You are on page 1of 111

Mainstreaming

Public Private
Partnerships in India

CUTS Institute for


Centre of Excellence
on Law & Economics Regulation & Competition
Mainstreaming
Public Private
Partnerships in India

CUTS Institute for


Centre of Excellence
on Law & Economics Regulation & Competition
Mainstreaming
Public Private Partnerships in India
Published by

Centre of Excellence
on Law & Economics

CUTS Institute for Regulation and Competition


R 75, 1st Floor, Greater Kailash I
New Delhi- 110048, India
Phone: +91-11-2646 3021, Telefax: +91-11-40535921
Email: circ@circ.in
Web: www.circ.in

Edited by:
Pradeep S. Mehta

Assisted by:
Hariprasad C.G.
Joymala Dutta

Designed by:
Sai Media Communication

Printed by:
Sai Media Communication

ISBN:
Citation: CIRC (2012), Mainstreaming Public Private Partnerships in India, Policy Document and Souvenir,
CIRC, New Delhi

© CUTS Institute for Regulation & Competition, 2012

Suggested Contributions Rs. 1000/US$50


Contents
Acknowledgements i
Foreword ii
Editor’s Note iii
What is CIRC? v

1. Infrastructure Regulatory Framework for India 001


A.P.Bahadur,
ADB PPP Expert for Haryana Former Chief Engineer, MoRTH, Govt. of India

2. Institutionalisation of PPP Process in the Government 006


Arvind Mayaram,
Secretary, Economic Affairs, Ministry of Finance

3. Framework for PPP in Indian Ports - issues and emerging lessons 009
A. Balasubramanian,
Senior Director, IDFC is a lawyer and a financier with extensive experience in PPP and infrastructure.

4. Creative Financing of Urban Infrastructure in India through Market-based 014


Financing and Public-Private Partnership Options
Chetan Vaidya, Director, School of Planning and Architecture
Hitesh Vaidya,Urban Advisor IPE Global, a development sector consulting firm

5. Public Private Partnerships in National Highway - Overview of the framework 018


Gajendra Haldea, Additional Secretary, Advisor to DCH (Infrastructure)

6. Contours of Public-Private Partnership (PPP) Management Regime in 024


Decentralised Renewable Energy Systems in India1
Gopal K Sarangi, TERI University

7. Transforming Water Supply Regimes in India: Do Public-Private 027


Partnerships Have a Role to Play?
Govind Gopakumar, Assistant Professor, Concordia University

8. Few thoughts on policy changes in PPP in India 034


J.K. Dadoo, IAS

9. Public Private Partnership and Social Infrastructure 037


K.M. Mital and Vivek Mital, Institute for Integrated Learning in Management,
Financial Management and Derivatives Consultant,

10. Impact of Public Private Partnership in Infrastructure on Growth in India 043


P.Ambigadevi, Professor of Economics, Avinashilingam Institute for Home Science
and Higher Education for Women

11. Public Private Partnerships: Present experience, challenges and the way forward 047
Piyush Tiwari and Ranesh Nair, Associate Professor in Property,
Faculty of Architecture Building and Planning University of Melbourne

12. Public Private Partnerships: Some issues related to financing 051


Prabal Roy Chowdhury, Indian Statistical Institute
Contents
13. Quality Infrastructure Good Regulatory Framework, the Key 053
Pradeep S. Mehta, Secretary General, CUTS International

14 . Revenue Sharing Models in a "Public Private Partnership" (PPP) Context 055


Pradeep Valsangkar, (MD & Chief Consultant), GCS Consulting Services Pvt. Ltd.

15. The Early Phases of Innovation: Opportunities and Challenges of Public-Private Partnership 059
Rajnish Tiwari, Institute of Technology and Innovation Management,
Hamburg University of Technology (TUHH)

16. Need for a comprehensive PPP policy in infrastructure 064


Ranen Banerjee, Partner at PwC

17. Competition & Regulation & the Competition Assessment Framework 067
Roger Nellist* with John Preston**
*Team Leader and Deputy Head, Growth and Investment Group,
Department for International Development, UK
**Commerce Commission, New Zealand

18. Risks & Audits of PPP Projects 071


Sharmila Chavaly , JS, Department of Economic Affairs

19. Public Private Partnership and the Institutional Considerations 074


Sharmistha Ghosh, Lecturer in Commerce, Shri Shikshayatan College

20. Quality of Regulation: Meaning, Determinants and Assessment 077


Siddhartha Mitra, Professor, Deptt. of Economics, Jadavpur University

21. Urban Governance and Service Delivery in Bangalore: Public-Private Partnership 079
Sangita S N, Head & Professor & Smitha K C, Doctoral student
(Centre for Political Institutions Governance and Development,
Institute for Social and Economic Change)

22. Public-Private Partnerships: Keeping Human Rights on the Radar 085


Surya Deva, Associate Professor, JD Programme Leader,
Faculty Editor, City University of Hong Kong Law Review
School of Law, City University of Hong Kong

23. Public Private Partnership in Infrastructure Sector in India 088


Dr. Sushil Kumar, Assistant Professor, Institute of Management Studies, Kurukshetra University

24. Public Private Partnership (PPP): Way Forward to Infrastructural Developments in India 095
Tarique Anjum, Chartered Accountant

25. Needed, a Water Policy that Taps Private Sector 100


Udai S Mehta, Associate Director, CCIER

26. Public Private Partnerships and Infrastructure Projects in Transition Economies 102
Yannis S Katsoulacos,Professor of Economics, Athens University of Economics and Business
Acknowledgments
During the compilation of the Policy Document and Souvenir, significant contributions were also
made by CUTS/CIRC staff. It may be difficult to list all of them but some need special mention.

n Coordination n Contributors
A.P. Bahadur
Pradeep S. Mehta
Arvind Mayaram
Kamal Sharma
A. Balasubramanian
Hariprasad C.G.
Chetan Vaidya
Arvinder Kaur
Gajendra Haldea
Preeti Singh
Gopal K. Sarangi
Joymala Dutta
Govind Gopakumar
Wilson Tharakan
J.K. Dadoo
Krishna Mohan Mital & Vivek Mital
P. Ambigadevi
Piyush Tiwari & Ranesh Nair
Prabal Ray Chowdhury
Pradeep S. Mehta
Pradeep Valsangkar
Rajnish Tiwari
Ranen Banerjee
Roger Nellist
Sharmila Chavaly
Sharmistha Ghosh
Siddhartha Mitra
S.N. Sangita & K.C. Smitha
Surya Deva
Sushil Kumar
Tarique Anjum
Udai S. Mehta
Yannis S. Katsoulacos

This publication contains copyrighted material some of whose use has not been specifically
authorised by the copyright owners. CIRC is making these articles available in our efforts to advance
understanding of regulatory issues. We believe that this constitutes a ‘fair use’ of the copyrighted
material as provided for in Article 10 of the Berne Convention for the Protection of Literacy and
Artistic Works (Paris Text 1971) and in section 107 of the US Copyright Law. If anybody wishes to use
materials from this publication for purpose that go beyond ‘fair use’, she/he must obtain permission
from the copyright owner. CIRC will not draw any profit from this publication, since it is solely for
informative and educational purposes. Suggested contribution has been sought from the public for
printing and postage costs only.

i
Nitin Desai

Foreword
Sustained growth of Indian economy is critical for equitable development in the country which can impact all strata of
society. The requirement for sustainable infrastructure development is paramount in order to provide the backbone for
economic activities as well as to ensure the efficient use of resources.

Public Private Partnerships or PPPs are seen to have a significant role in bringing in much needed investments as well as
efficiencies in utilization and management of resources. Indian government has taken a number of steps to encourage
private investment in infrastructure through public private partnerships. However it has been observed that while PPP
projects in some sectors have been successful in attracting huge private investments, several other sectors like Railways,
Power Transmission and Distribution achieved only limited success.

Project implementation, monitoring, time bound execution of PPP projects and financing are the key issues of the
infrastructure developers. Given the limitations of government resources to meet the investment gap, the contribution
through PPP has achieved paramount significance. However despite the established importance of PPPs as a valuable
instrument for infrastructure, there have been constant calls for a comprehensive National PPP Policy. Many state
governments have put in place an institutional framework for encouraging PPPs and others are in process of doing so.

The ability to detect the need for regulation, use regulatory tools discerningly and take appropriate action against anti-
competitive practices requires specialised knowledge and skills. These skills have to be developed through targeted
instructions and training which simulates reality. It is only then that such skills can be enhanced through learning by doing
and finally used for the benefit of the economy. CUTS Institute for Regulation and Competition (CIRC) has been conceived
with the objective of not only developing capacity in regulation but also that of various stakeholders who support and
provide strength to regulators.

This Policy Souvenir on PPPs contains insightful articles written by eminent experts of the subject based in India and
abroad focussing on the scope of National PPP Policy, existing frameworks and challenges for PPPs in India, key issues
relating to overlaps and ambiguity between Centre and the States, etc. and will bring forth the options or policy choices
which the proposed National PPP Policy can look at.

Through the Policy Souvenir on PPPs, CIRC envisage to provide inputs for the National PPP Policy and to generate
resources for development of short and long term professional courses on PPPs suiting different stakeholders.

This Policy document focusses on large number of important areas such as progression of PPPs, usage of PPPs in India,
existing framework & challenges for PPPs, State level experiences, best practices followed in other countries. The articles
will be accessible to all layman, Central and State Government officials, employees of infrastructure companies,
transaction advisors, consultants etc. The compilation of articles in the Policy document will be an important reference to
the concerned authorities while structuring their PPP projects and will serve as a benchmark to mainstream Public Private
Partnerships in India.

Nitin Desai
President, Governing Council
CUTS Institute for Regulation & Competition
Pradeep S Mehta

Editor's Note
This is the second Policy Document and Souvenir brought out by CIRC. It may be recalled that the first one took a look at
how infrastructure and its growth enhancing effects can be promoted through better regulation. The appreciation it
received and the debate some of the essays therein were able to generate has encouraged us to look at a different side of
Public Private Partnerships this time. In his budget speech of 2011-12, the then Finance Minister, Dr. Pranab Mukherjee
mentioned the experience with PPP Model and announced Central Government's intent to come up with a comprehensive
policy for developing PPPs. Since then, deliberations are being organised towards drafting of the National PPP Policy. This
Policy Document and Souvenir envisages providing inputs for the proposed National PPP Policy in the form of policy
choices facing regulatory and operational dilemmas and generating resources for development of short and long term
professional courses on PPPs as desired by different stakeholders. The Policy Souvenir is a compilation of essays authored
by eminent PPP experts based in India and abroad and offers the readers comprehensive and candid analysis of how the
PPPs can be mainstreamed.
Each article contained herein is focused on a specific issue (and related sub-issues) and discuss merits/demerits of policy
options to address it. The articles touch upon the mentioned agenda from different angles.
A.P. Bahadur has written on the desirability of an effective and independent regulatory mechanism to harmonise the
interests of various stakeholders in PPP projects, for benefits of development to reach out all sections of society and for
protection of consumer interest. All these steps will be aimed to facilitate competition, promote investment, stabilise
market and prices, market structure, procurement process, quality and protect consumer interest. He opines that
regulatory mechanism has to act as the fourth arm of governance.
Arvind Mayaram states that PPPs form the most feasible option to attract private finance into the infrastructure sector. He
further enumerates in his article the list of constraints that restricts the use of PPPs and explains how these can be overcome.
In his article, ChetanVaidya goes on to enumerate the progress made in development of policy and legal framework for
local governments to access funds for development projects. PPP route, in his view, offer options to Local Bodies to access
project management expertise and financial structuring.
With regard to port sector, Balasubramanian traces the evolution of port legislation in India and has touched a few vital
aspects for this article. Balasubramanian's article outlines the overview of MPTA, 1963 enacted to administer ports locally.
The article further examines the framework for PPP in Indian port sector and raises the issues that emerge in governance of
federal port trust by MPTA. He goes on to suggest remedies which includes identification of a well drafted approach, port
policy and a new legislation to direct the port industry.
In the realm of the energy sector Gopal K Sarangi opines that excessive government interference have proved to have
generated multiple distortions and inefficiencies. He explains that decentralized renewable energy provision is the one
answer of the ill provisions of centralised energy systems.
Govind Gopakumar through his article highlights the dynamics of partnership efforts in different urban contexts and role
of partnerships in transforming existing infrastructure regimes. J.K. Dadoo while focussing on regulatory issues
highlighted the need for strong and independent regulators for the success of PPP. He advocates that PPP is a great idea for
solving the problem of poor infrastructure in India. His recommendations for creating a favourable environment to
encourage infrastructure development includes: PPP should keep public interest upper most and should work towards
facilitation of that public interest; Financial and technical parameters must be clear, feasible ;Evaluation process must be
transparent, unbiased etc.
With regard to highway sector, Gajendra Haldea in his article advocates the need for a comprehensive policy and a
regulatory framework for addressing the complexities of PPP. He goes on to elaborate the rationale behind the phased
development and explains how the idea of phased development can create a favourable regime to address the issues likely
to arise in financing and structuring of highway projects.
K.M. Mital through her article attempted to review a set of public private partnership models relevant for infrastructure
development and review problems and issues in different areas of social infrastructure including education, healthcare,
women empowerment, care of elderly etc. with the help of select case studies based on different public private partnership
models and information and communication technologies.
P Ambigadevi emphasized on the importance of infrastructure development and how a positive relationship exists
between economic growth and infrastructure development. He further claims that for proper development of
infrastructure it is very necessary to initiate public private partnership in infrastructure investment.
Piyush Tiwari discusses about the present experience of public private partnerships in India, certain successful PPP projects,
enumerates the various reasons for the slow pace of private sector participation and the way forward. Prabal Roy Chowdhury's
article deals with two finance related issues to do with public private partnerships- one whether the financial aspect of a project
should be delegated to the private partner or not and the other issue is with respect to the SHG- linkage program in micro finance.
Pradeep Valsangkar tries to bring out different revenue sharing models in a PPP deal between government and private
enterprise. Since the ability of the government to invest in to and run large e-governance projects may be limited, these
models present a very interesting mix of risk and reward for the government as well as the private vendor.
Pradeep S. Mehta writes on the key role played by regulation in infrastructure development, particularly to raise the
massive resources required for its overhaul. His recommendations for quality enhancement include: direct accountability
of regulators to the legislature, MoU between the line ministry and regulator to promote non-interference by the former in
the latter's functioning, use of consumer association as watchdogs, financial autonomy promoted through direct linkages
with the legislature and most importantly fair and competitive appointment of regulators.
Rajnish Tiwari in his article talks about the importance of innovation and proposed an “innovation coalition” comprising the
industry, the government and the academia that could enhance the innovation capacity of firms, especially SMEs in a given region,
country or industry sector. Using results of two empirical surveys, conducted with the author's involvement, it demonstrated the
opportunities and challenges of such a public private partnership in strengthening the innovativeness of firms.
Roger Nellist focuses on the competition aspects of regulation rather than those of commercial behaviour. A methodology is
elaborated for assessing the pro-competitive nature of sector regulation. Ranen Banerjee stresses on the need for a comprehensive
PPP policy in infrastructure while Sharmistha Ghoshargues for institutional amendments to secure effective implementation of
PPP Policy. In this regard Ghosh through her article tries to pinpoint those key issues and suggest ways to deal with it.
Smitha K.C. and Sangita S N explores through their article public private partnership in the light of persistent state failure,
institutional constraints and systematic weakness which impede the service delivery. Their study examines various types
of partnership at work for service delivery in metropolitan Bangalore.
Surya Deva giving a completely different flavour emphasized on devising a framework that can ensure that human rights
find a voice in all stages of the PPP process. He opines that there are sound legal and moral reasons to demand that both
public and private participants of PPP projects comply with universal human rights obligations and has suggested certain
steps to keep human rights on the radar of PPP Policy makers and participants.
Siddhartha Mitra's article focuses completely on sector regulation-the underlying objectives and the rationale. He
elaborates on “Regulatory Impact Assessment” as a tool to judge the status of implementation of regulations.
Sushil Kumar discusses about PPPs and infrastructure position in a broader light with emphasising on each core sector from
highways, railways, ports, airports, telecoms, power etc. Tarique Anjum opines in his article that world class infrastructure is
the key to a globally competitive economy and India's objective of sustained double digit growth can only be achieved through
a quantum growth in infrastructure sector. He looks at infrastructure as a key driver for steady growth of Indian economy and
goes on explaining how Public Private Partnerships (PPPs) can act as an effective means of developing infrastructure.
Udai S Mehta tries to envisage that given the scarcity of water resource it is pertinent to devise effective public private
partnership projects for supply and distribution of water. He goes on in his article about the very need for an overarching
Water Framework Law which will enable smooth implementation of the New National Water policy. Yannis S Katsoulacos
elaborates on how the arrangement of public private partnerships can be implemented in transition economics.
Through this note, the editor endeavours to provide a flavour of the diverse contributions to various categories. References
to various articles are necessarily brief and provide only a sketch of ideas. The attempt is to capture the essence of content
rather than the arguments made in entirety. The collection of articles compiled in this Policy Document and Souvenir
comprehensively deal with amongst others, sector specific issues, and endeavour to provide conceptual and practical
solutions to the issues presented.
The Souvenir will reach out to the Central and State Governments, Infrastructure development companies, banks and
other financial institutions, transaction of advisors/consultants, think tanks, civil society organisations, media etc. within
the country and abroad.

Pradeep S. Mehta
Chairman, Managing Committee,
CIRC, India
CIRC- An Overview
What is CIRC?
Regulatory reforms are gaining pace in the developing world, with an increasing number of countries enacting
competition and sectoral regulatory laws. However, there is a severe shortage of institutional capacity to both implement
the reforms and facilitate the spread of knowledge on regulatory matters in developing countries.
There is a huge vacuum in this area and current efforts are largely piece-meal and fragmented. Adequate emphasis is not
given on learning from cross-sectoral and cross-country experiences. There is a clear gap in terms of research and its
utilisation in designing the course curriculum. Even the approach taken by the existing training programmes is not as
broad based as it should be.
CUTS has been working on economic policy issues since 1984 as a leading research, advocacy and networking group and thus, has
realized the importance of the issues involved. CUTS, therefore initiated the formulation of CUTS Institute for Regulation and
Competition (CIRC), which aims to fill in the prevailing gaps and enhance knowledge on regulatory issues. With this background
CIRC has been set up to offer research-based capacity building solutions to governments, regulators, private sector, civil society
and students. It focuses on two principal domains: Competition Policy and Law, and Economic Regulation. It's activities are
guided by a Board, which has prominent experts in these two fields, and is led by former UN Under Secretary General Nitin Desai.
CIRC within a very short span of time has started working with both government and non-government agencies in its focus areas.
CIRC is very pleased to announce that it has very successfully launched its first ever course in India on “Competition Policy
and Law” in partnership with National Law University, Delhi. It comprises a Certificate Course on the basics of
Competition Policy and Law of 6 months duration and a diploma course of 1 year duration which is an add on to the
certificate course.

The Perspective:
• To be a specialised, premier capacity building institute in the area of Infrastructure Regulation and competition policy & law;
• Create an intellectual and knowledge base on regulatory reforms including economic regulation & competition policy;
• Facilitate research to enhance understanding; bridge the gap in research and its utilisation in course curriculum;
• Offer consultancy services to governments, regulators, businesses, etc. and
• Cater to specific needs by offering customised training programmes.

Methodology:
It includes: interactive lectures, field visits, case studies, and simulation exercises to provide strategic understanding, developing core
skills and encouraging in-depth knowledge of the dynamics involved; local content in course curriculum (real life situations)are the
basis of the study material; global quality standards and inter-disciplinary approach forms the basis of or all disciplines; and a multi-
stakeholder approach while maintaining a rich tapestry of resources both in terms of faculty and institutional affiliations.
CIRC is on the way of introducing an online learning platform for all its courses. In doing so, the aim is to share knowledge
and build an extensive network of CIRC.

Activities Range:
• Certificate Courses and Diploma Courses
• Conferences/ Seminars/Workshops
• Capacity Building Training
• Bi-monthly publications-RegTracker
• Research Journals
• Policy Briefs
• Quarterly newsletter- CIRCular
The Guides:
CIRC offers a practical focus on learning. The faculty (part
and full time)on board explores the challenges involved in
relation to real life experiences. Emphasis is laid on the key
issues, supported by research. Visiting fellows, both
academics and practitioners, are available at the Institute
for delivering lectures, offering expert views on course
development, writing papers, developing training
modules and conducting training programmes. There is an
expert group formulated as per the two subject streams of
Competition Policy & Law and Economic Regulation.
CIRC will eventually have a core faculty for teaching,
research and training assignments.

Target Clientele:
Civil Servants; Academicians; Professionals; Businesses;
Civil Society Organisations; Regulatory bodies; Media; and
Career aspirants are the target clients of CIRC
Activities till Date:
Academic Lectures
• January 18, 2012, New Delhi- “Future of Online
• December 19, 2011, Magnolia Hall, India Habitat
Markets- Market Dynamics and Regulatory
Centre, New Delhi- Panel discussion on “Building
Challenges in India” by Prof Benjamin Edelman,
capacity for an Effective Competition Regime in India”
Harvard Business School
http://www.circ.in/InvitationLaunch_of_Course_on
• May 29, 2009, New Delhi- “Interface between the
_Competition_Policy_and_Law_Panel_Discussion_
Indian Competition Act 2002 and the IPR Laws in
on_Building_Capacity.htm
India” by Allan Asher, Board Member of the United
• November 24, 2011, New Delhi, India- Seminar on
Kingdom Office of Fair Tradinghttp://www.circ.in
Building 'Friends of Competition 'http://www.circ.in
/pdf/Backgrounder-Public_Lecture_By_Allan
/pdf/BackgrounderBuilding_Friends_of_Competitio
_Asher_29May2009.pdf
n_in_India.pdf
• July 07, 2008, New Delhi- How India should deal with
• November 11, 2011, New Delhi, India- Seminar on
Abuse of Dominance and Cartel Busting - Experiences
"Regulating Online Markets in India"
from Across the Globe” by Prof Allan
• November 10, 2011, Mumbai, India-"SME
Felshttp://www.circ.in/eventreportALS-09.htm.
Vulnerability & Resilience in the Online Economy"
• October 26, 2007, Jaipur Academic Lecture on'Current
• March 11, 2011, New Delhi, India- Competition Law
State of the Doha Round of Negotiations'by Prof.
workshop for Marketing Professionals “Understanding
Ahmed Farouk Ghoneim, Giza, Egypt.http://
Legal Boundaries and Facing Competition”
www.circ.in/erALS08.htm
• January 07, 2011, Yojana Bhawan, New Delhi, India-
• April 18, 2007, Mumbai 'Competition Policy &Law in
Interactive Meeting on Activating Open Access in
India' by Surendra Kanstiya. http://circ.in/pdf/ALS-07.pdf
Electricity Sector
• December 06, 2006, Mumbai 'Competition Policy&
• May 03-08, 2010, Bhopal, India- GTZ-DoCA Project on
Law in a Liberalising Economy' by H.D. Pithawalla.
Training of Consumer Advice Staff http://www.circ.in
http://circ.in/ALS-06.htm
/pdf/Report-GTZ-DoCA_Project_on_Training_of_
• August 26, 2006, Kolkata 'Evolution of Competition
Consumer_Advice_Staff_May2010.pdf
Law with respect to India' by Pradeep S. Mehta.
• April 26-May 01, 2010, Bhubaneswar India- GTZ-
http://circ.in/ALS05.htm
DoCA Project on Training of Consumer Advice
• July 04, 2006, New Delhi 'Trade Policy Making and
Staffhttp://www.circ.in/pdf/Report-GTZ-
Multi stakeholder Diplomacy' by Dr. Raymond Saner
DoCA_Project_on_Training_of_Consumer_Advice_St
& Dr Lichia Yiu. http://circ.in/ALS04.htm
aff_April2010.pdf
• May 15, 2006, Mumbai 'Intellectual Property and
• New Delhi, 25-26 November, 2009- International
Competition Law' by Professor Richard Whish.
Conference Interface between Competition Policy &
http://circ.in/er15may06.htm
Law and Business Strategy http://www.circ.in/pdf
• January 18, 2006, New Delhi 'Capacity Building for the
/IntConf-CPL_and_BusinessStrategy_25-
Indian Competition Regime with focus on Abuse of
26Nov09.pdf
Dominance' addressed by Dr Eleanor Fox.
• October 08-10, 2009, Mumbai, India- Training
http://circ.in/er-ALSCP01.htm
Programme on Anti-dumping, Anti-subsidy and
Safeguard Measures http://www.circ.in/pdf/
Training Programmes
Brochure-TRM0902.pdf
• April 27, 2012, India International Centre, New Delhi- • April 23-25, 2009, New Delhi, India- Trade Remedial
Competition Law workshop for Public Sector Enterprises. (Anti-Dumping and Safeguard Measures)http://
Http://www.circ.in/pdf/Workshop_PSE.pdf www.circ.in/pdf/Brochure-TRM0901.pdf
• March 28, 2009, New Delhi, India- “The Political • CIRC and Institute for Transport Studies (ITS) have
Economy of Regulation in India-What do we need to signed a Memorandum of Understanding to work
do?”http://www.circ.in/pdf/Backgrounder- jointly on capacity building activities and educational
RoundTable-Mar28-09.pdf programmes of mutual interest with special reference
• February 16-20, 2009, New Delhi, India- Training to Economic Regulation and Infrastructure.
Programme for SERC Officials on Consumer • CIRC and Centre for Socio-Eco-Nomic Development
Protection Issues http://www.circ.in/pdf/Report (CSEND) have entered into collaboration to work on
Training_Programme_for_SERC_Officials_Feb2009.pdf capacity building activities and educational
• May 12-16, 2008, Addis Ababa Training programme programmes of mutual interest with special reference
on 'Competition Law Enforcement for Ethiopia'. to Commercial Diplomacy.
• January 09-11, 2008, Jaipur - Training programme on • CIRC and The Trade Policy Training Centre in Africa
'Strengthening Skills on Commercial & (TRAPCA) have entered into a Memorandum of
Economic Diplomacy' for Senior-level Civil Servants Understanding (MoU) to cooperate in capacity
and Executives. http://www.circ.in/erCDS04.htm building activities and educational programmes on
• October 22-26, 2007, Jaipur Training programme on issues relating to trade negotiations and Commercial
'Developing Skills on Commercial & Diplomacy.
Economic Diplomacy' for Junior-level Civil Servants • CIRC and Institute for Trade and Commercial
and Executives. http://www.circ.in/CDS03 Diplomacy (ITCD) have entered into a collaboration to
/cds03.htm provide knowledge in developing negotiating skills
• August-September 2007 National Training Workshops and capacity building activities.
on 'Competition Policy & Law in Seven Eastern and • CIRC and British Institute of International &
Southern African Countries for Government Officials'. Comparative Law (BIICL) have joined hands and are
http://www.cuts-international.org/NTW/index.htm going to work together in providing knowledge on
• August 22-25, 2007, Jaipur Training programme on Competition Policy & Law, and Regulatory Policy and
'Building Skills on Commercial & Economic Law.
Diplomacy' for Mid-level Civil Servants and • CIRC and American Antitrust Institute (AAI) have
Executives. http://www.circ.in/CDS02/cds02.htm established association to work jointly towards
• March 21, 2007, New Delhi Seminar on 'Competition enhancing knowledge on Competition and Antitrust
Policy & Law'. http://www.circ.in/CPS-07.htm Policy and Law.
• February 15-17, 2007, Pretoria Africa Regional
Training Workshop on 'Competition Policy & Law Governance:
Administration'. http://www.circ.in/CPS-05.htm
CIRC has a compact governing structure, which includes
• June 29-July 01, 2006, Bangkok Seminar on'
the governing council, a managing committee and an
Competition Policy & Law'. http://circ.in/
academic council. It has a rich tapestry of a visiting faculty
fe29june06.htm
along with that of the core faculty. These councils have
• June 28-July 01, 2006, New Delhi Seminar on'
several eminent persons comprising economists, judges
Commercial Diplomacy' http://www.circ.in/
and former civil servants.
erCDS01.htm
• May 13, 2006, New Delhi Seminar on 'Competition Governing council comprises of Nitin Desai as the
Law of India with focus on International Cartels'. President while C. Rangarajan as the President Emeritus,
http://www.circ.in/erCDS04.htm Vikram Singh Mehta as the Vice President and Pradeep S.
• March 29-30, 2006, Addis Ababa Seminar on Mehta, Isher Judge Ahluwalia, Vijay Kelkar, Kirit Parikh,
'Competition Policy & Law for the Ethiopian Rajendra S. Pawar, S.L. Rao, S. Sundar, B.K. Zutshi, Amit
Competition Authority'. http://www.circ.in/ Kapur, Ritu Anand, Bibek Debroy as its members.
er29mar06.htm
Managing Committee comprises of Pradeep S. Mehta as
• March 20-24, 2006, New Delhi Five-day Seminar on '
the Chairman and Nitin Desai, Amit Kapur, S.L. Rao, S.
Competition Policy & Law'. http://circ.in/er20mar
Sunder, B.K. Zutshi as its members.
06.htm
Academic Council comprises of TCA Anant, S. Chakravarthy,
Affiliations: R.S. Khemani, Devendra Kodwani, J.P. Lehmann, N.L.
Mitra, Richard Whish, B. K. Zutshi, and S. L. Rao.
• CIRC and National Law University, Delhi (NLUD)
have signed a Memorandum of Understanding to
Subject Expert Group:
work jointly on capacity building activities and
educational programmes of mutual interest with The subject expert groups would focus on two subjects
special reference to Competition Policy & Law and relevant to our work: Economic Regulation, and
Regulation Competition Policy & Law. The expert group's guidance
• CIRC and Competition and Regulation European would be sought primarily for: preparing and
Summer School and Conference (CRESSE) have commenting on course design and modules and
signed a Memorandum of Understanding to work participating and brainstorming in meetings, as and
jointly on capacity building activities and educational when convened.
programmes of mutual interest with special reference
to Competition Policy & Law and Regulation.
Competition Policy & Law
i. S Chakravarthy Advisor/Consultant on Competition
Policy & Law
ii. Aditya Bhattacharjea, Professor DSE, University of
Delhi
iii. T C A Anant, Professor, Delhi University
iv. Jaivir Singh, Assistant Professor, Jawaharlal Nehru
University (JNU)
v. Subhashish Gupta, Professor, Indian Institute of
Management, Bangalore(IIMB)
vi. H. D. Pithawalla, Advocate, Supreme Court of India
vii. Sudhir Krishnaswamy, Assistant Professor of Law,
National Law School of India University (NLSIU),
Bangalore

Given below are the names of experts subject wise:


Economic Regulation
i. S L Rao Chairman, Institute for Social and Economic
Change (ISEC)
ii. S Sundar, Distinguished Fellow, The Energy and
Resources Institute (TERI)
iii. Rajat Kathuria Professor of Economics, International
Management Institute (IMI)
iv. Sudha Mahalingam, Member, Petroleum and Natural
Gas Regulatory Board (PNGRB)
v. B K Zutshi, Former Indian Ambassador to General
Agreement on Tariffs and Trade (GATT)
vi. J L Bajaj, Former Chairman, Uttar Pradesh Electricity
Regulatory Commission(UPERC)
www.circ.in

Infrastructure
Regulatory Framework for India
A.P.Bahadur,
ADB PPP Expert for Haryana Former Chief Engineer, MoRTH, Govt. of India

1. Background • Facilitation of making Indian industry globally


competitive.
1.1 India has taken up a massive programme for
infrastructure development and an investment • The benefits of progress and development
of around US dollar one trillion (about reaching to all sections of society.
Rs. 5,00,000 cr) is expected to be made in the 12th • People as consumers getting the services which
Plan (2012 2017) period, in order to achieve a are of the required and desired quality which
growth rate of 9 to 10 percent. Around 50 percent provides value for their money.
of the required investment is likely to come from 1.3 In this scenario, it becomes imperative that an
the private sector. Traditionally the Government effective and independent regulatory
institutions have been developing the mechanism is put in position, to address above
infrastructure and playing the role of policy issues and to the provide consumer protection.
makers, implementers and regulators with
virtual monopoly. Now with greater involvement 2. International Practices
of private sector and the people /users becoming
2.1 More than 200 infrastructure regulatory bodies
more aware and demanding, the concept of value for
have emerged in the last 15 years for improving
money has become more significant for the
the needs of consumers and investors and also to
Government as well as for the people.
create institutions which would encourage and
1.2 With the present approach of the Government to
involve more and more private sectors in support stable and sustainable long term
delivery of the public services and utility, so that economic and legal commitment by
the benefits of progress reach to the poorest of Government as well as investors. Countries like
the poor, following issues gain importance: USA, UK and Australia have been having
• Government/Policy makers changing role of the infrastructure regulatory mechanism for a long
State from implementer / operator to facilitator time. A brief on them is as below:-
harmonizing the interests of various stake holders 2.1.1 USA have multi sectors regulator like Federal
and by addressing the issues of monopoly, Communication Commission and sector specific
competition, safety, benefits to the users and regulators like Electrical Commission,
user charges. Transmission Infrastructure Regulator, US

Page 001
www.circ.in

Foods and Drug Administration, US Securities


and Exchange Commission, National Highway
Traffic Safety Administration etc. The
regulatory agencies are empowered to create
and enforce rules with the backing of the law
whereby individuals, business and public
private organizations can be fined, sanctioned,
forced to close and even imprisoned for
violation of federal regulations.
2.1.2 UK in the last two decades has created
regulators, governmental bodies and non
governmental organizations in many sectors to
carry out the states roles. They have regulatory
mechanism in privatised infrastructure industry
sectors of gas, energy, water and sewerage etc.
such as Office of telecommunication (Oftel),
Office of gas and electricity markets (Ofgem),
consolidated regulator for the communications consumer interest. It is defined by the
and broadcasting sectors (Ofcam), protection of combination of institution, laws and processes
the interests of water customers (Ofwat), Office that give a Government control over the
of rail regulator (ORR). UK regulators are not operating and investment decision of
necessarily backed by law for their functions and enterprises that supply the infrastructure services.
autonomy. However the convention and
tradition in UK are so strong that they take care 3.2 Regulatory governance involves decision on:-
of such shortcomings and have achieved • Autonomy, independence and accountability of
consolidation and maturity. the regulator
2.1.3 Australia has three tier regulatory structures. • Relationship between the regulator and policy
The Commonwealth or Central Government has makers.
control over competition policy for essential • Processes (formal and informal) by which
infrastructure with regulation to National decisions are made.
Networks in all sectors as well as in sectors of • Transparency of decision making by the
telecommunication, airports and national roads.
regulator or other entities making regulatory
The states regulate water, urban, transport,
decisions.
electricity, gas distribution and retail supply.
• Quality- of service standards.
Local Government regulates water services and
• Handling of consumer complaints.
local roads. Each regulator is established under
• Social obligations.
its own legislations which set out the objective
• Evaluating the effectiveness of Regulatory Systems
institutional framework and procedure.
3.3 For an effective regulatory governance,
Australian practice has been able to develop the
following key principles should be taken into
coordination between the Centre and State and
consideration:
common regulatory approach in some sectors.
2.1.4 Many countries in Europe, South America and
3.3.1 Independence
Asia have sector regulators with responsibility
Infrastructure regulators should, by law, is free
for promoting competition.
to make decisions within their scope of authority
2.2 Most of the East Asia and Pacific (EAP) countries
without having to obtain prior approval from
are in the process of reforming their
other officials or agencies of the government.
infrastructure sectors, focusing on
They need to be adequately insulated from
strengthening the regulatory framework and
short-term political pressure. Independence for
making the investment climate more
infrastructure regulators consists mainly of two
predictable. In this context assessing the status
elements:
of consumer participation in infrastructure
• An arm's-length relationship with regulated
regulation is also necessary to ascertain whether
service providers, consumers and political
regulatory reforms in the region are supported
authorities and
by adequate mechanisms to safeguard
• The organizational autonomy necessary to
consumer interests.
attract the required expertise to perform
regulatory functions effectively.
3. Regulatory System
The level of independence of a regulatory
3.1 Regulatory mechanism has to act as the fourth agency depends on the types of safeguards in
arm of governance for intervention for place to promote its autonomy. Following main
controlling market and industry, facilitate safeguards are key to achieving regulatory
competition, promote investment, stablise independence.
market and prices, market structure • Providing regulator with a distinct legal
procurement process, quality and protect mandate, free of ministerial control;

Page 002
www.circ.in

• Right selection of right people with right • All documents and information's used for
professional knowledge and for fixed terms and decision making should be available for public
protection from arbitrary removal; inspection.
• Involving both executive and legislative • All procedures by which and criteria upon
branches in the appointment process; which decisions are made should be known in
• Exempting the regulating agency from civil advance and made publicly available.
service salary rules that make it difficult to • No major decision should be made without
attract and retain well-qualified staff; being set down in a publicly available written
• Providing the agency with reliable source of document.
funding usually earmarked levies on regulated
3.3.4 Predictability
3.3.2 Accountability The regulatory system should provide reasonable
Regulators need to be held accountable for their principles and rules that will be followed within
actions. The mechanisms for ensuring the overall framework:
accountability include the following: • Changes should occur only after extensive
• Appeal rights for parties believing their interest public notice and consultation so that
harmed by regulatory agency decisions that stakeholders have a meaningful opportunity to
have been make against the requirements in the provide feedback to decision makers before the
law either on process or on substance. change is implemented.
• Extensive transparency obligations (for • Regulatory decisions and policy determinations,
example, or regulatory decisions and their including laws and governing regulatory
justification). decisions, should apply prospectively and never
• Setting up of bench marks with substantive retroactively.
reporting and audit obligations. • Consistent approach under similar conditions

3.3.3 Transparency and public participation 3.3.5 Clarity of Roles


The entire regulatory process must be fair and The role of the regulatory agency and that of
impartial and open to opportunity for public other sector agencies should be carefully defined
participation. This can be achieved by following in law to avoid:
actions with very limited exceptions. • Duplication of functions.
• Interagency conflicts.
• Policy confusion.

3.3.6 Completeness and Clarity in Rules


The regulatory system, through laws and agency
rules, should provide all stakeholders with clear
and complete timely advance notice of the
principles, guidelines, expectations,
responsibilities, consequences of misbehavior,
and objectives that will be pursued in carrying
out regulatory activities.

3.3.7 Proportionality
Regulatory intervention in the sector should be
proportionate to the challenges that the
regulators are addressing:
• Intervention should be minimum necessary to
remedy the problem being addressed and
should be undertaken only if the likely benefits
outweigh the expected economic and social costs.
• Regulators should have an array of powers and
remedies at their disposal in order to ensure that
they possess the ability to calibrate their actions
to the circumstances faced.

3.3.8 Appropriate Institutional Characteristic


• Regulatory agencies must be able to consistently
perform professionally, competently, and
thoroughly, which requires the following:
• A reliable, adequate, and independent source of
revenue and adequate budgets.
• The ability to retain outside consultants when
needed.

