Public-Private Partnership for Infrastructure


Hi guys, now I am going to talk about public-private
partnerships for infrastructure. First of all, why do we need public-private
partnerships in infrastructure? We need public-private partnerships in Infrastructure
because governments today are running out of money, I mean, they are running in debts. They can’t invest more on infrastructure. But we need infrastructure for sure. So this is why we are looking for public-private
partnerships. These are the some advantages of infrastructure
privatisation. One of the key things mentioned is capital
savings. Government can save capital, government can
save capital and in operations also government can save, and there are many means of financing
and in some of the areas there is lack of expertise from government, like in building
or operations. So that’s where the private companies come
in and help them to overcome this. And they will provide the better service of
course. Next, there is a wide spectrum for public-private
partnership, ranging from public owned assets to the completly private assets. The first of, first 2 are completely owned
by public, but there are some of the contracts given to private persons like established
contracts. For example, you can see IRCTC gave contract,
IRCTC got ticketing contracts, some of the things like that. Then there may be corporatisation, decentralisation
within the public assets. Now, moving towards public-private partnerships. Government may give management and operating
contracts to some of the companies and there are some leases given and then comes transitional
projects. BOT is one of the most important public-private
partnership, more we are going to discuss. And there are some joint-venture partnerships,
and then we move towards completely privately owned assets, like full divestiture, like
you will completely sell the assets to the private sector. So, when we go from public owned assets to
the private owned assets, the risk obviously will increase. Now there are some strategic issues involved
there in public-private partnerships, my friend will cover those. Student 2: We will see about the strategic
issue in the public private partnerships. The first comes the roles and functions. So, if we take roles and functions, so, like,
there for each and every project, there will be different kind of roles, like kind of operation
management and then capital of finance, working capital, so these 4 roles should be allotted
in the start, before the project starts. For like, in the normal small project, they
are going to go but if we take a big and complex project and everything, there will be so many
sectors which will be involving, banks, designing companies, so kind of so many companies combined
in the private, public-private partnership. So that will be a main issue where they will
have a problem of who will do which project and everything. And for next comes the competition. Competition in the sense, competition is everywhere,
like the bidding everything will happen where companies will be selected, depends upon the
prices, like, like less time who is taking and how and everything. But when we see in the larger scale, like
there is more investment, many companies can’t able to participate, where there will be a,
national monopoly will come. So at that time, only the big big companies
only can participate. But in some cases, government will, like they
will form a monopoly where more of them, they cannot able to participate in the bidding
and they can take the competition. And in the case of comes the regulation, in
the case of regulation, if you see, there should be kind of some regulations, rules
and everything for for the operator everywhere. Where, keep on the time increases, the rate
also should increases because the economic value and everything will increase. So in the starting itself, the government
or any organization will form the regulations and rules, which should be followed in the
timely manner. And if we come to the risks, rewards and regulations,
they are mainly categorised into 3 different parts, three different parts. Business risk, finance risk financial risk
and political risk. Business risk is mainly kind of mix, it mainly
depends upon the operation cost, okay, like, operation cost, revenue, if the company will
they able to make the revenue which they expected. Because demand is, a demand they couldnt be
able to get, that and all everything will come under revenue risk. Then financial risk is a risk which they couldn’t
be to pay the debts or for example if they got this much amount of money and if they
couldn’t be able to pay, after the revenue comes, they couldn’t be able to pay the
debts, then that comes under financial risk. Political risk and everything will be from
the like kind of, where most of the political risk will have a third party insurance. Like they might have some political risk kind
of thing. And they extra, which we ourselves take, technical,
technology risk, environmental risk and everything. Next is called procurement. Procurement
( You guys have to wind up quickly, you’ve already taken your five minutes)
Student 2: Procurement, like, they are the, broadly divided into advertised procurement,
competitive procurement and three steps procurement. Yeah, so I will just go through, go through
the generic barriers to PPPs in Indian context. So there are 3 types of barriers, mainly,
first is institutional barrier, so here in some cases we are seeng that only the public
