INVESTMENT MODELS

Public Private Partnership

 A business relationship between a private-

sector company and a government agency
for the purpose of completing a project
that will serve the public.
 PPP involves a contract between a public
sector authority and a private party, in
which the private party provides a public
service or project and assumes
substantial financial, technical and
operational risk in the project.
 Public-private partnerships can be used to finance,
build and operate projects such as public
transportation networks, parks, roads etc.

 A project is financially viable for the private entity

if the revenues generated by the project cover
its cost and provide sufficient return on investment.

 On the other hand, the viability of the project for

the Government depends on PPP project’s efficiency
in comparison with the economics of financing the
project with public funds
 PPP mechanism is a major element of India’s
infrastructure creation efforts as there is huge level
of investment requirement in the sector.
 In India we need close to $1000 billion to expand our
infrastructure.
 Conventional form of finance – the budgetary
allocation by the government is not enough to meet
this big investment size.
 So the government at present is making several
efforts to modify and energize the PPP (Public Private
Partnership) mode of infrastructure generation.
 A committee chaired by Kelkar also made valuable
recommendations to empower the PPP mechanism.
Investment Models:

Public Investment Model:

 For a government to invest, it needs revenue (mainly
tax revenue), but the present tax revenues of India
are not sufficient enough to meet the budgetary
expenditure of India.
 So India cannot move ahead in the path of growth
without private individuals; even for government to
have a share in the investment, they need tax
revenue from the private investors.
Private Investment Model:
 The private investment can come from

India or abroad. If it’s from abroad – they

can be as FDI or FPI. (Details will be
discussed later.)
Public Private Partnership Model:
 PPP means combining the best benefit

from both public and private

investments
Risks in PPP for Private partner:
Political risk: especially in the
developing countries because of the
possibility of dramatic overnight
political change. Ex Maldives, GMR
Airport
Technical risk: construction difficulties,
for example unforeseen soil conditions,
breakdown of equipment
 Financing risk: foreign exchange rate risk and
interest rate fluctuation, market risk (change in
the price of raw materials), income risk (over-
optimistic cash-flow forecasts), cost overrun
risk
 Availability risks: Depend on “availability” of
an asset
 Demand risks: relate to ongoing need for the
service
 Residual value risk: relate to future market
price of assets
Advantages of PPP
 Introducing private sector technology
 Innovation in providing better public
services
 Improved operational efficiency
 To deliver projects on time and
within budgets
 Developing local private sector
capabilities through joint ownership
as well as sub-contracting
opportunities for local firms
 Gradually exposing state owned
enterprises to develop capabilities
 Creating diversification in the economy
 Developing public infrastructure without
taxing people
 Users pay rather than everyone
 Integration and cross transfer of public
and private sector skills, knowledge and
expertise.
Disadvantages of PPP:
 Tendering and negotiation cost: PPP contracts are typically
much more complicated than conventional contracts. It has
been estimated that total tendering costs equal around 3%
of total project costs as opposed to around 1% for
conventional contract
 Contract renegotiation: Given the length of the
relationships created by PPPs and the difficulty in
anticipating all contingencies, it ends up in renegotiation at
later stages
 Performance enforcement: One of the difficulties with PPP
is that performance sometimes has dimensions which are
hard to formulate in a way that is suitable for evaluation.
 Political acceptability: Given the difficulty in
estimating financial outcomes over such long
periods, there is a risk that the private sector
party will either go bankrupt, or make very
large profits. Both outcomes can create political
problems for the government, causing it to
intervene.
 Lack of independent evaluation or limited
ability of auditors to question government
policy, wrong assumptions about future income
stream that form the premise of the project,
and inaccurate estimate of risk transfers from
the public to the private sector.
 Non-realization of loans to infrastructure projects is
believed to comprise a large chunk of the non-
performing asset portfolio of public sector banks in
India.

 Over-reliance on debt and lack of substantial equity

stakes for the private firms create a situation where
the promoter has little “skin in the game” and limited
motivation to work towards the success of the venture.

