The New PPP Policy: The devil lies in the detail

The government recently decided the PPP policy needs clarity and drafted a new one. The new document, however, dwells too much in generalisations. A reward/disincentivisation should be a necessary part of awards, say Amit Kapur and Vishnu Sudarsan.

Over the last two decades, numerous initia­tives by the Centre and the state-level planners have emerged to cultivate an eco-system for PPP for delivery of infrastructure goods and services. Sectoral reforms and legislative changes in infrastructure sectors like electricity (between 1995 and 2003), airports (in 1994), ports (in 1996) and highways (in 1995) initially incubated the PPP market in India. As of 31 January 2011, the total project cost of PPP projects completed/under implementation across different sectors is estim­ated to be about Rs 383,332.06 crore (see table).

The new PPP policy

The Draft PPP Policy seeks to harness private sector efficiencies in asset-creation, maintenance and service delivery while promoting technological improvements and innovation to give affordable and improved services to users. It starts by defining infrastructure project as a project for the provision of public goods and services where there exists a well-defined allocation of risk bet­ween the parties and receipt of performance-linked ince­ntives by the private entity benchmarked against spec­ified measurable performance standards. The Policy seeks to:

• