Public-Private Partnership in India

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By moderator July 30, 2019 15:32

Public-Private Partnership (PPP) comprehensively allude to the long haul, legally binding organizations between the public and private part offices, uncommonly focused on towards financing, planning, executing, and working services and amenities that were customarily given by the Government and/or its officers.

Evolution of PPP in India

In India, there is no exact date and year which could speak of the beginning of Public-Private Partnership PPP but it is said that the PPP story began with private sterling investments in Indian railroads in the latter half of the 1800s. Then again we could follow it to the mid-1900s when private makers and merchants developed in power sector in Kolkata (Calcutta Electric Supply Corporation) and in Mumbai with the Tata playing a prominent role in starting the “Tata Hydroelectric Power Supply Company” in 1911.

A new wave in Public-Private Partnership PPP was felt when a policy was made by the Central government in 1991 and it was decided to allow private participation in the Power sector which opened up the doors for independent power producers. The National Highways Act, 1956 was altered in 1995 to empower private support. In 1994, through a focused offering process, licenses were conceded to eight-cell cellular telephone utility administrators in four metro urban areas and 14 administrators in 18 state circles.

Need for Public-Private Partnership PPP in India

  1. Better infrastructure: It is a fact that most governments face the problem that public financing is not enough to bridge the gap between infrastructure need and available funds. In this respect, infrastructure development has to rely increasingly on private markets to leverage and mobilize capital.

  2. Risk sharing: The private sector is considered to be more proficient in resource acquisition and utilities deliverance than the government, and, therefore, it is further bolstering government’s good fortune to impart the related risks to the private segment.

  3. Optimum allocation of resources: PPPs can help in the optimum allocation of public resources for the development of infrastructure. Though conventional models of public acquirement concentrate on accomplishing the most reduced forthright expenses in conveying infrastructural ventures infrastructural projects, PPPs concentrate on delivering cost-effectiveness over the duration.

  4. Innovations: Development is another imperative idea that the private segment can convey to public utilities. As a rule, people in the public sector may not be as inventive similar to the private area. The private division is constantly hunting down new items and utilities to expand its aggressive edge and to save costs.

  5. Aid in growth of other sectors: To the government, PPP frees up fiscal funds for other areas of public service and improves cash flow management as high upfront capital expenditure is replaced by periodic service payments and provides cost certainty in place of uncertain calls for asset maintenance and replacement.

  6. The catalyst for the economy: To the private sector participants, PPP provides access to public sector markets. If priced accurately and costs managed effectively, the projects can provide reasonable profits and investment returns on a long-term basis.

  7. More employment generation: Development of infrastructure will need manpower at various levels and hence it will generate more employment opportunities for the people.

  8. Improves the image of the country: There will be more development of better physical infrastructure and services through PPP and it will create a good impact on tourism and other enthusiast investors.

  9. Attract FDI: Scope for investment by the private sector in infrastructure will also provide the opportunities to foreign investors to participate and the financial crunch can be meted out easily. The better infrastructure is also a major boost to foreign direct investment (FDI).

Models in PPP

India majorly follows 3 types of PPP models out of many models available. They are:

  1. Hybrid Annuity Model(HAM)

  2. Build-Operate-Transfer(BOT)

  3. Engineer-Procure-Construct(EPC)

HAM is a mixture of BOT and EPC where the financing, risks, operations, etc, are distributed between Government and a private partner. The following table would show the difference in these models:

 

BOT

EPC

HAM

Risk

Private

Public

Private (60%), Public (40%)

Finance

Private

Public

Private (60%)

Public (40%)

Operations and Management

Private

Public

Private

Revenue

Private

Public

Public

 

Challenges faced by PPP in India

  1. Construction/implementation risk, arising from delay in project clearance; contractor default; environmental damage.

  2. Market risk, arising from insufficient demand; insufficient demand.

  3. Finance risk, arising from inflation; changes in interest rates; increase in taxes, Change in exchange rates.

  4. Operation and maintenance risk, arising from the termination of the contract; technology risk; labor risk.

  5. Legal risk, arising from changes in law; changes in title/lease rights; insolvency of developer/service provider; change in security structure.

 Way Forward

The success of Public-Private Partnership PPP to a large extent depends on optimal risk allocation among stakeholders, the environment of trust among stakeholders, robust institutional capacity to undertake grooming and implementation of PPP projects. Further to foster the successful implementation of a PPP project, a robust PPP enabling ecosystem including liquid and diversified financial institutions; sound regulatory and arbitration framework; mature developers and experienced consultants etc. is essential. To develop the PPP projects in India, the Kelkar Committee proposed some changes. Some of them are:

  1. The PPP model requires the involvement of a private partner to leverage financing and improve operational efficiencies. Therefore, state-owned enterprises or public sector undertakings should not be allowed to bid for PPP projects.

  2.   PPPs should not be used by the government to evade its responsibility for service delivery to citizens. This model should be adopted only after checking its viability for a project, in terms of costs and risks.

  3. Further, PPP structures should not be adopted for very small projects, since the benefits are not commensurate with the costs.

  4. Risk allocation and management: Public-Private Partnership PPP contracts should ensure optimal risk allocation across all stakeholders by ensuring that it is allocated to the entity that is best suited to manage the risk. A generic risk monitoring and evaluation framework should be developed covering all aspects of a project’s lifecycle.

  5. Strengthening policy and governance: The Prevention of Corruption Act, 1988 should be amended to distinguish between genuine errors in decision making and acts of corruption by public servants.

  6. Strengthening institutional capacity: A national-level institution should be set up to support institutional capacity building activities and encouraging private investments with regard to PPPs. Independent regulators must be set up in sectors that are going for PPPs. An Infrastructure PPP Project Review Committee may be set up to evaluate PPP projects. An Infrastructure PPP Adjudication Tribunal should also be constituted. A quick, efficient, and enforceable dispute resolution mechanism must be developed for PPP projects

  7. The government should notify guidelines for auditing of Public-Private Partnership PPPs, only enabling the review of government internal systems. Special Purpose Vehicles (private partners) should follow norms of corporate governance and financial disclosures as per the Companies Act, 2013.

  8. Strengthening contracts: The private sector must be protected against such loss of bargaining power. This could be ensured by amending the terms of the Public-Private Partnership PPP contracts to allow for renegotiations.

  9. Following some successful models such as, in the UK, the starting point in terms of efficiency and service quality was high, and corruption in service delivery low. The Indian public sector suffers from peculiarly Indian constraints. Political interference in recruitment, competitive trade union activity (witness the posters in every railway station), rigidities on salaries and writs in courts on service matters, reduce the efficiency of personnel management in the public sector. Activities of oversight agencies — Vigilance, Comptroller and Auditor General, etc — cause extreme risk aversion in decision-making, reducing the efficiency of procurement and operational decisions.

  10. PPP must not be a short cut only to save money or bridge fiscal gaps or transfer risks; it should be used to improve service quality or bring efficiency improvements.

Source:

  1. Evolution and need of PPP in India (Samta Singh)

  2. ISSUES AND PROSPECTS OF PUBLIC-PRIVATE PARTNERSHIP IN INDIA (KARUNENDRA PRATAP SINGH)

Also read: The Non-Banking Financial Company

Right To Information (Amendment) Bill, 2019

Source 

moderator
By moderator July 30, 2019 15:32