PublicPrivate Partnerships Today 101
# PUBLICPRIVATE PARTNERSHIPS
TODAY
5.1 THE DRAFT INFRASTRUCTURE POLICY OF KARNATAKA FOR
PUBLICPRIVATE PARTNERSHIP
A policy should be a charter that enunciates the principles
of goal-setting, sets out the framework for achieving
targeted objectives and, thereby, brings about economic
performance. Policy-making in India, since the mid-1970s,
has been a short-sighted exercise, not free of the influences
of the vicissitudes of political expediency. Rarely have
policies been market-friendly.
The mandate to review the Infrastructure Policy of the
Government of Karnataka presented the first opportunity
to iDeCK (Infrastructure Development Corporation of
Karnataka) to create policies and measures that are incentive-
compatible and have economic and market logic, and draw
little administrative energies. The policy was first announced
in 1997 with the principal objective of encouraging private-
sector participation in infrastructure development. Similar
policy measures in other sectors such as tourism, ports,
roads, IT, and power were also separately announced
around the same period, setting out briefly the governments
agenda in incentivizing private-sector investments in various
planned and envisaged sectoral development initiatives.
What was particularly apparent in infrastructure policy,
was the need to delineate a framework for operationalizing
suitable public-private partnerships (PPP) and the process
that government would largely adopt for leveraging private
finance initiatives.
DEFINITION AND OBJECTIVES
As a first step, iDeCK sought to define what infrastructure
would essentially be covered under the gamut of the
S. Vasudevan
policy. These were broadly organized under the following
heads:
power, including power generation (captive generation,
non-conventional and renewable energy projects),
transmission, distribution, and power trading services,
integrated transport and logistics, covering roads,
bridges (flyovers), railway systems, ports, airports, oil and
gas pipelines, and warehousing infrastructure;
urban and municipal infrastructure comprising water
supply and sewerage systems, solid waste and garbage
disposal facilities;
industrial infrastructure including industrial parks
(IT, biotech, floriculture, etc.), Special Economic/Free
Trade Zones, Export Promotion Zones, industrial estates,
and industrial townships; and
other infrastructure such as township development
and infrastructure related to tourism and agriculture.
Next, the objective of the policy was defined, with a
clear message to potential private investors of the
governments commitment to the reform process and an
unambiguous recognition of the formers role in state
infrastructure development. The need to provide high
service standards while at the same time value for money
(VFM) to users was defined as underlying the objective
of the policy. The private sector was expected to play a
key role in providing VFM by ensuring the following key
benefits:
savings in costs due to innovative designs, timely
project implementation, and higher efficiencies in operations;
102 India Infrastructure Report 2004
enhanced quality of services to users due to better
managerial practices;
reduction in and gradual elimination of pricing
constraints;
enabling public funds to be earmarked for socially-
justifiable projects; and
financial innovation and development of cost-effective
solutions.
Next was the creation of an appropriate institutional
and regulatory framework. Touchstone principles, as outlined
below, were enunciated:
Efficient Use of Existing Assets and Optimal Allocation of
Additional Resources: The intention of the government
would be to first look at the option of better utilization
of existing assets before new investments were proposed.
Further, priority would be accorded to those projects
where development of critical linkages provide significant
network externalities. The government would also develop
objective criteria for rationalization of investments for
expansion, upgradation or development of infrastructure
facilities.
Equitable Contractual Structures: The government would
enter into suitable contractual arrangements with private
developers for development and management of both existing
(O&M contracts, leases, sale or divestment) and new assets
(BOT, BOOT, BOO, etc.). The contractual/ implementation
structures could be evolved based on equitable allocation
of risks between the parties, taking into account the
legitimate concerns of private investors.
Transparent Process of Procurement: To ensure that private
services are procured in a fair and transparent manner, the
government would typically award contracts on the basis
of an open competitive bidding process for which the
criteria would be spelt out upfront. The government would
adopt a single-stage or 2-stage process depending on the
complexity of the project. The selection criteria used
would be one or more of the following:
quantifiable technical criteria (for example, level of
service, quality of assets offered);
lowest present value of financial support from GoK/
subsidy;
highest share (or present value) of revenue;
lowest present value of payments by GoK;
highest upfront payment (or present value of upfront
payments);
highest present value of future payments;
lowest concession period;
lowest present value of user fees; or
highest premium (or present value of ) on equity
shares offered.
Bidding Efficiency: The policy also provides for procurement
through a swiss-challenge approach or an innovative/suo-
motu proposal, where warranted, based on the proposal
meeting the necessary conditions.
Commitment to Clearances: With a view to achieve better
accountability and hasten the process of project
implementation, the policy also proposes that the
government would endeavour to provide all clearances and
approvals for sanctioned projects within 30 days of a
technically complete application.
FAIR REGULATORY FRAMEWORK
Since many infrastructure facilities and services have
natural monopoly characteristics or have excludability/
appropriability problems, independent regulation would be
desirable to ensure that the interests of both users and
service providers are not compromised. The policy also
underscores the intention of the government to set up
independent regulatory authorities for all the infrastructure
sectors. The independent regulator would ensure that
services provided by the operator are of the highest quality
at the best possible prices and put in place a mechanism
to address consumer grievances with regard to service
quality on the one hand and ensure compliance with
environmental, safety, and other standards on the other.
In addition, the independent regulator would also arbitrate
disputes between the various stakeholders. The scope and
functions of the regulatory authority would be specifically
outlined for each sector.
ENABLING INSTITUTIONAL INFRASTRUCTURE
At present the process of project identification and
development is handled by the various government
departments and agencies and in the case of urban projects
by the respective urban local bodies. For projects over
Rs 100 crore, the Infrastructure Development Department
(IDD, Government of Karnataka) has been set up as the
nodal agency to streamline the process of appraisal and
approval. Subsequent to this policy, IDD would also be
the nodal department for all infrastructure projects to be
implemented through private sector participation.
The policy proposes strengthening of the nodal agency
with appropriate technical staff to enable it to coordinate
and integrate the necessary procedures and processes and
ensure that projects are implemented expeditiously. It is
also proposed that an Inter-Departmental Committee (IDC)
headed by the chief secretary and comprising secretaries
of the various government departments concerned with
infrastructure could constitute the approving authority,

