role of ppp in transportation sector

8/9/2019 Role of PPP in Transportation Sector

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Role of PPP in Transportation Sector

Submitted by,

Rahul Kumar Singh

Roll No.57 [AB]


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What is PPP (Public private

partnership)?

A public-private partnership (PPP) is a contractual agreement between the

public and the private sectors, whereby the private operator provides

services that have traditionally been executed or financed by a public

institution. The ultimate goal of PPPs is to obtain more value for money

than traditional public procurement options would deliver. Although the ex

ante assessment of expected value for money is often extremely complex, in

general a PPP can be said to generate value improvements whenever it

produces/achieves the following advantages:

reduced life-cycle costs;

more efficient allocation of risk;

faster implementation;

improved service quality; and

additional revenue.

When compared with in-house delivery by the public sector, the private

provision of a public

service is socially beneficial whenever the net gains from PPPs are greaterthan the corresponding net gains from traditional public provision. In a

nutshell, the following relationship must hold true:

PPP net allocative efficiency gains + PPP net productive efficiency

gains > gains with public provision

From a theoretical viewpoint, the main justification for the adoption of a PPP

is the possibility to exploit the management qualifications and the efficiency

of the private sector without giving up quality standards of outputs, thanks

to appropriate control mechanisms from the public party. This result isachieved by setting up complex contractual arrangements with private

sector operators where the public sector acts as principal and the private

operator as agent. In principal-agent relationships, the most complex

issues are the precise definition of the tasks assigned to the agent, the

measurement of the agents performance, and the extent to which the

principal can control and monitor the agents performance for the whole


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duration of the contractual relationship. In PPPs, the core principle lies in the

allocation of risk between the two parties: well designed PPPs redistribute

the risk to the party that is the superior insurer or the least cost avoider,

i.e. the party best suited to control and/or bear the risk.

Public-private partnerships are commonly employed for the provision of

various types of services and infrastructure such as transportation (rail,

metro, roads), energy, telecommunications, water treatment and supply,

waste management, healthcare, criminal

justice (courts and prisons), education facilities (schools, dormitories), and

environmental

management. PPPs generally take the form of a long-term (e.g. 30 years)

agreement between

public and private entities, whereby the private partner commits to perform

some or most of the phases of the service or asset provision.

PPP : How it evolved ?

Pressure to change the standard model of Public Procurement arose initially

from concerns about the level of public debt, which grew rapidly during

the macroeconomic dislocation of the 1970s and 1980s. Governments

sought to encourage private investment in infrastructure, initially on the

basis of accounting fallacies arising from the fact that public accounts did not

distinguish between recurrent and capital expenditure.

The idea that private provision of infrastructure represented a way of

providing infrastructure at no cost to the public has now been generally

abandoned, interest in alternatives to the standard model of public

procurement persisted. In particular, it has been argued that models

involving an enhanced role for the private sector, with a single private sector

organisation taking responsibility for most aspects of service provisions for a

given project, could yield an improved allocation of risk, while maintaining

public accountability for essential aspects of service provision.

Initially, most public-private partnerships were negotiated individually, as

one-off deals. In 1992, however, the Conservative government of John


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Major in the United Kingdom introduced the private finance initiative (PFI) ,

the first systematic programme aimed at encouraging public-private

partnerships. In the 1992 programme, the main focus was on reducing

the Public Sector Borrowing Requirement, although, as already noted, the

effect on the public accounts was largely illusory. The Labour government

of Tony Blair elected in 1997, persisted with the PFI sought to shift the

emphasis to the achievement of "value for money" mainly through an

appropriate allocation of risk.

A number of Australian state governments have adopted systematic

programmes based on the PFI.

Transportation Sector in India:

1- Highways

Size of the Initiatives

With an extensive road network of 3.3 million kilometers, India is the

second largest in the world. Indian roads carry about 61% of the freight

and 85% of the passenger traffic. All the highways and expressways

together constitute about 66,000 kilometers (only 2% of all roads),

whereas they carry 40% of the road traffic. To further the existing

infrastructure, Indian Government annually spends about Rs.18000

crores .

