PPP PUBLIC PRIVATE PARTNERSHIP

PPP PUBLIC PRIVATE PARTNERSHIP

Definition by MOF 1. An arrangement between Government and Private party 2. To provide public assets and/or related services for public benefit 3. Private party makes investments and/or management is undertaken by private party 4. For a specific period 5. Where a substantial risk is borne by the private sector 6. Private sector receives performance linked payments 7. Payments conform to specified, pre-determined and measurable performance standards. 8. Government provides concessions.

Final responsibility for service delivery rests with the Public sector agency Concession granting Authority Concession agreement Design risk Financiers Equity investors Lenders Guarantors Insurers Debt/Equity Services at pre determined quality SPV Service receivers Performance obligations Tolls/user charges RISKS Construction risk Operational /Revenue Financial Risk allocation Contracts It bridges the investment gap faced by Government in providing Public goods

Public authority Characteristics Can enter into long term PPP contracts will have only one contract with private party Risk sharing with private party Monitor the service delivery by single point of responsibility and accountability Final responsibility of service delivery rests with Public authority. Private party can innovate Brings in its skills and technology to provide public service Focuses on Life cycle costs as O&M is their responsibility Private party brings the Capital

Public procurement Vs PPP Public procurement PPP Product oriented No concept of life cycle Short term contracts Many contracts to procure a product. Mismatch in qualities will spoil the final product Service Oriented Ex: service of Life cycle concept is considered Long term contracts Single contract by public authority with private party. Risk is totally borne by the Public sector Risk is transferred Pvt party and in turn allocated to other parties who can best manage it.

The continuum Works and service contracts Management and maintenance contracts Operation and Maintenance contracts Build operate and Transfer concessions: BOT,BOOT,DFBOT etc Full Privatization Low Extent of Private Partnership High

Structuring a PPP project Key Element Scope Cost Recovery Duration Issues in Structuring Scope of the PPP project need not be same as that of overall project Scope is defined in terms of tasks and responsibilities between Parties Related to the assets that are to be designed, built, financed maintained and operated Whether project is bankable based on user charges? Demand forecasting- demand conversion into revenue stream Willingness of the users ability to pay Any possibility of windfall profits to private party? Annuity based approach? Long term Can duration be bidding parameter? PPP model Selection of suitable model based on Risk allocation Nature of the project

Financial analysis and structuring Financial analysis covers : Pre project and project phases. Pre-Project questions: Is the project warranted? Current asset utilization Rehabilitation or new project Alternatives Future demand analysis Demand analysis Sustainability and elasticity of demand Competing alternatives effect on project inflows Project initiation stage Cost estimation Need for accurate cost estimation Involves life cycle costing unlike in case of public procurement.

Financing the project Capital providers to the project Debt Banks, Development partners, Bonds, Government Equity Sponsors/promoters, Government. Equity is costlier than debt equity provider is at higher risk. After taxes, OpEx and debt servicing only dividend payment is possibly Project finance involves high levels of debt.

Financial analysis contd.. Non Recourse Financing : In this, the lender is satisfied to look initially to the projected cash flows and earnings of that project as the source of funds from which a loan will be repaid and to the assets of the project as collateral for the loan. Project finance No or limited recourse to sponsor s assets Bankability of the project is based on debt service capacity Debt service capacity is based on future cash flows Corporate Finance Recourse to sponsor s assets Bankability is based on debt service capacity and Collateral value Debt service capacity is based on future cash flows taking into account prior performance

Bidding & Contracting Process RFQ: Request for Qualification Eligibility criteria- threshold technical capacity Eligible and prospective bidders are pre-qualified RFP ( Request for Proposal) From pre qualified bidders Financial bid Evaluation

Major elements of Concessional Agreements: Risk mitigation framework Spell out service obligations Performance linked payment Rights and obligations of the parties Conditions Precedent to be fulfilled Financial close O&M obligations O&M manual, practices, penalties etc User fees Determination, Collection and appropriation,discounts Revision of fee etc Force Majeure Non Political & Political Defaults Termination Payments Dispute resolution Mechanism Concession agreements A concession is a bundle of rights conferred on the private entity in return of certain specified obligations to be undertaken

US $ Bn. Projected Investment in Twelfth Plan 300.0 250.0 XII Plan: Projected: US $ 1,025 bn. (Rs. 40,99,240 cr.) 200.0 XI Plan: 150.0 100.0 Revised Projections: US $ 514 bn. (Rs. 20,54,205 cr.) Business as Usual: US $ 857 bn. (Rs. 34,28,918 cr.) 50.0 0.0 13

150 120 90 60 30 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Energy Telecoms Transport Water and sewerage Total Source: World Bank & PPIAF

PPP Investment in Infrastructure in India (USD billions) Period Approx Infra Sector Investment Estimated PPP % Estimated PPP Investment 10 th Plan 222 25 56 11 th Plan 500 37 185 12 th Plan (Projection) 1000 50 500 Source: Planning Commission Documents

IFRS Treatment of Concession agreements A service concession arrangement contractually obliges the operator to provide the services to the public on behalf of the public sector entity. IFRIC 12 Service Concession Arrangements applies to public-to-private service concession arrangements if: (a) The grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price; and (b) The grantor control through ownership, beneficial entitlement or otherwise any significant residual interest in the infrastructure at the end of the term of the arrangement. [IFRIC 12.5]

Issues addressed in IFRIC 12 a) Treatment of the operator s right over the infrastructure Paragraph 11 Treatment The operator does not recognize infrastructure as property, plant and equipment or as a leased asset because the contractual service arrangement does not convey the right to control the use of the public service infrastructure to the operator. (b) Consideration given by the grantor Paragraphs 15-19 The operator recognize consideration for construction or upgrade services at fair value. The consideration may be rights, financial assets of intangible assets. (c) Items provided to the operator by the grantor Infrastructure items to which the operator is given access by the grantor for the purposes of the service arrangement are not recognized as property, plant and equipment of the operator.

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