and act as a single window mechanism for evaluation of
proposals for private-sector investment. Where necessary,
the government could also set up independent advisory
group(s) which would serve as think-tanks to assist in the
formulation of sector strategies, selection of implementation
options and overall infrastructure development.
SUSTAINABLE INCENTIVES: FISCAL MEASURES
From a policy perspective, the government has realized
that fiscal incentives are perhaps necessary but not a
sufficient condition for successful private sector
participation. Hence, this appears last in the hierarchy of
touchstone principles. Various incentives and concess-
ions to promote private finance initiatives in infra-
structure development are already available under the existing
policy and have been carried forward to the new (draft)
policy. Besides, other incentives and concessions under
extant sectoral policies would also be available to private
investors.
A key priority of government is the progressive
elimination of subsidies and cross-subsidies so that prices
for services are commensurate with the real costs of
provision. A level playing field and market determination
of demand and supply can bring about commercialization.
Subsidies, as long as they continue in the infrastructure
sector, would be based on the need for adequate cost
recovery, social needs, and balanced regional development.
Wherever subsidy is necessitated by social compulsions,
it would be the endeavour of the government to ensure
5.2 REAL ESTATE INDUSTRY: CREATING VALUE THROUGH
PUBLICPRIVATE PARTNERSHIPS
The real estate industry cluster, broadly defined, consists
of a collection of industrial and services sectors of the
economy, such as construction (housing construction, as
well as construction of commercial offices, retail and
industrial buildings, and infrastructure projects such as
dams, roads, and bridges), brokerage services, real estate
finance services (mortgage banking, real estate investment),
real estate operations, property management, architecture
and design. A number of other sectors of the economy are
also intricately linked to the real estate cluster. These
include the cement manufacturing industry, the power
sector, the furniture and appliances industry, the finance
cluster as well as a range of other downstream and
upstream sectors. The cluster is, therefore, critical for the
PublicPrivate Partnerships Today 103
that payments are direct and transparent and funded out
of a dedicated corpus raised through appropriate fiscal
measures. Such subsidies may also be a bid out for private
service provision in a competitive bidding framework.
These principles form the crux of the draft infrastructure
policy developed by iDeCK for the Government of
Karnataka. The infrastructure policy provides an umbrella
framework for development/restructuring of various sectoral
policies to bring about purposeful reform in issues of
governance that would allow greater private participation
in infrastructure projects. Further, it also provides a basis
on which the government would develop medium and long
term strategies and implementation plans for each of the
infrastructure sectors clearly setting out the role for the
private sector, in both the management of existing assets
and creation of new assets.
GoKs decision to review and restructure the existing
infrastructure policy was primarily 2-fold. First, the policy
was due for a temporal review, as provided in the earlier
document. Second, and more significantly, it was borne
out of the governments genuine intention to institutionalize
private sector participation in infrastructure development.
This policy is predicated on the governments vision to
build strong PPP in order to develop, expand, broaden,
and deepen private investment in infrastructure that would
help achieve the twin objectives of high growth and equity.
The formalization of this policy would be a significant step
towards establishing Karnataka as a role model for
infrastructure development, where governance is based on
best practices.
Ashok Deo Bardhan and Samir K. Barua
health of the nation as its impact is felt throughout the
economy.
Real estate as a whole, and housing in particular, is the
single largest asset class and wealth holding of individuals
and households globally. The development of the housing
sector is an integral part of economic development. In
addition to its size in the economy, its importance also
arises from the positive externalities and spillover effects,
and their impact on the social and political climate. In
most countries, and particularly in developing countries,
housing is a very large proportion of a households
expenditure and takes up a substantial part of lifetime
income. The backward and forward linkages to land
markets, durable goods manufacturing and the contribution
104 India Infrastructure Report 2004
to the development of labour markets with depth and
mobility further underscores the significance of this sector,
particularly in the process of economic reform and
transition.
Housing and Real Estate Markets are Large
The total market value of housing in the US, for example,
is approximately US$12 trillion. This is larger than the
market capitalization of the US stock market or the US
GDP. Similarly, in other OECD countries, the total stock
of housing is worth 100 per cent to 150 per cent of GDP.
Even in an era of financial maturity and enthusiasm for
investments in stocks and other financial channels, the
primary residence remains the principal form of wealth
held by a household in the US, and constitutes over 50 per
cent of its net worth1. Moreover, the claims represented
in financial assets, both stocks and bonds, also pertain in
part to the real estate held by firms and the government.
Real Estate in China
The role played by the real estate industry in economic
growth is underscored by the example of China. In
comparison to the well-known contribution to economic
growth of Chinas special economic zones, the impact of
foreign direct investment, and the impetus provided by
town and village enterprises in the hinterland, the story of
the real estate cluster and its impact on the economy is
relatively unknown. Major construction projects in the
office and residential real estate sectors2, industrial
construction and massive infrastructure projects have been
instrumental in providing the necessary conditions for
other sectors to flourish, and have themselves had a
significant direct and indirect impact on the overall growth
rates. Commercial real estate growth has been exceeding
25 per cent per annum in recent years, with the first half
of 2003 alone witnessing completion of approximately
80 million sqm of office space. Chinas overall real estate
investment (including housing) grew by 33.5 per cent year-
on-year to 198 billion yuan (US$24.9 billion) during the
first 4 months of this year, according to Chinas National
Bureau of Statistics. There have been major spillover
effects in the economy with sectors such as furniture,
appliances, and other home furnishings growing at rates
in excess of 25 per cent and the State Council Information
Office, which oversees the official government information
portal, estimates that the real estate industry contributes
1.5 to 2 per cent to the overall growth rate of GDP.
1
Bureau of Economic Analysis, US Dept. of Commerce.
2 in the sanctity of the title that they acquire, regardless of
The development of Shanghai Pudong New Area alone, where
a metropolis with world class urban infrastructure has sprung up in
a matter of a decade, is worth special emphasis.
While the commercial real estate sector may be a
manifestation of derived demand, dependent on how well
the industrial and services sectors are doing or are expected
to do in the future, the housing sector is driven by a
number of extra-economic and demographic factors, in
addition to the economic ones such as income and the
interest rate environment. This attribute of the housing
sector coupled with its size and its multiplier effects on
the economy gives it the role of a leading indicator of the
imminent state of health of the economy at large.
We examine the multifaceted value that the real estate
cluster is capable of delivering to the economy and society.
We look at the spillover effects that it generates, review
some of the theoretical and conceptual issues involved, and
make an assessment of the new institutional and market
innovations required, as well as the reforms that are needed
in India to enhance the role of the industry as an engine
of growth for the economy and as a tool of long-term
wealth creation. Based on the statistics thrown up by the
recently concluded survey by the Census of India, we argue
that the sector offers immense potential for creation of
value through PPP (Box 5.2.1).
LEGAL REFORMS
By a number of criteria India seems poised to jump on
to a higher growth path. It is our contention that the gamut
of industries comprising the real estate cluster can not only
play a critical role in this economic transformation, but
can also serve as an engine of future growth. A number
of reforms, however, need to be carried out and bottlenecks
impeding the natural growth of the industry removed
before the inherent potential can be realized.
Property Rights Deficiencies
The legal structure in India has not kept pace with some
of the far-reaching reforms now taking place in the Indian
economy. This is also true of the laws and regulations
governing real estate development and investment.
Development of a proper transparent process of title
registration, for example, is critical to the growth of the
industry. The need for evidence of a good title, indicating
that the property is free from past residual and future
claims and encumbrances is the bedrock of secure property
transfers and sales. Due to the vagaries of history, convoluted
legislation and a plethora of systems, what we have today
in India is mostly transaction registration rather than title
registration. It is important that potential buyers feel secure
the pursuit back into the record books, and do not feel
required to hire lawyers or investigators to dig into title
 PublicPrivate Partnerships Today 105

Box 5.2.1
Value Creation by Housing and Real Estate

SOCIAL IMPACT
The purported benefits of housing, and of home ownership in particular, have been stressed in theoretical and empirical literature
on housing. The social value creation by housing, such as social stability, functional neighbourhoods, development of civil society,
abatement of crime, and general enhancement of welfare, have been well recognized. This is particularly true of provision of
affordable housing for the poor, in addition to the widely acclaimed objectives of equity and social justice. Homeowners
accumulate wealth as the investment in their homes grows, enjoy better living conditions, are often more involved in their
communities, and have children who tend on average to do better in school and are less likely to become involved with crime.
Communities benefit from real estate taxes homeowners pay, and from stable neighborhoods homeowners create (US Department
of Housing and Urban Development 2000). Home ownership creates neighbourhoods with a collective sense of identity through
the development of stakeholding that is linked in terms of its value to the dynamics of the neighbourhood at large. By this we
do not just mean value in the monetary sense, but also in terms of the quality of life in the immediate neighbourhood of the
primary residence. Indeed, some go so far as to raise the question whether home owners make better citizens (DiPasquale and
Glaeser 1999). Although the ownership rate in India is higha (that is, owned homes as a proportion of total dwellings) the quality
of a large segment of dwellings leaves much to be desired and many of the externalities of housing are thus not captured.

SPILLOVERS, MULTIPLIER EFFECTS

Direct new expenditures in the construction industry or in other sectors in the real estate cluster themselves stimulate the economy
and generate jobs. Since a substantial portion of such generated income is plough back into the economy, there is an additional,
multiplier effect. This is true of any industry. However, since the real estate cluster is largely a non-tradable industry (that is,
most of the output and inputs associated with the industry stay, and originate from within the confines of the domestic economy),
there is very little leakage out of the country. The localized and domestic nature of real estate, therefore, leads to a much higher
multiplier effect than would be the case for a more tradable industry. While construction, home maintenance and repairs, power
and transportation directly affect the economy, the extensive nature of downstream and upstream linkages of real estate, from
the finance sector to the furniture/consumer goods sector, from infrastructure (roads, bridges, public works) to superstructure
(commercial space/retail, industrial etc.) further impact the national economy. A given amount of expenditure in the real estate
industry, therefore, tends to support larger number of jobs in the economy.

IMPACT ON FINANCIAL MARKETS

Underlying the provision of real estate services in general, and housing services in particular, lies the criticality of a well-functioning
financial system. Indeed, without a properly functioning housing finance system that operates in an allocationally and operationally
efficient manner, the real housing market would be grossly sub-optimal. Moreover, in a manner similar to the housing markets,
the housing finance system has beneficial spillover effects on the entire financial system with far-reaching consequences for economic
development. For example, a mortgage market is very important for the process of capital accumulation in a developing economy.
Since housing is the primary tangible asset of a developing or transitioning economy it can then also be used as collateral to borrow
funds in order to carry out productive capital investment. Mortgage debt ends up accounting for a large proportion of household
debt and, through secondary markets and securitization, supports the efficient functioning of financial markets. Housing finance,
as well as real estate finance more generally are vital elements both in the development of a dynamic housing sector, as well as in
the development and deepening of the financial sector. In addition to creation of more lending channels, more investment channels
are opened up as well for both institutional and individual investors, thus leading to more complete and efficient markets.

ROLE IN CREATION OF A NATIONALLY INTEGRATED MARKET

A national residential and non-residential/commercial real estate market is essential for the proper development of a nationally
integrated market in general. A national market assumes free flow of capital, labour, and resources within the borders of a nation-
state, and neither is possible without a concomitant free flow of housing and other real estate resources. The experience of several
countries shows that regional disparities and distorted development are the norm if real estate markets are regionally segregated
and segmented. Whether firms respond to investment opportunities in various parts of the country or whether people follow
jobs, a rapidly responsive market in commercial construction and support services, in the development of hotels, rental housing,
and homes for sale can lead to a more efficient and mobile labour market.

TOOL OF UPWARD MOBILITY

In some countries the first purchase of an entry-level home, usually subsidized in some form or another has served as a stepping
stone for upward social and economic mobility. As pointed out by Bardhan, Datta, Edelstein, and Kim (2003), the Singapore
a Proxenos (2002).
106 India Infrastructure Report 2004

housing market, for example, is characterized by the coexistence of a dominant public sector and a small, growing private sector
with relatively higher quality housing. While accounting for the impact of the former on the latter in an econometric model,
they find that an increase in the rate of change of public housing resale prices has an important and significant positive impact
on the sales of private residential units. The underlying reason here is that occupants of the subsidized public sector flats are
allowed to sell their flats after a certain period, subject to some restrictions, and the sale mitigates their down payment constraints
in the purchase of new, more expensive, private apartments. This interesting tandem of privatepublic activity lends a helping
hand to upwardly-mobile households, and the larger social and economic value created far surpass the resources sunk and foregone
in the public sector housing subsidies.

records going back a long time. Title and title guarantee
companies providing title insurance and escrow services
may then develop together with the market.
Land Acquisition: A Problem
The exercise of the doctrine of eminent domain for land
acquisition by the government has been carried out widely
in other countries. Given the needs of development and
the penchant of the state for quasi-coercive acquisition,
it is vital that some independent body looks into the
criteria for exercising this ultimate power of the state. In
the Indian context, this power should be exercised only
with the transparently stated objective of appropriate,
imminent use in the public interest, with a particular
regard for environmental sustainability and with fair and
just compensation/resettlement3.
Foreclosure Proceedings
A proper system for foreclosure proceedings in case of
mortgage default that also shortens the time for repossession
of the collateral is important to allay the apprehensions of
mortgage lenders. Also, various kinds of liens, such as the
mechanics lien, which is a claim against property on which
contractors have expended labour can protect the interests
of various real estate related creditors. In the Indian
context, a reform of laws governing landlordtenant
relationships also needs to take into account the issue of
balance between affordability and landlord rights in a way
that market distortions are minimized and the needs of
equity served. This is easier said than done. However, it
should be noted that even the most market-oriented
countries have tenant protection and rent control systems
in place.
Zoning and FSIs
With major real estate development comes the need for
proper zoning and land-use controls for economic and
aesthetic reasons, as well as for larger social objectives.
Zoning in its broadest sense would involve determining
3 Some attempts to use the private sector to bring about land
development have begun. (Box 5.2.2).
and planning the kind of real estate (residential, office,
retail, or mixed use), design norms and neighbourhood
landscaping in addition to the floor space index or floor
area ratios. Unbridled market development can lead to
eyesores and can also distort the market in favour of
powerful players. Intervention in the market process is also
needed in order to choose between alternative strategies
of density versus sprawl in real estate development.
Restrictive and low floor space indices can artificially
ration land-use, drive prices up, lead to speculative
behaviour, and may not be the optimal usage of scarce
land. Cities with inadequate transportation infrastructure
are served better by liberalization of floor area ratios,
which lead to more efficient and intense exploitation of
land, albeit at the cost of achieving higher density.
INSTITUTIONAL AND MARKET REFORM
Mortgage Markets
For the housing sector to function well over a long period
of time, it is necessary to have a vigorous market-oriented
system for financing the construction and purchases of new
and existing housing. Well-functioning mortgage markets,
in addition to their positive effects on the development of
the real estate market, may also have a critical impact on
the functioning of the banking sector and the financial
industry as a whole. For example, for banks to issue loans
as complicated as mortgage loans, they need to develop
critical capabilities and expertise in product design, credit
analysis, and risk management. In addition, offering
mortgage loans would attract increased savings and
investments from which both financial and non-financial
sectors would benefit. Indeed, mortgage market development
is likely to be a key factor in overall financial market
development. As pointed out by Jaffee and Renaud (1997),
an efficient mortgage market will act as a positive externality
for other capital markets, creating pressure for higher
efficiency in these markets. On the other hand, a poorly
functioning mortgage market is likely to pollute other
financial markets with its inefficiency. A combination of
economic and social factors, such as high domestic savings
rates, particularly after accounting for mattress savings
 PublicPrivate Partnerships Today 107

Box 5.2.2
Private Land Development in Lucknow
Bhavin Kothari

Partnerships for urban development in general and for urban infrastructure and land development in particular have become
increasingly popular, as an alternative arrangement to direct provision by local authorities (Payne 1998). According to the Centre
for Monitoring Indian Economy in 19989 alone 129 partnerships were forged in the various sectors of the Indian economy. Since
1994 UNDP under its Public Private Partnerships for the Urban Environment (PPPUE) programme, has tried to initiate action
by creating new enterprises, owned jointly by public authorities and private companies to deliver reliable, affordable, profitable, eco-
efficient urban infrastructure services. Partnership arrangements seem to have become the panacea for all urban issues.
The real estate contributes approx 10 per cent of Indias GDP. If the parallel economy is recognized it should form a much
higher share of the GDP of the country. We have now recognized real estate as an important aspect and means to ensure economic
growth and investment. But systematic overhaul of policy, law, and rules governing real estate, zoning, town planning, building
rules still need to be addressed. The entry of the private sector in a significant and organized way, even with the current constraints,
is worth mentioning. Private parties are, for the first time outside Delhi and Gurgaon, showing an appetite for large projects. The
shortages built up over the last several decades are quite large and despite the liberalization of housing finance over the last 2
decades, these shortages are only now beginning to be addressed. Organizations both in the public and the private sector are
increasingly looking towards converting their real estate assets such as vacant land holdings and other surplus real estate into revenue
earners or profit centres. Research shows that a crore of investment in the real estate sector generate 750 man-years of employment.
Synergy between public and private sector participation is a winwin situation for all. The National Housing and Habitat Policy
1998 envisages a shift in the governments role from a builder to an enabler, with the government committed to removing barriers
like access to land, finance, and technology, and forging strong to accelerate the pace of house construction mainly for the
disadvantaged sections. NRIs are permitted to invest up to 100 per cent in the housing and real estate development projects.