 It is worth noting that a large chunk of “politically

connected firms” in India are in the infrastructure
sector, which have used political connections to win
contracts
Indian Examples
 Roads
 BOT Concessions for toll roads and bridges (NHAI, state
governments)
 Annuity payment based concessions – highways, urban
roads (NHAI/ state governments)
 Solid Waste Management
 Engineered landfills – tipping fee linked payments
(Bangalore, Trivandrum)
 Sewage Waste Collection and Transportation (New Delhi
Municipal Corp)
 Port Concessions
 Major Ports – container berths (JNPT, Chennai,
Kochi, Tuticorin, Vizag, Kandla); bulk cargo
berths (Marmagao, Haldia, Ennore, New
Mangalore)
 Minor Ports –Pipavav, Mundra, Kakinada
 Airport
 Delhi, Hyderabad, Bangalore, Mumbai
 Water Supply and Sanitation – Bulk water supply
systems in Tirupur and Vizag
 Tourism Facilities – hotels, tourist facilities, PWD
rest houses – Karnataka & Kerala
 Bus Terminals/ Parking Facilities
 Bus terminals – Dehra Dun, Amritsar, Jullundur
 Parking + commercial complexes –Bangalore
Types of Investment Models
 DB(design-build)
 BOT (build–operate–transfer)
 BOT – Annuity (Build Operate Transfer – Annuity)
 BOOT (build–own–operate–transfer)
 BOOST (Build-Operate -Own -Share -Transfer)
 BOO (build–own–operate)
 DBOT (design–build–operate–transfer)
 VGF (Viability Gap Funding)
 HAM
 Toll Operate Transfer (TOT) Model
 Swiss Challenge
Design-Build (DB)/EPC
 Under this model, the government contracts with a
private partner to design and build a facility in
accordance with the requirements set by the
government.
 After completing the facility, the government assumes
responsibility for operating and maintaining the facility.
 Its like contracting out
 It helps Govt in using private sector’s
technical expertise
 Using private manpower instead of
increasing manpower in govt
 Disadvantage of this model is there are
chances of compromising on quality by
private partner
 Ex Contract for construction of a Govt
building
BOT (build–operate–transfer)
 In the BOT framework a third party, for example the
public administration, delegates to a private sector
entity to design and build infrastructure and to operate
and maintain these facilities for a certain period
 During this period the private party has the
responsibility to raise the finance for the project and is
entitled to retain all revenues generated by the
project
 The facility will be then transferred to the public
administration at the end of the concession agreement
 Ex. Most of the National Highways
 Risk: Land acquisition, forest clearance etc makes the
project cost over run
BOT – Annuity (Build Operate Transfer
– Annuity)
 This model though is globally accepted one did
not have the favour of the Planning Commission
of India.
 In case of annuity model, the cost of building the
entity is paid to the private entity or the
developer annually after starting the commercial
operations of the facility
 No user fee collection but Government will keep
paying the private entity every year
BOOT (build–own–operate–transfer)
 A BOOT structure differs from BOT in that the
private entity owns the works
 During the concession period the private company
owns and operates the facility with the prime goal
to recover the costs of investment and
maintenance while trying to achieve higher margin
on project
 BOOT makes it suitable for infrastructure projects
like Airports, Oil Exploration, railway transport and
power generation
 [Link] International Airport Ltd
BOOST (Build Operate Own Share
Transfer)
 This model is very similar to the BOOT
model, except that there exists an
arrangement or sharing the revenue to
the private entity for a longer time even
after the rights of the private entity is
transferred to the public entity
 Concessionaire gets share even after the
concession period
 Technically it should be BOOTS not
BOOST
BOO (build–own–operate)
 In a BOO project, ownership of the project
remains usually with the project company
 A BOO scheme involves large amounts of finance
and long payback period
 The government grants the rights to design,
finance, build, operate and maintain the project
to a private entity, which retains ownership of
the project.
 In BOO the private entity is usually not required
to transfer the facility back to the government
 Ex:Ultra Mega Power Projects (UMPP) in Mundra,
Sasan
DBOT (design–build–operate–transfer)
 Under this model, the private sector designs
and builds a facility.
 Once the facility is completed the private
sector operates the facility for a specified
period.
 As operation is with private sector,
performance guarantee can be ensured
 Will transfer the facility to Government after
the concession period
 Ex: Worli-Haji Ali sea link in Mumbai
Viability Gap Funding (VGF)
 Viability Gap Funding (VGF) means a grant provided
to support infrastructure projects that are
economically justified but fall short of financial
viability.
 The lack of financial viability usually arises from
long gestation periods and the inability to increase
user charges to commercial levels.
 Through the provision VGF, several projects may
become bankable and help mobilise private
investment in infrastructure.
 Ex:PURA project
Hybrid Annuity Model

