What is Public Private Partnership?
Every government needs funds for fulfilling its social obligations. Every governmental activity requires resources, both financial and human, and sometimes governments run short of these resources. Hence, to overcome the resources gaps, the model of Public Private Partnership (PPP) is often used by Public Sector companies.
PPP1 is an arrangement between a public sector organization and a private sector company where two organizations, one public and another private, join hands to work on a single developmental project, thereby creating a collaborative environment to work for the welfare of the citizens and development of the country.
Such partnerships are meant to finance, build, and operate projects in the domain of infrastructural needs of the society. The PPP model of development has been in use for a very long time now, but due to increasing State role in providing welfare services and infrastructural development, this model has seen a positive growth in last couple of decades.
Earlier, governments, both Union and state, were wary of the idea of including private corporations in the conversation around the development and welfare of the country. But, after the 1991 economic reforms, governments started engaging private companies, mainly due to their increased sizes and the amount of money they had, in the matters of development of the nation and welfare of the citizens and asking for their help to achieve growth and empowerment objectives.
The objective of any PPP project, like any other governmental action, is to mitigate a set of pressing and sometimes even life-altering – poor people’s lives – issues. From building a dam to setting up a manufacturing unit, the work under the PPP model can be initiated by the government wherever it sees the gaps between the government resources and required competencies, from monetary gaps to lack of technical skills.
PPP is closely related with concepts such as privatization and contracting of governmental services. Conventionally, the PPP collaborations are commissioned for definite and longer time periods. The ideas behind PPP are diverse, from the need for special expertise to a shortage of funds or human resources or simply outsourcing the responsibility of an arduous task to a private corporation. The financing for PPP project usually comes from the private sector, but requires payments from the public sector, or the users of the infrastructure created.
When explained in technical terms, PPP sounds like a foreign concept. It, in actuality, is not. The idea of PPP is closely linked with our lives. A good example of that would be something we are all quite used to today: the payment of toll on certain roads. How it works is that the governmental agency contracts the project of construction and maintenance of the road to a private company, through a process of bidding.
Once that has been done, the private partner in the project applies its own resources, from designing, to completing, and implementing, as well as financing the project. The governmental agency in the meantime focuses on defining and monitoring compliance with the objective of the project, ensuring that everything stays in line. Once the project is complete, the private entity in the partnership recovers the costs through the users, by the means of the toll.
Wastewater2 treatment is another example of PPP; it is the users of the service that pay for it, and not the governmental body. It is crucial to take note that the arrangement of payment might vary from project to project, and is not a defining entity of PPP.
PPP has contributed immensely to growth around the world, especially in the last few decades, where governments have been deciding to put their resources to use more and more judiciously.
Advantages of PPP3
The advantages of PPP are manifold. The technology and innovation the private sector brings to the partnership can help provide better public services, and increase operational efficiency. PPP ensures that the necessary amount of investment, in monetary as well as human resource terms, happens into the public sector, and that the invested resources are managed and maintained in the most efficient manner.
PPP also ensure a higher quality of service, since it brings in the outcome-based framework of the private sector. A private entity in the partnership has to deliver on quality, and that ensures that the loopholes that usually exist in a public sector framework are eliminated. It also ensures a timely provision of the services for the public sector. The private entity also brings in expertise and experience which the public sector would have had to individually seek out otherwise. This expertise and experience can be utilized in the PPP projects to the fullest.
Utilization of PPP can also act as a way of developing the local private sector, and its capabilities. Joint ventures with international firms, and sub-contracting opportunities for local firms is one way to do that. Areas that usually see this pattern are civil works, electrical works, facilities management, security services, cleaning services, maintenance services. PPP also leads to the creation of an economic diversification that serves to make the country more competitive in facilitating, and maintaining its own infrastructure.
PPP serves, most importantly, to supplement the limited public sector capabilities, and to meet the growing demand for infrastructural developments. That is critical for a time when governments are running short handed when it comes to resources; the areas with need for development are many, but there is only so much the public sector can do, all by itself. Thus, PPP has manifold advantages, and continues to play an important role in the development of local as well as larger frameworks.
Example of Kochi Airport: A Case Study
Cochin International Airport, Kochi, Kerala, is the first4 airport in India which was developed under the policy of public-private partnership (PPP). It is by far the busiest and the largest airport in Kerala and handles about 170 aircraft movements a day. In the year 2016-201, the airport singlehandedly handles about 8.95 million passengers. The airport is the fourth largest terminal in India right now. With its own dedicated solar power plant, the airport is also the first I the world to be fully solar powered. So, how did this project come into existence?!
The original plan for the airport was commissioned in May 1993; it was to be a PPP project. With an estimated cost of INR 100 crores, the expected date of completion was set for 1997. The plan was in place, it was now to be executed. The most important thing to get the plan off the ground was the funding. The airport, surprisingly, was funded by nearly 10,000 non-resident Indians, from 30 different countries.