sector is allowed to provide certain services, whereas there is no such law which prevents
certain private sector from providing infrastructure services. Organisational barriers, so there is a lack
of knowledge or conceptual clarity among the private and public sectors regarding the legal
and financial structuring of the infrastructure projects. Third is the project level barrier, so it
is very specific, in this case is certain public, sorry, certain private agencies are
unable to get the, get the operational cost back or breakeven. Next is barriers to urban PPPs in India. So 1st is the contrasting mindsets and distrust
between the private and public sectors. So generally the government officers see the
private agencies as contractors, they, they cannot imagine a private sector company or
agency to own or operate a project. So there is contrasting mindsets between these
sectors. Second is the political, lack of political
will towards project implementation. So in some cases it has been seen that if
a project is backed, a project has a political backing, so it will, so the private agency
involved in the PPP will perform well. So, yeah, that is the thing. Lack of enabling institutional environment,
I have gone through this, so it is just same as institutional barriers. Lack of public sector capacity to select and
procure PPP projects. So government offices, they in some cases
it has been seen that the offices, government offices are unable to properly structure the
financial structure of the project and sometimes it results in the overruns, cost overruns
and renegotiations. Poor project design and structuring. So this is also similar to the project level
barriers. In some cases like in, in some cases like
Dabhol project, it has been, Dabhol Power project, it has been seen that the company
was unable to get, get its investment due to poor assumptions that they made. So that is the thing. A few aspects of this presentation I am going
to talk about. Let’s see. Let me just start after this slide. First, so, when we say public-private partnerships,
they are a spectrum of arrangement. So, essentially the way I define it, is in
terms of risks. So private sector involvement in infrastructure
is not new, right. So the any project you see, the construction
fellow is probably a private sector operator, it is as if the government has its own machinery,
own labour, own engineers and they actually go ahead and construct. They come out with a tender, they pay for
the project, but ultimately it is a private sector organisation that builds it in most
parts of the world. So, private participation is not something
that’s new, right. What is new is that traditionally the private
sector was asked to take design and construction risk. If I went to the private sector, you design
it for me, you construct it for me, if you don’t construct it on time, then whatever
penalties you will have to pay, if you know, don’t construct it within the budget, then
I am not going to pay you anymore. So you will take the design and construction
risk. Now what we are saying with PPP is we are
expanding that. We are saying that in addition to design and
construction, right, also take the financing risk, you go figure out where the money is
going to come from, right, and also take the operations risk. Up until now you just built the road and you
weren’t bothered about who went on that road, right. You just finished the contract and you went
away, right. Now you need to start taking a little bit
more interest in actually operating and maintaining the asset. So, your risk spectrum increases, right. Don’t just take design and construction
risk, take design construction risk, but also financing risks, operation risks, etc. And there are different permutations and combinations. So the most, this is where the, okay, that
is okay, I think. So here the one in the middle, in blue which
says concessions, BOT projects, DBOs, that is the sort of canonical PPP where you go
to the private sector and you say bring in money, design and build this project and operate
it for a period of time and then give the asset back to me. So the ownership of this asset rests within
the public sector. Ultimately it is my road, I am giving you
what we call a concession, right. Why is it called a concession, because I am
conceding the right to operate and build this road to you for a period of time. Right, so it comes from the word conceding,
so it is actually my right, I am conceding that right to you, so the next 30 years, bringing
the money, build it, operate it, etc., right. So we call it a concession. But after a while you transfer it back to
me. Right, so that is where the T comes from,
so BOT, build, operate, transfer, right, that is the canonical form of PPPs. But that need not be the only way for of PPP. So, operations, just a, operations and management
contract, which is the red box, 3rd from the left is also a former PPP. When you say, ok, that the asset is big, I
don’t need you to design and build it but maybe you can refurbish it, you can you know
whatever, do some modifications on it and then continue to operate and manage the asset
over a period of time, that might be a PPP as well. So that different kinds of PPPs and I don’t
want to get into the technicality of what are leases, what are affermages and etc. But essentially just think of it as PPP is
involved, private sector taking more risk in design and construction. What exactly that more risk is can vary and
