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.

1. PPP Definition & PPP Policy
2. Structure /Models and their applicability
3. Scope of PPP - with regard to sectors
4. Project development cycle
5. Institutional arrangements and approval process
6. Procurement process (including role of Swiss challenge)
7. Financing and state support - project development fund /VGF/Capacity building / PMU
8. Project Appraisal Mechanism
9. Risk management
10. Project Monitoring Mechanism
11. 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.

• 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	Roads and Bridges, railways, seaports, airports, inland waterways; Power; Urban transport, water supply, sewerage, solid waste management and other physical infrastructure in urban areas; Infrastructure projects in Special Economic Zones; International convention centers and other tourism infrastructure projects; Education, Health, Skill Development; Storage and Irrigation.
As per AP IDE Act, 2001 (Projects not covered in GOI list)	Roads include State Highways, Major District Roads, Other District Roads & Village Roads. Land Reclamation Canals, Dams Water treatment and distribution Drainage Public Markets Trade Fair, Convention, Exhibition and Cultural Centres Public Buildings Gas and Gas Works Sports and recreation infrastructure, public gardens and parks Real Estate Any other Projects or sectors as may be notified by the Government
As per Other State Governments (Projects not covered in GOI list & A P List)	Gujarat: Power Generation, Transmission and Distribution System Industrial Estates and Industrial Parks Information technology related projects Fisheries not beyond territorial waters Development of minor minerals Karnataka: Agri-infrastructure Renewable and non-conventional energy sources Hotels, resorts Urban transport systems: MRTS, LRTS, Monorail, BRTS Mechanised and multi-storey parking facilities Desalination
As per Other State Governments (Projects not covered in GOI list & A P List)	Punjab: Flood control infrastructure Medical and health care facilities and Medical Research and Education facilities Environment and pollution control infrastructure including effluent treatment plants Streets and lighting Civil Aviation including airports, flying clubs, aviation training institutes, airport city side development, airport aviation & non-aviation facilities. Assam: Disaster Management Rajasthan: Art  and Culture Welfare of Scheduled Castes, Scheduled Tribes and other Backward Classes Welfare of Women and Children Labour and Employment Social Security and Welfare Nutrition Soil and Water Conservation Animal Husbandry Forestry and Wild Life 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

The capacity building for these two units may take place through engagements with APIA and PPP Cell.