Public Private Partnership and the Indian Economy: A Discussion

2.1 Economics:

Submitted By:

Raajdwip Vardhan

UID: SM0116035

Second year 1st Semester

Faculty-in-charge

Mr. Nayan Jyoti Pathak

National Law University, Assam

 CONTENTS

1. Introduction………………………………………………………………………….02
1.1 Literature Review……………………………………………………………. …03
1.2 Research Questions………………………………………………………….. ….03
1.3 Aims & Objectives……………………………………………………………....04.
1.4 Research Methodology……………………………………………………..….. .04

2. Chapterisation

2.1 The Concept of Public-private partnership………….……….………………….05

2.2 The Government’s motivation for entering into a PPP.………...……………… 07

2.3 PPP in India……...……….……………………………………………………. 09

2.3.1 Forms of PPP in India..………………………………………………………..10
2.3.2 key Sectors for PPP in India………………… ……………………………….11

2.4 Positives and Negatives of PPP…………………………………………………13

2.4.1 Positives of PPP……………………………………………………………….13
2.4.2 Negatives of PPP……………………………………………………………...14
2.4.3 Challenges to PPP in India………………………………………………….…15

3. Conclusion…………………………………………………………………………..17

4. Bibliography……………………………………………………………………...... 18

Page | 1
 INTRODUCTION

Public-private partnerships are basically a socio-economic and legal alliance between the public
as well as private sectors for the construction as well as development of public infrastructure.
Under this alliance or partnership or alliance, the government i.e. the public sector and the
private sector carry out a task according to certain pre-determined conditions, pertaining to the
risks as well perks obtained from the completion of the collaborative project. These are typically
long term alliances, and over the years, economies over the world have adopted the mechanism
of utilizing public-private partnerships for initiating as well as speeding up development of
1
public infrastructure. More broadly speaking, public-private partnerships are the natural
extension of mixed economies such as India, where governments have become increasingly
aware of their own inefficiencies as well as the various problems that they run into during the
financing and budgeting stages of public infrastructure development. Thus, they have resorted to
more efficient private providers of services as well as goods, while the public sector can still
promote its agenda, leading to a sort of de-facto alliance between the two otherwise segregated
groups within the economy.2

In the Indian economy, the concept of private-public partnerships have been a constant since the
past couple of years, and they also found mentions in the 12th and final five-year plan initiated in
the year 2012, making it evident that the concept of public-private relationships will play major
role in the Indian economic system.

The aim of this paper shall be to look at the concept of public-private partnerships and also to
analyse the impact and effect that it has on the Indian economy. The paper shall also try to look
at the merits and demerits that public-private partnerships have on the Indian economy.

1
Hodge, G. A and Greve, C. PUBLIC–PRIVATE PARTNERSHIPS: AN INTERNATIONAL PERFORMANCE REVIEW, Public
Administration Review, 2007, pp. 546
2
Elisavet Karaiskou, PUBLIC –PRIVATE PARTNERSHIPS: AN INNOVATIVE TOOL FOR DECENTRALIZING THE
PRODUCTION OF PUBLIC GOODS IN CONTEMPORARY GREECE. Panteion University Press. Pp-03

Page | 2
 1.1 LITERATURE REVIEW

 Sudhanshu Sekhar Nanda. INFRASTRUCTURE DEVELOPMENT IN INDIA:

THE ROLE OF PUBLIC-PRIVATE PARTNERSHIPS. (2015)

This research article elucidates in detail about the concept of public-private partnerships,
and looks at the importance of the concept in the Indian context, specifically in the
domain of infrastructure development. It analyses the emergence of public-private
partnerships in both the rural and the urban contexts, and utilizes statistical data to
highlight the advantages as well as disadvantages of using public-private partnerships in
India.

 Ernest & Young. PUBLIC PRIVATE PARTNERSHIPS : THE NEXT

CONTINUUM

It is a comprehensive study formulated in collaboration with FICCI in order to highlight

the importance as well as significance of public-private partnerships in the different
sectors of the Indian economy. It also aims to elucidate the challenges faced by the
concept of public private partnerships in India in the various sectors, and aims to provide
solutions to overcome those problems for a better implementation of public-private
partnership programs.