the most popular form is the build, operate and transfer, where you bring somebody in
to build you know finance, build, operate, after a period of time, transfer the asset
back to you. Like most of our roads, power plants, all
of them are built on BOT, alright. How old do you guys think PPPs are? We have known evidence of PPPs for about 500
years, right. Because there are some ferry crossings in
the US, which were done typically on a build-operate-transfer model in the 17th centuryish time period. Where essensually the private sector came
and said, I will build you know these, the jetties or docks or whatever on both sides
of the river, I will operate, you know, me or another private ferry operator can operate
ferries which charge everyone some toll or tax or fee or whatever, through which I will
recoup my money for building those docks. And after a certain period of time, I will
give those docks back to the government, if you want, you run the ferries yourself or
you want somebody else to run them. So, again private sector financing-building-operating
infrastructure and then again we have examples like the Suez canal, where essentially the
enterprising group of Frenchmen went to the Badshah of Egypt and said, you know why do
ships need to go all the way down to the Horn of Africa and out to the other side to Asia
or vice versa, why cannot we cut through the Mediterranean and through you know,the Isthumus
of Suez and on the other side. The Badshah said great idea but I do not have
the money or the technical know-how to do it, so the French said that we will do it
for you, concede the right to us. We will actually build the Suez canal, we
will bring in the money, we will build it, we will operate it, make it desilted and whatnot. And we will charge a toll for every ship that
passes through, that’s how we make our investment back and about 99 years later we will turn
it back to you, right, so exactly the kind of BOT that we are seeing today, on the Suez
canal. So, it is pretty old, the BOT, the old PPP
concept, okay. So the next question, which is what this slide
deals with, these guys are explained it. Why do I do PPP? Right, off these if you had to pick one reason,
what would you pick? I’ve got 5 reasons here, capital savings,
operations savings, means of financing, lack of expertise, better service? You want to pick one. Students: Means of financing. Means of financing? Okay, so everybody you go, if you read, you
go to conferences on PPPs, right, if you read, what the planning commission said about PPPs
or Niti Ayog or whatever, right, very often that is what takes it, right. They essentially say that I do not have money
and therefore I am going to do PPP, alright. And see if this works, okay, it does work,
it does work, oh okay. Okay, so, they say I do not have money, I
am going to, oh its gone back there. Okay, so, let me do this then. Alright, I will then shift to my presentation,
because it has more or less similar slides. Alright, I am going talk about this slide
and the other slide I want you guys to keep in mind is this, this slide, barriers and
so on. So want to talk about those and I think we
will have… Alright, so there are spectrum of ways of
doing projects, you can have completely government owned, you can have just the government giving
out contracts, which is the engineering, procuring and construction one, or you can have the
BOT or even fully privatised. No need to transfer back the assets. Okay, so why do we need to adopt PPPs, what
are the advantages? Right, so number-one advantage that comes
to everyone’s mind is finance, okay. There is a little bit of a problem, right,
and therefore it seems logical, right, the private sector is bringing in money, right,
it don’t have money, isn’t that why I should do PPP, okay. By and large, that is not a completely illogical
argument, but that one sort of nuance which I want you guys all to think about, right
and here is how it goes. Okay. 100 crore project, alright, 100 crore, I do
not have the money with me and therefore I go to the private sector, okay. The private sector says, okay, we do, you
know, same thing we just talked about, 80 percent debt, 20 percent equity, you know,
cost of debt is 12 percent, cost of equity is another 20 percent and so this works out
to about 13.6 percent is the rate of return. So now the private sector says, I need to
set tariffs, toll rates, right. So that I will get 13.6 percent return, right. So I need to balance, I know what the costs
are, the costs are fixed, I can play around with the revenues, right, I cannot play around
with demand, that’s fixed but I can play around with the tariff, right. So let us just say for the moment that I say,
I set I sort of set Rs. 50 per vehicle tariffs, let us just assume that there aren’t different
types of vehicles and all of that, flat Rs. 50, fee alright. Now the thing is, right, you do not have the
100 crores, right, that’s where we started this journey. But what if you had got and you have borrowed
the money yourself? Right, instead of going with the private sector,
what if you had gone and you have borrowed the money yourself, okay. So let us say you went go to the World Bank,
okay or you went to IDBI or whatever, right. And let’s, let us say you went to the World
Bank, the World Bank is a development institution, so they are looking at interest rates that
are probably a little bit lower than the commercial interest rates because they are looking at