Page 003
www.circ.in

3.4.1 Government
• Respect Regulatory
independence
• Right and timely
selection of regulators
• Competent and multi
member Regulatory
Commission

3.4.2 Utilities Agencies


• Regulatory Compliance
• Regulatory information
system
• Transparency in
dealing with Regulators

3.4.3 Consumers
• Members who are appropriately insulated from • Active participation (Right to Information-RTI
short-term political repercussion. could be potent and effective tool)
• All regulatory decisions should be subject to • Feedback on the performance of the players
final appeal to a single, impartial or
independent, legally designated court or 4. Regulatory Institutions
tribunal. 4.1 Regulatory agencies should be set up with the mandate
3.3.9 Requisite Powers to protect customers' interests, to minimize regulatory
Regulatory agencies should, under the law, costs so as to lower the overall cost of service, and make
possess all powers required to perform their it more affordable for the poor.
mission, with the authority to: 4.2 Regulatory agencies are expected to be professionally
• Set tariffs for regulated entities. competent, effective, a-political, and publicly credible,
• Establish, modify, and monitor market and with transparent procedures which are subject to
service quality rules. judicial review. However, in most countries - even the
• Investigate, as well as adjudicate or mediate, most developed-regulation lacks some of these
consumer complaints.
desirable attributes.
• Provide dispute resolution facilities for the
4.3 Consumer protection especially from Monopoly,
regulated entities.
• Compel the provision of needed information. unreasonable and non affordable tariff and sub
• Monitor and enforce its decisions, and to standard performance, should be the main objective
remedy problems and concern on infrastructure Regulator. For this,
• Prohibition against bribes and gratuities of any regulators must insure effective consumer participation
kind, conflicts of interest and any form of through :
preferential treatment • Informing consumers and there by raising awareness
• Reasonable disclosure of financial interest. • Resolving consumers complaints and follow up
• Prohibition of use of inside information for to ensure consumer satisfaction
personal gain. • Soliciting consumer inputs through consultation
and public meetings
3.3.10 Integrity • Strengthening consumer bodies
Strict rules governing the behavior of decision • Training and workshops for raising awareness
makers should be in place so as to preclude 4.4 The issue as to whether there should separate
improprieties or any conduct appearing to be regulator for each sector or a joint one for the
improper. The rules governing behavior should combination of many sectors needs to be carefully
be fully, fairly, and vigorously enforced by considered. The main argument in favour of a
ethical rules. These should be: separate regulator for each industry is the ability to
• Prohibition against bribes and gratuities of any focus in depth on the specific attributes of the
kind, conflicts of interest and any form of industry and, consequently, to adopt the most
preferential treatment suitable “menu” of regulatory policy instruments. At
• Reasonable disclosure of financial interest. the same time, many infrastructure industries share
• Prohibition of use of inside information for a common concern with certain economic issues
personal gain. (e.g., the telecommunications and electricity
industries are both concerned with access
3.4 Role and responsibility of stake holders pricing of bottleneck services), and therefore
besides regulatory institutions, the other there could be one joint regulatory agency for electricity,
important stake holders are the government, gas, and perhaps also water, and a separate agency for
utilities agencies and consumers. Each needs telecommunications, which undergoes particularly
to play their roles to make the system effective rapid technological change. In either case, multiplicity of
and successful. Their main roles are : regulators should be avoided and synergy among
sectors be optimised.

Page 004
www.circ.in

5. Development of Regulatory Mechanism for India • Urban roads, mass transport (rail and bus
5.1 Traditionally the public services and utilities have based), water, sanitation, solid waste and other
been provided by the Government agencies city infrastructure
responsible for that sector and the regulation has • Social health, education, housing,
been mostly through contract and or governmental • Rural roads, water, sanitation, waste
notifications. There has been not much separation management, irrigation, agro, tourism, industry
between the policy maker and implementer.
Presently only a few sectors such as ports, power, 5.3.3 Selection of Regulators
and telecommunication have broad regulatory • The Regulatory Body should be compact with
institutional framework. multi disciplinary composition of professionals
5.2 An effective an efficient infrastructure having impeccable track record.
development in the country, requires adoption • It should have a chairman and eight members
of appropriate public policies and its with fixed tenure of 5-6 years and selected
implementation as also a regulatory mechanism trough pre-defined transparent process.
that provides stability, protect consumer • At least half of them from non- governmental
interest and guards against political interference sector and one third of members should be from
for consumers and operators, provide incentives consumer protection, field specialist and
to the investors for efficient operation and academician.
needed investments. The important challenge • In order to attract the best available talent,
for regulators is that the state agencies often do remuneration/ compensation should be
Not operate on a commercial basis and have to comparable to the market. Facilities of house
manage the conflicting situation of short term and car are part of package.
social interest and the long term viability of the
enterprise. The situation is not different in many 6. Capacity Building
developed countries as well. India needs to Capacity building for the regulators, its staff and other
evolve a consistent and coherent approach stakeholders, on regulatory aspects would be the
towards independent regulatory mechanism. crucial aspect for effectiveness of the system. The
present capacity is quite inadequate. There is dire need
5.3 Government should start acting as facilitator of learning from experiences of other countries to take
rather than implementer. Issues relating to care of possible pitfalls. Capacity building could be
regulator vis-à-vis Competition Commission done through existing institutions of repute till a
and speedier dispute resolution mechanism are dedicated institution on Regulation is established.
addressed for enhancing the confidence. Capacity building is an ongoing exercise and should be
Following steps may facilitate creating the initiated with :
enabling regulatory regime: • Facilitating and organizing structured training
programmes for skill development of Government
5.3.1 Create enabling appropriate legislation for functionaries, regulators, utilities agencies and
infrastructure regulatory regime with consumer protection groups.
• Clearly defined roles, powers, responsibilities • Discussions on past experiences and best practices
for Government and Regulator and enforcement • Institutionalise regular interaction amongst
mechanism stakeholders and sector experts and mechanism for
• Clearly defined dispute resolution mechanism independent expert views.
with judicial and appellate review
• Defined sources of funding possibly through
• Budgetary sources (allocation), annual grant
• Fee to be recovered from stakeholders such as
service providers, consumers

5.3.2 Identify Sectors requiring independent


regulators. Challenge would be for social
sectors where consumer interests/ protection
require special attention. Considering the
present situation where regulatory mechanism
is in evolving stage, it would be prudent to have
sector specific approach restrict the number of
regulatory bodies, whereby one regulatory
body could be for entire sector, such as
• Energy to include electricity, coal, gas, petroleum,
non renewable energy
• Communication to include telecommunication,
cable, TV, print
• Transport to include road, rail, shipping, ports,
aviation

Page 005
www.circ.in

Institutionalisation
of PPP Process in the Government
Arvind Mayaram,
Secretary, Economic Affairs, Ministry of Finance

“Whereas the initiatives have gone a long way in creating What prevents the private sector to invest and the
greater awareness about PPPs within the central ministries Financial Institutions (FIs) to lend to PPP projects?
and state governments, there is still a long way to go before
The Government of India has identified six constraints:
Public Private Partnerships (PPPs) get mainstreamed in the
A. Policy and regulatory gaps, specially relating to
public spending process”
specific sector policies and regulations;
B. Inadequate availability of long term finance both
Globally, infrastructure spending is being seen as the
equity and debt;
major driver for economic turnaround. National
C. Inadequate capacity in public institutions and public
governments are taking steps to increase liquidity in the
officials to manage PPP processes;
financial sector for increased lending that, it is expected,
D. Inadequate capacity in the private sector both in the
would increase infrastructure spending, and in turn infuse
form of developer/investor and technical manpower;
the economies with some confidence.
E. Inadequate shelf of bankable infrastructure projects
Even though Indian economy is likely to record a that can be bid out to the private sector; and
growth rate of over seven percent in the current fiscal and F. Inadequate advocacy to create greater acceptance of
above six percent in the next, there is considerable diffidence PPPs by the public at large.
in the financial institutions and despite several rounds of
packages by the Reserve Bank of India (RBI) and the To address these constraints and create an enabling
government, requisite liquidity is not being injected in the framework for PPPs, several initiatives have been taken by
economy. Infrastructure projects are also facing the crunch. the government related to the policy and regulatory
environment. To address the financing needs of these
It is estimated that Rs 20,01,776 crore (at 2006-07 prices) projects, various steps have been taken like the setting up of
or US $ 488bn would be required for investment in the India Infrastructure Finance Company and launching of a
infrastructure sectors during the next five years. Although Scheme for Viability Gap Funding (VGF) of PPP projects.
significant share of this investment is expected from the
public sector, around 30 percent of the investment must Setting up of infrastructure funds is also being
come from the private sector. Provided the process issues can encouraged and multilateral agencies such as Asian
be resolved by the different arms of the government, PPPs Development Bank (ADB) and International Finance
present the most viable option for attracting private capital. Corporation (IFC) have been permitted to raise Rupee

Page 006
www.circ.in

bonds and carry out currency swaps to provide long term and its benefits for the stakeholders, including the
debt to PPP projects. Recently, India Infrastructure Finance consumers and the public at large. An effective
Company Limited (IIFCL) has also been empowered to communication strategy is needed for a greater acceptance
provide refinance to FIs for infrastructure lending. of PPPs as part of public advocacy.

To meet the capacity building requirements in the One of the methods for implementing communication
sector, necessary measures are being taken, with technical strategy is to organise conferences and seminars where
assistance from the World Bank and the ADB, to provide policies related to PPPs in specific sectors can be discussed
experts to the state governments and central ministries and debated. As for wider communication with the public,
who are working as part of the teams of the PPP nodal content must be developed for dissemination with the help
officers. The Department of Economic Affairs (DEA) has of media.
also notified a panel of technically qualified transaction
advisers to assist in PPP transaction management. In 2. Capacity building
addition, manuals on PPPs to guide the users are being There is need for managing the entire gamut of
developed and training programmes for public officials capacity building activities that include training needs
undertaken. Assessment, content development, training of trainers,
working with state level and central training institutions,
While quality advisory services are fundamental to and promoting autonomous organisations to develop
procuring affordable, value-for-money PPPs, the costs of capacities in this area. The expertise developed in Indian
PPP transactions, and particularly the costs of transaction Institute of Managements (IIMs), Indian Institute of
advisers, are significant. Considering the risk of failure of Technologies (IITs) and other institutions, such as the PPP
the bid, in which case the entire cost of project Capacity Building Trust set up by the Infrastructure
development is to be written off, the sponsoring authorities Development Finance Company (IDFC) should be
either depend on grossly inadequate internal resources to leveraged. Given India's access to grant funding from
manage the transaction, including preparing of legal multilateral organisations, expertise can also be accessed
documents, or try to save on cost by hiring sub-standard from different research institutes and universities.
consultants.
3. Investment promotion
For providing financial support for quality project Attracting private developers to bid for PPP projects
development activities 'India Infrastructure Project from within the country and abroad would be a major
Development Fund' (IIPDF), with an initial contribution of challenge, especially when the deal flow increases
Rs 100 crore has been created in the DEA. considerably. There is need to develop a focused
investment promotion strategy for PPP projects and for
Whereas, all these initiatives have gone a long way in this the outreach of various apex industries associations,
creating greater awareness about PPPs within the central and bilateral and multilateral platforms should be
ministries and the state governments, there is still a long leveraged for marketing projects in ports, roads, power,
way to go before PPPs get mainstreamed in the public airports, urban infrastructure and other sectors.
spending process. The work being done by the DEA and by
other agencies, such as the Planning Commission has only
scratched the surface, considering that PPPs need to be
internalised not only at the Central and the State level but
also by Municipal Governments.

Public resistance to PPPs seen as another form of


privatisation and the fear that the “profit motive” would
drive up the cost of delivery of services has also slowed
down the main streaming of PPPs.

There is, therefore, need to provide focussed attention


to some of the following activities.

1. Advocacy
There is need for sustained policy advocacy for
creating environment conducive for PPPs through policy
research and advocacy. This would be necessary not only at
the Central government level but also at the state and the
local level. This would include area of legal and regulatory
reform and policy setting. This would also include
developing new accounting practices to factor PPPs in
public accounting.

It is also imperative that a sustained and intensive


campaign be undertaken to create awareness about PPPs

Page 007
www.circ.in

4. Project implementation assistance 5. PPP Statistics Cell


` Once the deal has been done and the private developer There is a need to collect and monitor data relating to
has been given the projects, the process of getting statutory PPP projects in a systematic and useful manner. Although
and other approvals from different government agencies at the web enabled PPP database created by DEA captures
the central and the state level is complex, time consuming data on more than 40 parameters, there is need for more
and cumbersome. Recently, an excellent report has been comprehensive management of PPP data.
prepared by DEA on statutory clearances required for PPP
projects. There is a massive task cut out for the Government of
India, and more specifically for the Finance Ministry as
It is revealing how time consuming it still is to get the PPPs entail contingent liabilities that need to be identified
approvals from the government agencies even though and capped. Risk management over the concession period
most of the Model Concession Agreements (MCAs) put the is the essence of PPPs as an element of public finance.
onus to getting these clearances on the sponsoring Without a more defined strategy and time bound
authorities). There is need for also considering institutional implementation programme, it may be difficult to achieve
arrangement on lines of the Public Private Partnership the targets that the government has set out for itself.
Appraisal Committee (PPPAC) that can help the private
sector partners through different ministries and
governments.
www.circ.in

Framework for PPP in Indian Ports


- issues and emerging lessons
(This article is an abridged version of a larger article.)

A. Balasubramanian,
Senior Director, IDFC is a lawyer and a financier with extensive experience in PPP and infrastructure.

1. The Evolution of port legislation1 in India 1. The ownership is diffused. The assets and liabilities
Ports were harbours providing safe havens for ships of the central government were transferred to the
visiting sea ports for leisure or trade and there was a Board of Trustees Port authorities vide Sec 29 of the
need to conserve the ports so as to ensure safe MPTA. In fact the preamble to the MPTA says that
navigation and pilotage. Indian ports Act, 1908 was it is an act to make provision for the constitution of
conceived and enacted to ensure these arrangements. port authorities for certain major ports in India and
Over a period of time, some of the harbours including to vest the administration, control and management
in Madras, Calcutta and Bombay were developed into of such ports in such authorities and for the
ports and passengers and each of these had separate connected matters
legislation ( Bombay Port Trust Act, 1879, Calcutta 2. Governance is overseen by GoI in all important
Ports Act, 1890 and Madras Port Trust Act 1905) managerial decisions-
providing the framework for their governance where a. Board of Trustees2 has an unwieldy 17 or 19
the port trusts administer the ports subject to the members ( Sec 3)
control of the central government(Government of b. Board includes trade interests (users who pay
India namely GoI) in certain specified matters. Later
for services such as ship owners, shippers) vide
the GoI set up the major ports in Cochin,
Sec 3 who would be privy to commercial
Visakhapatnam and Kandla under their direct
proposals as tariff but would not vote on it but
administration. Since decisions could not be taken
the users who represent undertakings owned or
locally except by reference to GoI and also as trade
controlled by the government (say a steel PSU
interests wanted a direct voice in the administration of
ports, a new legislation Major Port Trust Act 1963 being a prominent user with conflicting
(MPTA) was enacted and made applicable to these interests) can still vote. Similarly the state
new major ports and other new ports of the future. In government (even it operates ports which
1974 the old ports of Bombay, Madras and Calcutta compete) or trade unions can still vote on
were also brought under this act. interested matters. ( Sec 19)
c. Filling up key positions, entering into contracts
2. Do federal port trusts continue to be relevant? to buy/sell property (sec 34) or for contracting
MPTA was enacted to administer the ports locally with out (read BOT) or execution of major capital
representation of trade interests. In essence the Act constituted expenditure work (Sec 93) require central
local authorities to administer in trust for the trade. government approval.

1
The author has chosen to focus only on a few vital aspects relevant for this article as port legislation is broader.
2
MPTA vests ports in the Board of Trustees and not really in port trusts though the author uses these two terms interchangeably as in popular understanding.

Page 009
www.circ.in

d. Annual budget requires government approval Companies Act, 1956. But on the flip side, no
u/s 98. Annual performance report is called significant initiatives or investments have been made
administration report (Sec 106). U/s 107, every so far leveraging on these legislative amendments
year the Board of Trustees should submit a so far in spite of significant passage of time. To sum up,
statement of income and expenditure during the while the statute allows them to forge joint ventures, to
year to arrive at operating surplus or deficit ( the invest in other ports and also offers tax rebate for their
words profit or loss are excluded indicating that investments in infrastructure and tax advantage in
the MPTA does not consider federal port trusts borrowing, they are unable to leverage under the
as commercial entities) existing legislation which requires GoI approval for
e. Recognizing the important role of port rusts as any/all decisions. In addition there is reluctance on
landlord cum operator, the Act empowers trust the part of port trusts also to change.
to render ship and cargo related services
including by rail (vide Sec 42 (1)) and also has
enabled outsourcing of the said services with
prior GoI approval to any person ( read PPP)
vide 42 (3).
f. Recognizing the role as landlords, the Act has
empowered the trust with GoI approval to
develop infrastructure facilities for ports vide 42
(1) (f) and also to execute capital expenditure
works vide Sec 35 such as port civil and
mechanical facilities and equipment, hotels,
warehouses, bridges, buses, railways,
breakwater, etc within or outside port limits. Sec
46 enables execution of private wharves etc with
Board approval (read PPP enabled in
outsourcing construction )

In short, the MPTA empowers the Boards to play a


landlord role (within and outside port limits in port
and bus/rail connectivity and hotels3) cum operator
role including port and rail. It also enables outsourcing
construction or operations with prior GOI approval.
The MPTA has conferred a wider and enabling
business mandate but under a governance model 3. Is corporatization of federal port trusts the answer?
whose objective is to administer federal ports locally Now there is a proposal to corporatize4 port trusts on
under the direct control of the GoI. the lines of Ennore ostensibly to improve autonomy
and commercial focus. Corporatization of the Port of
Thus while significant changes in the competitive Singapore is a classic example of how corporatization
landscape and in expectation from trust ports have can transform an erstwhile public sector organization
occurred since then, major Port Trusts felt that they do and enable it to become nimble to respond fast to the
not enjoy autonomy in decision making changing competitive landscape A corporatized port
commensurate with the business dynamics. would be free to pursue business models (e.g.:
GoI responded by initiating amendments to MPT Act. passenger terminals, marina, SEZ, non port) and
Sec 42(3A) was inserted in the year 2000 empowering practices which are customer driven. It would be foot
port trusts to enter into JV with any person or body loose and not bound by local port limits. It would
corporate for performing its services. Sec 88 which diversify to other port locations and strive not be port
defines areas of investment for port trusts was also centric but logistic driven. It would for instance be able
amended in 2000 by adding Sec 88 (d) and (e) to allow to forge JV with right partners and be able to hive off
port trusts to invest in joint ventures within own port uncompetitive units and to unlock value from port
limits and in other major and other ports subject to assets It would strive to find its own means of
government approval. Technically this means that financing investments from the market so as to achieve
major ports can diversify by investing in other ports to financial Independence from the government. Projects
mitigate respective hinterland risks .Major ports may would be subject to investor due diligence and hence
consider floating SPV (off Balance sheet ) and invest as efficient. It would hence be able to source resources
BOT investor in other ports and they may consider competitively from the market and stand the rigours of
hiving off unviable units to JV . In addition to these due diligence by hard- nosed investors and seek listing
amendments in the Act, IT Act (Sec 80 IA) was in stock exchanges similar to the Associated British
amended to extend the Income tax benefits of Ports or the erstwhile P&O. The threat of take-over
investment in infrastructure. As an experiment to the would deter managerial complacency in such ports. It
demands for corporate style of autonomy, the GoI would seek no sovereign protection from the market
Notified the new port of Ennore as a major port but it failure In short, freedom with commensurate
was outside the ambit of the MPTA. Ennore was commercial accountability would make corporatization
incorporated as a limited company under the worthwhile to pursue.

3
MPTA is commendable as it has enabled multi modal investments including in hotels for passenger terminals.
4
U/s 5, every Board constituted under the MPTA is a body corporate and there is strictly no need to corporatize. What is meant then is converting the
Boards into stock corporate with equity share capital.

Page 010
www.circ.in

Experience so far seems to suggest that these


assumptions are aggressive and are not tenable in the
current Indian political and economic context. While
there seems to be reluctance on the part of GoI to cede
control, federal port trusts also appear unwilling to
take the initiative as they have failed to take advantage
of favourable amendments including those in Sec 88
and the like so far as discussed in the earlier section of
this article. Also if the model of the only
corporatization namely the major port of Ennore is any
indication, corporatization is unlikely to change the
situation as the decision making is still in government
as most of the Board of Directors are from the
government or do not have a direct pecuniary or
meaningful stake in the entity . In Indian context, for
corporatization to succeed, induction of a strategic
private port operator appears vital. Continuation of
government ownership and management control even
post corporatization is unlikely to serve the intended
purpose. amendments to MPTA to empower the managers to
take key decisions and to induct in the Board persons
Given that port services require business orientation with the right type of expertise and independence
and customer focus on the lines discussed above, under an equitable compensation structure.
corporatization in the current format as in case of
Ennore is futile. Ideally, federal port trusts should 4. Framework for PPP in Indian ports issues and
relinquish their as service providers and remain as emerging lessons
landlords and port conservators. Service delivery in a. Facilitating PPP by MPTA
federal ports in India would be best left to the private In federal port trusts governed by MPTA, PPP
sector whose incentives to cater to customer needs are facilitation is indirect and inferred. PPP activities
greater. In case public sector should continue to be in (say BOT) would involve rendering “services” and
charge of service delivery for whatsoever reason, the execution of certain “works”. Sec 42 (1)lists
existing port trusts should be unbundled into business “services” which Board can do and includes5
units and regulatory units. The business units should
passenger transport by rail and feeding to/by rail
be corporatized by inducting a strategic port operator
transport and provision of infrastructure facilities
with significant equity stake and management control.
(albeit with GoI approval) for ports .Sec 42 (3) allows
The residual regulatory unit may continue to be port
trust playing the role of the landlord but would require the Board to permit any person (read BOT operator)
significant capacity building in terms of playing to perform these with GoI approval.
landlord role well. The typical landlord functions
include port marketing, property management, While no time limit is specified for the same in the
project development and PPP management (bidding MPTA, the executive arm of the GoI (namely PPP
process, project structuring and financial analysis, Guidelines by GoI) limits it to 30 years on BOT basis.
negotiation of concession agreement) and more In addition Sec 42 (3A) which was inserted in the
important navigation and conservancy. But the year 2000 permits the Board to enter into JV with
capacity and capabilities of existing staff are not any person or body corporate (read private
appropriate for playing landlord function effectively operator) for performing the said services. While
particularly project development with serious these refer to services, “works” part is dealt with by
conflicts of interest as service providers or operator Sec 35 (2) which lists the works which Board could
today. In terms of governance, the Board in its current execute on its own (wharves, etc) within the port
statutorily mandated structure lacks industry limits. Works include hotels, buses, rail rolling
professionals as trustees; terms of contract are not
stock, etc. But Sec 46 says that no person (read
market driven with serious conflicts of interest
private operator) can erect private wharves, etc
between the trustees and port. In addition they are not
empowered as commercial autonomy and without Board approval and subject to terms Board
accountability are non existent as trusts with no power may specify. So a combined reading of Sec 35 (2)
to appoint key personnel, plan budget, take decisions and Sec 46 for the works and a combined reading of
on investment and financing. Also the existing Sec 42(1) and 42(3) for services and Sec 42 ( 3A) for
framework (vide Sec 110,110 A and 111 of MPTA) joint venture of the Board with private investors
allows government intervention in PPP contracts enables PPP in the nature of BOT. However these
awarded, supervening terms of award of contract by PPP decisions of the Board require approval from
the port authority. In short, to play the landlord role the GoI as Sec 93 requires works exceeding set
effectively, they have to be enabled and empowered. limits to obtain GoI approval before execution
This would mean that federal port trusts would need /contracting out (read BOT) by the Board. Similarly
significant investments in building capacity in terms of Sec 34 requires GoI approval for sale or purchase of
training, recruitment of appropriately skilled staff and property or lease of property beyond 30 years or for

5
The list of activities enabled is quite forward looking and flexible with multimodal transport perspective.

Page 011
www.circ.in

contracts exceeding certain set limits BOT


arrangements of PPP may fall in these categories
and require compliance. An amendment of MPTA
in future should capture all the aspects of the PPP
together (instead of piece meal dealing as of now)
empowering the concessioning authority clearly for
investor comfort leaving no room for ambiguity.

5. Regulatory framework in retrospect and prospect


A. Independence of regulator:
Tariff authority for Major Ports (TAMP) was
constituted under Sec 47 A of MPTA (Port Law
Amendment Act, 1997) to frame scale of rates for
levy in major ports covered by MPTA including by
major port trust Boards and private terminal
operators in major ports. Earlier before PPP was
introduced, the Board of Trustees of each federal
port trust framed their tariff (called scale of rates) .
Pursuant to the first BOT transaction in Indian
private terminals in federal and state ports. TAMP6
adopts cost based tariff for regulations and private component of system costs but it is regulated. Ocean
f
investors in federal ports and federal port trusts are reight and terminal handling charges levied by shipping
subject to regulatory risk as TAMP sets/revises companies and cargo clearing and forwarding charges
tariff from time to time. At a different level, the charged by intermediaries are a higher component of
regulator also lacks independence and is subject to system cost to the importer/exporter but they are not
the risk of intervention by the GoI, adding one more regulated. As per the study by the World Bank (1995) on
layer of uncertainty for the private investor in Indian ports, port tariff is not the issue of concern. It is the
federal ports. To quote a few examples, vide Sec 111, system cost arising from delayed ship handling
GoI is empowered to issue directions to TAMP on and high intermediary costs which render Indian
questions of “policy” and GoI decision on whether a trade uncompetitive.
question is one of policy or not shall be final (Sec
111). Also GoI is empowered vide Sec 110 A to Also tariff is not the only area of regulation in
supersede TAMP in case of failure to “comply” with international ports. Tariff is part of economic regulation
the directions issued by GoI under Sec 111. Also covering inter alia competition among terminals within
tariff orders of TAMP are not final and GoI can and across ports, dispute resolution between the
modify/cancel rates in 'public interest” (Sec 54 of government/concessioning authority and the conditions
MPTA). In addition the terms and conditions of of service forming part of tariff package. Over time, tariff
service of chairman or any member of TAMP are as determination in India should yield to economic
may be prescribed by the GoI (Sec 47 B) and Sec 47 D regulation whose objective is to check anti competitive and
empowers GoI to remove the chairman or any restrictive trade practices.
member of TAMP . If TAMP is seen as a proxy for
control by GoI , private investors in federal ports are Technical regulation- conservancy, pilotage, navigation,
apprehensive whether they will be treated at par compliance with international maritime convention, etc
with federal port trusts which are administered Indian Ports Act, 1908 creates ports and their limits. It deals
indirectly by GoI. It is noteworthy to observe the with the powers and duties of the Government and port
lessons from the relatively successful PPP officials, rules for port conservation and safety of shipping.
experience in state ports. Tariff and commercial It defines major and other ports. Government means the
freedom to develop the state ports have yielded Federal (Central) government for major ports and
optimum results sometimes prompting private respective state government for other ports. The following
investors to assume risks higher than in federal are the provisions regarding the government's role in
ports such as in investing in connectivity ( rail as in conservancy and technical regulation:
Pipavav and Mundra by private investors) and a. Federal/State Government is entitled to appoint
assuming development risks of a higher magnitude officer or body of persons (including private limited
in the absence of traffic history and having to secure companies ) as Conservator u/s7
project clearances from scratch in the absence of a. The Conservator could delegate all powers to his
existing infrastructure as in federal ports) staff u/s 66
b. The Government enjoys indemnity against the acts
b. What should be the objective, approach and scope of Conservator or staff u/s 18
of regulation ?
Tariff regulation at terminal level exists in very few Conservator is responsible for conservancy finally
countries7 such as India where again only federal including the obligation for cleaner seas and safer
ports are regulated. Terminal tariff is a minor shipping under the onerous International Maritime
Organization (IMO) conventions and in addition the

6
Nowadays bids are invited for new terminals from private investors in federal ports under a pre determined tariff ( inflation adjusted partially over time) so
as to insulate from regulatory risk but these are under executive guidelines pending review of MPTA.
7
Tariff is not framed in many countries. Only tariff guidelines are applied situation specific

Page 012
www.circ.in
www.circ.in

new international security codes to be complied 6. Way forward


with. It is interesting to note that each port has its own The author argues the case for a considered debate on
style of conservancy and thereception facilities at ports the strategic intent and direction of the port industry
are inadequate leading to illegal dumping of waste by and to identify the approach for the same before
ships which are not properly equipped. As initiating changes in port legislation especially
conservancy entails huge costs and risks, there are not concerning PPP. As law can capture only the
sufficient economic incentives for thinly capitalized intentions of the policy makers, a new legislation
private limited companies which could assume however well drafted offers no panacea for PPP if the
conservancy role in state ports exposing the Indian policy objectives of PPP are not clear and consistent. A
ports to significant risks of pollution and safety8. To well considered port policy including in PPP is all the
sum up, while it is in the nation's interest to make port more important as Courts of law would refrain9 from
business free and competitive, port waters being reviewing policy decisions of the government in case
sensitive for national trade and security interests of disputes entailing PPP .The author is conscious of
should be subject to common conservancy code under the potential of the executive guidelines on PPP
the monitoring of a technically competent authority. (besides sector legislation ) to influence the quality of
In short, port business may be free but port waters are outcomes but these are beyond the scope of this article.
not. The Indian Ports Act may codify the same.
Needless to say, the author's views are personal and
do not necessarily reflect the views of his employer
namely IDFC Ltd.

8
The case of ship collisions arising from poor safety procedures causing maritime traffic to halt indefinitely or a single oil pollution can cause Indian waters
unfit for shipping for long are risks arising from poor conservancy.
9
Rightly so as the purpose of Courts is to interpret statutes as they stand and not as Courts think they should be as policy and law making are the prerogatives
ofthe government and/or legislature.

Page 013
www.circ.in

Creative Financing of Urban Infrastructure in India


through Market-based Financing and Public-Private Partnership Options
(This article is an abridged version of a larger article.)

Chetan Vaidya,
Director, School of Planning and Architecture

Hitesh Vaidya,
Urban Advisor IPE Global, a development sector consulting firm

Abstract issue. Over 80 urban local bodies in the country have either
Rapid urbanization has increased the demand for urban obtained a credit rating or are in the process of obtaining one.
infrastructure in India. Since public funds for these services Several ULBs and utility organizations have issued bonds
are inadequate. Urban organizations have to look for and have so far mobilized over Rs. 12,000 million through
alternative sources for financing their infrastructure needs. taxable bonds, tax-free bonds and pooled financing. A
Accessing capital markets and PPP have emerged as viable number of PPP options have emerged and these include:
options to finance urban infrastructure. In 1998, the service contracts; performance-based service contract; joint
Ahmedabad Municipal Corporation issued India's first sector company to implement and finance the project; a
municipal bond without state guarantee to finance a water management contract for operations and maintenance; and
supply and sewerage project. To boost the municipal bond construction cum build-operate-transfer contract. Thus,
market, the GOI decided to provide tax-free status to market access and PPP are important innovations in the
municipal bonds. Only financially strong, large municipal financing of urban infrastructure in the country.
corporations are in a position to directly access capital
markets. To help small and medium local bodies to access Background
the market Government of India introduced the concept of The urban population in India is 285 million (Census 2001)
pooled financing. The Indo-US FIRE project helped the and is likely to be twice its present level by 2030. . Rapid
State Governments of Tamil Nadu and Karnataka issue urbanization has increased the demand for urban services.
municipal bonds by pooling municipalities. Based on the The Steering Committee on Urban Development for
success of these two issues, the Government of India Eleventh Five Year Plan of India (2007-2012), has estimated
introduced a scheme for a Pooled Finance Development that total fund requirement for implementation of the Plan
Fund that will support small- and medium-sized local target in respect to urban water supply, sewerage and
bodies to access capital markets. Credit rating of a bond sanitation, drainage and solid waste management is Rs.
issue provides investors with an independent third-party 12,702 billion. The 74th Constitutional Amendment gave
evaluation of the credit strength or weakness of a particular urban local bodies (ULBs) the responsibility to provide

Page 014
www.circ.in

these services. The sources of revenue devolved to ULBs policy and procedural issues that need to be addressed so as to
are, however, not sufficient and still depend on higher reform urban water supply and sewerage issues. The new PPP
levels of government. Traditionally, urban infrastructure guidelines advocate the changed approach and can drive and
has been financed mainly through budgetary allocations. sustain comprehensive reform of urban water and sanitation
Other financing has come from financial institutions like services. This approach will also strengthen the role of urban
Housing and Urban Development Corporation and organizations to provide the urban services more effectively
limited investments by the ULBs themselves through their and support the decentralization objective of the Government.
internal resources. Financial resources from all these In this improved environment, public-private participation
sources, however, fall far short of the urban sector's models for provisioning of various services would also
estimated investment requirements. Since public funds for become feasible. Features of the PPP options are presented
these services are inadequate, ULBs have to look for below. Service Contract: The Chennai Metropolitan Water
alternative sources for financing their infrastructure costs. Supply and Sewerage Board have made a significant advance
Market-based financing and Public-Private Partnership in use of service contracts for PPP in O&M of water supply and
(PPP) have emerged as a viable alternative to finance sewerage systems in the city. Out of the 119 city sewerage
infrastructure investments. This paper describes the pumping stations 70 have, so far, been given to private
development of this new market-based urban contractors for operation and maintenance. The system is
infrastructure financing system, emerging PPP options in working very well which has resulted in an increase in the
India and draws certain conclusions. contract period from one to three years. The Board has also
given service contracts for O&M of two sewage treatment
Public-Private Partnership Options plants for a period of three years.
As a response to an insufficient provision of basic urban
services and a lack of access to finance and other resources Performance-Based Service Contract: In the Navi Mumbai
by ULBs that aim to increase access to these services, a Municipal Corporation (local body for a planned new city
number of PPP options have emerged. These include: close to Mumbai), core municipal services are managed by
service contracts; performance-based service contract; joint the private sector on a labor contract basis. Of the forty-two
sector company to implement and finance the project; a contracts in operation, nineteen performance-based
management contract for operations and maintenance service (PBS) contracts were prepared for managing the
(O&M); and construction cum build-operate-transfer water distribution system and one PBS contract for the
(BOT) contract. transmission system. The basis for repackaging the
contracts was to increase the efficient operation of the
It is pertinent to mention already at the beginning that the system, and take specific steps to: maximize the water that
Government of India has designed PPP guidelines to is billed; reduce leakages in the system; detect illegal use of
sensitize state governments and urban local bodies to the water; and take similar steps to minimize the consumption
www.circ.in

of power. The scope of work included: system operations; water supply to survive in a highly competitive
operations based on schedule of rates; water audit; energy international market, the Tiruppur Exporters Association
audit; repairs and maintenance, and advice. The PBS supported by the state and local government decided to
contract envisaged provision of services for 3 years with involve the private sector in meeting the water demand. As
annual performance reviews. a result, a public limited company with private sector
participation, the New Tiruppur Area Development
Operator Consultant: As part of the World Bank funded Corporation, was formed to implement the project. When
Karnataka Urban Water Supply Improvement Project, operational, the water project will supply 185 million liters
demonstration zones have been identified in the three cities of water per day and serve nearly 1,000 textile units and
Belgaum, Gulbarga, Hubli-Dharwad and entrusted on a residents in Tiruppur and its surrounding areas. The
performance based contract to a Private Operator project was implemented on BOT basis. The Project will
Consultant for carrying out water supply improvements in recover the total project cost along with realizing
the zones with the prime objective of demonstrating reasonable returns through user charges. The estimated
provision of 24/7 water supply. The scope of the contract is cost of the project is Rs. 10,500 million. Construction-cum-
to undertake detailed technical investigations of the present BOT Contract: Alandur Sewerage Project had a
water supply in the Demo Zones and prepare a detailed construction contract for 120 KM sewage collection system;
investment plan and undertake the rehabilitation of the whereas, the treatment plant of 24 MLD is with a BOT
distribution zonal assets, provide operations, maintenance, contract. The total cost of the project is Rs. 340 million. The
and customer services at agreed levels of service. operator is expected to make capital investment for the
treatment plant and recover it over a period of 14 years. The
Management Contract: Jamshedpur Utilities and local body will recover the costs through a combination of
Services Company (JUSCO) a wholly owned subsidiary sewerage tax, sewerage charge, connection charge, general
of the Tata Steels was formed in 2003 to provide and revenues and state government support.
maintain urban services in the city. This private
company provides very good urban services including There are several PPP projects in solid waste management.
power to its 7 lakhs population. It has a management Vaious ULBs are now taking help from private sector to
contract for O&M of water supply and sewerage develop ater supply projects in PPP mode and some of
services for Jamshedpur city. these initiatives in Latur, Nagpur, Mysore, Maduari,
Mandvi, etc. are now at different stages of project
Joint Sector Company: This option is adopted in development and implementation. The initial focus of new
Tiruppr water supply project. Tiruppur city in the State investments on PPP of water supply projects was on
of Tamilnadu had a population of 3,500,000 in 2001. The provision of bulk supply. However, BOT projects often did
city produces more than 75 percent of the country's not address problems of existing water supply and
knitwear exports. Realizing the need for an improved sanitation systems such as high unaccounted for water,

Page 016
www.circ.in

high expenditure on energy and low cost recovery. The market to finance urban infrastructure. However, to
focus is slowly shifting to improved management of routinely access capital markets or invite private sector,
existing systems. It may be mentioned here that most of ULBs will have to have the capacity to develop
PPP projects in water supply sector are in pilot stages. Most commercially viable projects. The most critical factor for
of them are not citywide, water supply tariff in India are obtaining market finance will be a healthy municipal
low, base data of exiting water supply systems are missing revenue base. A market-based approach to financing urban
and capacity of private operators is also inadequate. Unless infrastructure linked with JNNURM will further
these issues are taken care it will not be possible to strengthen ULBs and help achieve the decentralization
undertake PPP projects in urban water supply and objective of the 74th Constitutional Amendment. PPP for
sanitation sector. urban infrastructure projects that are funded by the
Mission. The FIRE-D project assisted Nagpur and Thane
Linkages with JNNURM Municipal Corporations to prepare financial and resource
Acknowledging the critical role of cities in the country's mobilization plans to fund their local contributions to
current economic context, GOI launched in December 2005 projects identified under JNNURM. The Nagpur
a flagship program, called Jawaharlal Nehru National Municipal Corporation issued Rs.212 million municipal
Urban Renewal Mission (JNNURM). The program aims at bond in March 2007 to fund a WSS project under JNNURM.
providing incentives to cities to undertake institutional, The Thane Municipal Corporation is expected to access the
structural and fiscal reforms at state and local levels to market for a Rs. 1,000 million bond to fund its local
improve service delivery systems, boost local economic contribution for a sewerage project under JNNURM. PPP
performance and enhance quality of life. JNNURM has two options were have been approved for 22 projects under
overarching goals, one relate to provision of urban JNNURM and most of them are for solid waste
infrastructure and second reduction of poverty in cities. management in cities.
Through this program, GOI is providing investment follow Thus, market-based financing is an important innovation
up for cities undertaking comprehensive reform. The for urban infrastructure in the country.
JNNURM will disburse a total of at least Rs. 1,000 billion
over a seven-year period (2005-12). Of this, Rs. 500 billion As far as PPP options for urban infrastructure are
will be contributed by GOI and another Rs. 500 billion will concerned, the entire notion of developing and
be contributed by states and ULBs. States and ULBs implementing projects in a commercial format is a
accessing the JNNURM must complete a total of 22 relatively new trend in India. These project require
reforms, some mandatory and some optional, during the considerable efforts in evolving project documentation,
seven-year period (2005-12). The mandatory and optional developing institutional arrangements for project
reforms of states/ULBs under the JNNURM include structures, securing approvals and clearances from
decentralization of urban governance and empowering stakeholders, financial structuring, selecting a contractor,
urban local bodies, introduction of improved accounting operator or concessionaire and ensuring overall financial
systems, improved revenue base, reform of rent control closure. A wide range of actors have to be involved in all
acts, delivery of services to poor, etc. The JNNURM these processes, and consistent coordination is necessary.
encourages ULBs to access market-based financing and In addition there is a constant need for the sponsor to
pursue project related activities to mitigate and minimize
Conclusion risks. Both capacity and legitimacy are required to perform
Great progress has been made in developing the policy and these roles.
legal framework for local governments to access the capital
www.circ.in

Public Private Partnerships in National Highway


- Overview of the framework
Gajendra Haldea,
Additional Secretary, Advisor to DCH (Infrastructure)

The highways sector in India is witnessing significant interest from both


domestic as well as foreign investors following the policy initiatives taken
by the Government of India to promote Public Private Partnership (PPP)
on Build, Operate and Transfer (BOT) basis. However, the inflow of
investment will depend on a comprehensive policy and regulatory
framework necessary for addressing the complexities of PPP, and for
balancing the interests of users and investors. Moreover, the
transformation of rules must be accompanied by a change in the
institutional mind set. For sustaining investor interest in upgradation and
maintenance of highways on BOT basis, a precise policy and regulatory
framework is being spelt out in a Model Concession Agreement (MCA). A comprehensive
This framework addresses the issues which are typically important for
limited recourse financing of infrastructure projects, such as mitigation framework is
and unbundling of risks; allocation of risks and rewards; symmetry of
obligations between the principal parties; precision and predictability of a pre-requisite for
costs and obligations; reduction of transaction costs; force majeure; and
termination. It also deals with other important concerns such as user PPP
protection; transparent and fair procedures; and financial support from
the Government. The MCA also elaborates on the basis for
commercialising highways in a planned and phased manner through
optimal utilisation of resources on the one hand and adoption of
international best practices on the other hand. The objective is to secure
value for public money and provide efficient and cost-effective services to
the users.