Target

Developing 1000 km of expressways

Developing 8,737 km of roads, including 3,846 km of national

highways, in the North East

Four-laning 20, 000 km of national highways

Four-laning 6,736 km on North-South and East-West corridors


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Six-laning 6,500 km of the Golden Quadrilateral and selected

national highways

Widening 20,000 km of national highways to two lanes

Policy

100% FDI under the automatic route is permitted for all road

development projects

100% income tax exemption for a period of 10 years

Grants / Viability gap Funding for marginal projects by NHAI.

Formulation of Model Concession Agreement

Opportunity

Road development is recognized as essential to sustain Indias economic

growth. Road development is a priority sector and the ongoing focus on

the highway infrastructure development is targeted to projected annual

growth of 12-15% for passenger traffic and 15-18% for cargo traffic. The

project has been attracting huge Direct Foreign Investment (FDI).

Outlook

Annual growth projected at 12-15% for passenger traffic, and 15-

18% for cargo traffic

Over $5060 billion investment is required over the next 5 years

to improve road infrastructure

Potential

Road development is recognised as essential to sustain Indias

economic growth

o The Government is planning to increase spends on roaddevelopment substantially with funding already in place

based on a cess on fuel

A large component of highways is to be developed through public-

private partnerships

o Several high traffic stretches already awarded to private


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companies on a BOT basis

o Two successful BOT models are already in place the

annuity model and the upfront/lumpsum payment model

Investment opportunities exist in a range of projects being

tendered by NHAI for implementing the NHDP contracts are for

construction or BOT basis depending on the section being

tendered.

A Rs.41,200 crores (US $ 5 billion) project plans to lay 6 lane roads

over 6,500 kms of National Highways on the Design Build Finance

and Operate (DBFO) basis in Golden Quadrilateral and other high

traffic stretches.

Government Initiative

For a country of India's size, an efficient road network is necessary both

for national integration as well as for overall socio-economic

development. The National Highways (NH), with a total length of 65,569

km, serve as the arterial network across the country. The four-laning the

5,900 km long Golden Quadrilateral (GQ) connecting Delhi, Mumbai,

Chennai and Kolkata is on the verge of completion. The ongoing four-

laning of the 7,300 km North-South East-West (NSEW) corridor is

scheduled to be completed by December 2009. The Committee onInfrastructure adopted an Action Plan for development of the National

Highways network. An ambitious National Highway Development

Programme (NHDP), involving a total investment of Rs.2,20,000 crore

(USD 45.276 billion) up to 2012, has been established. The main

elements of the programme are as follows:

Steps Taken

100 per cent FDI under the automatic route in all road

development projects.

100 per cent income tax exemption for a period of 10 years

Cabinet Committee on Economic Affairs (CCEA) has agreed upon

the National Highways Fee (Determination of Rates and Collection)

Rules, 2008 to establish uniformity in fee rate for public funded

and private investments projects.


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An increment in the overseas borrowing amount of infrastructure

sectors, to US$ 500 million from US$ 100 million.

Offering cheaper loans for highway projects that will speed up the

projects worth more than US$ 12. 70 billion under separate

phases of the NHDP.

The Ministry of Shipping and Road Transport is considering a

green corridor' highway project solely for farmers with no toll'

charges that would link rural roads with National Highways. This is

likely to be developed along with the six-lane project under the

NHDP.

2- Railways

Indian Railways is the backbone of the socio-economic growth of India.

World's fourth largest rail network and the second largest in Asia, Indian

Railways has recently attracted immense global attention due to its

successful turnaround to profitability. Indian Railways has been

consistently recording impressive growth rates for the last few years.

The cash surplus before dividend and net revenue are estimated at US$

6.17 billion and US$ 4.53 billion, for 2007-08 respectively. This has

placed Indian Railways in a much better position ahead of many of the

Fortune 500 companies.

India Railway has taken up one of the most ambitious annual plans for

2008-09 with huge investment of about USD 7.91 billion. The plan

includes a total budgetary support of USD 1.66 billion that includes USD

163.33 million from the Central Road Fund. This much ambitious plan is

eying a massive profits of more than USD 20.447 billion for the year

2008-09 .

