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Managing Public Private Partnerships

Bridging the infrastructure gap by promoting public private partnerships has become the preferred mode for the execution of public projects. The government needs to develop the necessary capability to handle the large number of PPP projects that are to be taken up during the Eleventh Plan.

COMMENTARYEconomic & Political Weekly EPW august 16, 200823sanitation, particularly in case of the vil-lages which have not been awarded the Nirmal Gram Puraskar. Hence, as a long-term perspective, people’s behavioural/attitudinal trigger should be the fulcrum in this context. (3) It is critical to remem-ber that the motivators, animators, and campaigners are the key agents in this campaign. This campaign may be retained for at least five years or more so that the new practice of hygiene/sanitation becomes part and parcel of normal life. (4) The open defecation-free villages should be in-centivised in terms of giving them priority in taking up various developmental activi-ties under various rural development and other schemes of development. 4 Conclusions The campaign could succeed basically be-cause of the motivators and the support of the local bureaucracy who could create sustainable demand and action for sani-tation through properly engineered social marketing and attitudinal-behavioural transformation of the villagers. The study refutes the myth that poor people will construct toilets only if they get financial assistance from the government. The Bhi-wani experiment has, indeed, been an eye-opener that poor people opted for loans to construct their toilets once they had been educated and motivated.It is hoped that much can be learnt from the Bhiwani model which can be replicated elsewhere. For this, natural leaders have to be properly identified and nurtured. Equally significant, the govern-ment agencies/officials have to act more as managers and team leaders and have to cast off their bureaucratic styles. Notes 1 CLTS is an approach which facilitates a process of empowering local communities to end open def-ecation and to build and use latrines without the support of any external subsidy. This approach was first pioneered in 1999 by Kamal Kar working with the Village Education Resource Centre and supported by Water Aid, in a small community of Rajshahi district in Bangladesh. 2 Nirmal Gram Puraskar, an award scheme for achieving an environment completely free of open defecation was launched by the government of India on October 2, 2003 for PRIs, individuals and organisations, for promotion of sanitation. 3 One of the state coordinators told the research team that they had been designated as “Tatti wala”,i e, those who are dealing with faeces, in some villages. 4 Generally in every term, the panchayat’s elections created enough jealousy and animosity between and among different sections of rural community. The animosity still persists in the villages even though the elections were held two years ago and it is very difficult to handle villagers belonging to different groups. 5 There is a concentration of SCs in this village. There are a few Jat families in this village. A sar-panch (woman) happened to be from this caste. The husband of the sarpanch said he had given loans to a number of SC families to construct their toilets as after participating in various workshops and meetings on the issue of sanitation, he decided to make Siwana an open defecation free village. ReferencesKar Kamal and Katherine Pasteur (2005): ‘Subsidy or Self-respect? Community Led Total Sanitation, An Update on Recent Developments’, Institute of Development Studies, Sussex.GoI (2002): Guidelines of the Central Rural Sanitation Programme (TSC), Department of Drinking Water Supply, Government of India, May.Census of India (2001): Series-7 Haryana, Tables on Houses, Household Amenities and Assets.Managing Public Private PartnershipsSatish BagalBridging the infrastructure gap by promoting public private partnerships has become the preferred mode for the execution of public projects. The government needs to develop the necessary capability to handle the large number ofPPP projects that are to be taken up during the Eleventh Plan.The draft Eleventh Five-Year Plan sets a very high target for invest-ment in the infrastructure sector. According to the Planning Commission’s estimates investments in road, rail, water supply, irrigation, power generation, transmission and distribution would need to increase from 4.6 per cent of gross domestic product (GDP) to between 7 and 8 per cent during the Eleventh Plan period. And if one looks carefully into the plan document, investment in the infra-structure sector is supposed to contribute at least 50 per cent of the proposed increase in the growth rate of the economy. Translated in sheer numbers it would mean that in next four to five years the investment need will be to the tune of $ 275-300 billion.Structurally it is not possible for the public sector to contribute substantially to such massive requirement and therefore the Planning Commission is banking on finalising a large number of public private partnerships (PPPs) to meet the investment needs.The problem of the Planning Commis-sion and the government of India, however, appears to be that there is shortage of viable and bankable projects that can be taken up asPPP projects. Further, the investments that have come during the last five years or so have come mainly in the telecom sector; not much has come in the power sector or other sectors such as urban utilities or water supply sector where it is required urgently. And although the government has introduced fairly reasonable guidelines together with an attractive scheme for granting viability gap funding, there are difficul-ties in implementing the scheme as project sponsors have to either adhere to the Model ConcessionAgreement(MCA) or get their concession agreement vetted by the Planning Commission. On the whole there is a general feeling in the govern-ments, especially with the implementing agencies and some decision-makers that the PPPs are difficult to forge and take considerable time to conclude. This would lead us to ask two questions. Would the Satish Bagal (satish_bagal@hotmail.com) is currently with the Mumbai Metropolitan Regional Development Authority.