NEED FOR A PUBLICPRIVATE PARTNERSHIP MODEL OF LAND DEVELOPMENT

The public sector is faced with constraints of lack of expertise, and lack of commitment to quality besides the budgetary
constraints. The private sector faces difficulties in assembling large chunks of contiguous land, inordinate delays and problems
in approvals from the local authority, development control regulations, non-coordination with the local authorities who are
charged with the provision of off-site infrastructure. There has always been a problem in getting institutional finance for the
private sector because housing is not declared as an industry. Hence, PPPs, when correctly structured even with the current policy
and administrative constraints, can help to lead to better results. To cover all cities and town with basic infrastructure, the Rakesh
Mohan Committee set up by the Government of India had estimated that urban India would need at least Rs 793 billion
between 19962001. Partnerships assume strategic dimension since they aim to tackle an important issue, policy or problem,
which extends beyond the capabilities of a single individual and organization.
The PPP models used in Gurgaon in Haryana and Lucknow in Uttar Pradesh for land developments have proved to be
successful. In these PPP models the private sector was principally responsible for all on-site development like provisions of internal
infrastructure, social and public amenities, plots, houses of desired sizes for different income groups, whereas the public sector
was to make suitable provisions for the off-site infrastructure in a prespecified time frame, as well as act as a sanctioning, facilitating,
and controlling authority. In case of Haryana the (undeveloped) land was to be acquired by the private developer, whereas in
the case of Lucknow the land for development was provided by the public sector. Both these PPP models for the land
development were self-sustaining and commercially viable.

PPP IN LUCKNOW
Lucknow, the capital city of Uttar Pradesh, is ranked 10th amongst the million plus urban centres in India. The city has
experienced high growth in population. To satisfy the housing demand of the city the public agencies like Lucknow Development
Authority (LDA), Uttar Pradesh Housing Development Board (UPHDB), Uttar Pradesh Avaas Vikaas have been engaged in this
process of housing supply.
In 1985, the High Court ruled that a public agency can acquire the land and start physical development on-site only after
awarding 80 per cent of the decided compensation to the farmers. This was to ensure that such agencies did not delay payments
to farmers and others from whom the land was acquired. Thus there was a sudden change in the process of acquiring land because
this judgement made it compulsory for LDA to financially strengthen their base before starting any new development scheme.
Given the financial weakness of the agencies, bringing in the private sector was, therefore, necessary even to acquire land. First
it happened along the Lucknow-Kanpur Road.
To support the public sector agencies the UP State Housing Policy, enacted by the UP State Government in 1987, as a
government order, No. 379 under Section-5, of this notification, empowered 20 development authorities throughout the state
The author acknowledges the assistance of Dinesh Gajjar and inspirations from Ushaben and Dhvani. The views expressed in this paper are
those of the author and do not represent any other individuals or organization.
108 India Infrastructure Report 2004

to provide land on licence basis to the reputed private developers within the country engaged in the field of land development.
Lucknow was the first city to implement this policy of the government.
LDA invited the private developers to come forward and negotiate with the development authority to initiate the land
development in potential urban areas of south lucknow, along the Kanpur and Rai Bareli road. The entire scheme was called
the Kanpur Road Extension Scheme.
LDA has played a major role by developing 6500 acres of land. UPHDB has developed about 2612 acres of land in the
past 30 years. LDA and UPHDB was instrumental in adding housing stock of the city till the 1990s and have added 70,000
and 43,500 dwelling units, respectively. 2056 acres of land was decided to be developed with the help of the private sector,
out of which 811 acres of land was allotted to the private developers like Ansals, Eldeco, and Unitech as part of the Kanpur
Road Extension Scheme. M/s Ansals Housing and Construction Ltd was allotted about 432.25 acres land for development on
Kanpur Road. M/s Eldeco Housing and Construction Ltd was allotted about 155 acres on Rai Bareli Road. M/s Unitech Housing
and Construction Ltd was given 224 acres of land for development on Rai Bareli Road as part of the Sharda Nagar Yojna.

SALIENT FEATURES OF PPP MODEL IN LUCKNOW

The (undeveloped) land (Khand) is provided to private developers by the development authority and developer has to
pay the cost of this land to LDA in specific time frame.
10 per cent of the cost of land and External Development Charges (EDC) is to be paid within 45 days from the date
of issue of the licence.
15 per cent of the land cost is to be paid in 90 days from the date of issue of licence.
The remaining 75 per cent of the land cost is to be paid in 6 half-yearly equal installments.
The private developer reimburses the cost of external services like trunk infrastructure connection points to the development
authority.
Internal development of physical and social infrastructure is to be done by the developer as per the development control
norms of LDA.
Out of the total area available with the developer 55 per cent will be for residential development and 45 per cent for
the internal infrastructure and social facilities. Out of the total residential area 70 per cent should be as group housing and up
to 30 per cent could be plotted development.
40 per cent of the total number of constructed units should be of economically weaker section (EWS) category, with a
built up area of 30 sq m. Developer is to be reimbursed at the predetermined rate for construction of EWS houses through LDA
and HUDCO.
The developer is free to sell residential area other than those in the EWS category.
The licence granted to the developer is valid for a period of 3 years. Extension may be granted for the genuine case.
Initially the developer maintains the colony for the period decided upon by the LDA but eventually it is to be done by
the respective public departments.

SELECTION CRITERIA FOR THE DEVELOPER AS A PARTNER

The private developer has to develop a minimum of 100 acres of land allotted by the LDA. This criterion was later reduced
to 50 acres.
The private partner should be a firm registered under the Indian Companies Act as a private company and should provide
documents regarding its financial/technical and administrative capability.
The private land developer should have experience of developing at least 25 acres of land.
The details of the schemes and documents provided by the private developer are scrutinized by the concerned departments
of the development authority and the private developer has to deposit 50 per cent of the bank guarantee of the estimated cost
of internal development within 30 days after the sanctioning of the scheme.
South City
The South City Project was established as part of the Sharda Nagar Yojna of the Kanpur Road Extension Scheme on the
LucknowRai Bareli highway. M/s Unitech Ltd was the developer for this project with 224 acres of land finally allotted by LDA.

Land Use Statement of South City Scheme

Land Use Area in Acres

Residential 125.74
Commercial 6.224
Community Facilities 19.035
Recreational Spaces 20.115
Roads 52.88
Total 224.00
 PublicPrivate Partnerships Today 109

Details of Plotted Development in South City Scheme

Plot Area in Sq m No. of Plots

142 99
188 659
293 357
418 317
Total 2686

Details of Group Housing in South City Scheme

Built up area in Sq m No. of Units

30 1254
5075 100
75100 239
100150 80
>150 131
Total 1804

Pricing of the Scheme

The launching price of the plots in 1998 was between Rs 340 to 370 per sq m. The construction cost at that time was about
Rs 200 per sq ft. In South City majority of the houses have been provided with 142 sq m to 188 sq m plots with the construction
of 5060 per cent of different types. Thus the houses in South City are available from Rs 1 lakh to the maximum of Rs 16
lakhs. The predominant range of houses are between Rs 37 lakhs. The EWS houses were being sold at Rs 65,000 in 1997.
Rs 50 per month maintenance charges are taken as from group housing occupants and Rs 75 per month from the serviced plot
owners in the South City Scheme.