Government Initiatives

The Indian Railways has initiated one of the most challenging growth

targets for the coming year. This has been claimed on the basis of the

most innovative plans and initiatives thought out by the ministry. Over

past few years Indian Railways has remarkably transformed itself to set


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a bench mark in the global level.

increase in income through advertising on all Rajdhanis, with the

cost of advertising being around US$ 1.26 million per train.

Introduction of new generation trains that would be fuel-efficient,recyclable and have low-emission to generate certified emission

reduction credits.

Construction of a dedicated freight corridor, with an investment of

US$ 81.92 million slated for 2008-09 and US$ 614.40 million for

2009-10.

Renewal of 44.5 million of PSC sleepers has been set for open line

works.

Technological up gradation and modernization for higher

operating efficiency

Development of PPP envisaged in new routes, railway stations,

logistics parks, cargo aggregation and warehouses etc.

Development of 100 budget hotels with private participation in the

vicinity of railway stations.

Installation of Wi-Fi for providing wireless access at 500 stations.

Introduction of marketing rights for advertising on railway tickets

and reservation charts.

Establishment of integrated logistic parks on unused lands.

Development of agri-retail hubs, cold storage houses, multi-

purpose warehouses on surplus land with the Railways.

Training of railway managers to meet future challenges, Indian

Railways is planning to set an international management institutein New Delhi.

Renewal over 2941 kilometres (kms), which will require 3,39,288

tonnes of rail steel, and sleeper renewal over 2382 kms.

Implementation of Dynamic Pricing Policy, Tariff Rationalization,


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Non-Peak Season Incremental Freight Discount Scheme, Empty

flow Direction Freight

Discount Scheme, Loyalty Discount Scheme and Long-term Freight

Discount Scheme among others to boost its capacity utilization

levels.

The rapid rise in international trade and domestic cargo has

placed a great strain on the Delhi-Mumbai and Delhi-Kolkata rail

track. Government has, therefore, decided to build dedicated

freight corridors in the Western and Eastern high-density routes.

The investment is expected to be about Rs. 22,000 crore (USD

4.525 billion). Requisite surveys and project reports are in

progress and work is expected to commence within a year.

3- Ports

Size of the Initiatives

With 12 major ports and 187 minor ports, 7,517 km long Indian coastline

plays a pivotal role in the maritime transport helping in the international

trade. Traffic handled at major ports during April 2008 to January 2009

is recorded to be 436686 units. The ports in India offer tremendousscope for international maritime transport both for passenger and cargo

handling.

Target

The Government of India targets to increasing the cargo handling

capacity of major ports by two folds to reach 1.5 billion metric tonnes

(MT) by the year 2012. This will be achieved at an investment of around

USD 25 billion through public-private partnerships. A Crisil research on

Indian ports and maritime transport estimates that ports will grow by

160 per cent over the 201112 period. Cargo handling at the major

ports is projected to grow at 7.7% per annum (CAGR) till 2011-12 and

the cargo traffic is estimated to reach 877 million tonnes by 2011-12,

whereas the containerized cargo is expected to grow at 15.5% (CAGR)

over a period of 7 years. The New Foreign Trade Policy envisages


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doubling of Indias share in global exports in next five years to

Rs.675000 crores (USD 150 billion). A large portion of the foreign trade

to be through the maritime route: 95% by volume and 70% by value

Approach

Indian Government plans to bring a new orientation to encourage the

private sector to come forward in developing port activities and

operations. The goal is planned to be achieved through numerous

initiatives and policies. Many international port operators are invited to

submit competitive bid for BOT terminals on a revenue share basis,

which has attracted foreign players, such as Dubai Ports International

(Cochin and Vishakhapatnam), Maersk (JNPT, Mumbai) and P & O Ports,

(JNPT, Mumbai and Chennai), and PSA Singapore (Tuticorin). TheNational Maritime Development Plan (NMDP) has been set up by the

Indian government to improve facilities at all the 12 major ports in India.

At an investment of about US$ 12.4 billion, by November 2009, many

projects are expected to be completed. This includes ambitious projects,

such as the first phase of the international container transshipment

terminal (ICTT) at Vallarpadam. Kochi port is being developed as a

transshipment hub for India.

