IPublic Private Partnership Contracts and Approval Issues
Introduction:
Public Private Partnership (PPP) arrangements are still in their infancy although the governments (State and Central) see a tremendous potential in such relationships for providing public infrastructure and service. Balancing the interests of users and the investors on one hand and seeking ‘value for money’ on the other, are the essential features PPP projects. This has initiated governments across the world to enter into such alliances that has matured with the passage of time, in such other countries. India too is trying to follow suit based on the success of other countries.
Creation of public assets like roads, dams, bridges, ports, railways, etc., having long gestation periods, was the prerogative of the government. Being sensitive to a significant deficit in the availability of public infrastructure facilities and services, in a growing economy, government has changed its policies to seek the cooperation of private sector participants for the mega projects. Enough lessons are now available, both within the country and abroad, for sanctioning and approving projects under the PPP model.
Designing the contract to meet ‘value for money’ requirements:
The arrangements have to be carefully designed and vetted, as any disputes arising in such contracts may cause undue inconvenience to public and unwarranted outflows of public money for the government. Even assuming that the private partners are going to be selected through the competitive e-tendering bid, the process can only provide for a transparent and level playing field to the participants. However, it may not provide a guarantee for quality service or may not meet the requirements of ‘value for money’ concept. Typically, any PPP contract will have the following features:
Transfer of public assets and extension of concessional arrangements by the government or any public sector entity;
Delegation of authority to collect and appropriate user fees;
Fulfilling government’s obligation to provide services as per the required standards;
Defining and sharing risks, rewards and obligations.
Approval process:
A PPP Appraisal Committee (PPPAC) will be set up comprising of the following:
Secretary, Department of Economic Affairs (in the Chair);
Secretary Planning Commission- an appraisal note is to be put up to PPPAC with suitable suggestions;
Secretary, Department of Expenditure;
Secretary, Department of Legal Affairs- for legal scrutiny of documents;
Secretary of the Department sponsoring the project.
Ministry of Finance will examine the concession agreements for deciding upon the following issues-
Guarantees extended by the government;
Risk allocation between partners;
Scrutinizing it from the angle of government expenditure.
The Committee or the sponsoring department may seek the assistance of legal, financial and technical experts to undertake the due diligence process to protect the interest of the government. This will also aid in understanding the solvency position of the participating private partner. When once the PPPAC clears the project, it will be put up to the competent authority for final approval. Thereafter, the concerned Ministry will develop individual proposal for ‘in principle’ clearance before inviting ‘expression of interest’ from prospective investors.
Viability Gap Funding (VGF):
A scheme has been approved by the Cabinet Committee on Economic Affairs for supporting certain PPPs by way of financial assistance to fund the viability gap. The essential features of this scheme are as follows:
a)The Empowered Committee will sanction VGF up to Rs. 200 Crores for each project subject to budgetary ceilings of the Finance Ministry. Anything beyond this has to be with the approval of Finance Minister. b)Requirements of sectoral coverage to be adhered to, so as to avoid consumption of such funds by large projects. c)Allocation of VGF between any on-going Plan Scheme and this Scheme to be determined and monitored. d)Eligibility of projects for the financial assistance under VGF to be justified and clarifications to be offered as and when required.
While the Empowered Committee has sanctioning authority for Rs 200 Crores under VGF, the Empowered Institution will sanction projects for VGF up to Rs. 100 Crores, for each eligible project subject to budgetary ceiling indicated by the finance Ministry.
Sectors eligible for VGF:
The following sectors are presently eligible for VGF under the Scheme:
Roads and bridges, railways, seaports, airports, inland waterways;
Urban transport, water supply, sewerage, solid waste management and other physical infrastructure in urban areas;
Infrastructure projects in SEZs; and
International convention centres and other tourism infrastructure projects.
Conclusion:
A peep into the approval procedure, indicated above, is one element of the public private partnership arrangement. It is the international experience that projects that is ill-conceived may end up with adverse consequences both to the government and the private participant. Hence the approval process is a long drawn affair, seeking for predictability and market driven approach to mitigate risks in long gestation projects. Again it looks for sufficient user density to ensure that the project is viable, and cost effective to the consumer of services.
DECLARATION
I, hereby declare:
That the article titled ‘Public Private Partnership Contracts and Approval Issues’ being sent for publication in ‘Prudence’ is my original contribution.
It is an exclusive contribution for the e-newsletter and has not been/nor would be sent for publication elsewhere.
That I shall be responsible for views expressed in the article.
For any breach of the above undertaking, I shall be liable for any action that may be initiated by the Institute.