Cost Break Up for the South City Scheme

Component Cost in million Rs

Land 87.5
Internal Development 107.5
Construction 218.0
Overheads 87.0
Total Cost of the Project 500.0

Marketing Strategy of the Private Developer

Initially the developer sells 25 per cent of the stock at the launching price, which is comparatively less. Then the firm stops
selling the units for a considerable time by which time the prices go high. Then the developer brings the stock in the market
and disposes of it at the high market rate, to generate the surplus.
SWOT Analysis of PPP Models for Land Development with reference to the case study of Lucknow reveals:
Strengths
Efficient supply of serviced land and houses to the different income groups;
Good quality houses with excellent social and public amenities;
Guided development takes place even in the peripheral areas to develop new town culture;
Proper marketing, management, and maintenance of the projects;
These models are self sufficient and commercially-viable;
Risk reduces since the portfolio is diversified;
Partners and the stakeholders are the same;
Quality development takes place because of professional approach and expertise of the private sector; and
Control on land speculation because of public sector involvement.
Weaknesses
Project may suffer in case of conflict of interest between partners;
Beneficiaries may suffer in case of delay in delivering the goods in time (In case of Lucknow, off-site infrastructure came
much later than the completion of the Sharda Nagar Scheme;
Local authority takes a long time in approving project and plans;
The development costs collected by the authority is too little to support the provision of infrastructure;
110 India Infrastructure Report 2004

Coordination with local authority for provision of off-site external infrastructure;

Sector is not recognized as an industry so continue to await institutional and bank finance;
Constraints to development of land are many. The city areas are constrained by archaic zoning, building, and floor space
index (FSI) regulations, so that development takes place mainly in the peripheral areas;
Prices of undeveloped land are highly distorted, with land related policies like rent control act, tenancy law, urban land
ceiling, and regulation act, stamp duty act, being major factors, besides low FSIs; and
Existing land holdings and title clearance is a problem, so is acquiring contiguous land for major projects.

and cash holdings, the high price to income ratios, and
a general cultural and social predisposition towards home
ownership seem to suggest that the essential core of the
problem in the development of a vibrant housing market
lies in the provision of housing finance services that can
allocate untapped resources, mitigate regional distortions,
and assist in consumption smoothening for households
over long periods. The creation of a functioning mortgage
market will release these moribund savings, stimulate pent
up demand, and move the economy to a higher equilibrium.
MORTGAGE INSURANCE
In an environment fraught with the difficulty of risk
assessment, the widespread promotion of mortgage
insurance might be necessary for boosting lending. Mortgage
insurance is a contract that promises to compensate a
creditor (a bank) in the case of an insolvent debtor. The
systematic component of risk is much higher for mortgage
insurance than for other types of insurance contracts.
Indeed, with proper demographic and geographic
diversification it is possible to reduce risk to a minimum
with other types of insurance contracts. However, both the
default and pre-payment risks of mortgage loans greatly
depend on macroeconomic variables, such as the change
of real estate prices, interest rates, average income, and
unemployment rate. The advantage of the introduction of
a mortgage insurance scheme is that it will boost the
number of mortgages and consequently have an indirect
impact on the real housing sector. Urosevic et al. (2003),
study the costs and impact of a government-sponsored
mortgage insurance system in transition and developing
economies in which mortgage markets either fail to
materialize or are underdeveloped. They calculate the
mortgage insurance premium that such an agency would
fairly charge, and its profits and losses. They also assess
the beneficial impact on the economy of developing mortgage
insurance, and, by extension, of mortgage markets. While
in developed economies the mortgage insurance premium
is in the range of 0.3 to 0.5 per cent, of the outstanding
loan, the costs in developing countries would be a multiple
of that, that is, 1 to 2 per cent of the mortgage amount.
However, the estimated impact on employment will be
significant because of the pent-up demand for new housing
as well as for additions, improvements, and repairs.
Secondary Mortgage Markets
For complete housing finance markets with depth, it is also
necessary to create secondary mortgage markets. By
insuring, packaging, and selling the original mortgages in
the form of Mortgage Backed Securities, and in good time
their related derivatives to outside investors (foreign or
domestic), originators can free up their capital and
simultaneously reduce the risk of mortgage origination in
order to offer fresh issuance of mortgages. The creation
and development of mortgage insurance/secondary market
institutions, dominated by state establishments, but with
economic space afforded to private players, particularly in
the commercial real estate mortgage business would play
a key role in generating investor confidence in mortgage
products.
Corporatization is Necessary
Generally speaking, investment in real estate comes in
various forms: sole proprietorships, partnerships of different
kinds, and corporations with limited liability. In many
countries there are also Real Estate Investment Trusts
(REITs). The promotion of REITs, entities that own,
manage, and operate income-producing portfolios of real
estate assets would have multiple benefits. Investing in
REIT stock is akin to investing in a mutual fund. Whereas
in the latter case an investor has a claim on underlying
company stocks, in the case of REITs it is a claim on
underlying properties. Development of REITs would
professionalize and corporatize real estate operations and
management. It would also give an opportunity to individual
and institutional investors to add real estate to their
portfolio, a problematic thing under usual circumstances
because of the lumpiness of the assets and the low liquidity.
In most countries, REITs are not subject to taxation at
the corporate level and 90 per cent of the income is
distributed as a dividend payout. There are various
regulations regarding share of income from real estate
holdings, as well as restrictions on ownership concentration,
and like a mutual fund a REIT can be quoted at a discount