COMMENTARYEconomic & Political Weekly EPW august 16, 200825government’s presence is necessary to ensure that the operator performs well.The PPP projects aim at transferring more risks to the private operator/partner for an appropriate rate of return and may seem to be a technique of reducing the government’s work. In reality, however, the process of forging PPP projects is very painful and requires more skill, exper-tise, diligence and patience. Understand-ing the concession agreement, its nitty-gritty, finer points that have significant financial implications, especially in the distant future requires attention and time that a bureaucrat can rarely afford to give. TheMCA lay down precisely and minutely the responsibilities of the government functionaries and contain penal provi-sion for not adhering to deadlines, com-pensations for failure to do things in time and exacting milestones both for the concessionaire as also the grantor of the concession. The private party that assumes many risks is ever alert to exer-cise its rights as provided in the conces-sion. Moreover, the government func-tionaries need to do considerable home-work in identifying risks, incorporating them in the agreements and watch com-pliance. All this requires more specialised knowledge and more dedication than perhaps in handling the traditionally structured projects.Let alone PPP projects, most of the urban bodies and government departments and organisations do not possess even ex-pertise and skills of handling conventional simple projects which are nothing but simple cash contracts. Especially, the government organisations and urban bodies cannot fully appreciate the financial and commercial aspects of the PPP projects which have a capacity of releasing more value and which have to be very carefully handled. ThePPP projects also require a different mindset. While the project men-tors have to be very businesslike and understand various aspects such as demand, tariff/pricing, etc, and their effect on the project outcome, they have also to treat the partners as true partners and not as contractors who can be loaded with only risks. Moreover, the initial stages of the project are very crucial and the government functionaries have to do considerable ground work such as land acquisition, preparing the site and fixing tariffs and issuing notifications.The initial success stories of the BOT projects indicate that each project had ad hoc mechanisms and informal structure to deal with resolution of day-to-day prob-lems. In complex PPP projects structuring the projects optimally is a great challenge and requires creative insights as also innovative approaches. If governments are to handle a large number of PPP projects, then they have to start develop-ing the necessary manpower and groups of skilled, knowledgeable and dedicated functionaries. Local bodies and other parastatles also need considerable guid-ance and support from state governments in the matter of approaching the govern-ment of India and the Planning Commis-sion for VGF wherever necessary. Risk-prone ProjectsAlthough greenfield projects such as high-way projects with substantial demand are relatively easy to do and for which the country has learnt sufficiently in the last 10 years, thePPP projects in other areas are difficult to finalise as the listing of various kinds of risks and structuring them optimally in the projects take considerable time.This scenario however changes when one encounters somewhat difficult projects such as those in the urban areas which involve risks that cannot all be perceived immediately and encompassed so methodically and where situation continue to be very fluid and risk and costs both rise with time very fast making it impos-sible for the parties to see things clearly. These include urban mass transit systems such as metros, water supply systems and sewerage systems and other urban infrastructure. The projects which involve considerable preparations and are contingent on suchcrucialactivities as land acquisition, obtaining “right of way” through thickly populated urban areas, various permissions, etc, become riskyand investors can claim huge risk premium. In addition these projects be-come difficult and risk-prone because they involve shifting of a number of utili-ties such as electric connections, water supply pipes and sewerage systems. In addition,working in dense traffic systems create considerable difficulties and add to costs.In large cities and metropolises a number of agencies operate separately and proper coordination amongst them is a prerequisite to successful implement-ation of projects. Especially in densely populated metropolises, land acquisition for the projects or obtaining right of ways could be very exasperating, complex and long drawn process. In many urban projects the actual costs involved in pre-liminaries and preparations constitute substantial part of the total project cost. If one adds to this the cost of removal of un-authorised constructions and rehabilita-tion of the project affected families then the preliminary costs to the government could be substantial and the governments may start thinking of PPP as the right approach. This initial phase of the project is very crucial and the private partner cannot do much at this stage. It is this stage where the governments have to be very diligent, assuring and forthcoming. If this time is lost and preliminaries are delayed it is likely that the private partner may lose confidence and may start looking for an early exit.3 PPP or Joint Venture?There are also some PPP projects where the governments are entering into joint-venture-like arrangements with the con-cessionaires, in addition to granting con-cession and assuming the responsibility of land acquisition, etc. Modernisation of airports is a case in point, but there are other PPP projects being formatted on these lines. It is argued that in totality considering the government’s contribu-tions such as land acquisition costs, other preliminary and preparatory costs and VGF the government’s stakes are very high and hence the governments should obtain a substantial equity to safeguard the investments. Direct equity participation in the entity, however, may create complexi-ties as governments start sharing all the risks and responsibilities of the entity. This undermines the very spirit of thePPP, for PPP projects are premised on private partner assuming substantial business and revenue risks. By holding equity in the entity the grantor of the concession is simply trying to assume all the risks in the
