Understanding Public Private Partnerships

A lot has been said and debated about Public Private Partnerships, but for many individuals this just serves as a term used to describe an obscure idea of development occurring in our nation. It is important for the citizens of India to be involved in decisions being made within our democracy and for that to occur they must be educated in the intricacies of something as impactful as the creation of a partnership between the public and private sector.

In the context of infrastructure development what is PPP?

As is the case with most countries, governments face the challenging task of providing new infrastructure services and assets such as electricity supply or a new highway. Even with 2013-2014 witnessing a gross tax collection of ₹13.64 trillion (US$210 billion) India struggles to create adequate systems. Funds raised through taxes and regulatory fees are massive yet limited, due to multiple expenses such as scientific research, agricultural support and military defense, to name a few.

In such a scenario, partnering with the private sector provides an attractive solution towards creating a new supply source for infrastructural improvements.

How does PPP work?

A legal contract binds partners in a PPP to share the responsibility for the implementation, operation, management and monitoring of the infrastructure project. Emphasis is laid on each partner's skill and their ability to fulfil public needs through the efficient allocation of resources and risks in return of rewards.

What advantages PPPs may provide?

To better understand the advantages of a PPP we spoke to Mr. Arun Lakhani, MD of Vishvaraj Infrastructures Limited. "Governments worldwide are increasingly turning to the private sector to help provide services in communication, energy and power, water and transport sectors. Streamlined and efficient methods usually adopted by corporates are the reason for this"

In addition, there are several other reasons which encourage governments to collaborate with private players.

• The access to additional resources that can be utilised to match the exponentially increasing needs of the public

• Availability of extra investments through local and international players

• State-of-the-art technology employed for the operation and management of these services

Reduced cost in the form of better executed planning and development of each project is a large benefit that is often considered. A profitability driven approach ensures better screening of options, structuring of projects and choice of technology.

"The Indian Government can benefit from an increase in services, without spending immediate cash, avoiding major risks by transferring them to the private sector and ensuring timely delivery of projects", added Mr. Lakhani.

PPP are often misunderstood to be simple construction projects by the masses. However, in reality, there are differences between a traditional construction project and a PPP in terms of development, implementation and management. The objective of the PPP is to deliver a specific service and not simply build an asset. Most importantly PPP contracts are more complex and have a much longer tenure than a construction contract. An understanding of this is necessary not just for the partners but also for the general public interested in the development of the country.

Countries around the world have experimented with different forms of PPP. In India, there are 6 major models, Service Contract, Management Contract, Lease Contract, Concessions, Build-Operate-Transfer and Joint Ventures. The government usually analyses the need for a PPP and then decides upon the model through which to achieve it's goal. A great example of a PPP model in our country is the Nagpur 24x7 water project.

Nagpur, due to rapid urbanisation across the last two decades, has faced severe water supply challenges. The availability of water has been highly inconsistent ranging from a few hours a day to a few minutes . Mismanagement of water distribution lead to losses of upto 60%. Quality of water was frequently found to be below drinking standards.

In 2012, in order to overcome this gigantic challenge the Nagpur Municipal Corporation chose to enter in to a Public Private Partnership, a landmark move in the history of the Government working hand-in-hand with the private sector. Nagpur essentially opened it's doors and mind to an opportunity that would help build a streamlined and efficient model which could be replicated in the future.

Nagpur became the first city in India to build a 24/7, fully pressurised drinking water supply system. A joint venture company aptly named Orange City Water was created and entered a concussion contract under the Jawaharlal Nehru National Urban Renewal Mission (JnNURM)

There several challenges faced when forming a PPP and these are often cited as reasons to avoid a collaborative approach. However, naysayers and critics fail to see the potential that PPPs provide for the citizens and the government. It is of course important to understand the challenges and in most scenarios these are caused to due to bad governance, weak policies and a lack of transparency. "As a country we should overcome the challenges, figure out ways to build a better PPP model based on strong protocols and the use of technology and rise over the risks that this model presents, because only in doing so is India going to match the benchmarks of economic growth set by other nations", advises Mr. Arun Lakhani.

There is much to be learnt and researched about PPP models, but as citizens the right way ahead would be to study the projects proposed under PPPs and vocalise our concern or support.

Arun Lakani on Developing a Robust Framework to Make PPP Work

Private Public Partnerships are a great way to boost the development of a nation. A partnership beneficial to all the parties involved including the public. A lot of things go into making a successful venture. One of these is policies associated with such partnerships.

