ASSIGNMENT

ON
“MANAGEMENT OF PUBLIC PRIVATE
PARTERNIPSHIP”

(PGPM – 42)

SUBMITTED TO:

NATIONAL INSTITUTE OF CONTRUCTION

MANAGEMENT
& RESEARCH (NICMAR) PUNE.

SCHOOL OF DISTANCE EDUCATION

(SODE)

By
SUMIT KUMAR
Reg. no: - 216-09-31-12668-2184
 INDEX

S.NO. DESCRIPTION PAGE NO.

1 Introduction 3–6

2 Different Public Private Participation Schemes 7-8

Parties involved in Public Private Partnership

3 9–12
and their roles

Financial structuring of Public Private

4 13– 19
Partnership Projects

Ideal Scheme for the Infrastructure

5 20–21
Development

6 Conclusion 21

7 Bibliography/ Readings 22
1. Introduction:
The growth of a country is depend open the infrastructure facility of the country. If a

country has no proper road network, no proper Railway network how a country can grow.

To grow interest of the private company to establish a factory, Government should prepare

a good transport facility for his staff & worker and also smooth transportation of raw

material and finish goods. Further to that the arrangements of sufficient electricity also

require very much to attract the entrepreneur. In order to ensure progress of the nation

leading to a bright future, the government must provide these facilities.

But in India, Every year during budget our major amount of fund evoke by the military

department and also our major foreign Money goes to collect the oil (Petrol, Diesel, etc.). So

after that Government has no such fund for development of infrastructure of our

country.Also our country has large road & railway network. So for the country like ours, the

involvement of Private Company to build the infrastructure is very much needed. In the joint

venture project, private company also earn a good amount of money by investing a good

amount of money & as well as Government also gets an infrastructure without any

investment. Common people are also happy, as they are the main party who gets the

benefit of the infrastructure by spendingof some money. This system i.e. joint venture with

the private company with the government is called as Public Private Partnership or PPPor 3P

or P3.

Public Private Partnership means an arrangement between a government / statutory entity

/ government owned entity on one side and a private sector entity on the other, for the

provision of public assets and/or public services, through investments being made and/or

management being undertaken by the private sector entity, for specified period of time,
where there is well defined allocation of risk between the private sector and the public

entity and the private entity receives performance linked payments that conform (or are

benchmarked) to specified and pre-determined performance standards, measurable by the

public entity or its representative.

Essential conditions in the definition are as under:

Arrangement with private sector entity: The asset and/or service under the contractual

arrangement will be provided by the Private Sector entity to the users. An entity that has a

majority non-governmental ownership, i.e., 51 percent or more, is construed as a Private

Sector entity.

Public asset or service for public benefit: The facilities/ services being provided are

traditionally provided by the Government, as a sovereign function, to the people. To better

reflect this intent, two key concepts are elaborated below:

‘Public Services’ are those services that the State is obligated to provide to itscitizens or

where the State has traditionally provided the services to its citizens.

‘Public Asset’ is that asset the use of which is inextricably linked to the delivery of Public

Service, or, those assets that utilize or integrate sovereign assets to deliver Public Services.

Ownership by Government need not necessarily imply that it is a PPP.

Investments being made by and/or management undertaken by the private sector entity:

The arrangement could provide for financial investment and/or non-financial investment by

the private sector; the intent of the arrangement is to harness the private sector efficiency

in the delivery of quality services to the users.

Operations or management for a specified period: The arrangement cannot be in

perpetuity. After a pre-determined time period, the arrangement with the private sector

entity comes to a closure.

Risk sharing with the private sector: Mere outsourcing contracts are not PPPs.

Performance linked payments: The central focus is on performance and not merely

provision of facility or service.

Conformance to performance standards: The focus is on a strong element of service

delivery aspect and compliance to pre-determined and measurable standards to be

specified by the Sponsoring Authority.

The above definition puts forth only the essential conditions for an arrangement to be

designated as a Public Private Partnerships (PPP). In addition to these, some ofthe desirable

conditions or ‘good practices’ for a PPP include the following:

Allocation of risks in an optimal manner to the party best suited to manage the risks.