Policy

The government has established firm policies, such as 100% FDI under

the automatic route is permitted for port development projects, 100%

income tax exemption for a period of 10 years. A comprehensive

National Maritime Policy is being formulated that will lay down the vision

and strategy for development of the port sector in India till the year

2025. The ceiling for tariffs charged by Major ports/port operators will be

regulated by Tariff Authority for Major Ports (TAMP).

Government Initiatives

The Government of India has undertaken the the expansion and

modernization of ports on a priority basis as part of its initiatives in the

up gradation of Indias infrastructure achieving the targeted growth

rate. The government has initiated numerous plans, which includes;


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Formulation of a National Maritime Development Policy to

facilitate private investment, improve service quality and promote

competitiveness, and US$ 11.33 billion has been allocated for the

same.

An investment of more than US$ 9.07 billion will be made by 2015

for 111 Shipping Sector Projects.

In 200809, the Ministry of Shipping is going to launch 10 major

expansion projects at an estimated investment of US$ 1.06 billion,

60% of which is allocated for the Chennai mega container

terminal.

Permission for 100 per cent foreign direct investment (FDI) for

port development projects under the automatic route.

100 per cent income tax exemption is provided for a period of 10

years for port developmental projects.

Opened up of all the areas of port operation for private sector

participation.

Increase in the rail connectivity of ports with the domestic market.

The experience of operating berths through PPPs at some of the

major ports in India has been quite successful. It has, therefore,

been decided to expand the programme and allocate new berths

to be constructed through PPPs. A model concession agreement is

being formulated for this purpose.

The Government has also decided to empower and enable the 12

major ports to attain world-class standards. To this end, each port

is preparing a perspective plan for 20 years and an action plan for

seven years.

A high level committee has finalized the plan for improving rail-

road connectivity of major ports. The plan is to be implemented

within a period of three years. Further, changes in customs

procedures are being carried out with a view to reducing the dwell

time and transaction costs. The government has also delegated

powers to the respective Port Trusts for facilitating speedier


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decision-making and implementation. At the same time, several

measures to simplify and streamline procedure related to security

and customs are been initiated.

The National Maritime Development Programme is expected to

bring a total investment of over Rs.50,000 crore in the portinfrastructure. Such improvement in the scale and quality of

Indian port infrastructure will significantly improve Indias

competitive advantage in an increasingly globalized world.

Policy

100% FDI under the automatic route is permitted for port

development projects

100% income tax exemption is available for a period of 10 years

Tariff Authority for Major Ports (TAMP) regulates the ceiling for

tariffs charged by Major ports/port operators (not applicable to

minor ports)

A comprehensive National Maritime Policy is being formulated to

lay down the vision and strategy for development of the sector till

2025.

Outlook

Cargo handling at the major ports is projected to grow at 7.7%

p.a. (CAGR) till 2011-12

o Traffic estimated to reach 877 million tonnes by 2011-12

o Containerised cargo is expected to grow at 15.5% (CAGR)

over the next 7 years

The New Foreign Trade Policy envisages doubling of Indias share

in global exports in next five years to $150 billion (Rs.675000crores)

o A large portion of the foreign trade to be through the

maritime route: 95% by volume and 70% by value

Potential


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Growth in merchandise exports projected at over 13% p.a.

underlines the need for large investments in port infrastructure

Investment need of $13.5 billion (Rs.60,750 crores) in the major

ports under National Maritime Development Program (NMDP) to

boost infrastructure at these ports in the next 7 years

o Under NMDP, 276 projects have been identified for the

development of Major ports

o PublicPrivate partnership is seen by the Government as the

key to improve Major and Minor ports

o * 64% of the proposed investment in major ports envisaged

from private players

The plan proposes an additional port handling capacity of 530MMTA in Major Ports through:

o Projects related to port development (construction of jetties,

berths etc.)

o Procurement, replacement and/or up-gradation of port

equipment

o Deepening of channels to improve draft

o Projects related to port connectivity

Investment need of $4.5 billion (Rs.20,250 crores) for improving

minor ports

4- Airports

Size

Of a total number of 454 airports and airstrips in India, 16 are

designated as international airports. The Airports Authority of India (AAI)owns and operates 97 airports. A recent report by Centre for Asia Pacific

Aviation (CAPA), Over the next 12 years, India's Civil Aviation Ministry

aims at 500 operational airports. The Government aims to attract

private investment in aviation infrastructure. India has been witnessing

a very strong phase of development in the past few months. Many

domestic as well as international players are showing interest in the


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growth and development of the aviation sector with immense focus on

the development of the airports. Indian private airlines Jet, Sahara,

Kingfisher, Deccan, Spicejet - account for around 60% of the domestic

passenger traffic. Some have now started international flights. For the

next years to come India is poised with strong focus on the development

of its airport to meet the international standards. The government is

planning modernization of the airports to establish a standard. The

newly developed airports will help releasing pressure on the existing

airport in the country.

