In 1974 the old ports of Bombay, Madras and Calcutta were also brought under this act.
2. Do federal port trusts continue to be relevant?
MPTA was enacted to administer the ports locally with representation of trade interests. In essence the Act constituted local authorities to administer in trust for the trade
1. The ownership is diffused. The assets and liabilities of the central government were transferred to the Board of Trustees Port authorities vide Sec 29 of the MPTA. In fact the preamble to the MPTA says that it is an act to make provision for the constitution of port authorities for certain major ports in India and to vest the administration, control and management of such ports in such authorities and for the connected matters
2. Governance is overseen by GoI in all important managerial decisions2
a. Board of Trustees has an unwieldy 17 or 19 members ( Sec 3)
b. Board includes trade interests (users who pay for services such as ship owners, shippers) vide Sec 3 who would be privy to commercial proposals as tariff but would not vote on it but the users who represent undertakings owned or controlled by the government (say a steel PSU being a prominent user with conflicting interests) can still vote. Similarly the state government (even it operates ports which compete) or trade unions can still vote on interested matters. ( Sec 19)
c. Filling up key positions, entering into contracts to buy/sell property (sec 34) or for contracting out (read BOT) or execution of major capital expenditure work (Sec 93) require central government approval.
d. Annual budget requires government approval u/s 98. Annual performance report is called administration report (Sec 106). U/s 107, every year the Board of Trustees should submit a statement of income and expenditure during the year to arrive at operating surplus or deficit ( the words profit or loss are excluded indicating that the MPTA does not consider federal port trusts as commercial entities)
e. Recognising the important role of port rusts as landlord cum operator, the Act empowers trust to render ship and cargo related services including by rail (vide Sec 42 (1)) and also has enabled outsourcing of the said services with prior GoI approval to any person ( read PPP) vide 42 (3).
f. Recognizing the role as landlords, the Act has empowered the trust with GoI approval to develop infrastructure facilities for ports vide 42 (1) (f) and also to execute capital expenditure works vide Sec 35 such as port civil and mechanical facilities and equipment, hotels, warehouses, bridges, buses, railways, breakwater, etc within or outside port limits. Sec 46 enables execution of private wharves etc with Board approval (read PPP enabled in outsourcing construction )
In short, the MPTA empowers the Boards to play a landlord role (within and outside port limits in port and bus/rail connectivity and hotels ) cum operator role including port and rail. It also enables outsourcing construction or operations with prior GOI approval. The MPTA has conferred a wider and enabling business mandate but under a governance model whose objective is to administer federal ports locally under the direct control of the GoI.
Thus while significant changes in the competitive landscape and in expectation from trust ports have occurred since then, major Port Trusts felt that they do not enjoy autonomy in decision making commensurate with the business dynamics. GoI responded by initiating amendments to MPT Act. Sec 42(3A) was inserted in the year 2000 empowering port trusts to enter into JV with any person or body corporate for performing its services. Sec 88 which defines areas of investment for port trusts was also amended in 2000 by adding Sec 88 (d) and (e) to allow port trusts to invest in joint ventures within own port limits and in other major and other ports subject to government approval. Technically this means that major ports can diversify by investing in other ports to mitigate respective hinterland risks .Major ports may consider floating SPV (off Balance sheet ) and invest as BOT investor in other ports and they may consider hiving off unviable units to JV . In addition to these amendments in the Act, IT Act (Sec 80 IA) was amended to extend the Income tax benefits of investment in infrastructure. As an experiment to the demands for corporate style of autonomy, the GoI Notified the new port of Ennore as a major port but it was outside the ambit of the MPTA. Ennore was incorporated as a limited company under the Companies Act, 1956. But on the flip side, no significant initiatives or investments have been made so far leveraging on these legislative amendments so far in spite of significant passage of time. To sum up, while the statute allows them to forge joint ventures, to invest in other ports and also offers tax rebate for their investments in infrastructure and tax advantage in borrowing, they are unable to leverage under the existing legislation which requires GoI approval for any/all decisions. In addition there is reluctance on the part of port trusts also to change.
3. Is corporatization of federal port trusts the answer?
Now there is a proposal to corporation port trusts on the lines of Ennore ostensibly to improve autonomy and commercial focus. Corporation of the Port of Singapore is a classic example of how corporation can transform an erstwhile public sector organization and enable it to become nimble to respond fast to the changing competitive landscape A corporatized port would be free to pursue business models (e.g.: passenger terminals, marina, SEZ, non port) and practices which are customer driven. It would be foot loose and not bound by local port limits. It would diversify to other port locations and strive not be port centric but logistic driven. It would for instance be able to forge JV with right partners and be able to hive off noncompetitive units and to unlock value from port assets It would strive to find its own means of financing investments from the market so as to achieve financial Independence from the government. Projects would be subject to investor due diligence and hence efficient. It would hence be able to source resources competitively from the market and stand the rigours of due diligence by hard- nosed investors and seek listing in stock exchanges similar to the Associated British Ports or the erstwhile P&O. The threat of take-over would deter managerial complacency in such ports. It would seek no sovereign protection from the market failure In short, freedom with commensurate commercial accountability would make corporatization worth while to pursue.
Experience so far seems to suggest that these assumptions are aggressive and are not tenable in the current Indian political and economic context. While there seems to be reluctance on the part of GoI to cede control, federal port trusts also appear unwilling to take the initiative as they have failed to take advantage of favourable amendments including those in Sec 88 and the like so far as discussed in the earlier section of this article. Also if the model of the only corporatization namely the major port of Ennore is any indication, corporatization is unlikely to change the situation as the decision making is still in government as most of the Board of Directors are from the government or do not have a direct pecuniary or meaningful stake in the entity . In Indian context, for corporatization to succeed, induction of a strategic private port operator appears vital. Continuation of government ownership and management control even post corporatization is unlikely to serve the intended purpose.
Given that port services require business orientation and customer focus on the lines discussed above, corporatization in the current format as in case of Ennore is futile. Ideally, federal port trusts should relinquish their as service providers and remain as landlords and port conservators. Service delivery in federal ports in India would be best left to the private sector whose incentives to cater to customer needs are greater. In case public sector should continue to be in charge of service delivery for whatsoever reason, the existing port trusts should be unbundled into business units and regulatory units. The business units should be corporatized by inducting a strategic port operator with significant equity stake and management control. The residual regulatory unit may continue to be port trust playing the role of the landlord but would require significant capacity building in terms of playing landlord role well. The typical landlord functions include port marketing, property management, project development and PPP management (bidding process, project structuring and financial analysis, negotiation of concession agreement) and more important navigation and conservancy. But the capacity and capabilities of existing staff are not appropriate for playing landlord function effectively particularly project development with serious conflicts of interest as service providers or operator today. In terms of governance, the Board in its current statutorily mandated structure lacks industry professionals as trustees; terms of contract are not market driven with serious conflicts of interest between the trustees and port. In addition they are not empowered as commercial autonomy and accountability are non existent as trusts with no power to appoint key personnel, plan budget, take decisions on investment and financing. Also the existing framework (vide Sec 110,110 A and 111 of MPTA) allows government intervention in PPP contracts awarded, supervening terms of award of contract by the port authority. In short, to play the landlord role effectively, they have to be enabled and empowered. This would mean that federal port trusts would need significant investments in building capacity in terms of training, recruitment of appropriately skilled staff and amendments to MPTA to empower the managers to take key decisions and to induct in the Board persons with the right type of expertise and independence under an equitable compensation structure.
4. Framework for PPP in Indian ports issues and emerging lessons
a. Facilitating PPP by MPTA
In federal port trusts governed by MPTA, PPP facilitation is indirect and inferred. PPP activities (say BOT) would involve rendering “services” and execution of certain “works”. Sec 42 (1)lists “services” which Board can do and includes passenger transport by rail and feeding to/by rail transport and provision of infrastructure facilities (albeit with GoI approval) for ports .Sec 42 (3) allows the Board to permit any person (read BOT operator) to perform these with GoI approval. While no time limit is specified for the same in the MPTA, the executive arm of the GoI (namely PPP Guidelines by GoI) limits it to 30 years on BOT basis. In addition Sec 42 (3A) which was inserted in the year 2000 permits the Board to enter into JV with operator) for performing the said services. While these refer to services, “works” part is dealt with by Sec 35 (2) which lists the works which Board could execute on its own (wharves, etc) within the port limits. Works include hotels, buses, rail rolling stock, etc. But Sec 46 says that no person (read private operator) can erect private wharves, etc without Board approval and subject to terms Board may specify. So a combined reading of Sec 35 (2) and Sec 46 for the works and a combined reading of Sec 42(1) and 42(3) for services and Sec 42 ( 3A) for joint venture of the Board with private investors enables PPP in the nature of BOT. However these PPP decisions of the Board require approval from the GoI as Sec 93 requires works exceeding set limits to obtain GoI approval before execution /contracting out (read BOT) by the Board. Similarly Sec 34 requires GoI approval for sale or purchase of property or lease of property beyond 30 years or for contracts exceeding certain set limits BOT arrangements of PPP may fall in these categories and require compliance. An amendment of MPTA in future should capture all the aspects of the PPP together (instead of piece meal dealing as of now) empowering the concessionaire authority clearly for investor comfort leaving no room for ambiguity.
5. Regulatory framework in retrospect and prospect
A.Independence of regulator:
Tariff authority for Major Ports (TAMP) was constituted under Sec 47 A of MPTA (Port Law Amendment Act, 1997) to frame scale of rates for levy in major ports covered by MPTA including by major port trust Boards and private terminal operators in major ports. Earlier before PPP was introduced, the Board of Trustees of each federal port trust framed their tariff (called scale of rates) .
Pursuant to the first BOT transaction in Indian private terminals in federal and state ports. TAMP adopts cost based tariff for regulations and private investors in federal ports and federal port trusts are subject to regulatory risk as TAMP sets/revises tariff from time to time. At a different level, the regulator also lacks independence and is subject to the risk of intervention by the GoI, adding one more layer of uncertainty for the private investor in federal ports. To quote a few examples, vide Sec 111, GoI is empowered to issue directions to TAMP on questions of “policy” and GoI decision on whether a question is one of policy or not shall be final (Sec 111).
Also GoI is empowered vide Sec 110 A to supersede TAMP in case of failure to “comply” with the directions issued by GoI under Sec 111. Also tariff orders of TAMP are not final and GoI can modify/cancel rates in ‘public interest” (Sec 54 of MPTA). In addition the terms and conditions of service of chairman or any member of TAMP are as may be prescribed by the GoI (Sec 47 B) and Sec 47 D empowers GoI to remove the chairman or any member of TAMP . If TAMP is seen as a proxy for control by GoI , private investors in federal ports are apprehensive whether they will be treated at par with federal port trusts which are administered indirectly by GoI. It is noteworthy to observe the lessons from the relatively successful PPP experience in state ports.
Tariff and commercial freedom to develop the state ports have yielded optimum results sometimes prompting private investors to assume risks higher than in federal ports such as in investing in connectivity ( rail as in Pipavav and Mundra by private investors) and assuming development risks of a higher magnitude in the absence of traffic history and having to secure project clearances from scratch in the absence of existing infrastructure as in federal ports
b. What should be the objective, approach and scope of regulation ?
Tariff regulation at terminal level exists in very few 7 countries such as India where again only federal ports are regulated. Terminal tariff is a minor component of system costs but it is regulated. Ocean reight and terminal handling charges levied by shipping companies and cargo clearing and forwarding charges charged by intermediaries are a higher component of system cost to the importer/exporter but they are not regulated. As per the study by the World Bank (1995) on Indian ports, port tariff is not the issue of concern. It is the system cost arising from delayed ship handling and high intermediary costs which render Indian trade uncompetitive.
Also tariff is not the only area of regulation in international ports. Tariff is part of economic regulation covering inter alia competition among terminals within and across ports, dispute resolution between the government/concessioning authority and the conditions of service forming part of tariff package. Over time, tariff determination in India should yield to economic regulation whose objective is to check anti-competitive and restrictive trade practices.
Technical regulation- conservancy, pilotage, navigation, compliance with international maritime convention, etc Indian Ports Act, 1908 creates ports and their limits. It deals with the powers and duties of the Government and port officials, rules for port conservation and safety of shipping. It defines major and other ports. Government means the Federal (Central) government for major ports and respective state government for other ports. The following are the provisions regarding the government’s role in conservancy and technical regulation:
a. Federal/State Government is entitled to appoint officer or body of persons (including private limited companies ) as Conservator u/s7
b. The Conservator could delegate all powers to his staff u/s 66
c. The Government enjoys indemnity against the acts of Conservator or staff u/s 18
Conservator is responsible for conservancy finally including the obligation for cleaner seas and safer shipping under the onerous International Maritime Organization (IMO) conventions and in addition the new international security codes to be complied with. It is interesting to note that each port has its own style of conservancy and the reception facilities at ports are inadequate leading to illegal dumping of waste by ships which are not properly equipped. As conservancy entails huge costs and risks, there are not sufficient economic incentives for thinly capitalized private limited companies which could assume conservancy role in state ports exposing the Indian ports to significant risks of pollution and safety . To sum up, while it is in the nation’s interest to make port business free and competitive, port waters being sensitive for national trade and security interests should be subject to common conservancy code under the monitoring of a technically competent authority. In short, port business may be free but port waters are not. The Indian Ports Act may codify the same.
6. Way forward
The author argues the case for a considered debate on the strategic intent and direction of the port industry and to identify the approach for the same before initiating changes in port legislation especially concerning PPP. As law can capture only the intentions of the policymakers, a new legislation however well drafted offers no panacea for PPP if the policy objectives of PPP are not clear and consistent. A well considered port policy including in PPP is all the 9 more important as Courts of law would refrain from reviewing policy decisions of the government in case of disputes entailing PPP .The author is conscious of the potential of the executive guidelines on PPP (besides sector legislation ) to influence the quality of outcomes but these are beyond the scope of this article.
Needless to say, the author’s views are personal and do not necessarily reflect the views of his employer namely IDFC Ltd.
Creative Financing of Urban Infrastructure in India through Market-based Financing and Public-Private Partnership Options
(This article is an abridged version of a larger article.)
Director, School of Planning and Architecture
Urban Advisor IPE Global, a development sector consulting firm
Rapid urbanization has increased the demand for urban infrastructure in India. Since public funds for these services are inadequate. Urban organizations have to look for alternative sources for financing their infrastructure needs. Accessing capital markets and PPP have emerged as viable options to finance urban infrastructure. In 1998, the Ahmedabad Municipal Corporation issued India’s first municipal bond without state guarantee to finance a water supply and sewerage project. To boost the municipal bond market, the GOI decided to provide tax-free status to municipal bonds. Only financially strong, large municipal corporations are in a position to directly access capital markets. To help small and medium local bodies to access the market Government of India introduced the concept of pooled financing. The Indo-US FIRE project helped the State Governments of Tamil Nadu and Karnataka issue municipal bonds by pooling municipalities. Based on the success of these two issues, the Government of India introduced a scheme for a Pooled Finance Development Fund that will support small- and medium-sized local bodies to access capital markets. Credit rating of a bond issue provides investors with an independent third-party evaluation of the credit strength or weakness of a particular issue. Over 80 urban local bodies in the country have either obtained a credit rating or are in the process of obtaining one. Several ULBs and utility organizations have issued bonds and have so far mobilized over Rs. 12,000 million through taxable bonds, tax-free bonds and pooled financing. A number of PPP options have emerged and these include: service contracts; performance-based service contract; joint sector company to implement and finance the project; a management contract for operations and maintenance; and construction cum build-operate-transfer contract. Thus, market access and PPP are important innovations in the financing of urban infrastructure in the country.
The urban population in India is 285 million (Census 2001) and is likely to be twice its present level by 2030. Rapid urbanization has increased the demand for urban services. The Steering Committee on Urban Development for Eleventh Five Year Plan of India (2007-2012), has estimated that total fund requirement for implementation of the Plan target in respect to urban water supply, sewerage and sanitation, drainage and solid waste management is Rs. 12,702 billion. The 74th Constitutional Amendment gave urban local bodies (ULBs) the responsibility to provide these services. The sources of revenue devolved to ULBs are, however, not sufficient and still depend on higher levels of government. Traditionally, urban infrastructure has been financed mainly through budgetary allocations.
Other financing has come from financial institutions like Housing and Urban Development Corporation and limited investments by the ULBs themselves through their internal resources. Financial resources from all these sources, however, fall far short of the urban sector’s estimated investment requirements. Since public funds for these services are inadequate, ULBs have to look for alternative sources for financing their infrastructure costs. Market-based financing and Public-Private Partnership (PPP) have emerged as a viable alternative to finance infrastructure investments. This paper describes the development of this new market-based urban infrastructure financing system, emerging PPP options in India and draws certain conclusions.
Public-Private Partnership Options
As a response to an insufficient provision of basic urban services and a lack of access to finance and other resources by ULBs that aim to increase access to these services, a number of PPP options have emerged. These include: service contracts; performance-based service contract; joint sector company to implement and finance the project; a management contract for operations and maintenance (O&M); and construction cum build-operate-transfer (BOT) contract.
It is pertinent to mention already at the beginning that the Government of India has designed PPP guidelines to sensitize state governments and urban local bodies to the policy and procedural issues that need to be addressed so as to reform urban water supply and sewerage issues. The new PPP guidelines advocate the changed approach and can drive and sustain comprehensive reform of urban water and sanitation services. This approach will also strengthen the role of urban organizations to provide the urban services more effectively and support the decent rationalisation objective of the Government. In this improved environment, public-private participation models for provisioning of various services would also become feasible. Features of the PPP options are presented below. Service Contract: The Chennai Metropolitan Water Supply and Sewerage Board have made a significant advance in use of service contracts for PPP in O&M of water supply and sewerage systems in the city. Out of the 119 city sewerage pumping stations 70 have, so far, been given to private contractors for operation and maintenance. The system is working very well which has resulted in an increase in the contract period from one to three years. The Board has also given service contracts for O&M of two sewage treatment plants for a period of three years.
Performance-Based Service Contract: In the Navi Mumbai Municipal Corporation (local body for a planned new city close to Mumbai), core municipal services are managed by the private sector on a labor contract basis. Of the forty-two contracts in operation, nineteen performance-based service (PBS) contracts were prepared for managing the water distribution system and one PBS contract for the transmission system. The basis for repackaging the contracts was to increase the efficient operation of the system, and take specific steps to: maximize the water that is billed; reduce leakages in the system; detect illegal use of water; and take similar steps to minimize the consumption of power. The scope of work included: system operations; operations based on schedule of rates; water audit; energy audit; repairs and maintenance, and advice. The PBS contract envisaged provision of services for 3 years with annual performance reviews.
As part of the World Bank funded Karnataka Urban Water Supply Improvement Project, demonstration zones have been identified in the three cities Belgaum, Gulbarga, Hubli-Dharwad and entrusted on a performance based contract to a Private Operator Consultant for carrying out water supply improvements in the zones with the prime objective of demonstrating provision of 24/7 water supply. The scope of the contract is to undertake detailed technical investigations of the present water supply in the Demo Zones and prepare a detailed investment plan and undertake the rehabilitation of the distribution zonal assets, provide operations, maintenance, and customer services at agreed levels of service.
Jamshedpur Utilities and Services Company (JUSCO) a wholly owned subsidiary of the Tata Steels was formed in 2003 to provide and maintain urban services in the city. This private company provides very good urban services including power to its 7 lakhs population. It has a management contract for O&M of water supply and sewerage services for Jamshedpur city.
Joint Sector Company:
This option is adopted in Tiruppr water supply project. Tiruppur city in the State of Tamilnadu had a population of 3,500,000 in 2001. The city produces more than 75 percent of the country’s knitwear exports. Realizing the need for an improved water supply to survive in a highly competitive international market, the Tiruppur Exporters Association supported by the state and local government decided to involve the private sector in meeting the water demand. As a result, a public limited company with private sector participation, the New Tiruppur Area Development Corporation, was formed to implement the project. When operational, the water project will supply 185 million liters of water per day and serve nearly 1,000 textile units and residents in Tiruppur and its surrounding areas. The project was implemented on BOT basis. The Project will recover the total project cost along with realizing reasonable returns through user charges. The estimated cost of the project is Rs. 10,500 million. Construction-cumBOT Contract: Alandur Sewerage Project had a construction contract for 120 KM sewage collection system; whereas, the treatment plant of 24 MLD is with a BOT contract. The total cost of the project is Rs. 340 million. The operator is expected to make capital investment for the treatment plant and recover it over a period of 14 years. The local body will recover the costs through a combination of sewerage tax, sewerage charge, connection charge, general revenues and state government support.
There are several PPP projects in solid waste management. Vaious ULBs are now taking help from private sector to develop ater supply projects in PPP mode and some of these initiatives in Latur, Nagpur, Mysore, Maduari, Mandvi, etc. are now at different stages of project development and implementation. The initial focus of new investments on PPP of water supply projects was on provision of bulk supply. However, BOT projects often did not address problems of existing water supply and sanitation systems such as high unaccounted for water, high expenditure on energy and low cost recovery. The focus is slowly shifting to improved management of existing systems. It may be mentioned here that most of PPP projects in water supply sector are in pilot stages. Most of them are not citywide, water supply tariff in India are low, base data of exiting water supply systems are missing and capacity of private operators is also inadequate. Unless these issues are taken care it will not be possible to undertake PPP projects in urban water supply and sanitation sector.
Linkages with JNNURM
Acknowledging the critical role of cities in the country’s current economic context, GOI launched in December 2005 a flagship program, called Jawaharlal Nehru National Urban Renewal Mission (JNNURM). The program aims at providing incentives to cities to undertake institutional, structural and fiscal reforms at state and local levels to improve service delivery systems, boost local economic performance and enhance quality of life. JNNURM has two overarching goals, one relate to provision of urban infrastructure and second reduction of poverty in cities. Through this program, GOI is providing investment follow up for cities undertaking comprehensive reform. The JNNURM will disburse a total of at least Rs. 1,000 billion over a seven-year period (2005-12). Of this, Rs. 500 billion will be contributed by GOI and another Rs. 500 billion will be contributed by states and ULBs. States and ULBs accessing the JNNURM must complete a total of 22 reforms, some mandatory and some optional, during the seven-year period (2005-12). The mandatory and optional reforms of states/ULBs under the JNNURM include decentralization of urban governance and empowering urban local bodies, introduction of improved accounting systems, improved revenue base, reform of rent control acts, delivery of services to poor, etc. The JNNURM encourages ULBs to access market-based financing.
Great progress has been made in developing the policy and legal framework for local governments to access the capital market to finance urban infrastructure. However, to routinely access capital markets or invite private sector, ULBs will have to have the capacity to develop commercially viable projects. The most critical factor for obtaining market finance will be a healthy municipal revenue base. A market-based approach to financing urban infrastructure linked with JNNURM will further strengthen ULBs and help achieve the decentralization objective of the 74th Constitutional Amendment. PPP for urban infrastructure projects that are funded by the Mission. The FIRE-D project assisted Nagpur and Thane Municipal Corporations to prepare financial and resource mobilization plans to fund their local contributions to projects identified under JNNURM. The Nagpur Municipal Corporation issued Rs.212 million municipal bond in March 2007 to fund a WSS project under JNNURM. The Thane Municipal Corporation is expected to access the market for a Rs. 1,000 million bond to fund its local contribution for a sewerage project under JNNURM. PPP options were have been approved for 22 projects under JNNURM and most of them are for solid waste management in cities.
Thus, market-based financing is an important innovation for urban infrastructure in the country.
As far as PPP options for urban infrastructure are concerned, the entire notion of developing and implementing projects in a commercial format is a relatively new trend in India. These project require considerable efforts in evolving project documentation, developing institutional arrangements for project structures, securing approvals and clearances from stakeholders, financial structuring, selecting a contractor, operator or concessionaire and ensuring overall financial closure. A wide range of actors have to be involved in all these processes, and consistent coordination is necessary.
In addition there is a constant need for the sponsor to pursue project related activities to mitigate and minimize risks. Both capacity and legitimacy are required to perform these roles.
Public Private Partnerships in National Highway
–Overview of the framework
-Additional Secretary, Advisor to DCH (Infrastructure)
The highways sector in India is witnessing significant interest from both domestic as well as foreign investors following the policy initiatives taken by the Government ofIndia to promote Public Private Partnership (PPP) on Build, Operate and Transfer (BOT) basis. However, the inflow of investment will depend on a comprehensive policy and regulatory framework necessary for addressing the complexities of PPP, and for balancing the interests of users and investors. Moreover, the transformation of rules must be accompanied by a change in the institutional mindset. For sustaining investor interest in up-gradation and maintenance of highways on BOT basis, a precise policy and regulatory framework is being spelt out in a Model Concession Agreement (MCA). This framework addresses the issues which are typically important for limited recourse financing of infrastructure projects, such as mitigation and unbundling of risks; allocation of risks and rewards; symmetry of obligations between the principal parties; precision and predictability of costs and obligations; reduction of transaction costs; force majeure; and termination. It also deals with other important concerns such as user protection; transparent and fair procedures; and financial support from the Government. The MCA also elaborates on the basis for commercialising highways in a planned and phased manner through optimal utilisation of resources on the one hand and adoption of international best practices on the other hand. The objective is to secure value for public money and provide efficient and cost-effective services to the users.
Rationale for phased development
The four critical elements that determine the financial viability of a highway project are traffic volumes, user fee, concession period and capital costs. As the existing highways have dedicated traffic and the Government has prescribed the user fee for uniform application across India, revenue streams for a Project Highway can be assessed with a fair degree of accuracy. The concession period, on the other hand, can be extended only marginally for improving project viability as the growth of traffic would not permit very long concession periods. In any case, the present value of projected revenues after say, 15 years, is comparatively low from the Concessionaire’s perspective. As three of the four above-stated parameters are pre-determined, capital cost is the variable that will determine the financial viability of a project. Bidders would, therefore, seek an appropriate capital grant/subsidy from the National Highways Authority of India (Authority) in order to reduce the capital cost for arriving at an acceptable rate of return.
In the given scenario, higher the capital cost, greater would be the compulsion of project sponsors to seek larger grants from the Authority. This, in turn, would restrict the ability of the Government to leverage a larger pool of extra-budgetary resources, including private investment, and would hence result in a limited programme of highway development. In view of the foregoing, it is important to rely on cost-effective designs and to combine them with a phased investment programme to enable a more efficient and sustainable programme of highway development.
As a general principle, capacity augmentation of highways should be based on the standards adopted by the Indian Roads Congress for different bands of traffic volume. The emphasis should be on phased development rather than on providing high cost roads for catering to the projected growth in the long term. Where traffic intensity is comparatively low, limited widening of highways should be undertaken with further widening planned after 7-12 years depending on projected traffic growth. Up-gradation of designs and standards, construction of bypasses in urban and semi-urban areas and other improvements may also be planned in phases depending on traffic intensity. As an alternative, comparatively shorter concession periods may be stipulated so that the Authority can augment the capacity when it is due. These issues would be subjected to in-depth examination and reflected in a Manual of Standards and Specifications that would form part of the standard documents associated with the MCA.
Unlike the normal practice of focussing on construction specifications, the technical parameters proposed in the MCA are based mainly on output specifications, as these have a direct bearing on the level of service for users. Only the core requirements of design, construction, operation and maintenance of the Project Highway are to be specified, and enough room would be left for the Concessionaire to innovate and add value.
In sum, the framework focuses on the ‘what’ rather than the ‘how’ in relation to the delivery of services by the Concessionaire. This would provide the requisite flexibility to the Concessionaire in evolving and adopting cost-effective designs without compromising on the quality of service for users. Cost efficiencies would occur because the shift to output-based specifications would provide the private sector with a greater opportunity to innovate and optimise designs in a way normally denied to it under conventional input-based procurement specifications.
The guiding principle for determining project-specific concession period is the carrying capacity of the respective highway at the end of the proposed concession period. As such, the concession period is proposed to be determined on a project-specific basis depending on the volume of present and projected traffic. Toll paying users should not be subjected to congested highways and the Concession should, therefore, cease when full capacity of the road is reached, unless further augmentation is built into the MCA. The time required for construction (about two years) has been included in the concession period so as to incentivise early completion, implying greater toll revenues.
Selection of Concessionaire
Selection of the Concessionaire will be based on open competitive bidding. All project parameters such as the concession period, toll rates, price indexation and technical parameters are to be clearly stated upfront, and short-listed bidders will be required to specify only the amount of grant sought by them. The bidder who seeks the lowest grant should win the contract. In exceptional cases, instead of seeking a grant, a bidder may offer to share the project revenues with the Authority.
It is proposed that based on competitive bidding, the Authority should provide a capital grant of up to a maximum of 20 percent of the project cost. This would help in bridging the viability gap of the PPP projects. Where such assistance is inadequate for making a project commercially viable, an additional grant not exceeding 20 percent of the project costs may be provided for O&M support during the period following the commissioning of the Project Highway.
Concession fee will be a fixed sum of Re. 1 per annum for the concession period. Where bidders do not seek any grant and are instead willing to make a financial offer to the Government, they will be free to quote a higher concession fee.
As an underlying principle, risks have been allocated to the parties that are best suited to manage them. Project risks have, therefore, been assigned to the private sector to the extent it is capable of managing them. The transfer of such risks and responsibilities to the private sector would increase the scope of innovation leading to efficiencies in costs and services.
The commercial and technical risks relating to construction, operation and maintenance are being allocated to the Concessionaire, as it is best suited to manage them. Other commercial risks, such as the rate of growth of traffic, are also being allocated to the Concessionaire. The traffic risk, however, is significantly mitigated as the Project Highway is a natural monopoly where existing traffic volumes can be measured with reasonable accuracy. On the other hand, all direct and indirect political risks are being assigned to the Authority.
It is generally recognised that economic growth will have a direct influence on the growth of traffic and that the Concessionaire cannot in any manner manage or control this growth rate. By way of risk mitigation, the MCA provides for extension of the concession period in the event of a lower than expected growth in traffic. Conversely, the concession period is proposed to be reduced if the traffic growth exceeds the expected level. The MCA provides for a target traffic growth and stipulates an increase of upto 20% in the concession period if the growth rate is lower than projected. For example, a shortfall of 5% in the target traffic after 10 years would lead to extension of the concession period by 7.5% thereof. On the other hand, an increase of 5% in the target traffic would reduce the concession period by 3.75% thereof.
Unlike other agreements for private infrastructure projects which neither define a time-frame for achieving financial close, nor specify the penal consequences for failure to do so, the MCA stipulates a time limit of 180 days (extendable up to another 120 days on payment of a penalty), failing which the bid security shall be forfeited. By prevalent standards, this is a tight schedule, which is achievable only if all the parameters are well defined and the requisite preparatory work has been undertaken.
The MCA represents the comprehensive framework necessary for enabling financial close within the stipulated period. Adherence to such time schedules will usher in a significant reduction in costs besides timely provision of the much needed infrastructure. This approach would also address the problem of infrastructure projects not achieving financial close for long periods.
User feel balanced and precise mechanism for determination of user fee has been specified for the entire concession period since this would be of fundamental importance in estimating the revenue streams of the project and, therefore, its viability. The user fee shall be based on the rates to be notified by the Government.
The MCA provides for indexation of the user fee to the extent of 40 percent thereof linked to WPI. Since repayment of debt would be virtually neutral to inflation, the said indexation of 40 percent is considered adequate. A higher level of indexation is not favoured, as that would require the users to pay more for a declining (more congested) level of service when they should be receiving the benefit of a depreciated fee. A higher indexation would also add to uncertainties in the financial projections of the project.
Owing to the absence of an alternative road, highways should be open to use by local residents without any payment of tolls until free service lanes are provided. This would ensure local support for the project and avoid legal challenges or local opposition arising out of easement rights. Frequent users should be entitled to discounted rates, in accordance with the tolling policy.
Handing over possession of at least 80% of the required land and obtaining of environmental clearances are being proposed as conditions precedent to be satisfied by the Authority before financial close. The MCA defines the scope of the project with precision and predictability in order to enable the Concessionaire to determine his costs and obligations. Additional works may be undertaken within a specified limit, only if the entire cost thereof is borne by the Authority. Before commencing the collection of user fee, the Concessionaire will be required to subject the Project Highway to specified tests for ensuring compliance with the specifications relating to safety and quality of service for the users.
Operation and maintenance
Operation and maintenance of the Project Highway is proposed to be governed by strict standards with a view to ensuring a high level of service for the users, and any violations thereof would attract stiff penalties. In sum, operational performance would be the most important test of service delivery. The MCA provides for an elaborate and dynamic mechanism to evaluate and upgrade safety requirements on a continuing basis. The MCA also provides for traffic regulation, police assistance, emergency medical services and rescue operations.
Right of substitution
In the highways sector, project assets do not constitute adequate security for lenders. It is project revenue streams that constitute the mainstay of their security. Lenders would, therefore, require assignment and substitution rights so that the concession can be transferred to another company in the event of failure of the Concessionaire to operate the project successfully. The MCA accordingly provides for such substitution rights.
The MCA contains the requisite provisions for dealing with force majeure events. In particular, it affords protection to the Concessionaire against political actions that may have a material adverse effect on the project.
In the event of termination, the MCA provides for a compulsory buyout by the Authority, as neither the Concessionaire nor the lenders can use the highway in any other manner for recovering their investments.
Termination payments have been quantified precisely as compared to the complex formulations in most agreements relating to private infrastructure projects. Political force majeure and defaults by the Authority are proposed to qualify for adequate compensatory payments to the Concessionaire and thus guard against any discriminatory or arbitrary action by the Government or the Authority. Further, the project debt would be fully protected by the Authority in the event of termination, except for two situations, namely, (a) when termination occurs as a result of default by the Concessionaire, only 90 percent of the debt will be protected, and (b) in the event of non-political force majeure such as Act of God (normally covered by insurance), only 90 percent of the debt beyond the insurance cover will be protected.
Monitoring and supervision
Day-to-day interaction between the Authority and the Concessionaire has been kept to the bare minimum following a ‘hands-off’ approach, and the Authority shall be entitled to intervene only in the event of default. Checks and balances have, however, been provided for ensuring full accountability of the Concessionaire. Monitoring and supervision of construction, operation and maintenance is proposed to be undertaken through an Independent Engineer (a qualified firm) that will be selected by the Authority through a transparent process. Its independence would provide added comfort to all stakeholders, besides improving the efficiency of project operations. If required, a public sector consulting firm may discharge the functions of the Independent Engineer. The MCA provides for a transparent procedure to ensure selection of well reputed statutory auditors, as they would play a critical role in ensuring financial discipline. As a safeguard, the MCA also provides for appointment of additional or concurrent auditors. To provide enhanced security to the lenders and greater stability to the project operations, all financial inflows and outflows of the project are proposed to be routed through an escrow account.
Support and guarantees by the Authority
By way of comfort to the lenders, loan assistance from the Authority has been stipulated for supporting debt service obligations in the event of a revenue shortfall resulting from political force majeure or default by the Authority. Guarantees have also been provided to protect the Concessionaire from construction of competing roads, which can upset the revenue streams of the project. Additional toll ways would be allowed, but only after a specified period and upon compensation to the Concessionaire by way of an extended concession period.
A regular traffic census and annual survey has been stipulated for keeping track of traffic growth. Sample checks by the Authority have also been provided for. As a safeguard against siphoning of revenue share by the Concessionaire, a floor level of present and projected traffic has also been stipulated. The MCA also addresses issues relating to dispute resolution, suspension of rights, change in law, insurance, defects liability, indemnity, redressal of public grievances and disclosure of project documents.
Together with the Schedules, the proposed framework addresses the issues that are likely to arise in financing of highway projects on BOT basis. The proposed regulatory and policy framework contained in the MCA is a pre-requisite for attracting private investment with improved efficiencies and reduced costs, necessary for accelerating growth.
Contours of Public-Private Partnership (PPP)
Management Regime in Decentralised Renewable Energy Systems in India
Gopal K Sarangi
The unfettered belief that government knows what is best for its citizens is gradually being demystified on the face of increasing frequency of state failures in the management of certain key strategic sectors. Excessive government intervention is foundto be costly in many instances and believed to have generated multiple distortions and inefficiencies. In addition, two dissimilar forces i.e. shrinking budgetary resources and growing private potential in leveraging the valued financial resources and technical know hows, have urged policymakers and planners to look for alternative resource management regimes. As a rational response to the traditional resource allocation system, public private partnership (PPP) management styles are prioritized in many instances. Unlocking of private potential through PPP modalities appears to be more sensible to weed out the pervasive syndrome of soft budget constraints inextricably associated with the management of public resources. In the top of it, emergence of PPP forms of management is rationalized in the context of growing commodification of erstwhile publicly supplied goods and services like water, electricity etc.
Recent transformations in the energy policy landscape have us here new era of energy sector management. In the realm of energy, decent realized renewable energy systems have emerged as potential ground for PPP as a viable and effective mode of resource allocation and management. Interestingly, the recent focus on decentralised renewable energy systems grows out of simmering discontent with the highly subsidised centralised fossil fuel energy supply regimes.
Centralised energy supply systems are argued to have evolved out of misconstrued and ill-conceived wisdom. It is contended that these systems have generated large scale inequities, unbearable external debts and irreversible environmental degradation and nurtured a culture of inertia and inefficiency.In addition, ever increasing energy security threats and growing scientific consensus about the perils of climate change have questioned the relevance of centralised energy supply systems in the current juncture and emphasised the need for alternatives like decentralised renewable energy supply systems. Centralised supply systems are also ridiculed for being unable to address the ever growing problem of energy access. To substantiate this, recent statistics demonstrate that about 300 million Indian are facing acute energy access problems reiterating the need to transit to alternative energy supply regimes.
Decentralised renewable energy provisions are highly emphasised for being capable of addressing the ill-effects of centralised energy supply systems. Global consensus to this has been echoed in United Nation’s (UN) declaration of the year 2012 as International Year of Sustainable Energy for All, with its emphasis on possible business solutions to the problem of energy access. The thrust has also been articulated in changing policy directions in many countries with targeted focus on decentralised renewable energy facilities as viable mode of energy generation. For an instance, UK Department for Trade and Industry envisages meeting 40-50 percent of energy needs from micro-generation energy technologies.
India also looks forward to this form of energy supply not only as an additional source of energy, but also as an instrument to improve rural economic conditions.
India’s experience with decentralised energy systems as an alternative source of energy has not been encouraging till recent past. The entrenched belief that decentralised supply systems at best are ‘charity centric services’, often advocated by donor agencies and implicitly recognized by publicly supported schemes, has resulted mass scale failure of such projects in the past. In addition, ill-defined ownership structures have generated the characteristic problem of ‘tragedy of commons’ undermining the stated goals of such interventions. Community level conflicts and problems of elite capture within the communities also have germinated sub-optimal outcomes in many situations. However, with change in policy, legislative, and regulatory landscapes governing decentralised renewable energy regime in India, a new era has been created with renewed focus to attract private investors into the sector through all possible channels.There is also an implicit understanding within policy circles that misplaced incentives like those available to mega power projects have yielded dampening effects on small scale decentralised energy projects, hence strengthening the case for policy change. Most important legal and legislative enshrinements altering the operational dynamics of the sector are the Electricity Act 2003 and the Rural Electrification Policy 2006, among others. The legal provisions like de-licensing of electricity generation in rural areas and emphasis on micro-enterprising of such projects have spurred the private spirit and transformed the sector as an attractive business venture.
In addition, since decentralised electricity generation segment has been out of the current regulatory control, except for certain regulatory requirements (e.g. provisions relating to technical standards and safety measures), it offers additional freedom to private generators to set their own standards and norms through self-regulatory processes. Importantly, political environment has matured enough in providing right kind of impetus to bring in place this new form of managerial acumen and skill. In addition, conventional thinking on the market potential of rural economies has undergone a transformation with fast changing business dynamics. The notion of ‘bottom of pyramid’ propounded by C.K. Prahalad, and growing evidence of the viability of ‘social enterprising’ models have redefined the business bottom lines and strengthened the business credibility of this sector. Above all, fast changing local institutional settings characterized by increasing credibility of banking sector in this business, active community participation, growing market linkages and supply chains, and proactive user responses etc. have created the fertile ground for private investors to venture into the field. Recent thrust on environmental markets like carbon trading has also become an additional attraction for private investors for the sector. On the top of it, business sense of this rural energy provisions has been well appreciated by international bodies. International agencies like REDCO Alliance and Energy Access Foundation (EAF) have been pivotal in catalyzing the rapid growth of rural energy business in many countries. It is believed that transition to a market oriented approach becomes an essential ingredient in the current scheme of arrangement. Estimates reveal that decentralised renewable energy systems offer a business potential of about 94 billion INR per year in India within the current policy & programme focus.
A deeper introspection into the operational artefacts of PPP models in decentralised energy systems in India demonstrates some interesting insights. At first glance, it is evident that various possible PPP variants have been tried out in different parts of the country over last decade or so. The emerging trends reflect multiplicity in the form of such partnerships and heterogeneity in the approaches followed. Institutional innovations in the form of various combinations between public-private-NGOs-Donor agencies have evolved over years. While each model is a variant on its own, interestingly, the dominant pattern is private led but public supported model. The available documentation on PPP mode of decentralised rural electrification demonstrates that the intervention styles are characterized by social enterprising propositions where social well being is delicately intertwined with the profit motives of private entrepreneurs. Importantly, in order to enhance the business viability of such projects;emphasis is laid on creating productive activities. This has been unequivocally emphasized in all types of interventions. In PPP form of decentralised energy systems, public support comes through multiple ways. While the dominant form of public support is the provision of capital subsidy, side by side, a host of other supports are also provided by government at multiple levels. State renewable energy development agencies (SREDAs) provide the needed institutional support to private investors. In many cases, financial support for O & M of the plant, technical guidance to operate the facility, capacity building initiatives, are provided by government agencies to supplement the private effort.
Evidences suggest that PPP style of social enterprising models could effectively be built into variety of decentralised renewable technical options starting from solar home systems (SHS) to mini-grid based energy facilities. In the field of SHS, SELCO has been fore runner in building social enterprising models through wide scale dissemination of home based decentralised energy systems by tapping innovative financing schemes. Other social enterprisers like Husk Power Systems (HPS), Saran Renewables, SCATEC Solar, Sun edison have ventured into the field of decentralised energy arena and successfully operating the business for some time. Since most of these ventures have capitalized the existing institutional arrangements at the local level,the thrust has also been given to create large pool of rural entrepreneurs to manage the systems in franchising modes. Importantly, there is a clearly defined ownership structure with this kind of intervention with pre defined accountability framework. Realizing capacity constraints, various training modules have been designed to run the complex energy enterprises in the rural contexts. Contrast to the publicly dominated systems, local needs and contexts are effectively accommodated in the entire process of project operation and management.
However, multiple inhibiting factors hold back PPP as a promising management pattern for decentralised energy systems. Often, the enthusiasms of private investors are characterized by adhocism and partial engagements subverting the stated goals of the sector. This is primarily due to lack of sustainable business models to translate the vision into executable business plans. Institutional determinants like normative and cognitive constraints often derail the process. Given the complexity of these systems and numerous variants, it becomes difficult to scale up a particular form in other institutional settings. Often market creation is obstructed by information asymmetry challenges, multi-level welfare causation chains, and institutional lock in at local levels. Lack of complementary conditions also acts as a deterrent. Unavailability of complementary local infrastructures in the rural settings like availability of water, communication facilities, lack of education also create additional hurdles.
Effective design and main streaming of PPP requires painstaking effort of creating necessary institutional structures keeping in mind the country requirements and needs. It is also important to comprehend the nuances of socio-economic dynamics of local settings as ‘recipients’ of energy projects. Implanting it within the prevailing socioeconomic-cultural milieu is quite challenging. Complexity also emerges from the existing grey areas in the legal arena. There have been issues related to price considerations, risk allocations, etc. In a successful PPP framework, most important ingredient is the risk transfer, which depends on appropriate level of competition and opportunity to contest a bid. While the need for a ground for competition has been articulated at the policy level, the practical implementation frameworks do not offer adequate scope to private entities to bid for a project. Associated conditionalities and localized approach often hinder this process. Another strategic consideration comes in terms of negotiation between government or any delegated agencies of government and the private partner. In nutshell, while PPP form of resource management holds promising potential for efficient resource allocation, there is also a need to have a cautious and careful approach to leverage the potential.
Transforming Water Supply Regimes in India:
Do Public-Private Partnerships Have a Role to Play?
(This article is an abridged version of a larger article. Please visit http://www.wateralternatives.org for the complete version of this article)
Assistant Professor, Concordia University
Public-private partnerships (PPP) are an important governance strategy that has recently emerged as a solution to enhance the access of marginalised residents to urban infrastructures. With the inception of neo-liberal economic reforms in India, in Indian cities too PPP has emerged as an innovative approach to expand coverage of water supply and sanitation infrastructures. However, there has been little study of the dynamics of partnership efforts in different urban contexts: What role do they play in transforming existing infrastructure regimes? Do reform strategies such as partnerships result in increased privatisation or do they make the governance of infrastructures more participative? Reviewing some of the recent literature on urban political analysis, this article develops the concept of water supply regime to describe the context of water provision in three metropolitan cities in India. To further our understanding of the role of PPP within regimes, this article sketches five cases of water supply and sanitation partnerships located within these three metropolitan cities. From these empirical studies, the article arrives at the conclusion that while PPP are always products of the regime-context they are inserted within, quite often strategic actors in the partnership use the PPP to further their interests by initiating a shift in the regime pathway. This leads us to conclude that PPPs do play a role in making water supply regimes more participative but that depends on the nature of the regime as well as the actions of partners.
It is widely known that Indian cities, like many others in developing countries, are conspicuous for their acute lack of environmental wholesomeness. Numerous international, national and regional groups have gathered at celebrated conventions such as the UN Millennium Development Goals, World Summit on Sustainable Development (WSSD) in order to chart out possible pathways to rectify the dysfunctional nature of urban services in less affluent cities. Public-private partnerships (PPP) are an important governance strategy that has recently emerged to enhance the functionality of infrastructure flows, especially in augmenting access to marginalised urban residents. With the inception of economic reforms in India, in Indian cities too PPP has emerged as an innovative approach to expand coverage of water supply and sanitation(WSS) infrastructures.
Whereas in itself these innovations are significant for their attempt to improve the urban environment, what is of interest to scholars is to comprehend the effectiveness of these partnerships – how they become enmeshed within the existing political endowments in Indian cities and how these efforts catalyse the transformation of water supply regimes. The important question to ask is what is the role of partnership efforts in transforming water supply regimes in India: Are partnerships a means of privatising infrastructure regimes (as many have suggested) or will it contribute to a more participative infrastructure regime? In order to understand the role that partnerships play, it is first necessary to fathom the constitution of water supply regimes
Urban political analysis is a useful point of departure for such an exercise and in the next section we conduct a selective review of some recent trends in urban political analysis with a focus on “national infrastructures” (Sellers, 2005). However, as we shall note, urban politics alone cannot sufficiently explain the presence of distinct patterns of infrastructural provision. This requires some creative conceptual integration. This article will attempt to do so by developing the concept of water supply regimes. This understanding will then be utilised for analysing the politics of urban infrastructural partnerships from an empirical study of five water supply and sanitation partnerships in three metropolitan cities in India. The article will conclude with some salient points regarding the role of public-private partnerships in transforming existing water supply regimes.
Dynamics of Public-private Partnerships
Cities in India continue to struggle to provide all its residents with water supply, despite most cities possessing an entrenched regime for purveying potable water. Public managers reason that access to universal, standardised Water supply and sanitation is crucial for not only improving local environmental conditions in Indian cities but also creating settings conducive to healthier lives for their inhabitants. In India, with infrastructure policy reform, public-private partnerships (PPP) have become a pervasive policy instrument to achieve these ends of urban environmental improvement. Five cases of public private partnership were studied – the BATF and BWSSB cases in Bengaluru, the Alandur and the TWAD Board cases in Chennai and the Vypeen case in Kochi. From our previous discussion of the independent significance of water supply regimes we have seen that the three cities have differing significance in their regional politics. This varying significance gives partnership ventures differing political valences, opportunities and constraints to operate within the regime and change the regime. This article suggests that reform efforts can proceed along three change pathways – aligned, modified or interrupted. In an aligned change pathway the reform effort does not significantly alter the constitution of the water supply regime, and infrastructural relations in the regime are largely reproduced. In a modified change pathway, the reform effort succeeds in bringing about a modification in the constitution of the regime. Finally, reform efforts can be disrupted and change pathways in the regime interrupted.
Given the low autonomous significance of Bengaluru’s water supply regime in state politics, it is not surprising that reform transitions initiated through cases of PPP have very low political valence and so disrupting or modifying reform transitions is quite easily accomplished by actors. A close study of the BATF and the BWSSB cases reveals how this was accomplished.
BATF, or the Bangalore Agenda Task Force, was instituted as a public-private partnership in 1999. The objective of the effort was not only to channel the technical expertise located within Bengaluru’s high technology enterprise into the development of public infrastructure but also to provide a venue for Bengaluru’s burgeoning “new middle classes” to showcase their intentions to transform the city. The BATF launched several projects that were to be models of technical excellence in infrastructural development. One such project was the Nirmala Bangalore Pay and Use Toilets. BATF constructed modern toilet blocks that provided a vastly improved quality of service compared to the standard public toilet blocks constructed by the city government (Gopakumar, 2009a). In addition, the BATF used venues such as the BATF Summit as exercises to build allies. It was to be an arena to publicise its role in guiding infrastructural development in Bengaluru in front of media, voluntary organisations and the 19 citizenries. Despite BATF’s technical and managerial excellence, the reform transition was interrupted in 2004 by the changed political circumstances after an election. The new government, drawing support from a pro-farmers’ 20 party, did not renew BATF’s mandate. Due to a lack of appreciation for the fluid political context within which Bengaluru is located, BATF’s technological entrepreneurs had few influential allies or strategies to rescue their 21 enterprise. Their technical and managerial brilliance alone was insufficient to heighten the significance of their enterprise and prevent the dissolution of the partnership. BWSSB: BWSSB, Bengaluru’s water supply utility, launched a public-private partnership to improve access to 22 water supply and sanitation in slums in the city. The partnership between the utility, non- profit organisations and slum residents was expected to provide slum households with individual water and sewerage connections. By providing individual connections water utility engineers perceived the partnership to be a positive exercise because it enhanced the revenue of the utility.
However, the perception of non-profit organisations and slum residents involved in the partnership was very different. They understood the partnership as a necessary evil that would enhance access to water supply but would impose the burden of paying user fees on residents. “So meterisation of these people [slum dwellers] is also a step towards privatisation Once they are all metered there is no left and right to the people – they have to follow them 23 [BWSSB]”. The response of non-profit organisations and slum residents was to utilise the partnership as a means to deploy strategies that would allow them to intervene at the regime level. First, all slum partners were drafted into a state-level slum dweller’s federation (KKNSS). By connecting different slums in the city to the state slum dwellers’ federation, they not only enhanced their associational presence but also sought to increase the organisational capacity of slum residents to mobilise for common causes through KKNSS we organised slum residents and formed committees. In Bangalore city there are 14 MLA [Member of Legislative Assembly] constituencies.
In all constituencies we formed slum committees (…) So if democracy believes in numbers then we will struggle in large numbers by bringing people and hold urban poor rally to pressurise government. And by asking and putting our slum dweller’s demands in front of all the political 24 Parties in the state we make them commit their support.
This strategy has given slum residents and non-profit organisations enormous protest capacity and the necessary leverage to exert pressure upon the state government. Given the low autonomous significance of Bengaluru’s water regime, it is notable that the organisational capacity of the urban poor is directed at the state government. This capacity was on display in 2004, when S. M. Krishna, Chief Minister of Karnataka announced the Greater Bangalore Water Supply and Sanitation Project (GBWASP) – a comprehensive project to enhance water supply and sanitation access to the residents of Greater Bengaluru 25 through private participation. At this stage, KKNSS through the Campaign against Water Privatisation Karnataka (CAWPKA) launched an agitation against the “profit-making model” in the project with a series of protests and marches in Greater Bengaluru that eventually culminated in a massive protest rally by the urban poor in 26 the city. In the face of the spirited opposition to the project, the Government of Karnataka backed down from proceeding with the IFC-initiated project. Currently, BWSSB has accepted the decision to implement the project and operate the system (Ranganathan et al., 2009). This effort reveals the capacity that urban poor have acquired in the city partly through the BWSSB partnership.
The above discussion on the BATF and BWSSB partnerships suggests that given the low autonomous significance of Bengaluru’s regime, any reform initiative is very susceptible to interruption or at least weakening from political and societal forces whose interests are threatened by reforms. We see in the BATF case a conclusive interruption of reform efforts while in the BWSSB case reform efforts to privatise water supply in the peripheral areas were weakened by civil society actors.
As we have seen, Kochi’s water supply regime has recently acquired a greater autonomous significance that arises from the rising political significance of the city in regional politics, and the nascent predatory nature of its water supply. The rising significance of the city has made the existing water supply regime well entrenched, which has made efforts to contend with this regime all the more difficult. Vypeen: In the Vypeen case in Kochi, activist civil society actors have succeeded in weakening the reform transition initiated by public-private partnerships in Vypeen only through developing an extensive mobilisational capacity and through years of sustained protests marked by some dramatic episodes of confrontation. Vypeen is a large, densely populated island offshore of Kochi city. Despite large amounts of rainfall, Vypeen faces a shortage of drinking water because all local sources of water on the island are saline from ingress of seawater. As a result, water has to be piped onto the island from the mainland. Before it gets to Vypeen however, much of the water is diverted to the city of Kochi. Residents of Vypeen have dealt with chronic shortages of water that periodically intensify during summer. This has been the cause for sporadic instances of protest. Forging public private partnerships for the creation of small-scale desalination, and rainwater harvesting units are some of the reform initiatives launched by government agencies to enhance water availability on the island. Since 2000, Kerala has witnessed an explosion of alternative decentralised water production and collection partnership schemes such 27 as the Swajaladhara project, Varsha and the Jalanidhi. These partnerships were instituted between women’s self help groups, island residents and some large non-profit organisations. While these efforts theoretically do increase the availability of water, they impose social and economic costs on island residents rather than on the citizens of Kochi. This disparity was the motivation for Vypeen Drinking Water Protest (VKSS) movement organisers to employ the women’s self-help groups in these partnerships as a means to increase the awareness among island residents about water utilisation and the policies of the 28 government. Given the rising significance of the city, protest movements on the island that arose against the disparity of water availability between Kochi city and Vypeen island, have found it exceptionally difficult to upset the existing regime. Organisers have found it necessary to mobilise for sustained confrontation with the infrastructure regime in the city. In addition to numerous minor episodes of protest, organisers demonstrated the popular support for their cause by mobilising large numbers of Vypeen island residents to participate in some dramatic instances of protest when island residents laid siege to Kochi city, bringing the arterial thoroughfares of 29 the city to a halt. As a result of this event, protest organisers were successful in operationalising a dedicated water pipeline to Vypeen that diverted water supply meant for Kochi to the island.
The arrival of piped water supply on Vypeen island has been interpreted by VKSS as a successful achievement of the island-based mobilisation. The strategy of the VKSS by successfully challenging Kochi’s primary claim to water piped to the greater metropolitan region has not only initiated a transformation in Kochi’s water supply regime from one marked by resource appropriation to one of resource-sharing but also weakened the reform transition in the regime whereby piped public water was made available only to urban elites in Kochi.
In contrast with the Bengaluru and Kochi cases, Chennai’s high autonomous political significance and the extremely entrenched and predatory nature of water supply have created conditions that have muted the potential of partner actors to question the structural solidity of reform. Partnership actors, under such a condition, find it virtually impossible to disrupt the water supply regime. At most, they can make minor modifications to reform efforts as seen in the Alandur case.
TWAD Board: The inability of partners to question or resist the unequal, predatory nature of water supply is best evidenced in the structurally aligned reform transition in the TWAD Board partnership. TWAD Board is the utility that provides water supply and sanitation services to settlements in Chennai’s peripheral areas. In 2004, some engineers within TWAD Board sought to change the predominantly top- down approach to providing water supply services to residents by focusing on the relation 30 between users and the utility. This organisational initiative referred to as the Change Management Group sought to forge partnerships between women’s self-help groups (WSHG), the local government and utility personnel. This partnership was instituted in Pagalmedu village in the periphery of Chennai’s metropolitan area. This village lies close to the well fields that pump groundwater to meet the needs of the city. Between 2003 and 2004, Chennai suffered a severe episode of water scarcity when all its reservoirs dried up and the city was solely dependent on groundwater from its periphery. The intensive exploitation of groundwater to meet Chennai’s needs deprived the small agriculturists in Pagalmedu of water, leading to the collapse of their agrarian-based economy. Given plentiful groundwater in the region, farmers in Pagalmedu had typically cultivated water intensive crops such as rice. By the middle of 2004 however, with the severe unavailability of water, agricultural efforts had ceased to be productive. “That was a difficult time for all of us. We had no water to drink. There was no water for agriculture. In the crisis period, we had to walk long 31 distances for even drinking water”
It was at this juncture that the TWAD Board partnership was instituted to improve drinking water supply to the village. In the absence of any external support for infrastructural improvement, enhancing the availability of water supply was contingent upon the revival of the agrarian economy in the village. “Given the trouble we were going through we wanted better supply. But the engineer said that each of us would have to contribute towards the improvement, [TWAD] Board will not be able construct it for us. We told him, when we can’t feed our children how can you ask us to contribute”. Two options were available to the partnership to improve the agrarian economy in the village – struggling against The engine of groundwater exploitation that the village was trapped within or adapting to the change and re-making the local economy. Through the partnership, the predominantly rice farmers in the village have adapted to their situation and became drought-resistant flower cultivators. The yields from floriculture have contributed to a marked improvement in the local economy and made water supply improvements financially viable. Two aspects about the partnership are notable – the critical role of the engineer from TWAD Board and the marginal role of elected representatives of the village in leading the village. It was the initiative of the engineer from TWAD Board in consultation with the block development office that facilitated WSHG in the village to make the switch to floriculture. It is also through the engineer’s intervention that the elected representatives of the village have been assigned as members of the village water supply committee who monitor the operation of water supply in the village. A second crucial point in the partnership is the subsidiary role of the elected representatives (panchayath president and members) in water supply decisions for the 33 village. Under such conditions of centralisation of power and of Chennai’s great regime significance, it is no surprise that the partnership offers little scope for transforming Chennai’s water supply regime. This mode of water extraction was justified by an old woman in the village who said – “They are using the water for drinking. How can we 34 deny them the right to drinking water”? Given the large significance of the Chennai’s water regime in Tamil Nadu politics, aligning with the existing situation of water appropriation is the only path open. Resisting is not an option that is available.
Alandur, a suburban neighbourhood in metropolitan Chennai, is notable for the project to create a sewerage system through a public-private partnership. The elected Municipal Chairman of Alandur, Mr. Bharathi of the DMK party, initiated this partnership in 1996. The partnership comprised Mr. Bharathi, the private-sector company that constructed the sewerage project and, importantly, the resident welfare association (RWA) in the town of Alandur that contributed financially to the project. The partnership was initiated during a period (1996-2001) when the DMK government in power in Tamil Nadu created an environment that was very conducive to rapid infrastructural development. However, this was the time when Mr. Bharathi as the legal secretary of the DMK Party was personally involved in getting Ms. Jayalalithaa, leader of the rival ADMK Party convicted of abuse of power and corruption during her tenure in government between 1991 35 and 1996. This legal wrangle, that Mr. Bharathi initiated, was instrumental in unseating Ms Jayalalithaa from the office of Chief Minister of Tamil Nadu state after her party won the 2001 state elections. Unfortunately for Mr. Bharathi, an appeal to the High Court and Supreme Court overruled the conviction and cleared the way for Ms Jayalalithaa’s reappointment as Chief Minister in 2002.
Due to Mr. Bharathi’s personal involvement in the conviction case, the period (2001-2006) created a very hostile environment his infrastructural efforts in Alandur. Major roadblocks by way of procedural delays, and unreasonably high tariffs crept into the construction and, later on, to the operation of the sewerage project (Gopakumar, 2009). During this phase, due to the prevailing political climate, Mr. Bharathi assumed a secondary role even as the RWAs moved strategically to use influence and apply pressure on the government to ensure that residents’ objectives for an affordable sewerage 36 system were not compromised. Given the pattern of political contestation in Chennai, we have seen, there are few opportunities for civil society mobilisation to influence the existing water supply regime. Through their role in the partnership, and with Mr. Bharathi’s support, RWAs in Alandur were able to mobilise support to modify the role of users in the regime. Thus, despite the high regime significance, using its influence the RWAs have been successful in effecting a moderate change in their favour. As a result of specific political circumstances, the RWAs have been able to modify the existing regime by bringing some citizen considerations in an otherwise structurally strong regime.
After comparing the outcomes of these cases on their respective regimes we see that the cases initiate different change pathways in the regime. In Bengaluru, a low regime significance has created the condition whereby infrastructural partnerships can be easily derailed while reform transitions that seek to transform the water supply regime have been interrupted or modified. In Kochi, a medium significance for the water supply regime provides a context whereby partnerships require extensive mobilisation and strategy to modify the existing infrastructure regime. In contrast, in the Chennai case, the legacy of Chennai’s high political significance and high resource significance gives the regime a juggernaut-like quality. It requires considerable political strategy and a unique alignment of circumstances to even effect a slight modification that can transform the regime as we saw in the Alandur case. Given the solidity of the regime, aligning or adapting to the regime is the easiest way as in the TWAD Board example. Table 1 displays the political dynamics of infrastructural partnerships in Bengaluru, Chennai and Kochi. At the two extremes both the TWAD Board case in Chennai and the BATF case in Bengaluru suggest that PPPs are unsuccessful in making a change in the regime. In the TWAD Board case, the regime is too significant to make a change. In the BATF case, the regime has too low significance again for the PPP to make a change in the regime. However, in the three cases, Alandur, Vypeen and BWSSB, the partnership was successful in bringing about amodification in the regime. In the high significance regime of Chennai, this modification was brought about by a unique political circumstance. In Kochi’s medium significance regime, the Vypeen case brought about a modification with sustained mobilisation. In Bengaluru’s low significance regime, some mobilisation was able to bring about a modification in the regime.
Systems of water supply provision constitute one of the most politicised infrastructures. Numerous urban, regional and international struggles in the recent past have coalesced around access and process issues associated with water-supply and sanitation infrastructures. These struggles have been particularly concerted in cities of the developing world where the disparities over access have been especially egregious. International development agencies expect Public-Private Partnerships to improve access to water supply infrastructure. Developing the concept of water supply regime, this article empirically Investigates whether PPP can indeed transform existing systems of water supply provision using the example of five PPP efforts in three cities in India. From the investigation, we can draw out two important points. First, water supply regimes vary considerably in characteristics across cities. Given the local nature of water supply infrastructure, there is a degree of local specificity to the supply of the resource that does not exist in other infrastructures. This accounts for the variation across regimes. As a result, some cities possess regimes with a greater significance while others possess a regime of much lower significance within their respective regional/ political contexts. The significance of the regime in this article is related to the significance of the water resource to the city and to the autonomous significance of the city in politics. In cities like Bengaluru that possess a regime of low political significance and low resource significance, the regime of water supply has low independent significance. On the other hand, a city like Chennai possesses a regime of high significance. The significance of the water supply regime has a direct bearing on reform processes. Any change process initiated in a regime of high significance is extraordinarily difficult to interrupt or derail by civil society efforts opposed to it. As a result, in a regime with a high autonomous significance like Chennai’s, reform efforts such as PPP usually align with or reinforce the dynamics of the existing water supply regime. When civil society efforts seek to change the regime, they require extraordinary circumstances or skill (such as we saw in Alandur) to make even a minor modification. On the other hand, in regimes with low independent significance, like Bengaluru’s, reform efforts can be upset with minimal Effort (as we saw in the BWSSB case) with civil society actors who mobilise to upset these efforts being usually quite successful in their strategy. In other words, arrangements that underpin how water supply is provided in the city can be understood only in their historical contexts.
A second point concerns the role of PPP in transforming existing water supply regimes in developing cities. By bringing private actors and civil society groups into infrastructural delivery the expectation is that partnership efforts can make water supply systems more participative and democratic, which in turn can enhance access of different groups in society to essential services. It is true that such a characterisation disregards the role of social and political context that guides infrastructure regimes. PPP efforts are always inserted within existing contexts. It is these contexts that, to an extent, guide the role of PPP efforts in transforming water supply regimes. Regimes that have a lower autonomous existence are often usually more accessible and participative of multiple interests. PPP efforts within such contexts that seek to transform regimes by granting them greater autonomous significance are quite often successfully resisted and the regime change interrupted. The BATF case demonstrates the success that partners had in resisting transformations that would have enhanced regime significance and made them less participative. On the other hand, regimes that have a high autonomous significance as in Chennai are hostile environments for genuine participative and democratic urges since these regimes are insulated from the desires or interests of different social groups. Under such a situation, PPP efforts (like the TWAD Board case) usually reproduce existing regime settings. In this case, a regime transformation toward a more participative regime is unlikely. However, the outcomes of PPP efforts are not always guided by the regimes they are located within. Under conditions, PPP efforts and the actions of partners can become critical for initiating regime change. We see that in all three water supply regimes we considered. However, the degree of modification is related to the nature of the regime. In a high significance regime like Chennai, it is only a unique set of political circumstances that can ensure regime change in a participative direction. Under other circumstances, regime alignment is the likely outcome. In Kochi’s intermediate significance regime, partners require sustained mobilisation which can initiate regime modification. Given Bengaluru’s lower regime significance, reform modification is achieved easier than in Kochi or Chennai.
The picture that emerges from this article is that PPP efforts do certainly play a role in initiating regime changes that make them more participative or democratic. The significance of the regime in which the PPP is launched does guide to an extent the role PPPs play. But beyond that, strategic action by partners plays an important role in initiating pathways of regime change. It is of course much easier for partners to initiate these pathways of change in regimes with lower significance as Bengaluru as opposed to high significance regimes such as Chennai. But this does not discount the vital role of strategic action in launching directions of change in water supply regimes.
Few thoughts on policy changes in PPP in India
(This article is an abridged version of a larger article.)
(I) Regulatory Issues :
A strong independent Regulator is necessary for any objective decision making. All regulators of PPP sectors should be strong and independents and such people will be selected, aided and advised by the private sector.
(b) Absence of Regulator:
In sectors where Regulators do not exist, there is need to create a Regulatory Authority like in Real Estate, Food Processing etc. Absence of regulation does not help specially when the vibrant public sector does cut throat competition and the private sector players look to the Government to provide an objective referee.
The Regulator must have effective jurisdiction over all the stakeholders and no segment or region should be left out due to any vague definition of its jurisdiction.
(II) Policy :
(a) Central Vs. State Policies:
Because of the Constitutional provisions of a Central List, a State List and a Concurrent List, the issue of State v/s Centre normally should not arise. But, wherever it does, the Constitutional provisions are clear and they should be followed.
(b) Policy Overlaps and Ambiguity:
The private sector and the normal public do not understand the functioning of the Government and, therefore, feel that there is a plethora of policies in the country, creating ambiguity. For those who are enlightened, they realize that such policies are there in every country for different sectors like Investment, Trade, Environment, Land, Logistics, Infrastructure etc. Therefore, these policies cannot be wished away. What is important in the context of PPP is that there should be transparent guidelines for tendering, with clear technical parameters and financial parameters so that a level playing field is provided to all the concerned stakeholders. If the guidelines are clear and the tender notices are transparent, then PPP projects will not suffer from any ambiguity.
(c) One Stop Service Policy an Option:
To my mind, any project for which the Government cannot provide funds or which is not the task of the Government, should be put on the PPP mode. Therefore, it may not be a one stop service solution but if a particular facility has to be provided to the public and Government is unable to do so efficiently and effectively, there is no harm in resorting to the PPP mode
(d) Absence of Policies:
PPP is gaining ground in India and with more and more success in such projects, more and more State Governments, and the Central Government are taking up PPP projects. A time will come when PPP will become a norm because infrastructure needs of this country are too large for Government alone to take care.
(a) Lack of Legislation:
There is really no lack of legislation in this matter, because Planning Commission has taken out several PPP manuals for different sectors. Today, for any new sector, there are consultants available who can prepare the PPP document efficiently and effectively.
(b) Too much delay:
When the players in the PPP project play by the rules of the game and keep up the pressure of transparency, the chances of delay are very remote.
(c) Transaction Cost:
A PPP project should be undertaken only where normal funding is not possible. The transaction cost of advertising the tenders, processing the applications and evaluating the same efficiently and effectively, has to be met and this can be effectively done by charging a small fee for the application form, which covers the processing and evaluation costs.
(d) Lack of Transparency:
Concession agreements can be very transparent if the stakeholders agree for such transparency. Lack of transparency is very often a result of competing interest and undue influence on the Government decision makers.
(a) Appraisal/Economic Viability :
A very detailed appraisal of the project may not be required but what is more important is to determine the single or dual parameter on which the final vendor will be selected. If there is clarity on this point, then detailed appraisal is done by the private sector partners who put numbers on each cost and each return, and calculate the bottom line.
(b) Contract Standardization:
Each PPP project in different sectors is different and, therefore, a model PPP contract for all projects is not feasible. However, sector wise tandardization has been done by the Planning Commission.
(c) Government Guarantee:
Government guarantee should not be insisted for most PPP projects because they bring laxity in decision making. The private sector must do its due diligence and keep up the pressure on the Government for transparent decision making.
(d) Cost-time Overrun:
There are four reasons for cost and time overrun.
(i) Any material defects or mistakes in the tender document for which it has to be re-written;
(ii) enforced litigation by mischievous vendors who do not want certain parties to bid or to get the contracts;
(iii) fierce competition amongst bidders so that the losers cannot gracefully exit but want to litigate;
(iv) any biased decision making by the decision makers which leads to biased results. A strong Regulator can ensure that this does not happen frequently.
(e) Risk Allocation & Risk Assessment:
A project goes into PPP because of inherent risks and returns. The job of the private vendors is to assess this risk and to quote accordingly. Government can transparently project the risks and the returns, and let the market decide what is the best offer that can come out with.
(f) Financial Structuring:
Financial structuring can be facilitated through the guidelines mentioned in the financial parameters listed for decision making.
(g) Protection against uncontrollable factors:
This escape clause is provided by the Government in all PPP projects.
(h) Implementation Strategy:
For most PPP projects, if due diligence had been done by both the decision makers and the private vendors, the implementation plan will follow smoothly.
(i) Service Quality:
Service quality again is a component which has to be clearly mentioned in the tender document. Fines and penalties for not observing the service quality should also be clearly enunciated.
(V) Capacity and Trust :
(a) Lack of Capacity:
This is a very important point because capacity building for creating PPP projects does not exist throughout the country. PPP training needs to be given to all Civil Servants in their training Institutes during probation period so that they understand the different processes, and are able to formulate the PPP Projects when their time comes. All Collectors in 600 districts need to be sensitized about PPP because they are probably the most focal point of decision making for such projects.
(b) Lack of trust:
Lack of trust is an issue which has to be thrashed out at the stage of making the tender conditions and discussing it with the stakeholders. There can be no guarantee of trust either way, and utmost vigilance on both sides is necessary for success of any PPP.
(c) Concessions and Competitions:
The decision maker of the PPP project has full right to lay down transparent tender conditions which govern entry into the system.
(d) Competitive Dialogue Process :
The competitive dialogue process at each stage of the PPP project is the only way to remove doubts, confusion and trust deficiency. All questions are answered and the entire proceeds are `in camera’.
In short, PPP is a great idea; it requires careful planning of the tender document with transparent conditions; it should keep public interest upper-most and should work towards facilitation of that public interest in all circumstances; the financial and technical parameters must be clear, feasible and practical; the evaluation process must be transparent, unbiased and in public interest, the Regulator must oversee all this carefully and should be available for any consultation, clarification or communication.
If all these necessary conditions are met, PPP can be a great provider of additional public service to the community.
Public Private Partnership and Social Infrastructure
(This article is an abridged version of a larger article.)
Institute for Integrated Learning in Management
Financial Management and Derivatives Consultant
Select Cases on Public Private Partnership and Social Infrastructure Development Providing every child sound education, say, up to high school level is desirable for social and economic reasons. This would prepare more children to access higher education and courses for specialized qualifications. They would then be able to participate in India’s economic progress and its successful engagement with the global markets (Kamath, 2006).
GOI has sought to universalize education traditionally by setting up government schools both in urban and rural areas. Many of these schools however at present lack necessary infrastructure and adequate trained teachers due to continuously rising population. This is often discerned in terms of poor academic results and high dropout rates (Kamath, 2006). To fill the gap in elementary education, a number of private schools have come as education providers but with them too everything is not ideal in terms of quality of education or infrastructure facilities. There are apprehensions in achieving larger development objectives through private schools. Whereas on one hand private schools should accord development priorities, parallel efforts should be directed in improving government school system (Kamath, 2006).
ICICI Bank, a premier private bank in the country, as part of its social objectives, has come out with several solutions to improve teacher performance in government schools. It also provides loan facilities to private schools to expand their infrastructure and capacity. It also provides loan facilities including loan vouchers that allow low income families to access the education of their choice, whether public or private (Kamath, 2006).
Panchayats and Public Private Partnership
Traditionally, India’s development planning has been at macro level and top down that focused too much on big picture such as a big dam or river linking project. During the period of late Shri Rajiv Gandhi as Prime Minister (1984-89) emphasis was placed on bottom up approach for planning in which local bodies particularly village panchayats would play greater role. This experiment was conceived to meet the menace of drought with people support and part financing belonged to the bottom up approach for planning and poverty alleviation.
Panchayats can play important role in village cleanliness and village sanitation. Maharashtra’s experience with panchayats to promote sanitation and hygienic practices is a case-in-point (Iyer, 2006). In Maharashtra, between 1997 and 2000, a record 1.7 million toilets were constructed by the state government but hardly fifty per cent of them were actually utilized by villagers with large number converted into storage space by the unscrupulous farmers. Arising out of constitutional amendments, the Government of Maharashtra involved village panchayats in their Clean Village Campaign (Sant Gagde Baba Swachchta Abhiyan) and achieved impressive results in proper use of the facility created.
Maharashtra government provided necessary administrative, technical and financial support to the panchayats for creating awareness among villagers towards cleanliness. As an incentive to panchayats, it introduced a cash prize of Rs. 2.5 lakh to be awarded to a gram panchayat for pushing this programme, but with the rider that the award money is to be used for improving village infrastructure only (Iyer, 2006). Encouraged by the results, Government of Maharashtra, increased its outlay to Rs. 200 crores on sanitation for building more toilets in next stage of its programme (Iyer, 2006). During water crisis in eighties, Maharashtra faced severe drought when fifty lakh people were on look out for alternative means of occupation as it was not possible to go ahead with agriculture without water. The only alternative source of subsistence, which the state administration could think of providing to farmers was stone breaking at a paltry rate of Rs. 2 per day.
It occurred to Vilasrao and a group of rural entrepreneurs struggling to earn livelihood that rural entrepreneurs could instead divert their energies for conserving rain water which could meet formidable challenge posed by drought. Local authorities particularly the district collector showed keen interest in building structures for water storage and extended all possible support to the farmers for building the local water bodies (Salunkhe, 2004).
Highly motivated rural entrepreneurs spared no efforts in building scores of water storage structures in record two to three months’ time, and when the rains actually arrived, huge storage capacity was already in place for storing rain water. Initially, the pilot project was limited to 15 villages, but later on structures were built practically in all areas that were hard hit by the drought. If the experiment is successful in one state, it can be replicated anywhere in the country.
Realizing that land among farmers is not divided according to family size but it is largely the result of individual family circumstances, it occurred to Vilasrao that if not land at least water could be allocated among poor farmers on the basis of family size. This new basis of water allocation, motivation of rural entrepreneurs, and continuous monitoring of activities by ‘pani panchayat’ led to spectacular success of this novel experiment.
Several leading IT and Telecom companies are already partnering with panchayats in distributing ICT services in rural areas. Tata Teleservices, a cellular service provider, is partnering with panchayats in distributing its services in rural areas. Telecom industry associations like the Cellular Operators Association of India and the Association of Unified Service Providers of India are also supporting panchayat-business or in more common-terminology public-private partnership in rural sector. Rural-urban divide in rural telephony is wide considering that urban tele-density is 31 per cent while in rural areas it is barely 2 per cent (with overall tele-density as 20 per cent in June 2007). India as of 2006 had over 100 million mobile users which may touch 200 million mark by 2007 and 500 million by 2010 (Monga and Philip, 2006). With participation of several agencies including panchayats the total number of telephone subscribers reached 225.21 million at the end of June 2007 as compared to 218.05 million in May 2007.
Intel, the world’s largest semi-conductor company, is planning to reach India’s all villages with one lakh IT kiosks through public private partnership. These kiosks to be called as common service centre (CSC) provide various services with the help of a personal computer and the internet connectivity. Intel has entered into a memorandum of understanding with the Infrastructure Leasing and Financial Services (IL&FS), under which the ILFS will provide technical know-how. Intel will also offer advisory services for wireless implementation towards a rural broadband programme. Intel, as a pilot project, has already set up such centers in Karnataka, West Bengal and Bihar. The CSCs are set up by individual entrepreneurs, to be financed by financial institutions such as ICICI Bank, while companies like HCL Technologies, HCL Infosystems and Wipro Infotech shall make hardware supplies in public private partnership mode.
As a case-in-point till 2006, Nagaland was facing a huge problem of teacher absenteeism. Government of Nagaland found a solution to this problem by introducing system of ‘public scrutiny and management’, under which the control and management of government schools were handed over to the people, through their village education committees (VECs). Under this scheme of public private partnership, all 1500 primary schools in the state were under the purview of public management, which resulted in marked improvement in both teacher and student attendance (Singh, 2006).
This public private partnership model through ‘public scrutiny and management’ was not only used in education but also in other sectors such as electric power supply, water supply and rural tourism. This PPP model has worked scheme of public management has worked well for streamlining electricity revenue collection. The project is managed by village electricity management boards (VEMBs) set up under VCs. This was in aftermath of the single-point metering (SPM) installed under Rajiv Gandhi Grameen Vidyutkaran Yojna (RGGVY). Following SPM, electricity revenue collection in Nagaland increased from Rs.2, 41,302 annually to Rs. 4,48,534 annually with the Kohima division registering the highest growth of 122 percent (Singh, 2006).
VEMBs receive retail margins of 20 percent for every unit sold and employ personnel through the rebate they receive. Several VCs are even engaged in generating electricity and own and operate a micro-hydropower plant at Chizami village and a Biomass Gasifier Project at Pfutseromi village. The state government has sought Planning Commission’s approval to provide financial grants to the private local bodies to allow them to function as financial intermediaries to give cheap credit to local farmers and artisans under public private partnership. The VDBs already have substantial corpus, which requires to be supplemented by grants from the government. According to the state government, given the closely-knit society and sound village administration, the VDBs/VCs are in an advantageous position to ensure timely recovery of such loans. This PPP cooperation backed by careful monitoring and support of local people protects farmers and artisans from the problems they otherwise face from unscrupulous village money lenders, who charge exhorbitant rates of interest prejudicial to the interests of farmers and artisans (Singh, 2006).
NGOs and Social Infrastructure
Several leading NGOs such as CRY (Child Rights and You), ‘Pratichi Trust’ and Pratham and corporates such as Azim Premji Foundation (APF) of Wipro Technologies are providing helping hand to the government in its mammoth task of providing elementary education to country’s large children population and improving literacy levels of adults. With an annual disbursement of over Rs. 13 crore, CRY maintains five regional offices countrywide and employs over 170 full time employees. Prof. Amartya Sen for giving boost to social infrastructure including elementary education and healthcare in South Asia, Prof. Amartya Sen, India’s Nobel Laureate in Economics, set up ‘Pratichi Trust’ in 1999, with some of his Nobel Prize money, an NGO which is very active in India and Bangladesh.
The Pratichi Trust works as driver of change to ensure that social infrastructure operates with quality. In India, the Trust has been so far more active in West Bengal and Jharkhand. In 2001, Pratichi (India) Trust conducted surveys on primary education, healthcare service and role of trade unions in select areas, by holding discussions with all stakeholders including parents,teachers,government officials and society at large. In 2004, worked to improve the plight of some 1200 schools and 250 Shishu Shiksha Kendras attended by the poorest of the children whose parents include sex workers, beggars and domestic help. In 2005, Pratichi Trust with a local NGO,’AyoAidariTrust’ near Shanti niketan, to run a healthcare centre at Kundaphari village near Dumkaand has managed to revive the once abandoned immunization programme in the area (Majumdar,2006).
In 2005, Pratichi tried to evaluate the effectiveness of ‘midday meal scheme’ and its recommendations following evaluation were later forwarded to the HRD Ministry. GOI forwarded its recommendations to the Planning Commission and all the district collectors. This was followed by a meeting between select parents and teachers at the state education department headquarters in Kolkata. Following its recommendations, the West Bengal Government, launched a massive advertisement scheme, set up helplines through newspapers and incorporated mothers’ committee to involve parents. In 2006, it conducted a survey of private schools in Birbhum, findings of which were presented in a public meeting held at Shantniketan, which was also attended by Prof. Amartya Sen (Majumdar, 2006).
Pratham is another leading child welfare NGO in India which has annual budget of over 36 crore, was launched in 1994 with a mission to ensure that every child is in school and learning well. Pratham has played a major role in the conceptualisation of the Sarva Shiksha Abhiyan (Education for All). It works on a tripartite partnership between state governments, corporates and grass root voluntary organizations.
During 12 years of its existence till 2006, it was operational in eighteen states, it has made 5 lakh children literate though application of its intensive 21 day reading and basic mathematics programme. Based on survey of 485 districts, vide its Annual Status of Education Report (ASER)-2005, it reported that almost half of the students in class VII are unable to exhibit the learning and comprehension levels they should have achieved in class II. Apart from Pratham and CRY, there are several other NGOs which are working towards child welfare. Delhi-based NGO Pravah sensitizes students and teachers on issues like communal harmony and sexual harassment. A Delhi-based iDiscovery Centre for Education and Research works on education-based projects like innovative teaching, outdoor education and leadership development for corporates. Prayas works for protection of children and employment generation for the marginalized.
Habitat-building and housing-repair create opportunities to earn money and other micro-enterprise opportunities for the poor. Slum upgrade programme of the SEWA (Self Employed Women’s Association) in Gujarat found that 35 per cent of the households who availed the loan facility also increased their weekly earnings by 35 percent, due in part to the benefits of loans for home improvement, electricity, sanitation and piped water supply (Selvarajan, 2006).
Corporate Social Responsibility and Social Infrastructure
Corporates in the first instance should provide welfare facilities for its employees such as education and health care facilities including crèche facilities for working women at its works. Corporates and NGOs under CSR obligations can offer technological back-up support for design of low cost housing, village drainage system, sanitation, solid waste management, drinking water supply, warehousing for grain and seed storage, crop drying, decentralized energy systems, street lighting, etc. depending on the type of expertise available with them, which they may share under CSR obligations.
Contribution of private sector in GOI’s flagship programme ‘Sarva Shiksha Abhiyan’ under public private partnership is showing impressive results. Several IT companies including Wipro through APF, IBM, Microsoft, NIIT, Hewlett Packard, and Aptech have made noted contribution through computer-aided learning in alternative and innovative education component of SSA. The APF has emerged as a clear leader with its presence in 12 states. Madhya Pradesh, Karnataka, Maharashtra, Tamil Nadu, West Bengal, Jharkhand and Haryana have received maximum corporate support (Mukul, 2006).
Contribution of private sector has gone up from Rs. 40.36 crores in 2005-06 to Rs. 53.43 crore in 2006-07 benefiting 27,289 schools and 52.83 lakh children in IT-enabled learning under their CSR initiatives. Microsoft invested Rs. 9.89 crore in 2006-07 as against Rs. 7.64 crore in 2005-06. During 2005-06 and 2006-07 combine, APF spent Rs. 8.06 crore in Karanataka. During 2006-07 APF spent Rs. crore 4.35 crore in Tamil Nadu. Everonn Systems India Ltd. spent Rs. 6.15 crore in 2006-07 on computer-aided learning in Jharkhand (Mukul, 2006). Bill Gates, world’s greatest IT wizard owning over $50 million who evolved an extraordinary software and gave new meaning to the word ‘windows’, has donated more than half of his personal wealth to the ‘Bill and Melinda Gates Foundation’, making it world’s largest philanthropic organization devoted to health and education issues, especially in developing nations.
In June 2006, Warren Buffett, donated 85 percent of his personal net worth ($30 billion), largest philanthropic gift in history, to the Bill and Melinda Gates Foundation.
When donating 85 percent of his personal wealth to the Melinda Gates Foundation, Warren Buffett observed that he was applying the same principle to charity as he did to business by ‘entrusting money to where it would be put to best use, with optimum efficiency.’ (Nangia, 2006).
Warren Buffett’s extraordinary deed has the potential to spur a few more among the super rich to address the plight of the sick and uneducated. The ultra-rich may derive inspiration from the Warren Buffett’s famous quote, ‘A rich person leaves his kids enough to do something, but not enough to do nothing.’ Warren Buffett’s lead in this direction is indeed an act worth emulating by ultra-rich anywhere in the globe (Bhat, 2007). Bill Gates is on record having said that his three children will only get a small portion of his personal wealth.
It is very gratifying that world’s richest man Bill Gates, has chosen to pursue philanthropy as the road ahead for his rest of life. There are very few examples of likes of Bill Gates and Warren Buffett donating their huge portions of personal net worth for the cause of social welfare far removed from their chosen fields of expertise (Bhat, 2007).
7. Concluding Remarks
India’s capability wealth has made significant strides that enabled country launch satellite into outer space, make noted contributions in computer science and software development, but it could not achieve matching success in elementary education and primary healthcare. It is thus appropriate only that RBI has asked states to spend more on education, public health and family welfare (The Economic Times, January 5, 2007). According to the recent RBI guidelines, states need to accord much greater allocation on social infrastructure than it made so far. Mr. Sam Pitroda, Chairman, Knowledge Commission, has recently come out with host of suggestions, to tap country’s knowledge base for country’s all-round development.
Suggestions are wide-ranging starting from massive expansion in higher education with 1500 new universities, a national knowledge network with gigabit capabilities to connect all university libraries, laboratories, hospitals and agricultural institutions; independent regulatory authority for higher education, 1.5 per cent of GDP allocation for higher education, commercial utilization of the universities’ land for raising funds (Pitroda, 2007). Given the substantial risks involved, private sector may not be too enthusiastic about teaming with the bureaucracy to provide and manage infrastructure facilities (Kabra, 2006).
In view of low economic returns, corporates may not be interested in public private partnership projects in several areas such rural connectivity, rural energy, rural healthcare, rural housing, etc. but may evince more interest in strategic CSR initiatives such as contract farming, contract research or contract manufacturing. Education and healthcare and other social infrastructure development should thus be accorded much greater priority by the government than made so far with support of all including PRIs (Panchayati Raj Institutions), NGOs and corporates. Contributions made by NGOs such as CRY and Pratham and corporate entities like Azim Premji Foundation in improving elementary education in the country in supplementing government efforts on a large scale are worth emulating by others. For success of PPP models it is necessary that public capital (coming as it does, tied-in with government control) and private capital (tiedup with private sector efficiencies and incentives) have to be utilized in most effective manner with minimum of red-tapism or adhocism (Chatterjee, 2006).
For best operating results and resolving day-to-day conflicts, regulatory authority such as AICTE (All India Council of Technical Education) for technical and management education projects, MCI (Medical Council of India) for healthcare projects or TRAI (Telecom Regulatory Authority of India) for telecom projects play very useful role. PPPs need facilitative environment of independent regulatory authorities that help resolve conflicts among stakeholders.
Impact of Public Private Partnership in Infrastructure On Growth in India
Dr. P. Ambigadevi
Professor of Economics,
Avinashilingam Institute for Home Science and Higher Education for Women
Dr. S. Gandhimathi
Assistant Professor of Economics (SG)
Avinashilingam Institute for Home Science and Higher Education for Women
Impact of Public Private Partnership in Infrastructure on Growth in India
Infrastructure is an important component in the development of an economy. How a positive relationship exists between economic growth and infrastructure development is brought out in various studies (World Bank, 2009). Prior to 1991, it was the prerogative of the government to invest in infrastructure as it demands huge investment. But after the economic reforms of 1991, the government changed its policy decision of the lone provider of huge investment in infrastructure as it could not meet the financial requirements of infrastructure with the growing population and globalization. But care has to be exercised in taking a decision on investing in infrastructure avoiding the erroneous decisions taken by Latin American and East Asian countries in the 1990s when they faced financial crises.
Reducing investment in infrastructure turned out to be a short-sighted fiscal solution, making it all the more difficult for these countries to get out of recession. The XI plan document estimated that India has to double its infrastructure spending. Hence it is imperative for the government to change its stand and initiate the public private partnership in infrastructure investment for achieving higher growth rates. The current study is an attempt to find out how public private partnership in projects related to infrastructure leads to growth in GDP. The findings of the study showed that increase in the number of projects in infrastructure under public private partnership would enhance the growth process.
Infrastructure development is an indicator of the development of an economy. Prior to 1991, investing in infrastructure was primarily carried out by the government, owing to its huge size. But with growing population the government found it difficult to meet the financial requirement of infrastructure and it started inviting public private partnership in various fields. One such area is in infrastructure. By sustaining its commitment to infrastructure investment, India should also see that it does not commit the mistakes made by many Latin American and East Asian countries in the 1990s when they faced financial crises. In Latin America, one-half of the fiscal adjustments in the 1990s came through cuts in public infrastructure spending. A similar investment shortfall during the Asian crisis led to similar decisions.
For instance Indonesia’s total public investment in infrastructure dropped from about 7 percent of GDP in 1995-99 to 2 percent in 2000, and private investment fell from 2.5 percent of GDP to 0.09 percent during the same period. Reducing investment in infrastructure turned out to be a ,short-sighted fiscal solution, Making it all the more difficult for these countries to get out of recession. By contrast, China demonstrated 10 years ago that wisely chosen infrastructure projects can create jobs while building a foundation for productivity, growth, employment generation, and poverty reduction.
India faces extraordinary challenges in achieving its medium term infrastructure investment programme, anchored in the Government of India’s XI Five-Year Plan (2007-12). The plan has estimated that US$492 billion is needed over the next five years in improving roads, railways, ports, power, And water. (Over the X Plan period, infrastructure spending was about US$200 billion).
This would require almost doubling infrastructure spending from its current 5 percent of GDP (XI plan document).In this backdrop, an attempt was made to analyse the impact of public private partnership on economic growth in India with the following specific objectives.
|States||Number of projects||Percentage of projects||Value of the projects(Rs)||Percentage|
|Jammu and Kashmir||3||0.40||6,319.80||1.65|
1. To study the state-wise distribution of projects in infrastructure under public private partnership.
2. To assess the impact of public private partnership in infrastructure on growth.
Secondary data for the study were collected from Economic Survey, 2009-2010 and Ministry of Finance, 2010. To measure the impact of public private partnership in infrastructure on growth, logit regression analysis was employed for state-wise data for the period 2009-2010. The states were classified as states with presence of growth and absence of growth based on state domestic product. The states with net state domestic product (at constant prices) above national net state domestic average were assumed as states with presence of growth and the states with their net state domestic product below national average were treated as states absence of growth. The number of projects under public private partnership and the value of the projects under public private partnership were assumed to determine the growth of the states. Hence these factors were taken in the logit regression analysis. The logit regression analysis was identified as more suitable than the regression analysis which would be biased in the present analysis. The following table-1 shows the results of logit regression analysis. The equation used in the logit regression analysis is
where G = probability of a state with presence or absence of growth.
Y = parameter co-efficient
Z = Number of projects in infrastructure under public private partnership(Number), value of projects under public private partnership up to Rs100 crore (projects between Rs101- 250 crore , projects between Rs 251- 500 crore and projects More than Rs 500 crore . In the process of analysis, the variable, projects more than Rs 500 crore was excluded. The remaining variables are retained in the analysis.
Results and Discussion The development of PPPs in infrastructure started eleven years back. Most of the projects were completed in the last 5 to 7 years. Policies in favour of attracting private participation as well as innovation with different structures had met with varying degrees of success. Some sectors like telecommunications, power, and ports and roads had very good progress compared to limited success in other sectors. (Ministry of Finance, Government of India, 2010).The development of states depends on infrastructure. Hence an attempt was made to analyse the distribution of projects under public private partnership. The table -1 shows the distribution and percentage of projects under public private partnership across states in India in 2010.
The number of PPPs was higher in number in the states of Karnataka, Andhra Pradesh, and Madhya Pradesh, with 104, 96 and 86 awarded projects respectively. The percentage of projects distributed in these states was 13.72, 12.66 and 11.35 respectively. The highest value of the projects was observed in the state of Andhra Pradesh followed by Maharashtra and Karnataka.
|Variables||Logit Coefficients||t value||Significance level|
|Constant||2.1528||1.856||Significant at 10% level|
|Number of projects under PPP||0.1486||1.978||Significant at 5% level|
|Project value up to Rs 100 cr.||-0.0081||-0.985||In Significant|
|Project value between Rs 100 cr. to 250 cr.||0.0223||1.885||Significant at 10% level|
|Project value between Rs 251 cr. to 500 cr.||0.0071||0.154||In Significant|
|Project value above Rs 500 cr.||0.0009||1.262||In Significant|
To identify the impact of public private partnership in infrastructure on growth, logit regression analysis was employed for state-wise data for the period 2009-2010. The states were classified as states with presence of growth and absence of growth based on net state domestic product. The number of projects under public private partnership and the value of the projects under public private partnership were assumed to determine the growth of the states. Hence these factors were taken in to logit regression analysis. The table-2 shows the results of logit regression analysis. The result shows that the estimated logit model was statistically significant at 1% level.
It could be identified from the significant chi-square value (10.7621). It implies that the selected variables together were statistically significant to explain the model. Among the selected factors, the number of projects under public private partnership was statistically significant to determine the growth of states. It had positive relationship with growth. It implies that the increase in the number of projects under public private partnership in infrastructure could contribute to growth of states. The project value between Rs. 100 crore and 250 crore was statistically significant at 10% level. If the projects between Rs. 100 crore and 250 crore had increased, the growth of the states could be improved. Other factors turned out to be statistically insignificant and could not contribute to growth of states.
Higher percentage in the number of projects under PPP was observed in the states of Karnataka, Andhra Pradesh, and Madhya Pradesh. The highest value of the projects was observed in the state of Andhra Pradesh followed by Maharashtra and Karnataka. The increase in the number of projects in infrastructure under public private partnership could bring growth in the states. If the projects between Rs. 100 crore and Rs. 250 crore had increased, the growth of the states could be improved.
Public Private Partnerships:
Present Experience, Challenges And The Way Forward
Associate Professor in Property,
Faculty of Architecture Building and Planning, University of Melbourne
IDFC, Policy Group
Large infrastructure requirement
India’s burgeoning demand for infrastructure, the need to catch-up on its infrastructure deficit at breakneck speed and the limited capacity at government levels to deliver complex projects have made Public-Private Partnerships (PPPs) an interesting proposition for delivering India’s infrastructure needs.
The Planning Commission of India has projected the share of infrastructure requirements to be about 9 percent of GDP by 201112, up from 5.75 percent of GDP in 2007-08. Infrastructure investment is projected to be US$ 1 trillion for the period 2012-17, twice the figures from the current Plan period. While still preliminary, some estimates indicate that of the total investment in infrastructure over the last 5 years, private sector contribution has been in the range of 35-40 percent. This is expected to reach US$ 500 billion (50 percent of total) in the coming 5 years.
Growing role of private sector in infrastructure through PPPs
Still in its early years of evolution as a procurement model, a range of public private partnership (PPP) models across a number of sectors have been experimented with over the last decade. The pattern and extent of private sector contribution have, however, varied across the sectors. The exhibit highlights the contribution of the private sector in different sectors.
India’s road sector has been at the forefront of PPP activity in the country. Since 2005, 86 percent of the total national highways development has been procured through PPPs under the National Highway Development Programme. Private intervention has been in the form of Build Operate Transfer (BOT) contracts on a toll basis (with government providing Viability Gap Funding for commercially unviable projects), BOT contracts on an annuity basis (with the government retaining the revenue risk), and special purpose vehicles (with limited equity or debt support from the government). At the state level, close to 100 road projects with capital costs totaling about US$1.4bn have been implemented through PPPs, a further 155 road infrastructure projects are either under implementation or in the pipeline with required total capital investment of about US$2.2bn. Airports have seen an array of PPP Models deployed ranging from up-gradation of existing airports (examples Delhi and Mumbai) to Greenfield airports development (examples Hyderabad, Bangalore, Kochi). Delhi and Mumbai airports have been upgraded on a Lease Develop Operate Transfer (LDOT) model, Hyderabad and Bangalore greenfield airports on Build Own Operate Transfer (BOOT), while Kochi airport was procured on Build Own Operate (BOO) model.
Multiple revenue streams such as aeronautical services, aero related services, revenues from terminal related commercial activities such as advertising and shops; and other commercial activities such as real estate development have attracted private players to this sector.
PPP in the major seaports, which are controlled by the central government have been through leasing out existing port assets and creation of additional assets such as container terminals, jetties and berths on BOT toll, examples include container berths at the Chennai, Kochi and Kandla ports and bulk cargo berths at Haldia, Ennore, and New Mangalore. At the state level, twenty minor seaport projects with capital commitments of about US$4.3bn have been delivered through PPP with a further 37 ports currently under implementation necessitating capital investment of US$11.2bn. Railways, which have started procuring and delivering services through PPP recently, has witnessed 4 projects with capital investment of over US$1bn currently under implementation with a further 50 projects necessitating investment of circa US$19.5bn in the project pipeline. At the state government level, rapid expansion of PPPs within the power sector is projected. To date, 7 power projects have been delivered through PPPs, 8 projects currently under implementation and a further 34 in the project pipeline.
But, PPPs in urban and social infrastructure have lagged behind
While India has witnessed significant private sector momentum in the major infrastructure sectors, the basic infrastructure sectors like water and wastewater, urban transport, rural infrastructure, education and healthcare have yet to attract the same kind of private sector attention. With the recent PPP successes in the major infrastructure sectors and a healthy pipeline of projects, the focus should also be on urban and social sectors which clearly have the potential to attract private capital, provided they are supported by the right administrative and regulatory frameworks at the states and municipalities levels. Due to prevalence of low user charges (inadequate even to cover O&M of urban services) and lack of political will to rationalize them has led to the belief that the revenue risk in urban and social sector projects is too high to make them commercially viable for private sector engagement.
The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) has seen momentum pick up in the urban sector, including some activity in the PPP space. About 50 urban projects have been delivered in PPP model in India since the start of the Mission. PPPs in the urban sector are comparatively small in terms of capital cost. The average deal size across the 50 urban PPPs completed to date is about US$26m, by contrast the average deal size across the 20 seaport projects initiated at state level and delivered through PPP is about US$214m, whilst the average deal size within the power sector is about US$278m. The small deal size has also limited private sector interest in urban and social sectors.
Though there are some recent activities in urban and social sectors
Some of the successful PPP projects include the continuous water supply projects in the pilot zones of the 3 North Karnataka cities of Hubli-Dharwad, Belgaum and Gulbarga and the recently awarded contract for the full city water distribution in Nagpur. A number of sewage treatment plants have come up in the recent past in PPP mode, like in Navi Mumbai. The Municipal Solid Waste 2000 Act has provided a legal framework for the solid waste management sector and with impetus under JNNURM has seen a number of projects primarily on the collection and transportation part of the solid waste value chain, with remuneration being in the form of tipping fees. Examples of SWM projects with PPP participation include those at Delhi and Rajkot. A handful of projects like in Mysore and Bangalore have also come up on the treatment side. In the water projects, private sector operates the water distribution network receiving revenue from user charges or annuity payments from ULBs, with the downstream investments being made by the government. City bus service projects requiring modest capital investments and the ability to charge user fees and other revenue streams like commercial rents and advertisements, as in the case of Indore and Surat, have also resulted in PPPs.
Education and healthcare have also seen some projects delivered through interesting PPP models. For example, in the case of the 46 aided primary schools of the Municipal Corporation of Delhi, the private sector is responsible for design, finance, build and manage activities, with the delivery of education services resting with the public sectors. In healthcare, the Rajiv Gandhi Super Specialty Hospital in Raichur, Karnataka is an example of PPP where the initial infrastructure (land, building, staff quarters and support infrastructure such as power, water and road connectivity) is provided by the Government of Karnataka with Apollo Hospitals authorized to operate the hospital using private resources. In all these models, a combination of capital grant/subsidy and user charges is required. A general problem with urban and social sector projects is the limited revenue generation potential outside the core tariffs charged for the services except few projects where advertising or real estate based revenue streams could be exploited.
There are a number of constraints for the PPPs
A number of reasons can be attributed to the slow pace of private sector participation. Even when projects have been awarded, project implementation has been stifled by the absence of adequate project development leading to protracted negotiations and delays. Procurement issues, with projects based on negotiated contracts and not always through a competitive bidding process are also observed. The lack of credible baseline information has meant that project costing are not accurate, with instances of huge data errors identified after project commencement, impacting project costing and leading to post-contract award negotiations and delays. (Sathyanarayana and Ramaswamy, 2011).
From a financial perspective, projects are not always bankable, and this has hampered both private sector from putting capital and banks lending to projects. Underlying all this is the lack of security of payment to the private operator given the weak financial position of government bodies, especially in the urban sector. With state guarantees not always being made available, private sector has been hesitant to enter given the risks associated with timely payments. The lack of government support and political will in seeing the projects through is also a major impediment in the successful implementation of PPPs. PPPs that have been backed by strong political leadership, supported by the bureaucratic set up and implemented within a clear regulatory environment have shown better results.
The key to success of PPPs in infrastructure creation is the need to establish payment mechanisms that eliminate/lower revenue risk on projects. The success of PPP models in the power sector, can in large, be attributed to the power purchase agreements, which are irrevocable, between the private producer and public sector. Similar has been the case with the national highways, annuity payment agreements with national agency, NHAI. Projects in urban sector and other sectors like social infrastructure could attract private players, if arrangements that reduce revenue risk for the private sector could be thought through.
The requirements in the urban and social infrastructure sectors are also large and attention should now be on upscaling few pockets of success that the sector has seen. The major constraint in the urban sector is the revenue risks attached with the projects, given that most of them rely mainly on user charges as the major revenue stream and these are subject to political pressures. In formulating PPP arrangements, it might be worthwhile to separate pricing risks from performance risks, with the onus on performance delivery purely lying with the private operator. Suitable payment guarantee mechanisms as tried out in the power and highway sectors are important instruments to attract private players. This should be supplemented by government schemes and VGFs that can make projects bankable. The recommendation of the High Powered Committee on revenue sharing between state governments and urban local bodies can provide the much needed predictable, guaranteed transfers which can also serve as an important lever to tapping the debt markets for project financing.
The huge investment needs and the recent successes in the use of private participation in the delivery of infrastructure projects provide ample pointers that PPP as a delivery mechanism is a viable option. However, it is important to not look at PPPs as purely financing instruments, but more importantly as collaborative models (like work in progress experiments that would require fine-tuning) that can enhance operational efficiencies, deliver on time, adopt latest technology, and address the capacity constraints in the implementation of infrastructure projects. Moreover, PPPs can help governments move towards better management practices and financial discipline.
Some of the fundamental steps to creating a conductive environment for PPPs like availability of accurate data and standardized procurement processes must be carried out on an urgent basis. Capacity building for PPPs need to be carried out at all tiers of government as well as for private players, both towards skill up-gradation as well as on the softer aspects of project management like communications and community involvement. Delivery of urban infrastructure and social infrastructure projects would demand a great understanding of the local environment, making small scale local players with entrepreneurial flair ideal candidates to capitalize on opportunities that these sectors offer, with large/multinational players stepping in to provide technical expertise.
Given the shortage that exists in infrastructure sector investments, government would continue to play the dominant role in the short term. Private sector could come along where efficiency gains through their engagements could be achieved. However, this would require certain boundary conditions to be met such as good baseline data, public sector capacity to conceive, structure and administer PPPs and effective regulation (either through contracts or through independent regulatory agencies). Also, not all components of the value chain of infrastructure development are attractive for PPPs. Those components that are attractive for the private sector, some of which have already been demonstrated, should be pursued. The last decade has laid the groundwork for the use of PPPs in infrastructure development. Provided visible improvements in service delivery meeting specified service standards are observed, equity considerations are addressed and transparency in project award followed, PPPs can help fast-track India’s infrastructure development.
Public-Private Partnerships : Some Issues Related to Financing
Prabal Roy Chowdhury
Indian Statistical Institute
This short note deals with two finance related issues to do with public-private partnerships (henceforth PPPs). While the first issue is a more general one regarding whether the financial aspect of a project should be delegated to the private partner or not, the second issue is a more specific one that arises with respect to the SHG-linkage program in micro-finance.
Delegating financial aspects to the private partner
The first issue is central to the debate on PPPs, as one of the main reasons that governments opt for PPPs is because they may be cash-strapped. In this context, it is often argued that, compared to a private sector entity, the government can access finance at a cheaper rate, since it is in a better position to guarantee repayment. Starting from such a position, it is then sometimes argued that governments should not delegate financing to the private partners, as this would lead to higher financing costs, which would ultimately be passed on to the government, and hence the public exchequer. A related point is that PPPs may be a way of hiding government debt. While there is some merit to both these arguments, our main contention is that things are much more nuanced, and several caveats need to be taken into account.
First, suppose it is the case that the government can borrow at a lower rate of interest. Does this necessarily imply that the cost to the public exchequer is lower if it is the government that does the borrowing? The answer to this is not unambiguous because with private borrowing there may be a significant default possibility, so that the private borrower may be paying an interest that is effectively lower than the nominal one (once the default possibility is factored in). While comparing the rate of interest, it is therefore not clear if the government rates are necessarily lower in comparison with the effective’ rate facing the private sector.
Second, one should recognize that governments, in particular sub-national ones, can also get into financial difficulties and consequently face an upward sloping supply curve of capital. In that case with an increase in public borrowing, lenders charge a higher rate of interest, not only for the current project, but also for all other projects. Thus the effective cost of government borrowing is much higher, as the additional costs on the other projects must also be taken into account.
Third, the private rates also need not be too high, as the fact that a firm has obtained a long term government contract, will bring down the risk profile of the private partner. This may allow it to access funding at a rate close to the risk free one which may be available to the government. Interestingly, in this case the private partner is leveraging the government reputation for reliability and deep pocket to its own advantage
The final point is that shifting the financial aspect to the private sector partner has useful incentive properties, as this will incentivise the private partner to finish the project on time. This is of importance because typically it is the private partner who has the greatest ability to prevent time overruns
To summarize, while it must be acknowledged that in some cases delegating the financial aspect to the private partner is just a way to cover up the extent of public debt, there may be strong reasons why such delegation may make economic sense, at least in some cases.
We then examine a reverse scenario, where the government uses private agencies, in particular NGOs, to channelize credit to the rural poor. The most well known example of such a mechanism is the SHG-linkage program in India whereby funds from, for example, NABARD, are channelized to the rural poor using NGOs as intermediaries. In this case the issue is what is the best possible mechanism for delivering this credit, in particular should the NGOs be involved in all the stages of this process, or not.
Typically, the NGOs play a role in selecting the borrowers, who are then linked to some banks who provide them with loans. This follows an initial waiting period, typically around 6 months, when the potential borrowers make regular savings, and the NGOs try to inculcate the borrowers with financial discipline. The banks in turn may receive incentives from the government in case they provide these loans. Here the NGOs are not at all involved in the funding process, with the NGOs generally receiving an agreed upon amount in case the loan is repaid. Once the loans are made however, the NGOs may, or may not be involved in the process (Roy and Roy Chowdhury, 2009, Roy Chowdhury, 2012).
While the knee-jerk response may be that there is indeed a case for such involvement, so as to tap into the NGOs’ undoubted expertise regarding the local economy, the answer is not that straightforward. Interestingly, this is because the NGOs may be too caring, or motivated. In such a scenario the NGOs may select recipients not because they are efficient, but because they are in some sense more `deserving’ (according to the NGOs’ own criteria). In case the NGOs are involved in the post-loan project also, then the incentives for such distortions are even higher, as the NGOs feel that in that case they can utilize their own expertise to compensate for this inefficient selection of borrowers.
Thus in this case it would appear that NGO involvement would be desirable in case the area concerned does not have too much inequality and the average income is not too low, since the scope for such distortions would be less in that case. Otherwise, there may be a case for curtailing NGO involvement.
Quality Infrastructure : Good Regulatory Framework, the Key
Pradeep S. Mehta
Secretary General, CUTS International
To achieve a massive investment of around US$500bn over the next five years or more for the creation of quality infrastructure, we need money from home or abroad. And to get this money, we need a quality infrastructural regulatory framework, to ensure a predictable legal environment and a level-playing field. Alas, we are moving slow on this without understanding its costs. This is despite the Planning Commission’s exercise in developing a policy paper to deliver the best regulatory framework.
Regulatory environment plays a vital role in facilitating investment and operational efficiencies. The importance of having regulatory institutions in place is reflected from the statement of the President of India, while addressing the Parliament on June 07, 2005, “Competition, both domestic and external, will be deepened across the industry with professionally run regulatory institutions in place to ensure that competition is free and fair”.
During the last decade, the government has made a paradigm shift in its policies and governance structure in some of the infrastructure sectors. Specialised regulatory agencies have been established in telecom, electricity and oil and gas sectors.
The regulatory agencies are mandated to enable private investment and ensure development of the sector. However, the outcomes so far do not match with the expectations. Though in the telecom sector reasonable success has been achieved, the situation could have been far better. Private telecom companies are struggling with several policies and regulations that are biased in favour of the state-owned incumbent service providers.
The reasons of regulatory inefficacy in India are manifold, as given below:
Interface with the government/line ministry
It is desirable to maintain an arm’s length distance between the regulators and the concerned line ministry to ensure that the latter does not influence the former, unduly. At the same time, it needs to be appreciated that the line ministry is responsible for the overall development of the sector and the regulator is instrumental in achieving the said objective.
A mechanism needs to be developed to make the regulators directly accountable to the legislature and the same can be achieved by requiring the regulator to submit activity and outcome reports to a designated legislative committee, and also appear before it to explain its actions. It would also be desirable to have appropriate processes in place to facilitate consultations between the line ministry and the regulators, so that possible compromise on regulatory autonomy is avoided.
However, submission of activity and outcome reports to the legislature is not sufficient to ensure accountability in real terms. In practice, the legislature hardly devotes the time and attention required for analysing such reports. Addressing this would require having systemic arrangement in place to strike a desirable balance.
To that effect, mandating consumer organisations as watchdogs may help to a large extent. This would require a clear provision in the related legislation of such role to be given to consumer groups. Further, as another measure to enhance accountability, provisions could be made to carry out Regulatory Impact Assessment (RIA) on a periodic basis.
One way to achieve regulatory autonomy is the introduction of an Memorandum of Understanding (MoU) to be signed between the regulator and the line ministry. The regulator is responsible for performing certain functions and is accountable to the ministry as per the terms of the MoU. Consultation between the regulator and the line ministry is another good model. For example, the Reserve Bank of India (RBI) holds regular consultations with the Ministry of Finance, at formal and informal levels, without compromising its autonomy. Thus, the RBIMinistry of Finance model could be replicated in sectors, where it is feasible.
In addition to the above, the government has the power to issue policy directives without prior consultation with the regulators. Given the fact that the regulatory agencies are instrumental in achieving the said policy directives, the line ministry should defend and back the regulators’ decisions on the said policy directives before the legislature, as and when required.
The regulator’s dependence on the line ministry for getting its budget approved is not desirable, because the provision might limit the regulatory autonomy, indirectly. Presently, no common practice is being followed across the sectors. The Insurance Regulatory and Development Authority (IRDA) and the Securities and Exchange Board of India (SEBI) have been allowed to raise resources on their own, while other regulatory agencies have not been allowed.
Across sectors, regulators should be allowed to present their budget proposals to the Parliament to get direct grants from the Consolidated Fund of India. For example, in Brazil, the regulatory agencies propose their budget and seek the approval of the legislature.
The regulatory agencies could also be allowed to generate resources on their own through fee, cess, etc., wherever possible and be allowed to spend the same as well. For example, the water regulator in Philippines is allowed to raise resources by imposing levy/cess on the services.
At a recent research symposium to take a look at the political economy of regulatory regimes organised by CUTS International in New Delhi, in March 2007, Dr Bimal Jalan, former Governor, RBI, said, “There is an important distinction between regulation and control, but the former should not degenerate into the latter”. The statement shows his concern about the Indian regulatory bodies, which are required to be ‘professionally run’, though they are being manned by generalist retired bureaucrats. In developing the quality of regulation, the quality of people manning such bodies is very important. Thus, the procedures related to the selection, appointment and removal of regulators is crucial. The line ministry is responsible for appointing the chairperson/ members of the regulatory bodies.
The legislation provides for the appointment of serving/retired bureaucrats and judges as regulators. Attracting young blood and talent is the key to making these institutions work in an effective manner. However, the same cannot be achieved until the selection process is made transparent and attractive compensation is offered.
In fact, regulatory laws in India do not provide for the so-called ‘independent regulator’ to decide on the nature and strength of its own staff and the compensation. Consequently, talent and competent personnel prefer joining the private sector, rather than the regulatory authority, which reflects the latter’s sub-optimal performance and erodes credibility.
Fair and competitive appointment is one of the concerns, and provisions related to ousting a regulator are equally important. Expecting outstanding performance from regulators would be too much in case their survival is subject to the whims and fancies of the line ministry. For instance, no investigation needs to be undertaken to oust a member of the Telecom Regulatory Authority of India (TRAI) if the executive sitting in the Sanchar Bhavan perceives him to be working against ‘public interest’.
There is lot to be done in order to have an effective regulatory system in our country. The current regulatory approaches need to be renovated and reinvented from time to time to address new challenges. We have put forth few suggestions, which could be further debated among the policymakers, regulators and consumers in order to develop a roadmap for effective implementation of regulation system in place.
Revenue Sharing Models in a “Public Private Partnership” (PPP) Context
(MD & Chief Consultant), GCS Consulting Services Pvt. Ltd.
Since the availability of funds with state governments to implement e-governance initiatives is limited, governments are looking for PPP models to implement these projects. PPP initiatives not only save the costs for the government but also inject the much needed private sector efficiency in the government sector domain. While there is a need to create PPP deals , these need to be structured to ensure a win-win for all the stakeholders. Some times it is also ambiguous whether the proposed PPP contract is, indeed in the PPP domain or not. For example, in one such project, the vendor gets paid on a yearly plan linked to certain productivity.
While the payments might have been staggered, the model doesn’t construe a PPP structure. So, how do we exactly define Public Private Partnership? While a number of definitions have been proposed for the PPP projects; The one that equally apportions the risk and reward to the government and the private vendor is considered the most appropriate. It is important for the governments and the private vendor in a PPP contract to share the risk and the return on the project. The governments should be ready to dilute their overall control over the project and should be ready to share the expected revenue with the private partner.
The private partner, on the other hand, should invest in to the project in anticipation of the expected revenue. E’Seva kiosks for delivery of government services, toll payment based construction projects in the roads sector are good examples of well structured PPP projects. Projects where future revenues can be predicted fairly reasonably are likely to attract private partnership. If historical revenue data in respect of such initiatives is available then it may be in the interest of the project to share such data with the prospective vendors To encourage them to participate in PPP ventures with the governments.
A Public Private Partnership construes sharing of a number of entities. These include the capital, working capital, revenue, risk, responsibility, assets and authority. However this paper essentially deals with models that provide a basis for sharing of capital investment and revenue. Revenue sharing models have to be based upon the risk/return relationship principles of finance. Risks can be measured in terms of financial, business, social and administrative risks. Returns have to be in proportion of the risk faced by the PPP partner.
This paper suggests a number of revenue share models in running the PPP projects between the state government and the private enterprise. The revenue share model looks at the vendor, state government and the business as three different entities. The flow of capital, Fixed and variable costs for running the business and revenue sharing through fixed and variable payoffs constitute the business models. Accordingly different business models are being postulated. Some of these are as shown below. The vendor is presented with one of these models to decide upon the values of capital, fixed and variable costs and revenue sharing through fixed and variable payoffs.
1.2 Model – I
This model basically relies on the private partner’s ability to fund the project and run it independently of the public sector partner’s intervention. The public enterprise authority is vested with the private partner for a limited period of time. An effective Monitoring and evaluation framework is needed for implementing such a model. Invariably the business is run under strong business related service level agreements. These SLA are monitored by the government through an effective M&E framework. This model is particularly suitable where the capital investment is low and many private vendors can be attracted to invest into the venture. E-Sewa kiosks run using this model.
Projects like e-procurement may be quickly implemented and made operational using this model.
While the vendor shares the entire financial risk of the venture, the government shares the risk of loss of administrative control leading to citizen dissatisfaction. However, given the current low satisfaction levels with government services amongst the citizens , it is expected that this model will lead to improvement in these levels rather than deterioration of service levels. Accordingly it is considered appropriate for the private vendor to have a larger share of the revenue in this model of PPP.
Two variants of this model can be created by having just a fixed pay off by the vendor to the government or having just a variable pay off. These are as shown below. Where the revenues can be predicted with certainty, the fixed pay off variant will be useful. However when revenue figures are completely unpredictable Model 1b will be more useful. Model 1 shown above should be used when the revenue predictability is between the two extremes.
1 .3 Model – 2
In this model the capital investment is done by the government and the business is run by the private partner. This model is specially useful where the government wishes to utilize the efficiency of the private sector in running important citizen services. However the capital costs are high enough for private enterprises to be in a position to invest in to the project. The governments ability to invest high capital and the private vendors ability to run the business efficiently is combined to provide a best of breed solution.
The entire financial risk in this model is taken by the government. The government also incurs the administrative risk of project failure and subsequent loss of credibility amongst the citizens. Thus this model needs to be run under strong Service Level Agreement. Government needs to exercise close control over the vendor in this model. Government also becomes the major beneficiary of the revenue generated through this model. Large facilities like Hotels and hospitals may be run using this model. This model can also be used for running of large airports, rail stations and ports.
Two variants of this model are as shown in the diagrams below:
In the first variant the vendor is paid a variable amount in relation to the revenue generated. In the other model vendor gets a fix sum for running the facility against laid down SLAs. Invariably when revenue generation is not linked to the services provided by the private vendor, the fixed pay off model will be used. However when the services provided by the private vendor directly impact the revenue generation process, the variable payoff model should be used.
1.4 Model 3
This model is a true PPP model since it tries to divide the risk and return between the PPP partners equally. Both partners invest capital into the project. Returns are shared as per the original capital investment ratio as well as the risk perception of the partners. It is advisable for the project to be run by the private enterprise to draw upon its efficiency and past experience of running similar business.
Projects requiring large capital like oil refining etc may fall under this category of PPP revenue models.
Risk Perception: This model tries to equally distribute the risk and return amongst the PPP partners. Invariably the vendor will also have a large stake in the success of the project. Thus the model is likely to work with fair degree of autonomy to the vendor. Government may make initial investments and then accrue annual revenue for their investments.
Only a fixed pay off or only a variable payoff creates two separate alternatives of this model. These are as shown below
1.4.1 Model 3A
1.4.2 Model 3B
The above models provide a basis for structuring PPP deals in an e-governance scenario. Various Equity and revenue models can be envisaged. The government and the private partner can either invest together or individually in to the project. Higher, the equity stake in the project, higher is the risk for the participant and hence higher should be the entity’s share of the over all revenue generated by the facility created under the project.
Governments and private vendors can discuss the percentages of equity / fixed pay off / variable pay off to arrive at equitable distribution of wealth created under the project.
This paper only touches the surface of different financial models perceived in structuring a PPP deal in an e-governance framework. Each of these models can be investigated further for risk return patterns and advantages gained to government and the private enterprise to arrive at well structured PPP contracts.
The Early Phases of Innovation : Opportunities and Challenges of Public-Private Partnership
Institute of Technology and Innovation Management, Hamburg University of Technology (TUHH)
Innovations have acquired a key-role in the growth and competition strategies of firms in today’s globalized world. Governments in many, in developed as well as in developing, countries recognize the need to promote innovations and fund innovative projects; particularly those carried out in cooperation with other public sector institutions such as universities and specialized R&D institutions. This public-private partnership seems particularly useful in the early phases of innovation.
This article discusses how the cooperation between the industry, the academia and the government may be utilized in the early phases of innovation (idea generation, evaluation and selection) to increase the innovative capability of firms in a given region or sector. For the purpose of identifying the opportunities and challenges of such collaboration this paper presents selected findings of two recent empirical surveys carried out at our institute. The focus of attention is centred on the needs of small and medium-sized enterprises (SME) which, on account of resource constraints, are usually more dependent on cooperation than big firms.
1. Introduction and Background
Innovations are increasingly seen as a source of economic growth and simultaneously as a useful instrument to face the competition brought about by the forces of globalisation. Not surprisingly, innovations have acquired a key-role in the growth and competition strategies of firms, as indeed of many countries and economic regions. They are seen as an essential tool to stimulate growth, for instance by generating additional demand, and stay ahead of competitors. In developed countries they are thought to provide a vital buffer against challenges from low-cost providers from emerging countries such as China and India.
Governments across developed countries have recognized the need for their firms to remain innovative and have constituted various “innovation funds” to support innovation-related activities of domestic firms. For instance, the German chancellor Angela Merkel announced at a recently held “National IT-Summit” an innovation-support programme by German federal government that will provide domestic firms in 17 “key areas” by 2009 with up to 15 billion euros as a part of its “high-tech strategy” [GFG, 2006a]. The key areas “include health care, security, energy production, nano technology, biotechnology, as well as information and communications technologies” [GFG, 2006b]. Other European countries have also set up similar programmes.
The attention is generally focused on certain industry sectors or on certain geographical regions. An example of Such measures are “Regional Innovation Strategies” (RIS) programme of the European Union (EU). Hereby, special attention is paid to small and medium-sized enterprises (SMEs), which usually are a vital source of employment in many countries. The SMEs are hereby encouraged to forge cooperation with universities and specialised research and development (R&D) institutions. The funding is however not limited to SMEs alone, bigger concerns in developed as well as developing countries are also reported to regularly receive financial and other support for cutting-edge innovative projects.
Some developing countries, notably China and India, have also started their own innovation-support programmes. For instance, in India a “National Innovation Foundation” has been established with government’s participation “to help India become an inventive and creative society and a global leader in sustainable technologies”, as per information provided on the foundation website. According to an OECD report, China is set to become the second-largest R&D investor by spending 136 billion euros on R&D in 2006 overtaking Japan (130 billion euros) and way ahead of third-placed Germany (70 billion euros) [OECD, 2006].
Universities, too, play an important role in strengthening the innovativeness of firms by providing trained researchers who are “familiar with the latest research techniques and integrated in international research networks” [Pavitt, 2005]. In return, universities receive direct industrial funding of industrial research. Practice oriented education and research also help universities in attracting (and eventually retaining) talents.
The resultant flurry of activities demands an efficient and goal-oriented coordination of support efforts from all players involved, i.e. the industry, the government and the academia, so as to strengthen the innovation capacity of firms in given country, geographical region or industry sector. This article analyzes the role of cooperation between these above mentioned players in removing barriers to innovation in early phases, which are crucial for the purpose of idea generation, evaluation and selection. The article makes use of the results of two recent empirical surveys carried out with the author’s involvement at Institute of Technology and Innovation Management, Hamburg University of Technology. The surveys examined the role of cooperation for innovation in SMEs in Germany. The first survey [see, Napp, 2006] had 76 participants from the medical equipment manufacturing sector in Germany, the second survey [see, Herstatt et al, 2006] 70 SMEs from various technology-intensive industry sectors in the metropolitan area of Hamburg in Germany. The respondents were senior-level managers who answered a questionnaire on the issues concerned.
Even while providing the lion’s share of employment in an economy, SMEs are generally more affected by resource constraints than big firms. They therefore are often forced to seek cooperation with other firms/universities in order to compensate the resources-crunch. This article therefore places a special focus on SMEs, the findings are however by and large as valid for bigger firms.
The article is structured on following lines: Section 2 introduces the concept of the innovation process and defines the “early phases of innovation”. Section 3 introduces an “innovation coalition”. Sections 4 and 5, respectively, deal with opportunities and challenges of cooperation. The final section entails a brief summary
2. The Innovation Process and its Early Phases
Innovation may be defined as invention of new, or 4 betterment of existing, products, processes or services . The innovation process encompasses systematic steps, beginning from problem/requirement analysis to idea generation, idea evaluation, project planning, product development and testing to finally product marketing [Verworn et al, 2000/2006]. The steps may overlap each other. These steps may be categorised into 3 broad phases, which represent a simplified innovation process:
This article focuses on the “early phases of innovation”, which in the academic literature are often referred to as “fuzzy front-end of innovation”, “pre-development” or “up-front activities” [Napp, 2006]. According to Khurana and Rosenthal  the front-end includes product strategy formulation and its communication, opportunity identification and assessment, idea generation, product definition and project planning etc. This phase is of particular importance to this article, since:
– Innovations are unlikely to succeed if the process of requirement analysis and/or idea generation/ evaluation does not run satisfactorily. Not surprisingly, 30% participants of a survey identified problems in the early phases as a “significant barrier to innovation” in their firm [Herstatt et al, 2006].
– The broad field of problem identification, opportunity assessment and idea generation, evaluation provides a large scope for cooperation between public and private sectors. The potential of this cooperation is, however, rarely utilized fully. 33% participants of a survey identified managing cooperation as a “significant barrier to innovation” [Herstatt et al, 2006].
– Particularly SMEs, on account of their limited resources, are more dependent on cooperation to identify and evaluate opportunities as well as to reduce uncertainty of their innovation projects.
3. The Innovation Coalition
In practice, firms rarely innovate in isolation. They operate in a given macro-economic environment, which in turn is influenced by the socio-cultural environment of a particular region. In a market economy firms often innovate “in collaboration and interdependence with other organizations” [Edquist, 2006], the reason being that such collaboration generally includes intra-industry cooperation, e.g. with customers, suppliers and 5 competitors . But there are also significant collaborations with non-firm entities such as universities and government. For instance, universities are a significant source of knowledge diffusion and technology transfer. They may also produce/support spin-offs by their students with new, innovative ideas. The government may, while acting in concert with the industry and academic experts, formulate rules and policies that are conducive to innovation in a given region or industry sector. Figure 2 demonstrates this “innovation coalition”, in which the three partners influence the innovativeness of firms in a given region or industry sector.
This innovation coalition may be understood as a “system of innovation” in a given region, country or sector. Freeman  defined a “national system of innovation” as “the network of institutions in the public and private sectors whose activities and interaction initiate, import, and diffuse new technologies”. This definition may however be well adapted for a regional or sectoral system of innovation. According to Edquist  these three viewpoints national, sectoral and regional may be grouped together as variants of a single generic “systems of innovation” approach.
Having understood the systems of innovation we may now turn our attention to the opportunities and challenges arising out of this collaboration. The next section discusses how cooperation may be utilized to strengthen innovations in the early phases.
4. Opportunities Generated by Cooperation
Cooperation, be it within the industry or with other non-firm entities, rovides certain opportunities and incentives for all partners. In the following we discuss how such cooperation may contribute to the innovativeness of firms, particularly SMEs, in the early phases of innovation. Figure 3 demonstrates the three main objectives that cooperation ideally seeks to achieve in early phases of innovation, i.e. to generate better ideas faster and cheaper.
In the following we may have a look at these aspects individually:
The quality of ideas and concepts may be measured in the probability of their successful realisation and, at a later stage, successful marketing. In the case of process innovation it would also mean the probability of a successful implementation. Better quality in generation of ideas and concepts may be achieved via cooperation that may provide:
a) access to (complementary) know-how,
b) better knowledge of market (understanding of demand and supply side factors),
c) a broader base for idea generation and evaluation,
d) access to physical resources (e.g. Laboratories),
e) enhancement of product portfolio
F) better acceptance in market.
The innovation process may be accelerated, e.g. by saving time through division of labour and by access to complementary or specialized know-how.
The cooperation between the academia, the industry and the government also has a significant financial advantage. For instance, the government may reduce the risk of failure of an innovation project by providing a partial (or full) funding of a promising idea that has the potential of positively influencing public welfare in a region. It might also provide easier and cheaper access to capital. The government may also provide “support for high-tech start-ups and innovative SMEs through corporate tax reform and systematic reduction of bureaucracy” [GFG, 2006b].
Governments play a key-role by formulating innovation friendly policies and promoting or restricting research in certain fields. The German government for example is financing with 280 million euros an innovation project to develop a next-generation search engine called “Theseus”. On the other hand restrictions in many countries, including Germany, on research with cloning of human embryos are well known. Governments may also set up laboratories to do basic research, whose findings are made available to the (domestic) industry or the public-at-large for free or on subsidized rates.
Universities may provide complementary and/or specialized know-how and reduce development costs while sharing the possible profits in the event of success and thereby strengthen their own resources. Alternatively, they might also offer R&D services on cheaper (subsidized) rates. In a survey of medical equipment manufacturer SMEs in Germany [Napp, 2006], 51% of all participants reported cooperation-projects with universities. However, 74% reported willingness to forge (further) cooperation with academic institutions.
5. Challenges of Cooperation
Cooperation between two or more partners necessitates coordination, which unto itself is a tedious task, sometimes. The coordination between heterogeneous entities, e.g. firms and non-firms (i.e. between profit-oriented private sector firm and non-profit oriented public sector entities) is even more difficult to manage, owing to different working styles of the parties concerned. A survey in Hamburg [Herstatt et al, 2006] found that SMEs often have some typical problems while seeking cooperation with universities. Asked to identify cooperation partners with which they generally had a particular type of problem, universities scored unfavourably on following counts [Herstatt et al, 2006]:
a) Lack of effectiveness (50%),
b) Trouble finding right partners (38%),
c) Lack of financial resources (27%),
d) Coordination troubles (26%),
e) Communication problems, differing “time-horizons” (23%).
Another Germany-wide survey of SMEs in the medical equipment manufacturing sector returned comparable results [Napp, 2006].
Further, it was revealed that resource-constrained SMEs are usually not well-informed about various support programmes and rarely try to receive state funding. While 42% of the surveyed SMEs reported aborting innovation projects in the “early phases” owing to financial reasons, over 50% said they were not aware of state-run support programmes. On the other hand, in the same survey firms with a turn-over of over 50 million euros did not report any finance-related project-abortions and called themselves “well-informed” about support programmes [Herstatt et al, 2006]. The above facts point to certain deficits in the “innovation coalition” proposed above. The challenges however can be mastered with concerted action and effort on the part of the parties concerned. This paper proposes a support structure for SMEs (see Figure 7) that would reduce their problems in the early phases of innovation and generate resources to make them more competitive and stable.
The corner-stones of this structure are built by:
a) Providing better education infrastructure especially in technical fields,
b) Installing a more efficient financial-support infrastructure, and by
c) Providing guidance and support to SMEs in internationalising their business and gain access to global resources.
Each of these factors has a positive impact on improving the competitiveness of firms. But these factors also benefit from a certain interdependence and enforce each other leading to a stable innovation capacity and global competitiveness of domestic firms.
Need for a Comprehensive PPP Policy in Infrastructure
Partner at PwC
Despite not having a formal PPP policy, India has a good framework for supporting public-private partnerships. The finance minister’s announcement of the formulation of a comprehensive PPP policy is, thus, welcome, writes Ranen Banerjee, Executive Director & Partner – Public Finance & Infrastructure and Government Reforms & Infrastructure Development, PwC.
The projected investment in infrastructure for the 12th Plan is about $1,025 billion with at least 50 percent expected to come from private sector. With such large investments to be channelled from the private sector, the private players would need comfort of a comprehensive PPP policy before opening their purse strings. Though we have made good strides in undertaking projects under PPPs, there have been several learning points and grey areas that have emerged. The announcement of the Finance Minister for formulation of a comprehensive PPP policy in his Union Budget speech is welcome.
Despite not having a formal PPP policy, India has a good framework for supporting PPPs. These include the Empowered Committee on Infrastructure (ECOI) headed by the Prime Minister at the apex level; PPP Approval Committee (PPPAC) for appraisal of projects; PPP cells in central government ministries and state governments; Viability Gap Funding mechanism for financial support; programmes for capacity building of implementing agencies and IIPDF for project development; and IIFCL and infrastructure debt funds.
According to the latest Economic Survey, there is a good pipeline of infrastructure PPP projects (including under bidding, construction and operational). However, majority of these PPPs are in the economic infrastructure sectors like energy, roads and highways, ports and airports. As the Indian economy has grown at a fast clip over the last decade, private investors have benefited from the upside due to increase in demand and have not been averse to assuming demand risk. However, health, education and urban infrastructure have seen little success as the upside potential from demand may be limited in these sectors.
Global outlier in PPP
India is an outlier by a huge margin when the quantum of private investment in infrastructure is compared across other similar sized economies relative to the level of GDP. However, it is likely that actual completion of projects may be less impressive. The graph shows that while the present policy framework has served well, translating the level of investment commitments into successful projects warrants a more comprehensive institutional framework that addresses critical challenges that plague PPPs in India. Despite the stellar performance, effort is required across several areas to further increase the pace of implementation of PPPs. Apart from the need for financial outlays, there are several other constraints which impede the timely execution of infrastructure projects-problems of tendering of unviable projects; bad planning at DPR stage;
Land acquisition delays and slow approval processes; especially environmental and forest clearances; weak project management in nodal agencies; and inadequate availability of skilled and semi-skilled manpower.
Pipeline of PPP Projects
|Up to 100
and 500 crore
Contracts (` crore)
Government of India is seized on these challenges and this has led the Finance Minster to announce a comprehensive PPP policy as part of his 2011-12 budget speech. The following paragraphs highlight some of the areas that should be addressed under the PPP policy:
Treat complex projects differently: In complex PPP
projects better discovery could happen through negotiated agreements. The Competitive Dialogue under Partnership Contract adopted in France involves shortlisting three to four competent parties and holding several rounds of Negotiations with each of them. These negotiations are carried out over several rounds in a transparent manner wherein the initial proposals by each party may be available to all the prospective bidders. This allows the prospective bidders to define solutions that fit the project objectives and enables the implementing agency to award the project to the most economically viable one and not necessarily to the least cost criteria. Needless to say, sufficient safeguards are required for ensuring transparency and non-discriminatory behaviour.
Provide necessary tools to implementing agencies:
Tools like Public Sector Comparator (PSC) and Value for Money (VFM) have to be mainstreamed into the policy framework. These would help the implementing agencies answer three key questions- what is the PPP for (what is the objective i.e. for construction, financing, technology O&M or a combination); why is it necessary (rationale based on VFM and PSC); and how will it be executed (actual model of PPP and the entire bidding process). To make sure that PPP arrangements enjoy high credibility in public opinion, the Comptroller & Auditor General of India published the Public Auditing Guidelines for PPP projects in 2009. The same audit guidelines can be used for creation of reliable benchmark PSCs in sectors where PSCs are non-existent.
Supporting availability based payments through multiyear budgetary commitments:
The next generation of PPP policy has to significantly support social sector PPP projects. As private sector may be reluctant to take on substantial part of the demand risk, Availability Based Payment (ABP) mechanism could be considered. These involve compensating the service provider based on making the infrastructure available to meet a desired service level. The implementing agencies need to set up clear performance standards and also have capacity to monitor actual performance.
Further, these contracts would involve annuity payments and the recent decision to impose a cap on annuity payments may limit the ability of the implementing agencies to do PPP projects. In South Africa, Treasury Regulation 16 issued under the Public Financial Management Act allows government agencies to undertake PPP projects based on current year allocations and projection of future allocations. This allows them to undertake multi year PPP projects.
Avoid regulatory confusion: India is at a crossroad of a regulatory revolution in infrastructure. On one hand, concession contracts are the most common regulatory instruments for governing PPP contracts. Yet several sectors like airports, ports etc. have an independent regulator who has significant powers to set tariffs. Effort is also on to set up water regulator at state level as well. When concession contracts lay out the tariff setting mechanism, it is not clear as to how much model flexibility the regulator has in tariff setting. One option is that in sectors where concession contracts are in operation, the regulator could focus on setting standards, issue of licenses, set benchmarks, and oversee the tariff process as laid out in the concession agreement. This is similar to the role played by Conciliation and Arbitration Commission in Chile.
From MCA to MCP:
While Model Concession Agreements help in case projects are highly standardised, in practice each infrastructure project is unique. Several market commentators have opined that MCAs have hindered rather than promoted faster project implementation. There www.circ.in is a need to evolve Model Concession Principles (MCP) document outlining the risk sharing, payment mechanism, and the Concessionaire and sponsor responsibilities, and yet leave sufficient flexibility to adapt the contract document to unique project situation.
Supporting local government PPPs:
Specialised VGF guidelines may be required for urban infrastructure PPPs. Operating a separate window through the KFW funded PPP-UIF infrastructure fund could be the way ahead. Such a fund could effectively blend grant and loan funds to reduce the overall cost of resources. There may also be a separate channel for providing guarantee to debt taken by ULBs or PPP operators. Finally, the recommendations of the 13th Finance Commission to evolve a predictable pattern of devolution of funds should be addressed by state governments.
Addressing land acquisition:
There is a strong case for bringing in parity between the compensation package admissible under the Land Acquisition Act 1894 and that applicable to land acquisition under the National Highways Act 1956 to enable faster acquisition. It is also important that the 80 per cent minimum norm for physical acquisition of land before tendering should be strictly enforced through suitable disincentives. Also, a differential land acquisition policy which distinguishes between acquisition for pure public infrastructure like water, wastewater etc. and allows for greater sharing of benefits with land owners in case of economic infrastructure such as airports, SEZs etc. may be introduced.
Competition & Regulation & the Competition Assessment Framework
Competition is central to the operation of a modern market economy. Effective competition benefit consumers directly, through lower prices and better quality, and indirectly, through the higher rates of economic growth that result from productivity improvements and innovation fostered by vigorous competition. But, despite the importance of competitive markets, barriers to effective competition are pervasive.
The Department for International Development’s (DFID), UK mission is to help reduce world poverty. While grants from donors and internal redistribution can make a modest contribution to poverty reduction, substantial progress can come only from real economic growth. The link between competitive markets and economic growth, and the link between growth and poverty reduction, is the basis for DFID’s interest in competition policy and regulation.
Competition assessment framework
Since 2000, DFID has supported a range of activities to encourage the wider user of appropriate competition policy in developing countries. In 2008, one of these included the preparation and publication of the Competition Assessment Framework (CAF).
