Notes On Public Private Partnerships
1. Public Private Partnerships which aim at financing, designing, implementing and operating public sector facilities and services will have three main characteristics, namely,
a) Long term (sometimes up to 30 years) service provisions;b)
The
transfer of risks to the private sector; and,
c)
Different
forms of long-term contracts drawn up between legal entities and public
authorities.
2.
2 In a paper titled “Managing Public Private Partnership6”, the World Bank describes PPPs as “long-term arrangements in which the
governments purchases services under
a contract either directly or by subsidizing supplies to consumers.
3.
The
concept of PPPs is of recent origin and started with the initiative of the Conservative Government in the United
Kingdom under Prime Minister Margaret Thatcher, who actively promoted what is
known as ‘Private Finance Initiative’ (PFI)
4.
PPP
shall have the following ingredients:
i)
government
departments or agencies and bodies and entities under them on the one part and
selected private sector parties on the other will enter into valid and legal
contracts;
ii)
partnership
between the two will be to provide long term public services (and/or goods) of
required quality;
iii)
the
public sector will, while transferring the responsibility to design, construct
and/or operate the project to the private sector, retain the overall
responsibility to provide the public service;
iv)
the
private sector will bring in the required finance either fully or substantially
to complete the project and to operate it, with the public sector providing
right to revenue likely guarantees to financiers or viability gap funding /
annuity in appropriate cases;
v)
the
public sector will assign the right to collect revenues arising from the
project to the private sector for a defined period based on demand projections,
or pay grants or annuity and/ or agree to share any surplus, subject to a
balanced sharing of the risks and gains;
vi)
Value
for money will be the basic criterion for the public sector to enter into the
arrangement.
5.
‘Guidelines
for Formulation, Appraisal and Approval of PPP Projects’, issued by the Secretariat of the Committee on
Infrastructure, Planning Commission,
6.
The
usually adopted PPP models (Type of PPP)
are as indicated in the table below :–
I.
Build, Operate and Transfer (BOT): The public sector will either pay a
rent for using the facility or allow it to collect revenue from the users. The
national highway projects contracted out by NHAI under PPP mode is an example.
II.
Lease, Operate and Transfer (LOT): Leasing a school building or a
hospital to the private sector along with the staff and all facilities by
entrusting the management and control, subject to pre-determined conditions
could come under this category.
III.
Build, Own, Operate (BOO) or Build Operate
and Transfer (BOOT): the facility / project built under PPP will be transferred
back to the government department or agency at the end of the contract period,
generally at the residual value and after the private partner recovers its
investment and reasonable return agreed to as per the contract.
IV.
Design, Build, Finance and Operate
(DBFO) or Design, Build, Finance, Operate and Maintain (DBFOM): These are other variations of PPP and as the
nomenclatures highlight, the private party assumes the entire responsibility
for the design, construct, finance, and operate or operate and maintain the
project for the period of concession. These are also referred to as
“Concessions”11. The private participant to the project will recover its
investment and return on investments (ROI) through the concessions granted or
through annuity payments etc. It may be noted that most of the project risks
V.
Operations Concessions (OC): In these cases, the public sector
(department or agency) which is responsible to provide the service to the
public and collect revenue by way of user charges, toll, tariff etc.,
VI.
Joint Ventures (JV): The public service for which the
joint venture is established will be provided by the entity on certain pre-set
conditions and subject to the required quality parameters and specifications.
Examples are international airports (Hyderabad and Bangalore), ports etc.
7.
The
main difference between PPP and privatization is that in the former there is no permanent transfer of ownership
of the assets to the private partner and moreover, the public sector agency
remains accountable for providing services of the required quality.
8.
According
to the above Framework, the objectives of PPP are to:
i.
Encourage
private sector involvement in public infrastructure and related services where
value for money for the government could be clearly demonstrated.
ii.
Encourage
innovation in the provision of infrastructure and related service delivery.
iii.
Encourage
rigorous governance over the selection of projects and competition for the
award of contracts.
iv.