Rationale for phased development


The four critical elements that determine the financial viability of a
highway project are traffic volumes, user fee, concession period and

Page 018
www.circ.in

capital costs. As the existing highways have dedicated traffic and the
Government has prescribed the user fee for uniform application
across India, revenue streams for a Project Highway can be assessed
with a fair degree of accuracy. The concession period, on the other
hand, can be extended only marginally for improving project
viability as the growth of traffic would not permit very long
concession periods. In any case, the present value of projected
revenues after say, 15 years, is comparatively low from the
Concessionaire’s perspective. As three of the four above-stated
parameters are pre-determined, capital cost is the variable that will
determine the financial viability of a project. Bidders would,
therefore, seek an appropriate capital grant/subsidy from the
National Highways Authority of India (Authority) in order to reduce
the capital cost for arriving at an acceptable rate of return.

In the given scenario, higher the capital cost, greater would be the
compulsion of project sponsors to seek larger grants from the
Authority. This, in turn, would restrict the ability of the Government to
leverage a larger pool of extra-budgetary resources, including private
Phased
investment, and would hence result in a limited programme of
highway development. In view of the foregoing, it is important to rely
development will
on cost-effective designs and to combine them with a phased
investment programme to enable a more efficient and sustainable be affordable and
programme of highway development.
cost-effective
As a general principle, capacity augmentation of highways should be
based on the standards adopted by the Indian Roads Congress for
different bands of traffic volume. The emphasis should be on phased
development rather than on providing high cost roads for catering to the
projected growth in the long term. Where traffic intensity is
comparatively low, limited widening of highways should be undertaken
with further widening planned after 7-12 years depending on projected
traffic growth. Upgradation of designs and standards, construction of
bypasses in urban and semi-urban areas and other improvements may
also be planned in phases depending on traffic intensity. As an
alternative, comparatively shorter concession periods may be stipulated
so that the Authority can augment the capacity when it is due. These
issues would be subjected to in-depth examination and reflected in a
Manual of Standards and Specifications that would form part of the
standard documents associated with the MCA.
www.circ.in

Technical parameters
Unlike the normal practice of focussing on construction Technical
specifications, the technical parameters proposed in the MCA are
based mainly on output specifications, as these have a direct bearing parameters will
on the level of service for users. Only the core requirements of design,
construction, operation and maintenance of the Project Highway are focus on the
to be specified, and enough room would be left for the Concessionaire
to innovate and add value. Level of service
In sum, the framework focuses on the ‘what’ rather than the ‘how’ in for the users
relation to the delivery of services by the Concessionaire. This would
provide the requisite flexibility to the Concessionaire in evolving and
adopting cost-effective designs without compromising on the quality
of service for users. Cost efficiencies would occur because the shift to
output-based specifications would provide the private sector with a
greater opportunity to innovate and optimise designs in a way
normally denied to it under conventional input-based procurement
specifications.

Concession period
The guiding principle for determining project-specific concession Concession
period is the carrying capacity of the respective highway at the end of
the proposed concession period. As such, the concession period is Period will be
proposed to be determined on a project-specific basis depending on
the volume of present and projected traffic. Toll paying users should linked to projected
not be subjected to congested highways and the Concession should,
therefore, cease when full capacity of the road is reached, unless traffic
further augmentation is built into the MCA. The time required for
construction (about two years) has been included in the concession
period so as to incentivise early completion, implying greater toll
revenues

Selection of Concessionaire
Selection of the Concessionaire will be based on open competitive Competitive
bidding. All project parameters such as the concession period, toll
rates, price indexation and technical parameters are to be clearly bidding on single
stated upfront, and short-listed bidders will be required to specify
only the amount of grant sought by them. The bidder who seeks the parameter will be
lowest grant should win the contract. In exceptional cases, instead of
seeking a grant, a bidder may offer to share the project revenues with the norm
the Authority.

Grant
It is proposed that based on competitive bidding, the Authority
should provide a capital grant of up to a maximum of 20 per cent of
the project cost. This would help in bridging the viability gap of the
Grants to Bridge
PPP projects. Where such assistance is inadequate for making a
project commercially viable, an additional grant not exceeding 20 per
viability gaps
cent of the project costs may be provided for O&M support during the
period following the commissioning of the Project Highway.

Concession fee
Concession fee will be a fixed sum of Re. 1 per annum for the
concession period. Where bidders do not seek any grant and are Concession
instead willing to make a financial offer to the Government, they will
be free to quote a higher concession fee Fee should be
levied when
revenue streams
can sustain it

Page 020
www.circ.in

Risk Allocation
As an underlying principle, risks have been allocated to the parties Risk alleviation
that are best suited to manage them. Project risks have, therefore,
been assigned to the private sector to the extent it is capable of and mitigation is
managing them. The transfer of such risks and responsibilities to the
private sector would increase the scope of innovation leading to critical to private
efficiencies in costs and services.
investment
The commercial and technical risks relating to construction, operation
and maintenance are being allocated to the Concessionaire, as it is best
suited to manage them. Other commercial risks, such as the rate of
growth of traffic, are also being allocated to the Concessionaire. The
traffic risk, however, is significantly mitigated as the Project Highway is
a natural monopoly where existing traffic volumes can be measured
with reasonable accuracy. On the other hand, all direct and indirect
political risks are being assigned to the Authority.

It is generally recognised that economic growth will have a direct


influence on the growth of traffic and that the Concessionaire cannot
in any manner manage or control this growth rate. By way of risk
mitigation, the MCA provides for extension of the concession period
in the event of a lower than expected growth in traffic. Conversely,
the concession period is proposed to be reduced if the traffic growth
exceeds the expected level. The MCA provides for a target traffic
growth and stipulates an increase of upto 20% in the concession
period if the growth rate is lower than projected. For example, a
shortfall of 5% in the target traffic after 10 years would lead to
extension of the concession period by 7.5% thereof. On the other
hand, an increase of 5% in the target traffic would reduce the
concession period by 3.75% thereof.

Financial Close
Unlike other agreements for private infrastructure projects which
Project
neither define a time-frame for achieving financial close, nor specify
the penal consequences for failure to do so, the MCA stipulates a time
implementation
limit of 180 days (extendable up to another 120 days on payment of a
penalty), failing which the bid security shall be forfeited. By prevalent
must commence as
standards, this is a tight schedule, which is achievable only if all the
parameters are well defined and the requisite preparatory work has
per agreed time
been undertaken.
frame
The MCA represents the comprehensive framework necessary for
enabling financial close within the stipulated period. Adherence to
such time schedules will usher in a significant reduction in costs
besides timely provision of the much needed infrastructure. This
approach would also address the problem of infrastructure projects
not achieving financial close for long periods.

User feeA balanced and precise mechanism for determination of user


fee has been specified for the entire concession period since this
would be of fundamental importance in estimating the revenue
streams of the project and, therefore, its viability. The user fee shall be
based on the rates to be notified by the Government.

The MCA provides for indexation of the user fee to the extent of 40 per
cent thereof linked to WPI. Since repayment of debt would be
virtually neutral to inflation, the said indexation of 40 per cent is
considered adequate. A higher level of indexation is not favoured, as
that would require the users to pay more for a declining (more
congested) level of service when they should be receiving the benefit
of a depreciated fee. A higher indexation would also add to
uncertainties in the financial projections of the project.

Page 021
www.circ.in

Local traffic
Owing to the absence of an alternative road, highways should be Safety and quality
open to use by local residents without any payment of tolls until free
service lanes are provided. This would ensure local support for the of service must be
project and avoid legal challenges or local opposition arising out of
easement rights. Frequent users should be entitled to discounted ensured
rates, in accordance with the tolling policy.

Construction
Handing over possession of at least 80% of the required land and
obtaining of environmental clearances are being proposed as conditions
precedent to be satisfied by the Authority before financial close.
The MCA defines the scope of the project with precision and
predictability in order to enable the Concessionaire to determine his
costs and obligations. Additional works may be undertaken within a Maintenance
specified limit, only if the entire cost thereof is borne by the Authority.
Before commencing the collection of user fee, the Concessionaire will standards will be
be required to subject the Project Highway to specified tests for
ensuring compliance with the specifications relating to safety and enforced strictly
quality of service for the users.

Operation and maintenance


Operation and maintenance of the Project Highway is proposed to be
governed by strict standards with a view to ensuring a high level of
service for the users, and any violations thereof would attract stiff
penalties. In sum, operational performance would be the most
important test of service delivery. The MCA provides for an elaborate Lenders will have
and dynamic mechanism to evaluate and upgrade safety
requirements on a continuing basis. The MCA also provides for traffic the right of
regulation, police assistance, emergency medical services and rescue
operations. substitution
Right of substitution
In the highways sector, project assets do not constitute adequate
security for lenders. It is project revenue streams that constitute the
mainstay of their security. Lenders would, therefore, require Concessionaire will
assignment and substitution rights so that the concession can be
transferred to another company in the event of failure of the be protected against
Concessionaire to operate the project successfully. The MCA
accordingly provides for such substitution rights. political actions
Force majeure
The MCA contains the requisite provisions for dealing with force
majeure events. In particular, it affords protection to the
Concessionaire against political actions that may have a material Pre-determined
adverse effect on the project.
termination
Termination
In the event of termination, the MCA provides for a compulsory buy- payments should
out by the Authority, as neither the Concessionaire nor the lenders
can use the highway in any other manner for recovering their provide
investments.
Termination payments have been quantified precisely as compared predictability
to the complex formulations in most agreements relating to private
infrastructure projects. Political force majeure and defaults by the
Authority are proposed to qualify for adequate compensatory
payments to the Concessionaire and thus guard against any
discriminatory or arbitrary action by the Government or the A credible and
Authority. Further, the project debt would be fully protected by the
Authority in the event of termination, except for two situations, fair arrangement
namely, (a) when termination occurs as a result of default by the
Concessionaire, only 90 per cent of the debt will be protected, and (b) For supervision is
in the event of non-political force majeure such as Act of God
(normally covered by insurance), only 90 per cent of the debt beyond essential
the insurance cover will be protected.

Page 022
www.circ.in

Monitoring and supervision


Day-to-day interaction between the Authority and the
Concessionaire has been kept to the bare minimum following a
‘hands-off’ approach, and the Authority shall be entitled to intervene
only in the event of default. Checks and balances have, however, been
provided for ensuring full accountability of the Concessionaire.
Monitoring and supervision of construction, operation and
maintenance is proposed to be undertaken through an Independent
Engineer (a qualified firm) that will be selected by the Authority
through a transparent process. Its independence would provide
added comfort to all stakeholders, besides improving the efficiency of
project operations. If required, a public sector consulting firm may
discharge the functions of the Independent Engineer. The MCA
provides for a transparent procedure to ensure selection of well-
reputed statutory auditors, as they would play a critical role in
ensuring financial discipline. As a safeguard, the MCA also provides
for appointment of additional or concurrent auditors. To provide
enhanced security to the lenders and greater stability to the project Support and
operations, all financial inflows and outflows of the project are
proposed to be routed through an escrow account. guarantees by the
Support and guarantees by the Authority Authority are
By way of comfort to the lenders, loan assistance from the Authority
has been stipulated for supporting debt service obligations in the essential
event of a revenue shortfall resulting from political force majeure or
default by the Authority. Guarantees have also been provided to
protect the Concessionaire from construction of competing roads,
which can upset the revenue streams of the project. Additional toll
ways would be allowed, but only after a specified period and upon An effective dispute
compensation to the Concessionaire by way of an extended
concession period. resolution
Miscellaneous mechanism is
A regular traffic census and annual survey has been stipulated for
keeping track of traffic growth. Sample checks by the Authority have critical
also been provided for. As a safeguard against siphoning of revenue
share by the Concessionaire, a floor level of present and projected
traffic has also been stipulated. The MCA also addresses issues
relating to dispute resolution, suspension of rights, change in law,
insurance, defects liability, indemnity, redressal of public grievances
Private
and disclosure of project documents.
participation should
Conclusion
Together with the Schedules, the proposed framework addresses the
improve efficiencies
issues that are likely to arise in financing of highway projects on BOT
basis. The proposed regulatory and policy framework contained in
and reduce costs
the MCA is a pre-requisite for attracting private investment with
improved efficiencies and reduced costs, necessary for accelerating
growth.

Page 023
www.circ.in

Contours of Public-Private Partnership (PPP)


1
Management Regime in Decentralised Renewable Energy Systems in India
Gopal K Sarangi
TERI University
The unfettered belief that government knows what is best for Centralised energy supply systems are argued to have
its citizens is gradually being demystified on the face of evolved out of misconstrued and ill-conceived wisdom. It is
increasing frequency of state failures in the management of contended that these systems have generated large scale
certain key strategic sectors. Excessive government inequities, unbearable external debts and irreversible
intervention is foundto be costly in many instances and environmental degradation and nurtured a culture of inertia
believed to have generated multiple distortions and and inefficiency. In addition, ever increasing energy security
inefficiencies. In addition, two dissimilar forces i.e. shrinking threats and growing scientific consensus about the perils of
budgetary resources and growing private potential in climate change have questioned the relevance of centralised
leveraging the valued financial resources and technical know- energy supply systems in the current juncture and
hows, have urged policy makers and planners to look for emphasised the need for alternatives like decentralised
alternative resource management regimes. As a rational renewable energy supply systems. Centralised supply
response to the traditional resource allocation system, public systems are also ridiculed for being unable to address the
private partnership (PPP) management styles are prioritized ever growing problem of energy access. To substantiate this,
in many instances. Unlocking of private potential through PPP recent statistics demonstrate that about 300 million Indian
modalities appears to be more sensible to weed out the are facing acute energy access problems reiterating the need
pervasive syndrome of soft budget constraints inextricably to transit to alternative energy supply regimes.
associated with the management of public resources. In the top
of it, emergence of PPP forms of management is rationalized in Decentralised renewable energy provisions are highly
the context of growing commodification of erstwhile publicly emphasised for being capable of addressing the ill-effects of
supplied goods and services like water, electricity etc. centralised energy supply systems. Global consensus to this
has been echoed in United Nation's (UN) declaration of the
Recent transformations in the energy policy landscape have year 2012 as International Year of Sustainable Energy for All,
ushered new era of energy sector management. In the realm of with its emphasis on possible business solutions to the
energy, decentrealized renewable energy systems have problem of energy access. The thrust has also been articulated
emerged as potential ground for PPP asa viable and effective in changing policy directions in many countries with targeted
mode of resource allocation and management. Interestingly, focus on decentralized renewable energy facilities as viable
the recent focus on decentralised renewable energy systems mode of energy generation. For an instance, UK Department
grows out of simmering discontent with the highly for Trade and Industry envisages meeting 40-50 percent of
subsidise dcentralised fossil fuel energy supply regimes. energy needs from micro-generation energy technologies.

1
The piece of writing is a part of the on-going OASYS project funded by an EPSRC/ DfID research grant. The views expressed are personal.

Page 024
www.circ.in

India also looks forward to this form of energy supply not dynamics. The notion of 'bottom of pyramid' propounded
only as an additional source of energy, but also as an by C.K. Prahalad, and growing evidence of the viability of
instrument to improve rural economic conditions. 'social enterprising' models have redefined the business
bottom lines and strengthened the business credibility of
this sector. Above all, fast changing local institutional
settings characterized by increasing credibility of banking
sector in this business, active community participation,
growing market linkages and supply chains, and proactive
user responses etc. have created the fertile ground for
private investors to venture into the field. Recent thrust on
environmental markets like carbon trading has also
become an additional attraction for private investors for
the sector. On the top of it, business sense of this rural
energy provisions has been well appreciated by
international bodies. International agencies like REDCO
Alliance and Energy Access Foundation (EAF) have been
pivotal in catalyzing the rapid growth of rural energy
business in many countries. It is believed that transition to a
market oriented approach becomes an essential ingredient
in the current scheme of arrangement. Estimates reveal that
decentralised renewable energy systems offer a business
potential of about 94 billion INR per year in India within
India's experience with decentralised energy systems as an the current policy & programme focus.
alternative source of energy has not been encouraging till
recent past. The entrenched belief that decentralised supply A deeper introspection into the operational artefacts of PPP
systems at best are 'charity centric services', often advocated models in decentralised energy systems in India
by donor agencies and implicitly recognized by publicly demonstrates some interesting insights. At first glance, it is
supported schemes, has resulted mass scale failure of such evident that various possible PPP variants have been tried
projects in the past. In addition, ill-defined ownership out in different parts of the country over last decade or so.
structures have generated the characteristic problem of The emerging trends reflect multiplicity in the form of such
'tragedy of commons' undermining the stated goals of such partnerships and heterogeneity in the approaches
interventions. Community level conflicts and problems of followed. Institutional innovations in the form of various
elite capture within the communities also have germinated combinations between public-private-NGOs-Donor
sub-optimal outcomes in many situations. However, with agencies have evolved over years. While each model is a
change in policy, legislative, and regulatory landscapes variant on its own, interestingly, the dominant pattern is
governing decentralised renewable energy regime in India, a private led but public supported model. The available
new era has been created with renewed focus to attract private documentation on PPP mode of decentralised rural
investors into the sector through all possible channels. There is electrification demonstrates that the intervention styles are
also an implicit understanding within policy circles that characterized by social enterprising propositions where
misplaced incentives like those available to mega power social well being is delicately intertwined with the profit
projects have yielded dampening effects on small scale motives of private entrepreneurs. Importantly, in order to
decentralised energy projects, hence strengthening the case enhance the business viability of such projects; emphasis is laid
for policy change. Most important legal and legislative on creating productive activities. This has been unequivocally
enshrinements altering the operational dynamics of the emphasized in all types of interventions. In PPP form of
sector are the Electricity Act 2003 and the Rural decentralised energy systems, public support comes through
Electrification Policy 2006, among others. The legal multiple ways. While the dominant form of public support is
provisions like de-licensing of electricity generation in rural the provision of capital subsidy, side by side, a host of other
areas and emphasis on micro-enterprising of such projects supports are also provided by government at multiple levels.
have spurred the private spirit and transformed the sector as State renewable energy development agencies (SREDAs)
an attractive business venture. provide the needed institutional support to private investors.
In many cases, financial support for O & M of the plant,
In addition, since decentralised electricity generation technical guidance to operate the facility, capacity building
segment has been out of the current regulatory control, initiatives, are provided by government agencies to
except for certain regulatory requirements (e.g. supplement the private effort.
provisions relating to technical standards and safety
measures),it offers additional freedom to private Evidences suggest that PPP style of social enterprising
generators to set their own standards and norms through models could effectively be built into variety of
self-regulatory processes. Importantly, political decentralised renewable technical options starting from
environment has matured enough in providing right solar home systems (SHS) to mini-grid based energy
kind of impetus to bring in place this new form of facilities. In the field of SHS, SELCO has been fore runner
managerial acumen and skill. In addition, conventional in building social enterprising models through wide scale
thinking on the market potential of rural economies has dissemination of home based decentralised energy
undergone a transformation with fast changing business systems by tapping innovative financing schemes. Other

Page 025
www.circ.in

social enterprisers like Husk Power Systems (HPS), Saran Effective design and main streaming of PPP requires
Renewables, SCATEC Solar, Sun edison have ventured into painstaking effort of creating necessary institutional
the field of decentralised energy arena and successfully structures keeping in mind the country requirements and
operating the business for some time. Since most of these needs. It is also important to comprehend the nuances of
ventures have capitalized the existing institutional socio-economic dynamics of local settings as 'recipients' of
arrangements at the local level, the thrust has also been given energy projects. Implanting it within the prevailing socio-
to create large pool of rural entrepreneurs to manage the economic-cultural milieu is quite challenging. Complexity
systems in franchising modes. Importantly, there is a clearly also emerges from the existing grey areas in the legal arena.
defined ownership structure with this kind of intervention There have been issues related to price considerations, risk
with pre defined accountability framework. Realizing allocations, etc. In a successful PPP framework, most
capacity constraints, various training modules have been important ingredient is the risk transfer, which depends on
designed to run the complex energy enterprises in the rural appropriate level of competition and opportunity to
contexts. Contrast to the publicly dominated systems, local contest a bid. While the need for a ground for competition
needs and contexts are effectively accommodated in the has been articulated at the policy level, the practical
entire process of project operation and management. implementation frameworks do not offer adequate scope
However, multiple inhibiting factors hold back PPP as a to private entities to bid for a project. Associated
promising management pattern for decentralised energy conditionalities and localized approach often hinder this
systems. Often, the enthusiasms of private investors are process. Another strategic consideration comes in terms of
characterized by adhocism and partial engagements negotiation between government or any delegated
subverting the stated goals of the sector. This is primarily agencies of government and the private partner. In
due to lack of sustainable business models to translate the nutshell, while PPP form of resource management holds
vision into executable business plans. Institutional promising potential for efficient resource allocation, there
determinants like normative and cognitive constraints is also a need to have a cautious and careful approach to
often derail the process. Given the complexity of these leverage the potential.
systems and numerous variants, it becomes difficult to
scale up a particular form in other institutional settings.
Often market creation is obstructed by information
asymmetry challenges, multi-level welfare causation
chains, and institutional lock in at local levels. Lack of
complementary conditions also acts as a deterrent.
Unavailability of complementary local infrastructures in
the rural settings like availability of water, communication
facilities, lack of education also create additional hurdles.
www.circ.in

Transforming Water Supply Regimes in India:


Do Public-Private Partnerships Have a Role to Play?
(This article is an abridged version of a larger article.
Please visit http://www.wateralternatives.org for the complete version of this article)

Govind Gopakumar
Assistant Professor, Concordia University

Abstract: Introduction
Public-private partnerships (PPP) are an important It is widely known that Indian cities, like many others in
governance strategy that has recently emerged as a developing countries, are conspicuous for their acute lack of
solution to enhance the access of marginalised residents to environmental wholesomeness. Numerous international,
urban infrastructures. With the inception of neo-liberal national and regional groups have gathered at celebrated
economic reforms in India, in Indian cities too PPP has conventions such as the UN Millennium Development
emerged as an innovative approach to expand coverage of Goals, World Summit on Sustainable Development (WSSD)
water supply and sanitation infrastructures. However, in order to chart out possible pathways to rectify the
there has been little study of the dynamics of partnership dysfunctional nature of urban services in less affluent cities.
efforts in different urban contexts: What role do they play Public-private partnerships (PPP) are an important
in transforming existing infrastructure regimes? Do reform governance strategy that has recently emerged to enhance
strategies such as partnerships result in increased the functionality of infrastructure flows, especially in
privatisation or do they make the governance of augmenting access to marginalised urban residents. With
infrastructures more participative? Reviewing some of the the inception of economic reforms in India, in Indian cities
recent literature on urban political analysis, this article too PPP has emerged as an innovative approach to expand
develops the concept of water supply regime to describe coverage of water supply and sanitation (WSS) infrastructures.
the context of water provision in three metropolitan cities Whereas in itself these innovations are significant for their
in India. To further our understanding of the role of PPP attempt to improve the urban environment, what is of interest
within regimes, this article sketches five cases of water to scholars is to comprehend the effectiveness of these
supply and sanitation partnerships located within these partnerships - how they become enmeshed within the existing
three metropolitan cities. From these empirical studies, the political endowments in Indian cities and how these efforts
article arrives at the conclusion that while PPP are always catalyse the transformation of water supply regimes. The
products of the regime-context they are inserted within, important question to ask is what is the role of partnership
quite often strategic actors in the partnership use the PPP to efforts in transforming water supply regimes in India: Are
further their interests by initiating a shift in the regime partnerships a means of privatising infrastructure regimes (as
pathway. This leads us to conclude that PPPs do play a role many have suggested) or will it contribute to a more
in making water supply regimes more participative but participative infrastructure regime? In order to understand the
that depends on the nature of the regime as well as the role that partnerships play, it is first necessary to fathom the
actions of partners. constitution of water supply regimes.

Page 027
www.circ.in

residents with water supply, despite most cities possessing


an entrenched regime for purveying potable water. Public
managers reason that access to universal, standardised
Water supply and sanitation is crucial for not only
improving local environmental conditions in Indian cities
but also creating settings conducive to healthier lives for
their inhabitants. In India, with infrastructure policy
reform, public-private partnerships (PPP) have become a
pervasive policy instrument to achieve these ends of urban
environmental improvement. Five cases of public-private
partnership were studied - the BATF and BWSSB cases in
Bengaluru, the Alandur and the TWAD Board cases in
Chennai and the Vypeen case in Kochi. From our previous
discussion of the independent significance of water supply
regimes we have seen that the three cities have differing
significance in their regional politics. This varying
significance gives partnership ventures differing political
valences, opportunities and constraints to operate within
the regime and change the regime. This article suggests
that reform efforts can proceed along three change
pathways - aligned, modified or interrupted. In an aligned
change pathway the reform effort does not significantly
alter the constitution of the water supply regime, and
infrastructural relations in the regime are largely
reproduced. In a modified change pathway, the reform
effort succeeds in bringing about a modification in the
constitution of the regime. Finally, reform efforts can be
disrupted and change pathways in the regime interrupted.

Bengaluru
Given the low autonomous significance of Bengaluru's
water supply regime in state politics, it is not surprising
that reform transitions initiated through cases of PPP have
very low political valence and so disrupting or modifying
reform transitions is quite easily accomplished by actors. A
close study of the BATF and the BWSSB cases reveals how
this was accomplished.

BATF: BATF, or the Bangalore Agenda Task Force, was


instituted as a public-private partnership in 1999. The
objective of the effort was not only to channel the technical
expertise located within Bengaluru's high technology
Urban political analysis is a useful point of departure for enterprise into the development of public infrastructure
such an exercise and in the next section we conduct a but also to provide a venue for Bengaluru's burgeoning
selective review of some recent trends in urban political "new middle classes" to showcase their intentions to
analysis with a focus on "national infrastructures" (Sellers, transform the city. The BATF launched several projects that
2005). However, as we shall note, urban politics alone were to be models of technical excellence in infrastructural
cannot sufficiently explain the presence of distinct patterns development. One such project was the Nirmala Bangalore
of infrastructural provision. This requires some creative Pay and Use Toilets. BATF constructed modern toilet
conceptual integration. This article will attempt to do so by blocks that provided a vastly improved quality of service
developing the concept of water supply regimes. This compared to the standard public toilet blocks constructed
understanding will then be utilised for analysing the by the city government (Gopakumar, 2009a). In addition,
politics of urban infrastructural partnerships from an the BATF used venues such as the BATF Summit as
empirical study of five water supply and sanitation exercises to build allies. It was to be an arena to publicise its
partnerships in three metropolitan cities in India.1 The role in guiding infrastructural development in Bengaluru
article will conclude with some salient points regarding the in front of media, voluntary organisations and the
role of public-private partnerships in transforming existing citizenry.19 Despite BATF's technical and managerial
water supply regimes. excellence, the reform transition was interrupted in 2004 by
the changed political circumstances after an election. The
Dynamics of Public-private Partnerships new government, drawing support from a pro-farmers'
Cities in India continue to struggle to provide all its party, did not renew BATF's mandate.20 Due to a lack of

19
As some scholars have noted, these efforts were at best partial in scope. BATF's tactics for gathering support were at the most partial in their scope. It was
noted that the mayor and elected councillors were conspicuous in their absence from the summit and from round table meetings (Vijaylakshmi, 2004; Ghosh,
2005). Vijaylakshmi has noted that none of the established political parties in Bengaluru - Congress, BJP or the JD(S) or JD(U) - considered BATF's contribution
significant to the city's infrastructure to warrant a mention in the 2002 city elections (Vijaylakshmi, 2004).
20
The Hindu. Government silent on BATF. 29 September 2005.
See Gopakumar, 2009a for a description of how the BATF effort failed to become durable.

Page 028
www.circ.in

appreciation for the fluid political context within which connecting different slums in the city to the state slum
Bengaluru is located, BATF's technological entrepreneurs dwellers' federation, they not only enhanced their
had few influential allies or strategies to rescue their associational presence but also sought to increase the
enterprise.21Their technical and managerial brilliance alone organisational capacity of slum residents to mobilise for
was insufficient to heighten the significance of their common causes through KKNSS we organised slum
enterprise and prevent the dissolution of the partnership. residents and formed committees. In Bangalore city there
BWSSB: BWSSB, Bengaluru's water supply utility, are 14 MLA [Member of Legislative Assembly]
launched a public-private partnership to improve access to constituencies.
water supply and sanitation in slums in the city.22 The
partnership between the utility, non- profit organisations In all constituencies we formed slum committees (...) So if
and slum residents was expected to provide slum democracy believes in numbers then we will struggle in
households with individual water and sewerage large numbers by bringing people and hold urban poor
connections. By providing individual connections water rally to pressurise government. And by asking and putting
utility engineers perceived the partnership to be a positive our slum dweller's demands in front of all the political
exercise because it enhanced the revenue of the utility. Parties in the state we make them commit their support.24
However, the perception of non-profit organisations and
slum residents involved in the partnership was very This strategy has given slum residents and non-profit
different. They understood the partnership as a necessary organisations enormous protest capacity and the necessary
evil that would enhance access to water supply but would leverage to exert pressure upon the state government.
impose the burden of paying user fees on residents. "So Given the low autonomous significance of Bengaluru's
meterisation of these people [slum dwellers] is also a step water regime, it is notable that the organisational capacity
towards privatisation Once they are all metered there is no of the urban poor is directed at the state government. This
left and right to the people - they have to follow them capacity was on display in 2004, when S. M. Krishna, Chief
[BWSSB]".23 The response of non-profit organisations and Minister of Karnataka announced the Greater Bangalore
slum residents was to utilise the partnership as a means to Water Supply and Sanitation Project (GBWASP) - a
deploy strategies that would allow them to intervene at the comprehensive project to enhance water supply and
regime level. First, all slum partners were drafted into a sanitation access to the residents of Greater Bengaluru
state-level slum dweller’s federation (KKNSS). By through private participation.25 At this stage, KKNSS

21
See Gopakumar, 2009a for a description of how the BATF effort failed to become durable.
22
Connors has suggested that the incentive to forge a partnership happened for two reasons in addition to the loss of revenue. In the first instance, a pilot project
launched under the AUS Aid scheme and secondly due to a financial package provided by the BMP for provision of water to slum dwellers (Connors, 2005).
However, senior engineers at BWSSB were unconvinced about the reasoning and suggested that the effort was an internal decision of the BWSSB (Interview
with ENG1, retired Chief Engineer, BWSSB, 12 July 2006).
23
Interview with Y., NGO partner, 12 August 2006.
24
Interview with Y., NGO partner, 12 August 2006.
25
The New Indian Express. Rupees 343 crore plan to supply water to CMCs by 2005. 8 January 2004; The New Indian Express. CM gifts Greater Bangalore
project to city. 6 February 2004.

Page 029
www.circ.in

through the Campaign against Water Privatisation


Karnataka (CAWPKA) launched an agitation against the
"profit-making model" in the project with a series of
protests and marches in Greater Bengaluru that eventually
culminated in a massive protest rally by the urban poor in
the city.26 In the face of the spirited opposition to the project,
the Government of Karnataka backed down from
proceeding with the IFC-initiated project. Currently,
BWSSB has accepted the decision to implement the project
and operate the system (Ranganathan et al., 2009). This
effort reveals the capacity that urban poor have acquired in
the city partly through the BWSSB partnership.

The above discussion on the BATF and BWSSB


partnerships suggests that given the low autonomous
significance of Bengaluru's regime, any reform initiative is
very susceptible to interruption or at least weakening from
political and societal forces whose interests are threatened
by reforms. We see in the BATF case a conclusive employ the women's self-help groups in these partnerships
interruption of reform efforts while in the BWSSB case as a means to increase the awareness among island
reform efforts to privatise water supply in the peripheral residents about water utilisation and the policies of the
areas were weakened by civil society actors. government.28 Given the rising significance of the city,
protest movements on the island that arose against the
Kochi disparity of water availability between Kochi city and
As we have seen, Kochi's water supply regime has recently Vypeen island, have found it exceptionally difficult to
acquired a greater autonomous significance that arises upset the existing regime. Organisers have found it
from the rising political significance of the city in regional necessary to mobilise for sustained confrontation with the
politics, and the nascent predatory nature of its water infrastructure regime in the city. In addition to numerous
supply. The rising significance of the city has made the minor episodes of protest, organisers demonstrated the
existing water supply regime well entrenched, which has popular support for their cause by mobilising large
made efforts to contend with this regime all the more numbers of Vypeen island residents to participate in some
difficult. Vypeen: In the Vypeen case in Kochi, activist civil dramatic instances of protest when island residents laid
society actors have succeeded in weakening the reform siege to Kochi city, bringing the arterial thoroughfares of
transition initiated by public-private partnerships in the city to a halt.29 As a result of this event, protest
Vypeen only through developing an extensive organisers were successful in operationalising a dedicated
mobilisational capacity and through years of sustained water pipeline to Vypeen that diverted water supply meant
protests marked by some dramatic episodes of for Kochi to the island.
confrontation. Vypeen is a large, densely populated island
offshore of Kochi city. Despite large amounts of rainfall, The arrival of piped water supply on Vypeen island has
Vypeen faces a shortage of drinking water because all local been interpreted by VKSS as a successful achievement of
sources of water on the island are saline from ingress of the island-based mobilisation. The strategy of the VKSS by
seawater. As a result, water has to be piped onto the island successfully challenging Kochi's primary claim to water
from the mainland. Before it gets to Vypeen however, piped to the greater metropolitan region has not only
much of the water is diverted to the city of Kochi. Residents initiated a transformation in Kochi's water supply regime
of Vypeen have dealt with chronic shortages of water that from one marked by resource appropriation to one of
periodically intensify during summer. This has been the resource-sharing but also weakened the reform transition
cause for sporadic instances of protest. Forging public- in the regime whereby piped public water was made
private partnerships for the creation of small-scale available only to urban elites in Kochi.
desalination, and rainwater harvesting units are some of
the reform initiatives launched by government agencies to Chennai
enhance water availability on the island. Since 2000, Kerala In contrast with the Bengaluru and Kochi cases, Chennai's
has witnessed an explosion of alternative decentralised high autonomous political significance and the extremely
water production and collection partnership schemes such entrenched and predatory nature of water supply have
as the Swajaladhara project, Varsha and the Jalanidhi.27 created conditions that have muted the potential of partner
These partnerships were instituted between women's self- actors to question the structural solidity of reform.
help groups, island residents and some large non-profit Partnership actors, under such a condition, find it virtually
organisations. While these efforts theoretically do increase impossible to disrupt the water supply regime. At most,
the availability of water, they impose social and economic they can make minor modifications to reform efforts as
costs on island residents rather than on the citizens of seen in the Alandur case.
Kochi. This disparity was the motivation for Vypeen
Drinking Water Protest (VKSS) movement organisers to TWAD Board: The inability of partners to question or resist
the unequal, predatory nature of water supply is best

26
The New Indian Express. Drive against water privatisation soon. 20 November 2005.
27
"In the three panchayats of Elankunnapuzha, Njarakkal and Nayarambalam *in Vypeen+ alone, there are 650 Varsha [rain water harvesting units], that too in
the financial year 2004-05", in The Hindu. Poor response to Swajaladhara scheme. 1 December 2005.
28
with movement organiser and panchayath member, 29 May 2007.
29
Malayala Manorama (in Malayalam). Drinking water project: Vypeen residents blockade the city. 3 May 2005.