It was time to execute the project. Thus, the Cochin International Airport Society, under the chairmanship of the Chief Minister(CM) of Kerala, was registered in July 1993 to implement the project. Subsequently a public limited company under the name Cochin International Airport Ltd. (CIAL) was registered in March 19945. This setting up of a separate company was done for the sole purpose of better mobilisation of the resources, and for administrative convenience. It enabled for the project to be freed from the rungs of the governmental framework.
With a machinery in place, the next step was the execution of the project. About 2,000 acres of land was acquired for the construction of the airport. The acquiring of the land also meant that about 3,000 landowners and families had to be rehabilitated. Another step which needed to be taken was diverting irrigation canal and electric lines, to free up the space, and make is geographically apt for the construction of the airport.
Finally, after five years of rigorous efforts, the airport opened in 1999. Given the time, the airport is a rare story of success for the PPP model in India. The airport has since seen four phases of expansion, and today is capable of handling any type of aircraft. The airport now has two separate terminals, one for international operations and another for domestic operations. It also has an integrated cargo complex that is capable of handling perishable/non perishable and dangerous cargo. The airport is next setting its sights on developing a plan to an airport township, with all facilities to enable to company to earn substantial non-aeronautical revenue.
The airport is a unique case of a PPP success. Unlike most projects, it was not just handed out to an already existing company; a company was built from scratch just to make the project happen. This enabled for the project to not only gain while the airport was still under construction, but also keep gaining since, through the expansion, and more.
Ralegaon Siddhi: A Case study
Ralegaon Siddhi6 has gone from being a highly degraded village ecosystem in a semi-arid region of extreme poverty to one of the richest in the country, and all of that in 25 years. It is an example to demonstrate how it is possible to rebuild natural capital, while maintaining a partnership with the local economy. Anna Hazare, of course, is the man behind the success.
When Hazare returned to the village, having spent several years outside, he found the village in the condition on extreme degradation, and unsustainability. The village was characterized by the obvious, poor farming practices which led to low productivity and thus low incomes. People did not have many options of jobs other than agriculture, and when that did not yield enough, they engaged into illegal distilling of alcohol. People weren’t happy, at all. They were either moving away to find work, or were ridden with ill health, and there was a lot of alcohol driven violence in the village, especially against women.
The village has come a long way from that since. What makes this journey unique is the role individual citizens played in it. Government, like always, had a lot of schemes in place, for the development of the village. They were focusing on reform through agricultural practices, watershed development, use of renewable energy etc. However, most of these plans always ended up staying only on the paper. The reason being that the implementation of the plans, first, required manpower, and no one seemed to be investing in getting it. Second, the true intentions of the local representatives, along with that of the government officials, always seemed to be lacking when it came to the implementation.
Anna Hazare7 recognized all these issues, and decided to take a step. He reached for community involvement on all government or self-supported developmental projects. The people came forward, and invested thousands of their hours in the developmental activities. It was the common interest that people saw, in their own upliftment, that enabled them to work for the prosperity of the village, and work around the very gaping loopholes that had been left in place by the governmental infrastructure that has been in place.
Today, the village has been able to find a way to get enough water for all its needs. The village is self-sufficient and they can grow crops year round. They are also able to grow a better quality of the crop, and grow a wider variety of the crops. The economy of the village is flourishing, and the resources are being invested into more and more development. How this happened is by putting a fair system in place.
Anna organized community efforts, and it was expected that everyone would participate. With each new task the people of the village would decide on an amount of time for each person to spend providing labor. This system ensured that everyone did their part, and that no one had to do more than their share. It was a fair system and was the cornerstone of Ralegan Siddhi’s success.
Scope of PPP in future
Current loopholes in the PPP structure
Much like everything else, PPP comes with its own set of drawbacks and loopholes. For starters, development, bidding and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes. It is thus important for the governmental bodies to develop a method to examine a value for money, and determine whether the greater costs are justified or not.
The second issue comes around financing. While the participation of the private sector can make it easier to get finance, it will only be available while the operating cash flows of the project company are expected to provide a return on investment. So, in the end, the cost of the financing has to either be borne by the customers, or by the government through financing, and the project can’t be independent entirely.
Some projects are easier to finance than others, based on if there is proven technology involved, and/or the extent of the liability placed upon the private sector is clearly identified. Some projects, such as water harvesting, are limited to generating revenue in the local currency only. Other projects, such as ports, and airports, are likely to generate money also in the currency of other countries.
Some projects also end up being politically or socially challenging to introduce, and implement, especially given that at times there is an existing public workforce that fears being transferred to the public sector. This only gets worse if there are any requirements for significant tariff increases, or significant land in involved, or resettlement issues exist on a large scale.
Private firms are always cautious about the amount of risk they are bearing. If the private entity bears any additional or severe risks, then the price of the project will tend to reflect that. And if the private sector participates, it would want an assurance that the rules of the game are respect by the government. It will also expect a significant amount of control over operations, given there might be different degree of risk involved.
The private sector will tend to keep itself limited to doing what is the requirement, and nothing more. So, incentives, and performance requirements need to be kept out of the contract. Focus of PPP contracts is usually on output based requirements that are easy to manage and monitor.