Plans

A projected investment of USD 8.5 billion has been planned for the

development of Indian airports during the 11th plan. Mumbai and Delhi

airports have already been privatized. These two airport are beingupgraded at an estimated investment of US$ 4 billion for the period

2006-16. Development of airport infrastructure is a focus area for the

Government. There has been a significant uptrend in domestic and

international air travel.

AAI has planned a heavy investment of USD 3.07 billion over the next

five years. Out of it 43 per cent will be for the three metro airports in

Kolkata, Chennai and Trivandrum. The rest will be invested in upgrading

other non-metro airports and in the modernization of the existing

aeronautical facilities.

Passenger traffic is projected to grow at a CAGR of over 15% in

the next 5 years. It is estimated that the data will cross 100

million passengers per annum by 2010

Cargo traffic to grow at over 20% per annum. over the next five

years, crossing 3.3 million tonnes by 2010

Major investments planned in new airports and up gradation of

existing airports

100% FDI is permissible for existing airports; FIPB approvalrequired for FDI beyond 74%.

100% FDI under automatic route is permissible for greenfield

airports.

49% FDI is permissible in domestic airlines under the automatic

route, but not by foreign airline companies.

100% equity ownership by Non Resident Indians (NRIs) is


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permitted.

AAI Act amended to provide legal framework for airport

privatization.

100% tax exemption for airport projects for a period of 10 years.

Open Sky Policy of the Government and rapid air traffic growth

have resulted in the entry of several new privately owned airlines

and increased frequency/flights for international airlines.

Initiatives

The Committee on Infrastructure has initiated several policy measures

that would ensure time-bound creation of world-class airports in India. A

comprehensive civil aviation policy is on the anvil. An independent

Airports Economic Regulatory Authority Bill for economic regulation is

also under consideration.

The policy of open skies introduced some time ago has already

provided a powerful spurt in traffic growth that has exceeded 20%

per annum during the past two years.

Major airports such as Chennai and Kolkata are also proposed to

be taken up for modernization through the PPP route.

To ensure balanced airport development around the country, a

comprehensive plan for the development of other 35 non-metro

airports is also under preparation. These measures are expected

to bring a total investment of Rs. 40,000 crore (USD 8.312 billion)for modernization of the airport infrastructure.

A Model Concession Agreement is also being developed for

standardizing and simplifying the PPP transactions for airports, on

the analogy of the highways sector.

This would include upgrading of the ATC services at the airports.

Issues relating to customs, immigration and security are also

being resolved in a manner that enhances the efficiency of airport

usage.

A greenfield airport is already operational at Bangalore and theone at Hyderabad, built by private consortia at a total investment

of over USD 800 million, will be operational soon.

A second greenfield airport being planned at Navi Mumbai is

planned to be developed using public-private partnership (PPP)

mode at an estimated cost of USD 2.5 billion.

35 other city airports are proposed to be upgraded through PPP


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mode where an investment of USD 357 million is being considered

over the next three years.

Potential

High demand for investments in aviation infrastructure. Favorable demographics and rapid economic growth point to a

continued boom in domestic passenger traffic and international

outbound traffic.

Greenfield airport projects planned in resort destinations and

emerging metros such as Goa, Pune, Navi Mumbai, Greater Noida

and Kannur.

International inbound traffic will also grow rapidly with increasing

investment and trade activity and as Indias rich heritage and

natural beauty are marketed to international leisure travelers. Modernisation / upgradation of metro airports induction of

partners for Chennai, Kolkata expected subsequently

SME lending, a largely untapped market, presents a significant

opportunity. This accounts for 40% of the industrial output and

35% of direct exports.