fostering development, right in these kind of developing countries. What if they actually give you all of these
100 crores at 8 percent, okay. What if they give you all of those 100 crores
at 8 percent? What could you do to these toll rates? What will happen to these toll rates? He will cut down, right, I don’t need to
charge Rs. 50, i don’t need to make 13.6 percent. I can charge, I do not know, Rs. 40. So which one is better, charging Rs. 50 or
charging Rs. 40? Charging Rs. 40, right, all of us get to pay
Rs. 40, okay. So the point is if I do not have money and
I go to the, and I do not have money now, so essentially what I have done is I have
looked that my account, my treasury and we do not have money right now, I still have
the option to borrow, right. I can borrow and I can continue to pay over
a period of time. It is like buying a house, right, you buy
a house only after you have saved up all 4 crores to buy the house or do you sort of
buy the house when you have for the down payment and finance it as you go right. So similar logic, I do not have to save up
for the entire road to buy the road, right. Aslong as I have a little bit of money to
keep going, I can continue to pay over a period of time and I can collect tolls, just the
same as anyone else. Right. But I can be, I can charge less for the tolls
because my interest rates are cheaper. People are going to lend to me, government
interest rates are always cheaper everywhere in the world, because government is safe,
right, they are not going to default on payments, right. So if it just a question of money, right,
PPP is actually the wrong option. Right, you should look at borrowing yourself. You do not have the money now, it is better
off that you borrow an 8 percent, rather than ask a private sector, who by the way, is also
borrowing. Right, it is not that in the private sector
the money is stuffed in their back pockets and they are putting on the projects. Right, they also borrowing 80 percent at much
higher interest rates and that is driving the cost of the project up, that is driving
the cost of the services up. Okay, so, financing perse cannot be the reason,
okay, so the real reasons have to be one of 2 things, right, one is there’s something
in government, particularly in India, I am sure there are things in Germany and elsewhere,
which recall as FRBM rules, right, fiscally responsible budgetary management rules, okay. What this means is, it limits the amount of
money that a government can borrow, right. So the government takes the view that, no
problem, right, I can get low interest rates, let me sort of borrow indiscriminately. Then essentially what are you doing, you are
putting on a loan repayment burden on to future generations. Today you happily borrowed, right, crores
and crores of rupees, tomorrow you have got voted out. Right, but the burden of repayment will last
for generations to come, which doesn’t make sense, right. So you have to put some cap on government
borrowing, which is what the fiscally responsible budgetary management rules try to do, okay. So, if you have already reached that cap on
borrowing, then there is no question of you able to borrow at 8 percent, you can’t borrow
anymore. In which case you are left with a choice of,
let the private sector borrow at 13.6 percent, I will have a project or let me wait 5-6 years,
until I repay enough loans that I will be able to borrow more and then I will be build
this project. At that point of time, maybe you cannot 6-7
years to build a sewage treatment plant or a water supply project. Right, so, in those cases it makes sense. Say I cannot borrow, so let me go with the
private sector that is one sort of reason. But the 2nd reason is that, yes the private
sector will borrow at 13.6 percent, I understand that, right. But somehow because they are more innovative,
they will actually come up with efficiencies that will bring the overall cost down. So because they are likely to invest in, they
have better people, better access to technology, what not, maybe they can actually build this
at 85 crores. Right, if you take 100 crores for me to do
it, but these guys, I mean desalination, but these guys understand the latest and greatest
desalination technology, they bring in lean construction principles, building information
modelling, what not, put in all of this innovation, they are sort of, able to incentivise and
attract higher quality people because they pay higher salaries and therefore their operations
are going to be much better. So for whatever reason, well, it cost me 100
crores, it will cost them only 85. So now the comparison is, 100 crores at 8
percent, and what tariff that leads to or 85 crores at 13.6 percent and it could be
that 85 crores at 13.6 percent could be serviced to the Rs. 40 tariff, because it is only 85
crores. Right, and therefore the public sector is
net net more efficient, I am sorry, the private sector is net net more efficient. So, it is more expensive for them to borrow,
but they are somehow innovating and bringing the overall cost down. In that case the PPP makes sense. Right, so when you go in with the private
sector, let us all understand, that the private sector is also going to borrow money and that
money is going to be more expensive for them to borrow. So, if you want the private sector to do all
of that, there should be some benefit, right, for them borrowing more expensive capital,
