SCOPE OF PPP MODEL IN THE

HOUSING FINANCE SECTOR

“AN INDIAN PERSPECTIVE”

Submitted by:
Anubhuti Nigam (09FN - 062)
Siddharth Aggarwal (09FN - 103)
Soumya Darshan Mishra (09FN - 105
Current Issues in Housing
Growing Shortages in Housing

Source: As per estimates of National Building Organization

 What is PPP?
 PPP(Public private partnerships) are arrangements
between government and private sector entities for the
purpose of providing public infrastructure, community
facilities and related services.
 Draws on strengths of both the private and the public
sector
 Government – responsible for delivering services and
projects in manner which furthers the public interest
 Basis of deciding types of PPPs
 The degree of risk allocated between the partners
 The amount of expertise required on the part of each
partner to negotiate contracts
 The potential implications for ratepayers
 Types of PPP
Operations and Maintenance
The local government contracts with a private partner to operate and maintain a
publicly owned facility.

Advantages
Potential service quality and efficiency improvements
Cost savings
Flexibility in structuring contracts
Ownership vests with local government

Disadvantages
Collective agreements may not permit contracting out
Costs to re-enter service if contractor defaults
Reduced owner control and ability to respond to changing public demands
 Types of PPP(Contd.)
 Design and Build
 The local government contracts with a private partner to design and build a facility that conforms
to the standards and performance requirements of the local government. Once the facility has
been built, the local government takes ownership and is responsible for the operation of the
facility.
Advantages
 Access to private sector experience
 Opportunities for innovation and cost savings flexibility in procurement opportunities for
increased efficiency in construction
 Reduction in construction time
 Increased risk placed on private sector
 Single point accountability for the owner
 Fewer construction claims
Disadvantages
 Reduced owner control
 Increased cost to incorporate desirable design features or change contract in other ways once it
has been ratified
 More complex award procedure
 High operating and maintenance costs
 Types of PPP(Contd.)
Turnkey Operations
The local government provides the financing for the project but
engages a private partner to design, construct and operate the facility
for a specified period of time.
Advantages
Places construction risk on the private partner
Transfer of operating obligations can enhance construction quality
Potential public sector benefits from increased efficiency in private
sector construction
Disadvantages
Reduced local government control over facility operations
Increased cost to incorporate changes in design and operations once
contract is completed
 Types of PPP(Contd.)
Wrap Around Addition
A private partner finances and constructs an addition to an existing
public facility. The private partner may then operate the addition to
the facility for a specified period of time or until the partner recovers
the investment plus a reasonable return on the investment.
Advantages
Public sector does not have to provide capital funding for the upgrade
Financing risk rests with private partner
Time reduction in project implementation
Disadvantages
Perceived loss of control
Expense involved in alteration of existing contracts with the private
partner
 Types of PPP(Contd.)
Lease - Purchase
The local government contracts with the private partner to
design, finance and build a facility to provide a public service.
The private partner then leases the facility to the local
government for a specified period after which ownership vests
with the local government.
Advantages
Improved efficiency in construction
Lease payments may be less than debt service costs
Improve services available to residents at a reduced cost
Disadvantages
Reductions in control over service or infrastructure
 Types of PPP(Contd.)
Build – Transfer - Operate
The local government contracts with a private partner to finance and
build a facility. Once completed, the private partner transfers ownership
of the facility to the local government. The local government then leases
the facility back to the private partner under a long-term lease during
which the private partner has an opportunity to recover its investment
and a reasonable rate of return.
Advantages
Public sector obtains the benefit of private sector construction expertise
Public sector maintains ownership of the asset
Long-term operational savings
Disadvantages
Possible difficulty in replacing private sector entity or terminating
agreements in event of bankruptcy or performance default
 Other types of PPP
 Build – Own – Operate
 Build – Own – Operate – Transfer
 Lease – Develop – Operate or Buy – Develop – Operate
 Temporary Privatization
 BENEFITS OF PPP
 Cost savings

• Construction cost savings can often be realized by combining design and construction in
the same contract leading to less project over-runs.

• Efficiency and innovation in designs leading to cost savings.

• Less costs for professional services (inspection and contract management).

• Reduction in the cost of operating or maintaining facilities by applying economies of

scale, innovative technologies, more flexible procurement and compensation
arrangements, or by reducing overhead.

 Risk sharing

• Risks are shared between the public and private sector.

Improved levels of service

• New technologies and economies of scale.

Enhancement of revenues

• Setting of user fees that reflect the true cost of delivering a particular service.

• Other innovative revenue sources.

 Efficient implementation

• Efficient design and construction, more flexible contracting and procurement,

quicker approvals for capital financing and a more efficient decision-making
process.

 Economic benefits

• Increased employment and economic growth.

 RELEVANCE OF PPPs FOR INDIA

Need for heavy spending by the

GoI on infrastructure to sustain the
GDP growth.
• Need to increase from 4.6% of GDP to 7 –
8% during the 11th Five Year Plan.
• Private Sector Estimates: India needs to
increase infrastructure spending gradually
to US$100 billion per annum (8% of GDP)
by 2010.
Governments can not also borrow
arbitrarily, since their borrowing has
been capped through the Fiscal
Responsibility and Budgetary
Management Act.