1.2 RESEARCH QUESTIONS

 What is the concept of private public partnerships?

 What is the government’s motivation to enter into PPP?
 What is the importance of public private partnerships in Indian economy?
 What are the positives and negatives of using public private partnerships in an
economy?

Page | 3
 1.3 AIMS AND OBJECTIVES

 To try and understand the concept of public-private partnerships.

 To try and understand the motivations behind the implementation of PPP by the
government.
 To try and understand the importance and significance of the public-private
partnerships in context of the Indian economy.
 To understand the positives, as well as the drawbacks and criticisms of utilizing
public-private partnerships in the Indian context.

1.4 RESEARCH QUESTIONS

In this research work, the Doctrinal Method of Explanatory Research Design has been
employed for conducting the research. Only secondary sources such as books, articles and
journals have been used for the collection of information for the research work.

Page | 4
 2.1 The Concept of Public Private Partnership

The term public-private partnerships widely used, but it is not well-defined. A member of the
European Commission with responsibility for PPPs, Frits Bolkestein, recently said, “There is no
over-arching definition for public-private partnerships. PPP is an umbrella notion covering a
wide range of economic activity and is in constant evolution.”3

Most definitions of public-private partnership often include three things:

(1) A formal agreement between or among public and private parties.

(2) Mutual sharing of resources, information, risks, and rewards.

3) Formal links between output-oriented performance measures and the allocation of risk and
reward among partners.

While some private-public partnerships treat all partners in the same way, i.e. all the players in
the partnership are given the opportunity to define goals and all the partners share the effort to
pursue the accepted goals on the basis of mutually agreed to rules, other private-public
partnerships place the government body in charge of the entire operation, while the private
partner takes a backseat to the developments and works according to the plans and ideas
formulated by the government body or entity that the private body is in a partnership with. In the
latter type, the government body or entity that is chosen as the leader defines strategic goals and
uses it’s standing procurement regulations to structure an agreement that enlists the aid of private
sector partners in the pursuit of these goals4. These include a wide range of agreements in which
private parties provide services to a government agency or private parties use government assets,
such as buildings or test facilities, for commercial purposes. Both types of Public-private
partnerships are important because each of them play on the positives and negatives of each
other, and are therefore situation specific. In other words, each type works best in particular

3
Robert Klitgaard, Paul C. Ligh (ed.). HIGH-PERFORMANCE GOVERNMENT. (2005) pp-179

4
Ibid. 182

Page | 5
situations, and there is no specific concept of utilizing a particular type of private-public
partnership in a particular situation.

Apart from public-private partnerships, PPP is also known as private sector privatization (PSP).
From the two forms of PPP discussed above, it is clear that either of those are viable options for
any public-private partnership. A strong PPP allocates the tasks, obligations, and risks among the
5
public and private partners in an optimal way. The public partners in a PPP are government
entities, including ministries, departments, municipalities, or state-owned enterprises. The private
partners can be local or international and may include businesses or investors with technical or
financial expertise relevant to the project. Increasingly, PPPs may also include nongovernment
organizations (NGOs) and/or community-based organizations (CBOs) who represent
stakeholders directly affected by the project.

Effective PPPs recognize that the public and the private sectors each have certain advantages,
relative to the other, in performing specific tasks. The government’s contribution to a PPP may
take the form of capital for investment (available through tax revenue), a transfer of assets, or
other commitments or in-kind contributions that support the partnership. The government also
provides social responsibility, environmental awareness, local knowledge, and an ability to
mobilize political support. The private sector’s role in the partnership is to make use of its
expertise in commerce, management, operations, and innovation to run the business efficiently.
The private partner may also contribute investment capital depending on the form of contract.
The structure of the partnership should be designed to allocate risks to the partners who are best
able to manage those risks and thus minimize costs while improving performance.