or a premium to the underlying assets, that is, the market
capitalization and the net asset value are different. In the
US, for example, REIT stocks have become a very popular
investment alternative in recent years, particularly in the
wake of the dotcom collapse.
Home Equity Conversion Products
The development of home equity conversion products and
reverse mortgages might also provide benefits to the
economy. India has substantial wealth locked up in illiquid
housing stock. The increasing accumulation of wealth
locked up in illiquid housing stock around the world has
generated interest in new financing instruments that would
enable consumers and investors to tap this source of funds
for more productive usage. Real estate finance has come
up with ingenious instruments that can operationalize this
demand for home equity conversion products. One of
these financial innovations has been the development of
reverse mortgages for those who may have paid off their
regular mortgages and now own the home. In the US and
other developed economies, reverse mortgages enable those
elderly citizens who are house-rich and cash-poor to convert
the equity in their home into either a lump sum amount
or into a regular income stream. Since home equity is
distributed relatively more evenly than financial assets,
tapping this source of funds increases the lifetime
consumption of people who have low incomes, but who
happen to own a house. This tends to ameliorate income
inequality at the expense of wealth. The attractiveness of
these products for large developing countries like India is
great because a large proportion of households are in the
low-income, but home-owning category. From a pure
economic viewpoint, there are welfare and efficiency gains
to be had from loans that tap into home equity and boost
consumption. More complete markets are thus created,
and there is a smoothening of lifetime and inter-generational
consumption through re-injection of locked equity into the
economy.
Reverse Mortgages
In reverse mortgages, once a home owner qualifies, he is
offered a loan either as a stream of regular monthly
instalments, as a lump sum cash amount, or as a line of
credit. Unlike in regular mortgages, where borrowers make
monthly payments, in reverse mortgages it is the lenders
who make monthly payments to the borrowers. All the
monthly instalments and the accumulated interest become
due when the borrower moves, sells his home or dies. The
monthly payouts can be for a fixed term, or, if an insurance
annuity is part of the deal, for as long as the borrower lives.
The monthly payments and the loan amount depend on
PublicPrivate Partnerships Today 111
the age of the borrower, the market value of the house,
assumptions regarding house appreciation rate in the future,
and the interest rate.
Between 1991 and 2001, the number of households who
own their dwellings rose to 166 million from 130 million.
In the last few years, tax concessions for house building
and significant decline in interest rates have given a fillip
to the housing sector. Increase in life expectancy and the
existence of a large number of households that are wealthy
(through ownership of their homes) but poor in terms of
current income, point to a high potential for home equity-
based products in India. The major advantages for borrowers
in a reverse mortgage include: a) no income requirements
for borrowing, b) no payments to the lender as the repayment
of loan is only on maturity, and c) no possibility of owing
more than the value of the home at the time of maturity,
even if the accumulated principal and interest exceed it,
since it is a non-recourse loan.
It is estimated that in most industrialized countries
more than 10 per cent of the total number of households
could take advantage of reverse mortgage loans. However,
the actual market is considerably smaller in comparison
to the size of the potential market. The problems with
reverse mortgages have come from both the demand, as
well as the supply side. On the borrowers side, complications
arise due to: a) the contradiction between the desire to
maximize lifetime consumption and their wish to bequeath
homes to their children, b) uncertainty about future
preferences, costs and benefits, and c) the high level of risk
aversion regarding the primary residence. On the supply
side, the lenders face issues relating to upkeep and
maintenance of the houses, since the borrowers lose equity
in them. Optimal pricing of reverse mortgages is extremely
difficult because they involve a number of uncertainties,
such as future value of houses, life expectancy, and the
usual interest rate risks. The transaction costs, due to the
complex nature of these loans and the institutional and
regulatory complications are also high. These further reduce
the market size. One way of dealing with inter-generational
issues is to develop home equity conversion mortgages for
all households, and not just for the elderly. Inter-generational
contracts and significantly lower loan to value ratios might
mitigate some of the problems.
Equity Participation
Equity financing in housing can help solve a lot of financial
bottlenecks, such as the issue of affordability for younger
households, income enhancement for those who are willing
to forego home equity and diversification of investment
portfolios for lenders. Shared partnerships in housing,
where equity, and, hence, any future appreciation is shared
with the lending institution, reduce the cost of home
112 India Infrastructure Report 2004
owning, both in terms of the down-payment, as well as the
monthly instalment, while the borrower/home owner enjoys
the same housing services as he would with a higher equity
in the home. The mistakes made in developed countries
should be taken into account in the contract design and
particular care should be taken to promote an institutional
and regulatory structure that supports a fair pricing
mechanism. In India where a large proportion of housing
wealth sits idle, home equity conversion products would
create a more active housing market.
INFORMATION AND RESEARCH
Both serious academic research and informed business
activity will be enhanced by reliable collection of data
relating to housing and commercial real estate. Housing
data, including prices, volumes of existing and new housing
transactions, housing starts, vacancy rates, and household
formation rates, as well as other demographic data,
segmented by metros, states, and at the national level need
to be collected frequently and in a reliable manner by local
and central authorities and disseminated widely. Real estate
commercial data would be more or less the exclusive
domain of the private sector.
Use of IT is Vital
Here India has an opportunity of leapfrogging ahead of
a number of other countries by harnessing its comparative
advantage in information technology. In some of the more
developed countries online databases of different kinds of
real estate (office, retail, and industrial/warehouse) with
data on city-wise vacancy rates, capitalization rates, the
local economic situation, job and household creation help
firms, investors, and businessmen make informed choices.
The Discipline
Links with urban planning and regional economics, on the
one hand, and finance and macroeconomics on the other
would go a long way in a better understanding of the
economy, its monitoring, regulation, management, and
forecasting. It would also promote appraisal and valuation
techniques. In India, provision of housing credit may be
a supply side issue since banks cannot properly evaluate
lending risks in the absence of development of credit and
risk assessment systems, and databases on credit benchmarks
and credit scoring. It is vital to develop these risk-
management systems on the basis of sound data and
proper, widely available techniques. All these steps will
promote analyses and research that could inform domestic
or foreign investors to evaluate markets and carry out risk
assessment for purposes of property development and
investment. The establishment of the discipline of real
estate economics would help in the dissemination of a
common language of discourse and promote standardized
procedures, both necessary for national market development.
AFFORDABLE HOUSING PROGRAMME
In the Indian context, a countrywide affordable housing
programme is important above all else for reasons of social
justice. However, due to its potential scale, externalities,
and hopefully its entry-level, stepping-stone nature, as
mentioned before in the case of Singapore, the programme
might end up having a sizeable positive impact on the
economy and society. For the urban segment of the
programme, urban planning commensurate with
transportation and labour market needs should be part of
the scheme. In addition to the synergy created by the
interaction of the public and private sectors in the upward
mobility model, other joint publicprivate initiatives,
involving local, state and central governments are required
for proper implementation and promotion of affordable
housing. The joint privatepublicnon-profit organization
initiatives are needed at the local urban level in order to:
promote new zoning ordinances and floor space
indices in such a way that it encourages supply of affordable
housing through an integrated incentive structure for
developers;
encourage a holistic approach that bundles together
new infrastructure projects with affordable housing;
coordinate and to lobby for more funding from state
and central governments, as well as for expansion of tax
credits and subsidies;
link some purely commercial developments with
affordable housing projects by stressing the long-term
benefits to firms; and
modify zoning codes to promote special low cost
affordable high-rises, that can simultaneously tackle issues
of efficient land usage, as well as affordability.
Unlike in the developed countries, where affordable
housing policy deals with both demand and supply side
issues, in the Indian scenario it is primarily a question of
boosting supply, that is, creating new housing. Although
the government needs to play the lead role, the problem,
as everywhere else, has to be attacked by all branches of
local and central governance, and business, and the real
estate community.
SUMMING UP
Real estate markets are fraught with problems of information
asymmetry, moral hazard, liquidity, and heterogeneity.

