Projects under Infrastructure Finance

Types of Projects under Infrastructure Finance:

I.   PPP Projects
II.  Private Projects
III. Public (Govt) owned Projects - PSU


Public Private Partnership (PPP) – Essential parameters and Forms of PPP

I. Public Private Partnership has the following seven essential parameters:

1. It is an arrangement between two set of entities. The two set of entities shall be as follows:

a)    A private sector entity – an entity in which 51% or more of the subscribed and paid up equity is owned and controlled by a Private entity, and

b)    A government/ statutory entity/ a  government owned entity – Statutory entity is a company formed by a private statute passed in the relevant jurisdiction or bodies/  corporate established under an Act, and a government owned entity is a legal entity created by a government to undertake commercial activities on behalf of the government (i.e. government owns an effective controlling interest (>50%)).

2. The arrangement so entered shall be for providing the following:

a)    Public Services – The services that the Government and/or state is obliged or traditionally has been providing to its citizens, And/ OR,

b)    Public Asset – These are :

(i)  Asset(s) which are used independently or in combination with sovereign/ government assets to extend public services, OR,

(ii) Those assets which are essential for delivery of a public service (though they may not be directly used for providing the service) e.g. A foot over bridge over Railway tracks connecting two platforms/ pedestrian underpass under busy highways passing through cities.

Note: Mere ownership of Asset(s) by the Government does not imply that the arrangement is PPP. The arrangement has to confirm with all parameters to qualify under PPP.

3. The investment (financial / non-financial) in the arrangement shall be made by and/ or the management control in the arrangement shall be that of the private sector entity. This arrangement ensures harnessing efficient and professional capabilities of the private sector entity, hence enables the arrangement to provide quality services to the users.

4. The Arrangement with the Private sector entity shall be for a specified (pre-determined) period of time, after which the arrangement comes to an end. Such time period is commonly called the Concession Period.

5. There is a defined risk sharing allotted between the private sector & public entity. Such public entity sharing the risk is commonly called the Concession Agency.

Note: A mere outsourcing arrangement/ contract (e.g. with EPC contractor, BTG supplier contracts, service contracts, etc.) will not be PPP.

6. The Private sector entity receives Performance linked payment. Thus the arrangement ensures maintaining performance standards & quality and is not rendered as a mere facility or service providing arrangement. For example, allowing toll collection by the concession agency is not merely to ensure return on investment to the developer but also to ensure that the developer provides quality services/ facility on the road developed/ maintained by him. 

7. The Performance by the private sector entity on which its payment is based, shall conform to specified and predetermined performance standards that are measurable by the public entity (concession authority) or its representative (commonly known as the Independent Engineer). The performance standards are specified by the concession authority/ agency.

II. In addition to the essential parameters detailed under I above, some desirable conditions for a PPP arrangement are as follows:

(i). The Private sector entity receives a return over its investment (or management stake) in the project by:

a.  A performance linked fee from the government entity. Usually called the Annuity paid by the concession authority to the private developer of the project. AND/OR

b.  Through User charges being taken from the consumers of the service provided. Usually called the Toll for Road, Freight charges in Rail, User Development Fee (DF)/ Aeronautical/Non-aeronautical charges in Airport, Handling Charges in Sea Ports, etc.    

(ii). The PPP arrangement shall have an incentive and penalty based structure to ensure that the private sector entity provides services which are benchmarked against predetermined service delivery standards.

(iii). The concession authority shall define the output parameters of the PPP arrangement rather than the specific technical specifications. This will enable the private sector entity to implement/ execute the project in the most appropriate manner by harnessing its efficient, innovative and professional capabilities. 

III. Forms of PPP:

1.    The prevalent form of PPP model at present are where the Ownership of the underlying project asset (e.g. Land, etc.) remains with the public entity during the Contract period and the project along with the asset is transferred back to the public entity after the completion/termination of contract i.e. after the concession period is over.

The form of PPP is mainly determined by the Value of Money (VfM) analysis.

2.    Commonly adopted forms of PPP in India are as follows:

-       Management Contracts

-       Build Operate Transfer (BOT) and its variants

-       Build Lease Transfer (BLT)

-       Design Build Operate Transfer (DBFOT)

-       Operate Maintain Transfer (OMT), etc.

2(a) PPP Models such as performance based management/ maintenance contracts, ensure improved efficiency and optimal utilisation of available resources.

This model is commonly used for projects under water supply, sanitation, solid waste management, road maintenance, etc.

2(b) User-fee based BOT model – Under this model, the costs are recovered mainly through user charges, however in some cases Viability Gap Fund (VGF) from government also takes care of a part of the cost.

Over the years, under this model, concessions have been awarded by the public entities via competitive bidding for projects to the private entity.

Under this model, medium to large scale PPPs are awarded, mainly in energy (power) and transport (road, port and airports) sectors.

2(c) Annuity based BOT model – In sectors/ projects where recovery of cost/ investment by the private entity is not viable through user charges, the public entity/ concession authority harnesses the private sectors efficiency through the arrangement based on performance payments. This performance payment is commonly called Annuity for the project.

This model is mainly used due to sociological conditions of the project, consideration of affordability to pay by the users of the services, etc. Hence, PPP under this model is mainly awarded in rural and urban areas, health and education sectors, etc.

2(d) Design Build model – Under this model the public entity engages the private entity for implementing an project for a fixed fee which is payable on completion of the project.

This model enables to save cost and time, efficiently share risk and improve quality for implementing the project.

2(e) Turnkey Design Build model – Under this model, the public entity, instead of making a lump sum payment on completion of project, makes payment to the private entity linked to achievement of measurable intermediary/ periodic construction milestones and/or short period maintenance/ repair works, etc.

Under this model, the public entity incorporates, in the concession agreement/ contract, penalties/ incentives norms for delay/ early completion of the project/ work and may also include performance guarantee (warranty) from the private entity for implementing the project.

2(f) Operation Maintenance collection model – Under this advanced form of PPP model, the project apart from the Design, Build forms of PPP are awarded to the private entity on an Operate Maintain and collect user-fee concession.

NOTE: An arrangement under the Build Own Operate (BOO) model is normally not considered as a PPP arrangement. This is on account of the complexity associated in determining the value of the underlying asset of the project in the event of an early termination of the concession and also in imposing penalties on the private entity in an event of non-performance. Also as the underlying asset does not remain under the ownership of the public authority during construction, it is normally not treated as a PPP form of arrangement

However, in certain unique PPP initiatives by some public entities in India, projects have been awarded to private entities on Build, Own and Operate (BOO) basis under competitive bidding process under ‘Case-2 bidding’ and thus have been classified as PPP project