5
PUBLIC PRIVATE PARTNERSHIP HANDBOOK. Asian Development Bank. Pp-07

Page | 6
 2.2 Government’s Motivation for entering into Public-Private Partnerships

Since public-private partnerships are mostly based around the idea of general public welfare,
specifically in the domain of infrastructure development, it can be argued that welfare is the
government’s job, and therefore, the private sector doesn’t have any reason nor responsibility to
get involved in such partnerships. Moreover, since it’s the government’s duty, why should it
involve the private sector in the first place, and why doesn’t it by itself work on public welfare?
These are some of the questions that come to mind when dealing with the concept of public-
private partnerships.

However, the government does get into public-private partnerships. The reasons behind the
government’s motivation to enter into such relationships are threefold.

Firstly, it helps with the mobilization of private capital. Governments face an ever-increasing
need to find sufficient financing to develop and maintain infrastructure required to support
growing populations. Governments are challenged by the demands of increasing urbanization,
the rehabilitation requirements of aging infrastructure, the need to expand networks to new
populations, and the goal of reaching previously underserved areas. Furthermore, infrastructure
services are often provided at an operating deficit, which is covered only through subsidies, thus
constituting an additional drain on public resources. Combined with most governments’ limited
financial capacity, these pressures drive a desire to mobilize private sector capital for
infrastructure investment. Structured correctly, a PPP must be able to mobilize previously
untapped resources from the local, regional, or international private sector which is seeking
investment opportunities. The goal of the private sector in entering into a PPP is to profit from its
capacity and experience in managing businesses (utilities in particular). The private sector seeks
compensation for its services through fees for services rendered, resulting in an appropriate
return on capital invest.6

6
Ibid. pp-11.

Page | 7
Secondly, public-private partnerships are essentially a tool aimed at greater efficiency of the
public welfare. 7The efficient use of scarce public resources is a critical challenge for
governments—and one in which many governments fall far short of goals. 8 The reason is that
the public sector typically has few or no incentives for efficiency structured into its organization
and processes and is thus poorly positioned to efficiently build and operate infrastructure.
Injecting such incentives into an entrenched public sector is difficult, though not impossible, as
Singapore has demonstrated by developing a government-wide dedication to efficiency while
maintaining many critical services within the public domain.9

Thirdly, public-private partnerships can be considered an ideal for greater and broader sector
reforms.10 Governments sometimes see PPP as a catalyst to provoke the larger discussion of and
commitment to a sector reform agenda, of which PPPs are only one component. A key issue is
always the restructuring and clarifying of roles within a sector. Specifically, there is a
requirement to reexamine and reallocate the roles of policy maker, regulator, and service
provider, particularly to mobilize capital and achieve efficiency, as outlined above. A reform
program that includes PPP provides an opportunity to reconsider the assignment of sector roles
to remove any potential conflicts and to consider a private entity as a possible sector participant.
Implementing a specific PPP transaction often forces concrete reform steps to support the new
allocation of sector roles such as the passage of laws and establishment of separate regulatory
bodies. In essence, re-examination of the regulatory and policy arrangements is critical to the
success of a PPP project.

7
P. Farlam. PUBLIC PRIVATE PARTNERSHSIPS. Pp-12. (2005)
8
Ibid. pp-13
9
PUBLIC PRIVATE PARTNERSHIP HANDBOOK. Asian Development Bank. Pp-17
10
J Delmon. Understanding Options for PPPs in Infrastructure. Pp-27 (2010)

Page | 8
 2.3 Public Private Partnerships in India

The Government of India defines PPPs as, “A partnership between a public sector entity
(sponsoring authority) and a private sector entity (a legal entity in which 51% or more of equity
is with the private partner/s) for the creation and/or management of infrastructure for public
purpose for a specified period of time (concession period) on commercial terms and in which the
private partner has been procured through a transparent and open procurement system”. 11 In
recent years the concept of PPP is gaining much more momentum across the country just
because it has been able to provide ample solution to the much needed projects which
government cannot do on its own.

According to a research conducted in the year 2012, India has had 881 PPP projects worth more
than INR5.4 trillion in awarded/underway status (i.e., in operational, construction or in stages
where at least construction/implementation is imminent. Among these 52% is dominated by the
construction roads and highways. According to the same research, there is also a need to focus
on social sectors, especially health and education, which currently accounts for only 3.7% of PPP
projects in India, and also a need of There is a need for mainstream PPPs in several areas, such
as power transmission and distribution, water supply and sewerage, and railways. These are
sectors where there are significant resource shortfalls, and a need for efficient delivery of
services.12

Due to this, the government of India realized the importance of accelerating infrastructure
development through increased private sector participation in order to boost the country’s
slowing economy. PPPs were made a tool for fast forwarding the development of infrastructure,
and it was ascertained that Out of this total investment, 48% is expected to come from the private
sector, which accounted for 36% of investments in the Eleventh FYP.

11
Sudhanshu Shekhar Nanda. INFRASTRUCTURE DEVELOPMENT IN INDIA : THE ROLE OF PUBLIC-PRIVATE
PARTNERSHIP. Pp-41 (2015)
12
Ernst & Young. Public-Private Partnership: The Next Continuum. Pp-04

Page | 9
 2.3.1 Forms of Public-Private Partnership in India.

Some of the common forms of PPP model found in India are:

 Performance-based management/operations and maintenance (O&M) contracts: In such

contracts, most or all of the operations and maintenance of a public facility or service is
given to the private sector. The sectors meant for such form of PPP models include water
supply, sanitation, solid waste management, road maintenance, etc.

 Modified design-build (turnkey) contracts: In traditional design-build (DB) contract, the

private contractor is paid a fixed fee after the completion of the designing and building
phase. These contracts yield benefits in the form of time and cost savings, efficient risk-
sharing and improved quality. The turnkey approach with milestone linked payments and
penalties or incentives can be linked to these kinds of contracts.

 BOT models: Under BOT contracts, the responsibility for construction and operations
rests with the private partner, while ownership is retained by the public sector. The BOT
model and its variants are the most common form of PPP models used in India,
accounting for almost two-thirds of PPP projects in the country. The two major forms of
BOT models are:
i) User-fee-based BOT model: commonly used in medium to large-scale PPPs for the
energy and transport subsectors (road, ports and airports).
ii) Annuity-based BOT model: commonly used in sectors/projects not meant for cost
recovery through user charges, such as rural, urban, health and education sectors.

Page | 10
 2.3.2 Key Sectors for Public-Private Partnerships in India

Most of the National Highway Development Project works are currently under development on
PPP basis through the BOT Annuity and the BOT Toll mode. With a considerable number of
new projects on offer under PPP in the roads sector, there exist several investment opportunities
for investors and companies with diverse business lines, such as engineering companies, civil
work contractors, O&M contractors and toll operators. As of December 2012, out of the 235
projects awarded for national highways on PPP basis, 186 (79%) were awarded through the BOT
(Toll) mode and the rest were awarded through the BOT (Annuity) mode.13

After roadways, the next sector is the Indian Railways. During the last one decade or so, Indian
Railways have experimented with various Public-Private Partnership schemes to set up railway
lines, connect ports, privatize container trains, deploy dedicated parcel trains and introduce the
Wagon Investment scheme — luxury trains as well as tourist lodges. The, Indian Railways has
also participated in some Public-Private Partnership projects directly and some through its
agencies, such as Rail Vikas Nigam Limited (RVNL) and Indian Railway Catering and Tourism
Corporation (IRCTC). For IR, the PPP experience has borne mixed results with success in
projects with clear-cut demarcation of responsibilities, such as last mile port connectivity and
delay in projects related to rolling stock and locomotives. In the Twelfth FYP, the Planning
Commission has projected an investment of INR5.2 trillion for the railways, which is
approximately 130% over the previous plan. Out of the total investment, around 80% (INR4.2
trillion) will be invested by the Central Government and the remaining 20% (INR1 trillion)17
will be raised through the private sector. 14

The next sector that PPPs are mostly involved are ports and airports. In the ports sector, PPP has
been primarily observed in segments, such as operation and management of ports construction of
deep water ports, container terminals, shipping yards and bulk ports. In FY13, the Ministry of
Shipping has managed to achieve only 18% of the investment target set for ports. Only14 PPP

13
Ibid. pp-13
14
“KEY DEVELOPMENTS,” INDIAN INFRASTRUCTURE MAGAZINE, Volume 15, February 2013, pp-09

Page | 11
projects were awarded in FY13,15 During the Eleventh FYP, the private sector played an
unprecedented role in the area of airport development. Five international airport projects were
successfully completed through the public–private partnership (PPP) mode, viz. greenfield
development of Hyderabad and Bengaluru international airports and modernisation of Kochi,
Delhi and Mumbai international airports. 16

15
Ruchika Chitravanshi. “Port sector gets 14 PPP projects,” THE BUSINESS STANDARD. 30th March 2013.
16
Ibid.

Page | 12
 2.4 Positives and Negatives of Using PPP

As a concept, public-private partnership is no doubt a novel idea that is being implemented in

economies all over the world. It is a comparatively new concept, and yet due to its novelty and
uniqueness, as well as ability to merge the two distinct sectors of the economy, i.e. the public and
private sectors, public-private partnership has been garnering a lot of popularity worldwide.

2.4.1 Positives of public-private partnership:

 Cost Reduction on the Public Treasury:-

By utilizing public-private partnerships, the government’s expenditure on infrastructural
development is greatly reduced, and this means the government i.e. the public sector can
now spend more money on other projects that are not related to infrastructural
development, projects that are aimed at the economic upliftment of the country or for the
social welfare of the people of the nation. 17

 Competition:-
Generally, the benefits of bringing the idea of competition into an area which is usually
dominated by the public sector achieves the goals of lowering the prices of that particular
product or service, reduces monopoly by the public sector, provides better quality of
commodities or services and increases investment in the particular sector. Because of
these reasons, in a PPP environment, the people can get better bang for their buck.

17
Gwen Van Herpen. THE ADVANTAGES AND DISADVANTAGES OF PUBLIC_PRIVATE PARTERSHIPS-EXAMINED. Pp-
05 (2002)

Page | 13
  Risk Transfer:-
In certain projects, the public sector and the government machinery might not be the best
option. In such times, private sector help is of utmost importance and significance to
ensure that the work is done properly. In a public-private partnership environment, the
work can be delineated in such a manner that the private sector bodies which have
immense expertise in the particular scenario can take over the work, by coming into a
collaboration with the government body, thus working together and ensuring greater
efficiency. Thus, the risk for making the commodity or providing a particular service is
relegated to that body which is most efficient in it18.

2.4.2 Negatives of Public-Private Partnership

 Insecurity:-
Whenever two or more parties enter into a contract, there is always the risk and insecurity
of the terms and conditions of said contract not being met by either or both the parties,
ultimately ensuring a dissolution of the relationship that was the basis of the contract, and
hence hampering the entire process for which the contract was formulated.19 As such,
when one single party operates, there are lesser chances of any project or partnership
falling apart due to the presence of only one sole body working in the project. Since
public-private partnerships involve the two opposing forces of a capitalist or mixed
economic system, the fact remains that either party can have a fallout and it can hamper
the entire project.

18
Ibid. 06
19
Ibid. 08

Page | 14
  Inefficiencies:-
There might be inefficiencies in one body while the other body would work diligently
This would definitely bring in gross miscalculations and problems when the final product
or service is made available to the public, due to the huge disparity in the quality of woke
exhibited by both the parties.

 Long-term contracts:-
Most public-private partnerships are extremely long term contracts, often spanning years
and even decades, until the completion of the project. This means that the basis for the
formation of the contract is formulated way beforehand, and the actual market, economic
and social scenario might drastically change by the time the goals decided by the PPP are
achieved.