Private sector entity receives cash flows for their investments in and/or management of the

PPP either through a performance linked fee payment structure from the government

entity and/or through user charges from the consumers of the service provided.

Generally a long term arrangement between the parties but can be shorter term dependent

for instance on the sector or focus of PPP.

Incentive and penalty based structures in the arrangement so as to ensure that the private

sector is benchmarked against service delivery;

Outcomes of the PPP are normally pre-defined as output parameters rather than technical

specifications for assets to be built, though minimum technical specifications might be

identified. Such a structure is expected to leave room for innovation and technology

transfer in project execution / implementation by the private sector entity.

The models where ownership of the underlying asset remains with the public entity during

the contract period and project is transferred back to the public entity after thetermination
contract are the preferred forms of Public Private Partnership models. The final decision on

the form of PPP is a determinant of the Value for Money analysis.

Some of the commonly adopted forms of PPPs include management contracts, build

operate-transfer (BOT) and its variants, build-lease-transfer (BLT), design-build operate-

transfer (DBFOT), operate-maintain-transfer (OMT), etc.

Build-own-operate (BOO) model is normally not the supported form of Public Private

Partnership in view of the finite resources of the Government and complexities in imposing

penalties in the event of non-performance and estimation of value of underlying assets in

the event of early termination. Government of India does not recognise service contracts,

Engineering-Procurement-Construction (EPC) contracts and divestiture of assets as forms of

PPP.
2. Different Public Private Participation Schemes:
Build Operate Transfer (BOT): BOT and similar arrangements are a kind of specialized

concession in which a private firm or consortium finances and develops a new infrastructure

project or a major component according to performance standards set by the government.

Under BOTs, the private partner provides the capital required to Build the new facility,

Operate & Maintain (O&M) for the contract period and then return the facility to

Government as per agreed terms.

Importantly, the private operator now owns the assets for a period set by contract—

sufficient to allow the developer time to recover investment costs through user charges.

BOTs generally require complicated financing packages to achieve the large financing

amounts and long repayment periods required. At the end of the contract, the public sector

assumes ownership but can opt to assume operating responsibility, contract the operation

responsibility to the developer, or award a new contract to a new partner. The main

characteristic of BOT and similar arrangements are given below:-

Design Build (DB): Where Private sector designs and constructs at a fixed price and transfers

the facility.

Build Transfer Operate (BTO): Where Private sector designs and builds the facility. The

transfer to the public owner takes place at the conclusion of construction. Concessionaire is

given the right to operate and get the return on investment.

Build-Own-Operate (BOO): A contractual arrangement whereby a Developer is authorized to

finance, construct, own, operate and maintain an Infrastructure or Development facility

from which the Developer is allowed to recover his total investment by collecting user levies

from facility users. Under this Project, the Developer owns the assets of the facility and may

choose to assign its operation and maintenance to a facility operator. The Transfer of the

facility to the Government, Government Agency or the Local Authority is not envisaged in

this structure; however, the Government may terminate its obligations after specified time

period.

Design-Build Operate (DBO): Where the ownership is involved in private hands and a single

contract is let out for design construction and operation of the infrastructure project.

Design Build Finance Operate (DBFO): With the design–build–finance–operate (DBFO)

approach, the responsibilities for designing, building, financing, and operating &

maintaining, are bundled together and transferred to private sector partners. DBFO

arrangements vary greatly in terms of the degree of financial responsibility that is

transferred to the private partner

Build- Operate- Transfer (BOT): Annuity/Shadow User Charge: In this BOT Arrangement,

private partner does not collect any charges from the users. His return on total investment

is paid to him by public authority through annual payments (annuity) for which he bids.

Other option is that the private developer gets paid based on the usage of the created

facility.