they have to bring in a certain benefit, right. And so, I do not know how this is going to
look but private sector has some shortcomings, Finance we’ve talked about, there is sometimes
a lack of expertise in the public sector, right and therefore that makes the private
sector more efficient. Things like, you know, all of this, power
politics, selection bias, corruption, whatever. So when you assume that, many, much of that
will go away when private sector comes in, so more efficiency will come in, then it makes
sense to go with the private sector. So the big advantage of private sector is
efficiency, not their ability to bring money. They are actually less efficient in bringing
in money than your government. For instance, if you look at toll rates today
on roads, private sector does not set those toll rates. NHAI, National Highway Authority sets that
toll rates, so if you travel on any national highway, you are paying roughly similar rates,
right. But for me to be able to set it at 40, the
project needs to work at 40 know. If the project will work only at 50 and I
set it at 40, nobody will come forward. Right, so, for me to even be able to regulate,
right, I need to get to a point of efficiency where 40 is possible. Right, then I can regualte that, to make sure
that this guy does not windfall profits by charging 50-60, that is another problem with
PPP. Right, I give you a water PPP, you are going
to supply water to the city, right, without water we will all die. So suddenly you say, fine, I am going to charge
you Rs. 5000 a kilo litre. You do not want my water, fine, knowing full
well that you have no option, right. So PPP sometimes have these monopoly characteristics,
which is where the regulation comes in. So that group had a slide on regulation, right,
essentially, you might have to regulate the PPP. Right, because otherwise the private sector
might just hold people to ransom. So you can regulate tariffs, quality of service,
all of those kind of things have to come in, that’s where TRAI does some regulation in
telecom, so you have to have regulators in these segments. So it kind of depends on the budget arrangements,
right. So for instance the PPP might be built on
an annuity mode. Right, so what does annuity mean, you build
and then every six months, I will give you a fixed payment, as long as the road is of
some acceptable quality, roughness index, all of that. So, in that scenario, private sector need
not collect toll, they are not making toll revenue. Right, so NHAI, in certain cases, the private
sector still collects the toll but hands it over straight to NHAI. They just are the operator that collects the
toll. Right, so, there are all kinds of arrangements
you know that are possible, right, depends on this thing. So, these are the things. So, I think it is something to think about
carefully, so we’ve looked at what is a PPP, why do we need PPP’s and of course
there are some challenges, there are certain risks and we are going to to cover all of
those risks in the next module. By the way, there are, there are some examples
of advantages, right, of the private sector. Right, so, for instance this is a graph that
says, following private participation, the amount of water available has increased. In other words, the private sector has been
more efficient, it might have been more costly but the amount of water that’s been made
available, right, in other words water that doesn’t leak, that doesn’t get lost etc
has been reduced considerably. Right, so the value of that outweighs the
extra few percent of interest that the private sector charges. So there are all of these graphs, I think
the next one is in energy, right, so, we look at at privatisation and post-privatisation,
the energy losses are reduced. Right, so therefore there is more power within
the system and that efficiency gain probably outweighs. So this kind of efficiency is required. If you don’t get any efficiency benefits,
then it’s just a more expensive project. So a large number of PPP projects are being
renegotiated, cancelled, they are not really bearing themselves out. So this is a graph that says, look, sometimes
in the mid-90s, PPP’s started to peak and then after that, almost everywhere in the
world, it started to come down. Of course this is a very dated graph, in India
again, there was a, about 2007, 2008, 2010, lots of PPP’s being enacted, post that things
have come down a little bit, now it looks like the infrastructure is picking up. To some extent there is a cycle but also there
have been several problems with PPPs, right. One of the problems is of course the fact
that you have to charge a tariff. Right, and that is sometimes is very difficult,
right. So people ask the question saying, am I not
already paying taxes, is it not the government’s duty to build roads with the taxes that I
pay? Right, how come you are also taking my taxes
and charging me for this road? Right, isn’t water a basic right, how can
you price my water, right. So you have all of these challenges that you
have to resolve. Right, you’ll have to talk to people, try
to see if you can convince them about these kinds of issues. Very often the public sector is operating
inefficiently, right. So there are far more people in a public sector
organisation, than there needs to be. So when a private sector comes in, what they
do, there are hardnosed about profits, so they only need 2 people per thousand water
connections and you already had 4 or 5 people. Then they are going to fire 2 or 3 people