COMMENTARYaugust 16, 2008 EPW Economic & Political Weekly26Open Review Several international journals are moving away from closed "Peer Review" of research papers, towards an "Open Review" process. In open reviews anyone can comment on a paper submitted for publi-cation.This will increase transparency in reviews as well as enhance participation and involvement of the research community. EPW occasionally posts a submission on its web site and invites comments. Visitors to the EPW web site and readers of the journal are encouraged to offer detailed comments. EPW will discuss the comments with the author and a revised version will beprocessed for publication.Please visit the Open Review section on our web site (www.epw.in)to read and comment on the paper currently submitted for Open Review. project, and trying to convert thePPP project into a joint venture. The prelimi-nary costs of the project are substantial and they have often to be borne by the government. Under these circumstances it makes little sense to contribute 30 per cent equity to the project thereby increas-ing unnecessarily the government’s expo-sure and liabilities. Through government’s equity participation in the SPV the private party gets off, de-risking its investments and dilutes the risk-taking spirit of capital. What in essence was to be a simple and effectivePPP ultimately turns into a joint-venture with a great possibility of combin-ing the worst of both the worlds.Another major issue that comes as a risk and a great hurdle in implementation of the infrastructure projects and which may create uncertainty, especially in the dense urban areas, is rehabilitation of the project affected people. Normally there is reluc-tance on the part of the government as also the private party to acknowledge the issue openly. The issue can be tackled only if it is acknowledged and included as a cost component in the project. There is also need for a uniform and credible policy for rehabilitation of the project affected persons and an adequate and realistic budget for this activity.Ultimately an important test for the PPP project is whether the private party assumes genuine risks proportionate to rewards. Even while exhorting the parties to make people-friendly philosophy a founding stone of the PPP, one cannot overlook the fact that the private capital will come to earn a return on the capital employed and that the partnership must agree to give a reasonable rate of return on the capital and remove all the ambigui-ties in the underlying arrangements. In reality it is not always possible to maintain balance between the public and the pri-vate and the private partner may try to pass on as many risks to the government as is possible. Where the process of ensur-ing that all the stipulations in the conces-sion agreements are complied with rests with the third party private consultants and where government agencies’ contract management performance is not very spectacular, the performance and out-come of thePPP projects may have to be watched carefully. Moreover, as the government itself is admitting that there is a lack of bankablePPP projects in vari-ous infrastructure sectors, care has to be taken to see that only those projects that are really useful to people come up via the PPP route. While, therefore, encouraging and inducting private investment in infra-structure through the PPP route it is necessary to examine critically what true benefits it brings to the people and at what cost. 4 Role of Regulatory AuthorityPrivatisation and private investments in infrastructure presume and presuppose that there is an independent regulator to ensure that the monopolies do not exploit the consumer and that the stipulated service levels and quality is maintained. In the transport and road sector the role of regulator is still being carried out by the National Highway Authority of India (NHAI) and no one really knows whether private operators are discharging their responsibilities as per the concession agreement. The performance of the new utilities and expressways especially as regards the safety measures incorporated in the service levels expected have never been measured or made public. Further, the amount of toll and tariff structure is largely determined with reference to the length of the road and the capital cost of the project. What happens when one encounters a series of toll roads while travelling from one destination to another?The amount of total toll that one may have to pay also assumes significance especially when these days even parallel facilities may also attract toll, as in case of Mumbai-Pune expressway, where both the roads are toll-roads. What is often irk-some is that tollable roads and bridges have become so popular that between two destinations one may encounter a large number of toll plazas collecting user charges. Further, this issue gets com-pounded as most of the toll rates were fixed in the period of high inflation and high interest rates in the past and go on increasing at an annual rate as per the provisions of the concession agreements. There are many such issues that are aris-ing in the transport sector. A missing link here is the independent regulator which can help resolve many of these issues. In the power sector the independent regula-tory authorities have done considerable work of not only disciplining the service providers but also of initiating new stud-ies and exploring hitherto neglected but important subjects such as transmission and distribution losses which are so central to understanding issues in power sector. Similarly the transport sector would also see considerable advancement in our understanding of issues. If more investments are to come via the PPP route in water supply, urban transport and other infrastructure sectors, there needs to be independent regulatory oversight of the sector.If the targets set by the government for investment in infrastructure sector are to be realised, the governments at the state and the local level will have to develop the necessary capability to handle a large number ofPPP projects. PPP does not mean less work or less responsibility for the government. It is often a complex arrange-ment and requires deft handling and more skills. The target set by the Planning Commission may still remain far off but in the process projects that have the poten-tial of being taken up in the PPP format may come up expeditiously complement-ing the governments’ investments in infrastructure and on the terms that are acceptable to people.

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