Recently we spoke to Mr. Arun Lakhani, MD Vishwaraj Infrastructure Ltd. and noted PPP expert on his experience in setting up successful PPP ventures such as the Nagpur 24x7 water project.

Here are some of the insight we gleaned on setting up the right kind of policy framework, to govern projects of the scope and complexity that generally entails a Public-Private Partnership.

Build a framework to identify potential partnership areas
The most important thing even before considering PPP is to identify which are the areas that require such ventures. This is important because failing to do so means great loss of resources, manpower, time and money.

One of the ways to do so is to know analyse which areas are facing demand and supply issues. An in-depth study will give a clear idea where such partnerships can contribute positively.

Stand together & support each other
Any partnership is tricky at best, add to that politics, media, extremists and there is a storm brewing. In such a scenario it is important that both parties support each other and policies made are effective, accountable and fair to all the stakeholders involved.

Since the operational and execution risks are almost always undertaken by private player, government must ensure it offers its complete support to them. By taking care of approvals, licences and paper work, the government body can take the burden off the shoulder of its partner.

Project Ownership is a joint responsibility
PPP is a joint venture and hence there are bound to be issues related to management, responsibility and accountability and when working with the government, it seems to be the norm to have bureaucratic hold ups, red tapism and lackadaisical attitudes.

However, Mr. Arun Lakhani here chose to disagree. He talks about the classic example of Yeola town development as a part of the BOT road contract and how it helped in winning over the people of the town bringing down natural resistance to toll road projects, as a testament to what can be achieved when responsibility and accountability are jointly shared for the better of society.

Stakeholder Protection:
It is a fact that even though PPPs are a joint venture, there is no denying that private partners are the more vulnerable party. With such a cloud of uncertainty hanging over their head, there needs to be a provision to protect their interests. Government takes the least risk in PPP and hence has very little to lose. In such a scenario the rights of private partners must be protected as they are operating at maximum risk. For example an untimely termination of PPP can result in a serious loss as they invest huge amount of money and resources.

Here though Mr Lakhani warns that the contractual conditions must be very clearly spelled out and there should not be any scope for manoeuvring by private operators.

To conclude we would like to say PPPsare very rarely short term associations. They are like a double edged sword; especially for private partners. Hence it is important that both, the government and private sector, prove themselves to be an able partner for the other. And this can be done only when there is clarity and transparency between the two.

Arun Lakhani on Minimizing Risks in PPP

Big projects follow big challenges and big challenges follow big risks. Though, effective planning and proper implementation can reduce risk and can lead to the maximum ROI. According to Economist Kent Buse, the biggest risk in PPP is misalignment of partnership missions and objectives with government policies.

Mr Arun Lakhani, MD Vishwaraj Infrastructure Limited, one of the pioneers in India in the field of Public-Private-Partnerships, says most of the partners want quick results which just isn't fair in a PP model. There are n numbers of factors that need to be considered while working on such projects like environmental sustainability, execution & implementation and maintaining timelines; where government agendas usually focus on improving systemic issues and delivery mechanisms.

We discussed a few insights with Mr. Lakhani, gained from extensive work in PPP projects such as Nagpur 24x7 water supply and Warora- Chandrapur - Ballarpur Road Project. Let's take a look at his philosophy for sustaining and implementing PPP projects.

1. Pre-execution Stage -
   
   
   • Set clear and specific goals - One has to be very specific about the project they are going to execute. First of all, you have to identify whether PPP is appropriate for this project or not. There has to be mature understanding between partner's expectations and government priorities. As two separate entities are collaborating for a common goal it is important that trust is built right at the start and there is a mutual understanding of expectations, and transparent methods of accountability.
   
   
   • Identify right partners - There needs to be a process to set up the right alliance. Stakeholders need to ask questions such as does the partner have the capability to execute the plan? What values your partner can add? A due diligence process and selection criteria is imperative for the future success of the project.
   
   
• Good governance - Create a board of management with equal participation of both the parties. Also, invite some experts as mentors that aren't directly involved with any party in the project. Clarify the roles and responsibilities of everyone for efficient execution. It will help in reducing duplication of work and identification of benefits, risks, costs and duties of each partner. Healthy communication always adds more points.


2. Execution Stage -
   
   
   • Standard Operating Procedures - Developing and executing standard operating procedures and processes for delivery is imperative for the smooth execution of any project.
     
     
     Each department needs to be aware of working methodology, timelines and deliverables. Working in an efficient manner with open and reliable communication channel goes a long way in hassle free execution.. Proper hierarchy is important in all types of organization irrespective of the project size and domain. How could PPP project be an exception for that? Above all, do not forget to ensure the smooth access to information, whenever needed.
   