Outlook

Passenger traffic is projected to grow at a CAGR of over 15% in

the next 5 yearso To cross 100 million passengers p.a. by 2010

Cargo traffic to grow at over 20% p.a. over the next five years

o To cross 3.3 million tonnes by 2010

Major investments planned in new airports and upgradation of

existing airports.

Share of Transport Sector in the National Economy

Year Share of Transport in GDP(%) Share of Transportin Total Expenditure (%)

19992000 5.7 3.220002001 5.8 4.520012002 5.8 4.8


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20022003 6.0 4.120032004 6.2 3.920042005 6.4 4.2

Source: Central Statistics Office. Government of India. 2006. National Account Statistics; and CMIE.2004.

Public Finance. Economic Intelligence Service.

So, Indias transport sector is large and diverse. Good physical connectivityin the urban and rural areas is essential for economic growth. Since the early1990s, India's growing economy has witnessed a rise in demand for transportinfrastructure and services.

However, the sector has not been able to keep pace with rising demand andis proving to be a drag on the economy. Major improvements in the sectorare required to support the country's continued economic growth and toreduce poverty.

Role of Private Players

1-Private Sector Participation in Highways

A KPMG report titled 'Opportunities in Infrastructure and Resources in India'

reveals that investments of the order of US$ 500 billion are expected to take

place in the coming years. This development would call for increased

resource requirement, consumer responsiveness, and concern for

managerial efficiency. The private sector will be largely involved both at

construction contracts and(BOT levels. Some major private participation in

this initiative includes.

Reliance Energy

Three contracts to four-lane 400 kilometers of highway and four-laning

of five national highway projects in Tamil Nadu that covers 400

kilometers and at an estimated cost of more than US$ 762.42 million.

L&T inter-state Road Corridor Limited

Four-laning of the 76 kilometers highway between Palanpur and

Swaroopgunj on the East-West Corridor.


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Jaiprakash Associates Ltd (JAL)

Implementing the 165 kilometers long Taj Expressway project, which

connects Greater Noida to Agra at a cost of US$ 554.93 million.

Lanco Infratech

four-laning of two highways in Karnataka at an estimated cost of US$247.41 million.

DS Construction

Development of the Gwalior-Jhansi section on NH-75 that includes four-

laning at a cost of US$ 159.9 million.

Maytas Infra Private Limited and Nagarjuna Construction

Company Ltd (Joint Venture)

Four-lane the highway from Tindivanam and Pondicherry, at an

estimated cost of US$ 70.09 million.

Era Constructions India Limited and Karam Chand Thapar &

Bros Limited

Construction of a section of the Delhi-Haryana Border to Rohtak and

four-laning of Gwalior by-pass at a cost of US$ 73.8 million.

Madhucon Projects

Executing ongoing BOT projects with four toll-based road projects.

2-Public Private Partnership in Railways

With increasing containerization of cargo, the demand for its movement by

rail has grown rapidly. So far, container movement by rail was the monopoly

of a public sector entity, CONCOR. The container movement has been thrown

open to competition and private sector entities have been made eligible for

running container trains. 14 applicants have submitted the application

seeking permission for container train operation, which have been approved.

3- Private Participation in Ports

A leading private shipyard, ABG Shipyard has decided to set up a

greenfield shipyard in south Gujarat with an investment of USD 255.58

million. The new shipyard will be set up over 300 acres.


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Gujarat-based Adani group is setting up a ship building and repair yard

at about USD 212.98 million.

Larsen and Toubro Ltd has chosen Kattupalli port, in Thiruvallur

district, near Chennai, as the location to build the over USD 425.97

million mega- shipbuilding yard.

Major shipping companies, such as Shipping Corporation of India (SCI),

Great Eastern (GE) and Essar have placed orders worth USD 3.3 billion

for 58 ships in Korea and China.

SCI has placed orders for 32 ships worth USD 1.87 billion and will be further

welcoming bids for its USD 3 billion order of 40 ships. GE has placed an order

worth US$ 780 million for 14 ships, while Essar has ordered 12 ships worth

US$ 630 million. The ships are to be delivered during 200912.

4- Public Private Partnership in Aviation

An example:

Greenfield airport - CIAL (Cochin International Airport Ltd.)