to keep their costs down. Right, so or maybe there will be unemployment,
if the private sector comes in, this is another concern. Right, because the private sector is interested
in making a profit, right, will they be interested in servicing people who may not have the ability
to pay. Right, so classic case in Latin America, sometime
ago, when people had not thought these things through, was they sort of give out the water
supply contract. Right, and you find that the private sector
would only connect the rich providers because only those providers, right, would pay the
money. The relatively poorer providers, anyway they
are unlikely to pay money, so you wouln’t even bother connecting them. And that leads to equitably, inequity in access
and so on. Ideological issues, right, isn’t this the
job of the government, right, should private sector be providing these services, particularly
should a foreign private sector be providing these services? Is my money going away from my own pocket
to the pockets of a foreign person for services that the government should provide. So these are the kind of ideologies that people
might articulate. Right and has to be, these things if not really
understood, dealt with, mitigated, could have, could lead to projects, problems on the projects,
right. So many of these kind of issues. Including the kinds of issues that team brought
up on the last slide. Right, where essentially said look public-private
partnership might fail if the project is not structured well. Sometimes if you run through, if you say,
look, the return on investment is only about 10-11 percent but somehow let us convince
somebody to do PPP, sometimes your initial studies that are done are very poorly done
and we will see a couple of examples in our class later on where it looks like you make
a large amount of money but that is because your surveys of the number of people travelling
on the road, etc. are very poorly done. So poor project structuring, the fact that
from a regular tolling perspective, now in India, almost every state has a infrastructure
development act. Right, I had to write the one for Tamil Nadu,
something called as Tamil Nadu infrastructure development act, which talks extensively about
how to do PPP’s in Tamil Nadu. And accompanying it is something called as
transparency intender’s act, how do you procure PPPs in Tamil Nadu. So because you have that framework, everyone
is clear how to do a PPP. But if not, then there is a lot of hesitancy
in terms of doing PPP. Right, so very few PPPs come to the table,
people are not clear, right when I get caught by some audit agency for doing this. Right, political willingness is another important
aspect because ultimately it is the elective representative who has to take the decision. Right, the minister of so and so must approve
that this project must be done on PPP. So, you need political willingness to do PPP. So there are all of these barriers, right,
that can, that can play havoc with PPP. So, the moral of the story in some sense is,
if you go back to the old estimates, the amount of infrastructure that India needs to build
is huge, we have already seen that. In my view it is just impossible for all government
departments to come together and build that infrastructure. I just don’t think we have enough capability,
resources, whatever to do that. If you just look at what NHAI is talking about,
what the Ministry of Energy is talking about, you know, what we are talking about under
Smart Cities, what we are talking about under AMRUT, under PMAY, just put all of these together. Right, the amount of work to be done is mindboggling. And to think that government organisations
can bring in the resources, financing, manpower to do that, I think it is impossible. Right, so we want to continue developing at
the rate at which we were developing, we have to bring the private sector in. Right, I think, so in my mind, that is relatively
clear. The question is, when do you bring the private
sector in, only in cases where you can clearly establish the efficiency, right and also some
of the barriers to bringing in the private sector will have to be resolved. So you can have this mix of publicly funded
projects that the government undertakes, perhaps where it is difficult to make revenues in
rural areas and privately funded projects, so that hand-in-hand we can actually start
developing. Okay, so that is the key public private partnership
story. Okay, I don’t think I have any other key
slides that I want to cover. I will put all of these up there. This was the slide that the group put up. Right, so these are some of the barriers to
PPPs. Right, the fact that there is a lot of distrust
between public and private sectors, people say PPP, where is the 3rd P? Right, there is public private partnership,
right there is often very little, partnership, so this public and private sector coming together. There is sort of analogy, I am not a big fan
of this analogy but a lot of people write about PPPs as analogous to marriage is, right. So long-term commitment between private and
public sector, right but these PPPs are more marriages of convenience at best, right, the
ones that we see. So all of these are the issues that we look
that. Yeah, alright, so I think we stop here, with
a little bit of understanding of PPPs. Again the slides are there, you can take a
look at them, probably add a few more points to your understanding.

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