Page 030
www.circ.in

evidenced in the structurally aligned reform transition in floriculture. It is also through the engineer's intervention
the TWAD Board partnership. TWAD Board is the utility that the elected representatives of the village have been
that provides water supply and sanitation services to assigned as members of the village water supply
settlements in Chennai's peripheral areas. In 2004, some committee who monitor the operation of water supply in
engineers within TWAD Board sought to change the the village. A second crucial point in the partnership is the
predominantly top- down approach to providing water subsidiary role of the elected representatives (panchayath
supply services to residents by focusing on the relation president and members) in water supply decisions for the
between users and the utility.30 This organisational village.33 Under such conditions of centralisation of power
initiative referred to as the Change Management Group and of Chennai's great regime significance, it is no surprise
sought to forge partnerships between women's self-help that the partnership offers little scope for transforming
groups (WSHG), the local government and utility Chennai's water supply regime. This mode of water
personnel. This partnership was instituted in Pagalmedu extraction was justified by an old woman in the village who
village in the periphery of Chennai's metropolitan area. said - "They are using the water for drinking. How can we
This village lies close to the well fields that pump deny them the right to drinking water"?34 Given the large
groundwater to meet the needs of the city. Between 2003 significance of the Chennai's water regime in Tamil Nadu
and 2004, Chennai suffered a severe episode of water politics, aligning with the existing situation of water
scarcity when all its reservoirs dried up and the city was appropriation is the only path open. Resisting is not an
solely dependent on groundwater from its periphery. The option that is available.
intensive exploitation of groundwater to meet Chennai's
needs deprived the small agriculturists in Pagalmedu of Alandur: Alandur, a suburban neighbourhood in
water, leading to the collapse of their agrarian-based metropolitan Chennai, is notable for the project to create a
economy. Given plentiful groundwater in the region, sewerage system through a public-private partnership.
farmers in Pagalmedu had typically cultivated water- The elected Municipal Chairman of Alandur, Mr. Bharathi
intensive crops such as rice. By the middle of 2004 however, of the DMK party, initiated this partnership in 1996. The
with the severe unavailability of water, agricultural efforts partnership comprised Mr. Bharathi, the private-sector
had ceased to be productive. "That was a difficult time for company that constructed the sewerage project and,
all of us. We had no water to drink. There was no water for importantly, the resident welfare association (RWA) in the
agriculture. In the crisis period, we had to walk long town of Alandur that contributed financially to the project.
distances for even drinking water".31 The partnership was initiated during a period (1996-2001)
when the DMK government in power in Tamil Nadu
It was at this juncture that the TWAD Board partnership created an environment that was very conducive to rapid
was instituted to improve drinking water supply to the infrastructural development. However, this was the time
village. In the absence of any external support for when Mr. Bharathi as the legal secretary of the DMK Party
infrastructural improvement, enhancing the availability of was personally involved in getting Ms. Jayalalithaa, leader
water supply was contingent upon the revival of the of the rival ADMK Party convicted of abuse of power and
agrarian economy in the village. "Given the trouble we corruption during her tenure in government between 1991
were going through we wanted better supply. But the and 1996.35 This legal wrangle, that Mr. Bharathi initiated,
engineer said that each of us would have to contribute was instrumental in unseating Ms Jayalalithaa from the
towards the improvement, [TWAD] Board will not be able office of Chief Minister of Tamil Nadu state after her party
construct it for us. We told him, when we can't feed our won the 2001 state elections. Unfortunately for Mr.
children how can you ask us to contribute".32 Two options Bharathi, an appeal to the High Court and Supreme Court
were available to the partnership to improve the agrarian overruled the conviction and cleared the way for Ms
economy in the village - struggling against The engine of Jayalalithaa's reappointment as Chief Minister in 2002.
groundwater exploitation that the village was trapped
within or adapting to the change and re-making the local Due to Mr. Bharathi's personal involvement in the
economy. Through the partnership, the predominantly rice conviction case, the period (2001-2006) created a very
farmers in the village have adapted to their situation and hostile environment his infrastructural efforts in Alandur.
became drought-resistant flower cultivators. The yields Major roadblocks by way of procedural delays, and
from floriculture have contributed to a marked unreasonably high tariffs crept into the construction and,
improvement in the local economy and made water supply later on, to the operation of the sewerage project
improvements financially viable. Two aspects about the (Gopakumar, 2009). During this phase, due to the
partnership are notable - the critical role of the engineer prevailing political climate, Mr. Bharathi assumed a
from TWAD Board and the marginal role of elected secondary role even as the RWAs moved strategically to
representatives of the village in leading the village. It was use influence and apply pressure on the government to
the initiative of the engineer from TWAD Board in ensure that residents' objectives for an affordable sewerage
consultation with the block development office that system were not compromised.36 Given the pattern of
facilitated WSHG in the village to make the switch to political contestation in Chennai, we have seen, there are

30
"Genesis of CMG". Available at http://cmgtn.com/history.asp, accessed 5 December 2007. Focus group
31
discussion with members of Women's SHG, Pagalmedu, 23 May 2007. "Focus group discussion with members of
32
Women's SHG, Pagalmedu, 23 May 2007.
33
Tamil Nadu is among the few states in India to have actively resisted decentralisation due to a perception among its political elites that making local
governments strong would result in the eventual weakening of the state government. The centralisation of power in the hands of the state government has
been achieved by efforts that have systematically weakened the standing of the local government. In fact, elected village panchayath presidents (VPPs)
although elected by villagers can be removed from office by the district administration if they are perceived to be in contravention of state laws (Natraj et al.,
2006). To add to the reduced standing of VPP, elections to panchayaths in Taminnadu are fought on a non-party basis. Being formally non-political positions
VPPs can rarely tap into bases of support extended by political party organisations. This often leaves the VPP a solitary figure negotiating a sea of powerful
officials with little social or political support.
34
Focus group discussion with members of Women's SHG, Pagalmedu, 23 May 2007.
35
The Frontline. The law and its potency. 17(22): 28 October-10 November, 2000.
36
The Hindu. Reduce maintenance fee, demand residents. 15 January 2004.

Page 031
www.circ.in

few opportunities for civil society mobilisation to influence Investigates whether PPP can indeed transform existing
the existing water supply regime. Through their role in the systems of water supply provision using the example of
partnership, and with Mr. Bharathi's support, RWAs in five PPP efforts in three cities in India. From the
Alandur were able to mobilise support to modify the role of investigation, we can draw out two important points. First,
users in the regime. Thus, despite the high regime water supply regimes vary considerably in characteristics
significance, using its influence the RWAs have been across cities. Given the local nature of water supply
successful in effecting a moderate change in their favour. infrastructure, there is a degree of local specificity to the
As a result of specific political circumstances, the RWAs supply of the resource that does not exist in other
have been able to modify the existing regime by bringing infrastructures. This accounts for the variation across
some citizen considerations in an otherwise structurally regimes. As a result, some cities possess regimes with a
strong regime. greater significance while others possess a regime of much
lower significance within their respective regional/
After comparing the outcomes of these cases on their political contexts. The significance of the regime in this
respective regimes we see that the cases initiate different article is related to the significance of the water resource to
change pathways in the regime. In Bengaluru, a low regime the city and to the autonomous significance of the city in
significance has created the condition whereby politics. In cities like Bengaluru that possess a regime of
infrastructural partnerships can be easily derailed while low political significance and low resource significance, the
reform transitions that seek to transform the water supply regime of water supply has low independent significance.
regime have been interrupted or modified. In Kochi, a On the other hand, a city like Chennai possesses a regime of
medium significance for the water supply regime provides high significance. The significance of the water supply
a context whereby partnerships require extensive regime has a direct bearing on reform processes. Any
mobilisation and strategy to modify the existing change process initiated in a regime of high significance is
infrastructure regime. In contrast, in the Chennai case, the extraordinarily difficult to interrupt or derail by civil
legacy of Chennai's high political significance and high society efforts opposed to it. As a result, in a regime with a
resource significance gives the regime a juggernaut-like high autonomous significance like Chennai's, reform
quality. It requires considerable political strategy and a efforts such as PPP usually align with or reinforce the
unique alignment of circumstances to even effect a slight dynamics of the existing water supply regime.
modification that can transform the regime as we saw in the When civil society efforts seek to change the regime, they
Alandur case. Given the solidity of the regime, aligning or require extraordinary circumstances or skill (such as we
adapting to the regime is the easiest way as in the TWAD saw in Alandur) to make even a minor modification. On the
Board example. Table 1 displays the political dynamics of other hand, in regimes with low independent significance,
infrastructural partnerships in Bengaluru, Chennai and like Bengaluru's, reform efforts can be upset with minimal
Kochi. At the two extremes both the TWAD Board case in Effort (as we saw in the BWSSB case) with civil society
Chennai and the BATF case in Bengaluru suggest that PPPs actors who mobilise to upset these efforts being usually
are unsuccessful in making a change in the regime. In the quite successful in their strategy. In other words,
TWAD Board case, the regime is too significant to make a arrangements that underpin how water supply is provided
change. In the BATF case, the regime has too low in the city can be understood only in their historical
significance again for the PPP to make a change in the contexts.37
regime. However, in the three cases, Alandur, Vypeen and
BWSSB, the partnership was successful in bringing about a A second point concerns the role of PPP in transforming
modification in the regime. In the high significance regime existing water supply regimes in developing cities. By
of Chennai, this modification was brought about by a bringing private actors and civil society groups into
unique political circumstance. In Kochi's medium infrastructural delivery the expectation is that partnership
significance regime, the Vypeen case brought about a efforts can make water supply systems more participative
modification with sustained mobilisation. In Bengaluru's and democratic, which in turn can enhance access of
low significance regime, some mobilisation was able to different groups in society to essential services. It is true
bring about a modification in the regime. that such a characterisation disregards the role of social and
political context that guides infrastructure regimes. PPP
Conclusion efforts are always inserted within existing contexts. It is
Systems of water supply provision constitute one of the these contexts that, to an extent, guide the role of PPP
most politicised infrastructures. Numerous urban, efforts in transforming water supply regimes. Regimes that
regional and international struggles in the recent past have have a lower autonomous existence are often usually more
coalesced around access and process issues associated with accessible and participative of multiple interests. PPP
water-supply and sanitation infrastructures. These efforts within such contexts that seek to transform regimes
struggles have been particularly concerted in cities of the by granting them greater autonomous significance are
developing world where the disparities over access have quite often successfully resisted and the regime change
been especially egregious. International development interrupted. The BATF case demonstrates the success that
agencies expect Public-Private Partnerships to improve partners had in resisting transformations that would have
access to water supply infrastructure. Developing the enhanced regime significance and made them less
concept of water supply regime, this article empirically participative. On the other hand, regimes that have a high
autonomous significance as in Chennai are
37
It needs to be pointed out here that understanding regime significance in terms of political significance and resource significance is crucial, because this
allows evaluating regime significance across different types of infrastructure such as water, electricity or transportation. Thus within any given city, while
regimes share similar political significances, the significance of the resource varies considerably. While a resource like water has incredible political traction,
this is often missing in the case of electricity or transportation. This could possibly account for why privatisation of water supply is such a thorny process
although electricity or transportation services have been privatised with little opposition in several cities. A good example of this is Delhi where water
privatisation efforts have stalled while electricity services have been privatised

Page 032
www.circ.in

hostile environments for genuine participative and The picture that emerges from this article is that PPP efforts
democratic urges since these regimes are insulated from do certainly play a role in initiating regime changes that
the desires or interests of different social groups. Under make them more participative or democratic. The
such a situation, PPP efforts (like the TWAD Board case) significance of the regime in which the PPP is launched
usually reproduce existing regime settings. In this case, a does guide to an extent the role PPPs play. But beyond that,
regime transformation toward a more participative regime strategic action by partners plays an important role in
is unlikely. However, the outcomes of PPP efforts are not initiating pathways of regime change. It is of course much
always guided by the regimes they are located within. easier for partners to initiate these pathways of change in
Under conditions, PPP efforts and the actions of partners regimes with lower significance as Bengaluru as opposed
can become critical for initiating regime change. We see to high significance regimes such as Chennai. But this does
that in all three water supply regimes we considered. not discount the vital role of strategic action in launching
However, the degree of modification is related to the directions of change in water supply regimes.
nature of the regime. In a high significance regime like
Chennai, it is only a unique set of political circumstances
that can ensure regime change in a participative direction.
Under other circumstances, regime alignment is the likely
outcome. In Kochi's intermediate significance regime,
partners require sustained mobilisation which can initiate
regime modification. Given Bengaluru's lower regime
significance, reform modification is achieved easier than in
Kochi or Chennai.
www.circ.in

Few thoughts on policy changes


in PPP in India
(This article is an abridged version of a larger article.)

J.K. Dadoo,
IAS

(I) Regulatory Issues : therefore, feel that there is a plethora of policies


(a) Independence: A strong independent Regulator in the country, creating ambiguity. For those
is necessary for any objective decision making. who are enlightened, they realize that such
All regulators of PPP sectors should be policies are there in every country for different
strong and independents and such people will sectors like Investment, Trade, Environment,
be selected, aided and advised by the private Land, Logistics, Infrastructure etc. Therefore,
sector. these policies cannot be wished away. What is
(b) Absence of Regulator: In sectors where important in the context of PPP is that there
Regulators do not exist, there is need to create a should be transparent guidelines for tendering,
Regulatory Authority like in Real Estate, Food with clear technical parameters and financial
Processing etc. Absence of regulation does not parameters so that a level playing field is
help specially when the vibrant public sector provided to all the concerned stakeholders. If
does cut throat competition and the private the guidelines are clear and the tender notices
sector players look to the Government to
are transparent, then PPP projects will not suffer
provide an objective referee.
from any ambiguity.
(c) Jurisdiction: The Regulator must have effective
(c) One Stop Service Policy an Option: To my
jurisdiction over all the stakeholders and no
mind, any project for which the Government
segment or region should be left out due to any
vague definition of its jurisdiction. cannot provide funds or which is not the task of
the Government, should be put on the PPP
(II) Policy : mode. Therefore, it may not be a one stop
(a) Central Vs. State Policies: Because of the service solution but if a particular facility has to
Constitutional provisions of a Central List, a be provided to the public and Government is
State List and a Concurrent List, the issue of State unable to do so efficiently and effectively, there
v/s Centre normally should not arise. But, is no harm in resorting to the PPP mode
wherever it does, the Constitutional provisions (d) Absence of Policies: PPP is gaining ground in
are clear and they should be followed. India and with more and more success in such
(b) Policy Overlaps and Ambiguity: The private projects, more and more State Governments, and
sector and the normal public do not understand the Central Government are taking up PPP
the functioning of the Government and, projects. A time will come when PPP will

Page 034
www.circ.in

become a norm because infrastructure needs of (b) Contract Standardization: Each PPP project in
this country are too large for Government alone different sectors is different and, therefore, a
to take care. model PPP contract for all projects is not feasible.
However, sector wise standardization has been
(III)Institutional : done by the Planning Commission.
(a) Lack of Legislation: There is really no lack of (c) Government Guarantee: Government
legislation in this matter, because Planning guarantee should not be insisted for most PPP
Commission has taken out several PPP manuals projects because they bring laxity in decision
for different sectors. Today, for any new sector, making. The private sector must do its due
there are consultants available who can prepare diligence and keep up the pressure on the
the PPP document efficiently and effectively. Government for transparent decision making.
(b) Too much delay: When the players in the PPP (d) Cost-time Overrun: There are four reasons for
project play by the rules of the game and keep up cost and time overrun. (i) Any material defects or
the pressure of transparency, the chances of mistakes in the tender document for which it has
delay are very remote. to be re-written; (ii) enforced litigation by
(c) Transaction Cost: A PPP project should be mischievous vendors who do not want certain
undertaken only where normal funding is not parties to bid or to get the contracts; (iii) fierce
possible. The transaction cost of advertising the competition amongst bidders so that the losers
tenders, processing the applications and cannot gracefully exit but want to litigate; (iv)
evaluating the same efficiently and effectively, any biased decision making by the
has to be met and this can be effectively done by decision makers which leads to biased results. A
charging a small fee for the application form, strong Regulator can ensure that this does not
which covers the processing and evaluation costs. happen frequently.
(d) Lack of Transparency: Concession agreements (e) Risk Allocation & Risk Assessment: A project
can be very transparent if the stakeholders agree goes into PPP because of inherent risks and
for such transparency. Lack of transparency is returns. The job of the private vendors is to
very often a result of competing interest and assess this risk and to quote accordingly.
undue influence on the Government decision Government can transparently project the risks
makers. and the returns, and let the market decide what
is the best offer that can come out with.
(IV)Project : (f) Financial Structuring: Financial structuring can
(a) Appraisal/Economic Viability : A very detailed be facilitated through the guidelines mentioned
appraisal of the project may not be required but in the financial parameters listed for decision
what is more important is to determine the making.
single or dual parameter on which the final
(g) Protection against uncontrollable factors: This
vendor will be selected. If there is clarity on this
escape clause is provided by the Government in
point, then detailed appraisal is done by the
private sector partners who put numbers on all PPP projects
each cost and each return, and calculate the (h) Implementation Strategy: For most PPP
bottom line. projects, if due diligence had been done by both

Page 035
www.circ.in

the decision makers and the private vendors, the (d) Competitive Dialogue Process: The
implementation plan will follow smoothly. competitive dialogue process at each stage of the
(i) Service Quality: Service quality again is a PPP project is the only way to remove doubts,
component which has to be clearly mentioned in confusion and trust deficiency. All questions are
the tender document. Fines and penalties for not answered and the entire proceeds are `in camera’.
observing the service quality should also be
clearly enunciated. In short, PPP is a great idea; it requires careful planning
of the tender document with transparent conditions; it
(V) Capacity and Trust : should keep public interest upper-most and should
(a) Lack of Capacity: This is a very important work towards facilitation of that public interest in all
point because capacity building for creating circumstances; the financial and technical parameters
must be clear, feasible and practical; the evaluation
PPP projects does not exist throughout the
process must be transparent, unbiased and in public
country. PPP training needs to be given to all
interest, the Regulator must oversee all this carefully
Civil Servants in their training Institutes and should be available for any consultation,
during probation period so that they clarification or communication.
understand the different processes, and are
able to formulate the PPP Projects when their If all these necessary conditions are met, PPP can be a
time comes. All Collectors in 600 districts need great provider of additional public service to the
to be sensitized about PPP because they are community.
probably the most focal point of decision
making for such projects.
(b) Lack of trust: Lack of trust is an issue which has
to be thrashed out at the stage of making the
tender conditions and discussing it with the
stakeholders. There can be no guarantee of trust
either way, and utmost vigilance on both sides is
necessary for success of any PPP.
(c) Concessions and Competitions: The decision
maker of the PPP project has full right to lay
down transparent tender conditions which
govern entry into the system.
www.circ.in

Public Private Partnership


and Social Infrastructure
(This article is an abridged version of a larger article.)

K.M. Mital,
Institute for Integrated Learning in Management
Vivek Mital,
Financial Management and Derivatives Consultant

Select Cases on Public Private Partnership and Social to improve teacher performance in government schools. It
Infrastructure Development Providing every child sound also provides loan facilities to private schools to expand
education, say, up to high school level is desirable for social their infrastructure and capacity. It also provides loan
and economic reasons. This would prepare more facilities including loan vouchers that allow low income
children to access higher education and courses for families to access the education of their choice, whether
specialized qualifications. They would then be able to public or private (Kamath, 2006).
participate in India's economic progress and its successful
engagement with the global markets (Kamath, 2006). Panchayats and Public Private Partnership
GOI has sought to universalize education traditionally by Traditionally, India's development planning has been at
setting up government schools both in urban and rural macro level and top down that focused too much on big
areas. Many of these schools however at present lack picture such as a big dam or river linking project. During
necessary infrastructure and adequate trained teachers the period of late Shri Rajiv Gandhi as Prime Minister
due to continuously rising population. This is often (1984-89) emphasis was placed on bottom up approach for
discerned in terms of poor academic results and high drop- planning in which local bodies particularly village
out rates (Kamath, 2006). To fill the gap in elementary panchayats would play greater role. This experiment was
education, a number of private schools have come as conceived to meet the menace of drought with people
education providers but with them too everything is not support and part financing belonged to the bottom up
ideal in terms of quality of education or infrastructure approach for planning and poverty alleviation.
facilities. There are apprehensions in achieving larger
development objectives through private schools. Whereas Panchayats can play important role in village cleanliness
on one hand private schools should accord development and village sanitation. Maharashtra's experience with
priorities, parallel efforts should be directed in improving panchayats to promote sanitation and hygienic
government school system (Kamath, 2006). practices is a case-in-point (Iyer, 2006). In Maharashtra,
between 1997 and 2000, a record 1.7 million toilets were
ICICI Bank, a premier private bank in the country, as part constructed by the state government but hardly fifty per
of its social objectives, has come out with several solutions cent of them were actually utilized by villagers with large

Page 037
www.circ.in

number converted into storage space by the unscrupulous farmers on the basis of family size. This new basis of water
farmers. Arising out of constitutional amendments, the allocation, motivation of rural entrepreneurs, and
Government of Maharashtra involved village panchayats continuous monitoring of activities by 'pani panchayat' led
in their Clean Village Campaign (Sant Gagde Baba to spectacular success of this novel experiment.
Swachchta Abhiyan) and achieved impressive results in
proper use of the facility created. Several leading IT and Telecom companies are already
partnering with panchayats in distributing ICT services in
Maharashtra government provided necessary rural areas. Tata Teleservices, a cellular service provider, is
administrative, technical and financial support to the partnering with panchayats in distributing its services in
panchayats for creating awareness among villagers rural areas. Telecom industry associations like the
towards cleanliness. As an incentive to panchayats, it Cellular Operators Association of India and the
introduced a cash prize of Rs. 2.5 lakh to be awarded to a Association of Unified Service Providers of India are also
gram panchayat for pushing this programme, but with the supporting panchayat-business or in more common-
rider that the award money is to be used for improving terminology public-private partnership in rural sector.
village infrastructure only (Iyer, 2006). Encouraged by the Rural-urban divide in rural telephony is wide considering
results, Government of Maharashtra, increased its outlay that urban tele-density is 31 per cent while in rural areas it is
to Rs. 200 crores on sanitation for building more toilets in barely 2 per cent (with overall tele-density as 20 per cent in
next stage of its programme (Iyer, 2006). During water June 2007). India as of 2006 had over 100 million mobile
crisis in eighties, Maharashtra faced severe drought when users which may touch 200 million mark by 2007 and 500
fifty lakh people were on look out for alternative means of million by 2010 (Monga and Philip, 2006). With
occupation as it was not possible to go ahead with participation of several agencies including panchayats the
agriculture without water. The only alternative source of total number of telephone subscribers reached 225.21
subsistence, which the state administration could think of million at the end of June 2007 as compared to 218.05
providing to farmers was stone breaking at a paltry rate of million in May 2007.
Rs. 2 per day.
Intel, the world's largest semi-conductor company, is
It occurred to Vilasrao and a group of rural entrepreneurs planning to reach India's all villages with one lakh IT kiosks
struggling to earn livelihood that rural entrepreneurs through public private partnership. These kiosks to be
could instead divert their energies for conserving rain called as common service centre (CSC) provide various
water which could meet formidable challenge posed by services with the help of a personal computer and the
drought. Local authorities particularly the district collector internet connectivity. Intel has entered into a
showed keen interest in building structures for water memorandum of understanding with the Infrastructure
storage and extended all possible support to the farmers for Leasing and Financial Services (IL&FS), under which the
building the local water bodies (Salunkhe, 2004). ILFS will provide technical know-how. Intel will also offer
advisory services for wireless implementation towards a
Highly motivated rural entrepreneurs spared no efforts in rural broadband programme. Intel, as a pilot project, has
building scores of water storage structures in record two to already set up such centers in Karnataka, West Bengal and
three months' time, and when the rains actually arrived, Bihar. The CSCs are set up by individual entrepreneurs, to
huge storage capacity was already in place for storing rain be financed by financial institutions such as ICICI Bank,
water. Initially, the pilot project was limited to 15 villages, while companies like HCL Technologies, HCL Infosystems
but later on structures were built practically in all areas that and Wipro Infotech shall make hardware supplies in public
were hard hit by the drought. If the experiment is private partnership mode.
successful in one state, it can be replicated anywhere in the As a case-in-point till 2006, Nagaland was facing a huge
country. problem of teacher absenteeism. Government of Nagaland
found a solution to this problem by introducing system of
Realizing that land among farmers is not divided 'public scrutiny and management', under which the control
according to family size but it is largely the result of and management of government schools were handed
individual family circumstances, it occurred to Vilasrao over to the people, through their village education
that if not land at least water could be allocated among poor committees (VECs). Under this scheme of public private

Page 038
www.circ.in

partnership, all 1500 primary schools in the state were and artisans from the problems they otherwise face from
under the purview of public management, which resulted unscrupulous village money lenders, who charge
in marked improvement in both teacher and student exhorbitant rates of interest prejudicial to the interests of
attendance (Singh, 2006). farmers and artisans (Singh, 2006).

This public private partnership model through 'public NGOs and Social Infrastructure
scrutiny and management' was not only used in education Several leading NGOs such as CRY (Child Rights and You),
but also in other sectors such as electric power supply, 'Pratichi Trust' and Pratham and corporates such as Azim
water supply and rural tourism. This PPP model has Premji Foundation (APF) of Wipro Technologies are
worked scheme of public management has worked well for providing helping hand to the government in its
streamlining electricity revenue collection. The project is mammoth task of providing elementary education to
managed by village electricity management boards country's large children population and improving literacy
(VEMBs) set up under VCs. This was in aftermath of the levels of adults. With an annual disbursement of over Rs. 13
single-point metering (SPM) installed under Rajiv Gandhi crore, CRY maintains five regional offices countrywide and
Grameen Vidyutkaran Yojna (RGGVY). Following SPM, employs over 170 full time employees. Prof. Amartya Sen
electricity revenue collection in Nagaland increased from for giving boost to social infrastructure including
Rs.2, 41,302 annually to Rs. 4,48,534 annually with the elementary education and healthcare in South Asia, Prof.
Kohima division registering the highest growth of 122 per Amartya Sen, India's Nobel Laureate in Economics, set up
cent (Singh, 2006).. 'Pratichi Trust' in 1999, with some of his Nobel Prize
money, an NGO which is very active in India and
VEMBs receive retail margins of 20 per cent for every unit Bangladesh.
sold and employ personnel through the rebate they
receive. Several VCs are even engaged in generating The Pratichi Trust works as driver of change to ensure that
electricity and own and operate a micro-hydro power plant social infrastructure operates with quality. In India, the
at Chizami village and a Biomass Gasifier Project at Trust has been so far more active in West Bengal and
Pfutseromi village. The state government has sought Jharkhand. In 2001, Pratichi (India) Trust conducted surveys
Planning Commission's approval to provide financial on primary education, healthcare service and role of trade
grants to the private local bodies to allow them to function unions in select areas, by holding discussions with all
as financial intermediaries to give cheap credit to local stakeholders including parents, teachers, government officials
farmers and artisans under public private partnership. The and society at large. In 2004, worked to improve the plight of
VDBs already have substantial corpus, which requires to some 1200 schools and 250 Shishu Shiksha Kendras attended
be supplemented by grants from the government. by the poorest of the children whose parents include sex
According to the state government, given the closely-knit workers, beggars and domestic help. In 2005, Pratichi Trust
society and sound village administration, the VDBs/VCs with a local NGO, 'Ayo Aidari Trust' near Shantiniketan, to run
are in an advantageous position to ensure timely recovery a healthcare centre at Kundaphari village near Dumka and has
of such loans. This PPP cooperation backed by careful managed to revive the once abandoned immunization
monitoring and support of local people protects farmers programme in the area (Majumdar, 2006).
www.circ.in

for the poor. Slum upgrade programme of the SEWA (Self


Employed Women's Association) in Gujarat found that 35
per cent of the households who availed the loan facility also
increased their weekly earnings by 35 per cent, due in part
to the benefits of loans for home improvement, electricity,
sanitation and piped water supply (Selvarajan, 2006).

Corporate Social Responsibility and Social Infrastructure


Corporates in the first instance should provide welfare
facilities for its employees such as education and health
care facilities including crèche facilities for working
women at its works. Corporates and NGOs under CSR
obligations can offer technological back-up support for
design of low cost housing, village drainage system,
sanitation, solid waste management, drinking water
supply, warehousing for grain and seed storage, crop
drying, decentralized energy systems, street lighting, etc.
depending on the type of expertise available with them,
In 2005, Pratichi tried to evaluate the effectiveness of 'mid- which they may share under CSR obligations.
day meal scheme' and its recommendations following
evaluation were later forwarded to the HRD Ministry. GOI Contribution of private sector in GOI's flagship
forwarded its recommendations to the Planning programme 'Sarva Shiksha Abhiyan' under public private
Commission and all the district collectors. This was partnership is showing impressive results. Several IT
followed by a meeting between select parents and teachers companies including Wipro through APF, IBM, Microsoft,
at the state education department headquarters in Kolkata. NIIT, Hewlett Packard, and Aptech have made noted
Following its recommendations, the West Bengal contribution through computer-aided learning in
Government, launched a massive advertisement scheme, alternative and innovative education component of SSA.
set up helplines through newspapers and incorporated The APF has emerged as a clear leader with its presence in
mothers' committee to involve parents. In 2006, it 12 states. Madhya Pradesh, Karnataka, Maharashtra,
conducted a survey of private schools in Birbhum, findings Tamil Nadu, West Bengal, Jharkhand and Haryana have
of which were presented in a public meeting held at received maximum corporate support (Mukul, 2006).
Shantniketan, which was also attended by Prof. Amartya
Sen (Majumdar, 2006). Contribution of private sector has gone up from Rs. 40.36
crores in 2005-06 to Rs. 53.43 crore in 2006-07 benefiting
Pratham is another leading child welfare NGO in India 27,289 schools and 52.83 lakh children in IT-enabled
which has annual budget of over 36 crore, was launched in learning under their CSR initiatives. Microsoft invested Rs.
1994 with a mission to ensure that every child is in school 9.89 crore in 2006-07 as against Rs. 7.64 crore in 2005-06.
and learning well. Pratham has played a major role in the During 2005-06 and
conceptualization of the Sarva Shiksha Abhiyan
(Education for All). It works on a tripartite partnership 2006-07 combine, APF spent Rs. 8.06 crore in Karanataka.
between state governments, corporates and grass root During 2006-07 APF spent Rs. crore 4.35 crore in Tamil
voluntary organizations. Nadu. Everonn Systems India Ltd. spent Rs. 6.15 crore in
2006-07 on computer-aided learning in Jharkhand (Mukul,
During 12 years of its existence till 2006, it was operational 2006). Bill Gates, world's greatest IT wizard owning over
in eighteen states, it has made 5 lakh children literate $50 million who evolved an extraordinary software and
though application of its intensive 21 day reading and basic gave new meaning to the word 'windows', has donated
mathematics programme. Based on survey of 485 districts, more than half of his personal wealth to the 'Bill and
vide its Annual Status of Education Report (ASER)-2005, it Melinda Gates Foundation', making it world's largest
reported that almost half of the students in class VII are philanthropic organization devoted to health and
unable to exhibit the learning and comprehension levels education issues, especially in developing nations.
they should have achieved in class II. Apart from Pratham
and CRY, there are several other NGOs which are working In June 2006, Warren Buffett, donated 85 per cent of his
towards child welfare. Delhi-based NGO Pravah sensitizes personal net worth ($30 billion), largest philanthropic gift
students and teachers on issues like communal harmony in history, to the Bill and Melinda Gates Foundation.
and sexual harassment. A Delhi-based iDiscovery Centre
for Education and Research works on education-based When donating 85 per cent of his personal wealth to the
projects like innovative teaching, outdoor education and Melinda Gates Foundation, Warren Buffett observed that
leadership development for corporates. Prayas works for he was applying the same principle to charity as he did to
protection of children and employment generation for the business by 'entrusting money to where it would be put to
marginalized. best use, with optimum efficiency.' (Nangia, 2006).

Habitat-building and housing-repair create opportunities Warren Buffett's extraordinary deed has the potential to
to earn money and other micro-enterprise opportunities spur a few more among the super rich to address the plight

Page 040
www.circ.in

of the sick and uneducated. The ultra-rich may derive for higher education, 1.5 per cent of GDP allocation for
inspiration from the Warren Buffett's famous quote, 'A rich higher education, commercial utilization of the
person leaves his kids enough to do something, but not universities' land for raising funds (Pitroda, 2007). Given
enough to do nothing.' Warren Buffett's lead in this the substantial risks involved, private sector may not
direction is indeed an act worth emulating by ultra-rich be too enthusiastic about teaming with the bureaucracy to
anywhere in the globe (Bhat, 2007). Bill Gates is on record provide and manage infrastructure facilities (Kabra, 2006).
having said that his three children will only get a small In view of low economic returns, corporates may not be
portion of his personal wealth. interested in public private partnership projects in several
areas such rural connectivity, rural energy, rural
It is very gratifying that world's richest man Bill Gates, has healthcare, rural housing, etc. but may evince more interest
chosen to pursue philanthropy as the road ahead for his in strategic CSR initiatives such as contract farming,
rest of life. There are very few examples of likes of Bill Gates contract research or contract manufacturing. Education
and Warren Buffett donating their huge portions of and healthcare and other social infrastructure
personal net worth for the cause of social welfare far development should thus be accorded much greater
removed from their chosen fields of expertise (Bhat, 2007). priority by the government than made so far with support
of all including PRIs (Panchayati Raj Institutions), NGOs
7. Concluding Remarks and corporates. Contributions made by NGOs such as CRY
India's capability wealth has made significant strides that and Pratham and corporate entities like Azim Premji
enabled country launch satellite into outer space, make Foundation in improving elementary education in the
noted contributions in computer science and software country in supplementing government efforts on a large
development, but it could not achieve matching success in scale are worth emulating by others. For success of PPP
elementary education and primary healthcare. It is thus models it is necessary that public capital (coming as it does,
appropriate only that RBI has asked states to spend more tied-in with government control) and private capital (tied-
on education, public health and family welfare (The up with private sector efficiencies and incentives) have to
Economic Times, January 5, 2007). According to the recent be utilized in most effective manner with minimum of red-
RBI guidelines, states need to accord much greater tapism or adhocism (Chatterjee, 2006). For best operating
allocation on social infrastructure than it made so far. Mr. results and resolving day-to-day conflicts, regulatory
Sam Pitroda, Chairman, Knowledge Commission, has authority such as AICTE (All India Council of Technical
recently come out with host of suggestions, to tap country's Education) for technical and management education
knowledge base for country's all-round development. projects, MCI (Medical Council of India) for healthcare
Suggestions are wide-ranging starting from massive projects or TRAI (Telecom Regulatory Authority of India)
expansion in higher education with 1500 new universities, for telecom projects play very useful role. PPPs need
a national knowledge network with gigabit capabilities to facilitative environment of independent regulatory
connect all university libraries, laboratories, hospitals and authorities that help resolve conflicts among stakeholders.
agricultural institutions; independent regulatory authority
www.circ.in

Impact of Public Private Partnership


in infrastructure on growth in India
Dr. P. Ambigadevi
Professor of Economics,
Avinashilingam Institute for Home Science
and Higher Education for Women

Dr. S. Gandhimathi
Assistant Professor of Economics (SG)
Avinashilingam Institute for Home Science
and Higher Education for Women

ABSTRACT document estimated that India has to double its


Impact of Public Private Partnership in Infrastructure on infrastructure spending. Hence it is imperative for the
Growth in India government to change its stand and initiate the public
Infrastructure is an important component in the private partnership in infrastructure investment for
development of an economy. How a positive relationship achieving higher growth rates. The current study is an
exists between economic growth and infrastructure attempt to find out how public private partnership in
development is brought out in various studies (World projects related to infrastructure leads to growth in GDP.
Bank, 2009). Prior to 1991, it was the prerogative of the The findings of the study showed that increase in the
government to invest in infrastructure as it demands huge number of projects in infrastructure under public private
investment. But after the economic reforms of 1991, the partnership would enhance the growth process...
government changed its policy decision of the lone
provider of huge investment in infrastructure as it could Introduction
not meet the financial requirements of infrastructure with Infrastructure development is an indicator of the
the growing population and globalization. But care has to development of an economy. Prior to 1991, investing in
be exercised in taking a decision on investing in infrastructure was primarily carried out by the
infrastructure avoiding the erroneous decisions taken by government, owing to its huge size. But with growing
Latin American and East Asian countries in the 1990s when population the government found it difficult to meet the
they faced financial crises. financial requirement of infrastructure and it started
inviting public private partnership in various fields. One
Reducing investment in infrastructure turned out to be a such area is in infrastructure. By sustaining its commitment
short-sighted fiscal solution, making it all the more difficult to infrastructure investment, India should also see that it
for these countries to get out of recession. The XI plan does not commit the mistakes made by many Latin

Page 043
www.circ.in

American and East Asian countries in the 1990s when they Indonesia's total public investment in infrastructure
faced financial crises. In Latin America, one-half of the fiscal dropped from about 7 percent of GDP in 1995-99 to 2
adjustments in the 1990s came through cuts in public percent in 2000, and private investment fell from 2.5
infrastructure spending. A similar investment shortfall during percent of GDP to 0.09 percent during the same period.
the Asian crisis led to similar decisions. For instance, Reducing investment in infrastructure turned out to be a

(Table-I)
Public Private Partnership In Infrastructure In India (2009-2010)

States Number of projects Percentage of projects Value of the projects(Rs) Percentage

Andhra Pradesh 96 12.66 66,918.30 17.46

Assam 4 0.53 391.2 0.10

Bihar 6 0.79 2,093.80 0.55

Chandigarh 2 0.26 75 0.02

Chhattisgarh 4 0.53 838 0.22

Delhi 13 1.72 11,316.60 2.95

Goa 2 0.26 250 0.07

Gujarat 63 8.31 39,637.20 10.34

Haryana 10 1.32 11,163.10 2.91

Jammu and Kashmir 3 0.40 6,319.80 1.65

Jharkhand 9 1.19 1,704.10 0.44

Karnataka 104 13.72 44,658.90 11.65

Kerala 32 4.22 22,281.50 5.81

Madhya Pradesh 86 11.35 14,983.40 3.91

Maharashtra 78 10.29 45,592.00 11.89

Meghalaya 2 0.26 762.1 0.20

Orissa 27 3.56 13,349.70 3.48

Puducherry 2 0.26 3,366.80 0.88

Punjab 29 3.83 3,562.50 0.93

Rajasthan 59 7.78 15,027.30 3.92

Sikkim 24 3.17 17,110.60 4.46

Tamil Nadu 43 5.67 18,628.60 4.86

Uttar Pradesh 14 1.85 26,595.80 6.94

Uttarakhand 2 0.26 521 0.14

West Bengal 30 3.96 6,617.10 1.73

Interstate 14 1.85 9,567.80 2.50

Total 758 100 383,332.1 100

Source : Department of Economic Affairs, Ministry of Finance, Government of India, 2010

Page 044
www.circ.in

short-sighted fiscal solution, Making it all the more regression analysis was identified as more suitable than
difficult for these countries to get out of recession. By the regression analysis which would be biased in the
contrast, China demonstrated 10 years ago that wisely present analysis. The following table-1 shows the results of
chosen infrastructure projects can create jobs while logit regression analysis. The equation used in the logit
building a foundation for productivity, growth, regression analysis is
employment generation, and poverty reduction. India
faces extraordinary challenges in achieving its medium- G*= z+e
term infrastructure investment programme, anchored in where G = probability of a state with presence or absence of
the Government of India's XI Five-Year Plan (2007-12). The growth.
plan has estimated that US$492 billion is needed over the Y = parameter co-efficient
next five years in improving roads, railways, ports, power, Z = Number of projects in infrastructure under public
And water. (Over the X Plan period, infrastructure private partnership(Number), value of projects under
spending was about US$200 billion). This would require public private partnership up to Rs100 crore (projects
almost doubling infrastructure spending from its current 5 between Rs101- 250 crore , projects between Rs 251- 500
percent of GDP (XI plan document).In this backdrop, an crore and projects More than Rs 500 crore . In the process of
attempt was made to analyse the impact of public private analysis, the variable, projects more than Rs 500 crore was
partnership on economic growth in India with the excluded. The remaining variables are retained in the
following specific objectives analysis.

Objectives Results and Discussion


1. To study the state wise distribution of projects in The development of PPPs in infrastructure started eleven
infrastructure under public private partnership. years back. Most of the projects were completed in the last 5
2. To assess the impact of public private partnership in to 7 years. Policies in favour of attracting private
infrastructure on growth. participation as well as innovation with different
structures had met with varying degrees of success. Some
Methodology sectors like telecommunications, power, and ports and
Secondary data for the study were collected from roads had very good progress compared to limited
Economic Survey, 2009-2010 and Ministry of Finance, 2010. success in other sectors. (Ministry of Finance, Government
To measure the impact of public private partnership in of India, 2010).The development of states depends on
infrastructure on growth, logit regression analysis was infrastructure. Hence an attempt was made to analyse the
employed for state wise data for the period 2009-2010. The distribution of projects under public private partnership.
states were classified as states with presence of growth and The table -1 shows the distribution and percentage of
absence of growth based on state domestic product. The projects under public private partnership across states in
states with net state domestic product (at constant prices) India in 2010.
above national net state domestic average were assumed
as states with presence of growth and the states with their The number of PPPs was higher in number in the states
net state domestic product below national average were of Karnataka, Andhra Pradesh, and Madhya Pradesh, with
treated as states absence of growth. The number of projects 104, 96 and 86 awarded projects respectively. The
under public private partnership and the value of the percentage of projects distributed in these states was 13.72,
projects under public private partnership were assumed to 12.66 and 11.35 respectively. The highest value of the
determine the growth of the states. Hence these factors projects was observed in the state of Andhra Pradesh
were taken in the logit regression analysis. The logit followed by Maharashtra and Karnataka.