• The combined deficit of the Union and state

governments is around 10% of GDP.
• While public investment in infrastructure would
continue to increase, private participation needs to
expand significantly to address the existing deficit
in infrastructure services.
PUBLIC PRIVATE
SECTOR SECTOR

Expertise in Financial
governance resources

Citizens’ support Cost savings

Access to public Operational

funding efficiencies

Assumption of
social, Innovative
environmental, technologies
and political risks

Managerial
effectiveness

Commercial risk
sharing
 ROLE OF PPP IN HOUSING FINANCE
HOW CAN A PPP MODEL ADDRESS THE STAKEHOLDERS’ (GOVERNMENT,
REAL ESTATE DEVELOPERS AND FINANCIAL INSTITUTIONS) CONCERNS BY
AFFECTING THE FOLLOWING FACTORS

Land Construction Connectivity

Availability and Other and
and Cost Costs Infrastructure

Credit
Delivery and Others
Risk
 Rehabilitation
• Increases prime space area. Redevelopment /
• Ratio of the total floor area of buildings on a certain location
to the size of the land of that location.
• Altering FSI norms by the government is a tool for providing
Floor Space Index
a cashless subsidy to builders.
• Purchase of large strips of land by government and its Land Banking
agencies and distribution to private developers.
• Land parcels currently in possession can be used for
government land.
development, thereby reducing the cost of land. available
• Government can enter into joint ventures with developers with
land as equity.
Effective use of
PROBLEMS
LAND AVAILABILITY AND COST
• Exemption from sales tax and reduction in
stamp duty
stamp duty. Sales tax and
• Reduction / exemption / deferment of taxes and duties on construction materials.
costs
• Subsidy to developers for R&D in new low cost materials and technologies.
• Subsidy to developer in view of employment generated.
• Lower cost of borrowing for development of affordable housing projects - can be

construction
achieved if government agencies have a participatory interest in the project and
guarantee the loans.
Subsidized
projects
• Reduction in approval related costs and cost
approval of
overruns for the total project. window
Single
CONSTRUCTION AND OTHER COSTS
• Upfront infrastructure development around
Towns
major cities a pre-requisite for planned of Satellite
development of satellite towns.
• Successfully implemented in Mumbai and NCR.
Development
• Joint developers with private players.
• Development of infrastructure and residential
Townships
space.
Integrated
• Planned expansion of city limits.
• Public transport facilities for accelerated growth of infrastructure
urban infrastructure.
• Increase budgetary focus on urban infrastructure.
of urban
• Increase support to State Governments to engage in
PPP projects
Development
INFRASTRUCTURE
CONNECTIVITY AND
 sector
priority
• Increase current limits on interest subsidies. as a
Housing
• Relaxation of ECB norms for housing
companies.
of capital
• Increase in income tax ceiling on housing loans
will reduce post tax cost of capital for borrowed
lower cost
funds.
• Increase support to State Governments to
Access to
engage in PPP projects.
CREDIT DELIVERY AND RISK
• Significantly higher Government involvement and
subsidiaries are required to provide equitable housing segment
for EWS segment.
• Innovative cross-subsidization schemes, extensive
on EWS
subsidies and suitable credit delivery mechanisms
ARE needed to address the specific challenges of
Special focus
EWS segment.
companies
• 80 IB benefits for all approved affordable
finance
housing projects and developers. housing
• Extension of 80 IB benefits for housing finance
companies lending to LIG and EWS lenders.
developers and
Profitability of
OTHERS…
 POTENTIAL RISKS OF PPP
 Loss of control by local government
• Sharing of benefits and decision making between the public and private bodies.
• Greater involvement of the private partner in decisions concerning how services are
delivered and priced.

 Increased costs
• The costs of overhead or administration and depreciation of assets, subsidies etc. are
often not included in the pricing of individual services.
• May lead to increasing user fees for specific services.

 Political risks
• Inexperience by local government and stakeholder unfamiliarity.

 Unacceptable levels of accountability

• With PPP, the lines of accountability for the provision of services are less clear to the
public than under conventional service delivery.

Unreliable service
• Labour services, financial problems may prevent private parties from honouring
their commitments.
Inability to benefit from competition
• Local governments may not be able to benefit from public private partnerships
if there are only a limited number of potential private partners with the
expertise or ability to respond to a request for proposals.

Reduced quality or efficiency of service

• Cost-plus contracts provide little incentive for the private partner to maintain
quality or increase efficiency.
• Local governments should also consider the life-cycle cost approach in
establishing evaluation criteria for projects or services.

 Bias in the selection process

• The potential for accusation of bias can be reduced through well developed
policy and procedures, and by ensuring transparency in dealing with potential
private partners.

 Labour issues
• There could be adverse reaction from labour unions or local government staff.
THANK YOU….