Public Private Partnership (PPP) Project is based on a contract or concession agreement, between a Government or statutory entity on the one side and a private sector company on the other side, for delivering an infrastructure service on payment of user charges. “Viability Gap Funding” or Grant (one-time or deferred), is provided by the govt. under this Scheme with the objective of making a project commercially viable.

The National Democratic Alliance (NDA) government has given a fresh lease of life to the PPP projects across sectors such as housing, railways, roads, aviation, power distribution, mining and even school education and health services.

Steps proposed by the Govt.

  • The government has approved a revised model concession pact for projects based on PPP design at major ports to make the investment climate more investor friendly.
  • The Union government announced a new metro policy wherein it will approve and aid metro rail projects only if they have private participation and ensure last-mile connectivity for users.
  • A new PPP was announced to promote private investments in affordable housing to help achieve the “housing for all” target by 2022.
  • For futuristic projects such as pod taxis—driverless vehicles that run along a predetermined course—as well, the government plans to adopt the PPP model because these projects are capital-intensive.
  • While India’s mines ministry’s 2008 national mineral policy revamp may allow PPPs in mining, states such as Rajasthan have awarded PPP contracts for electricity distribution in the districts of Kota and Bharatpur.
  • The government is working to farm out operations at Jaipur and Ahmedabad airports on a PPP basis.
  • The government is leveraging PPPs to bridge that gap in healthcare sector, by giving hospital services to the private partner for management for a fee to be paid out of the revenue.
  • The government has also announced, model contracts to increase the role of private hospitals in treating non-communicable diseases in urban India.

India’s experience with PPP in a serious manner started from 2006 onwards. PPP requires private sector participation in public asset creation through money, technology and management. For this, several models inviting their participation were launched for different projects.

Following are the main models of PPPs.

(a)  The Build Operate and Transfer (BOT) Model

Under BOT annuity, a developer builds the highway, operates it for a specified duration and transfers it back to the government. The government starts payment to the developer after the launch of commercial operation of the project. Payment will be made on a six month basis.

Role of the private sector partner is to bring the finance for the project and take the responsibility to construct and maintain it. In return, the public sector will allow it to collect revenue from the users. The national highway projects contracted out by NHAI under PPP mode is a major example for the BOT model.

(b) Build-Own-Operate (BOO): This is a variant of the BOT and the difference is that the ownership of the newly built facility will rest with the private party here. The public sector partner agrees to ‘purchase’ the goods and services produced by the project on mutually agreed terms and conditions.

(c) Build-Own-Operate-Transfer (BOOT): This is also on the lines of BOT. After the negotiated period of time, the infrastructure asset is transferred to the government or to the private operator. This approach has been used for the development of highways and ports. 

(d) Build-Operate-Lease-Transfer (BOLT): In this approach, the government gives a concession to a private entity to build a facility (and possibly design it as well), own the facility, lease the facility to the public sector and then at the end of the lease period transfer the ownership of the facility to the government.

(e) Lease-Develop-Operate (LDO): Here, the government or the public sector entity retains ownership of the newly created infrastructure facility and receives payments in terms of a lease agreement with the private promoter. This approach is mostly followed in the development of airport facilities.

(f) Rehabilitate-Operate-Transfer (ROT): Under this approach, the governments/local bodies allow private promoters to rehabilitate and operate a facility during a concession period. After the concession period, the project is transferred back to governments/local bodies.

(g) DBFO (Design, Build, Finance and Operate): In this model, the private party assumes the entire responsibility for the design, construction, finance, and operate the project for the period of concession.

(h) The private party assumes the entire responsibility for the design, construct, finance, and operate or operate and maintain the project for the period of concession.

(i) Management contract: Here, the private promoter has the responsibility for a full range of investment, operation and maintenance functions. He has the authority to make daily management decisions under a profit-sharing or fixed-fee arrangement.

(j) Service contract: This approach is less focused than the management contract. In this approach, the private promoter performs a particular operational or maintenance function for a fee over a specified period of time.

Highway construction PPP Model

The government has decided to introduce Hybrid Annuity Model (HAM) to revive PPP (Public Private Partnership) in highway construction. At present, three different models –PPP AnnuityPPP Toll and EPC (Engineering, Procurement and Construction) were followed by the government while adopting private sector participation.