(Table-II)
Impact of Public Private Partnership in Infrastructure on Growth
In India - Logit Regression Analysis

Variables Logit Coefficients t value Significance level

Constant 2.1528 1.856 Significant at 10% level

Number of projects under PPP 0.1486 1.978 Significant at 5% level

Project value up to Rs 100 cr. -0.0081 -0.985 In Significant

Project value between Rs 100 cr. to 250 cr. 0.0223 1.885 Significant at 10% level

Project value between Rs 251cr. to 500 cr. 0.0071 0.154 In Significant

Project value above Rs 500 cr. 0.0009 1.262 In Significant

Source: Estimated from the data, Department of Economic Affairs, Ministry of Finance, Government of India, 2010

Page 045
www.circ.in

References
1. Government of India, (2010), Public Private
Partnership, India Data Base, Department of Economic
Affairs, Ministry of Finance, Government of India,
New Delhi.
2. Economic survey, 2010-2011, (2011), Government of
India Publication, New Delhi.
3. World Bank, (2006). India-Building Capacities for
Public-Private Partnerships, Washington, D.C.: World
Bank.
4. Government of India, Ministry of Finance,
Department of Economic Affairs, Web site of the
Committee on Infrastructure: www.infrastructure.gov.in
5. Government of India, Right to Information (RTI) Act
(2005), www.rti.nov.in
6. Government of India, Ministry of Finance,
Department of Economic Affairs, “Guidelines on the
Formulation, Appraisal and Approval of PPP
Projects” (2006), www.infrastructure.nov.in.
7. Government of India, Ministry of Finance,
Department of Economic Affairs, Scheme for
“Financial Support to Public-Private Partnerships in
Infrastructure” (2006), www.infrastructure.gov.in.
To identify the impact of public private partnership in 8. Government of India, Ministry of Heavy Industries
infrastructure on growth, logit regression analysis was and Public Enterprises, Department of Public
employed for state wise data for the period 2009-2010. The Enterprises, “Guidelines on Corporate Governance for
states were classified as states with presence of growth and Central Public Sector Enterprises” (2007),
absence of growth based on net state domestic product. http://dpe.nic,in/newsite/ncncpse.pdf
The number of projects under public private partnership 9. Infrastructure Public-Private Partnership (PPP)
and the value of the projects under public private Financing in India, Draft (2007)-Report by Price
partnership were assumed to determine the growth of the Waterhouse Coopers for the World Bank
states. Hence these factors were taken in to logit regression 10. World Bank, (2002). “Improving India's Investment
analysis. The table-2 shows the results of logit regression Climate”, Washington, DC: World Bank.
analysis. The result shows that the estimated logit model 11. The world Bank (2009), Report on financing public-
was statistically significant at 1% level. It could be private partnerships in infrastructure through support
identified from the significant chi-square value (10.7621). to the India infrastructure finance company limited.
It implies that the selected variables together were Report No: 42132, Washington, DC: World Bank.
statistically significant to explain the model. Among the
selected factors, the number of projects under public
private partnership was statistically significant to
determine the growth of states. It had positive relationship
with growth. It implies that the increase in the number of
projects under public private partnership in infrastructure
could contribute to growth of states. The project value
between Rs. 100 crore and 250 crore was statistically
significant at 10% level. If the projects between Rs. 100 crore
and 250 crore had increased, the growth of the states could
be improved. Other factors turned out to be statistically
insignificant and could not contribute to growth of states.

Conclusion
Higher percentage in the number of projects under PPP
was observed in the states of Karnataka, Andhra Pradesh,
and Madhya Pradesh. The highest value of the projects was
observed in the state of Andhra Pradesh followed by
Maharashtra and Karnataka. The increase in the number of
projects in infrastructure under public private partnership
could bring growth in the states. If the projects between
Rs. 100 crore and Rs. 250 crore had increased, the growth of
the states could be improved.

Page 046
www.circ.in

Public Private Partnerships:


Present Experience, Challenges And The Way Forward
Piyush Tiwari,
Associate Professor in Property,
Faculty of Architecture Building and Planning, University of Melbourne

Ranesh Nair,
IDFC, Policy Group

Large infrastructure requirement number of sectors have been experimented with over the
India's burgeoning demand for infrastructure, the need to last decade. The pattern and extent of private sector
catch-up on its infrastructure deficit at breakneck speed contribution have, however, varied across the sectors. The
and the limited capacity at government levels to deliver exhibit highlights the contribution of the private sector in
complex projects have made Public-Private Partnerships different sectors.
(PPPs) an interesting proposition for delivering India's
infrastructure needs. India's road sector has been at the forefront of PPP activity
in the country. Since 2005, 86 per cent of the total national
The Planning Commission of India has projected the share highways development has been procured through PPPs
of infrastructure requirements to be about 9 per cent of under the National Highway Development Programme.
GDP by 201112, up from 5.75 per cent of GDP in 2007-08. Private intervention has been in the form of Build Operate
Infrastructure investment is projected to be US$ 1 trillion Transfer (BOT) contracts on a toll basis (with government
for the period 2012-17, twice the figures from the current providing Viability Gap Funding for commercially
Plan period. While still preliminary, some estimates unviable projects), BOT contracts on an annuity basis (with
indicate that of the total investment in infrastructure over the government retaining the revenue risk), and special-
the last 5 years, private sector contribution has been in the purpose vehicles (with limited equity or debt support from
range of 35-40 per cent. This is expected to reach US$ 500 the government). At the state level, close to 100 road
billion (50 per cent of total) in the coming 5 years. projects with capital costs totaling about US$1.4bn have
been implemented through PPPs, a further 155 road
Growing role of private sector in infrastructure through PPPs infrastructure projects are either under implementation or
Still in its early years of evolution as a procurement model, in the pipeline with required total capital investment of
a range of public private partnership (PPP) models across a about US$2.2bn. Air ports have seen an array of PPP

Page 047
www.circ.in

Exhibit 1: Projected Private Sector Investment in Infrastructure in India (2007-2012)

Total Investment Private sector investment as a % of total investment (RHS)

180 80
160 70
140 60
120
50
100
40
80
30
60
40 20

20 10
0 0

..
n

e
s

ns

ts

as
ity

d.
ge

ay

rt

ag
io

or

G
an
io

Po
ic

at
rid

ilw

or
irp
at
tr

rig

ly

St
ic
ec

Ra

A
dB

pp
un

Ir
El

an

Su
m
m
ad

er
co

at
Ro

le

W
Te

Source: Planning Commission, 2010

Models deployed ranging from up-gradation of existing But, PPPs in urban and social infrastructure have lagged
airports (examples Delhi and Mumbai) to Greenfield behind
airports development (examples Hyderabad, Bangalore, While India has witnessed significant private sector
Kochi). Delhi and Mumbai airports have been upgraded on momentum in the major infrastructure sectors, the basic
a Lease Develop Operate Transfer (LDOT) model, infrastructure sectors like water and wastewater, urban
Hyderabad and Bangalore greenfield airports on Build transport, rural infrastructure, education and healthcare
Own Operate Transfer (BOOT), while Kochi airport was have yet to attract the same kind of private sector attention.
procured on Build Own Operate (BOO) model. Multiple With the recent PPP successes in the major infrastructure
revenue streams such as aeronautical services, aero related sectors and a healthy pipeline of projects, the focus should
services, revenues from terminal related commercial also be on urban and social sectors which clearly have the
activities such as advertising and shops; and other potential to attract private capital, provided they are
commercial activities such as real estate development have supported by the right administrative and regulatory
attracted private players to this sector. frameworks at the states and municipalities levels. Due to
prevalence of low user charges (inadequate even to cover
PPP in the major sea ports, which are controlled by the O&M of urban services) and lack of political will to
central government have been through leasing out existing rationalize them has led to the belief that the revenue risk in
port assets and creation of additional assets such as urban and social sector projects is too high to make them
container terminals, jetties and berths on BOT toll, commercially viable for private sector engagement.
examples include container berths at the Chennai, Kochi
and Kandla ports and bulk cargo berths at Haldia, Ennore, The Jawaharlal Nehru National Urban Renewal Mission
and New Mangalore. At the state level, twenty minor sea (JNNURM) has seen momentum pick up in the urban
port projects with capital commitments of about US$4.3bn sector, including some activity in the PPP space. About 50
have been delivered through PPP with a further 37 ports urban projects have been delivered in PPP model in India
currently under implementation necessitating capital since the start of the Mission. PPPs in the urban sector are
investment of US$11.2bn. Railways, which have started comparatively small in terms of capital cost. The average
procuring and delivering services through PPP recently, deal size across the 50 urban PPPs completed to date is
has witnessed 4 projects with capital investment of over about US$26m, by contrast the average deal size across the
US$1bn currently under implementation with a further 50 20 sea port projects initiated at state level and delivered
projects necessitating investment of circa US$19.5bn in the through PPP is about US$214m, whilst the average deal
project pipeline. At the state government level, rapid size within the power sector is about US$278m. The small
expansion of PPPs within the power sector is projected. To deal size has also limited private sector interest in urban
date, 7 power projects have been delivered through PPPs, and social sectors.
8 projects currently under implementation and a further 34
in the project pipeline.

Page 048
www.circ.in

There are a number of constraints for the PPPs


A number of reasons can be attributed to the slow pace of
private sector participation. Even when projects have been
awarded, project implementation has been stifled by the
absence of adequate project development leading to
protracted negotiations and delays. Procurement issues,
with projects based on negotiated contracts and not always
through a competitive bidding process are also observed.
The lack of credible baseline information has meant that
project costing are not accurate, with instances of huge data
errors identified after project commencement, impacting
project costing and leading to post-contract award
negotiations and delays. (Sathyanarayana and
Ramaswamy, 2011)

From a financial perspective, projects are not always


bankable, and this has hampered both private sector from
putting capital and banks lending to projects. Underlying
all this is the lack of security of payment to the private
Though there are some recent activities in urban and
social sectors operator given the weak financial position of government
bodies, especially in the urban sector. With state
Some of the successful PPP projects include the continuous guarantees not always being made available, private sector
water supply projects in the pilot zones of the 3 North has been hesitant to enter given the risks associated with
Karnataka cities of Hubli-Dharwad, Belgaum and timely payments. The lack of government support and
Gulbarga and the recently awarded contract for the full city political will in seeing the projects through is also a major
water distribution in Nagpur. A number of sewage impediment in the successful implementation of PPPs.
treatment plants have come up in the recent past in PPP PPPs that have been backed by strong political leadership,
mode, like in Navi Mumbai. The Municipal Solid Waste supported by the bureaucratic set up and implemented
2000 Act has provided a legal framework for the solid within a clear regulatory environment have shown better
waste management sector and with impetus under results.
JNNURM has seen a number of projects primarily on the
Way forward
collection and transportation part of the solid waste value
The key to success of PPPs in infrastructure creation is the
chain, with remuneration being in the form of tipping fees.
need to establish payment mechanisms that
Examples of SWM projects with PPP participation include
eliminate/lower revenue risk on projects. The success of
those at Delhi and Rajkot. A handful of projects like in
PPP models in the power sector, can in large, be attributed
Mysore and Bangalore have also come up on the treatment
to the power purchase agreements, which are irrevocable,
side. In the water projects, private sector operates the water
between the private producer and public sector. Similar
distribution network receiving revenue from user charges
has been the case with the national highways, annuity
or annuity payments from ULBs, with the downstream
payment agreements with national agency, NHAI. Projects
investments being made by the government. City bus
in urban sector and other sectors like social infrastructure
service projects requiring modest capital investments and
could attract private players, if arrangements that reduce
the ability to charge user fees and other revenue streams
revenue risk for the private sector could be thought
like commercial rents and advertisements, as in the case of
through.
Indore and Surat, have also resulted in PPPs.
The requirements in the urban and social infrastructure
Education and healthcare have also seen some projects
sectors are also large and attention should now be on up-
delivered through interesting PPP models. For example, in
scaling few pockets of success that the sector has seen. The
the case of the 46 aided primary schools of the Municipal
major constraint in the urban sector is the revenue risks
Corporation of Delhi, the private sector is responsible for
attached with the projects, given that most of them rely
design, finance, build and manage activities, with the
mainly on user charges as the major revenue stream and
delivery of education services resting with the public
these are subject to political pressures. In formulating PPP
sectors. In healthcare, the Rajiv Gandhi Super Specialty
arrangements, it might be worthwhile to separate pricing
Hospital in Raichur, Karnataka is an example of PPP where
risks from performance risks, with the onus on
the initial infrastructure (land, building, staff quarters and
performance delivery purely lying with the private
support infrastructure such as power, water and road
operator. Suitable payment guarantee mechanisms as tried
connectivity) is provided by the Government of Karnataka
out in the power and highway sectors are important
with Apollo Hospitals authorized to operate the hospital
instruments to attract private players. This should be
using private resources. In all these models, a combination
supplemented by government schemes and VGFs that can
of capital grant/subsidy and user charges is required. A
make projects bankable. The recommendation of the High
general problem with urban and social sector projects is the
Powered Committee on revenue sharing between state
limited revenue generation potential outside the core
governments and urban local bodies can provide the much
tariffs charged for the services except few projects where
needed predictable, guaranteed transfers which can also
advertising or real estate based revenue streams could be
serve as an important lever to tapping the debt markets for
exploited.
project financing.

Page 049
www.circ.in

The huge investment needs and the recent successes in the Given the shortage that exists in infrastructure sector
use of private participation in the delivery of infrastructure investments, government would continue to play the
projects provide ample pointers that PPP as a delivery dominant role in the short term. Private sector could come
mechanism is a viable option. However, it is important to along where efficiency gains through their engagements
not look at PPPs as purely financing instruments, but more could be achieved. However, this would require certain
importantly as collaborative models (like work in progress boundary conditions to be met such as good baseline data,
experiments that would require fine-tuning) that can public sector capacity to conceive, structure and administer
enhance operational efficiencies, deliver on time, adopt PPPs and effective regulation (either through contracts or
latest technology, and address the capacity constraints in through independent regulatory agencies). Also, not all
the implementation of infrastructure projects. Moreover, components of the value chain of infrastructure
PPPs can help governments move towards better development are attractive for PPPs. Those components
management practices and financial discipline. that are attractive for the private sector, some of which have
already been demonstrated, should be pursued. The last
Some of the fundamental steps to creating a conductive decade has laid the groundwork for the use of PPPs in
environment for PPPs like availability of accurate data and infrastructure development. Provided visible
standardized procurement processes must be carried out improvements in service delivery meeting specified
on an urgent basis. Capacity building for PPPs need to be service standards are observed, equity considerations are
carried out at all tiers of government as well as for private addressed and transparency in project award followed,
players, both towards skill upgradation as well as on the PPPs can help fast-track India's infrastructure
softer aspects of project management like communications development.
and community involvement. Delivery of urban
infrastructure and social infrastructure projects would
demand a great understanding of the local environment, References:
making small scale local players with entrepreneurial flair Planning Commission (2010), Investment in Infrastructure
ideal candidates to capitalize on opportunities that these during The Eleventh Five Year Plan. The Secretariat for
sectors offer, with large/multinational players stepping in Infrastructure, Planning Commission, Government of
to provide technical expertise. India: New Delhi.

Sathyanarayana and Ramaswamy, R. (2011), PPPs in the


Drinking Water and Irrigation Sectors: A review of Issues
and Options in India Infrastructure Report 2011, Water:
Policy and Performance for Sustainable Development,
Infrastructure Development Finance Company
(forthcoming).
www.circ.in

Public-private partnerships:
Some issues related to financing
Prabal Roy Chowdhury
Indian Statistical Institute

Introduction government that does the borrowing? The answer to this is


This short note deals with two finance related issues to do not unambiguous because with private borrowing there
with public-private partnerships (henceforth PPPs). While may be a significant default possibility, so that the private
the first issue is a more general one regarding whether the borrower may be paying an interest that is ``effectively''
financial aspect of a project should be delegated to the lower than the nominal one (once the default possibility is
private partner or not, the second issue is a more specific factored in). While comparing the rate of interest, it is
one that arises with respect to the SHG-linkage program in therefore not clear if the government rates are necessarily
micro-finance. lower in comparison with the `effective' rate facing the
private sector.
Delegating financial aspects to the private partner
The first issue is central to the debate on PPPs, as one of the
Second, one should recognize that governments, in
main reasons that governments opt for PPPs is because
particular sub-national ones, can also get into financial
they may be cash-strapped. In this context, it is often
argued that, compared to a private sector entity, the difficulties and consequently face an upward sloping
government can access finance at a cheaper rate, since it is supply curve of capital. In that case with an increase in
in a better position to guarantee repayment. Starting from public borrowing, lenders charge a higher rate of interest,
such a position, it is then sometimes argued that not only for the current project, but also for all other
governments should not delegate financing to the private projects. Thus the effective cost of government borrowing
partners, as this would lead to higher financing costs, is much higher, as the additional costs on the other projects
which would ultimately be passed on to the government, must also be taken into account.
and hence the public exchequer. A related point is that
PPPs may be a way of hiding government debt. While there Third, the private rates also need not be too high, as the fact
is some merit to both these arguments, our main contention that a firm has obtained a long term government contract,
is that things are much more nuanced, and several caveats will bring down the risk profile of the private partner. This
need to be taken into account. may allow it to access funding at a rate close to the risk free
one which may be available to the government.
First, suppose it is the case that the government can borrow Interestingly, in this case the private partner is leveraging
at a lower rate of interest. Does this necessarily imply that the government reputation for reliability and deep pocket
the cost to the public exchequer is lower if it is the to its own advantage.

Page 051
www.circ.in

provide these loans. Here the NGOs are not at all involved
in the funding process, with the NGOs generally receiving
an agreed upon amount in case the loan is repaid. Once the
loans are made however, the NGOs may, or may not be
involved in the process (Roy and Roy Chowdhury, 2009,
Roy Chowdhury, 2012).

While the knee-jerk response may be that there is indeed a


case for such involvement, so as to tap into the NGOs'
undoubted expertise regarding the local economy, the
answer is not that straightforward. Interestingly, this is
because the NGOs may be too caring, or motivated. In such
a scenario the NGOs may select recipients not because they
are efficient, but because they are in some sense more
`deserving' (according to the NGOs' own criteria). In case
the NGOs are involved in the post-loan project also, then
the incentives for such distortions are even higher, as the
NGOs feel that in that case they can utilize their own
expertise to compensate for this inefficient selection of
borrowers.
Thus in this case it would appear that NGO involvement
would be desirable in case the area concerned does not
have too much inequality and the average income is not too
low, since the scope for such distortions would be less in
that case. Otherwise, there may be a case for curtailing
NGO involvement.

4. References

Roy, Jaideep and Roy Chowdhury, Prabal, 2009. "Public-


private partnerships in micro-finance: Should NGO
involvement be restricted?," Journal of Development
The final point is that shifting the financial aspect to the Economics, Elsevier, vol. 90(2), pages 200-208, November.
private sector partner has useful incentive properties, as
this will incentivise the private partner to finish the project Roy Chowdhury, Prabal, 2012. ``Microfinance: The SHG-
on time. This is of importance because typically it is the linkage Program.'' The Oxford Handbook of the Indian
private partner who has the greatest ability to prevent time Economy, pp. 149-162. Ed. Chetan Ghate. OUP, New York.
overruns.
To summarize, while it must be acknowledged that in some
cases delegating the financial aspect to the private partner
is just a way to cover up the extent of public debt, there may
be strong reasons why such delegation may make
economic sense, at least in some cases.
3. SHG-linkage program
We then examine a reverse scenario, where the
government uses private agencies, in particular NGOs, to
channelize credit to the rural poor. The most well known
example of such a mechanism is the SHG-linkage program
in India whereby funds from, for example, NABARD, are
channelized to the rural poor using NGOs as
intermediaries. In this case the issue is what is the best
possible mechanism for delivering this credit, in particular
should the NGOs be involved in all the stages of this
process, or not.
Typically, the NGOs play a role in selecting the borrowers,
who are then linked to some banks who provide them with
loans. This follows an initial waiting period, typically
around 6 months, when the potential borrowers make
regular savings, and the NGOs try to inculcate the
borrowers with financial discipline. The banks in turn may
receive incentives from the government in case they

Page 052
www.circ.in

Quality Infrastructure
Good Regulatory Framework, the Key
Pradeep S. Mehta
Secretary General, CUTS International

“During the last decade, the government has made a paradigm shift in its policies and
governance structure in some of the infrastructure sectors. Specialised regulatory
agencies have been established in telecom, electricity and oil and gas sectors”

To achieve a massive investment of around US$500bn over The regulatory agencies are mandated to enable
the next five years or more for the creation of quality private investment and ensure development of the sector.
infrastructure, we need money from home or abroad. And However, the outcomes so far do not match with the
to get this money, we need a quality infrastructural expectations. Though in the telecom sector reasonable
regulatory framework, to ensure a predictable legal success has been achieved, the situation could have been
environment and a level-playing field. Alas, we are moving far better. Private telecom companies are struggling with
slow on this without understanding its costs. This is several policies and regulations that are biased in favour of
despite the Planning Commission's exercise in developing the state-owned incumbent service providers.
a policy paper to deliver the best regulatory framework. The reasons of regulatory inefficacy in India are
manifold, as given below.
Regulatory environment plays a vital role in
facilitating investment and operational efficiencies. The Interface with the government/line ministry
importance of having regulatory institutions in place is It is desirable to maintain an arm's length distance between
reflected from the statement of the President of India, while the regulators and the concerned line ministry to ensure
addressing the Parliament on June 07, 2005, “Competition, that the latter does not influence the former, unduly. At the
both domestic and external, will be deepened across the same time, it needs to be appreciated that the line ministry
industry with professionally run regulatory institutions in is responsible for the overall development of the sector and
place to ensure that competition is free and fair”. the regulator is instrumental in achieving the said
objective.
During the last decade, the government has made a A mechanism needs to be developed to make the
paradigm shift in its policies and governance structure in regulators directly accountable to the legislature and the
some of the infrastructure sectors. Specialised regulatory same can be achieved by requiring the regulator to submit
agencies have been established in telecom, electricity and activity and outcome reports to a designated legislative
oil and gas sectors.

Page 053
www.circ.in

committee, and also appear before


it to explain its actions. It would
also be desirable to have
appropriate processes in place to
facilitate consultations between
the line ministry and the
regulators, so that possible
compromise on regulatory
autonomy is avoided.
However, submission of
activity and outcome reports to the
legislature is not sufficient to
ensure accountability in real terms.
In practice, the legislature hardly
devotes the time and attention Selection process
required for analysing such reports. Addressing this At a recent research symposium to take a look at the political
would require having systemic arrangement in place to economy of regulatory regimes organised by CUTS
strike a desirable balance. International in New Delhi, in March 2007, Dr Bimal Jalan,
To that effect, mandating consumer organisations as former Governor, RBI, said, “There is an important
watchdogs may help to a large extent. This would require a distinction between regulation and control, but the former
clear provision in the related legislation of such role to be should not degenerate into the latter”. The statement shows
given to consumer groups. Further, as another measure to his concern about the Indian regulatory bodies, which are
enhance accountability, provisions could be made to carry required to be 'professionally run', though they are being
out Regulatory Impact Assessment (RIA) on a periodic manned by generalist retired bureaucrats.
basis. In developing the quality of regulation, the quality of
One way to achieve regulatory autonomy is the people manning such bodies is very important. Thus, the
introduction of an Memorandum of Understanding (MoU) procedures related to the selection, appointment and
to be signed between the regulator and the line ministry. removal of regulators is crucial. The line ministry is
The regulator is responsible for performing certain responsible for appointing the chairperson/ members of
functions and is accountable to the ministry as per the the regulatory bodies.
terms of the MoU. Consultation between the regulator and The legislation provides for the appointment of
the line ministry is another good model. For example, the serving/retired bureaucrats and judges as regulators.
Reserve Bank of India (RBI) holds regular consultations Attracting young blood and talent is the key to making
with the Ministry of Finance, at formal and informal levels, these institutions work in an effective manner. However,
without compromising its autonomy. Thus, the RBI- the same cannot be achieved until the selection process is
Ministry of Finance model could be replicated in sectors, made transparent and attractive compensation is offered.
where it is feasible. In fact, regulatory laws in India do not provide for the
In addition to the above, the government has the so-called 'independent regulator' to decide on the nature
power to issue policy directives without prior consultation and strength of its own staff and the compensation.
with the regulators. Given the fact that the regulatory Consequently, talent and competent personnel prefer
agencies are instrumental in achieving the said policy joining the private sector, rather than the regulatory
directives, the line ministry should defend and back the authority, which reflects the latter's sub-optimal
regulators' decisions on the said policy directives before performance and erodes credibility.
the legislature, as and when required. Fair and competitive appointment is one of the
concerns, and provisions related to ousting a regulator are
Financial autonomy equally important. Expecting outstanding performance
The regulator's dependence on the line ministry for getting from regulators would be too much in case their survival is
its budget approved is not desirable, because the provision subject to the whims and fancies of the line ministry. For
might limit the regulatory autonomy, indirectly. Presently, instance, no investigation needs to be undertaken to oust a
no common practice is being followed across the sectors. The member of the Telecom Regulatory Authority of India
Insurance Regulatory and Development Authority (IRDA) (TRAI) if the executive sitting in the Sanchar Bhavan
and the Securities and Exchange Board of India (SEBI) have perceives him to be working against 'public interest'.
been allowed to raise resources on their own, while other
regulatory agencies have not been allowed. Conclusion
Across sectors, regulators should be allowed to present There is lot to be done in order to have an effective
their budget proposals to the Parliament to get direct grants regulatory system in our country. The current regulatory
from the Consolidated Fund of India. For example, in Brazil, approaches need to be renovated and reinvented from time
the regulatory agencies propose their budget and seek the to time to address new challenges. We have put forth few
approval of the legislature. suggestions, which could be further debated among the
The regulatory agencies could also be allowed to policy makers, regulators and consumers in order to
generate resources on their own through fee, cess, etc., develop a roadmap for effective implementation of
wherever possible and be allowed to spend the same as well. regulation system in place.
For example, the water regulator in Philippines is allowed to ______________________________
raise resources by imposing levy/cess on the services. This article first appeared in The Hindu Business Line, September 10, 2007

Page 54
www.circ.in

Revenue Sharing Models


in a "Public Private Partnership" (PPP) Context
Pradeep Valsangkar
(MD & Chief Consultant), GCS Consulting Services Pvt. Ltd.

Introduction The private partner, on the other hand, should invest in to


Since the availability of funds with state governments to the project in anticipation of the expected revenue. E'Seva
implement e-governance initiatives is limited, kiosks for delivery of government services, toll payment
governments are looking for PPP models to implement based construction projects in the roads sector are good
these projects. PPP initiatives not only save the costs for the examples of well structured PPP projects. Projects where
government but also inject the much needed private sector future revenues can be predicted fairly reasonably are
efficiency in the government sector domain. While there is likely to attract private partnership. If historical revenue
a need to create PPP deals , these need to be structured to data in respect of such initiatives is available then it may be
ensure a win - win for all the stake holders. Some times it is in the interest of the project to share such data with the
also ambiguous whether the proposed PPP contract is, prospective vendors To encourage them to participate in
indeed in the PPP domain or not. For example, in one such PPP ventures with the governments.
project, the vendor gets paid on a yearly plan linked to
certain productivity. A Public Private Partnership construes sharing of a
number of entities. These include the capital, working
While the payments might have been staggered, the capital, revenue, risk, responsibility, assets and authority.
model doesn't construe a PPP structure. So, how do we However this paper essentially deals with models that
exactly define Public Private Partnership? provide a basis for sharing of capital investment and
While a number of definitions have been proposed for the revenue. Revenue sharing models have to be based upon
PPP projects; The one that equally apportions the risk and the risk / return relationship principles of finance. Risks
reward to the government and the private vendor is can be measured in terms of financial, business, social and
considered the most appropriate. It is important for the administrative risks. Returns have to be in proportion of
governments and the private vendor in a PPP contract to the risk faced by the PPP partner.
share the risk and the return on the project. The This paper suggests a number of revenue share models in
governments should be ready to dilute their overall running the PPP projects between the state government
control over the project and should be ready to share the and the private enterprise. The revenue share model looks
expected revenue with the private partner.

Page 055
www.circ.in

at the vendor, state government and the business as three 1.2.2 Model 1b (Variable Payoff variant)
different entities. The flow of capital, Fixed and variable
Run Business
costs for running the business and revenue sharing
through fixed and variable payoffs constitute the business State Govt. Vendor (SPV) Business
models. Accordingly different business models are being Part of Variable Pay off Revenue
postulated. Some of these are as shown below. The vendor
is presented with one of these models to decide upon the
Administrative Control Capital Investments
values of capital, fixed and variable costs and revenue
sharing through fixed and variable pay offs.
1 .3 Model - 2
In this model the capital investment is done by the
1.2 Model - I
This model basically relies on the private partner's ability government and the business is run by the private partner.
to fund the project and run it independently of the public This model is specially useful where the government
sector partner's intervention. The public enterprise wishes to utilize the efficiency of the private sector in
authority is vested with the private partner for a limited running important citizen services. However the capital
period of time. An effective Monitoring and evaluation costs are high enough for private enterprises to be in a
framework is needed for implementing such a model. position to invest in to the project. The governments ability
Invariably the business is run under strong business to invest high capital and the private vendors ability to run
related service level agreements. These SLA are monitored the business efficiently is combined to provide a best of
by the government through an effective M&E framework. breed solution.
This model is particularly suitable where the capital
This revenue model is as shown below:
investment is low and many private vendors can be
attracted to invest in to the venture. E-Sewa kiosks run
using this model. The model is pictorially depicted below. Fixed Pay off Run Business

State Govt. Vendor (SPV) Business


Fixed Pay off Run Business
Variable Pay off
State Govt. Vendor (SPV) Business
Revenue
Part of Variable pay off Revenue
Capital Investments

Administrative Control Capital Investments


Risk Perception: The entire financial risk in this model is
Projects like e-procurement may be quickly implemented taken by the government. The government also incurs the
and made operational using this model. administrative risk of project failure and subsequent loss of
credibility amongst the citizens. Thus this model needs to
Risk Perception: While the vendor shares the entire be run under strong Service Level Agreement.
financial risk of the venture, the government shares the risk Government needs to exercise close control over the
of loss of administrative control leading to citizen vendor in this model. Government also becomes the major
dissatisfaction. However, given the current low beneficiary of the revenue generated through this model.
satisfaction levels with government services amongst the Large facilities like Hotels and hospitals may be run using
citizens , it is expected that this model will lead to this model. This model can also be used for running of large
improvement in these levels rather than deterioration of airports, rail stations and ports.
service levels. Accordingly it is considered appropriate for
the private vendor to have a larger share of the revenue in Two variants of this model are as shown in the diagrams
this model of PPP. below:

Two variants of this model can be created by having just a In the first variant the vendor is paid a variable amount in
fixed pay off by the vendor to the government or having relation to the revenue generated. In the other model
just a variable pay off. These are as shown below. Where vendor gets a fix sum for running the facility against laid
the revenues can be predicted with certainty, the fixed pay down SLAs. Invariably when revenue generation is not
off variant will be useful. However when revenue figures linked to the services provided by the private vendor, the
are completely unpredictable Model 1b will be more fixed pay off model will be used. However when the
useful. Model 1 shown above should be used when the services provided by the private vendor directly impact the
revenue predictability is between the two extremes. revenue generation process, the variable pay off model
should be used.
1.2.1 Model 1A: ( Fixed Pay off variant)
1.3.1 Model 2A
Fixed Pay off Run Business

State Govt. Vendor (SPV) Business State Govt. Variable Pay off Vendor (SPV) Run Business Business
Revenue

Revenue

Administrative Control Capital Investments Capital Investments

Page 056
www.circ.in

1.3.2 Model 2B 1.4.2 Model 3B

Variable Pay off Run Business


State Govt. Variable Pay off Vendor (SPV) Run Business
State Govt. Vendor (SPV) Business

Revenue
Revenue
Administrative Control
Capital Investments Capital Investments

1.4 Model 3 The above models provide a basis for structuring PPP deals
in an e-governance scenario. Various Equity and revenue
Fixed Pay Off Run Business models can be envisaged. The government and the private
partner can either invest together or individually in to the
State Govt. Vendor (SPV) Business
project. Higher, the equity stake in the project, higher is the
Variable Pay off Revenue risk for the participant and hence higher should be the
Administrative Control entity's share of the over all revenue generated by the
Capital Investments facility created under the project.

Governments and private vendors can discuss the


This model is a true PPP model since it tries to divide the percentages of equity / fixed pay off / variable pay off to
risk and return between the PPP partners equally. Both arrive at equitable distribution of wealth created under the
partners invest capital in to the project. Returns are shared project.
as per the original capital investment ratio as well as the
risk perception of the partners. It is advisable for the project This paper only touches the surface of different financial
to be run by the private enterprise to draw upon its models perceived in structuring a PPP deal in an e-
efficiency and past experience of running similar business. governance framework. Each of these models can be
investigated further for risk return patterns and
Projects requiring large capital like oil refining etc may fall advantages gained to government and the private
under this category of PPP revenue models. enterprise to arrive at well structured PPP contracts.

Risk Perception: This model tries to equally distribute the


risk and return amongst the PPP partners. Invariably the
vendor will also have a large stake in the success of the
project. Thus the model is likely to work with fair degree of
autonomy to the vendor. Government may make initial
investments and then accrue annual revenue for their
investments.

Only a fixed pay off or only a variable payoff creates two


separate alternatives of this model. These are as shown
below

1.4.1 Model 3A
Fixed Pay Off Run Business

State Govt. Vendor (SPV) Business

Variable Pay off Revenue


Administrative Control

Capital Investments

Page 057
www.circ.in

The Early Phases of Innovation:


Opportunities and Challenges of Public-Private Partnership

Rajnish Tiwari,
Institute of Technology and Innovation Management, Hamburg University of Technology (TUHH)

Abstract the competition brought about by the forces of


Innovations have acquired a key-role in the growth and globalisation. Not surprisingly, innovations have acquired
competition strategies of firms in today's globalized world. a key-role in the growth and competition strategies of firms,
Governments in many, in developed as well as in as indeed of many countries and economic regions. They are
developing, countries recognize the need to promote seen as an essential tool to stimulate growth, for instance by
innovations and fund innovative projects; particularly generating additional demand, and stay ahead of
those carried out in cooperation with other public sector competitors. In developed countries they are thought to
institutions such as universities and specialized R&D provide a vital buffer against challenges from low-cost
institutions. This public-private partnership seems providers from emerging countries such as China and India.
particularly useful in the early phases of innovation.
Governments1 across developed countries have recognized
This article discusses how the cooperation between the the need for their firms to remain innovative and have
industry, the academia and the government may be constituted various “innovation funds” to support
utilized in the early phases of innovation (idea generation, innovation-related activities of domestic firms. For
evaluation and selection) to increase the innovative instance, the German chancellor Angela Merkel
capability of firms in a given region or sector. For the announced at a recently held “National IT-Summit” an
purpose of identifying the opportunities and challenges of innovation-support programme by German federal
such collaboration this paper presents selected findings of government that will provide domestic firms in 17 “key
two recent empirical surveys carried out at our institute. areas” by 2009 with up to 15 billion euros as a part of its
The focus of attention is centred on the needs of small and “high-tech strategy” [GFG, 2006a]. The key areas “include
medium-sized enterprises (SME) which, on account of health care, security, energy production, nano technology,
resource constraints, are usually more dependent on biotechnology, as well as information and communications
cooperation than big firms. technologies” [GFG, 2006b]. Other European countries
have also set up similar programmes.
1. Introduction and Background
Innovations are increasingly seen as a source of economic The attention is generally focused on certain industry
growth and simultaneously as a useful instrument to face sectors or on certain geographical regions. An example of

1
The term “government” in this paper includes also quasi-governments like the European Commission.

Page 059
www.circ.in

Such measures are “Regional Innovation Strategies” (RIS) to seek cooperation with other firms/universities in order
programme of the European Union (EU). Hereby, special to compensate the resources-crunch. This article therefore
attention is paid to small and medium-sized enterprises places a special focus on SMEs, the findings are however by
(SMEs), which usually are a vital source of employment in and large as valid for bigger firms.
many countries. The SMEs are hereby encouraged to forge
cooperation with universities and specialised research and The article is structured on following lines: Section 2
development (R&D) institutions.2 The funding is however introduces the concept of the innovation process and
not limited to SMEs alone, bigger concerns in developed as defines the “early phases of innovation”. Section 3
well as developing countries are also reported to regularly introduces an “innovation coalition”. Sections 4 and 5,
receive financial and other support for cutting-edge respectively, deal with opportunities and challenges of
innovative projects. cooperation. The final section entails a brief summary.

Some developing countries, notably China and India, have 2. The Innovation Process and its Early Phases
also started their own innovation-support programmes. Innovation may be defined as invention of new, or
For instance, in India a “National Innovation Foundation” betterment of existing, products, processes or services4. The
has been established with government's participation “to innovation process encompasses systematic steps,
help India become an inventive and creative society and a beginning from problem/requirement analysis to idea
global leader in sustainable technologies”, as per generation, idea evaluation, project planning, product
information provided on the foundation website.3 development and testing to finally product marketing
According to an OECD report, China is set to become the [Verworn et al, 2000/2006]. The steps may overlap each
second-largest R&D investor by spending 136 billion euros other. These steps may be categorised into 3 broad phases,
on R&D in 2006 overtaking Japan (130 billion euros) and which represent a simplified innovation process:
way ahead of third-placed Germany (70 billion euros)
[OECD, 2006].

Universities, too, play an important role in strengthening


the innovativeness of firms by providing trained
researchers who are “familiar with the latest research
techniques and integrated in international research
networks” [Pavitt, 2005]. In return, universities receive
direct industrial funding of industrial research. Practice-
oriented education and research also help universities in
attracting (and eventually retaining) talents.

