Developing PPP Policy Framework for a State in India
The Context for Development of PPP Framework
The creation of new State after the bifurcation of the
erstwhile State of united Andhra Pradesh in to Telangana and Andhra Pradesh
(AP), the leadership of new truncated State of Andhra Pradesh sensed a huge
opportunity in infrastructure development, including development of a new
capital city. The statutory provision that created the two states did provide
for the federal Government of India to provide for new infrastructure
development in the State but the need for financial resources is so high and
the federal government is itself struggling with fiscal deficits that the leadership
in Government of Andhra Pradesh have given in to the inevitability of public
private partnerships (PPPs).
This is challenging in India given that there is a
widespread perception about failure of PPP as a business model for public
services and infrastructure development. Cases of botched up tender processes,
litigations, re-negotiations, unilateral terminations and delays leading to unbelievable
cost overruns are commonplace. Cases of corruption charges and scams are also
not uncommon. Articles and research reports in journals write frequently about
errors in transaction structuring, competitive bid process management and
further in project monitoring and payments processing that have led to failures
of several big ticket projects. Large scale annuity projects taken up in a few
states have also been seen to expose them to fiscal risks which were not
identified earlier due to poor fiscal accounting and management practices.
With these contextual setting, and large private sector
enthusiasm in investment and development of infrastructure in Andhra Pradesh,
the leadership of the State constituted a committee of Secretaries headed by Special
Chief Secretary to Government of Andhra Pradesh, with Principal Secretary
Finance being Member-Convener and the Principal Secretaries of the departments
of Transport, Roads & Buildings; Irrigation; Infrastructure &
Investment; and Panchayati Raj & Rural Water Supply (PR & RWS) as
members. The committee appointed Administrative Staff College of India as consultant to
advise the Committee on the development of framework for PPP policy and guidelines
for the departments of the government to follow. I was the project leader of
the consulting team working on the assignment.
The state of Andhra Pradesh prior to bifurcation had a state
legislation called the Andhra Pradesh Infrastructure Development Enabling Act,
2001, which the new state has inherited. Upon review of this legislation, it
was observed that it was merely statement of intent and comprised largely of
definitions, which were meant to be refined by implementing rules and
regulations to be formulated and promulgated by executive orders, but were not
done. The first question therefore was whether to re-write a new law that the
State Legislative Assembly could enact or to focus on policies, rules, regulations
or guidelines that may not need legislative approval. The Committee had to go
back to the Chief Minister of the State to seek the response. In view of
political manoeuvring and time required for a new piece of legislation, the
Chief Minister advised a policy framework and detailed guideline that could be
developed within the constraints of existing law.
The work began with the assessment of need for a policy
framework. The following table
presents some of the key areas that have led to the perception of failure of
PPPs:
Department
of Economic Affairs, Ministry of Finance, Government of India developed a draft
PPP Policy in 2011, and also published draft PPP Rules in 2012. The Planning
Commission, Government of India has come out with the following documents:
–
Compendium
of PPP related guidelines
–
Model
RFQ document
–
Model
RFP document
–
Model
Concession Agreements (sector-wise)
–
Project
Appraisal Mechanism
–
Project
Monitoring Mechanism
Government of Andhra Pradesh had
come out with A P Infrastructure Development Enabling Act, 2001 (APIDEA). Several States also have formulated their PPP
Policies / PPP Acts / PPP Guidelines and have legislated statutory provisions
for PPP projects – Gujarat, Karnataka, Odisha, Punjab, Bihar, Goa, Assam and
Madhya Pradesh.
Among the States Andhra Pradesh was the first
to legislate an Act titled, “Andhra Pradesh Infrastructure Development Enabling
Act, 2001” for enabling infrastructure
development through PPPs. This was a reform towards the goal of “Swarna Andhra
Pradesh – a State that is economically and socially viable in all respects by
2020”. The Act was legislated to create an enabling investment environment for
infrastructure developers and operators.
It must be stated that while
APIDEA was a pioneering piece of legislation, the follow up rules and
regulations that the Act proposed have not been formulated yet. The Andhra Pradesh Infrastructure
Development Enabling Act, 2001 was passed for the purpose of providing
legislative and regulatory framework for supporting infrastructure development
through private sector participation. It was last amended in 2006. As per
section 79 of the Act, to carry out all or nay of the purposes of this Act, rules
are need to be made.
The Key Features of the PPP Framework
The framework consists of the following key features that
will be expanded in scope, detailed in their application and procedures in the
guidelines and manuals.
- PPP Definition & PPP Policy
- Structure /Models and their applicability
- Scope of PPP - with regard to sectors
- Project development cycle
- Institutional arrangements and approval process
- Procurement process (including role of Swiss challenge)
- Financing and state support - project development fund /VGF/Capacity building / PMU
- Project Appraisal Mechanism
- Risk management
- Project Monitoring Mechanism
- PPP Research & Development
The PPP Definition
and Application
The APIDE Act, 2001 defines PPP as “Public Private
Partnership means Investment by Private Sector Participant in an Infrastructure
Project of the Government Agency or the Local Authority in the State.”
National PPP Policy 2011 (Draft) defines PPP as “Public
Private Partnership means an arrangement between a government / statutory
entity / government owned entity on one side and a private sector entity on the
other, for the provision of public assets and/or public services,
through investments being made and/or management being undertaken by the
private sector entity, for a specified period of time, where there is well
defined allocation of risk between the private sector and the public entity
and the private entity receives performance linked payments that conform
(or are benchmarked) to specified and pre-determined performance standards,
measurable by the public entity or its representative.
Some of the key elements of the definition are:
•
Investments being made by and/or management
undertaken by the private sector entity: The arrangement could provide for
financial investment and/or non-financial investment by the private sector; the
intent of the arrangement is to harness the private sector efficiency in the
delivery of quality services to the users.
•
Operations or management for a specified
period: The arrangement cannot be in perpetuity. After a pre-determined
time period, the arrangement with the private sector entity comes to a closure.
•
Risk sharing with the private sector: Mere
outsourcing contracts are not PPPs.
•
Performance linked payments & Conformance
to performance standards: The central focus is on performance and not
merely provision of facility or service.
The focus is on a strong element of service delivery aspect and
compliance to pre-determined and measurable standards to be specified by the
Sponsoring Authority.
The definition of APIDEA needs to be enhanced through the
guidelines, and subsequently through amendment in the Act itself.
Without prejudice to definition, the PPP model of infrastructure development must
meet the following conditions:
– Public good
– Budgetary constraints
– Value for money
– Certainty of outcomes/efficiency
reasons
– Sustainable development reasons
Reasons for
selection of PPP must be documented in the business case development for the infrastructure
project.
Infrastructure
projects which are considered critical for public services and that do not have
high financial resource commitment from the Government may be taken up as
public project
Line
Departments may be encouraged to come up with such thresholds of financial
floors as may be appropriate for their sector which will set the minimum
project size for PPPs.
The PPP Models
Many forms of a partnership between public and private
sectors exist that are selected depending on the investment objectives,
political environment, nature of the assets and the level of private sector
participation.
The following represents the entire spectrum of business models for PPPs – for new services and facilities; and existing services and facilities.
The following represents the entire spectrum of business models for PPPs – for new services and facilities; and existing services and facilities.
- Design-Build
- Design-Build-Maintain
- Design-Build-Operate
- Design-Build-Operate-Maintain
- Build-Own-Operate-Maintain
- Build-Own-Operate
And
- Service contracts
- Management contracts
- Lease
- Concessions
- Divestitures
For each of
these, PPP Guidelines need to be established for applicability of the PPP
models based on:
– Project capital outlay
– Capacity in the Government Agency to
perform works and manage assets/services
– Risk profile of the project
– Financial feasibility and the
ability to generate revenues and returns for private participation
The Sector Scope for PPPs
The AIDEA specifies the sectors in which the PPP projects may be identified but the list is not a structured one. The Framework and Guidelines attempt to provide a sectoral structure for the projects. Some of the proposed sectors and areas of PPP projects within them, which have been used in PPP frameworks/legislations/policy documents in comparison to the list in APIDEA are as mentioned in the table below:
Government
of India List: These are eligible for
funding under VGF & IIPDF Schemes
|
|
As per AP
IDE Act, 2001 (Projects not covered in GOI list)
|
|
As per
Other State Governments (Projects not covered in GOI list & A P List)
|
Gujarat:
Karnataka:
|
As per
Other State Governments (Projects not covered in GOI list & A P List)
|
Punjab:
Assam:
Rajasthan:
Bihar, Goa, Madhya Pradesh,
Orissa: They have not covered any
additional sectors apart from the above.
|
For a given project under any of the potential areas
identified above, the feasibility of PPP needs to be assessed for viability,
desirability and achievability. Value for Money framework is recommended to
assess the trade-off between risk / ownership transfer and investments.
The Project Development Cycle for PPPs
The framework captures the essence of project development
cycle for PPP projects, from genesis to implementation and operations. The
phases of the PPP projects are mentioned below:
- Genesis
- Feasibility
- Preparation
- Procurement
- Implementation
- Operations
The guidelines will dovetail into the details that will be
required to be captured in each of these phases for project development,
including their contents.
For example, the business case for a project, as part of
genesis, may include the following:
•
nature, scale and significance of the need to
the public
•
value of need
•
type of specification - input or output
•
complexity of the need including innovation
level
•
attractiveness to the market
•
market capacity
•
timescale and phasing
•
level of understanding of the need by
stakeholders and potential suppliers.
One of the important considerations is the exit strategy that is required to be considered as part of project preparation and planning documentation. In the absence of exit strategy, the project in the event of an unforeseen circumstance may lead to no option for the Government but to hold on and rely on the private partner indefinitely. Exit strategies must be devised for major default by an organisation; this may include contractual breaches or changed circumstances - market, political, economic, funding resulting in major procurement need changes, financial resulting in non-payment of supplier’s invoices; major default by the supplier; this may include breaches, technical inability, capacity, and so on; or frustration of the contract.
The Institutional Arrangement
The project development cycle has different phases which
require contributions from various organs of the Government as the various
capabilities are located in these organs. The framework proposes the following
broad roles of the organs of the Government of AP in various stages of PPP
projects:
The guidelines that will draw from the framework will detail
the responsibilities and process flows in these organs of the Government of
Andhra Pradesh during a typical PPP project life cycle.
It is envisaged that the guidelines will be defined in
alignment with Draft PPP Rules, 2012 of Department of Economic Affairs,
Government of India and approval process for PPP will be in alignment with
State Government project approval process.
The Procurement Process
The procurement process is key in the success of PPP
projects as it determines the outcome of conceptualization, planning and all
the other preparatory work. The procurement process is also the one which has
been the most accused of leading to failures of PPP due several reasons ranging
from lack of preparations to amenability to corruption.
The framework proposes the following cornerstones for
procurement process:
•
Value for money – procuring goods and
services at optimal cost, having regard to issues such as policy, performance
standards, risk management and life cycle costs.
•
Open and fair competition – maximising
the opportunity for firms and individuals to compete for business.
•
Accountability – allocating
responsibility for compliance with policy and adoption of best practice.
•
Risk Management – adopting management
strategies to minimise risk in tendering and contract management. Generally,
risk should be managed by the party best able to manage the specific risk.
•
Probity and transparency – ensuring
fairness, impartiality, consistency and transparency in all stages of the
tendering phase.
•
Local Industry Participation – using
local suppliers whenever and wherever they offer best value for money.
The framework also proposes the following processes for competitive bidding:
•
Expression of Interest (EOI)
•
Request for Qualification (RFQ)
–
Technical
–
Financial
–
Managerial
•
Pre-bid meeting and enquiries
•
Request for Proposal (RFP)
–
Technical
–
Financial
•
Amendments
•
Letter of Award (LOA)
•
Contract
The guidelines will detail the applicability of each of
these processes.
The guidelines will draw from the Central Vigilance
Commission’s guidelines for procurements for pre-award and post-award stages.
The guidelines will also specifically cover the processes of
procurements for Swiss Challenge method and procurements where business model
chosen is that of annuity payments.
The framework proposes that the processes of procurement,
based on their suitability for e-procurement, may be made electronic and
wherever chosen, the system requirements for e-procurement must be specified
clearly and time must be provided to deal with any electronic faults to be made
good in collaborative manner.
The framework also advocates the tenet of transparency. All the documents pertaining to the
PPP projects must be made publicly available, post award wherever appropriate.
These may include:
– Project selection
– Design and Feasibility Studies
– Bidding documents
– Concession Agreements
– Any amendments to the Agreements
The Financing and State Support for PPP Projects
The PPP projects must specify State support required for the
project and quantify the support in project documents. These must be taken into
account to determine project feasibility and for granting approvals. These must
be studied on a case to case basis.
APIDEA provides for the following kind of support to PPP
projects by the State:
•
Administrative
Support
•
Asset
Based Support
•
Foregoing
Revenue Streams
•
Guarantees
•
Financial
Support
The financial support may be provided upon careful examination in cases where it is critical for the State to support the project financially.
Annuity based projects are not preferred. PPPs based on
annuity models are of the nature of borrowings and hence, must be tracked for
exposures as they limit the budgetary flexibility of the Government. The
maximum annuity commitment of any Line Department of Government should not
exceed 20% of the budgetary outlay for that Line Department at any point of
time.
The Project Appraisal Mechanism
The project must be critically appraised for its value for
money.
Project
feasibility assessment must include the following and these must be documented:
– Demand assessment,
– Technical feasibility,
– Financial / economic viability,
– Strategic fit, and
– Environmental impact
Value for Money should be considered as the criterion for justification of projects, apart from the other economic measures such as payback period, net present value, internal rate of return, or economic value added.
Risk Management
Risk identification, measurement and management plan must be
incorporated as part of the entire project development cycle and there must be
risk management plans in feasibility reports and other project implementation
documents.
The framework proposes the following considerations for the
risk management:
•
DPR
will identify project risks and their mitigation plan
•
PPP
structure selection should be based on optimal sharing of risks
•
Risk
register to be part of DPR to include:
– Identified risks – definitions,
drivers, and impacts
– Identified control principles
– Identified mitigation measures
– Process for dealing with
un-identifiable risks
•
The
Concession Agreement to reflect the risk management mechanism
Project Monitoring and Review Mechanism
One of the reasons often cited in the failure of PPP
projects is poor project monitoring and review. Project monitoring and review
helps discover slippages, and address those and helps in taking appropriate
corrective actions prior to the project running into delays and cost overruns.
The framework proposes the following two units for project
monitoring and review:
1. PPP Project Monitoring Unit – housed in Project
Implementing Departments for the purpose of project progress assessment and
facilitation; project implementation and development specific risks need to
monitored and mitigated
2. PPP Project Review Unit – housed in the PPP Cell
to administer commercial risk assessments and advise Line Department for
remedial measures