 India has the second-largest road network in

the world, spanning around 50 lakh
kilometres, consisting of national highways,
state highways, rural, urban and district
roads.
 This hybrid type of payment method is
attached under the HAM. In India, the new
HAM is a mix of BOT Annuity and EPC models.
 HAM combines EPC (40 per cent) and BOT-
Annuity (60 per cent). On behalf of the
government, NHAI releases 40 per cent of the
total project cost. It is given in five tranches
linked to milestones. The balance 60 per cent is
arranged by the developer.
 Under HAM, Revenue collection is the
responsibility of the National Highways Authority
of India (NHAI). Advantage of HAM is that it gives
enough liquidity to the developer and the
financial risk is shared by the government
 Many projects under Namami Gange programme
have been approved under Hybrid Annuity based
PPP mode.
 As per approved Standard Operation Procedure
(SOP) of Bharatmala Pariyojana the base case
scenario is to take up 60 % of projects under
Hybrid Annuity Mode (HAM) and 10 % under BOT
(Toll) and remaining on Engineering,
Procurement, Construction (EPC) Model.
Toll Operate Transfer (TOT) Model
 The Toll Operate Transfer (TOT) Model was
introduced in 2016 to monetise publicly-funded
highways.
 Under this model, public funded projects,
operational for one year, would be put up for
bidding.
 The highest bidder wins the rights to operate and
maintain operating road assets, with rights to toll
revenues from these assets until then.
 This model is more attractive for investors as
they don’t have to build an infrastructure project
from scratch.
 The fund generated from such monetization
shall be utilized for development of highways in
the country, which will benefit users throughout
the country.
Swiss Challenge
 Swiss challenge method is a new process of giving
contracts.
 Any person with credentials can submit a
development proposal to the government.
 That proposal will be made online and a second
person can give suggestions to improve and beat
that proposal - an expert committee will accept the
best proposal and the original proposer will get a
chance to accept it if it is an improvement on his
proposal.
 In case the original proposer is not able to
match the more attractive and competing
counter proposal, the project will be
awarded to the organisation which gave
counter-proposal.
 Is it new in India?
 The Swiss challenge method is one that has
been used in India by various states including
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.
What are the advantages?
 South Africa, Chile, Korea, Indonesia, the
Philippines and Taiwan have seriously
considered, awarded and implemented
unsolicited projects.
 The obvious advantages are that it cuts red tape
and shortens timelines, and promotes enterprise
by rewarding the private sector for its ideas.
 The private sector brings innovation, technology
and uniqueness to a project, and an element of
competition can be introduced by modifying the
Challenge.
What are the problems?
 The biggest concerns are the lack of
transparency and competition while dealing
with unsolicited proposals.
 Governments need to have a strong legal
and regulatory framework to award
projects under the Swiss Challenge method.
 It can potentially foster crony capitalism,
and allow companies to employ dubious
means to bag projects.
Vijay Kelkar Committee on PPP
 Recommendations of the committee
 Setting up independent regulators to
address stalled infrastructure projects
for various sectors
 The Government may take early action
to amend the Prevention of Corruption
Act, 1988 which does not distinguish
between genuine errors in decision-
making and acts
 There is an urgent need to rebuild India’s
PPP capacities.
 Structured capacity building programmes for
different stakeholders including
implementing agencies and customized
programmes for banks and financial
institutions and private sector need to be
evolved.
 The need for a national level institution to
support institutional capacity building
activities must be explored.
 Risk allocation : The dominant, primary concern of
the Committee was the optimal allocation of risks
across PPP stakeholders. Inefficient and inequitable
allocation of risk in PPPs can be a major factor in
PPP failures, ultimately hurting the citizens of India
 Setting up of an Infrastructure PPP review
committee (IPRC) to evaluate and send its
recommendations in a time-bound manner upon a
reference being made of “Actionable Stress” in any
Infrastructure Project developed in PPP mode
 Setting up on an Infrastructure PPP
Adjudication Tribunal (IPAT)-Chaired by a
Judicial Member (former Judge SC/Chief
Justice HC) with a Technical and/or a
Financial member
 Case of very small Projects- The authorities
may be advised against adopting PPP
structures for very small projects, since the
benefits of delivering small PPP projects
may not be commensurate with the resulting
costs and the complexity of managing such
partnerships over a long period.
PYQ
Adaptation of PPP model for infrastructure development
of the country has not been free from criticism. Critically
discuss the pros and cons of the model.

Explain how private public partnership agreements, in

longer gestation infrastructure projects, can transfer
unsuitable liabilities to the future. What arrangements
need to be put in place to ensure that successive
generations’ capacities are not compromised?
Questions to Practice:
Public Private Partnerships (PPP) play an
important role in addressing the infrastructure
gaps in the country, yet they are hampered by
challenges. Discuss.

Define public-private partnership (PPP)?

Discuss various advantages and issues related
to public-private partnership (PPP) in India.