The resultant flurry of activities demands an efficient and


goal-oriented coordination of support efforts from all
players involved, i.e. the industry, the government and the
Figure 1: Simplified version of an innovation process
academia, so as to strengthen the innovation capacity of
firms in given country, geographical region or industry
This article focuses on the “early phases of innovation”,
sector. This article analyzes the role of cooperation between
which in the academic literature are often referred to as
these above mentioned players in removing barriers to
“fuzzy front-end of innovation”, “pre-development” or
innovation in early phases, which are crucial for the
“up-front activities” [Napp, 2006]. According to Khurana
purpose of idea generation, evaluation and selection. The
and Rosenthal [1998] the front-end includes product
article makes use of the results of two recent empirical
strategy formulation and its communication, opportunity
surveys carried out with the author's involvement at
identification and assessment, idea generation, product
Institute of Technology and Innovation Management,
definition and project planning etc. This phase is of
Hamburg University of Technology. The surveys
particular importance to this article, since:
examined the role of cooperation for innovation in SMEs in
• Innovations are unlikely to succeed if the process of
Germany. The first survey [see, Napp, 2006] had 76
requirement analysis and/or idea generation/
participants from the medical equipment manufacturing
evaluation does not run satisfactorily. Not
sector in Germany, the second survey [see, Herstatt et al,
surprisingly, 30% participants of a survey identified
2006] 70 SMEs from various technology-intensive industry
problems in the early phases as a “significant barrier to
sectors in the metropolitan area of Hamburg in Germany.
innovation” in their firm [Herstatt et al, 2006].
The respondents were senior-level managers who
answered a questionnaire on the issues concerned.
• The broad field of problem identification, opportunity
assessment and idea generation, evaluation provides a
Even while providing the lion’s share of employment in an
large scope for cooperation between public and
economy, SMEs are generally more affected by resource-
private sectors. The potential of this cooperation is,
constraints than big firms. They therefore are often forced
however, rarely utilized fully. 33% participants of a

2
For the sake of simplicity, all academic institutions including universities and specialized R&D institutions are hereafter jointly referred to as
“universities”
3
http://nifindia.org/mission.htm, site consulted 21.12.2006..
4
For detailed discussion on definition and scope of the term “innovation”, see amongst others [Biemens, 1992] and [Dangayach et al, 2005].

Page 060
www.circ.in

survey identified managing cooperation as a Having understood the systems of innovation we may now
“significant barrier to innovation” [Herstatt et al, turn our attention to the opportunities and challenges
2006]. arising out of this collaboration. The next section discusses
how cooperation may be utilized to strengthen innovations
• Particularly SMEs, on account of their limited in the early phases.
resources, are more dependent on cooperation to
identify and evaluate opportunities as well as to 4. Opportunities Generated by Cooperation
reduce uncertainty of their innovation projects. Cooperation, be it within the industry or with other non-
firm entities, provides certain opportunities and incentives
3. The Innovation Coalition for all partners. In the following we discuss how such
In practice, firms rarely innovate in isolation. They operate cooperation may contribute to the innovativeness of firms,
in a given macro-economic environment, which in turn is particularly SMEs, in the early phases of innovation. Figure
influenced by the socio-cultural environment of a 3 demonstrates the three main objectives that cooperation
particular region. In a market economy firms often ideally seeks to achieve in early phases of innovation, i.e. to
innovate “in collaboration and interdependence with other generate better ideas faster and cheaper.
organizations” [Edquist, 2006], the reason being that such
collaboration generally includes intra-industry
cooperation, e.g. with customers, suppliers and
competitors5. But there are also significant collaborations
with non-firm entities such as universities and
government. For instance, universities are a significant
source of knowledge diffusion and technology transfer.
They may also produce/support spin-offs by their
students with new, innovative ideas. The government
may, while acting in concert with the industry and
academic experts, formulate rules and policies that are
conducive to innovation in a given region or industry
sector. Figure 2 demonstrates this “innovation coalition”,
in which the three partners influence the innovativeness of
firms in a given region or industry sector.

Figure 3: Objectives of cooperation in early phases of innovation


Source: Adapted in a slightly modified form from [Napp, 2006, p.
Macro-economic environment
36]
Industry
In the following we may have a look at these aspects
individually:
Better quality: The quality of ideas and concepts may be
measured in the probability of their successful realisation
and, at a later stage, successful marketing. In the case of
process innovation it would also mean the probability of a
successful implementation. Better quality in generation of
Academia Govt. ideas and concepts may be achieved via cooperation that
may provide:

a) access to (complementary) know-how,


Socio-cultural environment
b) better knowledge of market (understanding of
demand and supply side factors),
c) a broader base for idea generation and evaluation,
Figure 2: The innovation coalition and its environment d) access to physical resources (e.g. Laboratories),
This innovation coalition may be understood as a “system e) enhancement of product portfolio
of innovation” in a given region, country or sector. F) better acceptance in market
Freeman [1987] defined a “national system of innovation”
as “the network of institutions in the public and private Less time: The innovation process may be accelerated, e.g.
sectors whose activities and interaction initiate, import, by saving time through division of labour and by access to
and diffuse new technologies”. This definition may complementary or specialized know-how.
however be well adapted for a regional or sectoral system
of innovation. According to Edquist [1997] these three Reduce costs: The cooperation between the academia, the
viewpoints national, sectoral and regional may be industry and the government also has a significant
grouped together as variants of a single generic “systems of financial advantage. For instance, the government may
innovation” approach.
5
Cooperation with competitors is particularly useful for innovative projects so as to define common standards

Page 061
www.circ.in

reduce the risk of failure of an innovation project by


providing a partial (or full) funding of a promising idea
that has the potential of positively influencing public
welfare in a region. It might also provide easier and
cheaper access to capital. The government may also
provide “support for high-tech start-ups and innovative
SMEs through corporate tax reform and systematic
reduction of bureaucracy” [GFG, 2006b].

Governments play a key-role by formulating innovation-


friendly policies and promoting or restricting research in
certain fields. The German government for example is
financing with 280 million euros an innovation project to Figure 5: Most important partner in early phases of innovation
develop a next-generation search engine called “Theseus”. The discussion above shows that there are various
On the other hand restrictions in many countries, including potentials for cooperation, especially also for a public-
Germany, on research with cloning of human embryos are private partnership, in the early phases of innovation. This
well known. Governments may also set up laboratories to potential remains largely untapped owing to certain
do basic research, whose findings are made available to the problems that negatively affect the (readiness for)
(domestic) industry or the public-at-large for free or on cooperation. We discuss these problems in the next section.
subsidized rates.
5. Challenges of Cooperation
Universities may provide complementary and/or Cooperation between two or more partners necessitates
specialized know-how and reduce development costs coordination, which unto itself is a tedious task,
while sharing the possible profits in the event of success sometimes. The coordination between heterogeneous
and thereby strengthen their own resources. Alternatively, entities, e.g. firms and non-firms (i.e. between profit-
they might also offer R&D services on cheaper (subsidized) oriented private sector firm and non-profit oriented public
rates. In a survey of medical equipment manufacturer sector entities) is even more difficult to manage, owing to
different working styles of the parties concerned.
SMEs in Germany [Napp, 2006], 51% of all participants
A survey in Hamburg [Herstatt et al, 2006] found that SMEs
reported cooperation-projects with universities. However,
often have some typical problems while seeking
74% reported willingness to forge (further) cooperation
cooperation with universities. Asked to identify
with academic institutions. cooperation partners with which they generally had a
particular type of problem, universities scored
Figure 4 shows the areas of cooperation in early phases of unfavourably on following counts [Herstatt et al, 2006]:
innovation. 95% of survey participants reported a) Lack of effectiveness (50%),
cooperation (with diverse partners) while analyzing b) Trouble finding right partners (38%),
requirements and 84% while generating new ideas [Napp, c) Lack of financial resources (27%),
2006]. d) Coordination troubles (26%),
e) Communication problems, differing “time-horizons”
(23%).

Another Germany-wide survey of SMEs in the medical


equipment manufacturing sector returned comparable
results [Napp, 2006].

Figure 4: Areas of cooperation in early phases of innovation


Figure 5 shows who was regarded as the “single most
important partner” in the early phases of innovation. Own
customers (65%) dominated the list. With 16%, universities
were second placed. The role of universities was thought to
be predominantly in enhancing the quality of the product
concepts and access to know-how (each 43%). Figure 6: Obstacles in cooperation with universities
The problems in cooperation with governments may be
seen in a similar light, e.g. trouble finding right partners
and the differing work-style of governments. For instance,
47% of the surveyed SMEs in Hamburg reported
“bureaucracy” as a major hurdle for their innovation
activities [Herstatt et al, 2006].

Page 062
www.circ.in

Further, it was revealed that resource-constrained SMEs are References:


usually not well-informed about various support
programmes and rarely try to receive state funding. While Biemens, W.G. (1992): Managing Innovation with Networks,
42% of the surveyed SMEs reported aborting innovation London: Routledge.
projects in the “early phases” owing to financial reasons, Dangayach, G.S., Pathak, S.C. and Sharma, A.D. (2005):
over 50% said they were not aware of state-run support “Managing Innovation”, in: Asia Pacific Tech Monitor,
programmes. On the other hand, in the same survey firms Vol. 22, Issue 3, pp. 30-33.
with a turn-over of over 50 million euros did not report any Edquist, C. (1997): “Systems of Innovation Approaches Their
finance-related project-abortions and called themselves Emergence and Characteristics”, in: Edquist, C. (Eds):
“well-informed” about support programmes [Herstatt et al, Systems of Innovation: Technologies, Institutions and
2006]. The above facts point to certain deficits in the Organizations, London: Pinter, pp. 1-35.
“innovation coalition” proposed above. The challenges Edquist, C. (2005): “Systems of Innovation: Perspectives and
however can be mastered with concerted action and effort on Challenges”, in: Fagerberg et al (Eds): The Oxford
the part of the parties concerned. This paper proposes a Handbook of Innovation, Oxford, a.o.: Oxford University
support structure for SMEs (see Figure 7) that would reduce Press, pp. 181-208.
their problems in the early phases of innovation and generate Freeman, C. (1987): Technology Policy and Economic
resources to make them more competitive and stable. Performance: Lessons from Japan, London: Pinter, p. 1.
GFG (2006a): Aiming to make Germany a leader in the IT sector,
Press release by the Press and Information Office of
German Federal Government, dated 18.12.2006,
available online at: http:// www.bundesregierung.de/,
as on 20.12.2006.
GFG (2006b): High-tech strategy: growth through innovation,
Press release by the Press and Information Office of
German Federal Government, dated 30.08.2006,
available online at: http:// www.bundesregierung.de/,
as on 20.12.2006.
Herstatt, C., Buse, S. and Tiwari, R. (2006): Innovations
hemmnisse in Hamburger KMU: Ergebnisse einer
empirischen Untersuchung in ausgewählten Branchen,
Figure 7: Ideal support structure for SMEs
Institute of Technology and Innovation Management,
The corner-stones of this structure are built by:
Hamburg University of Technology, (unpublished).
a) Providing better education infrastructure especially
Khurana. A. and Rosenthal, S.R. (1998): “Towards holistic
in technical fields,
'front ends' in new product development”, in: Journal of
b) Installing a more efficient financial-support
Product Innovation Management, Vol. 15, Issue 1, pp. 57-
infrastructure, and by
74.
c) Providing guidance and support to SMEs in
Napp, J.J. (2006): Kooperationen in den frühen Phasen des
internationalising their business and gain access to
Innovations prozesses: Potenziale für kleine und mittlere
global resources.
Unternehmen, Study conducted under joint supervision
of Dr. Stephan Buse and Rajnish Tiwari, Institute of
Each of these factors has a positive impact on improving
Technology and Innovation Management, Hamburg
the competitiveness of firms. But these factors also benefit
University of Technology, (unpublished).
from a certain interdependence and enforce each other
OECD (2006): OECD Science, Technology and Industry
leading to a stable innovation capacity and global
Outlook 2006, Organisation for Economic Co-operation
competitiveness of domestic firms.
and Development, Paris.
Pavitt, K. (2005): “Innovation Processes”, in: Fagerberg et al
6. Summary
(Eds): The Oxford Handbook of Innovation, Oxford, a.o.:
This paper analyzed the role of cooperation in the so-
Oxford University Press, pp. 86-114.
called “early phases of innovation” (also known as
Verworn, B., Herstatt, C. and Nagahara, A. (2006): “The
“fuzzy front-end of innovation”) and proposed an
impact of the fuzzy front end on new product development
“innovation coalition” comprising the industry, the
success in Japanese NPD projects”, in: Proceedings of R&D
government and the academia that could enhance the
Management Conference 2006, Manchester, CD-ROM
innovation capacity of firms, especially SMEs, in a given
version.
region, country or industry sector. Using results of two
Verworn, B., Lüthje, C. and Herstatt, C. (2000):
empirical surveys, conducted with the author's
Innovation smanagement in kleinen und mittleren
involvement, it demonstrated the opportunities and
Unternehmen, Working Paper No. 7, Institute of
challenges of such a public-private partnership in
Technology and Innovation Management, Hamburg
strengthening the innovativeness of firms.
University of Technology
Finally, it also proposed a support structure for SMEs that
can enhance their innovation capacity and thereby
competitiveness leading to a larger public welfare (e.g. via
growth and employment opportunities) in a region.

Page 063
www.circ.in

Need for a comprehensive


PPP policy in infrastructure
Ranen Banerjee,
Partner at PwC

Despite not having a formal PPP policy, India has a good According to the latest Economic Survey, there is a good
framework for supporting public-private partnerships. pipeline of infrastructure PPP projects (including under
The finance minister's announcement of the formulation of bidding, construction and operational). However, majority
a comprehensive PPP policy is, thus, welcome, writes of these PPPs are in the economic infrastructure sectors like
Ranen Banerjee, Executive Director & Partner - Public energy, roads and highways, ports and airports. As the
Finance & Infrastructure and Government Reforms & Indian economy has grown at a fast clip over the last
Infrastructure Development, PwC.
decade, private investors have benefited from the upside
due to increase in demand and have not been averse to
The projected investment in infrastructure for the 12th Plan
assuming demand risk. However, health, education and
is about $1,025 billion with at least 50 per cent expected to
come from private sector. With such large investments to urban infrastructure have seen little success as the upside
be channelled from the private sector, the private players potential from demand may be limited in these sectors.
would need comfort of a comprehensive PPP policy before
opening their purse strings. Though we have made good Global outlier in PPP
strides in undertaking projects under PPPs, there have India is an outlier by a huge margin when the quantum of
been several learning points and grey areas that have private investment in infrastructure is compared across
emerged. The announcement of the Finance Minister for other similar sized economies relative to the level of GDP.
formulation of a comprehensive PPP policy in his Union However, it is likely that actual completion of projects may
Budget speech is welcome. be less impressive. The graph shows that while the present
policy framework has served well, translating the level of
Despite not having a formal PPP policy, India has a good investment commitments into successful projects warrants
framework for supporting PPPs. These include the a more comprehensive institutional framework that
Empowered Committee on Infrastructure (ECOI) headed addresses critical challenges that plague PPPs in India.
by the Prime Minister at the apex level; PPP Approval
Despite the stellar performance, effort is required across
Committee (PPPAC) for appraisal of projects; PPP cells in
several areas to further increase the pace of
central government ministries and state governments;
implementation of PPPs. Apart from the need for financial
Viability Gap Funding mechanism for financial support;
programmes for capacity building of implementing outlays, there are several other constraints which impede
agencies and IIPDF for project development; and IIFCL the timely execution of infrastructure projects-problems of
and infrastructure debt funds. tendering of unviable projects; bad planning at DPR stage;

Page 064
www.circ.in

Land acquisition delays and slow approval processes; Treat complex projects differently: In complex PPP
especially environmental and forest clearances; weak projects better discovery could happen through negotiated
project management in nodal agencies; and inadequate agreements. The Competitive Dialogue under Partnership
availability of skilled and semi-skilled manpower. Contract adopted in France involves short listing three to
four competent parties and holding several rounds of

Pipeline of PPP Projects

Sector Total Number Up to ` 100 Between ` 251 More than Value of


of Projects Crore and 500 crore ` 500 crore Contracts (` crore)
Airports 5 0 303 18808 19111
Education 1 93.32 0 0 93.32
Energy 24 733.59 2669 13,708 17,110.59
Health Care 2 217 0 0 217
Ports 47 866 4070.29 64,777.09 69,713.38
Railways 4 102.22 905 594.34 1601.56
Roads 324 8760.51 36,721.42 1,01,363.98 1,46,845.91
Tourism 30 1492.08 0 1050 2542.08
Urban Development 81 2996.13 3484.28 10132 16612.41
Total 518 15,260.85 48,152.99 2,10,433.41 2,73,847.25
Source: I&I Division, DEA, Ministry of Finance.

Negotiations with each of them. These negotiations are


PPP reforms
Government of India is seized on these challenges and this carried out over several rounds in a transparent manner
has led the Finance Minster to announce a comprehensive wherein the initial proposals by each party may be
PPP policy as part of his 2011-12 budget speech. The available to all the prospective bidders. This allows the
following paragraphs highlight some of the areas that prospective bidders to define solutions that fit the project
should be addressed under the PPP policy: objectives and enables the implementing agency to award

1,20,000
Source: PPIAF & WDI

1,00,000 India
Total Investment Commitments, 2000-2009

80,000

China
60,000
(Mn USD)

40,000
Russian Federation

20,000
South Africa

2,000 4,000 6,000 8,000 10,000 12,000


Per Capita GDP, 2009 ( USD)
Total private investment commitments in infrastructure ($ Million)
during 2000-2009 compared to per capita GDP ($ US) during 2009

Page 065
www.circ.in

the project to the most economically viable one and not is a need to evolve Model Concession Principles (MCP)
necessarily to the least cost criteria. Needless to say, document outlining the risk sharing, payment mechanism,
sufficient safeguards are required for ensuring and the Concessionaire and sponsor responsibilities, and
transparency and non-discriminatory behaviour. yet leave sufficient flexibility to adapt the contract
document to unique project situation.
Provide necessary tools to implementing agencies: Tools
like Public Sector Comparator (PSC) and Value for Money Supporting local government PPPs: Specialised VGF
(VFM) have to be mainstreamed into the policy framework. guidelines may be required for urban infrastructure PPPs.
These would help the implementing agencies answer three Operating a separate window through the KFW funded
key questions- what is the PPP for (what is the objective i.e. PPP-UIF infrastructure fund could be the way ahead. Such
for construction, financing, technology O&M or a a fund could effectively blend grant and loan funds to
combination); why is it necessary (rationale based on VFM reduce the overall cost of resources. There may also be a
and PSC); and how will it be executed (actual model of PPP separate channel for providing guarantee to debt taken by
and the entire bidding process). To make sure that PPP ULBs or PPP operators. Finally, the recommendations of
arrangements enjoy high credibility in public opinion, the the 13th Finance Commission to evolve a predictable
Comptroller & Auditor General of India published the pattern of devolution of funds should be addressed by state
Public Auditing Guidelines for PPP projects in 2009. The governments.
same audit guidelines can be used for creation of reliable
benchmark PSCs in sectors where PSCs are non-existent. Addressing land acquisition: There is a strong case for
bringing in parity between the compensation package
Supporting availability based payments through multi- admissible under the Land Acquisition Act 1894 and that
year budgetary commitments: The next generation of PPP applicable to land acquisition under the National
policy has to significantly support social sector PPP Highways Act 1956 to enable faster acquisition. It is also
projects. As private sector may be reluctant to take on important that the 80 per cent minimum norm for physical
substantial part of the demand risk, Availability Based acquisition of land before tendering should be strictly
Payment (ABP) mechanism could be considered. These enforced through suitable disincentives. Also, a
involve compensating the service provider based on differential land acquisition policy which distinguishes
making the infrastructure available to meet a desired between acquisition for pure public infrastructure like
service level. The implementing agencies need to set up water, wastewater etc. and allows for greater sharing of
clear performance standards and also have capacity to benefits with land owners in case of economic
monitor actual performance. infrastructure such as airports, SEZs etc. may be
introduced.
Further, these contracts would involve annuity payments
and the recent decision to impose a cap on annuity
payments may limit the ability of the implementing
agencies to do PPP projects. In South Africa, Treasury
Regulation 16 issued under the Public Financial
Management Act allows government agencies to
undertake PPP projects based on current year allocations
and projection of future allocations. This allows them to
undertake multi year PPP projects.

Avoid regulatory confusion: India is at a crossroad of a


regulatory revolution in infrastructure. On one hand,
concession contracts are the most common regulatory
instruments for governing PPP contracts. Yet several
sectors like airports, ports etc. have an independent
regulator who has significant powers to set tariffs. Effort is
also on to set up water regulator at state level as well. When
concession contracts lay out the tariff setting mechanism, it
is not clear as to how much model flexibility the regulator
has in tariff setting. One option is that in sectors where
concession contracts are in operation, the regulator could
focus on setting standards, issue of licenses, set
benchmarks, and oversee the tariff process as laid out in the
concession agreement. This is similar to the role played by
Conciliation and Arbitration Commission in Chile.

From MCA to MCP: While Model Concession Agreements


help in case projects are highly standardised, in practice
each infrastructure project is unique. Several market
commentators have opined that MCAs have hindered
rather than promoted faster project implementation. There

Page 066
www.circ.in

Competition & Regulation


& the Competition Assessment Framework
Roger Nellist*with John Preston**
*Team Leader and Deputy Head, Growth and Investment Group, Department for International Development,
UK **Commerce Commission, New Zealand

“The range of factors that may adversely impact competition is wide. Some problems for competition might
be readily apparent but, in practice, significant problems are frequently hidden. This is sometimes because
they are part of a long-standing pattern that is taken for granted or because they involve intermediate
products so that the impact on consumers is obscured”

Competition is central to the operation of a modern market encourage the wider user of appropriate competition
economy. Effective competition benefit consumers policy in developing countries. In 2008, one of these
directly, through lower prices and better quality, and included the preparation and publication of the
indirectly, through the higher rates of economic growth Competition Assessment Framework (CAF).
that result from productivity improvements and
innovation fostered by vigorous competition. But, despite The origins of the CAF have a close connection with India.
the importance of competitive markets, barriers to effective In the past three years, DFID and the World Bank have
competition are pervasive. partnered with the Competition Commission of India
(CCI) in conducting studies on the state of competition in
The Department for International Development's (DFID), key sectors of the Indian economy. The Commission itself
UK mission is to help reduce world poverty. While grants funded additional studies, which include many important
from donors and internal redistribution can make a modest infrastructure sectors and product markets: energy,
contribution to poverty reduction, substantial progress can telecommunications, ports and railways, internal air
come only from real economic growth. The link between transport, road passenger transport, road goods transport
competitive markets and economic growth, and the link and manufacturing.
between growth and poverty reduction, is the basis for
DFID's interest in competition policy and regulation. Respected research institutions in India have undertaken
these studies. Workshops were held in New Delhi to help
Competition assessment framework researchers plan their research strategies. It soon became
Since 2000, DFID has supported a range of activities to evident that there could be considerable value in developing

Page 067
www.circ.in

a framework that would allow all significant influences on governments in federal countries, and those of local
competition to be considered, and that would lead to well- authorities. Where policies adversely affecting competition
structured advice to the Competition Commission. are identified, the current justification for them must be
reassessed.
The CAF was prepared partly in response to this need. It
was refined during the competition work in India, and on Sometimes, government policies limit the number of firms
the basis of DFID's competition work elsewhere. The CAF permitted to enter a market or restrict how firms can
is available in hard copy from DFID and also on to the operate. Compulsory quality standards might be
website: www.dfid.gov.uk. unnecessarily high. Meeting the conditions needed to
obtain regulatory approval might be unpredictable, costly
What is CAF? or unnecessarily protracted. Sector regulators might be
The CAF is a flexible diagnostic tool designed to help policy captured.
makers and researchers identify markets in which
competition is weak, to find the causes, and select If state-owned enterprises (SoEs) operate in the market, they
appropriate remedies. The range of factors that may might have privileges that make it difficult for private
adversely impact competition is wide, and the CAF takes a suppliers to compete. Public procurement can account for a
holistic approach to examine markets. significant part of transactions in many markets, including in
infrastructure provision and unless it is conducted
Some problems for competition might be readily apparent transparently and fairly, competition can be severely
(although their magnitude might be unknown) but, in retarded. The level of competition can be affected also by the
practice, significant problems are frequently hidden. This trade or the industrial policies of the country concerned.
is, sometimes because they are part of a long-standing
In the markets for some products there will be parties who are
pattern that is taken for granted, or because they involve
opposed to more effective competition. At times, their
intermediate products so that the impact on consumers is
positions will be widely known. However, even if this is the
obscured.
case, the competition assessment must identify their power
and influence. Politics, including funding for political parties,
Role and Functions of CAF
might be involved. Quantifying the extent of the influence of
In addition to its continuing use for competition sector
vested interests, and knowing why and how this influence is
studies in India, the CAF has an expanding role elsewhere.
exercised, will help to provide the basis for a realistic
It has been used in multi-country capacity building
assessment of what will be needed to modify any constraints
competition workshops in Eastern and Southern Africa
that exist, and to introduce more effective competition.
(ESA). Competition researchers in Bangladesh are using it.
The competition authority in Vietnam has adopted the
The ways in which firms in the market relate to their
CAF as the basis for its sector studies, and a Vietnamese
competitors, suppliers and consumers must be reviewed to
translation is being published to make it more widely see if there are signs of any anti-competitive conduct. There
accessible there. might be cartels (undertaking activities, such as price
fixing, bid-rigging, or the division of markets between
CUTS' national partners in the current 7Up4 project in competitors), the abuse of dominance by firms with strong
West Africa are using the CAF to assist in their research. market power, or a pattern of mergers that reduces the
The CAF is the base of the methodology being used by the number of competitors. If there are signs of such conduct,
London-based Overseas Development Institute (ODI) in its it is necessary to assess how significant the effects are likely
innovative two-year research project on the effects of to be. The cement industry is one example that gives rise to
competition in key product markets in certain countries of competition concerns in many countries, as the industry
Africa and Asia. appears prone to cartel formation.

The CAF recommends that, to justify competition analysis, Conclusion


markets should either be important to the economy or The CAF helps guide an assessment of the above-
consumer welfare. But, in addition, there should be at least one mentioned competition issues, and also lists possible
element suggesting a possible lack of effective competition. remedies ranging from the dissemination of information
to new legislation. What is appropriate in any given
Elements to be considered include whether there is a high situation would depend on the nature of the problems
level of market concentration (i.e. whether most of the identified, on the structure of national institutions and the
supply is controlled by a small number of firms), whether provisions of the national laws.
new firms seeking to enter the market would be impeded
by high barriers imposed by the government or by other Recognition of the importance of competitive markets and
firms, whether the sector has a history of anti-competitive appropriate regulation in developing countries continues
conduct, whether there have been expressions of concern to increase. We, in DFID, are pleased to have been able to
by consumers or competitors, or whether there are strong play some role in this. We are delighted to have this
vested interests opposed to change. opportunity to acknowledge the fine work on competition
and regulation that is being done by CUTS, which DFID
Government policies can strongly influence the level of has partnered on many projects.
competition in markets. Relevant policies are not just those
of the national government, but include those of state

Page 068
www.circ.in

Risks & Audits of PPP Projects


Sharmila Chavaly ,
JS, Department of Economic Affairs

One of the realities in India today is that there is limited suited" to deal with each. The practice is fairly
expertise in both government and the private sector in risk standardized and conventional but there are some areas in
evaluation in public private partnerships. This is partly the extant PPP process that directly impact the evaluation
because of historical reasons as our PPP experience has been of risks in a project and may require attention by sectors
of fairly recent origin and we are learning as we go along. It is undertaking PPPs. A few of these are discussed below.
also because we tend to docket risks into the standard matrix Firstly, we are yet to establish the Public Sector Comparator
without putting them through a rigorous testing process (PSC) approach in all sectors. Prudent PPP programs
where there can be assessed, simulations built in and require a PSC to be prepared before any decision on going
probabilities assigned, leading to eventual valuation. Most in for a PPP is considered. Major risks in the traditional or
countries with well-established public private partnership conventional approach to project delivery are to be
(PPP) programs have structured models that enable such a identified and a life-cycle costing done. In countries with
process. In India, we have begun to standardize this in some experience in PPPs, projects are first run through a filter to
sectors (highways, for one) but also tend to over-rely on the judge "PPP-ability" - whether they are amenable to being
advice of consultants. While this is not in itself inadvisable, taken up as PPPs from the point of view the expected
the risk allocation exercise becomes a largely theoretical one outcomes, including financial cost estimates. In India,
if consultants with hands-on experience are themselves rare, however, as we are currently faced with a virtual paucity of
as we generally find in India. Our experience with PPPs funds in the face of a critical shortfall in infrastructure, the
being relatively limited, the repercussions of this have not approach seems to be to decide upon the contours of a
yet hit the spotlight. project and as a first step, appoint consultants to bid it out
as a PPP. Market appetite, policy confusion and lack of
The current risk "framework" is one that involves, in general preparedness and readiness for implementation
most cases, the preparation of a risk allocation matrix that can often mean that the decision is delayed, the approach
identifies the risks at different stages of project shelved and avoidable expenditure incurred. Had the PSC
implementation. Whereas the risk profile keeps changing approach been taken, this could have been averted or the
during the process as in all project finance, it is this matrix risks anticipated to a reasonable degree. Further, even if a
that forms the basis for estimating the probabilities and project is successfully bid out, in the absence of a robust,
costs of different risks. Prior to this, the risks are formally defendable PSC ex-ante, the decision to opt for a PPP could
"assigned", as the basic principle goes, to the party "best result in justifiable audit concerns ex-post.

Page 070
www.circ.in

The approach to assignment of the risks has not kept pace PPP world that do introduce an element of objectivity to the
with developments in infrastructure finance and the process when combined with scenario testing and
economy. Often seen as an Us-vs-Them struggle, sensitivity analyses. The process of determining,
conventional textbook approaches are resorted to by both prioritizing and then dealing with the risk is facilitated by
parties in automatically divvying up the risks. The problem this. The main danger is the likelihood that poor risk
here is that some risks can derail a project significantly and assessment will cause a setback to the PPP program in one
the partners may have to re-consider the merits of a whole of two ways:
scale transfer of such risks and, instead, look for innovative
— By underestimating risks and, therefore, under-
solutions that are within the rules and also allow for a clear
provisioning for contingent liabilities, the
exposition of the logic behind this, which has to be placed on
experience with a bellwether PPP project may
record. For example, as a first principle all financing risks are jeopardize an entire program in a sector as a knee-
often routinely assigned to the private party. In a volatile jerk reaction.
interest regime, however, if interest rate risk is fully assigned
to the private partner and rates sharply increase, the — If the government has in place defined risk-
resultant financing costs could spiral out of control and result exposure thresholds, overestimating the likelihood
in either premature termination or the government bailing of some risks could result in alarm bells on the
out the project - the latter would be tantamount to an implicit estimated "real" cost of a project and make it
sovereign guarantee which was not costed up front. Both artificially unviable vis-à- vis an alternative. On the
these would immediately attract audit attention. Since flip side, if consequences of risks, measured in
projects are usually implemented in four to five years, an monetary terms, are incompletely assessed, the
alternative could be to explore a cap-floor approach that, impact of the resulting spill-over may even
while tapping into possible advantages of declining rates, snowball into safety and environmental disasters
can also provide a measure of comfort when faced with which would add to project costs.
possible runaway increases. In general, all risks, including
financial, need to be viewed as either explicit or implicit, their Since there is a tendency even in our PPP training courses
to build up a large contingent of "practitioners" who are
probabilities of occurrence assessed to qualify their priority,
exposed to the jargon and build up familiarity with the
alternatives studied and, finally, quantified in monetary
process, insufficient effort is being paid to building up a
terms for inclusion in the project costs. This is to be done as subset of core government experts, including in the Audit
part of the project preparatory process, and not tacked on as and Vigilance cadres, who can assess, estimate and
an after thought. examine risks in PPPs. The current framework was set in
place when the government was trying to mainstream
This brings us to the current framework of risk PPPs. Now that the concept has attained widespread
assessment. The methods we use to measure risks are acceptance, perhaps it is time to restructure the training
fairly rudimentary. While, in the final analysis, approach.
prediction of occurrence of a risk is more art than science,
there are well- established techniques conventional in the

Page 073
www.circ.in

PPPs entail the long-term alienation through contract of


some of the statutory rights of the public sector to provide
assets or services of an assured quality at a reasonable cost
to a party whose focus is on making a profit from the
transaction. While standard dangers in project
implementation like padding of costs, over-engineering
and unfair procurement practices can be detected even by
conventional methods, any assessment of the "correctness"
of risk allocation in a PPP project has to be based upon on a
proper appreciation of the following: that acceptance of
and comfort with the almost conflicting aims of the
principal parties to the contract is essential; that assessment
of whether value for money has been realized has to be seen
in a historical context, that is, when the initial decisions
were taken to proceed with the project on a PPP basis;, and
that risk allocation is always based upon assumptions and
can be objectively examined only with a degree of expertise
in the field. If this is simultaneously accompanied by
implementation of best technical practices in risk
allocation, valuation and regulation, it would help make
sectoral PPP programs sustainable.

_________________________
The author works for the government. The views
expressed are personal.

Page 072
www.circ.in

Public Private Partnership


and the Institutional Considerations
Sharmistha Ghosh,
Lecturer in Commerce, Shri Shikshayatan College Figure (1):
PPP projects undertaken by different sectors in MENA region
Abstract: 1%
Public Private Partnerships (PPP) have emerged as an 2%
0%
Power & Water
4%
extensive tool for the government to bridge the gap between 4% Wasterwater
public and private enterprises thereby enhancing the
efficiency in operations by using the expertise of the private Education
sector and the supportive functions of the government Transport
sector. Hence in order to implement such a policy in a full
fledged manner, certain institutional amendments are 89% Healthcare
required. In this regard, this paper aims at pinpointing those Industry
key issues and suggesting ways to deal with it.
Source: MEED
1. Introduction Hence it can be seen from the given figure that in the MENA
Public Private Partnership (PPP) is an innovative region PPP has been introduced in almost every
entrepreneurial system in which both the state and infrastructural sectors of the economy. In India, though this
private individuals can contribute their share to strategy has already been adopted in some of the states in
achieve an overall efficiency in operations in the selected sectors, its impact as a whole can only be felt when it
various sectors of industry. According to the gets implemented widely in every sector of the economy. But
Department of Economic Affairs, Ministry of Finance, implementation or introduction of every new thing requires
Government of India, PPP is“a partnership between a certain things to be considered or amended. It may be
public sector entity (sponsoring authority) and a regarding its policy formulation, regulatory norms or
private sector entity (a legal entity in which 51% or legislative alterations. In this perspective, this paper aims at:
more of equity is with the private partner/s) for the • analysing the institutional amendments required to
creation and/or management of infrastructure for implement PPP, and
public purpose for a specified period of time • discussing the implication of the proposed
(concession period) on commercial terms and in which the amendments.
private partner has been procured through a In order to address the above objectives the remainder of the
transparent and open procurement system”. In the paper is organised as follows. Section 2 draws the institutional
MENA region, the recent share of different sectors that considerations required to implement PPP. Section 3 sketches
have started its operations under the PPP regime can be the implications of such amendments. The last section is
viewed from the following diagram. devoted to concluding observations and suggestions.

Page 073
www.circ.in

2. Institutional Considerations • Timing issues: Though PPP is a new development


For implementing the structure of Public Private for India, but a standard duration for project
Partnership, the institutional amendments which may approval as well as its implementation is required.
be required are discussed under the following heads: Otherwise, the same story of carrying forward the
cases pending in the court of law over the years will b e
• Legislative considerations: A narrow concept of the scenario. There should be a committee for
PPP is intended to involve the private sector in selection of viable projects, a committee for
Public projects. Whereas a broad perspective of PPP approval and last, but not the least, another one to
involves the public sector intervention into private follow up on the implementation of the projects
practices and operations as well as consultation and where the members of the committee must include
dialogue in public decision making. In Kuwait, one expert from that particular sector or field. Since
broader PPP legislation has been undertaken. resource is scarce, we cannot afford to loose out on
Kuwait, Dubai and Jordan are increasing their focus them. So proper coordination is to be maintained
on implementing PPP projects by introducing between the public and the private sector through
relevant legislations in addition to setting up well defined laws and regulation.
specialized government departments to handle
future PPPs. On the other hand, the most common • Cost considerations: It will certainly involve a large
form of PPP in the UK is the Private Finance amount of expenditure to carry out the initial steps
Initiative (PFI) which was introduced in 1992 by a of project sanctioning. Financial institutions should
cash trapped Conservative government that needed come forward to provide assistance to viable
to boost public investment without increasing projects and design some new loan schemes for PPP
public borrowing. The great attraction of PFI is that enterprises. In addition, the government should
the projects are mostly off the public sector balance also assure to share such financial burdens once the
sheet, enabling the government to keep within the project is sanctioned.
restrictions set by economic and stability pact as
well as defer payments to future. In India, the Model • Transparency: Transparency is a very crucial
Concession Agreements (MCAs) framed and element if full fledged private participation is
standardised by the Government though provide a required. Transparency in creation of contracts is as
stable regulatory and policy framework, but in this important as in case of project design. Any
context, it is necessary to frame certain laws that will information gap in these cases will discourage
bind the state and the private sector and help them private participation.
execute their plans jointly in an organised and
efficient manner. There needs a balance to be set up Now, this new trend in entrepreneurship which requires
between the fixed legal and regulatory framework the above mentioned considerations to be taken into
as well as there should be a flexible one which account has its own implications which may be discussed
conforms to the day to day developments. Before in the next section.
zeroing on any particular legislation, some
experience from the countries who have already 3. Implications of the Proposed Amendments
adopted PPP should be taken into consideration Framing laws and training the officials in it require
which may be done in a consultative manner by considerable expenditure. Moreover successful
taking advisory assistance from them. It will be implementation of PPP calls for proper coordination
better if standardisation of laws are made across between the Government and the private
sectors so that it is easily understandable for the entrepreneur which can only be achieved if there is a
individual firms or rather the private sector that well defined set of norms and rules stating the power
how to initiate with the proceedings of PPP and authority of both the sector in a PPP initiative so
implementation. Moreover, government officials that no one is exploited at the cost of the other. The
should be acquainted, and in fact trained legislative body should not frame laws by being biased
beforehand with the laws and execution procedure. to the government. The coordination between the
sectors may be illustrated in the following figure.