   
   • Monitoring & Execution - Performance evaluation must be a continuous activity here. Internal and external performance analysis would be highly profitable and will lead to great results. Decision making is always a crucial part and maintaining balance of all stakeholders in this process is important. Nothing is like availability of experts on time. The secret of success lies within it.


3. Sustainability and Exit -
   
   
   • Set clear and specific goals - One must ensure the support from government agencies as well as corporates. Incorporate all levels of stakeholders in program implementation and delivery. Improve the easy access of delivery channels for best outputs.
   
   
   • Exit - Keeping the terms crystal clear from the day one is very important for maintaining healthy relationships. There must be simple and clear exit strategy for all the parties.

"Public private partnership projects aremuch more important than any normal profit making organization, though their work is going to affect public life and ultimately on the country's growth. It must handle with extra care." Arun Lakhani

Innovations in Pubic Private Partnerships

The BJP led NDA government has made it clear that Public Private Partnership (PPP) is the preferred mode for driving major infrastructure development projects. In light of this major push towards the PPP model we spoke to Mr. Arun Lakhani, Chairman & Managing Director Vishvaraj Infrastructure Ltd, one of the leading authorities on the PPP model.

Vishwaraj Infrastructure's various PPP projects such as the Nagpur 24X7 water supply project and Warora- Chandrapur - Ballarpur Road Project have given them the opportunity to bring about innovations in the PPP model and set up best practices.

We wanted to understand different working models for Public Private Partnerships and here are some interesting insights gleaned from our talks with Mr. Lakhani.

1. Service Contract:
   Under this structure, Government (which is a public entity) will hire a private entity. The aim behind this hiring is to utilise the potential of the private entity to carry out certain tasks or services for a set amount of time.In this type of PPP model, the Government will be the main provider of the investment and the infrastructure associated with the project. The private entity with which the Government has partnered with will be under a contractual obligation to complete the project within a set time for a set cost.


However, VIL under the leadership of Mr. Lakhani chose to do it differently for its 24X7 water projects. Under these the initial investment is brought in by the operator, the annuity is paid by the client over the contract period and the revenue generated by selling treated water is shared by both.


2. Lease Contract:
   Under a lease contract the role of the government is to lease out a service to a contractor/private entity, with the role of the Government body being limited to awarding of the service to the private body and maintaining a check on quality and delivery.


The private partner will be completely responsible for management of finance, operations, delivery and quality provided under the project. Financial risk associated with operation, maintenance is complete responsibility of the private partner.


The duration of this type of contract is usually longer than that of Service contract. A Lease contract usually has duration of 10 years with an option to extend to 20 years.


3. Joint Venture:
   Under this partnership model, the infrastructure is co-owned and is operated by both the partners (private and public). Partners either create a completely new company or become joint owners of an existing organization.


A key factor in making this type of PPP structure successful is that the corporate governance must be quite good. This means that since Government is a regulator and also part owner, the running of the project must be kept independent from its interference.


Another huge advantage is that since Government too has its own interests in the project (profits, sustainability) it will help out with official hurdles faced during the project.


4. Management Contract:
   Unlike service contract, this contract involves the Government body giving out either all or some services to a private sector entity. These include supply and service contract, maintenance management and operational management.


Even then the service provision is still in public domain. Private partner is given out responsibilities related to daily management of the project. Quite the private partner puts in the working capital but does not finance the project.


Government pays the private partner pre-decided payment for its labour and other costs related to the project.


5. Concessions:
   Under this type of partnership, the private partner is completely responsible for delivering all the services assigned to it. These services include operation, maintenance, collection, management, and construction and rehabilitation of the system.


Unlike the management contract, the private partner is now in-charge and responsible for all the capital investment related to the project.


There is also the option for the Government to make a capital investment in the project to enhance commercial viability of the project.


The role of Government in this is all about regulating the price and quality of service. This involves setting standards for performance and make sure that private partner meets these standards.This type of contract is generally used in case where there is a need for creating new facilities or rehabilitation facilities.


It is quite obvious that PPP is a format for the Government to improve infrastructure with the help of private partners. The final goal is to deliver quality projects by bringing in accountability and manageability from the private sector.


"Whatever the chosen model for PPP the final decision should be based on a creating holistic project structures, designed keeping the socio - economic scenarios of the project areas in focus, thereby increasing the sustainability factor of the projects." Arun Lakhani.