3. Parties involved in Public Private Partnership and their roles:

In the Public Private Partnership model project, third party, for example the public

administration, delegates to a private sector entity to design and build infrastructure and

to operate and maintain these facilities for a certain period. During this period the private
party has the responsibility to raise the finance for the project and is entitled to retain all

revenues generated by the project and is the owner of the regarded facility. The facility

will be then transferred to the public administration at the end of the concession

agreement without any remuneration of the private entity involved. Some or even all of

the following different parties could be involved in any Public Private Partnership model

project:

 The host government: Normally, the government is the initiator of the

infrastructure project and decides if the Public Private Partnership model project

is appropriate to meet its needs. In addition, the political and economic

circumstances are main factors for this decision. The government provides

normally support for the project in some form. A government department or

statutory authority is a pivotal party. It will:

1. grant to the sponsor the "concession", that is the right to build, own and

operate the facility,

2. grant a long term lease of or sell the site to the sponsor, and

3. Often acquire most or all of the service provided by the facility.

The government's co-operation is critical in large projects. It may be required to assist in

obtaining the necessary approvals, authorizations and consents for the construction and

operation of the project. It may also be required to provide comfort that the agency

acquiring services from the facility will be in a position to honor its financial obligations.

The government agency is normally the primary party. It will initiate the project, conduct

the tendering process and evaluation of tenderers, and will grant the sponsor the

concession, and where necessary, the off take agreement.

 The concessionaire / Sponsors: The project sponsors who act as concessionaire

create a special purpose entity which is capitalised through their financial

contributions.The sponsor is the party, usually a consortium of interested groups

(typically including a construction group, an operator, a financing institution, and

other various groups) which, in response to the invitation by the Government

Department, prepares the proposal to construct, operate, and finance, the

particular project. The sponsor may be a company, partnership, a limited

partnership, a unit trust, an unincorporated joint venture or a combination of

one or more.

 Construction Contractor: The construction company may also be one of the

sponsors. It will take construction and completion risks, that is, the risk of

completing the project on time, within budget and to specifications. These can

be sizeable risks and the lenders will wish to see a construction company with a

balance sheet of sufficient size and strength with access to capital that gives real

substance to its completion guarantee.

 Operation and Maintenance Contractor: The operator will be expected to sign a

long term contract with the sponsor for the operation and maintenance of the

facility. Again the operator may also inject equity into the project.

 Lending banks: Most Public Private Partnership model project are funded to a big

extent by commercial debt. The bank will be expected to finance the project on

“non-recourse” basis meaning that it has recourse to the special purpose entity

and all its assets for the repayment of the debt.

 Other lenders: The special purpose entity might have other lenders such as

national or regional development banks

  Equity Investors: It is always necessary to ensure that proposed investors in an

infrastructure project have sufficient powers to enter into the relevant contracts

and perform their obligations under those contracts. Two examples where

powers must be carefully reviewed are life insurance companies and trustees of

superannuation funds.

 Parties to the project contracts: Because the special purpose entity has only

limited workforce, it will subcontract a third party to perform its obligations

under the concession agreement. Additionally, it has to assure that it has

adequate supply contracts in place for the supply of raw materials and other

resources necessary for the project

A Public Private Partnership model project is typically used to develop a discrete asset

rather than a whole network and is generally entirely new or Greenfield in nature

(although refurbishment may be involved). In a BOT Project the project company or

operator generally obtains its revenues through a fee charged to the utility/ government

rather than tariffs charged to consumers. A number of projects are called concessions,

such as toll road projects, which are new build and have a number of similarities to Public

Private Partnership model project.

4. Financial structuring of Public Private Partnership Projects:
Under a public–private partnership (P3) for highway projects, a private partner may

participate in some combination of design, construction, financing, operations, and

maintenance, including the collection of toll revenues. With a form of highway P3 called a

concession or a Design – Build – Finance – Operate - Maintain (DBFOM) contract, a

concessionaire invests its own funds (known as equity) and borrows additional funds to pay

for the construction of a highway project. The concessionaire maintains and operates the

project for a specified period and expects to be repaid for its investment in the project over

the period of the concession. P3s allow public agencies to access private equity capital to

finance projects. P3s can accelerate the delivery of projects by helping public agencies raise

the upfront capital necessary to construct a major infrastructure project all at once, rather

than in stages. In some cases, private capital can mean the difference between developing a

project and having no project at all. Project Financing Project financing is a specific type of
financing used in P3s, through which an expected future revenue stream generated from

users of a project or committed by a public agency is the primary means for repaying the