Figure (2): Inter-sectoral linkages in Public Finance and Private Finance

Public Finance Private Finance

Government Government

Operating Contract Finance Contract Service Contract

Operating Contract Firm


Operating Company Finance Providers
Operating Company Construction
Contract
Construction Construction Company
Contract
Finance Contract

Construction Company Finance Providers

Source: Chongqing, 2009

Page 074
www.circ.in

There are some lacunas in the proposed PPP system 4. Concluding Observations
where it has not yet been clarified whether the private
entrepreneur share of income will be through sharing of PPP should therefore be encouraged in India and
profits of the business or through some fees should be implemented with the supportive
payment structure for their services. Furthermore, the institutional procedures and amendments. A broader
capital contribution ratio between the two sectors has perspective of implementation of PPP is supposed to
also not been defined so far in India. The area where reap greater benefits for the country. Hence a well phased
most of the PPP projects concentrate, that is the out plan taking into consideration all the sectors of the
economy should be prepared within a proper legislative
infrastructure sector involves a lot of risk for which the
framework. PPPs can be mainstreamed by taking into
private sector hesitate to come forward and participate in
consideration the needs of the economy and its people. The
those ventures. Here, the government should clarify feasibility study of every project with respect to other
and share the risk with the private sector through some factors and constraints should be carefully done before
kind of pre-defined mechanism. These are the places where making commitment to any proposal. Apart from the
proper legislation and regulation is required to make the institutional considerations there are other considerations
entire process transparent enough for the People. It as well, like the regulatory issues, project and policy related
obviously would help to better allocate the risk to the best considerations, and last but not the least, capacity and trust
suited party in an optimal way. Private participation related factors. It is necessary to standardize the core
should not be for profit motive alone. While framing laws, policies & practices to ensure integration of services &
the objective of social welfare with service motive should interaction between applications. So, along with the
also be kept in mind. Moreover, if the financial institutions amendments in institutional factors, necessary changes in
come forward with some well built schemes of lending other factors also need to be implemented in order to make
financial support to PPP schemes, this will enhance not PPP a successful endeavour.
only the finance business but also it will act as a great
support to the upcoming PPP projects. References:
http:// www.adb.org
Http://www.google.com
http:// www.imf.org
http://www.infrastructure.gov.in
Http://www.pppindia.com
www.circ.in

Quality of Regulation:
Meaning, Determinants and Assessment
Siddhartha Mitra
Professor, Deptt. of Economics, Jadavpur University

“The objective of regulation should be to produce desirable outcomes in the present


or future which might not otherwise occur or prevent undesirable outcomes which
might otherwise occur”

The quality of regulation of economic activity is judged Contrast this law with another that imposes heavy
by the desirability of underlying regulatory laws/rules penalties on cartels. The latter is obviously an example
and effectiveness in enforcing such laws/rules. The of a desirable regulatory law. However, it constitutes
objective of regulation should be to produce desirable only a necessary condition for good quality regulation.
outcomes in the present or future which might not The quality of regulation might still be poor in this
otherwise occur or prevent undesirable outcomes which case if this desirable regulatory law cannot be
might otherwise occur. enforced because of investigative incompetence or the
incidence of corruption. Success in enforcement often
In other words, the purpose of regulation is to rein in the depends on the institutional structure, i.e. the
free exercise of market forces and consumer and producer composition of the regulatory body and the
impulses in cases where such a display can act as an
ties/obligations that bind it to government, producers
obstacle to the maximisation of societal well-being or to
and consumers.
remove externally applied obstacles to market forces when
their play is desirable. Undesirable regulatory laws
The proximate determinants of regulation
(regulation that is not required) therefore automatically
Regulation is undertaken by various sectoral agencies with
give rise to poor quality regulation irrespective of how
such laws are implemented. different immediate objectives. The literature on regulation
highlights the following determinants of regulatory
For the sake of illustration, consider a law asking for an quality the degree of independence of the regulator with
excessive fee for registration/ licensing of business. It is respect to the government and sectional lobbies,
clearly undesirable as it prevents many firms from entering consistency and timeliness in pronouncements, well
the industry and hinders competition. Such a law will give qualified staff, accountability etc. Empirical studies have
rise to poor quality regulation irrespective of how shown that these qualities are positively linked to the
efficiently it is implemented. desirability and effectiveness of regulation.

Page 076
www.circ.in

Common sense also leads to the same conclusion unless a The net benefit from regulation is, therefore, the welfare
regulator has a fair degree of independence it will not be gains from regulation less the costs mentioned above and is
able to formulate and implement regulation in a manner a function of the stringency of regulation. When a
that is fair to all groups and consistent with the regulation is less stringent than that required to maximise
maximisation of social welfare. If it is not prompt in its net benefit it is deemed as sub-optimal and the relevant
pronouncements it will not be able to curb dangerous sector is said to be under-regulated. On the other hand over
excesses before they result in damage to the economy. regulation is said to occur if the stringency of existing
Without well-qualified staff it will have difficulty in regulation is more than the level which maximise net
formulating regulation and also in implementing it. benefits.
Accountability ensures that regulations are formulated
and implemented with care after assigning due importance While RIA is a good technique for determining the quality
to the welfare of all the stakeholders. of regulatory laws it might be inadequate for judging their
enforcement. The quality of regulatory enforcement can be
The factors mentioned so far are proximate determinants of judged by reviewing the status of its proximate or ultimate
regulation. Delving further into the sources of regulatory determinants mentioned above. While one or both classes
laws and activity enables us to determine the root/ultimate of determinants might be used the actual use might not be a
determinants which drive these proximate determinants. matter of choice. In certain cases, especially in developing
For example, no overlap in the functions of regulatory countries, the history of a regulatory body is so short at the
agencies and clear delineation of powers lead to timeliness time of assessment that it is often not possible to have
of regulation. If the regulatory agency has its own training adequately voluminous data on proximate determinants
facilities for generating man power then it results in which are usually performance indicators.
independence from the government and a steady flow of
well- qualified staff and consequently quality formulation In such cases information on ultimate causes, such as the
and implementation of regulation. availability of own training facilities and sources of funds,
which are input indicators might have to be used.
Own training facilities and sanction for generating
financial resources through taxes, fees and publications In general, it has been found that regulation is a task that
result in both functional and financial autonomy from the requires specialised skills and training. Regulatory regimes
government. The existence of an option for regulated in most developing countries are in an early stage of their
entities to appeal against regulators in a tribunal ensures evolution and many of them suffer from lack of funds and
the accountability of regulators. training facilities for their staff. They are, therefore, unable
to meet the demands of modern regulation. There is great
Three processes of regulation scope for multilateral intervention in this regard so that
As different sectors have different objectives in adopting economies of scale in training and development of skills
regulations it is very difficult to develop an integrated and can be exploited and rewarding interaction among
holistic framework for assessing the quality of regulation. countries on regulatory issues can be facilitated. Only then
However, any assessment of the quality of regulation can we raise the quality of regulation in the developing
involves three processes: (a) determining whether world.
regulation is needed; (b) if it is needed then determining its
deviation from the optimal level of regulation; and (c)
determining the effectiveness of regulation in achieving its _____________________________
objectives. This article first appeared in the Newsletter of the ECPR
Standing Group on Regulatory Governance, July 2008,
With regard to (a) regulation is usually needed when (i) Volume 1 (2).
there is a natural monopoly (economies of scale exist so that
competition is not desirable); (ii) externalities exist so that
agents are often not charged by the market for the costs
they impose on others; and (iii) there are information
asymmetries among buyers and sellers implying that the
market does not constitute a level playing field.

If any of these characteristics are not found in a market to a


significant extent regulation is deemed to be unnecessary
and therefore of poor quality. With regarding to (b) a
technique called regulatory impact assessment (RIA) is
used for determining the sub-optimality of regulation. This
technique involves determination of the extent of
regulation at which net benefits (benefits minus cost) are
maximised. Note that a regulation involves both
administrative costs (salaries of staff, equipment costs etc.)
for the regulator and compliance costs for the regulated
parties (documentation and associated costs of staff etc.).

Page 077
www.circ.in

Urban Governance and Service Delivery in


Bangalore: Public-Private Partnership
(This article is an abridged version of a larger article.)

Sangita S N**, Head & Professor,


Smitha K C*, Doctoral student,
(Centre for Political Institutions Governance and Development, Institute for Social and Economic Change)

Abstract growing city and poised to become mega city with 88 lakhs
The paper explores public-private partnership in the light population and 1,000 sq. Kms in 2015. The city is a leading
of persistent state failure, institutional constraints, and science centre with its internationally comparable
systemic weakness, which impede the service delivery. educational and research institutes. It is a centre for India's
The paper focus is on key issues: whether public-private Space research and aviation technology. Bangalore is
partnership facilitate innovation, and thereby enhance emerged as 'Silicon Valley' of India with a booming IT
quality services, and essentially pro- poor reflecting equity industry of over 125 multi-national companies, 1150
concerns. The study examines various types of partnership software export companies and 1,20,000 IT professionals.
at work for service delivery in metropolitan Bangalore. The The software exports from the city have been estimated to
paper is presented in five sections. The first section be around US $2.5 billion in 2003.
presents conceptual understanding of PPP in urban
context while second section explores empirical evidence 1. Stress on Urban Infrastructure
of PPP models in Bangalore. The third section deals with With the increase of population and stimulated economic
outcomes in terms of Efficiency and Equity issues. Final growth there has been an enormous strain on the existing
section presents policy prescription. infrastructure and service delivery. The problems related
to traffic, roads, water, sanitation, solid waste, electricity
Introduction 8 and transport in urban areas are quite acute
Bangalore: A City that beckons Bangalore is the sixth most (Sivaramakrishna and Kundu, 2005: 106; NIUA, 1995; GoI,
populous city in India and 43rd largest metropolis in the 2005: 363). The government has neither capacity nor required
world with a population of 60 lakhs spread across 595 sq. finances to cope with rising demand for public services. In this
kms geographical area (2001). It is the one of the fast context, many governance reforms have been initiated both

*
Doctoral student, Centre for Political Institutions Governance and Development, Institute for Social and Economic Change, Nagarabhavi, Bangalore.
**
Head & Professor, Centre for Political Institutions, Governance and Development, Institute for Social and Economic Change, Nagarabhavi, Bangalore.

Page 078
www.circ.in

by state and civil society to improve the quality of service delivery model to achieve efficiency and address
governance and service delivery. The major reforms shortages, although unlikely to replace fully traditional
include Public Private Partnership (PPP), privatization of service deliver by governments. The partnership concept is
government activities, and partnership with civil society linked to the network forms of governance, in which public
organizations, transparency and accountability in actors co-opt other actors to solve the governance
administration and so on. Against this backdrop, the study problems. PPP therefore, represent a new way of doing
examines the implications of governance reforms business to improve the quality and efficiency of public
particularly public private partnership on service delivery services.
in terms of efficiency and equity in Bangalore.
Typology of Public-Private Partnership
2. Public-Private Partnership for Service Delivery: PPP encompasses a range of partnerships based on (i)
Conceptual Framework number of partnership involved (ii) governance level at
There is lack of consensus over definition of PPP. PPP is which partnership is evolved and (iii) the objectives or
deferred as 'working arrangements based on a mutual purpose for which partnership is constituted (Sekar 2002:
commitment between a public sector organization with 5). Other classification include: type of partnership, size of
any organization outside of the public sector' (Gerrad 2001: partner (measurable in terms of funding, revenue,
49; Bovaid 2004: 200). It is a contractual agreement formed investments etc), extent of collaboration/level of
between a government agency and a private sector that commitment, role and functions, stage of partnership, type of
allows the latter in public service delivery towards actors involved, area of intervention for output, scope of
financing, designing, implementing (Peirre 1999:374; partnership, organizational form, capacity in partnership, and
Osborne 2000; Awortwi 2004: 213; Bovaid 2004: 200; DEA geographic location. All these forms of partnership imply
and ADB 2006: 17; Hodge and Greve 2007:545; Rajan 2007: 2). some degree of complementarity or synergy or collaboration
or co-production, dialogue, contracting, co-ownership, market
PPP is innovative, flexible collaborations in which the friendly regulation and trust between public and civic actors in
partners are bound by shared values and mutual trust to pursuit of common set of social objectives (Robinson and
share cost, risks, and benefits (Batley 1996; Ghere 2001: 441; White 2001: 107; Sansom 2006:210)).
Teisman and Klijn 2003: 197; Prosper Ngowi 2006: 3;
Bloomfield 2006:400). PPP is also understood in terms of The classification includes public-public, public-private,
inherent power dynamics shared mutually among the and public-civil society and International- development
partners (Lister 2000:228). Power might be political partners as shown in the chart 1.
information, or organizational power. PPP is alternative

Chart 1: Typology, Nature and Purpose of Public-Private Partnership for Service Delivery

Purpose of Partnership

Nature of PPP Sector/Number Type of Role of Area of Scope


of Partnerships Partnership Partnership Partnership Partnership
Involved

Public- Public Intergovernmental Power sharing Supply Side Policy Vertical


or Inter-Municipal Objectives

Public-Private Public authority Contractual/ Demand Side Customer Mixed


with private sector Out Sourcing Focus/Quality Partnership
Services

Public- Third sector Dialogue/ Demand Empowerment/ Horizontal


Civil Society Contestation Side Citizen
Participation/
Monitoring

Public- Both private and Loose Mixed (both Social Mixed


Development civil society Network Supply & Inclusion Partnership
Demand side) or PPP

Public- Private sector Contractual Supply side Economic Mixed


International Productivity Partnership
Or PPP
Source: Complied from different sources

Page 079
www.circ.in

Partnership between public-public is most common to with a public authority with a lower income country
cooperate and coordinate in service delivery (Hall, et al, usually to assist the latter with its development projects
2005: 7). The coordination between the Bangalore City (Hall, et al, 2005: 7-8; Brinkerhoff and Brinkerhoff, 2004:
Corporation (BCC) and Karnataka Slum Clearance Board 254).The second type of partnership is between
(KSCB) can be mentioned in this regard. The partnerships international partners when public authorities (Hall et al
between local and central or state governments for power 2005: 6) from different countries work together to address
sharing (for setting policy priorities, policy design or common set issues and agendas. These partnerships are
planning and policy implementation) are also come under Important inter-organizational mechanism for delivering
this category. international development assistance. For instance,
transnational agencies or international donor agencies like
PPP in partnership with 'private' sector include interalia World Bank, International Monetary Fund (IMF) or United
corporate bodies, consulting firms, contractors, Nations Development Programme (UNDP) has major
maintenance companies, private investors and so on. The funding or contribution for infrastructure such as water
The public-private also include: service contracts, supply; sanitation; energy or power sector.
operation and management contracts, Leasing-Buy-Build-
Operate (BBO), Lease-Develop-Operate (LDO), Wrap- Potential Drivers for Public-Private Partnership
Around Addition (WAA), Build- Operate-Transfer (BOT), There are many potential drivers for promoting
Build. Own-Operate-Transfer (BOOT) etc. Most contracts partnership in developing countries. First, glaring
cover the finance, design, management, and maintenance infrastructure deficit, in the areas such as water supply,
obligations. These contracts are usually financed by user sanitation, local transportation, and waste treatment compel
fees or tariffs or by government subsidies. The argument is the government to opt private sector for financing,
private participation results in better efficiency. The PPP design, construction, and operation (Lquian 2005: 312).
helps to raise resources (funds, techno- managerial skill Partnership would help to overcome impediments posed by
and expertise), innovation, cost saving and construction state failure, institutional constraints, and distributing costs
and commercial risk sharing, entrepreneurial spirit and and risk among partners. In addition, partnership
improve services simultaneously. The partnership with constitutes the most significant methods to generate
third sector such as local NGOs, community organizations, performance of essential services that tends to reflect the
trade unions and so on (Brinkerh off and Brinkerh off 2004) incorporation of market-based principles and practices into
is to achieve transparency, accountability, social equity the public provisioning of services (Pinto 1998: 394). In the
(Laquian 2005: 307). Partnership with NGOs or field of local governance, the governmental organizations
Community Based Organizations also varies depending are increasingly dependent on private or semi-private actors
whether primarily, a deepening role or stretching role for implementation of their policies and service delivery.
(Krishna, 2003: 365). Such engagements facilitate co-
production without undue interference of government Objectives and Outcomes of Public-Private Partnership
(Sansom 2006: 213). Public-Private Partnership (PPP) is recognized as the most
innovative tool for resource generation, quality and better
These civic groups play a predominant role in mobilizing services. PPP reduces the gap of meeting increasing
services, pressing for micro-policy reforms, engage in mass infrastructure needs and social exclusion. Partnership
campaigns, demand for better services, monitor actual further can bring creativity, dynamic, resilient, innovation,
provision and for ensuring accountability from service energy, vibrant and capacity building to improve service
providers (Chowdhury Roy 1999:1097; Jalal, 2000: 43; delivery. PPP is critical in promoting innovation in
Robinson and White 2001: 100; Paul, etal 2004: technological, institutional, and organizational behaviors
933). The horizontal engagement of public civil society is and practices in service delivery.
aimed to promote consultative process and prioritize
service options and widen the participatory democracy. In The objectives of PPP in service delivery vary with wider
fact, the process of decentralization has resulted in the political and private interest. The PPP promotes clear
empowerment of the common people through local-level customer focus through reduced cost, faster services, and
planning and community resource mobilization. Norms of improved service quality. Further, PPP promotes greater
such cooperation on networks of civic engagement among efficiency in terms of improved coverage, access and
ordinary citizens and public agencies are used for enhanced social service (Cook and Minogue 1990: 398;
developmental ends and serve as socialization agents of Kaul 1997: 21; Brown and Potoski, 2006:657; Bloomfield,
partnership (Chowdhury Roy 1999:1098; Vigoda 2002:536; 2006:401). PPP ensures recovery of user charges by better
Sangita, 2005: 75) and realize collective pressure to usher risk allocation and procure additional revenue streams.
policy changes. Instead of remaining passive recipients, the Thus, PPP is seen as the best way, to govern the complex
participation of civic groups has in fact inspired the relations and interactions in a modern network society
undertaking of a unique state-citizen dialogue in a big way (Teisman and Klijn 2002: 198). The chart 2 clearly enumerates
by 'pressurizing' or 'lobbying' the existing state for change. the objectives.
These structures are effective beyond their social role, by
linking the public issues at the grassroots into the PPP enable mobilization of resources and capacity building
appropriate platform at the local level. The deliberative (through sharing skill, management, expertise, new-
structures hope to promote civic values, civility as a technology and training programs). PPP symbolizes market
precondition for governance and thereby determine their driven competition, risk sharing, and transparency (Brown
own development paradigms. The state and international and Potoski, 2006: 666; Bloomfield, 2006: 401). PPP ultimate
partnership include a public authority from a country goal is to obtain more 'value for money' (Ranjan 2007: 2) and
(preferably high income country) enters into a partnership thereby safeguard consumer and public interest.

Page 080
www.circ.in

Chart 2: Objectives and Outcomes of PPP

Objectives Outcomes
Service Efficiency or effectiveness a.Efficient mode of Improved service delivery
b.Improved coverage and access to services
c.Promotion of equity in service delivery

Mobilization and Capacity Building a .Public awareness programs and training methods

Accountability and Transparency a . E-governance or e-services


b. Simplification of procedures

Civic Participation and Citizen engagement a . Consultative process with citizens and other
stakeholders
b. Public or interactive or redressal forums

Equity of Services a . Measured locally in terms of access,


standards, or level of services and affordability

Constraints for PPP of contention which includes: duplication of services,


The major constraints for PPP are: fragmentation, heterogeneous approaches, competition for resources, lack
duplication, heterogeneity and uncertain outcomes. of integration, corruption, inter-institutional coordination,
bureaucratization, and dependence (Robinson and White
Power relationship in partnership is often asymmetrical 2001: 103; Krishna 2003: 368). Key concerns include poor
and less ambivalence. The most vexed issues of a framework, lack of clarity, inadequate capacity to manage
partnership approach are fragmented structures and the process, and an overly narrow transaction focus
processes, blurring responsibilities and accountability. (Ghere, 2000: 448; Bloomfield, 2006:410).
Effective coordination in partnership seems to be the area
www.circ.in

Public authority in partnership is eclipsed in its traditional Enabling Conditions for Public-Private Partnership
weakness of monitoring and evaluation. Public authorities The full potential of PPP can be achieved by careful
rarely have access to such resources leading to weak planning and application through a clear framework for
relations. They also do not have adequate control over the partnerships. Governments need to work on accountable
PPP, especially for local contracts with private sector And transparent structures to formulate and enforce. First
involved in the provisioning of urban services that likely to the establishment of proactive mechanisms (such as
result in higher cost to local taxpayers (Bloomfield, ombudsman, ethical training, and citizen grievances
2006:402;Hodge and Greve 2007: 553). The long-term processes) would ensure partnership legitimacy. Second,
partnership entitling innovative methods of financing PPP needs to do preparatory work defining procedure
public facilities are susceptible to transparency problems (specificities), tasks, quality indicators and monitoring
(Ghere, 2000: 448; Bloomfiled, 2006: 403) and within- process. Improved and more independent regulation of
partnership coordination costs are a major challenge to public utilities is achieved by an effective entry point for
successful PPPs. Staff reduction or downsizing leads to future well defined PPP contracts (Sansom 2006:215). Some
mistrust and poor management. Tariff increase, layoffs, necessary pre-requisites include strong political
and poor stakeholder's coordination have contributed for Commitment, transparency and consistency of policy,
its weakness. Further, private investors are basically profit- effective regulation, careful design of the contract with
oriented. PPPs tend to focus on markets where revenues appropriate risk apportionment and attention to cost
are easily generated. The poor are often excluded from recovery, and clearly defined stakeholder roles, project
PPPs because of institutional constrains that prevent the financing, and extent of competition. And creation of a
development of an attractive market that involves the poor good information base is also an important factor.
(Robinson and White 2001: 104; Laquian 2005: 312; Leung Feedback and consultations with citizens, labour unions,
and Hui 2005: 14). relevant government agencies, private investors, civil
society organizations, and media will ensure support,
Many PPPs have failed due to strong opposition from civil client focus, and overall improved implementation of PPP
society, local media, and other stakeholders. Even in the and protect public interest.
absence of this bias, governments often lack the financial
resources and the technical capacities to provide services to Thus successful PPP stems from the nature of goods and
the poor. Partnership would be further marginalised the services produced and depends on transformation of
poor as they focus on markets for profits. Further, the inputs into outputs and tradeoffs that partnership face
availability of private financing for infrastructure projects (Orts, 1996: 1080; Rudolph, 2000: 1768). Further, the
has essentially provided governments an opportunity to successful partnership depends on the form of rates paid to
use a 'mega-credit' card to charge on infrastructure deals public officials and the opportunity costs facing citizens for
(Hodge and Greve 2007: 552). Lastly, the partnership inputs like knowledge, skills and time (Ostrom, 1996:
projects have generally undermined the significance of 1081). Finally, effective conflict resolution, contradicting
local cultural ethos. Overcoming these institutional social and political goals, complicated contractual
constrains often require innovative solutions and an agreements, expertise, consultation, cooperation and
inclusive partnership that will bring in all relevant attending to their suggestions are all potential areas of
stakeholders. concern.
www.circ.in

Public-Private Partnership in Urban Context collection, rationalisation of service charges, simplifications


Cities of the world experience tremendous pressure in of tax assessment system, computerization of services, and
terms of management and operation of urban systems as improved accounting and financial management systems.
well as service delivery. Important changes are taking
place in the governance of cities in developing countries, New Partnership Situation
one of the important being the proliferation of various The emergence of partnership and networks in urban
forms of networks and partnership between public-private context can be shown in the following illustration.
and civil society. Many urban reforms such as partnerships
with public-private and civil society organisations are 1. The rising expectations of citizens challenged in the
existing service delivery processes both in terms of
introduced to improve quality of governance and service
participation and quality of services. The demands are
delivery. The broad stakeholders in this reform process
no longer met in isolation by government alone.
include differing in sectors and levels. Changes in rules,
norms and values, practices have been brought to facilitate 2. Numerous inter-governmental networks, alliances
coordination among various agencies to improve and partnership arrangements are developed. These in
efficiency. Privatisation, decentralisation, restructuring of turn would create complex arrangements and
departments and administrative procedures, laws and processes.
regulations, social audit, e-governance, citizen charter, red 3. Due to private sector participation, alternative service
ressal grievances, transparency and sound personnel arrangements are defined and experiments are carried
policies constituted major strategies of urban governance out through partnerships.
reform (World Bank, 2003). Many Urban Local Bodies 4. Increase in multi-stakeholders partnership
(ULBs) introduce innovations to improve billing and representing people voice and dialogue.

Urban growth, Financial crisis, poor Rising expectations;


Increase infrastructure, demand for
population and increasing better/quality and
Consumerism supply-demand gap efficient Services

Increased
interdependency; need to
combined resources,
finances, technology and
skills

Increase complex
Creation of governance
networks; and Partnership
Networks and
arrangements
Partnership
arrangements

Stakeholders
Participation: Civil
Society like NGOs, Improved Service
CBOs and Voluntary Delivery
sector

Page 083
www.circ.in

Public-Private Partnerships:
Keeping Human Rights on the Radar
Surya Deva,
Associate Professor, JD Programme Leader, Faculty Editor, City University of Hong Kong Law Review
School of Law, City University of Hong Kong

I. Context The contours of this public-private relationship have


The idea of public-private partnerships (PPP) is changed over the years in that justifications for PPP,
gaining increasing recognition all over the world. scope and regulatory framework of PPP, the nature
While the origin of PPP is generally traced to the last and extent of partners' contributions, modes of sharing
decade of the 20th century, this might be a misnomer. benefits, and the parameters of responsibility as well
States (public) have formed partnerships with as risk allocation have continued to evolve as per
companies (private) for centuries. The British East diverse needs. Nevertheless, the basic postulate of the
India Company (Company) is a case in point: on 31 PPP has remained the same: a partnership between
December 1600, Queen Elizabeth I issued a charter to public and private sectors to achieve a mutually
the Company to conduct monopolistic trade into the beneficial goal by pooling in resources. PPP is now
East Indies1. Through subsequent charters, the used as a vehicle to run hospitals, operate
Company acquired rights to mint its own coin, bridges, highways and tunnels, offer consular services,
maintain army, manage overseas territories and collect provide security, fight wars, gather intelligence, run
taxes;2 basically, in exchange for serving the economic prisons, and provide a range of public services.3It is
and colonial interests of the British Empire, the regretful, however, that the mistake of ignoring the
Company can do everything that a sovereign state public good is being repeated again four-hundred
would do. That early experiment of PPP failed, among years down the road. In the current PPP discourse, the
others, because neither the British government nor the focus with some exceptions4 is mostly on employing
Company bothered to take responsibility to serve the PPP for achieving economic development and/or
public good.

1
John Keay, The Honourable Company: A History of the English East India Company (London: Harper Collins Publishers, 1991) 9, 39.
2
Alex Von Tunzelmann, Indian Summer: The Secret History of the End of an Empire (London: Pocket Books, 2008) 14-15.
3
Several factors underpin this push for PPP, e.g., resource crunch; general inefficiency of the public sector; new challenges and public expectations; optimising
strengths and gains by forging partnerships. See J Kwan, 'Public Private Partnerships; Public Private Dialogue', <http://www.civil.hku.hk/cicid/
3_events/32/papers/1.pdf>.
4
Apart from the UN Global Compact, one can refer to involving business in accomplishing the Millennium Development Goals (MDGs). See, e.g., UNDP,
UNDP and the Private Sector: Building Partnerships for Development (New York: UNDP, 2004).

Page 085
www.circ.in

entities to protect a wide range of human rights


interests. Having ratified several international human
rights conventions, the Indian government is under a
duty to respect, protect and fulfil human rights. This
obligation remains undiluted even when the
government joins hands with a private entity to
achieve certain economic goals.

Nevertheless, in practice, there are numerous


examples of the government ignoring their human
rights obligations while establishing PPP. Let us
consider the memorandum of understanding (MoU)
signed between the state of Orissa and POSCO, a
Koran company.11 Under the MoU, the government
of Orissa undertook to do almost everything necessary
to help POSCO establish the steel plan and related
projects from acquiring land to procuring raw
materials, ensuring availability of water and power,
improving infrastructure5.India's 2011 Draft National securing environmental clearance and providing
Public Private Partnership Policy (Policy) is no overall security. The MoU, however, hardly gave any
exception6, as neither the objectives of PPP nor the attention to the human rights implications of the
principles governing PPP make any reference to project or allocated clear responsibility in this regard.
human rights7.Nor do one find in the Policy a This approach is problematic: it neither helps in
provision for the human rights impact assessment accomplishing the PPP project on time nor protects the
alongside economic, financial and affordability interests of the affected community.
assessment.8 In short, rather than embedding human
rights into the plans for harnessing the potential of The recently adopted UN Guiding Principles on
PPP, the Policy totally ignores and externalises the Business and Human Rights (GPs) rightly remind
human rights impacts of the PPP-driven development. states to take multiple measures to protect against
Against this background, this articles argues that both human rights abuses by business entities within their
states and companies have human rights obligations territory or jurisdiction.12Directly relevant to PPP are
flowing from national laws and/or international law Principles 5 and 6, which provide that states 'should
and that these obligations do not disappear simply exercise adequate oversight in order to meet their
because 'public' and 'private' social organs join hands international human rights obligations when they
to pursue certain economic goals. For the sake of contract with, or legislate for, business enterprises to
convenience, the term 'human rights' is used in this provide services that may impact upon the enjoyment
article to include not only human rights but also labour of human rights' and 'should promote respect for
rights and environmental rights. human rights by business enterprises with which they
conduct commercial transactions.' It is clear that
II. PPP And Human Rights India's Draft Policy is totally oblivious of these
Why human rights should matter for PPP Irrespective expectations articulated by the Gps.
of the fact whether the entity behind PPP is public,
private or a hybrid of public and private, it The GPs also provide that companies have a
has certain human rights obligations under both law 'responsibility to respect' all international human
and morality. In Indian context, the government as rights. Principle 15 lays down that in order to
well as 'other authorities' within its control are subject discharge this responsibility, companies should
express a policy commitment to respect human right,
to extensive list of fundamental rights enumerated in
conduct human rights due diligence and put in place
the Constitution. 9Moreover, certain fundamental
processes for remediation of any adverse impacts.
rights do apply, or have been interpreted to apply, to
Although the GPs are not legally binding on
private entities.10In addition, there are numerous
companies, they can ignore human rights only at
domestic laws that obligate both public and private
their peril, especially in view of the increasing
5
See World Bank Institute, 'Public-Private Partnerships Can Deliver Critical Infrastructure if Developing Countries Tackle Financing and Governance Issues',
Press Release No 2012/292/WBI (24 February 2012), <http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:23126724~
pagePK:64257043~piPK:437376~theSitePK:4607,00.html>.
6
Draft National Public Private Partnership Policy 2011, Preamble (para 1), <http://www.pppinindia.com/pdf/draftnationalppppolicy.pdf>.
7
Ibid, paras 2.1 and 2.2. Protecting the interests of 'project affected persons' and 'other stakeholders' is though listed as one of the principles to be kept in mind.
Ibid, para 2.2.4.
8
Ibid, para 3.4.2.
9
Constitution of India, article 12.
10
Ibid, articles 15(2), 17 and 23; Vishaka v State of Rajasthan AIR 1997 SC 3011. See also Mahendra P Singh, 'India: Protection of Human Rights against State and
Non-state Actors' in Dawn Oliver & Jörg Fedtke (eds.), Human Rights and the Private Sphere: A Comparative Study (London: Routledge, 2007), 180.
11
'Memorandum of Understanding between the Government of Orissa and M/S POSCO for Establishment of An Integrated Steel Plant at Paradeep' (22 June
2005), <http://www.orissa.gov.in/posco/POSCO-MoU.htm>.
12
Human Rights Council, 'Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework',
A/HRC/17/31 (21 March 2011).
13
Ibid, Principles 11 and 12.
14
See Surya Deva, 'Guiding Principles on Business and Human Rights: Implications for Companies' (2012) 9:2 European Company Law 101.

Page 086
www.circ.in

Awareness-cum-activism on the part of consumers, mandatory and no PPP project should be approved unless
investors and the civil society. In other words, there is a its human rights implications have been considered and
business case for complying with human rights. taken care of. Past human rights track record of companies
should be one of factors to select a successful bidder and
Apart from legal and economic dimensions, it is also award procurement contracts. 17
arguable that companies should be subject to human
rights obligations because of their relation to and Special care should be taken in acquiring land for PPP
position in society.15 First and foremost, companies are projects: rather than merely satisfying the relevant legal
social organs and their license to maximise profit is requirements, the aim should be to win the support and
neither absolute nor irrevocable. Complying with confidence of affected land owners and other stakeholders,
human rights responsibilities should be a precondition otherwise significant delays in project completion are
to conducting business, otherwise human rights inevitable. It is highly desirable that the MoU, if any, and all
cannot be fully realised in an era of PPP and outsourcing. relevant contracts contain explicit provisions as to individual
as well as collective human rights responsibilities of different
Overcoming the challenges of PPP to human rights partners. The performance of PPP should be judged also
PPP projects pose unique challenges to the realisation of with reference to direct or indirect contribution to the
human rights. To begin with, human rights do not realisation of human rights. Project monitoring units should
generally feature on the radar of either states or companies be required to factor in non-economic variables in evaluating
and consequently, economic gains often push other equally the success of PPP projects and the experiences learned in
important social goals to the background. The second this process should be fed into the government nodal body in
problem is that the regulatory framework might not clearly charge of PPP.A mechanism should be set up to receive and
outline who would bear the responsibility to respect, resolve at an early stage potential human rights grievances of
protect and fulfil human rights. Third, even if human rights stakeholders arising out of PPP operations. Such a mechanism
responsibilities are clearly demarcated, the state in should be complemented with ensuring effective access to
question which ought to protect human rights might have judicial mechanisms, including by extending their jurisdiction
a vested interested in ignoring adverse human rights to deal with human rights abuses taking place within the PPP
impacts of PPP, especially if the involved company possess matrix. Preference for taking resort to ADR to resolve disputes
economic clout. Fourth, since the institutions tasked to should not unduly limit the right of affected parties to
monitor the implementation and enforcement of human approach courts to seek relief against PPP project providers.
rights are still based on the public-private divide, they are
not equipped to deal with human rights abuses by a hybrid III. Conclusion
PPP entity. Fifth, since PPP mostly relate to economic This article has pointed out that the idea of PPP, albeit
projects, alternative dispute resolution (ADR) methods in different forms, has existed for centuries.
such as arbitration and mediation are employed to settle Considering that the relevance of PPP is likely to
disputes, but these methods and the legal regimes deepen in years to come, it is critical that we devise a
governing them do not always accord adequate framework that can ensure that human rights find a
importance to human rights. Last but not least, if an voice in all stages of the PPP process. There are sound
overseas company is involved in the PPP project, this raises legal and moral reasons to demand that both public
a whole set of jurisdictional and/or political problems in and private participants of PPP projects comply with
fixing the responsibility. universal human rights obligations. While PPP
presents some unique challenges to the human rights
It is not, however, impossible to overcome these discourse, it is not impossible to overcome these. I have
challenges. Several measures can be taken to ensure that suggested some steps to keep human rights on the
the PPP development projects do not ignore human rights. radar of PPP policy makers and participants.
The trick lies in integrating human rights into all PPP stages
from planning to approval, implementation and
performance monitoring. Before selecting any project, the
government should conduct wide consultation with all
relevant stakeholders as to the appropriateness of PPP for
the given project or area. Since companies opt for PPP
primarily for financial reasons, projects with doubtful
long-term financial profitability should be a 'no-go zone'.16
Nor should the government opt for PPP if irreparable harm
may potentially be caused to a given public good (such as
indigenous land or a historical site) by a project driven by
profit motives or if there is no guarantee that the PPP
would result in delivery of better service at an affordable
price. Apart from consultation, the human rights impact
assessment by an independent agency should be made

15
Surya Deva, Regulating Corporate Human Rights Violations: Humanizing Business (London: Routledge, 2012), 145-50.
16
See Kwan, above note 3.
17
See Christopher McCrudden, 'Corporate Social Responsibility and Public Procurement' in D McBarnet, A Voiculescu and T Campbell (eds.), The New
Corporate Accountability: Corporate Social Responsibility and the Law (Cambridge: Cambridge University Press, 2007), 93.

Page 087
www.circ.in

Public Private Partnership


in Infrastructure Sector in India

Dr. Sushil Kumar,


Assistant Professor, Institute of Management Studies. Kurukshetra University

Abstract of infrastructure sector. Before further discussion on the


The present article deals with the public and private sector 'Public Private Partnership' we should understand its
partnership in infrastructure in India. The Indian meaning.
infrastructure sector is one of the largest sectors of our
economy. Since the early 1990s, India has been looking to 2. Meaning of Public Private Partnership (PPP)
the private sector to fill investment gaps in infrastructure To understand the meaning of PPP we need to know about
but investment in this sector has not lived up to the terms public, private and partnership.
expectations. More investment is required in case of core
sectors like roads, railways, ports, airports, power and 2.1 Public- The term public indicates public sector and it is
telecoms. This article Suggests how infrastructure can be that portion of economy which is controlled by national
improved with the help of public private partnership. This and local governments, public corporations and quasi-
article is divided into six major segments namely autonomous non-government organizations (QUANGO).
introduction, meaning of public private partnership, It includes services such as police, military, public road,
infrastructure position in India, core sectors in public transit, primary education and healthcare for the
infrastructure, Government of India and PPPs, suggestions poor. What we mean to say is that public sector might
& concluding remarks and lastly references. provide services that non-payers cannot be excluded from
and it benefits to whole of the society rather than the
1. Introduction individual one and these services encourages equal
With present state of physical infrastructure, India will be opportunities concept in society.
hard pressed to sustain 9 per cent annual GDP growth over
2.2 Private- Private sector is that part of an economy in
the medium term. So there is massive and urgent need to
which goods and services are produced and distributed by
increase investment in core sectors like roads, railways,
individuals and organizations that are not part of the
ports, airports, power, urban facilities or even telecoms
government or state bureaucracy. It is run for private profit
Public Private Partnership is a way to build world class
motivation only. It includes the personal sector
infrastructure. International experiences show that
(households) and corporate sector (firms), and is
facilitating Public Private Partnership (PPPs) in
responsible for allocating most of the resources within an
infrastructure is the one of the best idea for the betterment

Page 088
www.circ.in

economy. Hereby activities are designed in such a manner


which restricts competition in order to keep prices
relatively high. The main types of businesses in the private
sector i.e. Sole trader, Partnership, Private Limited, Public
Limited Company shares are open to the public etc.

2.3 Partnership- A partnership is a type of business entity


in which two or more persons share with each other the
profits or losses of the business However, depending on the
partnership structure and the jurisdiction in which it
operates, owners of a partnership may be exposed to
greater personal liability than they would as shareholders
of a corporation. More generally, a relationship of two or
more entities conducting business for mutual benefit is
known as partnership.

2.4 Public Private Partnerships (PPPs)- Public Private


Partnership is that private sector does all management and
labor activities in any approved project but under the
control of public sector. When all costs have been covered
by private enterprises then it is handed over to
Government and the project is treated as a social project,
such as flyovers, roads, rivers, ports, power etc.