2.4.3 Challenges to public-private partnerships in India

 Regulatory Environment: There is no independent PPP regulator as of now. In order to

attract more domestic and international private funding of the infrastructure, a more
robust regulatory environment with an independent regulator is essential.20

 Lack of information: The PPP program lacks a comprehensive database regarding the
project to be awarded under PPP. An online database, consisting of all the project
documents, including feasibility report, concession agreement and the status of various
clearances are required.

20
Sudhanshu Shekhar Nanda. INFRASTRUCTURE DEVELOPMENT IN INDIA : THE ROLE OF PUBLIC-PRIVATE
PARTNERSHIP. Pp-68 (2015)

Page | 15
  Project development: The absence of adequate project development by authorities leads
to reduced interest by the private sector, mispricing and many time delays at the time of
execution.

 Lack of institutional capacity: The limited institutional capacity to undertake large and
complex projects at various central ministries and especially at state and local bodies’
level hinder the translation of target into projects.21

 Financing availability: With commercial banks reaching the sectoral exposure limits, and
large Indian infrastructure companies being highly leveraged, funding the PPP project is
getting difficult.

21
Ibid. 69

Page | 16
 3. Conclusion

Public-private partnerships are basically a system under which the public and private sectors
come together and collectively work on a particular project. This is a concept which has gained
novelty and become famous in economies all over the world in the span of a few decades. The
private public partnerships are of multiple types and forms, with each one being properly suited
to one particular aspect of economic affairs and projects.

The government’s motivation for entering into public-private partnerships is mainly three fold.
Firstly, they bring in private capital into an investment, which reduces burden on the public
sector. Secondly, they are a tool aimed at generating a better degree of public and social welfare.
Thirdly, they are a tool for bringing in a broader sectoral development into the economy due to
the diversified expertise of the private sector.

In India, there are more than 800 PPPs functioning, according to a survey conducted in 2012.
However, the major crux of this is invested in building roadways and highways, with the PPPs
involved in the Indian Railways coming in second, and the Ports and Airports services coming in
third, as far as no of PPPs as well as the amount invested go. However, there are a lot of other
sectors which have been neglected by the government for generating PPPs, and this means that
the scope of those sectors has been greatly underutilized.

PPPs, as a concept have multiple positives and negatives, with the positives greatly outweighing
the negatives. Perhaps the greatest benefit of a PPP system is the sharing of risks regarding the
project, as well as the influx of private capital into an infrastructural project, enabling the public
sector to invest more money into other areas of the economy, either for social welfare or
economic development. In India, things like lack of a regulatory body for PPPs as well as lack of
proper planning and development has reduced the impact that this novel concept can have on the
Indian economy, but the fact still remains that PPP as an idea, if properly implemented in the
Indian economic scenario, can take the India to newer heights that have never been seen.

Page | 17
 4. Bibliography

 Hodge, G. A and Greve, C. Public–Private Partnerships: An International Performance

Review, Public Administration Review, (2007)

 Elisavet Karaiskou, Public –Private Partnerships: An Innovative Tool For Decentralizing

The Production Of Public Goods In Contemporary Greece. Panteion University Press

 Robert Klitgaard, Paul C. Ligh (ed.). High-Performance Government. (2005)

 Public Private Partnership Handbook. Asian Development Bank.

 P. Farlam. Public Private Partnershsips. (2005)

 J Delmon. Understanding Options for PPPs in Infrastructure. (2010)

 Sudhanshu Shekhar Nanda. Infrastructure Development In India: The Role Of Public-

Private Partnership. (2015)

 Ernst & Young. Public-Private Partnership: The Next Continuum

 Key Developments,” Indian Infrastructure Magazine, Volume 15, February (2013)

 Ruchika Chitravanshi. “Port sector gets 14 PPP projects,” THE BUSINESS

STANDARD. 30th March 2013.

 Gwen Van Herpen. The Advantages And Disadvantages Of Public_Private Parterships-

Examined. (2002)

Page | 18