upfront investment needed to fund it. Project financing is also known as nonrecourse

financing, because the project’s lenders have no recourse or only limited recourse on the

shareholders of the concessionaire in case the project runs into difficulties and the

concessionaire is unable to repay them. Private firms often use project financing for large,

high-risk projects because it can help to insulate them from financial risks associated with

the project; however, the transaction costs related to implementing project finance

structures are high, making the use of this type of financing inappropriate for smaller scale

projects. The capital generated from private finance must be paid back with commitments

of a long-term revenue stream to repay lenders and private investors, who typically demand

a higher rate of return than investors in tax-exempt municipal bonds. Financial Structure of

P3s Figure 1 depicts a common financing structure for P3 concession projects. Although a

single company Financial Structuring of Public–Private Partnerships (P3s) TOOLKIT Lenders

Concessionaire (SPV) Equity Investors Public Sponsor Availability Payment or Subsidy Shared

Revenue Bonds, loans Repayments Equity Investments Dividends Funds to build, maintain,

and operate Toll Revenue Facility.

Initial sponsors supply the initial equity of the project, and in some cases are required to

keep a fraction until the end of the PPP contract without the possibility of transferring.

The objective of this is to create long-term incentives. This is expensive for the initial

sponsor for two reasons: first, because the cost of capital for the sponsor is high; and

second, because by tying up resources for a long time, they cannot be deployed to other

uses. As the sponsor specializes in the early, building part of the project, this limits its
possibilities for future business. This means that projects must be very profitable to

compensate the sponsors for this cost.

Even though the SPV remains active over the whole life of the project, until the assets

revert to the government, there is a clear demarcation between financing during the

construction phase and financing in the operational phase (Figure 2). During construction,

sponsor equity (perhaps along with bridge loans and subordinated or mezzanine debt) is

combined with bank loans and, sometimes, government grants in money or kind. In the

case of projects that derive their revenues from user fees, the initial contribution to

investment is sometimes supplemented with subsidies from the government if the project

revenues are not sufficient to pay for the project.

As completion of the construction stage approaches, bondholders enter the picture and

substitute for bank lending. Bond finance is associated with two additional entities: rating

agencies and credit insurance companies. When the PPP project becomes operational, but

only then, the sponsor’s equity may be bought out by a facilities operator, or even third-

party passive investors, usually pension or mutual funds. Bondholders, of course, have

priority over the cash flow of the project.

The life cycle of PPP finance and the change in financing source is determined by the

different incentive problems faced in the construction and operational phases.

Construction is subject to substantial uncertainty and major design changes, and costs

depend crucially on the diligence of the sponsor and the building contractor. Thus, there is

ample scope for moral hazard in this stage. Banks perform a monitoring role that is well

suited to mitigate moral hazard, by exercising tight control over changes to the project’s

contract and the behavior of the SPV and its contractors. To control behavior, banks

disburse funds only gradually as project stages are completed. After completion and
 ramp-up of the project, risk falls abruptly and is limited only to events that may affect the

cash flows from the project. This is suitable for bond finance because bondholders only

care about events that significantly affect the security of the cash flows underpinning

repayment, but are not directly involved in management or control of the PPP. This is

appropriate for institutional and other passive investors, who by mandate can only invest

small amounts of their funds in the initial stages of a PPP because of their high risk.

Fig. Web of contracts near a SPV

The project is intended to provide a service to users, but the fundamental contracting

parties are the SPV and the procuring authority, which enforces the PPP contract and

represents users of the project. Because contracts give at least some discretion to the

procuring authority, cash flows and even the continuation of the concession may depend on
its decisions. Thus, ambiguous service standards and defective conflict resolution

mechanisms increase risk. In addition, user fees will be at risk if the political authority is

tempted to buy support or votes by lowering service fees, either directly or by postponing

inflation adjustments, in so-called regulatory takings. Similarly, if a substantial fraction of

the SPV’s revenues are derived from payments by the procuring authority, these payments

depend on the ability (or desire) of the government to fulfill its obligations. It follows that

the governance structure of the procuring authority, its degree of independence and the

financial condition of the government affect the level of risk perceived by debt holders.

Consider next the relationship of the SPV with construction and O&M contractors. Many

PPP projects involve complex engineering. In complex projects, unexpected events are more

likely and it becomes harder to replace the building contractor. In these cases, the

experience and reputation of the contractor become an issue. Moreover, the financial

strength of the contractor is relevant because this determines its ability to credibly bear

cost overruns without having to renegotiate the contract. Similarly, while the operational

phase is less complex, revenue flows depend on whether the contracted service and quality

standards are fulfilled, which depends on the O&M contractor. Again, the experience and,

secondarily, the financial strength of the contractor concern debt holders. Debt holders also

care about the type of risk-sharing agreements negotiated between the SPV and the

contractors. Cost-plus contracts, which shift cost shocks to the SPV, are riskier than fixed-

price contracts from their point of view.

Finally, debt holders care about the incentives of the sponsor, who provides around 30 per

cent of the funding in the typical PPP project. This large chunk of equity has the lowest

priority in the cash-flow cascade, and is theoretically committed for the length of the PPP

contract to provide incentives to minimize the life-cycle costs of the project. Providers of
funds worry about the financial strength and experience of sponsors, particularly during the

construction and the ramp-up phase of complex transportation projects. They value

previous successful experience in the industry and technical prowess, and look for evidence

that the sponsor is committed to the project, both financially and in terms of time and

reputation.

5. Ideal Scheme for the Infrastructure Development:

PPP or Public-Private-Partnership is a unique concept which involves coming together of

public and private sector with a purpose to develop public assets or for provision of public

services. It is an elaborate arrangement between a state body and a privately owned entity

which serves to promote private capital investment in public projects, especially those

connected with infrastructure development. The agreement also includes sharing of assets

and skills between state and privately owned bodies to be able to achieve the best possible

outcome. The private entity receives performance linked payments based on a specific set

of criteria.

A basic feature of any PPP scheme is that the project under consideration is usually a high

priority one and is well-planned by the government. Another essential aspect is that both

the sides assume some amount of risk and mutual value for the project. Some of the

infrastructure projects usually covered under PPP model include building of highways, ports,

airports, developing railways infrastructure, telecom facilities, power generation projects,

and sanitation, water and waste management projects.

In India, the PPP model was introduced by UPA Government at the Centre for developing

some of the major facilities including airports and metros. The model worked well in some

cases but in some others, there arose a number of issues which could not be addressed
properly. Considering the infrastructural growth needed to drive the economy further, the

newly formed NDA Government has also come up with a number of proposals in the current

Union Budget in which PPP model would be implemented to help achieve better and faster

results.

Finance Minister laid stress that with more than 900 infrastructure projects are underway in

the country, PPP model holds great potential for us but we must work to remove the

inefficiencies in its implementation and develop a responsive dispute redressal mechanism.

To this end, he announced the setting up of an exclusive institution called 3P India with a

budget allocation of Rest 500 crore which would be responsible for resolving any disputes

and issues arising in the planning and implementation of Public-Private-Partnership model.

There are several areas in which the government is looking forward to implement this

model including high-end metro projects, rural and urban development projects. The main

issues faced with proper implementation of this model is that infrastructure projects are

usually long-term ones and a number of factors including cost of materials, policies and

even economic conditions can change while the project is underway. If the initiative to set

up a sophisticated mechanism for resolving such issues in implementation of PPP model is

successful, it can attract big investments from private sector and lead to fast-paced

development of infrastructure.

6. Conclusion:

This PPP are a very useful tools / system for the developing country like India. Government

should give some relaxation to modify the rules and the regulation to the private sector as

more company may take interest on this and this leads our company from developing

country to the developed country.

7. Bibliography/ Readings:

a) International Journal of Computational Engineering Research – Vol. 03, Issue 8.

b) Draft for consultation -National Public Private Partnership Policy - Department of

Economic Affairs Ministry of Finance Government of India.

c) Wikipedia, the encyclopedia.

d) Public-Private Partnership in Indian Infrastructure Development: Issues and

Options – Reserve Bank of India.

e) Study of different Models.

f) Search from Google website.

g) 5 years site experience.

h) NICMAR Study Book.