3. Infrastructure Position in India


India has since the early 1990s, been looking to the private
sector to fill investment gaps in infrastructure. Investment
here did not initially grow as rapidly as in Latin America or
East Asia, as policy reforms were slower. However, with
the increasing emphasis, over time, on public private
partnerships in key sectors, such as telecom and transport,
India has seen a increase in investment. The years 2004 and
2005 saw the highest level of investment to date.
Investment in infrastructure in India over the past two
decades has not lived up to expectations. The 1996 India
Infrastructure Report projected the need for an increase in
investment in infrastructure from levels of under 5 per cent
to about 8 per cent of GDP by 2005-06. In the Union Budget
2005, the Finance Minister reiterated the importance of 4. Core Sectors in Infrastructure in India
infrastructure for rapid economic development and noted 4.1 Highways-
that, in the Government's view, 'the most glaring deficit in For a country of India's size, an efficient road network is
India is the infrastructure deficit'. Efforts has also been necessary both for national integration as well as for overall
made, over the years, to strengthen the policy and socio-economic development. The National Highways
regulatory framework underpinning some of the key (NH), with a total length of 65,569 km, serves as the arterial
infrastructure sectors, with notable success achieved in the network across the country. The Committee on
Telecommunications sector. Infrastructure adopted an Action Plan for development of
the National Highways network. In India, the central as
An overview of Investment in infrastructure sector by both well as a few state governments have successfully
private and public investors displays that the investment harnessed private sector partnership in road development.
by public private partnership mode was only 3.75% of GDP At the central level, as part of the first and second phases of
in 1991, has shown an increasing trends and touches to the National Highways Development Project (NHDP) - a
approximate 4.5 % of GDP in 1994 goes to 3.75% of GDP in flagship program with an estimated requirement of US$
1999. But in 2011 the total project cost through PPPs is 5060 billion investment within five years- 66 projects with a
estimated to be about Rs. 383,332.06 Crore. While the total value of about US$ 6 billion were implemented
private sector investment in infrastructure has been through the Build-Operate-Transfer (BOT) route (42 toll
increased to 2.73 % of total investment in infrastructure in projects and 22 annuity projects). Since January 2006, the
2011 from (Source: World Bank WDI Database). Hence it is Public-Private Partnership Appraisal Committee (PPPAC)
clear that the part of investment of public sector is much has granted approval to a total of 87 projects including 77
more than the private sector. But this trend is now going to highway projects. The PPPAC approves the infrastructure
be in favor of private sector since public sector now coming projects worth US$ 5.98 billion on November 2008. This
forward to help him. includes 21 highway projects to be taken up under NHDP
Phase III and V. An ambitious National Highway

Page 089
www.circ.in

Development Programme (NHDP), involving a total support of USD 1.66 billion that includes USD 163.33
investment of Rs.2,20,000 crore (USD 45.276 billion) up to million from the Central Road Fund. This much ambitious
2012, has been established. plan was eying massive profits of more than USD 20.447
billion for the year 2008-09 and onwards.
Some Private Sector Participants are -
Reliance Energy, L&T inter-state Road Corridor Limited, 4.3 Ports-
Jaiprakash Associates Ltd (JAL), Lanco Infratech, DS With 12 major ports and 187 minor ports, 7,517 km long
Construction, Maytas Infra Private Limited and Nagarjuna Indian coastline plays a pivotal role in the maritime
Construction Company Ltd (Joint Venture), Era transport helping in the international trade. Traffic
Constructions India Limited and Karam Chand Thapar & handled at major ports during April 2010 to January 2011
Bros Limited etc. was recorded to be approximate 636686 units. The ports in
India offer tremendous scope for international maritime
transport both for passenger and cargo handling. Although
there have not been considerable reforms in this sector,
neither major nor minor ports have independent
regulatory authorities. TAMP has done a commendable job
in creating a fair play regarding tariffs and charges levied
on private service providers at major ports. However,
TAMP's remit is limited. The Government of India targets
to increasing the cargo handling capacity of major ports by
two folds to reach 1.5 billion metric tonnes (MT) by the year
2012. This will be achieved at an investment of around USD
25 billion through public-private partnerships. A Crisil
research on Indian ports and maritime transport estimates
that ports will grow by 160 per cent over the 201112 period.
Cargo handling at the major ports is projected to grow at
7.7% per annum (CAGR) till 2011-12 and the cargo traffic is
estimated to reach 877 million tonnes by 2011-12, whereas
the containerized cargo is expected to grow at 15.5%
(CAGR) over a period of 7 years. The New Foreign Trade
Policy envisages doubling of India's share in global exports
in next five years to Rs.675000 crore (USD 150 billion). A
large portion of the foreign trade to be through the
4.2 Railways- maritime route: 95% by volume and 70% by value.
Indian Railway (IR) is the backbone of the socio-economic
growth of India. It is the second largest railway network in 4.4 Airports-
the world with 63,122 route kilometer (rkm) operating out There are 449 airports/airstrips in the country. Of these,
of 16 zones and 67 divisions. But it is in distress. Unlike 126 airports- which include 11 international airports, 89
other modes of transport, IR has failed to rise to the domestic airports and 26 civil enclaves- are owned,
challenge of being an efficient and reliable provider of managed and operated by the Airports Authority of India
transport infrastructure. Political compulsions have forced (AAI) under the Ministry of Civil Aviation. The traffic flow
the IR to expand networks to commercially unviable areas, at these airports is very uneven. Six airports (Mumbai,
highly subsidize passenger fares and raise freight tariffs to Delhi, Chennai, Bangalore, Kolkata and Hyderabad)
a point where traditional long haul goods traffic in items account for 90.5 percent of the total international passenger
such as cement, iron and steel and petroleum has shifted to traffic and 91.7 per cent of total passenger traffic. At
roads or pipelines. These issues have severely eroded the present, only 61 airports are being used by various airlines.
cost competitiveness of the railways and it finds itself in the Most of the airports are underdeveloped and underutilized
midst of financial distress. The market borrowings have while others have become overcrowded and are stretched
increased substantially, and are expected to be Rs.147.74 to capacity. A survey done by the International Air
billion during the Tenth Plan. Transport Association (IATA) in 1999 ranked the Mumbai
and Delhi airports amongst the three worst airports in the
There are many reform issues related to Indian Railways- Asia-Pacific region for all 19 service parameters included in
its serious financial state, inadequate investments in safety, the survey. With a rating of 2.3 and 2.6 on a scale of 1 (very
lines, signaling and rolling stock, and others. There are two poor) to (excellent) for Mumbai and Delhi airports
recommendations that are worth. International experience respectively, these airports were adjudged to offer the
suggests that the best way of doing this is by introducing at lowest service levels in terms of overall satisfaction.
least one- preferably two- other global sized competitors. It According to capital expenditure estimates presented by
is precisely here that the role of an independent regulator the AAI to the Standing Committee of the Parliament in
would be critical. 2002 the investment needed is around Rs.191 billion.

India Railway had taken up one of the most ambitious Airports too have no independent regulatory authority.
annual plans for 2008-09 with huge investment of about The AAI is a creation of the Ministry of Civil Aviation.
USD 7.91 billion. The plan included a total budgetary Given the stated objective of privatizing facilities in

Page 090
www.circ.in

million to 315.33 million during the same period. The


growth of Urban and Rural Subscription is 0.78% and
1.44% respectively.

These were serviced by 188 ISPs, again led by BSNL.


Regrettably, however, the domestic telecom instrument
manufacturing industry has not been able to keep pace
with the demands of the services sector. Today, bulk of the
telecom equipment is imported and the entire demand for
GSM and CDMA technologies are being met through
import. The target as set out in NTP 99 was to achieve a tele-
density of 7 per cent (75 million connections) by 2005 and 15
per cent (175 million connections) by 2010. In addition,
there has to be investment in broadband to provide high
speed, reliable, on demand internet connectivity with a
speed of at least 256 Kbps. Assuming 25 per cent annual
growth, and a tele-density of 25 per cent by 2010-11, the
investment needed is Rs.1,996 billion. To this should be
added an extra Rs.147 billion for broadband. The above
target is yet to be achieved. The 2G spectrum has spoiled
the image of telecom sector and increase government
challenge in the sector.

4.6 Power-
The most important aspect of power sector reform is to
recognize the fundamental truth of the maxim, “No money
no power”. No amount of economic or financial sophistry
can ensure funding for projects where consumers do not
Even pay for the marginal cost of a good or service sold. The
Electricity Act, 2003, is a welcome step in the right direction.
However it needs to be operationalzed at the level of each
state. Subject to the overriding issue of paying proper user
charges, the power sector is bedeviled with problems of
Mumbai and Delhi airports as well as the approval of new regulatory capture of the SERCs as well as frequent reneging
private airports in Bangalore and Hyderabad, it is of escrows and PPAs by bankrupt state governments. This
imperative that the government appoints an independent requires intervention at the highest level, without which the
regulatory authority for this sector. Besides this, the issue is entire PPP framework for power and reforms envisaged by
one of implementation. Enough reform policies have been the Electricity Act, 2003, will be under risk.
suggested in the report of the Naresh Chandra Committee
on civil aviation. It is time that the Ministry focuses on There is potential for private sector participation in
implementing them quickly. generation, transmission, distribution and rural
electrification. The private sector's interest is evident from
4.5 Telecoms- the results of the bidding for the two recently announced
The telecom sector in India is a case study of how the ultra mega projects. Several state governments and the
interplay of competition and technology can radically private sector are assessing alternate options for public
change the business landscape of infrastructure. Before private partnership in the urban areas in the distribution
opening-up in 1994, 52 the sector was characterized by business. Designing an equitable risk allocation framework
under investment, outdated technology and limited will be critical for the successful implementation of PPPs in
growth. In 1994, the waiting list for telephone connections distribution. An important lesson learnt from the
was as high as 2.2 million or almost 31 percent of the total involvement of the private sector in distribution has been
installed base. The constraint was not demand, but the lack that focus on customer benefits must be addressed on a
of resources of the public sector enterprises. Today, thanks priority basis. For sustainable change management,
to the boom in cellular services, the number of telephone employee concerns and an appropriate performance-
subscribers in India increased to 926.53 Million at the end of incentive framework must be addressed upfront in any
December, 2011 from 917.33 Million at the end of PPP model.
November 2011, thereby registering a growth rate of 1.00%.
The share of Urban subscribers has declined to 65.97% from As of January 31, 2011, India had an installed capacity of
66.11% whereas share of Rural subscribers has increased to 187549.62 MW, the bulk of which (44.5 per cent) is owned
34.03% in the month of December 2011. With this, the by state governments and 24.58 is owned by private sector.
overall Teledensity in India reaches to 76.86 at the end of A further approximate 32 percent of the capacity was from
December, 2011 from 76.18 of the previous month. SOEs owned or controlled by the central government,
Subscription in Urban Areas grew from 606.47 million in namely NTPC, National Hydro Electric Power
November, 2011 to 611.19 million at the end of December, Corporation (NHPC), North Eastern Electric Power
2011. Subscription in Rural Areas increased from 310.86

Page 091
www.circ.in

expand it to other sectors. In the civil aviation sector,


preparations are under way to engage the private sector in
non-aeronautical activities at 35 non-metro airports, and in
the development of Greenfield “merchant” airports and
about 300 airstrips.

According to him, some of the other areas in which the


government is envisaging greater scope for PPPs include
power, water and sanitation, tourism and hospitality
sectors. The Government of India is acutely conscious of
the need to make infrastructure services available to those
who need them but cannot afford to pay the full cost of
service provision. Here, too, the government sees a
substantive scope for leveraging its support through
engaging the private sector as a partner in its development
agenda. Citing an example of such initiative in the civil
aviation sector, the Honorable Minister noted that the
government was actively considering a proposal to
establish a fund to support airline and airport operations
that are not commercially viable but are considered
essential for national connectivity. As per our civil aviation
minister, in order to be able to attract private sector players,
the government would have to put in place appropriate
regulatory frameworks, credible dispute resolution
mechanisms, and satisfactorily resolve sensitive and
contentious issues like land acquisition. He cited the
phenomenal growth rates in sectors such as civil aviation
and telecom to make a case for tempering conservatism
with a more realistic assessment of growth prospects.
Although the government is committed to rely on PPPs
significantly in the provision of infrastructure services, it is
facing a variety of challenges- big and small- in translating
its intent into action. It was noted that, in trying to scale up
its program, India was facing the same challenges that
other countries have also faced, namely:

a) How to marry private sector motivation for profit with


public sector concern for public service (the need for
inclusiveness)
b) How to apportion risk in a manner that is fair, rational
Corporation (NEEPCO) and the Neyveli Lignite and sustainable
Corporation (NLC). Privately owned enterprises account c) How to manage the partnership through a tightly-
for the remaining around 11.5 percent of the generating framed concession agreement over a 2030 year period,
capacity. Among these, the more notable players are in a rapidly changing environment
Reliance Energy, Tata Power, the RPG group and d) How to develop capacities in the concerned financial
Torrent.49 Both the SOEs and the independent power institutions so that they are able to appraise projects
producers (IPPs) have long term PPAs with specific SEBs, which have a life span of 1520 years. Since effective
or their transmission companies. By the year 2012, India due diligence by these institutions will be critical for
requires an additional 100,000 MW of generation capacity. proper screening of PPPs proposals brought to them
A huge capital investment is required to meet this target. by developers.
This has welcomed numerous power generation,
transmission, and distribution companies across the globe PPP Experiences of Chile and the United Kingdom:
to establish their operations in the country under the Lessons for India
famous PPPs programmes. The experience of other countries suggests that it should be
possible to increase private investment in infrastructure in
5. Government of India and Ppps: Experiences & India from its current level of 1% of Gross Domestic
Expectations Product (GDP) to 2% of GDP. For example, Chile has
The Honorable Minister of Civil Aviation recalled that the succeeded in increasing its infrastructure investments to a
country initiated the process of partnering with the private level of 5% of GDP, in good part through encouraging
sector in 1991, beginning with the power sector, and since private participation in almost all infrastructure sectors.
then achieved notable successes through PPPs in the
telecom, roads, ports and airports sectors. He affirmed that 6. Sugessions and Concluding Remarks
the government is not only keen to continue to rely on 1) The government could aid private sector participation
public private partnership in these sectors, but also to in PPPs through expeditious awarding of contracts,

Page 092
www.circ.in

facilitating land acquisition and ensuring better References


coordination between the centre and states. In 1. Akash Deep, “Public Private Partnership for
particular, large size PPP projects may be put out for Financing Development, Harvard University
bidding after obtaining mandatory clearances and presentation, 2005.
approvals say, through a Shell Company/Special 2. Clive Harris, “Private Participation in Infrastructure
Purpose Vehicle (SPV) as was recently done in the in Developing Countries: Trends, Impacts, and Policy
case of the Ultra Mega Power Projects. Lessons,” World Bank Working Paper Series No. 5,
2) Information on the development of PPPs, prior to their Report no. 26526, 2003.
being bid out, would be appreciated by the private 3. Public Investment and Public-Private Partnerships,
sector, perhaps as part of a national database An IMF Publication ISBN 978-1-58906-478-2
3) The tax regime applicable to dividends paid out by 4. Report on “Financing Infrastructure: Addressing
SPVs needs to be rationalized; currently, in cases Constraints and Challenges” by The World Bank,
where a holding company is implementing multiple June, 2006
projects through SPVs, dividends are being taxed 5. Report on “Meeting India's Infrastructure Needs with
twice, first at the level of project-specific SPVs and Public Private Partnership-The International
then at the holding company level Experience and Perspective” February 5-6, 2007, GOI,
4) The entry of financial investors will introduce a Ministry of Finance, Department of Economic Affairs,
longer-term perspective than construction-oriented New Delhi.
concessionaires, and this can be encouraged by 6. http://www.answers.com/topic/public-sector, at 11
allowing concessions to be more tradable a.m., on February 2, 2010
5) The government should take measures to deepen debt 7. http://adbi.org/scripts/download_file.pdf, at 11.30
markets and encourage insurance funds to invest in a.m., on February 2, 2010
infrastructure projects. 8. Http://www.businessdictionary.com/definition/
economy. html, February 2, 2010
www.circ.in

Public Private Partnership (PPP):


Way Forward to Infrastructural Developments in India

Tarique Anjum,
Chartered Accountant

"Provision of quality infrastructure is a pre-requisite for the economy to achieve a higher growth trajectory
on a sustained basis. World-class infrastructure is the key to a globally competitive economy and India's
objective of sustained double digit growth can only be achieved through a quantum growth in the
infrastructure sector. Today, there is a need to focus on enhancing the quantity as well as improving the
quality of infrastructure services provided in India."

Introduction supply, sanitation, sewage disposal, education and health.


Infrastructure is the backbone of any modern economy. Inadequate attention and poor investment in roads, ports,
World-class infrastructure is the key to a globally airways and railways etc. render critical economic activities
competitive economy and India's objective of sustained uneconomical and lead to high inflation. Costs entailed due
double digit growth can only be achieved through a to inadequate and inefficient infrastructure prevent the
quantum growth in the infrastructure sector. Provision of economy from realizing its full growth potential and
public services and infrastructure has traditionally been considerably reduce the competitive edge of the economy.
the exclusive domain of the government. However, with
increasing population pressures, urbanisation and other In view of the above factors, channelization of long
developmental trends, government's ability to adequately term investments to infrastructure sector becomes a critical
address the public needs through traditional means has policy measure, particularly for the developing economies.
been severally constrained. This has led the Government's The Government of India is acutely conscious of the need to
across the world to increasingly look at the private sector to make infrastructure services available to those who need
supplement public investments and provide public them but cannot afford to pay the full cost of service
services through Public Private Partnerships. provision. Here, too, the government sees a substantive
scope for leveraging its support through engaging the
Need for PPP private sector as a partner in its development agenda.
The quality of human life in the economy is immensely
impacted by the nature of primary services available which Thus the government increasing looks at the private
can be categorised into whole physical infrastructure sector involvement and thereby the activities of financing,
covering road, transportation, power, communication etc. designing, implementing and operating infrastructural
through its backward and forward linkages facilitates facilities & services which were earlier taken by the
growth; or the other social infrastructure including water government traditionally shall henceforth be carried

Page 095
www.circ.in

forward by contractual partnerships between the public 3. Operations or management for a specified period:
and the private sector. Public Private Partnerships (PPP) Provides an element of time period after which the
present the most attractive option of meeting the above arrangement with the private sector entity comes to a
targets, not only in providing resources to an extent but closure. Hence, the arrangement is not in perpetuity.
also in upgrading the standards of delivery through 4. Substantial risk sharing with the private sector: It is
greater efficiency. typically specified to differentiate PPPs from mere
outsourcing contracts. For example, a facility service
What is PPP ? contract is also an outcome based reward contract but
There is varying understanding amongst stakeholders as to not a PPP.
what constitutes a Public Private Partnership. While giving 5. Performance linked payments: It is to provide central
a single definition of PPP would not be possible, this focus on performance and not merely provision of
arrangement may validly refer to any collaborative venture facility or service. A mere deferred payment contract
which are built around the expertise and capacity of the project should not get qualified as a PPP.
partners and are based on a contractual agreement, which 6. Conformance to performance standards: It is to
ensures appropriate and mutually agreed allocation of provide a strong element of service delivery aspect and
resources, risks, and returns. PPPs do not mean reduced the concepts of quality and compliance to pre-
responsibility and accountability of the government. They still determined and measurable standards to be specified
remain public infrastructure projects committed to meeting by the sponsoring authority.
the critical service needs of citizens. The government remains
accountable for service quality, price certainty, and cost-
effectiveness of the partnership. Under the PPP format, the
government role gets redefined as one of facilitator and
enabler, while the private partner plays the role of financier,
builder, and operator of the service or facility.

Thus, depending upon the infrastructural needs of the


economy, an umbrella definition of PPPs in Indian context
can be as follows : PPP means an arrangement between a
government or statutory entity or government owned
entity on one side and a private sector entity on the other,
for the provision of public assets and/ or related services
for public benefit, through investments being made by
and/or management undertaken by the private sector
entity for a specified time period, where there is a
substantial risk sharing with the private sector and the
private sector receives performance linked payments that
conform (or are benchmarked) to specified, pre-
determined and measurable performance standards.
PPP Vs. Privatisation
Basic elements to constitute PPPs An interesting query which may tinkle the mind of many is
A further surgery into this definition, thereby, reveals to whether PPP and privatisation are the same? The answer
some of the inherent characteristics of PPPs: to the same is "NO". PPPs are different from privatization.
While PPPs involve private management of public service
1. Arrangement with Private Sector Entity: The asset
through a long-term contract between an operator and a
and/or service under an arrangement will be provided
public authority, privatization involves outright sale of a
by the Private Sector Entity to the public.
public service or facility to the private sector. A typical PPP
2. Public asset or service for public benefit: Has the
example would be a toll expressway project financed and
element of facilities/ services being provided by the
constructed by a private developer. Thus all projects with
Government as a sovereign to its people. To better
private sector participation cannot be termed as PPP.
reflect this intent, two key concepts are elaborated
below:
Benefits of PPP
(a) 'Public Services' are those services that the State is The public sector contributes assurance in terms of stable
obligated to provide to its citizens (towards meeting governance, citizens' support, financing, and also assumes
the socio-economic objectives) or where the State social, environmental, and political risks. The private sector
has traditionally provided the services to its brings along operational efficiencies, innovative
citizens. For example, provision of security, law and technologies, managerial effectiveness, access to additional
order, electricity, water, etc. to the citizens. finances, and construction and commercial risk sharing.
(b)'Public Asset' is that asset the use of which is
Apart from enabling private investment flows, PPPs
inextricably linked to the delivery of a Public
also deliver efficiency gains and enhanced impact of the
Service. For example, public road which is linked to
investments. The efficient use of resources, availability of
public transportation or, those assets that utilize or
modern technology, better project design and
integrate sovereign assets to deliver public services.
implementation, and improved operations combine to

Page 096
www.circ.in

deliver efficiency and effectiveness gains which are not • Service Contract;
readily produced in a public sector project. PPP projects • Management Contract/Lease;
also lead to faster implementation, reduced life cycle costs, • Build Operate Transfer (BOT);
and optimal risk allocation. Private management also • Concession;
increases accountability and incentivizes performance and • Joint Venture;
maintenance of required service standards. Finally, PPPs • Community-based Provision; etc
result in improved delivery of public services and also
promote public sector reforms. Key considerations in PPPs
Government recognizes that the private sector regards
Various PPP forms and formats infrastructure investments as inherently risky, on account
As discussed, PPP is a blend of public sector agency and a of their long gestation periods, low user charges in many
private sector consortium. Such private sector consortium sectors, poor cost recovery, social & environmental risks
could comprise of contractors, maintenance companies, and the scope for policy reversals driven by political
private investors and consulting firms. The consortium considerations. Also, PPPs often involve complex planning
often forms a special company or a 'special purpose vehicle' and sustained facilitation.
(SPV). The SPV signs a contract with the government and
with the subcontractors to build the facility and then Thus when infrastructure is developed as PPPs, the
maintain it. In terms of terminology, the public body acts as process is often characterized by detailed risk and cost
the "Conceding Authority" while the private company acts appraisal, complex and long bidding procedures, difficult
a "Concessionaire". To enable the flow of private funds and stakeholder management, and long-drawn negotiations to
resources into public infrastructure and services, the PPP is financial closure. This means that PPPs are critically
operationalized through a contractual relationship dependent on sustained and explicit support of the
between the two parties. sponsoring government. To deal with these procedural
complexities and potential pitfalls of PPPs, governments
The public sponsor of the PPP decides the degree of need to be clear, committed, and technically capable to
private participation required for the particular project. handle the legal, regulatory, policy, and governance issues.
This decision is usually based on the government's
objectives of undertaking the project, the degree of control Constraints and Initiatives
it desires, and the ability of the PPP consortium to deliver The overall response to promote PPPs as the preferred
the required service. It is also influenced by the provisions mode for the execution of infrastructure projects, despite
of the existing legal and regulatory framework, the apparent benefits to the governments in the States and
structuring of the project to attract private resources, and Central Government departments, has not yielded
the potential to generate future cash flows. satisfactory results. While encouraging PPPs, following
constraints can be broadly perceived;
This partnership could take many contractual forms,
which progressively vary with increasing risk, responsibility, Weakness in enabling policy and regulatory
and financing for the private sector. However, the most framework. Substantial work needs to be done in making
common partnership options are sector policies and regulations PPP friendly.
www.circ.in

A large number of these projects are in the States and • Strengthening the regulatory and policy
without the active participation of the States it would not be framework, including the expansion of user fees;
possible to achieve satisfactory results. The Union Finance Minister, in the Budget speech
for the year 2011-12 has announced to come up with
The market presently does not have adequate a comprehensive policy that can be used by the
instruments and capacity to meet the long-term equity and Centre and the State Governments in further
debt financing needed by infrastructure projects. developing Public-Private Partnerships. The
National PPP Policy 2011 has been put forth for
There is also a lack of shelf of credible, bankable discussions, consultations and suggestions.
infrastructure projects, which could be offered for • To streamline the PPP Mechanism, the Planning
financing to the private sector. Some initiatives have been Commission is in its constant endeavours to evolve
taken both at the central as well as the states' level to "Guidelines" on various aspects of PPP to enshrine a
develop PPP projects. These tend to be isolated cases and comprehensive PPP process.
have demonstrated a marked lack of consistency.
• Preparation of standard documents such as Model
Therefore, a more aggressive approach is needed for
Concession Agreements, pre-bid qualification
preparing a pipeline of credible, bankable projects that can
methodology and procurement processes.
be offered to the private sector through competitive
• Establishing PPP as the preferred mode in sectors
bidding process.
such as highways; Permitting FDI up to 100% on the
automatic route in several infrastructure sectors;
There is also lack of capacity in public institutions
and officials to manage the PPP process. Since these • Providing fiscal incentives in terms of "tax holiday"
projects involve long term contracts covering the life cycle to infrastructure projects and tax incentives to
of the infrastructure asset being created, it is necessary to investors providing long-term finance or investing
manage this process to maximize returns to all the in equity capital;
stakeholders. • Setting up of infrastructure funds are also being
encouraged and multilateral agencies such as ADB
Thus some of the main concerns involved in PPPs are have been permitted to raise Rupee bonds and carry
standardization of bidding and procurement procedures, out currency swaps to provide long term debt to
project pipeline creation, transparency requirements, PPP projects
public sector capacity building, and enabling policy and • Creation of PPP Cells in all central ministries and
institutional frameworks for PPPs. state governments, and Public Private Partnership
Appraisal Committee (PPPAC) at the national level;
Government's Initiatives • A website exclusively devoted to PPPs has been
The Government has taken meta-level initiatives to launched to serve as a virtual market place for PPP
enhance the flow of private funds to infrastructure apart projects.
from other policy and regulatory reforms. The government • Conducting Research Studies to harness the benefit
is keen to know what more needs be done to accelerate the of specialized and efficient dispute resolution and
pace of private participation in infrastructure and is in its arbitration mechanisms, as seen in Chile; the need to
constant endeavours to innovate solutions to address the adapt and develop institutions over time, of which
pitfalls witnessed in the entire PPP process. The the UK is a good example; and how to build on the
Government understands that the efficacy of private sector achievements in one sector and broaden the
participation in infrastructure development would be program, as has been seen in South Korea and the UK.
contingent upon the capability to commercialize these
projects with a proper risk sharing inherent in such projects Highlights of Budget 2011-12 on Infrastructural Developments
between the government authorities and the private sector. The Union Finance Minister in his Budget Speech on
This would largely depend on the availability of expert 16th March, 2012 has yet again duly emphasised the
advisory services right from the stage of identification and need for development of infrastructure in India. The
conception of projects to the stage of financial closure and relevant extract on the topic is as under;
monitoring.
• During Twelfth Plan period, investment in
Steps to streamline PPP Mechanism
infrastructure to go up to Rs. 50 lakh crore with half
Government has taken measures to create enabling
of this, expected from private sector.
framework for PPPs by addressing issues relating to policy
• More sectors added as eligible sectors for Viability
and regulatory environment. Progressively more sectors
Gap Funding under the scheme "Support the PPP in
have been opened to private and foreign investment, levy
infrastructure."
of user charges is being promoted, regulatory institutions
•Government has approved guidelines for
are being set up and strengthened, fiscal incentives are establishing joint venture companies by defence
given to infrastructure projects, standardized contractual PSUs in PPP mode.
documents including the Model Concession Agreement • First Infrastructure Debt Fund with an initial size of
are being notified, approval mechanism for PPPs in the Rs. 8000 crore launched earlier in March 2012.
Central sector has been streamlined through setting up of • Tax free bonds of Rs. 60,000 crore to be allowed for
PPPAC. In order to develop the framework for PPPs and financing infrastructure projects in 2012-13.
build up capacities, the Government of India has taken • A harmonised master list of infrastructure sector
following steps; approved by the Government.

Page 098
www.circ.in

Conclusion Therefore, the way to the accelerated Infrastructural


To achieve consistent and steady growth rate of Indian Development in India lies in tapping the immense
economy, there is a critical need to accelerate investments potentials of PPP mechanism (PPP) which undoubtedly is
in the infrastructure sector. In fact, infrastructure has the most attractive option not only in providing resources
emerged as a key driver for sustaining the robust growth of to an extent but also in upgrading the standards of delivery
the economy and the government has been focusing on through greater efficiency.
development of infrastructure.

Unlike the conventional belief that government


expenditure crowds out private investment in
economically productive activities, research studies over
the last decade have shown that Government expenditure
in infrastructure is a useful measure to attract private
investment in the sector. Since the government faces fiscal
constraints in providing the huge amount of funds
required, a larger role is contemplated for the private sector
for investment in infrastructure sector. Thus, the quantum
increase in investments in infrastructure warrants unique
interventions and the urgent creation of a pool of ready,
bankable projects using the various formats of PPPs to
enhance the quantity as well as improve the quality of
infrastructure services provided in India for the overall
development of the country.
www.circ.in

Needed, a Water Policy that Taps


Private Sector
Udai S Mehta,
Associate Director, CCIER

“It is time the policymakers adopt effective independent regulatory body to devise effective Public-Private
Partnership projects for supply and distribution of water so as to supplement the government efforts”……

Water is a relatively scarce resource in India since we have 16 supplies in several developing countries and the
percent of the world's population and only 04 percent of the experiences have been diverse. Planning Commission also
usable fresh water. Daily wage earners pay up to 20 percent of recognises that further efforts are needed to mainstream
their incomes on water and slum-dwellers pay Rs. 5 for a can of PPPs in several areas such as power transmission and
water. This is the true, but sad picture of water distribution in distribution, water supply and sewerage and railways
India where the poor are forced to pay for water. Yet, the mere where there is significant resource shortfall and also a need
talk of privatisation of water raises waves of protests as if it for efficient delivery of services.
should forever remain a free public good.
In some cases, private investors have brought in
It is not only water but the shortage of almost every type of operational efficiencies and benefits to consumers, in
infrastructure that is affecting the country's growth and others it led to manifold increase in tariffs without
consumer welfare. For the 12th Five Year Plan, the Planning perceived improvements in delivery. For instance, in
Commission has suggested that investment in Buenos Aires, privatisation through a concession
infrastructure (road, rail, air and water transport, power agreement led to improvements in coverage, reliability and
generation, transmission and distributiontelecommunication, reduced prices of water.
water supply, irrigation and storage) would need to be
increased from 08 percent of gross domestic product (GDP) Driven by the profit motive, the private sector may not
to around 10 percent. Since the state's resources are limited, always care to serve consumers who are not remunerative.
an aggressive effort at promoting private investment Though the private sector is expected to bring in
through the PPP route is imperative. operational efficiencies and arguably better accountability
to consumers, in the absence of adequate incentives it may
Potential costs, benefits not be inspired to meet the social obligations. Therefore,
However, the debate on potential costs and benefits attaining multiple policy objectives demands a careful
associated with the participation of the private sector in design of the PPP initiatives. Recent experience suggests
that government agencies often get into sub-optimal
water distribution is still on and not confined to India. In
contracts, imperilling the entire project.
the last decade, the private sector made forays into water

Page 100
www.circ.in

into controversy, though privatisation has not happened as


yet. Lack of transparency in the process is a major concern
and the allocation of risks and potential rewards is drawing
heavy flak. At a time, when the DJB has a definite plan to
invest huge public money in the next couple of years to
improve supplies and reduce non-revenue water (NRW),
the privatisation move is being questioned.

Need for an Independent Regulator: Endorsed by


Planning Commission of India
Thus, there is a need to have an independent regulator in
place to set standards of service and to enforce the same.
12th Five year plan approach paper recommend that there is a
need for an overarching Water Framework Law that would
give teeth to the New National Water Policy. It is also
necessary to create regulatory bodies in different States to
resolve conflicts across different uses of water and between
users. The Centre should formulate and facilitate the
adoption by States of a model Water Resources Regulatory
Authority Bill. Whereas, Draft National Water Policy, 2012
from Ministry of Water Resources has already suggested that
a Water Regulatory Authority should be established in each
State. The Authority should fix and regulate the tariff
systems, regulating allocations, monitoring operations,
reviewing performance and suggesting policy changes, etc.
Water Regulatory Authority in a State may also assist in
resolving intra-State water-related disputes.
Opportunity abounds
At the conceptual level, the huge operational inefficiencies The Planning Commission's Working Group on Water
in most public sector water utilities offer enough scope for Governance has constituted a Sub Group on Model Bill for
the private sector to earn attractive returns and also serve State Water Regulatory Authority Act. The Draft Model Bill
disadvantaged consumers. In practice, this has not envisages the Water Resources Department (WRD) as the
happened in most cases. implementing or executive agencies. Two other governing
agencies are envisaged by the Bill, as the State Water
In some instances, the efficiency gains were not passed on Resources Regulatory and Development Council (SC) and
to consumers, while in others the agreement was not the State Independent Water Expert Authority (SIWEA).
binding enough. However, by using performance-based
management contracts to outline the technical and During the 12th Plan, there is also a proposal to set up a
managerial skills of the private sector, public utilities could National Water Commission (NWC) to monitor
enhance their ability to tackle operational inefficiencies compliance with conditionalities of investment and
and improve their service. environment clearance given to irrigation projects. At
present, there is no appropriate body that can provide a
rigorous and credible feedback to sanctioning authorities.
One such success story is of Navi Mumbai, which has
A multi-disciplinary, professionally capable and
improved water and sanitation services by using
independent NWC would have credibility with both
performance-based contracts to manage its water
Centre and States and would function on the lines of what
distribution and transmission system. There was an
has been attempted, for example, in Australia and become
increase of almost 45 percent in revenues and a substantial
a guide for further water resource development in India.
drop in customer complaints. Performance-based
contracts helped the utility provide better service, even
Surely, the private sector can play an important role in
while cutting operational costs. supplying water, supplementing government efforts and
investments. The managerial capabilities of the private
Tirupur in Tamilnadu, was the first town to implement a sector can improve operational efficiencies and the quality
PPP water project. A thriving garments industry city, of services. However, the success of PPP projects would
Tirupur required huge volumes of water for industrial use. depend largely on the capability of governments to
A consortium of three private firms implemented the PPP negotiate deals that take care of the interests of
project to ensure sustained supply of water. The project disadvantaged consumers.
was designed on a Build-Own-Operate-and-Transfer
(BOOT) basis for 30 years, after which it is to be transferred Transparency, the key
to the Government. Owing to the project, Tirupur residents Maintaining transparency in the processes is another
receive water everyday for four-six hours, as opposed to important criterion for the successful implementation of
receiving water on alternate days. The numbers of PPP projects. While the Government will have to create an
household connections have increased by 8,000 and local enabling regulatory milieu, the private sector needs to
industries have a reliable source of water. In contrast to the demonstrate a willingness to accept business risks
Tirupur case, the Delhi Jal Board (DJB) has been running associated with such projects.

Page 101
www.circ.in

Public Private Partnerships


and Infrastructure Projects in Transition Economies
Yannis S Katsoulacos,
Professor of Economics, Athens University of Economics and Business

"The economic reform process in transition economies is that of transferring assets from the public to the
private sector. This transfer can take the form of full fledged privatisation or other “weaker” forms of
transfer. Among the latter, the most popular in most cases is that of Concessionary Agreements or Public
Private Partnerships (PPPs)”

A fundamental aspect of the economic reform process in (ii) Unlike privatisation, in the long-run the state wishes to
transition economies is that of transferring assets from the keep open the option of maintaining control of the
public to the private sector. This transfer can take the form of asset. This could be the case if it is thought desirable to
fully fledged privatisation or other “weaker” forms of control directly the long-run development of the
transfer. Among the latter, the most popular in some cases is economic activity because it is associated with significant
that of Concessionary Agreements or PPPs. These are externalities or because, when the activity is a Natural
agreements through which the state transfers the right of Monopoly, it is not thought feasible to regulate
exploiting an economic asset to a private party for a number operations by an independent regulatory institution.
of years (usually for infrastructural projects the maximum is
30 years) in return for the party investing and developing It is important to note that by far most of the important
that asset. The state remains the legal owner and can resume cases in which state assets are transferred through PPPs or
management and operational responsibility after the end of concessionary agreements the markets in question are
the concessionary agreement. monopolistic. This implies that the concessionaire is a
single operator monopolist who is operating without
This form of transfer is chosen when the following conditions regulatory constraints except in terms of the conditions
are satisfied. specified in the concessionary contract.

(i) The state is financially and/or managerial-skills From this, it follows that an appropriate concessions
constrained. So it is not able (within the fiscal law and the processes of selection through competitive
constraints that it faces) to finance investment in the tendering and of negotiations of the concessionary contract
development of the asset and lacks the managerial are absolutely fundamental if the interests of society/
capacity for running the operations associated with consumers are to be secured whenever concessionary
economically exploiting the asset. agreements are made.

Page 102
www.circ.in

The European Commission (EC) has contributed clarified. For example, it is not clear what happens
towards the establishment of standards in the area of after the BOT contracts run out. There is usually no
concessionary agreements and PPPs through its “Inter- proper framework for PPPs but specifically mixed
pretative Communication on Concessions under forms of partnerships.
Community Law” (2000), as well as the Green Paper and 3. Selection procedures in particular are not
the “Guidelines for Successful Public-Private sufficiently developed (neither the pre-selection
Partnerships” (2003). procedure nor the procedure for requesting
proposals is usually regulated; no reference is made
Contributions have also been made by the UN and the to the publication/record of the concession award;
organisation for Economic Cooperation and Development there are unclear grounds for direct negotiations
(OECD)1. Transition economies enforce national laws on and regulation of unsolicited proposals; there is no
“concessions and participation of the private sector in reference to the possible review procedures).
public services and infrastructure” in order to deal with 4. The provisions regulating the project agreement
concessionary Agreements/Contracts of various forms: and lenders' rights need to be improved
Built-Operate-Transfer (BOT), Built-Own-Operate (BOO), (termination/compensation provisions, possibility
Leasing, Limited Financing, Management Contracts, for step-in rights) while certain things that may lead
Service Contracts etc. to abuse of law (e.g. ability to sell shares of
concessionary company) must be revised and
possibly abandoned altogether.
5. Negotiations and preparation of the contract the
most fundamental aspect of the procedure after
selection is not given sufficient attention with the
result that it is usually left to ministry officials
without the appropriate expertise.
6. Laws should be amended to clarify their relation
with public procurement law, make specific
references to international arbitration and, when a
Competition Commission has been established,
specify the potential role of this Commission in the
procedures.

It should be noted that a recent European Bank for


Reconstruction and Development (EBRD) study examined
concessionary Agreements Policy and Law in 19 Balkan
and former Soviet Union Republics that have adopted
Concessions legislation. Countries were ranked in terms of
The case of 'concessionary agreements' compliance to international standards in a number of
With the establishment of these laws, major concessionary dimensions as having “Very High Compliance”, “High
agreements can be implemented, which include: Compliance”, “Medium Compliance”, “Low Compliance”
and “Very Low Compliance”.
(a) Mining (chrome and copper)
(b) Water industry
However, it was found that many transition
(c) Hydro power
economies were rated as “Very low compliance” countries
(d) Port facilities and oil-storage
with regard to several criteria, such as their General Policy
(e) Airports
Framework towards private sector participation or the
(f) National road development
Selection of the Concessionaire.
(g) Maintenance of major infrastructural facilities
Given this for most transition economies it is required to:
Concessionary agreements are imple-mented by
authorised state committees involving representatives 1. Develop, amend, and clarify the provisions of the law
from the relevant line ministries with one of them usually on Concessions to deal with each one of the problems
given the primary responsibility for preparing identified and specified above thus ensuring selection
documentation and specifications, define conditions and procedures that are transparent, efficient and do not
methods and evaluate bids. distort competition and that negotiations and contract
However, several problems with concessionary preparation give appropriate weight to social
agreements have been identified in transition economies: welfare/consumers interests.
2. Assign one independent regulatory authority the
1. There is no overall policy framework for promoting
Competition Authority would seem one obvious and
private sector participation and for ensuring that
appropriate candidate the task of monitoring the
agreements are in the national interest or the interest
processes and approving agreements under
of consumers.
conditions that ensure that there was no distortion of
2. Concessions law is not sufficiently developed
competition and that the agreements are in the
according to international standards it needs to be
national interest.
developed further and a number of issues need to be
1
1OECD Basic Elements of a Law on Concession Agreements (1999-2000). UNCITRAL Model Legislative Provisions on Privately Financed Infrastructure
Projects (2003)

Page 103