The origins of the CAF have a close connection with India. In the past three years, DFID and the World Bank have partnered with the Competition Commission of India (CCI) in conducting studies on the state of competition in key sectors of the Indian economy. The Commission itself funded additional studies, which include many important infrastructure sectors and product markets: energy, telecommunications, ports and railways, internal air transport, road passenger transport, road goods transport and manufacturing
Respected research institutions in India have undertaken these studies. Workshops were held in New Delhi to help researchers plan their research strategies. It soon became evident that there could be considerable value in developing a framework that would allow all significant influences on competition to be considered, and that would lead to well-structured advice to the Competition Commission
The CAF was prepared partly in response to this need. It was refined during the competition work in India, and on the basis of DFID’s competition work elsewhere. The CAF is available in hard copy from DFID and also on to the website: www.dfid.gov.uk.
What is CAF?
The CAF is a flexible diagnostic tool designed to help policymakers and researchers identify markets in which competition is weak, to find the causes, and select appropriate remedies. The range of factors that may adversely impact competition is wide, and the CAF takes a holistic approach to examine markets. Some problems for competition might be readily apparent (although their magnitude might be unknown) but, in practice, significant problems are frequently hidden. This is, sometimes because they are part of a long-standing pattern that is taken for granted, or because they involve intermediate products so that the impact on consumers is obscured.
Role and Functions of CAF
In addition to its continuing use for competition sector studies in India, the CAF has an expanding role elsewhere. It has been used in multi-country capacity building competition workshops in Eastern and Southern Africa (ESA). Competition researchers in Bangladesh are using it. The competition authority in Vietnam has adopted the CAF as the basis for its sector studies, and a Vietnamese translation is being published to make it more widely accessible there.
CUTS’ national partners in the current 7Up4 project in West Africa are using the CAF to assist in their research. The CAF is the base of the methodology being used by the London-based Overseas Development Institute (ODI) in its innovative two-year research project on the effects of competition in key product markets in certain countries of Africa and Asia.
The CAF recommends that, to justify competition analysis, markets should either be important to the economy or consumer welfare. But, in addition,there should be at least one element suggesting a possible lack of effective competition.
Elements to be considered include whether there is a high level of market concentration (i.e. whether most of the supply is controlled by a small number of firms), whether new firms seeking to enter the market would be impeded by high barriers imposed by the government or by other firms, whether the sector has a history of anti-competitive conduct, whether there have been expressions of concern by consumers or competitors, or whether there are strong vested interests opposed to change
Government policies can strongly influence the level of competition in markets. Relevant policies are not just those of the national government, but include those of state governments in federal countries, and those of local authorities. Where policies adversely affecting competition are identified, the current justification for them must be reassessed.
Sometimes, government policies limit the number of firms permitted to enter a market or restrict how firms can operate. Compulsory quality standards might be unnecessarily high. Meeting the conditions needed to obtain regulatory approval might be unpredictable, costly or unnecessarily protracted. Sector regulators might be captured.
If state-owned enterprises (SoEs) operate in the market, they might have privileges that make it difficult for private suppliers to compete. Public procurement can account for a significant part of transactions in many markets, including in infrastructure provision and unless it is conducted transparently and fairly, competition can be severely retarded. The level of competition can be affected also by the trade or the industrial policies of the country concerned.
In the markets for some products there will be parties who are opposed to more effective competition. At times, their positions will be widely known. However, even if this is the case, the competition assessment must identify their power and influence. Politics, including funding for political parties, might be involved. Quantifying the extent of the influence of vested interests, and knowing why and how this influence is exercised, will help to provide the basis for a realistic assessment of what will be needed to modify any constraints that exist, and to introduce more effective competition.
The ways in which firms in the market relate to their competitors, suppliers and consumers must be reviewed to see if there are signs of any anti-competitive conduct. There might be cartels (undertaking activities, such as price fixing, bid-rigging, or the division of markets between competitors), the abuse of dominance by firms with strong market power, or a pattern of mergers that reduces the number of competitors. If there are signs of such conduct, it is necessary to assess how significant the effects are likely to be. The cement industry is one example that gives rise to competition concerns in many countries, as the industry appears prone to cartel formation.
The CAF helps guide an assessment of the abovementioned competition issues, and also lists possible remedies ranging from the dissemination of information to new legislation. What is appropriate in any given situation would depend on the nature of the problems identified, on the structure of national institutions and the provisions of the national laws.
Recognition of the importance of competitive markets and appropriate regulation in developing countries continues to increase. We, in DFID, are pleased to have been able to play some role in this. We are delighted to have this opportunity to acknowledge the fine work on competition and regulation that is being done by CUTS, which DFID has partnered on many projects.
Risks & Audits of PPP Projects
One of the realities in India today is that there is limited expertise in both government and the private sector in risk evaluation in public private partnerships. This is partly because of historical reasons as our PPP experience has been offairly recent origin and we are learning as we go along.It is also because we tend to into the standard matrix without putting them through a rigorous testing process where there can be assessed, simulations built in and probabilities assigned, leading to eventual valuation. Most countries with well-established public private partnership (PPP) programs have structured models that enable such a process. In India, we have begun to standardize this in some sectors (highways, for one) but also tend to over-rely on the advice of consultants. While this is not in itself inadvisable, the risk allocation exercise becomes a largely theoretical one if consultants with hands-on experience are themselves rare, as we generally find in India. Our experience with PPPs being relatively limited, the repercussions of this have not yet hit the spotlight.
The current risk “framework” is one that involves, in most cases, the preparation of a risk allocation matrix that identifies the risks at different stages of project implementation. Whereas the risk profile keeps changing during the process as in all project finance, it is this matrix that forms the basis for estimating the probabilities and costs of different risks. Prior to this, the risks are formally “assigned”, as the basic principle goes, to the party “best suited” to deal with each. The pratice is fairly standardized and conventional but there are some areas in the extant PPP process that directly impact the evaluation of risks in a project and may require attention by sectors undertaking PPPs. A few of these are discussed below. Firstly, we are yet to establish the Public Sector Comparator (PSC) approach in all sectors. Prudent PPP programs require a PSC to be prepared before any decision on going in for a PPP is considered. Major risks in the traditional or conventional approach to project delivery are to be identified and a life-cycle costing done. In countries with experience in PPPs, projects are first run through a filter to judge “PPP-ability” – whether they are amenable to being taken up as PPPs from the point of view the expected outcomes, including financial cost estimates. In India, however, as we are currently faced with a virtual paucity of funds in the face of a critical shortfall in infrastructure, the approach seems to be to decide upon the contours of a project and as a first step, appoint consultants to bid it out as a PPP. Market appetite, policy confusion and lack of general preparedness and readiness for implementation can often mean that the decision is delayed, the approach shelved and avoidable expenditure incurred. Had the PSC approach been taken, this could have been averted or the risks anticipated to a reasonable degree. Further, even if a project is successfully bid out, in the absence of a robust, defendable PSC ex-ante, the decision to opt for a PPP could result in justifiable audit concerns ex-post.
The approach to assignment of the risks has not kept pace with developments in infrastructure finance and the economy. Often seen as an Us-vs-Them struggle, conventional textbook approaches are resorted to by both parties in automatically divvying up the risks. The problem here is that some risks can derail a project significantly and the partners may have to re-consider the merits of a whole scale transfer of such risks and, instead, look for innovative solutions that are within the rules and also allow for a clear exposition of the logic behind this, which has to be placed on record. For example, as a first principle all financing risks are often routinely assigned to the private party. In a volatile interest regime, however, if interest rate risk is fully assigned to the private partner and rates sharply increase, the resultant financing costs could spiral out of control and result in either premature termination or the government bailing out the project-the latter would be tantamount to an implicit sovereign guarantee which was not costed up front.
Both these would immediately attract audit attention. Since projects are usually implemented in four to five years, an alternative could be to explore a cap-floor approach that, while tapping into possible advantages of declining rates, can also provide a measure of comfort when faced with possible runaway increases. In general, all risks, including financial, need to be viewed as either explicit or implicit,their probabilities of occurrence assessed to qualify their priority, alternatives studied and, finally, quantified in monetary terms for inclusion in the project costs. This is to be done as part of the project preparatory process, and not tacked on as an after thought.
This brings us to the current framework of risk assessment. The methods we use to measure risks are fairly rudimentary. While, in the final analysis, prediction of occurrence of a risk is more art than science, there are well- established techniques conventional in the PPP world that do introduce an element of objectivity to the process when combined with scenario testing and sensitivity analyses. The process of determining, prioritizing and then dealing with the risk is facilitated by this. The main danger is the likelihood that poor risk assessment will cause a setback to the PPP program in one of two ways:
—By underestimating risks and, therefore, under provisioning for contingent liabilities, the experience with a bellwether PPP project may jeo pardize an entire program in a sector as a knee jerk reaction.
—If the government has in place defined risk exposure thresholds, overestimating the likelihood of some risks could result in alarm bells on the estimated “real” cost of a project and make it artificially unviable vis-à- vis an alternative. On the flip side, if consequences of risks, measured in monetary terms, are incompletely assessed, the impact of the resulting spill-over may even snowball into safety and environmental disasters which would add to project costs.
Since there is a tendency even in our PPP training courses to build up a large contingent of “practitioners” who are exposed to the jargon and build up familiarity with the process, insufficient effort is being paid to building up a subset of core government experts, including in the Audit and Vigilance cadres, who can assess, estimate and examine risks in PPPs. The current framework was set in place when the government was trying to mainstream PPPs. Now that the concept has attained widespread acceptance, perhaps it is time to restructure the training approach.
PPPs entail the long-term alienation through contract of some of the statutory rights of the public sector to provide assets or services of an assured quality at a reasonable cost to a party whose focus is on making a profit from the transaction. While standard dangers in project implementation like padding of costs, over-engineering and unfair procurement practices can be detected even by conventional methods, any assessment of the “correctness” of risk allocation in a PPP project has to be based upon on a proper appreciation of the following: that acceptance of and comfort with the almost conflicting aims of the principal parties to the contract is essential; that assessment of whether value for money has been realized has to be seen in a historical context, that is, when the initial decisions were taken to proceed with the project on a PPP basis;, and that risk allocation is always based upon assumptions and can be objectively examined only with a degree of expertise in the field. If this is simultaneously accompanied by implementation of best technical practices in risk allocation, valuation and regulation, it would help make sectoral PPP programs sustainable
Public Private Partnership and the Institutional Considerations
Public Private Partnerships (PPP) have emerged as an extensive tool for the government to bridge the gap between public and private enterprises thereby enhancing the efficiency in operations by using the expertise of the private sector and the supportive functions of the government sector. Hence in order to implement such a policy in a full fledged manner, certain institutional amendments are required. In this regard, this paper aims at pinpointing those key issues and suggesting ways to deal with it.
Public Private Partnership (PPP) is an innovative entrepreneurial system in which both the state and private individuals can contribute their share to achieve an overall efficiency in operations in the various sectors of industry. According to the Department of Economic Affairs, Ministry of Finance, Government of India, PPP is“a partnership between a public sector entity (sponsoring authority) and a private sector entity (a legal entity in which 51% or more of equity is with the private partner/s) for the creation and/or management of infrastructure for public purpose for a specified period of time (concession period) on commercial terms and in which the private partner has been procured through a transparent and open procurement system”. In the MENA region, the recent share of different sectors that have started its operations under the PPP regime can be viewed from the following diagram.
Hence it can be seen from the given figure that in the MENA region PPP has been introduced in almost every infrastructural sectors of the economy. In India, though this strategy has already been adopted in some of the states in selected sectors, its impact as a whole can only be felt when it gets implemented widely in every sector of the economy. But implementation or introduction of every new thing requires certain things to be considered or amended. It may be regarding its policy formulation, regulatory norms or legislative alterations. In this perspective, this paperweight:
– analysing the institutional amendments required to implement PPP, and
– discussing the implication of the proposed amendments.
In order to address the above objectives the remainder of the paper is organised as follows. Section 2draws the institutional considerations required to implement PPP. Section 3 sketches the implications of such amendments. The last section is devoted to concluding observations and suggestions.
2. Institutional Considerations
For implementing the structure of Public Private Partnership, the institutional amendments which may be required are discussed under the following heads:
A narrow concept of PPP is intended to involve the private sector in Public projects. Whereas a broad perspective of PPP involves the public sector intervention into private practices and operations as well as consultation and dialogue in public decision making. In Kuwait, broader PPP legislation has been undertaken. Kuwait, Dubai and Jordan are increasing their focus on implementing PPP projects by introducing relevant legislations in addition to setting up specialized government departments to handle future PPPs. On the other hand, the most common form of PPP in the UK is the Private Finance Initiative (PFI) which was introduced in 1992 by a cash trapped Conservative government that needed to boost public investment without increasing public borrowing. The great attraction of PFI is that the projects are mostly off the public sector balance sheet, enabling the government to keep within the restrictions set by economic and stability pact as well as defer payments to future. In India, the Model Concession Agreements (MCAs) framed and standardised by the Government though provide a stable regulatory and policy framework, but in this context, it is necessary to frame certain laws that will bind the state and the private sector and help them execute their plans jointly in an organised and efficient manner. There needs a balance to be set up between the fixed legal and regulatory framework as well as there should be a flexible one which conforms to the day to day developments. Before zeroing on any particular legislation, some experience from the countries who have already adopted PPP should be taken into consideration which may be done in a consultative manner by taking advisory assistance from them. It will be better if standardisation of laws are made across sectors so that it is easily understandable for the individual firms or rather the private sector that how to initiate with the proceedings of PPP implementation. Moreover, government officials should be acquainted, and in fact trained beforehand with the laws and execution procedure.
Though PPP is a new development for India, but a standard duration for project approval as well as its implementation is required. Otherwise, the same story of carrying forward the cases pending in the court of law over the years will be the scenario. There should be a committee for selection of viable projects, a committee for approval and last, but not the least, another one to follow up on the implementation of the projects where the members of the committee must include one expert from that particular sector or field. Since resource is scarce, we cannot afford to loose out on them. So proper coordination is to be maintained between the public and the private sector through well defined laws and regulation.
It will certainly involve a large amount of expenditure to carry out the initial steps of project sanctioning. Financial institutions should come forward to provide assistance to viable projects and design some new loan schemes for PPP enterprises. In addition, the government should also assure to share such financial burdens once the project is sanctioned.
Transparency is a very crucial element if full fledged private participation is required. Transparency in creation of contracts is as important as in case of project design. Any information gap in these cases will discourage private participation.
Now, this new trend in entrepreneurship which requires the above mentioned considerations to be taken into account has its own implications which may be discussed in the next section.
3. Implications of the Proposed Amendments
Framing laws and training the officials in it require considerable expenditure. Moreover successful implementation of PPP calls for proper coordination between the Government and the private entrepreneur which can only be achieved if there is a well defined set of norms and rules stating the power and authority of both the sector in a PPP initiative so that no one is exploited at the cost of the other. The legislative body should not frame laws by being biased to the government. The coordination between the sectors may be illustrated in the following figure.
There are some lacunas in the proposed PPP system where it has not yet been clarified whether the private entrepreneur share of income will be through sharing of profits of the business or through some fees payment structure for their services. Furthermore, the capital contribution ratio between the two sectors has also not been defined so far in India. The area where most of the PPP projects concentrate, that is the infrastructure sector involves a lot of risk for which the private sector hesitate to come forward and participate in those ventures. Here, the government should clarify and share the risk with the private sector through some kind of pre-defined mechanism. These are the places where proper legislation and regulation is required to make the entire process transparent enough for the People. It obviously would help to better allocate the risk to the best suited party in an optimal way. Private participation should not be for profit motive alone. While framing laws, the objective of social welfare with service motive should also be kept in mind. Moreover, if the financial institutions come forward with some well built schemes of lending financial support to PPP schemes, this will enhance not only the finance business but also it will act as a great support to the upcoming PPP projects.
4. Concluding Observations
PPP should therefore be encouraged in India and should be implemented with the supportive institutional procedures and amendments. A broader perspective of implementation of PPP is supposed to reap greater benefits for the country. Hence a well phased out plan taking into consideration all the sectors of the economy should be prepared within a proper legislative framework. PPPs can be mainstreamed by taking into consideration the needs of the economy and its people. The feasibility study of every project with respect to other factors and constraints should be carefully done before making commitment to any proposal. Apart from the institutional considerations there are other considerations as well, like the regulatory issues, project and policy related considerations, and last but not the least, capacity and trust related factors. It is necessary to standardise the core policies & practices to ensure integration of services & interaction between applications. So, along with the amendments in institutional factors, necessary changes in other factors also need to be implemented in order to make PPP a successful endeavour.
Quality of Regulation: Meaning, Determinants and Assessment
Professor, Deptt. of Economics, Jadavpur University
The quality of regulation of economic activity is judged by the desirability of underlying regulatory laws/rules and effectiveness in enforcing such laws/rules. The objective of regulation should be to produce desirable outcomes in the present or future which might not otherwise occur or prevent undesirable outcomes which might otherwise occur.
In other words, the purpose of regulation is to rein in the free exercise of market forces and consumer and producer impulses in cases where such a display can act as an obstacle to the maximisation of societal well-being or to remove externally applied obstacles to market forces when their play is desirable. Undesirable regulatory laws (regulation that is not required) therefore automatically give rise to poor quality regulation irrespective of how such laws are implemented.
For the sake of illustration, consider a law asking for an excessive fee for registration/ licensing of business. It is clearly undesirable as it prevents many firms from entering the industry and hinders competition. Such a law will give rise to poor quality regulation irrespective of how efficiently it is implemented.
Contrast this law with another that imposes heavy penalties on cartels. The latter is obviously an example of a desirable regulatory law. However, it constitutes only a necessary condition for good quality regulation. The quality of regulation might still be poor in this case if this desirable regulatory law cannot be enforced because of investigative incompetence or the incidence of corruption. Success in enforcement often depends on the institutional structure, i.e. the composition of the regulatory body and the ties/obligations that bind it to government, producers and consumers.
The proximate determinants of regulation
Regulation is undertaken by various sectoral agencies with different immediate objectives. The literature on regulation highlights the following determinants of regulatory quality the degree of independence of the regulator with respect to the government and sectional lobbies, consistency and timeliness in pronouncements, well qualified staff, accountability etc. Empirical studies have shown that these qualities are positively linked to the desirability and effectiveness of regulation.
Common sense also leads to the same conclusion unless a regulator has a fair degree of independence it will not be able to formulate and implement regulation in a manner that is fair to all groups and consistent with the maximisation of social welfare. If it is not prompt in its pronouncements it will not be able to curb dangerous excesses before they result in damage to the economy. Without well-qualified staff it will have difficulty in formulating regulation and also in implementing it. Accountability ensures that regulations are formulated and implemented with care after assigning due importance to the welfare of all the stakeholders.
The factors mentioned so far are proximate determinants of regulation. Delving further into the sources of regulatory laws and activity enables us to determine the root/ultimate determinants which drive these proximate determinants. For example, no overlap in the functions of regulatory agencies and clear delineation of powers lead to timeliness of regulation. If the regulatory agency has its own training facilities for generating man power then it results in independence from the government and a steady flow of well- qualified staff and consequently quality formulation and implementation of regulation.
Own training facilities and sanction for generating financial resources through taxes, fees and publications result in both functional and financial autonomy from the government. The existence of an option for regulated entities to appeal against regulators in a tribunal ensures the accountability of regulators.
Three processes of regulation
As different sectors have different objectives in adopting regulations it is very difficult to develop an integrated and holistic framework for assessing the quality of regulation. However, any assessment of the quality of regulation involves three processes:
(a) determining whether regulation is needed;
(b) if it is needed then determining its deviation from the optimal level of regulation; and
(c) determining the effectiveness of regulation in achieving its objectives.
With regard to
(a) regulation is usually needed when
(i) there is a natural monopoly (economies of scale exist so that competition is not desirable);
(ii) externalities exist so that agents are often not charged by the market for the costs they impose on others; and
(iii) there are information asymmetries among buyers and sellers implying that the market does not constitute a level playing field.
If any of these characteristics are not found in a market to a significant extent regulation is deemed to be unnecessary and therefore of poor quality. With regarding to (b) a technique called regulatory impact assessment (RIA) is used for determining the sub-optimality of regulation. This technique involves determination of the extent of regulation at which net benefits (benefits minus cost) are maximised. Note that a regulation involves both administrative costs (salaries of staff, equipment costs etc.) for the regulator and compliance costs for the regulated parties (documentation and associated costs of staff etc.).
The net benefit from regulation is, therefore, the welfare gains from regulation less the costs mentioned above and is a function of the stringency of regulation. When a regulation is less stringent than that required to maximise net benefit it is deemed as sub-optimal and the relevant sector is said to be under-regulated. On the other hand over regulation is said to occur if the stringency of existing regulation is more than the level which maximise net benefits.
While RIA is a good technique for determining the quality of regulatory laws it might be inadequate for judging their enforcement. The quality of regulatory enforcement can be judged by reviewing the status of its proximate or ultimate determinants mentioned above. While one or both classes of determinants might be used the actual use might not be a matter of choice. In certain cases, especially in developing countries, the history of a regulatory body is so short at the time of assessment that it is often not possible to have adequately voluminous data on proximate determinants which are usually performance indicators.
In such cases information on ultimate causes, such as the availability of own training facilities and sources of funds, which are input indicators might have to be used. In general, it has been found that regulation is a task that requires specialised skills and training. Regulatory regimes in most developing countries are in an early stage of their evolution and many of them suffer from lack of funds and training facilities for their staff. They are, therefore, unable to meet the demands of modern regulation. There is great scope for multilateral intervention in this regard so that economies of scale in training and development of skills can be exploited and rewarding interaction among countries on regulatory issues can be facilitated. Only then can we raise the quality of regulation in the developing world.
Urban Governance and Service Delivery in Bangalore: Public-Private Partnership
The paper explores public-private partnership in the light of persistent state failure, institutional constraints, and systemic weakness, which impede the service delivery. The paper focus is on key issues: whether public-private partnership facilitate innovation, and thereby enhance quality services, and essentially pro- poor reflecting equity concerns. The study examines various types of partnership at work for service delivery in metropolitan Bangalore. The paper is presented in five sections. The first section presents conceptual understanding of PPP in urban context while second section explores empirical evidence of PPP models in Bangalore. The third section deals with outcomes in terms of Efficiency and Equity issues. Final section presents policy prescription.
A City that beckons Bangalore is the sixth most populous city in India and 43rd largest metropolis in the world with a population of 60 lakhs spread across 595 sq. kms geographical area (2001). It is the one of the fast growing city and poised to become mega city with 88 lakhs population and 1,000 sq. Kms in 2015. The city is a leading science centre with its internationally comparable educational and research institutes. It is a centre for India’s Space research and aviation technology. Bangalore is emerged as ‘Silicon Valley’ of India with a booming IT industry of over 125 multi-national companies, 1150 software export companies and 1,20,000 IT professionals. The software exports from the city have been estimated to be around US $2.5 billion in 2003.
1. Stress on Urban Infrastructure
With the increase of population and stimulated economic growth there has been an enormous strain on the existing infrastructure and service delivery. The problems related to traffic, roads, water, sanitation, solid waste, electricity 8 and transport in urban areas are quite acute (Sivaramakrishna and Kundu, 2005: 106; NIUA, 1995; GoI, 2005: 363). The government has neither capacity nor required finances to cope with rising demand for public services. In this context, many governance reforms have been initiated both by state and civil society to improve the quality of governance and service delivery. The major reforms include Public Private Partnership (PPP), privatization of government activities, and partnership with civil society organizations, transparency and accountability in administration and so on. Against this backdrop, the study examines the implications of governance reforms particularly public private partnership on service delivery in terms of efficiency and equity in Bangalore.
2. Public-Private Partnership for Service Delivery:
There is lack of consensus over definition of PPP. PPP is deferred as ‘working arrangements based on a mutual commitment between a public sector organization with any organization outside of the public sector’ (Gerrad 2001: 49; Bovaid 2004: 200). It is a contractual agreement formed between a government agency and a private sector that allows the latter in public service delivery towards financing, designing, implementing (Peirre 1999:374; Osborne 2000; Awortwi 2004: 213; Bovaid 2004: 200; DEA and ADB2006:17;Hodge and Greve 2007:545; Rajan 2007: 2).PPP is innovative, flexible collaborations in which the partners are bound by shared values and mutual trust to share cost, risks, and benefits (Batley 1996; Ghere 2001: 441; Teisman and Klijn 2003: 197; Prosper Ngowi 2006: 3; Bloomfield 2006:400). PPP is also understood in terms of inherent power dynamics shared mutually among the partners (Lister 2000:228). Power might be political information, or organizational power. PPP is alternative service delivery model to achieve efficiency and address shortages, although unlikely to replace fully traditional service deliver by governments. The partnership concept is linked to the network forms of governance, in which public actors co-opt other actors to solve the governance problems. PPP therefore, represent a new way of doing business to improve the quality and efficiency of public services.
Typology of Public-Private Partnership
PPP encompasses a range of partnerships based on (i) number of partnership involved (ii) governance level at which partnership is evolved and (iii) the objectives or purpose for which partnership is constituted (Sekar 2002: 5). Other classification include: type of partnership, size of partner (measurable in terms of funding, revenue, investments etc), extent of collaboration/level of commitment,role and functions, stage of partnership, type of actors involved, area of intervention for output, scope of partnership, organizational form, capacity in partnership, and geographic location. All these forms of partnership imply some degree of complementarity or synergy or collaboration or co-production,dialogue,contracting,co-ownership,market friendly regulation and trust between public and civic actors in pursuit of common set of social objectives (Robinson and White2001:107;Sansom2006:210)).
The classification includes public-public, public-private, and public-civil society and International- development partners as shown in the chart 1 Partnership between public-public is most common to cooperate and coordinate in service delivery (Hall, et al, 2005: 7). The coordination between the Bangalore City Corporation (BCC) and Karnataka Slum Clearance Board (KSCB) can be mentioned in this regard. The partnerships between local and central or state governments for power sharing (for setting policy priorities, policy design or planning and policy implementation) are also come under this category.
PPP in partnership with ‘private’ sector include interalnal corporate bodies, consulting firms, contractors, maintenance companies, private investors and so on. The The public-private also include: service contracts, operation and management contracts, Leasing-Buy-BuildOperate (BBO), Lease-Develop-Operate (LDO), WrapAround Addition (WAA), Build- Operate-Transfer (BOT), Build. Own-Operate-Transfer (BOOT) etc. Most contracts cover the finance, design, management, and maintenance obligations. These contracts are usually financed by user fees or tariffs or by government subsidies. The argument is private participation results in better efficiency. The PPP helps to raise resources (funds, techno- managerial skill and expertise), innovation, cost-saving and construction and commercial risk sharing, entrepreneurial spirit and improve services simultaneously. The partnership with third sector such as local NGOs, community organizations, trade unions and so on (Brinkerh off and Brinkerh off 2004) is to achieve transparency, accountability, social equity (Laquian 2005: 307). Partnership with NGOs or Community Based Organizations also varies depending whether primarily, a deepening role or stretching role (Krishna, 2003: 365). Such engagements facilitate coproduction without undue interference of government (Sansom 2006: 213).
These civic groups play a predominant role in mobilizing services, pressing for micro-policy reforms, engage in mass campaigns, demand for better services, monitor actual provision and for ensuring accountability from service providers (Chowdhury Roy 1999:1097; Jalal, 2000: 43; Robinson and White 2001: 100; Paul, etal 2004: 933). The horizontal engagement of public civil society is aimed to promote consultative process and prioritize service options and widen the participatory democracy. In fact, the process of decentralization has resulted in the empowerment of the common people through local-level planning and community resource mobilization. Norms of such cooperation on networks of civic engagement among ordinary citizens and public agencies are used for developmental ends and serve as socialization agents of partnership (Chowdhury Roy 1999:1098; Vigoda 2002:536; Sangita, 2005: 75) and realize collective pressure to usher policy changes. Instead of remaining passive recipients, the participation of civic groups has in fact inspired the undertaking of a unique state-citizen dialogue in a big way by ‘pressurizing’ or ‘lobbying’ the existing state for change. These structures are effective beyond their social role, by linking the public issues at the grassroots into the appropriate platform at the local level. The deliberative structures hope to promote civic values, civility as a precondition for governance and thereby determine their own development paradigms. The state and international partnership include a public authority from a country (preferably high income country) enters into a partnership with a public authority with a lower income country usually to assist the latter with its development projects (Hall, et al, 2005: 7-8; Brinkerhoff and Brinkerhoff, 2004: 254).The second type of partnership is between international partners when public authorities (Hall et al 2005: 6) from different countries work together to address common set issues and agendas. These partnerships are Important inter-organizational mechanism for delivering international development assistance. For instance, transnational agencies or international donor agencies like World Bank, International Monetary Fund (IMF) or United Nations Development Programme (UNDP) has major funding or contribution for infrastructure such as water supply; sanitation; energy or power sector.
Potential Drivers for Public-Private Partnership
There are many potential drivers for promoting partnership in developing countries. First, glaring infrastructure deficit, in the areas such as water supply, sanitation, local transportation, and waste treatment compel the government to opt private sector for financing, design, construction, and operation (Lquian 2005: 312). Partnership would help to overcome impediments posed by state failure, institutional constraints, and distributing costs and risk among partners. In addition, partnership constitutes the most significant methods to generate performance of essential services that tends to reflect the incorporation of market-based principles and practices into the public provisioning of services (Pinto 1998: 394). In the field of local governance, the governmental organizations are increasingly dependent on private or semi-private actors for implementation of their policies and service delivery.
Purpose of Partnership
|Nature of PPP||Sector/Number
|Area of Partnership||Scope Partnership|
|Public- Public||Intergovernmental or Inter-Municipal||Power sharing||Supply Side Objectives||Policy||Vertical|
with private sector
|Contractual/Out Sourcing Services||Demand Side Focus/Quality||Customer||Mixed Partnership|
|Dialogue/Contestation||Demand Side||Empowerment/Citizen Participation/Monitoring||Horizontal|
|Public- Development||Both private and
|Loose Network||Mixed (both Supply & Demand side)||Social Inclusion||Mixed Partnership or PPP|
|Public- International||Private sector||Contractual||Supply side||Economic Productivity||Mixed Partnership Or PPP|
Objectives and Outcomes of Public-Private Partnership
Public-Private Partnership (PPP) is recognized as the most innovative tool for resource generation, quality and better services. PPP reduces the gap of meeting increasing infrastructure needs and social exclusion. Partnership further can bring creativity, dynamic, resilient, innovation, energy, vibrant and capacity building to improve service delivery. PPP is critical in promoting innovation in technological, institutional, and organizational behaviors and practices in service delivery.
The objectives of PPP in service delivery vary with wider political and private interest. The PPP promotes clear customer focus through reduced cost, faster services, and improved service quality. Further, PPP promotes greater efficiency in terms of improved coverage, access and enhanced social service (Cook and Minogue 1990: 398; Kaul 1997: 21; Brown and Potoski, 2006:657; Bloomfield, 2006:401). PPP ensures recovery of user charges by better risk allocation and procure additional revenue streams. Thus, PPP is seen as the best way, to govern the complex relations and interactions in a modern network society (TeismanandKlijn2002: 198).The chart 2 clearly enumerates the objectives.
PPP enable mobilization of resources and capacity building (through sharing skill, management, expertise, new technology and training programs). PPP symbolizes market driven competition, risk sharing, and transparency (Brown and Potoski, 2006: 666; Bloomfield, 2006: 401). PPP ultimate goal is to obtain more ‘value for money’ (Ranjan 2007: 2) and there by safeguard consumer andpublic interest.
|Service Efficiency or effectiveness||a.Efficient mode of Improved service delivery
b.Improved coverage and access to services
c.Promotion of equity in service delivery
|Mobilization and Capacity Building||a .Public awareness programs and training methods|
|Accountability and Transparency||a . E-governance or e-services
b. Simplification of procedures
|Civic Participation and Citizen engagement||a . Consultative process with citizens and other
b. Public or interactive or redressal forums
|Equity of Services||a . Measured locally in terms of access,
standards, or level of services and affordability
Constraints for PPP
The major constraints for PPP are: fragmentation, duplication, heterogeneity and uncertain outcomes.
Power relationship in partnership is often asymmetrical and less ambivalence. The most vexed issues of a partnership approach are fragmented structures and processes, blurring responsibilities and accountability. Effective coordination in partnership seems to be the area of contention which includes: duplication of services, heterogeneous approaches, competition for resources, lack of integration, corruption, inter-institutional coordination, bureaucratization, and dependence (Robinson and White 2001: 103; Krishna 2003: 368). Key concerns include poor framework, lack of clarity, inadequate capacity to manage the process, and an overly narrow transaction focus (Ghere, 2000: 448; Bloomfield, 2006:410).
Public authority in partnership is eclipsed in its traditional weakness of monitoring and evaluation. Public authorities rarely have access to such resources leading to weak relations. They also do not have adequate control over the PPP, especially for local contracts with private sector involved in the provisioning of urban services that likely to result in higher cost to local taxpayers (Bloomfield, 2006:402;Hodge and Greve 2007: 553). The long-term partnership entitling innovative methods of financing public facilities are susceptible to transparency problems (Ghere, 2000: 448; Bloomfiled, 2006: 403) and within partnership coordination costs are a major challenge to successful PPPs. Staff reduction or downsizing leads to mistrust and poor management. Tariff increase, layoffs, and poor stakeholder’s coordination have contributed for its weakness. Further, private investors are basically profit oriented. PPPs tend to focus on markets where revenues are easily generated. The poor are often excluded from PPPs because of institutional constrains that prevent the development of an attractive market that involves the poor (Robinson and White 2001: 104; Laquian 2005: 312; Leung and Hui 2005: 14)
Many PPPs have failed due to strong opposition from civil society, local media, and other stakeholders. Even in the absence of this bias, governments often lack the financial resources and the technical capacities to provide services to the poor. Partnership would be further marginalised the poor as they focus on markets for profits. Further, the availability of private financing for infrastructure projects has essentially provided governments an opportunity to use a ‘mega-credit’ card to charge on infrastructure deals (Hodge and Greve 2007: 552). Lastly, the partnership projects have generally undermined the significance of local cultural ethos. Overcoming these institutional constrains often require innovative solutions and an inclusive partnership that will bring in all relevant stakeholders.
Enabling Conditions for Public-Private Partnership
The full potential of PPP can be achieved by careful planning and application through a clear framework for partnerships. Governments need to work on accountable And transparent structures to formulate and enforce. First the establishment of proactive mechanisms (such as ombudsman, ethical training, and citizen grievances processes) would ensure partnership legitimacy. Second, PPP needs to do preparatory work defining procedure (specificities), tasks, quality indicators and monitoring process. Improved and more independent regulation of public utilities is achieved by an effective entry point for future well defined PPP contracts (Sansom 2006:215). Some necessary pre-requisites include strong political Commitment, transparency and consistency of policy, effective regulation, careful design of the contract with appropriate risk apportionment and attention to cost recovery, and clearly defined stakeholder roles, project financing, and extent of competition. And creation of a good information base is also an important factor. Feedback and consultations with citizens, labour unions, relevant government agencies, private investors, civil society organizations, and media will ensure support, client focus, and overall improved implementation of PPP and protect public interest.
Thus successful PPP stems from the nature of goods and services produced and depends on transformation of inputs into outputs and tradeoffs that partnership face (Orts, 1996: 1080; Rudolph, 2000: 1768). Further, the successful partnership depends on the form of rates paid to public officials and the opportunity costs facing citizens for inputs like knowledge, skills and time (Ostrom, 1996: 1081). Finally, effective conflict resolution, contradicting social and political goals, complicated contractual agreements, expertise, consultation, cooperation and attending to their suggestions are all potential areas of concern.
Public-Private Partnership in Urban Context
Cities of the world experience tremendous pressure in terms of management and operation of urban systems as well as service delivery. Important changes are taking place in the governance of cities in developing countries, one of the important being the proliferation of various forms of networks and partnership between public-private and civil society. Many urban reforms such as partnerships with public-private and civil society organisations are introduced to improve quality of governance and service delivery. The broad stakeholders in this reform process include differing in sectors and levels. Changes in rules, norms and values, practices have been brought to facilitate coordination among various agencies to improve efficiency. Privatisation, decentralisation, restructuring of departments and administrative procedures, laws and regulations, social audit, e-governance, citizen charter, red ressal grievances, transparency and sound personnel policies constituted major strategies of urban governance reform (World Bank, 2003). Many Urban Local Bodies (ULBs) introduce innovations to improve billing and collection, rationalisation of service charges, simplifications of tax assessment system, computerization of services, and improved accounting and financial management systems.
New Partnership Situation
The emergence of partnership and networks in urban context can be shown in the following illustration.
1. The rising expectations of citizens challenged in the existing service delivery processes both in terms of participation and quality of services. The demands are no longer met in isolation by government alone.
2. Numerous inter-governmental networks, alliances and partnership arrangements are developed. These in turn would create complex arrangements and processes.
3. Due to private sector participation, alternative service arrangements are defined and experiments are carried out through partnerships.
4. Increase in multi-stakeholders partnership representing people voice and dialogue.
Public-Private Partnerships: Keeping Human Rights on the Radar
Associate Professor, JD Programme Leader, Faculty Editor, City University of Hong Kong Law Review School of Law, City University of Hong Kong
The idea of public-private partnerships (PPP) is gaining increasing recognition all over the world. While the origin of PPP is generally traced to the last decade of the 20th century, this might be a misnomer. States (public) have formed partnerships with companies (private) for centuries. The British East India Company (Company) is a case in point: on 31 December 1600, Queen Elizabeth I issued a charter to the Company to conduct monopolistic trade into the East Indies . Through subsequent charters, the Company acquired rights to mint its own coin, maintain army, manage overseas territories and collect taxes; basically, in exchange for serving the economic and colonial interests of the British Empire, the Company can do everything that a sovereign state would do. That early experiment of PPP failed, among others, because neither the British government nor the Company bothered to take responsibility to serve the public good.
The contours of this public-private relationship have changed over the years in that justifications for PPP, scope and regulatory framework of PPP, the nature and extent of partners’ contributions, modes of sharing benefits, and the parameters of responsibility as well as risk allocation have continued to evolve as per diverse needs. Nevertheless, the basic postulate of the PPP has remained the same: a partnership between public and private sectors to achieve a mutually beneficial goal by pooling in resources. PPP is now used as a vehicle to run hospitals, operate bridges, highways and tunnels, offer consular services, provide security, fight wars, gather intelligence, run prisons, and provide a range of public services. It is regretful, however, that the mistake of ignoring the public good is being repeated again four-hundred years down the road. In the current PPP discourse, the focus with some exceptions is mostly on employing PPP for achieving economic development and/or improving infrastructure .India’s 2011 Draft National Public Private Partnership Policy (Policy) is no exception , as neither the objectives of PPP nor the principles governing PPP make any reference to human rights .Nor do one find in the Policy a provision for the human rights impact assessment alongside economic, financial and affordability assessment. In short, rather than embedding human rights into the plans for harnessing the potential of PPP, the Policy totally ignores and externalises the human rights impacts of the PPP-driven development. Against this background, this articles argues that both states and companies have human rights obligations flowing from national laws and/or international law and that these obligations do not disappear simply because ‘public’ and ‘private’ social organs join hands to pursue certain economic goals. For the sake of convenience, the term ‘human rights’ is used in this article to include not only human rights but also labour rights and environmental rights.
2. PPP And Human Rights
Why human rights should matter for PPP Irrespective of the fact whether the entity behind PPP is public, private or a hybrid of public and private, it has certain human rights obligations under both law and morality. In Indian context, the government as well as ‘other authorities’ within its control are subject to extensive list of fundamental rights enumerated in the Constitution. Moreover, certain fundamental rights do apply, or have been interpreted to apply, to 10 private entities. In addition, there are numerous domestic laws that obligate both public and private entities to protect a wide range of human rights interests. Having ratified several international human rights conventions, the Indian government is under a duty to respect, protect and fulfill human rights. This obligation remains undiluted even when the government joins hands with a private entity to achieve certain economic goals.
Nevertheless, in practice, there are numerous examples of the government ignoring their human rights obligations while establishing PPP. Let us consider the memorandum of understanding (MoU) signed between the state of Orissa and POSCO, a 11 Koran company. Under the MoU, the government of Orissa undertook to do almost everything necessary to help POSCO establish the steel plan and related projects from acquiring land to procuring raw materials, ensuring availability of water and power, securing environmental clearance and providing overall security. The MoU, however, hardly gave any attention to the human rights implications of the project or allocated clear responsibility in this regard. This approach is problematic: it neither helps in accomplishing the PPP project on time nor protects the interests of the affected community.
The recently adopted UN Guiding Principles on Business and Human Rights (GPs) rightly remind states to take multiple measures to protect against human rights abuses by business entities within their 12 territory or jurisdiction. Directly relevant to PPP are Principles 5 and 6, which provide that states ‘should exercise adequate oversight in order to meet their international human rights obligations when they contract with, or legislate for, business enterprises to provide services that may impact upon the enjoyment of human rights’ and ‘should promote respect for human rights by business enterprises with which they conduct commercial transactions.’ It is clear that India’s Draft Policy is totally oblivious of these expectations articulated by the Gps.
The GPs also provide that companies have a ‘responsibility to respect’ all international human rights. Principle 15 lays down that in order to discharge this responsibility, companies should express a policy commitment to respect human right, conduct human rights due diligence and put in place processes for remediation of any adverse impacts. Although the GPs are not legally binding on companies, they can ignore human rights only at their peril, especially in view of the increasing Awareness-cum-activism on the part of consumers, investors and the civil society. In other words, there is a business case for complying with human rights.
Apart from legal and economic dimensions, it is also arguable that companies should be subject to human rights obligations because of their relation to and 15 position in society. First and foremost, companies are social organs and their license to maximise profit is neither absolute nor irrevocable. Complying with human rights responsibilities should be a precondition to conducting business, otherwise human rights cannot be fully realised in arena of PPP and outsourcing.
Overcoming the challenges of PPP to human rights
PPP projects pose unique challenges to the realisation of human rights. To begin with, human rights do not generally feature on the radar of either states or companies and consequently, economic gains often push other equally important social goals to the background. The second problem is that the regulatory framework might not clearly outline who would bear the responsibility to respect, protect and fulfill human rights. Third, even if human rights responsibilities are clearly demarcated, the state in question which ought to protect human rights might have a vested interested in ignoring adverse human rights impacts of PPP, especially if the involved company possess economic clout. Fourth, since the institutions tasked to monitor the implementation and enforcement of human rights are still based on the public-private divide, they are not equipped to deal with human rights abuses by a hybrid PPP entity. Fifth, since PPP mostly relate to economic projects, alternative dispute resolution (ADR) methods such as arbitration and mediation are employed to settle disputes, but these methods and the legal regimes governing them do not always accord adequate importance to human rights. Last but not least, if an overseas company is involved in the PPP project, this raises a whole set of jurisdictional and/or political problems in fixing the responsibility
It is not, however, impossible to overcome these challenges. Several measures can be taken to ensure that the PPP development projects do not ignore human rights. The trick lies in integrating human rights into all PPP stages from planning to approval, implementation and performance monitoring. Before selecting any project, the government should conduct wide consultation with all relevant stakeholders as to the appropriateness of PPP for the given project or area. Since companies opt for PPP primarily for financial reasons, projects with doubtful 16 long-term financial profitability should be a ‘no-go zone’. Nor should the government opt for PPP if irreparable harm may potentially be caused to a given public good (such as indigenous land or a historical site) by a project driven by profit motives or if there is no guarantee that the PPP would result in delivery of better service at an affordable price. Apart from consultation, the human rights impact assessment by an independent agency should be made mandatory and no PPP project should be approved unless its human rights implications have been considered and taken care of. Past human rights track record of companies should be one of factors to select a successful bidder and award procurement contracts.
Special care should be taken in acquiring land for PPP projects: rather than merely satisfying the relevant legal requirements, the aim should be to win the support and confidence of affected land owners and other stakeholders, otherwise significant delays in project completion are inevitable. It is highly desirable that the MoU, if any, and all relevant contracts contain explicit provisions as to individual as well as collective human rights responsibilities of different partners. The performance of PPP should be judged also with reference to direct or indirect contribution to the realisation of human rights. Project monitoring units should be required to factor in non-economic variables in evaluating the success of PPP projects and the experiences learned in this process should be fed into the government nodal body in charge of PPP.A mechanism should be set up to receive and resolve at an early stage potential human rights grievances of stakeholders arising out of PPP operations. Such a mechanism should be complemented with ensuring effective access to judicial mechanisms, including by extending their jurisdiction to deal with human rights abuses taking place within the PPP matrix.Preference for taking resort to ADR to resolved is putes should not unduly limit the right of affected parties to approach courts to seek relief against PPP project providers.
Public Private Partnership in Infrastructure Sector in India
Dr. Sushil Kumar,
Assistant Professor, Institute of Management Studies. Kurukshetra University
The present article deals with the public and private sector partnership in infrastructure in India. The Indian infrastructure sector is one of the largest sectors of our economy. Since the early 1990s, India has been looking to the private sector to fill investment gaps in infrastructure but investment in this sector has not lived up to expectations. More investment is required in case of core sectors like roads, railways, ports, airports, power and telecoms. This article Suggests how infrastructure can be improved with the help of public private partnership. This article is divided into six major segments namely introduction, meaning of public private partnership, infrastructure position in India, core sectors in infrastructure, Government of India and PPPs, suggestions & concluding remarks and lastly references.
With present state of physical infrastructure, India will be hard pressed to sustain 9 percent annual GDP growth over the medium term. So there is massive and urgent need to increase investment in core sectors like roads, railways, ports, airports, power, urban facilities or even telecoms Public Private Partnership is a way to build world class infrastructure. International experiences show that facilitating Public Private Partnership (PPPs) in infrastructure is the one of the best idea for the betterment of infrastructure sector. Before further discussion on the ‘Public Private Partnership’ we should understand its meaning.
2. Meaning of Public Private Partnership (PPP)
To understand the meaning of PPP we need to know about the terms public, private and partnership.
The term public indicates public sector and it is that portion of economy which is controlled by national and local governments, public corporations and quasi autonomous non-government organizations (QUANGO). It includes services such as police, military, public road, public transit, primary education and healthcare for the poor. What we mean to say is that public sector might provide services that non-payers cannot be excluded from and it benefits to whole of the society rather than the individual one and these services encourages equal opportunities concept in society.
Private sector is that part of an economy in which goods and services are produced and distributed by individuals and organizations that are not part of the government or state bureaucracy. It is run for private profit motivation only. It includes the personal sector (households) and corporate sector (firms), and is responsible for allocating most of the resources within an economy. Hereby activities are designed in such a manner which restricts competition in order to keep prices relatively high. The main types of businesses in the private sector i.e. Sole trader, Partnership, Private Limited, Public Limited Company shares are open to the public etc.
A partnership is a type of business entity in which two or more persons share with each other the profits or losses of the business However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation. More generally, a relationship of two or more entities conducting business for mutual benefit is known as partnership.
2.4 Public Private Partnerships (PPPs):
Public Private Partnership is that private sector does all management and labor activities in any approved project but under the control of public sector. When all costs have been covered by private enterprises then it is handed over to Government and the project is treated as a social project, such as flyovers, roads, rivers, ports, power etc.
3. Infrastructure Position in India
India has since the early 1990s, been looking to the private sector to fill investment gaps in infrastructure. Investment here did not initially grow as rapidly as in Latin America or East Asia, as policy reforms were slower. However, with the increasing emphasis, over time, on public private partnerships in key sectors, such as telecom and transport, India has seen a increase in investment. The years 2004 and 2005 saw the highest level of investment to date. Investment in infrastructure in India over the past two decades has not lived up to expectations. The 1996 India Infrastructure Report projected the need for an increase in investment in infrastructure from levels of under 5 percent to about 8 percent of GDP by 2005-06. In the Union Budget 2005, the Finance Minister reiterated the importance of infrastructure for rapid economic development and noted that, in the Government’s view, ‘the most glaring deficit in India is the infrastructure deficit’. Efforts has also been made, over the years, to strengthen the policy and regulatory framework underpinning some of the key infrastructure sectors, with notable success achieved in the Telecommunications sector.
An overview of Investment in infrastructure sector by both private and public investors displays that the investment by public private partnership mode was only 3.75% of GDP in 1991, has shown an increasing trends and touches to approximate 4.5 % of GDP in 1994 goes to 3.75% of GDP in but in 2011 the total project cost through PPPs is estimated to be about Rs. 383,332.06 Crore. While the private sector investment in infrastructure has been increased to 2.73 % of total investment in infrastructure in 2011 from (Source: World Bank WDI Database). Hence it is clear that the part of investment of public sector is much more than the private sector. But this trend is now going to be in favor of private sector since public sector now coming forward to help him.
4. Core Sectors in Infrastructure in India
For a country of India’s size, an efficient road network is necessary both for national integration as well as for overall socio-economic development. The National Highways (NH), with a total length of 65,569 km, serves as the arterial network across the country. The Committee on Infrastructure adopted an Action Plan for development of the National Highways network. In India, the central as well as a few state governments have successfully harnessed private sector partnership in road development. At the central level, as part of the first and second phases of the National Highways Development Project (NHDP) – a flagship program with an estimated requirement of US$ 5060 billion investment within five years- 66 projects with a total value of about US$ 6 billion were implemented through the Build-Operate-Transfer (BOT) route (42 toll projects and 22 annuity projects). Since January 2006, the Public-Private Partnership Appraisal Committee (PPPAC) has granted approval to a total of 87 projects including 77 highway projects. The PPPAC approves the infrastructure projects worth US$ 5.98 billion on November 2008. This includes 21 highway projects to be taken up under NHDP Phase III and V. An ambitious National Highway Development Programme (NHDP), involving a total investment of Rs.2,20,000 crore (USD 45.276 billion) up to 2012, has been established
Some Private Sector Participants are –
Reliance Energy, L&T inter-state Road Corridor Limited, Jaiprakash Associates Ltd (JAL), Lanco Infratech, DS Construction, Maytas Infra Private Limited and Nagarjuna Construction Company Ltd (Joint Venture), Era Constructions India Limited and Karam Chand Thapar & Bros Limited etc.
Indian Railway (IR) is the backbone of the socio-economic growth of India. It is the second largest railway network in the world with 63,122 route kilometer (rkm) operating out of 16 zones and 67 divisions. But it is in distress. Unlike other modes of transport, IR has failed to rise to the challenge of being an efficient and reliable provider of transport infrastructure. Political compulsions have forced the IR to expand networks to commercially unviable areas, highly subsidize passenger fares and raise freight tariffs to a point where traditional long haul goods traffic in items such as cement, iron and steel and petroleum has shifted to roads or pipelines. These issues have severely eroded the cost competitiveness of the railways and it finds itself in the midst of financial distress. The market borrowings have increased substantially, and are expected to be Rs.147.74 billion during the Tenth Plan.
There are many reform issues related to Indian Railwaysits serious financial state, inadequate investments in safety, lines, signaling and rolling stock, and others. There are two recommendations that are worth. International experience suggests that the best way of doing this is by introducing at least one- preferably two- other global sized competitors. It is precisely here that the role of an independent regulator would be critical.
India Railway had taken up one of the most ambitious annual plans for 2008-09 with huge investment of about USD 7.91 billion. The plan included a total budgetary support of USD 1.66 billion that includes USD 163.33 million from the Central Road Fund. This much ambitious plan was eying massive profits of more than USD 20.447 billion for the year 2008-09 and onwards.
With 12 major ports and 187 minor ports, 7,517 km long Indian coastline plays a pivotal role in the maritime transport helping in the international trade. Traffic handled at major ports during April 2010 to January 2011 was recorded to be approximate 636686 units. The ports in India offer tremendous scope for international maritime transport both for passenger and cargo handling. Although there have not been considerable reforms in this sector, neither major nor minor ports have independent regulatory authorities. TAMP has done a commendable job in creating a fair play regarding tariffs and charges levied on private service providers at major ports. However, TAMP’s remit is limited. The Government of India targets to increasing the cargo handling capacity of major ports by two folds to reach 1.5 billion metric tonnes (MT) by the year. This will be achieved at an investment of around USD 25 billion through public-private partnerships. A Crisil research on Indian ports and maritime transport estimates that ports will grow by 160 percent over the 201112 period. Cargo handling at the major ports is projected to grow at 7.7% per annum (CAGR) till 2011-12 and the cargo traffic is estimated to reach 877 million tonnes by 2011-12, whereas the containerized cargo is expected to grow at 15.5% (CAGR) over a period of 7 years. The New Foreign Trade Policy envisages doubling of India’s share in global exports in next five years to Rs.675000 crore (USD 150 billion). A large portion of the foreign trade to be through the maritime route: 95% by volume and 70% by value.
There are 449 airports/airstrips in the country. Of these, 126 airports- which include 11 international airports, 89 domestic airports and 26 civil enclaves- are owned, managed and operated by the Airports Authority of India (AAI) under the Ministry of Civil Aviation. The traffic flow at these airports is very uneven. Six airports (Mumbai, Delhi, Chennai, Bangalore, Kolkata and Hyderabad) account for 90.5 percent of the total international passenger traffic and 91.7 percent of total passenger traffic. At present, only 61 airports are being used by various airlines. Most of the airports are underdeveloped and underutilized while others have become overcrowded and are stretched to capacity. A survey done by the International Air Transport Association (IATA) in 1999 ranked the Mumbai and Delhi airports amongst the three worst airports in the Asia-Pacific region for all 19 service parameters included in the survey. With a rating of 2.3 and 2.6 on a scale of 1 (very poor) to (excellent) for Mumbai and Delhi airports respectively, these airports were adjudged to offer the lowest service levels in terms of overall satisfaction. According to capital expenditure estimates presented by the AAI to the Standing Committee of the Parliament in 2002 the investment needed is around Rs.191 billion.
Airports too have no independent regulatory authority. The AAI is a creation of the Ministry of Civil Aviation. Given the stated objective of privatizing facilities in Mumbai and Delhi airports as well as the approval of new private airports in Bangalore and Hyderabad, it is imperative that the government appoints an independent regulatory authority for this sector. Besides this, the issue is one of implementation. Enough reform policies have been suggested in the report of the Naresh Chandra Committee on civil aviation. It is time that the Ministry focuses on implementing them quickly.
The telecom sector in India is a case study of how the interplay of competition and technology can radically change the business landscape of infrastructure. Before opening-up in 1994, 52 the sector was characterized by under investment, outdated technology and limited growth. In 1994, the waiting list for telephone connections was as high as 2.2 million or almost 31 percent of the total installed base. The constraint was not demand, but the lack of resources of the public sector enterprises. Today, thanks to the boom in cellular services, the number of telephone subscribers in India increased to 926.53 Million at the end of December, 2011 from 917.33 Million at the end of November 2011, thereby registering a growth rate of 1.00%. The share of Urban subscribers has declined to 65.97% from 66.11% whereas share of Rural subscribers has increased to 34.03% in the month of December 2011. With this, the overall Teledensity in India reaches to 76.86 at the end of December, 2011 from 76.18 of the previous month. Subscription in Urban Areas grew from 606.47 million in November, 2011 to 611.19 million at the end of December 2011 , Subscription in Rural Areas increased from 310.86 million to 315.33 million during the same period. The growth of Urban and Rural Subscription is 0.78% and 1.44% respectively.
These were serviced by 188 ISPs, again led by BSNL. Regrettably, however, the domestic telecom instrument manufacturing industry has not been able to keep pace with the demands of the services sector. Today, bulk of the telecom equipment is imported and the entire demand for GSM and CDMA technologies are being met through import. The target as set out in NTP 99 was to achieve a teledensity of 7 percent (75 million connections) by 2005 and 15 percent (175 million connections) by 2010. In addition, there has to be investment in broadband to provide high speed, reliable, on demand internet connectivity with a speed of at least 256 Kbps. Assuming 25 percent annual growth, and a tele-density of 25 percent by 2010-11, the investment needed is Rs.1,996 billion. To this should be added an extra Rs.147 billion for broadband. The above target is yet to be achieved. The 2G spectrum has spoiled the image of telecom sector and increase government challenge in the sector.
The most important aspect of power sector reform is to recognize the fundamental truth of the maxim, “No money no power”. No amount of economic or financial sophistry can ensure funding for projects where consumers do not Even pay for the marginal cost of a good or service sold. The Electricity Act, 2003, is a welcome step in the right direction. However it needs to be operationalzed at the level of each state. Subject to the overriding issue of paying proper user charges, the power sector is bedevilled with problems of regulatory capture of the SERCs as well as frequent reneging of escrows and PPAs by bankrupt state governments. This requires intervention at the highest level, without which the entire PPP framework for power and reforms envisaged by the Electricity Act, 2003,will be under risk.
There is potential for private sector participation in generation, transmission, distribution and rural electrification. The private sector’s interest is evident from the results of the bidding for the two recently announced ultra mega projects. Several state governments and the private sector are assessing alternate options for public private partnership in the urban areas in the distribution business. Designing an equitable risk allocation framework will be critical for the successful implementation of PPPs in distribution. An important lesson learnt from the involvement of the private sector in distribution has been that focus on customer benefits must be addressed on a priority basis. For sustainable change management, employee concerns and an appropriate performance incentive framework must be addressed upfront in any PPP model.
As of January 31, 2011, India had an installed capacity of 187549.62 MW, the bulk of which (44.5 percent) is owned by state governments and 24.58 is owned by private sector. A further approximate 32 percent of the capacity was from SOEs owned or controlled by the central government, namely NTPC, National Hydro Electric Power Corporation (NHPC), North Eastern Electric Power Corporation (NEEPCO) and the Neyveli Lignite Corporation (NLC). Privately owned enterprises account for the remaining around 11.5 percent of the generating capacity. Among these, the more notable players are Reliance Energy, Tata Power, the RPG group and Torrent.49 Both the SOEs and the independent power producers (IPPs) have long term PPAs with specific SEBs, or their transmission companies. By the year 2012, India requires an additional 100,000 MW of generation capacity. A huge capital investment is required to meet this target. This has welcomed numerous power generation, transmission, and distribution companies across the globe to establish their operations in the country under the famous PPPs programmes.
5. Government of India and Ppps: Experiences & Expectations
The Honorable Minister of Civil Aviation recalled that the country initiated the process of partnering with the private sector in 1991, beginning with the power sector, and since then achieved notable successes through PPPs in the telecom, roads, ports and airports sectors. He affirmed that the government is not only keen to continue to rely on public private partnership in these sectors, but also to expand it to other sectors. In the civil aviation sector, preparations are underway to engage the private sector in non-aeronautical activities at 35 non-metro airports, and in the development of Greenfield “merchant” airports and about 300 airstrips.
According to him, some of the other areas in which the government is envisaging greater scope for PPPs include power, water and sanitation, tourism and hospitality sectors. The Government of India is acutely conscious of the need to make infrastructure services available to those who need them but cannot afford to pay the full cost of service provision. Here, too, the government sees a substantive scope for leveraging its support through engaging the private sector as a partner in its development agenda. Citing an example of such initiative in the civil aviation sector, the Honorable Minister noted that the government was actively considering a proposal to establish a fund to support airline and airport operations that are not commercially viable but are considered essential for national connectivity. As per our civil aviation minister, in order to be able to attract private sector players, the government would have to put in place appropriate regulatory frameworks, credible dispute resolution mechanisms, and satisfactorily resolve sensitive and contentious issues like land acquisition. He cited the phenomenal growth rates in sectors such as civil aviation and telecom to make a case for tempering conservatism with a more realistic assessment of growth prospects. Although the government is committed to rely on PPPs significantly in the provision of infrastructure services, it is facing a variety of challenges- big and small- in translating its intent into action. It was noted that, in trying to scale up its program, India was facing the same challenges that other countries have also faced, namely:
a) How to marry private sector motivation for profit with public sector concern for public service (the need for inclusiveness)
b) How to apportion risk in a manner that is fair, rational and sustainable
c) How to manage the partnership through a tightly framed concession agreement over a 2030 year period, in a rapidly changing environment
d) How to develop capacities in the concerned financial institutions so that they are able to appraise projects which have a life span of 1520 years. Since effective due diligence by these institutions will be critical for proper screening of PPPs proposals brought to them by developers.
PPP Experiences of Chile and the United Kingdom: Lessons for India
The experience of other countries suggests that it should be possible to increase private investment in infrastructure in India from its current level of 1% of Gross Domestic Product (GDP) to 2% of GDP. For example, Chile has succeeded in increasing its infrastructure investments to a level of 5% of GDP, in good part through encouraging private participation in almost all infrastructure sectors.
6. Sugessions and Concluding Remarks
1) The government could aid private sector participation in PPPs through expeditious awarding of contracts, facilitating land acquisition and ensuring better coordination between the centre and states. In particular, large size PPP projects may be put out for bidding after obtaining mandatory clearances and approvals say, through a Shell Company/Special Purpose Vehicle (SPV) as was recently done in the case of the Ultra Mega Power Projects.
2) Information on the development of PPPs, prior to their being bid out, would be appreciated by the private sector, perhaps as part of a national database
3) The tax regime applicable to dividends paid out by SPVs needs to be rationalized; currently, in cases where a holding company is implementing multiple projects through SPVs, dividends are being taxed twice, first at the level of project-specific SPVs and then at the holding company level
4) The entry of financial investors will introduce a longer-term perspective than construction-oriented concessionaires, and this can be encouraged by allowing concessions to be more tradable
5) The government should take measures to deepen debt markets and encourage insurance funds to invest in infrastructure projects.
Public Private Partnership (PPP): Way Forward to Infrastructural Developments in India
Infrastructure is the backbone of any modern economy. World-class infrastructure is the key to a globally competitive economy and India’s objective of sustained double digit growth can only be achieved through a quantum growth in the infrastructure sector. Provision of public services and infrastructure has traditionally been the exclusive domain of the government. However, with increasing population pressures, urbanisation and other developmental trends, government’s ability to adequately address the public needs through traditional means has been severally constrained. This has led the Government’s across the world to increasingly look at the private sector to supplement public investments and provide public services through Public Private Partnership
Need for PPP
The quality of human life in the economy is immensely impacted by the nature of primary services available which can be categorised into whole physical infrastructure covering road, transportation, power, communication etc. through its backward and forward linkages facilitates growth; or the other social infrastructure including water supply, sanitation, sewage disposal, education and health. Inadequate attention and poor investment in roads, ports, airways and railways etc. render critical economic activities uneconomical and lead to high inflation. Costs entailed due to inadequate and inefficient infrastructure prevent the economy from realizing its full growth potential and considerably reduce the competitive edge of the economy.
In view of the above factors, channelization of long term investments to infrastructure sector becomes a critical policy measure, particularly for the developing economies. The Government of India is acutely conscious of the need to make infrastructure services available to those who need them but cannot afford to pay the full cost of service provision. Here, too, the government sees a substantive scope for leveraging its support through engaging the private sector as a partner in its development agenda.
Thus the government increasing looks at the private sector involvement and thereby the activities of financing, designing, implementing and operating infrastructural facilities & services which were earlier taken by the government traditionally shall henceforth be carried forward by contractual partnerships between the public and the private sector. Public Private Partnerships (PPP) present the most attractive option of meeting the above targets, not only in providing resources to an extent but also in upgrading the standards of delivery through greater efficiency.
What is PPP ?
There is varying understanding amongst stakeholders as to what constitutes a Public Private Partnership. While giving a single definition of PPP would not be possible, this arrangement may validly refer to any collaborative venture which are built around the expertise and capacity of the project partners and are based on a contractual agreement, which ensures appropriate and mutually agreed allocation of resources, risks, and returns. PPPs do not mean reduced responsibility and accountability of the government.They still remain public infrastructure projects committed to meeting the critical service needs of citizens. The government remains accountable for service quality, price certainty, and cost effectiveness of the partnership. Under the PPP format, the government role gets redefined as one of facilitator and enabler, while the private partner plays the role of financier, builder,and operator of the service or facility.
Thus, depending upon the infrastructural needs of the economy, an umbrella definition of PPPs in Indian context can be as follows : PPP means an arrangement between a government or statutory entity or government owned entity on one side and a private sector entity on the other, for the provision of public assets and/ or related services for public benefit, through investments being made by and/or management undertaken by the private sector entity for a specified time period, where there is a substantial risk sharing with the private sector and the private sector receives performance linked payments that conform (or are bench marked) to specified, predetermined and measurable performance standards.
Basic elements to constitute PPPs
A further surgery into this definition, thereby, reveals some of the inherent characteristics of PPPs:
1. Arrangement with Private Sector Entity:
The asset and/or service under an arrangement will be provided by the Private Sector Entity to the public.
2. Public asset or service for public benefit:
Has the element of facilities/ services being provided by the Government as a sovereign to its people. To better reflect this intent, two key concepts are elaborated below:
(a) ‘Public Services’ are those services that the State is obligated to provide to its citizens (towards meeting the socio-economic objectives) or where the State has traditionally provided the services to its citizens. For example, provision of security, law and order, electricity, water, etc. to the citizens.
(b) ‘Public Asset’ is that asset the use of which is inextricably linked to the delivery of a Public Service. For example, public road which is linked to public transportation or, those assets that utilize or integrate sovereign assets to deliver public services.
3. Operations or management for a specified period:
Provides an element of time period after which the arrangement with the private sector entity comes to a closure. Hence, the arrangement is not in perpetuity.
4. Substantial risk sharing with the private sector:
It is typically specified to differentiate PPPs from mere outsourcing contracts. For example, a facility service contract is also an outcome based reward contract but not a PPP.
5. Performance linked payments:
It is to provide central focus on performance and not merely provision of facility or service. A mere deferred payment contract should not get qualified as a PPP.
6. Conformance to performance standards:
It is to provide a strong element of service delivery aspect and the concepts of quality and compliance to predetermined and measurable standards to be specified by the sponsoring authority.
PPP Vs. Privatisation
An interesting query which may tinkle the mind of many is to whether PPP and privatisation are the same? The answer to the same is “NO”. PPPs are different from privatization. While PPPs involve private management of public service through a long-term contract between an operator and a public authority, privatization involves outright sale of a public service or facility to the private sector. A typical PPP example would be a toll expressway project financed and constructed by a private developer. Thus all projects with private sector participation cannot be termed as PPP.
Benefits of PPP
The public sector contributes assurance in terms of stable governance, citizens’ support, financing, and also assumes social, environmental, and political risks. The private sector brings along operational efficiencies, innovative technologies, managerial effectiveness, access to additional finances, and construction and commercial risk sharing.
Apart from enabling private investment flows, PPPs also deliver efficiency gains and enhanced impact of the investments. The efficient use of resources, availability of modern technology, better project design and implementation, and improved operations combine to deliver efficiency and effectiveness gains which are not readily produced in a public sector project. PPP projects also lead to faster implementation, reduced life cycle costs, and optimal risk allocation. Private management also increases accountability and incentivizes performance and maintenance of required service standards. Finally, PPPs result in improved delivery of public services and also promote public sector reforms.
Various PPP forms and formats
As discussed, PPP is a blend of public sector agency and a private sector consortium. Such private sector consortium could comprise of contractors, maintenance companies, private investors and consulting firms. The consortium often forms a special company or a ‘special purpose vehicle’ (SPV). The SPV signs a contract with the government and with the subcontractors to build the facility and then maintain it. In terms of terminology, the public body acts as the “Conceding Authority” while the private company acts a “Concessionaire”. To enable the flow of private funds and resources into public infrastructure and services, the PPP is operationalized through a contractual relationship between the two parties.
The public sponsor of the PPP decides the degree of private participation required for the particular project. This decision is usually based on the government’s objectives of undertaking the project, the degree of control it desires, and the ability of the PPP consortium to deliver the required service. It is also influenced by the provisions of the existing legal and regulatory framework, the structuring of the project to attract private resources, and the potential to generate future cash flows.
This partnership could take many contractual forms, which progressively vary with increasing risk, responsibility, and financing for the private sector. However, the most common partnership options are
– Service Contract;
– Management Contract/Lease;
– Build Operate Transfer (BOT);
– Joint Venture;
– Community-based Provision; etc.
Key considerations in PPPs
Government recognizes that the private sector regards infrastructure investments as inherently risky, on account of their long gestation periods, low user charges in many sectors, poor cost recovery, social & environmental risks and the scope for policy reversals driven by political considerations. Also, PPPs often involve complex planning and sustained facilitation.
Thus when infrastructure is developed as PPPs, the process is often characterized by detailed risk and cost appraisal, complex and long bidding procedures, difficult stakeholder management, and long-drawn negotiations to financial closure. This means that PPPs are critically dependent on sustained and explicit support of the sponsoring government. To deal with these procedural complexities and potential pitfalls of PPPs, governments need to be clear, committed, and technically capable to handle the legal, regulatory, policy, and governance issues.
Constraints and Initiatives
The overall response to promote PPPs as the preferred mode for the execution of infrastructure projects, despite apparent benefits to the governments in the States and Central Government departments, has not yielded satisfactory results. While encouraging PPPs, following constraints can be broadly perceived;
Weakness in enabling policy and regulatory framework. Substantial work needs to be done in making sector policies and regulations PPP friendly.
A large number of these projects are in the States and without the active participation of the States it would not be possible to achieve satisfactory results.
The market presently does not have adequate instruments and capacity to meet the long-term equity and debt financing needed by infrastructure projects.
There is also a lack of shelf of credible, bankable infrastructure projects, which could be offered for financing to the private sector. Some initiatives have been taken both at the central as well as the states’ level to develop PPP projects. These tend to be isolated cases and have demonstrated a marked lack of consistency. Therefore, a more aggressive approach is needed for preparing a pipeline of credible, bankable projects that can be offered to the private sector through competitive bidding process.
There is also lack of capacity in public institutions and officials to manage the PPP process. Since these projects involve long term contracts covering the life cycle of the infrastructure asset being created, it is necessary to manage this process to maximize returns to all the stakeholders.
Thus some of the main concerns involved in PPPs are standardization of bidding and procurement procedures, project pipeline creation, transparency requirements, public sector capacity building, and enabling policy and institutional frameworks for PPPs
The Government has taken meta-level initiatives to enhance the flow of private funds to infrastructure apart from other policy and regulatory reforms. The government is keen to know what more needs be done to accelerate the pace of private participation in infrastructure and is in its constant endeavours to innovate solutions to address the pitfalls witnessed in the entire PPP process. The Government understands that the efficacy of private sector participation in infrastructure development would be contingent upon the capability to commercialize these projects with a proper risk sharing inherent in such projects between the government authorities and the private sector. This would largely depend on the availability of expert advisory services right from the stage of identification and conception of projects to the stage of financial closure and monitoring.
Steps to streamline PPP Mechanism
Government has taken measures to create enabling framework for PPPs by addressing issues relating to policy and regulatory environment. Progressively more sectors have been opened to private and foreign investment, levy of user charges is being promoted, regulatory institutions are being set up and strengthened, fiscal incentives are given to infrastructure projects, standardized contractual documents including the Model Concession Agreement are being notified, approval mechanism for PPPs in the Central sector has been streamlined through setting up of PPPAC. In order to develop the framework for PPPs and build up capacities, the Government of India has taken following steps;
– Strengthening the regulatory and policy framework, including the expansion of user fees; The Union Finance Minister, in the Budget speech for the year 2011-12 has announced to come up with a comprehensive policy that can be used by the Centre and the State Governments in further developing Public-Private Partnerships. The National PPP Policy 2011 has been put forth for discussions, consultations and suggestions.
– To streamline the PPP Mechanism, the Planning Commission is in its constant endeavours to evolve “Guidelines” on various aspects of PPP to enshrine a comprehensive PPP process.
– Preparation of standard documents such as Model Concession Agreements, pre-bid qualification methodology and procurement processes.
– Establishing PPP as the preferred mode in sectors such as highways; Permitting FDI up to 100% on the automatic route in several infrastructure sectors;
– Providing fiscal incentives in terms of “tax holiday” to infrastructure projects and tax incentives to investors providing long-term finance or investing in equity capital;
– Setting up of infrastructure funds are also being encouraged and multilateral agencies such as ADB have been permitted to raise Rupee bonds and carry out currency swaps to provide long term debt to PPP projects
– Creation of PPP Cells in all central ministries and state governments, and Public Private Partnership Appraisal Committee (PPPAC) at the national level;
– A website exclusively devoted to PPPs has been launched to serve as a virtual market place for PPP projects.
– Conducting Research Studies to harness the benefit of specialized and efficient dispute resolution and arbitration mechanisms, as seen in Chile; the need to adapt and develop institutions over time, of which the UK is a good example; and how to build on the achievements in one sector and broaden the program, as has been seen in South-Korea and the UK.
Highlights of Budget 2011-12 on Infrastructural Developments
The Union Finance Minister in his Budget Speech on 16th March, 2012 has yet again duly emphasised the need for development of infrastructure in India. The relevant extract on the topic is as under;
– During Twelfth Plan period, investment in infrastructure to go up to Rs. 50 lakh crore with half of this, expected from private sector.
– More sectors added as eligible sectors for Viability Gap Funding under the scheme “Support the PPP in infrastructure.”
-Government has approved guidelines for establishing joint venture companies by defence PSUs in PPP mode.
– First Infrastructure Debt Fund with an initial size of Rs. 8000 crore launched earlier in March 2012.
– Tax free bonds of Rs. 60,000 crore to be allowed for financing infrastructure projects in 2012-13.
– A harmonised master list of infrastructure sector approved by the Government.
Needed, a Water Policy that Taps Private Sector
Udai S Mehta,
Associate Director, CCIER
Water is a relatively scarce resource in India since we have 16 percent of the world’s population and only 04 percent of the usable fresh water. Daily wage earners pay up to 20 percent of their in comes on water and slum-dwellers pay Rs.5 for a can of water. This is the true, but sad picture of water distribution in India where the poor are forced to pay for water.Yet, the mere talk of privatisation of water raises waves of protests as if it should forever remain a free public good.
It is not only water but the shortage of almost every type of infrastructure that is affecting the country’s growth and the consumer welfare. For the 12 Five Year Plan, the Planning Commission has suggested that investment in infrastructure (road, rail, air and water transport, power generation, transmission and distribution telecommunication, water supply, irrigation and storage) would need to be increased from 08 percent of gross domestic product (GDP) to around 10 percent. Since the state’s resources are limited, an aggressive effort at promoting private investment through the PPP route is imperative.
Potential costs, benefits
However, the debate on potential costs and benefits associated with the participation of the private sector in water distribution is still on and not confined to India. In the last decade, the private sector made forays into water supplies in several developing countries and the experiences have been diverse. Planning Commission also recognises that further efforts are needed to mainstream PPPs in several areas such as power transmission and distribution, water supply and sewerage and railways where there is significant resource shortfall and also a need for efficient delivery of services.
In some cases, private investors have brought in operational efficiencies and benefits to consumers, in others it led to manifold increase in tariffs without perceived improvements in delivery. For instance, in Buenos Aires, privatisation through a concession agreement led to improvements in coverage, reliability and reduced prices of water.
Driven by the profit motive, the private sector may not always care to serve consumers who are not remunerative. Though the private sector is expected to bring in operational efficiencies and arguably better accountability to consumers, in the absence of adequate incentives it may not be inspired to meet the social obligations. Therefore, attaining multiple policy objectives demands a careful design of the PPP initiatives. Recent experience suggests that government agencies often get into sub-optimal contracts, imperilling the entire project.
At the conceptual level, the huge operational inefficiencies in most public sector water utilities offer enough scope for the private sector to earn attractive returns and also serve disadvantaged consumers. In practice, this has not happened in most cases.
In some instances, the efficiency gains were not passed on to consumers, while in others the agreement was not binding enough. However, by using performance-based management contracts to outline the technical and managerial skills of the private sector, public utilities could enhance their ability to tackle operational inefficiencies and improve their service.
One such success story is of Navi Mumbai, which has improved water and sanitation services by using performance-based contracts to manage its water distribution and transmission system. There was an increase of almost 45 percent in revenues and a substantial drop in customer complaints. Performance-based contracts helped the utility provide better service, even while cutting operational costs.
Tirupur in Tamilnadu, was the first town to implement a PPP water project. A thriving garments industry city, Tirupur required huge volumes of water for industrial use. A consortium of three private firms implemented the PPP project to ensure sustained supply of water. The project was designed on a Build-Own-Operate-and-Transfer (BOOT) basis for 30 years, after which it is to be transferred to the Government. Owing to the project, Tirupur residents receive water everyday for four-six hours, as opposed to receiving water on alternate days. The numbers of household connections have increased by 8,000 and local industries have a reliable source of water. In contrast to the Tirupur case, the Delhi Jal Board (DJB) has been running into controversy, though privatisation has not happened as yet. Lack of transparency in the process is a major concern and the allocation of risks and potential rewards is drawing heavy flak. At a time, when the DJB has a definite plan to invest huge public money in the next couple of years to improve supplies and reduce non-revenue water (NRW), the privatisation move is being questioned.
Need for an Independent Regulator: Endorsed by Planning Commission of India
Thus, there is a need to have an independent regulator in place to set standards of service and to enforce the same. The 12 Five year plan approach paper recommend that there is a need for an overarching Water Framework Law that would give teeth to the New National Water Policy. It is also necessary to create regulatory bodies in different States to resolve conflicts across different uses of water and between users. The Centre should formulate and facilitate the adoption by States of a model Water Resources Regulatory Authority Bill. Whereas, Draft National Water Policy, 2012 from Ministry of Water Resources has already suggested that a Water Regulatory Authority should be established in each State. The Authority should fix and regulate the tariff systems, regulating allocations, monitoring operations, reviewing performance and suggesting policy changes, etc. Water Regulatory Authority in a State may also assist in resolving intra-State water-related disputes.
The Planning Commission’s Working Group on Water Governance has constituted a Sub Group on Model Bill for State Water Regulatory Authority Act. The Draft Model Bill envisages the Water Resources Department (WRD) as the implementing or executive agencies. Two other governing agencies are envisaged by the Bill, as the State Water Resources Regulatory and Development Council (SC) and the State Independent Water Expert Authority(SIWEA).
During the 12th Plan, there is also a proposal to set up a National Water Commission (NWC) to monitor compliance with conditionalities of investment and environment clearance given to irrigation projects. At present, there is no appropriate body that can provide a rigorous and credible feedback to sanctioning authorities. A multi-disciplinary, professionally capable and independent NWC would have credibility with both Centre and States and would function on the lines of what has been attempted, for example, in Australia and become a guide for further water resource development in India.
Surely, the private sector can play an important role in supplying water, supplementing government efforts and investments. The managerial capabilities of the private sector can improve operational efficiencies and the quality of services. However, the success of PPP projects would depend largely on the capability of governments to negotiate deals that take care of the interests of disadvantaged consumers.
Transparency, the key
Maintaining transparency in the processes is another important criterion for the successful implementation of PPP projects. While the Government will have to create an enabling regulatory milieu, the private sector needs to demonstrate a willingness to accept business risks associated with such projects.
Public Private Partnerships and Infrastructure Projects in Transition Economies
Yannis S Katsoulacos,
Professor of Economics, Athens University of Economics and Business
A fundamental aspect of the economic reform process in transition economies is that of transferring assets from the public to the private sector. This transfer can take the form of fully fledged privatisation or other “weaker” forms of transfer. Among the latter, the most popularin some cases is that of Concessionary Agreements or PPPs. These are agreements through which the state transfers the right of exploiting an economic asset to a private party for a number of years (usually for infrastructural projects the maximum is 30 years) in return for the party investing and developing that asset. The state remains the legal owner and can resume management and operational responsibility after the end of the concessionary agreement.
This form of transfer is chosen when the following conditions are satisfied.
(i) The state is financially and/or managerial-skills constrained. So it is not able (within the fiscal constraints that it faces) to finance investment in the development of the asset and lacks the managerial capacity for running the operations associated with economically exploiting the asset.
(ii) Unlike privatisation, in the long-run the state wishes to keep open the option of maintaining control of the asset. This could be the case if it is thought desirable to control directly the long-run development of the economic activity because it is associated with significant externalises or because, when the activity is a Natural Monopoly, it is not thought feasible to regulate operations by an independent regulatory institution.
It is important to note that by far most of the important cases in which state assets are transferred through PPPs or concessionary agreements the markets in question are monopolistic. This implies that the concessionaire is a single operator monopolist who is operating without regulatory constraints except in terms of the conditions specified in the concessionary contract.
From this, it follows that an appropriate concessions law and the processes of selection through competitive tendering and of negotiations of the concessionary contract are absolutely fundamental if the interests of society/ consumers are to be secured whenever concessionary agreements are made.
The European Commission (EC) has contributed towards the establishment of standards in the area of concessionary agreements and PPPs through its “Interpretative Communication on Concessions under Community Law” (2000), as well as the Green Paper and the “Guidelines for Successful Public-Private Partnerships” (2003).
Contributions have also been made by the UN and the organisation for Economic Cooperation and Development (OECD). Transition economies enforce national laws on “concessions and participation of the private sector in public services and infrastructure” in order to deal with concessionary Agreements/Contracts of various forms: Built-Operate-Transfer (BOT), Built-Own-Operate (BOO), Leasing, Limited Financing, Management Contracts, Service Contracts etc.
The case of ‘concessionary agreements’ With the establishment of these laws, major concessionary agreements can be implemented, which include:
(a) Mining (chrome and copper)
(b) Water industry
(c) Hydro power
(d) Port facilities and oil-storage
(f) National road development
(g) Maintenance of major infrastructural facilities
Concessionary agreements are implemented by authorised state committees involving representatives from the relevant line ministries with one of them usually given the primary responsibility for preparing documentation and specifications, define conditions and methods and evaluate bids.
However, several problems with concessionary agreements have been identified in transition economies:
1. There is no overall policy framework for promoting private sector participation and for ensuring that agreements are in the national interest or the interest of consumers.
2. Concessions law is not sufficiently developed according to international standards it needs to be developed further and a number of issues need to be clarified. For example, it is not clear what happens after the BOT contracts run out. There is usually no proper framework for PPPs but specifically mixed forms of partnerships.
3. Selection procedures in particular are not sufficiently developed (neither the pre-selection procedure nor the procedure for requesting proposals is usually regulated; no reference is made to the publication/record of the concession award; there are unclear grounds for direct negotiations and regulation of unsolicited proposals; there is no reference to the possible review procedures).
4. The provisions regulating the project agreement and lenders’ rights need to be improved (termination/compensation provisions, possibility for step-in rights) while certain things that may lead to abuse of law (e.g. ability to sell shares of concessionary company) must be revised and possibly abandoned altogether.
5. Negotiations and preparation of the contract the most fundamental aspect of the procedure after selection is not given sufficient attention with the result that it is usually left to ministry officials without the appropriate expertise.
6. Laws should be amended to clarify their relation with public procurement law, make specific references to international arbitration and, when a Competition Commission has been established, specify the potential role of this Commission in the procedures.
It should be noted that a recent European Bank for Reconstruction and Development (EBRD) study examined concessionary Agreements Policy and Law in 19 Balkan and former Soviet Union Republics that have adopted Concessions legislation. Countries were ranked in terms of compliance to international standards in a number of dimensions as having “Very High Compliance”, “High Compliance”, “Medium Compliance”, “Low Compliance” and “Very Low Compliance”.
However, it was found that many transition economies were rated as “Very low compliance” countries with regard to several criteria, such as their General Policy Framework towards private sector participation or the Selection of the Concessionaire.
Given this for most transition economies it is required to:
1. Develop, amend, and clarify the provisions of the law on Concessions to deal with each one of the problems identified and specified above thus ensuring selection procedures that are transparent, efficient and do not distort competition and that negotiations and contract preparation give appropriate weight to social welfare/consumers interests.
2. Assign one independent regulatory authority the Competition Authority would seem one obvious and appropriate candidate the task of monitoring the processes and approving agreements under conditions that ensure that there was no distortion of competition and that the agreements are in the national interest