PPP MODELS

Managing adequate amount of fund for infrastructure development has been always a challenge for India. In reform era, the government evolved the idea of public private partnership (PPP) for the sector aimed at attracting investments from the private sector (domestic as well as foreign). We see an encouraging contributions coming from the private sector in this regard also.

But by 2013-14, the PPPs started getting unattractive for the private sector— primarily caused by the in-built flaws in the PPP models together with regulatory reasons—although external reasons have been also there (slowdown in the country’s economy due to recession among the western economies).

Various volumes of the Economic Survey together with the Kelkar Committee on the PPP have discussed about the various flaws in the existing model of the PPP, primarily used for the development of road projects in the country. In this backdrop, a better PPP model was announced by the Government by early 2016—the Hybrid Annuity Model (HAM). A brief review of the major PPP models (few of them are non-PPP models, too) are given below:

(i) BOT-TOLL: The ‘Build-Operate-Transfer-Toll’ was one of the earliest models of PPP. Other than sharing the project cost (with the Government) the private bidder was to build, maintain, operate the road and collect toll on the vehicular traffic. The bid was given to the private company offering to share maximum toll revenue to the government. The private party used to cover “all risks” related to—land acquisition, construction (damage), inflation, cost over-runs caused by delays and commercial. The government was responsible for only regulatory clearances.

Due to inherent drawbacks, this model proved to be unsustainable for the private bidder—undue delay in land acquisition due to litigation, cost over-runs and uncertainties in traffic movement (commercial risk)— made the road projects economically unviable.

(ii) BOT-ANNUITY: This was an improvement over the BOT-TOLL model aimed at reversing the declining interest of the private companies towards road projects by manly reducing the risk for the private players. Other than sharing the project cost the private player was to build, maintain and operate the road projects without any responsibility of collecting toll on the traffic. The private players were offered a fixed amount of money annually (called ‘annuity’) as compensation—the party bidding for the minimum ‘annuity’ used to get the project. Toll collection was the responsibility of the Government.

This was different from the previous model (BOT-TOLL) in one sense— private players were not having any commercial risk (traffic)—but they remained very much exposed to other risks (land acquisition delays, inflation, cost over-runs, construction). Even this model, over the time proved to be unviable for the private sector due to the leftover risks they were exposed to.

(iii) EPC MODEL: The PPP model which was seen to be a better way out to promote the infra projects were visibly failing by the year 2010 and Government was unable to attract the private players towards the road sector. It was in this backdrop that the Engineering-Procurement- Construction (EPC) Model was announced. In this model, project cost was fully covered by the Government (it means, it was not a PPP model and was like normal contracts given to the bidders) together with majority of the risks—land acquisition, cost over-runs due to delay, inflation and commercial.

The private developers were supposed to design, construct and hand over the road projects to the government—maintenance, operation and toll collection being the government’s responsibilities. Contract was given to the private player who offered to construct roads at the lowest cost/price guaranteeing the desired quality levels. It means, the private player in this model was only exposed to the construction-related risks which is a normal risk involved in any contract given by the government to the private party.

EPC Model could have been a temporary way out to develop road projects as it was fully funded by the government—reform era had aimed to attract investment from the private players by evolving a ‘business model’ for the road sector—need was to develop a new PPP model. In this backdrop we see the government coming up with a new PPP model for the road projects—the Hybrid Annuity Model.

(iv) HAM: Hybrid Annuity Model (HAM) is a mix of EPC and BOT- ANNUITY models. In this model the project cost is shared by the government and the private player in ratio of 40:60, respectively. The private player is responsible to construct and hand over the roads to the government which will collect toll (if wishes)—maintenance remaining

the responsibility of the private player till the annuity period. Private player is paid a fixed sum of economic compensation (called ‘annuity’, similar to the BOT-ANNUITY model of past) by the government for a fixed tenure (normally 15 years, though it is flexible). The private player which demands lowest annuity (in bidding) gets the contract.

In this model, most of the major risks are covered by the government— land acquisition, clearances, operation, toll collection and commercial while the risks related to inflation and cost over-runs are shared in ration of the project cost sharing. But the private sector is still exposed to the construction and maintenance risks (delays from the government side in clearances and land acquisition have chances to enhance the degree of risks private players are exposed to). But overall, this is the best PPP model for the time devoid of most of the flaws of past. By early 2017, private sector had shown good response to this model.

(v) Swiss Challenge Model: Government of India, for the first time, announced the use of this model for redevelopment of railway stations in the country (by late 2015). This is a very flexible method of giving contracts (i.e., public procurement) which can be used in PPP as well as non-PPP projects.

In this, one bidder is asked by the government to submit the proposal for the project which is put in public domain. Afterwards, several other bidders submit their proposals aimed at improving and beating the original (first) bidder—finally an improved bid is selected (called counter proposal). If the original bidder is not able to match the counter proposal, the project is awarded to the counter bidder. Government has made it an online method.

Though, the Government of India used this model for the first time, this has already been used by several states by now—Karnataka, Andhra Pradesh, Rajasthan, Madhya Pradesh, Bihar, Punjab and Gujarat—for roads and housing projects. In 2009, the Supreme Court approved the method for award of contracts.

(vi) PPP Model for other sectors: Though, the idea of PPP model was originally evolved for the infrastructure sector, in recent times, there have been proposals for its uses in other areas, too—such as education,

healthcare and even agriculture. The model is getting popular support from the urban local bodies in the country and it is believed that in the Smart Cities scheme it could play a very lucrative role. Recently, the Economic Survey 2016-17 suggested68 the government to create a new institution as a PPP to compete with and complement existing institutions to procure stock and dispose pulses.

(vii) PPPP Model: Experts have suggested public private people partnership (PPPP) model, too for certain sector in the country. Though such a model has been in use since 2000-01 itself by in agriculture sector to promote participatory irrigation development—in the Command Area Development Programme of 1974 (renamed as Command Area Development and Watershed Management Programme in 2004)—in which individual financial contributions come from the farmers (around 15 per cent of the total cost) to develop field channels and drains.

It is believed that in the area of developing, maintaining and protecting local public assets this model could be highly effective. In future, the local bodies—urban as well as rural—may be using this model to develop social and economic infrastructure.