Clearly
articulate accountability for outcomes.
9.
Guidelines
for formulation, appraisal and approval of PPP Projects were issued vide
Ministry of Finance O.M.No.1/52005 dated 12th January, 2006.
10. The broad-based “Public Private
Partnership Appraisal Committee” (PPPAC) established for the purpose comprise
of the following members:
a.
Secretary,
Department of Economic Affairs – Chairperson.
b.
Secretary,
Planning Commission.
c.
Secretary,
Department of Expenditure.
d.
Secretary,
Department of Legal affairs.
e.
Secretary,
Department sponsoring the Proposal.
11. The Committee will be serviced by a
Special Cell set up for the purpose in the
Department of Economic Affairs (DEA). Moreover, the Ministry of Finance
(MOF) will be the nodal ministry to examine concession agreements.
12. No discussion on the Institutional
Arrangements for PPP Projects would be complete
without a mention of the Model Concession Agreements (MCA). The MCA is a
document prepared by the Planning Commission, at the instance of the Committee
13. What Are the Types of Documents to be Audited?
a.
Documents regarding the project
formulation, appraisal and approval, available with the nodal ministry,
promoting agency.
b.
Data and documents relating to the
contract documents and concession award originated by and available with the
public sector partner.
c.
Data and documents furnished to the
public sector partner by the private contractor and available with the former
for verification.
d.
Reports submitted by the Independent
Engineers and Independent Auditors
14. in case any additional information is
essential for the purpose of verifying facts and for audit evidence, the public
auditors may take recourse to Regulation 169 of the CAG’s Regulations on Audit
and Accounts 2007 and; , if the audit is being undertaken under Section 20 (1)
or (2) of the DPC Act, and the body to be audited is either a joint venture
with minority participation by the public sector agency
15. when the President or the Governor of
a State requests the CAG to
undertake the audit of a PPP organization in terms of section 20 of the DPC
Act.
16.The International Organization of
Supreme Audit Institutions (INTOSAI) has
brought out a set of guidelines for the audit of PPP projects. Basically,
the INTOSAI guidelines list out the key risks facing the Governments and the SAIs in developing / auditing
PPP projects, and these include:
State’s
Risks
1)
Lack
of clarity about partnership objectives;
2)
Inadequate
definition of business model of the partnership;
3)
Risks
associated with negotiating an appropriate partnership;
4)
Risks
to the State’s interests as a minority shareholder;
5)
Risk
associated with monitoring of the State’s interests in the partnerships, and;
6)
State’s
exposure in the event of difficulties24
Supreme Audit
Institutions’ Risks
SAI’s risks would include:
1)
Insufficient
domain knowledge;
2)
Lack
of expertise required to examine the process and the results;
3)
Failure
to identifying worthwhile lessons, and;
4)
Absence
of following up the audit work.
17. Incidentally, the INTOSAI guidelines
were originally framed in 2001
18. A PPP partnership involves several
risks, and a balanced sharing of these risks between the public and private sector partners is essential for
its enduring success. The INTOSAI Auditing Guidance discussed above identifies
the risks as under:-
I.
Feasibility/Organizational
Risk
II.
Condition
Precedent Risk
III.
Financing
Risk
IV.
Construction
Risk
V.
Operation
and Maintenance Risk
VI.
Demand
Risk
VII.
Revenue
Risk
VIII.
Risk
from unforeseen developments
IX.
Termination
Risk
X.
Residual
Value Risk
19. Generally, the Central Government may seek
following documents while project formulation and approval.
-
Strategic
Plan.
-
Feasibility
Report.
-
Detailed
Project Report.
-
Shareholders’
Agreement.
-
State
Support Agreement.
-
Operation,
Maintenance and Development (OMD) Agreement.
-
Concession
Agreement.
-
Technical
Operation Agreement (where required.)
-
Lease
Agreement.
-
Substitution
Agreements.
-
Independent
Engineer’s / Auditor’s Agreement.
-
Escrow
Account Agreement.
-
Other
subsidiary Agreements.
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