Market failures are, therefore, common and state
intervention is imperative at many levels to ensure fair
economic outcomes. Our assessment is that the share of
the real estate finance sector, as well as that of the cluster
of real-estate-related industries in Indias GDP is
significantly less than corresponding shares in market-
oriented economies. For example, total outstanding
mortgages are on an average about 40 per cent of GDP
for countries of the European Union, the US, and Japan,
whereas it is a relatively new activity in India. The recently
concluded first ever survey of household amenities and
assets by the Census of India has thrown up statistics that
clearly point to the immense potential that the sector
offers for growth. There are only 179 million houses for
192 million families in the country. There is thus a
significant gap of 13 million in availability of dwellings.
The situation is in fact worse since about 10 per cent of
the dwellings are vacant, perhaps because of the archaic
Rent Control Act. Close to 50 per cent of the households
live in non-permanent constructions. About two in every
5 houses are 1-room residences. About one in every 5
houses has a concrete roof and only about a third have
cement floors. About two-thirds of the residences do not
get water at home and just over 50 per cent of houses
have electricity connection (though some of them may not
be receiving any electricity because of the poor state of
the electricity sector!). In short, the assessed gap in
requirement and availability of housing severely
underestimates the real gap if bare minimum standards
for space and amenities are the basis. There is, therefore,
scope and a crying need for action by the government to
improve the situation. Along with appropriate changes in
the laws and the regulatory framework, adequate public
funding for the sector is called for to act as a catalyst for
attracting private capital and management. The value in
exchange for the public resources spent and in terms of
an active PPP would be immense.
In addition to the housing sector, the hotel, retail, and
office real estate sectors are also underdeveloped, relative
to the size of the economy. We, are convinced that the
real estate industry can play the role of a core sector for
decades to come and serve as an engine of growth for the
economy. There are early signs of this already. Housing
activity is witnessing a major boom as a result of low
interest rates and excess liquidity in the economy. The
commercial real estate sector is also booming, partly because
of the expected inflow of business in the software and
business process outsourcing sector, large infrastructure
projects particularly in road and highway construction, and
affordable housing projects such as the Indira Awaas Yojana.
Major new developments are also taking place in mortgage
finance, securitization, and regulations.
PublicPrivate Partnerships Today 113
Yet, there are a number of critical questions that need
to be answered: a) To what extent are supply of housing
credit and demand for housing constrained by the existing
financial system? b) What are the bottlenecks and rigidities
in the existing institutions, norms, and regulations
surrounding land, construction policy, urban planning, and
infrastructure? c) What are the appropriate and optimal
instruments of mortgage design in the Indian context?
d) How can one unlock the illiquid wealth represented in
Indias stock of owned homes? e) What should be the role
of the public sector in both housing and housing finance
markets? f ) What are the costs and benefits underlying the
implicit guarantee that a government supported mortgage
insurance programme would entail? g) How to provide
individuals and others a way to invest in real estate? and
h) How to go about promoting growth in secondary and
tertiary cities in order to moderate congestion and high
costs in major metros?
Answers from China?
Some answers can be found from scrutiny of practices
elsewhere, learning from mistakes and market failures in
other countries and then designing programmes appropriate
for Indian conditions. Since we have a penchant for
comparisons with China, it is worthwhile to note that
although the real estate industry in that country plays a key
role in the ongoing dynamism displayed by the Chinese
economy, haphazard policies, the lopsided growth-at-any-
cost approach, and uneven reform in different sectors of
the economy have given rise to serious concerns and
misgivings. Indeed, all the breakneck activity in the real
estate sector, fuelled by rapid, and at times reckless,
expansion of commercial bank lending to the construction
industry is now raising concerns about a real estate bubble,
high vacancy rates and solvency of some banks. Housing
prices have increased by over 5 per cent between the first
and the second quarters of 20034. Together with a number
of other sectors of the Chinese economy, the real estate
industry also faces some structural pitfalls. To begin with,
the financial sector has not kept pace with the overall
economic reform process, and mortgage activity, bank
supervision, credit assessment capabilities, clarification of
property rights, land markets, and privatization in the
housing sector are all in the initial stages of development.
Critical shortcomings of the existing financial system
include underdevelopment of effective financial
institutions, channels, and instruments to support the
housing industry, and the lack of effective operating
mechanisms to guarantee the smooth flow of such financing.
Historically, after the establishment of the Peoples Republic,
4 ISI Emerging Markets Database.
114 India Infrastructure Report 2004
housing policy envisaged an all-pervasive role for the
public sector. This sustained a planned system and although
it initially did serve to house large numbers of the urban
population, resulted in restricted housing choices, uneven
quality of construction, and low maintenanceissues that
exist till today. Privatization of housing stock belonging
to the state-owned enterprises and housing bureaus is a
major issue confronting reformers, since it is tied up with
the reform of state enterprises as a whole. As these entities
get restructured they will no longer be primary home-
builders, as well as home providers and landlords, a void
that will have to be filled by the private sector5. In India,
the relatively more organic growth of both the real estate
5.3 A PPP FRAMEWORK IN EDUCATION
The Government of India and several state governments
are increasingly looking to PPPs as the mechanism for
implementation of projects and programmes across various
infrastructure sectors including education. Many more
new/refurbished schools are required urgently throughout
the country, to meet the increase in demand. The objectives
sought to be achieved could be the improvement in quality
of education, improvement in infrastructure or better
value for the money spent by the government. PPP could
play a crucial role in opening up a large pool of sustainable
financial resources and bring in private sector innovation
and efficiencies into design, implementation, and
management of education infrastructure and at the same
time ease fiscal pressures of governments.
PROJECTS IN THE EDUCATION SECTOR
The types of projects, which could be taken up for develop-
ment under a PPP framework, could include the following:
1. Construction of new schools and handing over
of entire school operations/maintenance under a BOT
concession, under which the concessionaire would be free
to recruit its own teaching and non-teaching staff and
implement its own O&M plan for the school. This would
cover the methodology of educational instruction, co-
curricular activities, and so on. The curriculum would be
as specified by the government from time to time. However,
the following conditions could be stipulated:
5
Thus, in another example of a positive externality, housing
reform will improve the stability of Chinas ailing banking system by
making state-owned enterprises more profitable.
sector and the financial sector, democratic and participatory
processes of urban planning, and a long history of public
and private activity in and ownership of real estate bode
well for sound future development and a sustained PPP
for value creation.
We have attempted to answer some of the questions
posed above by suggesting development of institutions and
markets for home equity conversion products and real
estate investment trusts among other reforms and measures.
We believe the whole gamut of policies can lead to significant
enhancement of overall welfare, increase geographical
mobility, reduce regional disparities, increase efficiency,
and give a boost to the economy.
Sanjay Agrawal
admissions only from a pre-determined area;
government fee would be charged;
level of Government funding would be as per scale
for other government schools.
2. Handing over entire school operations/maintenance
of newly constructed schools under ROMT/OMT (Renovate
Operate Maintain and Transfer/Operate Maintain and
Transfer) concessions.
3. Upgradation and modernization of existing schools
(either with or without transfer of teaching/non-teaching
staff under OMT Concessions.
4. Upgradation of quality of education under
management contracts.
5. Outsourcing of servicesmidday meal scheme,
IT services, housekeeping services, building/facilities
maintenance, teaching services (general/specialized).
6. Extending standards to learning targets/ education
performance which could be assessed by surveys (for
example; measuring improvement in attitudes to using
technology in learning), attendance levels, educational
attainment, including performance of students at national
level tests for example, Class 10/Class 12 examination. It
could also be done by independent third party evaluation
of a students performance on the basis of surprise tests.
However, education outcomes have the bearing on factors
like quality of teaching, management of the school, and
the nature of the schools intake. Therefore, the
concessionaires risk relating to education outcomes should
be proportionate to the influence he could have on the
above factors.
Producing an effective output specification involves the
art of defining the end without specifying the means. This

remains a fundamental challenge. The option of subsidizing
purely private schools and educational institutions, and
hoping that tests student performance and reputational
effects alone would suffice has proven problematic.
Therefore, a more direct role of the state in education
becomes necessary in most contexts. (Editors Note)
STANDARDS MEASURING LEVEL OF EDUCATIONAL
PERFORMANCE
Standards measurement has never been easy, education
being an experience good. Nevertheless, standards
measurement would have to:
reflect the actual requirement of school users;
be clear, concise, and unambiguous;
give the potential bidders sufficient information to
decide and cost the facilities and services they will offer;
take account of the need for compliance with legal
or other statutory requirements and policies;
specify any constraints, which are essential to defining
a deliverable. They should be distinguished between
mandatory and other constraints;
identify those service areas which are critical to the
availability and performance of the school and which,
therefore, will be given most weight in the payment structure
and performance monitoring.
The range of high-level outputs required in a schools PPP
project, would typically cover some or all of the following:
demolition/redevelopment of existing buildings;
provision of new/altered forms of access to the
school (for example, roads, disabled access);
provision of school playing fields, sports halls, car
park, or other external facilities;
maintenance and service standards for building,
installations and related assets, grounds and recreational
facilities, furniture, and equipment;
energy management;
5.4 PPP FRAMEWORKS FOR TOURISM INFRASTRUCTURE: USING
THE ROMT CONCESSION
Most state governments, have made investments for the
development of hospitality infrastructure both for the use
of its officials as well as for the general public. These
include rest houses and inspection bungalows (managed
usually by the Public Works Departments), guesthouses,
Yatri Niwases, and hotels (usually managed by the state level
PublicPrivate Partnerships Today 115
cleaning and waste management service;
care taking/site supervisory services;
security and safety;
catering, including provision of midday meals;
information technology requirements.
Other support activities, which could also be delivered
under these frameworks, could include:
pupil transport;
reception and administration services;
printing, photocopying, and stationery services;
examination administration;
library services; and
other specific technical support services.
PAYMENT MECHANISMS
A variety of payment mechanisms could be used across
different project types in the education sector based on
the following principal parameters:
availability of services;
performance standards; and
usage.
These could be structured as:
fixed periodical payments depending upon the capital
costs incurred for creating school assets and facilities and
cost of subsequent O&M;
payments based upon performance against availability,
usage, and education performance targets;
fixed payments per student depending upon the
targets achieved;
fixed lump sum periodical payment plus fixed
payment per student.
The PPP approach can go a long way in developing
education infrastructure in the country. However, political
commitment would be the key in programme implementation.
Ashvini Parashar and Cherian Thomas
tourism development corporations, and which are more
up-market properties). Since these facilities have been
created either for use by employees or as low cost alternatives
for tourists, the user fees recovered are inadequate to cover
operating costs let alone service capital investments.
Moreover, their management departmentally leaves much
116 India Infrastructure Report 2004
to be desired in terms of the quality of service, so that in
their present status, high charges or rentals would not
be feasible. Very high costs emanating from inefficiencies
in management are an additional aspect. With increasing
fiscal pressures on state governments over the last few
years, the subsidies required for the sustainable O&M of
these properties have been declining steeply, as a result of
which many of these are in a poor state of maintenance
and need significant repair and upgradation work. These
factors coupled with inadequate managerial skills and
increased competition from private hotel operators have
led to a general decline in the utility of most such facilities.
Interestingly many of these properties are in places
of tourist interest or prime urban locations. Several
governments are, therefore, looking at options to unlock
the commercial value of these properties without changing
the purpose for which these were constructed in the first
place. For larger properties owned/operated by the India
Tourism Development Corporation (ITDC), the Government
of India has proceeded with the divestment option. Some
of the state governments have given out properties on
leases or management contracts. The process, however, has
not been without its share of controversies and scrutiny
by the industry, academia, and media. In case of divestment,
the major controversieshave centred around the valuation
of the properties/underlying business. In particular, the
case of Hotel Centaur in Mumbai where the original buyer
(the successful bidder) paid Rs 83 crore to the government,
but within a period of 4 months sold it to another private
investor for Rs 115 crore, a return on investment of 38.5
per cent attracted considerable media attention. While
leasing is a less complex alternative, for certain reasons,
several state governments find it difficult to offer
mortgageable rights on properties under a lease, without
which debt financing becomes difficult to achieve.
THE ROMT OPTION
It is in this context that the ROMT concession structure
was developed by iDeCK for giving out such properties
to private investors, while meeting the objectives of all
stakeholders. For the government it ensures that the property
gets re-developed/renovated to a pre-specified standard, is
sustainably operated and maintained, meets the needs of
users and unlocks commercial value in that concession
payments are made over the period of the concession,
without any transfer of title interest in the property. The
private investor obtains exclusive rights to commercially
exploit the property for a pre-specified period. Lenders
rights are recognized under the concession. Lenders can
also substitute the concessionaire in the event of financial
default. The structure is particularly suitable for smaller
properties and has been successfully used for hotels in
Karnataka and PWD rest houses in Kerala.
DEVELOPMENT PROCESS
In developing the project it was ab initio agreed with the
governments that the basic objective in development of
these properties would be to offer better facilities to users
since tourism development was the original purpose for
their creation in the first place. The properties would,
therefore, have to be developed only as hotels. As a natural
corollary, it was considered appropriate to evaluate the
value of the properties and the likely returns to the
government through the process of selection of the private
investor through a competitive bidding process on the
basis of their underlying business potential as hotels. This
approach circumvented a major obstacle encountered earlier
in the valuation of properties which was simply based on
the perceived real estate value of these properties as a
result of which returns expected by the governments were
unrealistic and led to lack of success in bidding them out.
The period of concession offered was arrived at after a
limited market study that was undertaken for this purpose.
iDeCK developed a proxy financial model, taking into
account considerations of a potential investor. This
incorporated assumptions regarding operating parameters,
revenues, and O&M costs, as well as the upfront cost of
renovation and re-development. Based on the targeted
equity return expectations, the possible payments that
could be made to the government out of the projected cash
flows were estimated. This was translated into an upfront
and annual fixed payment to be stipulated in the bidding
documents as mandatory payments by all bidders, with
variable payments to be quoted by each bidder then being
stipulated as the main bid evaluation parameter.
SELECTION OF THE PRIVATE INVESTOR
An open, competitive, 2-stage bidding process, comprising
qualification and proposal stages was used to select the
private investor. Quantifiable and objective qualification
criteria relating to experience and financial capability were
used to qualify interested parties. To improve competition,
consortia comprising an experienced hotel operator and
a financially capable investor were also deemed eligible to
participate in the bidding. In order to generate investor
interest, iDeCK embarked on an active process of
marketingthrough letters, e-mails, telephonic discussions
and visits to potential investors in order to encourage them
to participate in the bidding process.
A combination of technical and financial parameters
were used to evaluate the proposals. Objective technical