The process for development of CIAL as a private airport began in

1993, airport was made operational on 10th June 1999.

Investment Pattern Rs. In Crores

Govt. of Kerala 52.04 (35% )

Central PSU (AI, BPCL) 10.25 ( 7% )

Commercial Banks 8.75 ( 6% )

Investor Directors and Relatives 55.37 ( 37% )

Facility Providers (AI,BPCL,SBT) 1.50 ( 1% )

Public and NRIs 21.00 ( 14% )


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International PPP Models in

Transportation sector

The main models listed by the European Commission are:

Service contracts are agreements between a public agency and the

private sector

particularly suited for simple, short-term operational requirements. It is a

very limited form

of PPP, where the private party procures, operates and maintains an asset

for a short period

of time. Management and investment responsibilities remain with the public

sector, which

bears the financial risk and residual value risk, but benefits from the

technical expertise of

the private operator and obtains some cost savings, without transferring

control over the

quality of outputs. Service contracts are commonly used for toll collection

services, for the

provision and maintenance of vehicles or other technical sctivities.

Operation and management contracts are agreements in which theresponsibility for asset

operation and management is passed on to the private sector. The duration

is generally short

but can normally be extended. The private party is remunerated on a fixed

fee basis or on an

incentive basis with premiums linked to specific performance targets. The

public party still

bears the investment risk and the financial risk. This type of contract allows

significant

efficiency gains and investment in technological sophistication, as the

private operator has a

strong interest in improving service quality to reduce both overall costs and

the demand risk

during the operational stage. This type of agreement is particularly suited

during transition


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phases that ultimately lead to privatisation. It can also be used to stimulate

greater private

participation in service delivery by setting the conditions for a greater

involvement of the

private sector in a secondary stage.

In Leasing agreements, the private party purchases the income streams

generated by

publicly owned assets in exchange for a fixed lease payment and the

obligation to operate

and maintain the asset. Since the commercial risk and the demand risk are

transferred to the

private sector, the private agent has an incentive to achieve operational

efficiency. The

private party indeed profits only if it manages to reduce operating costswhile meeting the

designated service level. On the other hand, the public party bears the risks

related to

network expansion (construction), capital improvements and financing.

Leasing is

particularly suited for infrastructures that generate independent revenue

streams, as occurs in

the case of public transport. More complex leasing schemes such as the

BBO, LDO or WAA

(see table below) allocate greater construction risk to the private sector, thus

reducing the

burden for the public party.

Turnkey procurement or Build-Operate-Transfer (BOT) is an

integrated type of

partnership in which the private party bears the responsibility of designing,

constructing and

operating the asset. The combination of these different responsibilities under

a single entityfosters greater efficiency gains and removes important maintenance issues

from the public

budget. This integrated scheme obliges the private operator to take into

account the cost of

operating the asset during the design and operation phase and therefore

stimulates a better


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planning and management of the service itself. Here again, the public party

bears the

financial risk; however, unlike what occurs in other types of PPP, the public

party

relinquishes its control on important phases of the life-cycle of the asset.

Since the

ownership of the asset generally remains with the public party, the

specification of quality

outputs is essential for achieving the desired results.

The BOT scheme is considered to be particularly suited for water and waste

projects, and

can be declined in a number of variants (BOOT, BROT, BLOT, and BTO)

according to the

specific project needs.

In Design-Build Finance-Operate (DBFO) schemes, the private partner

designs the service

or the asset according to the requirements set by the public entity, ensures

and finances the

construction/implementation of the asset/service following the design phase,

and finally

operates the facility. At the end of the PPP contract, the service or asset can

be granted back

to the public sector under the terms of the original PPP agreement; in

alternative, the

agreement is renegotiated. DBFO is the most complex type of PPP, since it

guarantees all

the implementation and operational efficiencies of the previous models, but

also provides

for new sources of capital. The most common model is the DBFO

concession where the

private investor designs, finances, constructs and operates a revenue-

generating

Infrastructure in exchange for the right to collect the revenues for a specifiedperiod of time,

generally for 25-30 years. Ownership of the asset remains with the public

sector. This model

is particularly suited for roads, water and waste projects and generally for

services where


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user charges can be applied. To the contrary, in a variant termed private

divestiture, the

asset is partially or entirely sold to the private sector, while the government

only maintains a

regulatory role aimed at protecting consumers from monopolistic prices and

output

restrictions. The divestiture can also be partial, if the government maintains

the ownership of

some portion of the asset to ensure a certain standard of service while

transferring a

substantial share of overall costs to the private partner. The DBFO model can

be declined

and adapted in multiple ways to respond to the peculiarities of the service

provided.