The limited involvement of the private sector means that the responsibility of the government continues, and that the citizens continue to hold the government responsible for the quality of the services. A PPP arrangement also required for the government to retain sufficient expertise, whether it is related to the implementation of the project or to serve as a regulatory body.
However, the private sector is likely to have an advantage, given that it is likely to always have more expertise. Thus, it is important to ensure that there are clear cut reporting requirements that are set up within the arrangement, and imposed on the private sector to reduce the potential of imbalance.
It is difficult to identify all possible loopholes of PPP, but the above are some general ones. During project development, or implementation, other issues might arise, that might serve as bigger loopholes. Those will need to be managed during the course of the project.
The Way Head: A Case for Reforms
Much like anything else, PPP also needs constant reform. Over the time, deep problems have risen in the manner in which PPP projects are designed, bit-out, financed, and implemented. The key reason for the logjam is the amount of private investment that most PPP projects require, in addition to the unfavourable financial environment at the time. To keep itself going, PPP has gone through several cycles or reform.
Today, there are standard documents for every stage of the procurement and contractual cycle. This serves to introduce transparency, and predictability for investors. There are also funds set up, such as the India Infrastructure Project Development Fund, that afford the transactional costs of running a successful PPP project. There are committees set up to weed out the flaws of the PPP proposal, at early stages.
The financing of projects is usually supported by India Infrastructure Finance Company, and the Reserve Bank of India has also been continually adapting the banking norms to facilitate PPP projects. Through extensive training programmes, tool kits, outreach, pilot projects and structured exchange of learning, a great deal of capacity building has been undergone. It is also accompanied by real time support from PPP cells in state governments and at the centre.
However, there still remain many issues to be addressed. The first reform that is needed is with regards to the domination of public sector banks, which often results in less-than-sensible due-diligence and risky lending for large and potentially important PPP projects. Reform is needed to ensure that banks strictly do not finance a project, and the government does not bit-out a project, until all clearances have been received from the authorities.
There is also reform needed in the monetization of the existing public assets, which could generate revenue for the government by leasing out such operation and maintenance functions to suitable parties. For that reason, such O&M concessions require lower, initial private investments while still providing a robust revenue stream, and all the good that comes with it. Another part of this reform could be that the government affronts the proportion of public financing in a PPP.
Another reform that is important for PPP to continue being a success is improved and time-bound dispute resolution. For this, some kind of system needs to be put in place, to reduce regulatory delays. Suggestions for reform over the past have included the suggestion of letting independent regulators help solve the disputes, and oversee contract management for a PPP. Say, for example, reports show that more than one-third of highway PPP projects get stuck because actual revenue from traffic and tolls are less than those assumed at the start of the project.
This has served to highlight that the expectation that independent regulation can solve commercial problems is not justified. Thus, independent regulators tend to adopt a narrow bureaucratic, defensive approach to recognizing and working with the private sector. This needs to change, and the independent regulators need to do a better job towards resolving unforeseen business risks, which tend to crop up with PPP project.
Thus, we have seen that there are many loopholes to PPP, and there is reform that is needed in many areas. The above are only a few of those, and the reform must not be limited only to these areas. With continued reform, PPP is likely to maintain successful projects.
PPP: The Conclusion
Private Public Partnership, we have thus seen, is when entities from the government and the private sector come together to work on a project, typically of a long term nature. PPP is usually used to improve the infrastructure of an area, while also helping the economy at the same time. PPP initially arose out of a need to change the standard model of public procurement, and concerns over the level of public debt.
It started with governments encouraging private investments for infrastructure projects, at first, on the basis of accounting roadblocks arising because public accounts did not distinguish between recurrent and capital expenditures. PPP has been used throughout history. Over the time PPP has evolved a lot, and has penetrated much deeper into our lives. In the past few decades the role of public private partnership has only been increasing.
There are various example of PPP that we come across in our daily lives. From paying the toll on the use of a road, to paying fee for water harvesting, all of these are daily example of PPP. There are many benefits to PPP, however, much like almost everything else, PPP also tends to have loopholes. Some of these loopholes exist due to the scope for human error, while some due to problems within the framework, and the regulations. However, all of these must be address for PPP to continue to remain being a success.
1) Page Title: What are Public Private Partnerships? (Published on World Bank`s Website)
2) Page Title : Wastewater treatment and Use in Agriculture ( Published on Food and Agriculture Organization`s Website)
3) Article Title: Government Objectives: Benefits and Risks of PPPs (Published on World Bank`s Website)
4) Page Title: About CIAL: A Brief History (Published on Cochin International Airport`s Website)
5) Page Title: History of CIAL (Published on Cochin International Airport`s Website)
6) Report Title: A successful case of participatory watershed management at Ralegan Siddhi (Published on Food and Agriculture Organization`s Website)
7) Page Title: Anna Hazare: Biography (Published on Annahazare.org)
8) Article Title: Government Objectives: Benefits and Risks of PPPs (Published on World Bank`s Website)
9) Report Title: Public-Private Partnerships in India: A Case for Reform? (Published on Environment Portal)