criteria (proposed upgradation level, star category, minimum
concession period quoted, bidder status6, etc.) were used,
with the scoring pattern for these being clearly defined
in the request for proposal (RFP) document. Since the
properties were small and with time the number of those
offered would increase significantly, a simple financial
parameter was developedpayments were offered, rather
than any profit/revenue linked parameter, the monitoring
of which would otherwise, require a high degree of
administrative effort. The payment structure design
incorporates a certain mandatory minimum level of upfront
and fixed payments (set out in the bidding document) over
and above which the bidder has to quote a variable payment.
The present value of payments offered, with the discount
factor set out upfront was used as the financial evaluation
parameter.
Features of the Concession
A draft concession agreement was circulated to bidders as
part of the RFP document. As a result, all issues were
clarified at the pre-bid meetings, with little or no
negotiations after selection of the concessionaire. The key
features of the concession structure are set out below:
The concession (and, therefore, the concession
agreement) would be for a duration of 20 to 30 years,
depending on the minimum selected concession period
thrown up by the bidding process.
The concessionaire would have to implement the project
and make available the facilities undertaken to be provided
in the bid, within a stipulated period from the date of
signing the concession agreement. For this, the investor
would have to submit appropriate performance security.
The concessionaire would be at liberty to add new
facilities and construct additional rooms as deemed fit,
subject to adherence to applicable laws and obtaining
applicable statutory permissions. Where warranted, he
could demolish the old construction, carry out new
construction, and renovate the existing building structures,
subject to obtaining applicable statutory permissions.
However, prior to carrying out any demolition, written
permission of the government would need to be obtained,
which permission would not be unreasonably withheld.
The concession payments that is, the sum of the fixed
payment and variable payment would have to be made in
advance annually, on the anniversary of signing of the
concession agreement7. In the case of the Kerala PWD
6 For the properties in Kerala, proposals from non-resident
Keralites were given a small additional weightage.
7 If the selected concession period is 28 years, then 28 annual
payments would be made by the concessionaire. The first annual
payment would be made at the time of the signing of the concession
agreement and the last concession payment would be made at the
beginning of the 28th year.
PublicPrivate Partnerships Today 117
properties, the concessionaire would have to provide a
pre-specified number of rooms, redeveloped to specified
standards, for use by persons authorized by PWD, during
the concession period. The concessionaire would not be
entitled to collect room rent/tariffs from such users.
However, the occupants would have to pay for all other
services and facilities used by them at the normal
rates prescribed by the concessionaire. According to the
terms the concession, lenders have the right to substitute
an erring concessionaire in consultation with the
government.
At the end of the concession period the redeveloped
property would be handed back to the government. The
government would have the option of either renewing the
concession on mutually agreed terms or rebidding the
concession. Since there is no transfer of land or structures
to the private investor under the concession, the real estate
value would continue to remain at all times with the
government.
RESULTS
So far 4 rounds of bidding for 31 properties have been
concluded. Valid bids have been received for 18 of these
and concession agreements have already been signed for
7 properties, which are in an advanced stage of renovation.
This includes a partially constructed beach side property
at Malpe in Karnataka, the construction of which was held
up for nearly 2 decades. A summary of the outcomes is
set out in the Table 5.4.1.
Since the properties offered in each round are a mix
of good and bad (from the point of view of location and
commercial attractiveness), bids have not come in for
some of them. Further, in some cases, bidders have found
the level of fixed payments a little high. All in all, though,
the ROMT concession structure appears to have been well
understood and accepted by the market, with increased
responses at each new round of bidding. The entire process
can be completed in a matter of 45 months depending
on the speed of response of the government at various
stages.
For governments, the ROMT concession structure has
opened up a new mechanism for developing tourism
infrastructure while at the same time providing some
financial returns. In Karnataka, the upfront payments are
being set apart in a dedicated fund to be utilized for
funding a voluntary retirement scheme. Around 50 more
properties in Karnataka, Kerala, and Uttaranchal are now
on the anvil and would be on offer soon. Most importantly,
however, this structure would help utlilize and sweat
government assets productively, which otherwise would
only fall into progressive disuse and deterioration.
118 India Infrastructure Report 2004

Table 5.4.1
Summary of Outcomes Post-ROMT Concessions in Tourism

Government agency Properties No. of No. of Properties Status

applications qualifying for which
received applicants valid bids
received
Department of Tourism, Karnataka 2 heritage hotels 12 2 2 Government decided to give
in Karnataka properties to a state-owned
undertaking.
Public Works Department, 9 PWD rest 20 8 6 Concession agreements
Government of Kerala houses across signed for 3 rest houses.
the state One bidder for 3 properties
backed out resulting in
forfeiture of bid security.
Karnataka State Tourism 8 properties at 21 14 4 Concession agreements
Development Corporation various locations signed for 4 hotels.
Karnataka State Tourism 12 properties at 36 29 6 Process concluded.
Development Corporation various locations Concession agreements to be signed.

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