Issues when deciding whether or nota P3 is right

Need, level and form of government support. The balancebetween the economic feasibility and the financial bankability of a

project would require some kind of support from the public entity. To

the extent that it is possible to specify the minimum parameters which

must be complied by the private sector (in terms of possible social

obligations and quality of service), the contribution of the public entity

must be structured in a way of reducing interference with the

construction, maintenance and management of the transport

infrastructure by the private entrepreneur. As a public-private

partnership, however, the private-public scheme should permit the

sharing of both the risks and the up-side potential of the investment

(i.e., the possible extra surplus revenues). These characteristics would

favor an initial contribution from the government in the form of a grant

(with specified shares in the possible surpluses) or in the form of equity

(with no management power). The justification for this government

contribution must be proved through the evaluation of the economic


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worth of the project (and hence the added benefits to the society of

the project).

Ultimate fiscal impact of project investment. In addition, the

structuring of the project should include an analysis of the net fiscal

impact of the project, taking into consideration all the additional tax

revenues which would accrue to the government as a consequence of

carrying out the project by the private sponsor. In this manner, a

project which may require the government participation may prove, in

addition, an additional source of tax revenue from the additional

construction or corporate profits, or from the added contribution of the

users (for instance, in terms of added taxes from gasoline consumption

or other fees) who would not travel if the infrastructure is not

constructed (latent demand).

Distribution of benefits. Furthermore, taking into consideration all of

the costs, benefits and cash flows of the project, the benefits that

accrue to each one of the stakeholders (government, users, sponsors)

can be calculated, for the purpose of estimating the distribution of the

net benefits/costs. For this exercise, it may also be possible to discern

among groups of users (like, for a road, among trucks, buses, or

private automobiles) and assess the support the project would be

expected to receive from those various groups. If a group is

particularly disadvantaged from the construction of the transport

infrastructure, resistance from that group will likely take place.

Risks of economic and financial returnss. The calculation of the

economic and financial feasibility of the project to the extent possible

should be undertaken using risk analysis techniques in order to

ascertain the likelihood that the project may not end up being feasible

economically or financially. (See Figure 2 for an schematic

representation of this type of analysis.) This analysis requires the

estimation of the probabilistic variation of the main input values, which

may be the subject of disagreement, but a reasonable approximationcan be made from past experiences and with the consensus of a

representative sample of stakeholders.

Performance indicators. Finally, the structuring of the project should

include the definition of a set of performance indicators that can allow

both the public and private sectors to monitor the achievement of a


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mutually agreed set of objectives. This exercise should be undertaken

following what is called a logical framework exercise, specifying the

assumptions that underlie the definition of the dated indicators and the

means of verifications. By monitoring the achievement of the

objectives, the private and public sectors would establish a continuous

dialogue and allow for a justified adjustment to the initial investment

and operational performance.

The outcome of those considerations should bring additional insights

on how to improve the interactions among the stakeholders in order to

reduce the risks as perceived by each stakeholder (and for the project as

a whole), and subsequently spur the development of transport

infrastructure at the quality and quantity required by the users demand.

Summary

Creating world class transportation system is of earnest importance to

progress economically. Though government spending on infrastructure is

humongous so far as the budget allocated is concerned. But it is not possible

to maintain a pace that is needed without the help of private enterprise. Also

it provides financial flexibility to the government. PPP in creatingtransportation system will soon be order of the day.

Recognising that strengthening the capacities of different levels of

government to conceptualise, structure and manage PPPs will lead to more

and better PPPs, Department of Economic Affairs is facilitating

mainstreaming Public Private Partnerships through Technical Assistance from

Asian Development Bank. The primary objective is effective

institutionalization of the PPP cells to deliver their mandate through provision

of 'in-house' consultancy services to each of the selected entities at the

Center and State level.


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role of ppp in transportation sector

Documents