Launch of the new model is due to the many problems with the existing ones. Large number of stalled projects are blocking infrastructure projects and at the same time adding to NPAs of the banking system.

In this context, the government has introduced Hybrid Annuity Model (HAM) to rejuvenate PPP.

By features the HAM is a mix between the existing two models – BOT Annuity and EPC. Hence to understand the HAM, we should know the basic features of the existing PPP models.

PPPs relate to the delivery of public services by private entities, and are awarded through a competitive bidding process. These projects are typically run on the lines of Build-Operate-TransferBuild-Operate-Own-Transfer or Build-Operate-Own modelsand are favoured by governments globally to make up for a shortfall in investment spending.

1. The Build Operate and Transfer (BOT) Annuity Model (Mentioned above)

2. BOT Toll Model

In this toll based BOT model, a road developer constructs the road and he is allowed to recover his investment through toll collection. This toll collection will be over a period of nearly 30 years in most cases. There is no government payment to the developer as he earns his money invested from tolls.

3. Engineering, Procurement and Construction (EPC) Model

Under this model, the cost is completely borne by the government. Government invites bids for engineering knowledge from the private players. Procurement of raw material and construction costs are met by the government. The private sector’s participation is minimum and is limited to the provision of engineering expertise. A difficulty of the model is the high financial burden for the government.

In financial terminology hybrid annuity means that payment is made in a fixed amount for a considerable period and then in a variable amount in the remaining period. This hybrid type of payment method is attached under the HAM.

The Hybrid Annuity Model (HAM)

In India, the new HAM is a mix of BOT Annuity and EPC models. As per the design, the government will contribute to 40% of the project cost in the first five years through annual payments (annuity). The remaining payment will be made on the basis of the assets created and the performance of the developer. Here, hybrid annuity means the first 40% payment is made as fixed amount in five equal instalments whereas the remaining 60% is paid as variable annuity amount after the completion of the project depending upon the value of assets created.

Analysts propose that the issues with original PPPs have been substantially addressed to a large extent with the introduction of annuity and hybrid annuity models and the recognition by the government that certain risks which are contrary to businesses and need to be addressed at a social level come under the government’s ambit. There is no toll right for the developer. Under HAM, Revenue collection would be the responsibility of the National Highways Authority of India (NHAI).

Advantages of HAM:

  • Provides liquidity to the developer.
  • The financial risk is shared by the government.
  • The private partner continues to bear the construction and maintenance risks as in the case of BOT (toll) model, he is required only to partly bear the financing risk.

Government’s policy is that the HAM will be used in stalled projects where other models are not applicable.

The PPP model has delivered mixed results in India, given problems on account of overextended balance sheets, contract disputes, land acquisition problems and lack of a dispute resolution mechanism. Stalled projects, in turn, have saddled banks, especially public sector lenders, with large bad loans.

However, some believe that a raft of new project launches is evidence that a new beginning has been made.

Experts say, the PPP strategy holds promise for infrastructure creation when the financing piece is tied up. The government’s renewed focus on PPP will hold infrastructure sector in good stead. Analysts believe that the government needs to take proactive measures to facilitate financing for the projects related to infrastructure, as the public sector lenders and Indian developers are stretched.

Significant developments

  • After the privatization of the Delhi and Mumbai airports in 2006, the PPP approach has been adopted for airports across the country. While the new airports in Navi Mumbai and Goa have been won by GVK Power and Infrastructure Ltd and GMR Infrastructure Ltd respectively, the state owned Airports Authority of India (AAI) has won the right to build the new Bhogapuram airport in Andhra Pradesh.
  • While India has experimented with healthcare PPPs for various services, the successful ones involve laboratory services, mobile medical units, primary health centre management, telemedicine services and hospital maintenance.
  • With health being a state subject, there are also several successful PPP examples across the country such as a boat health service in the dense Sunderbans, free drugs for below-poverty-line patients in Rajasthan, Karnataka’s telemedicine programme and Uttarakhand’s voucher scheme for institutional deliveries.

Experts say that PPPs have a very important role to play in India’s healthcare architecture. Experts believe that the scope and meaning of PPPs must be expanded against the current public health landscape of the country—partnerships that bring together strengths of each partner to what best they can deliver and not in fact merely a contract of convenience between public and private stakeholders who may have ideological disagreements must be advocated widely.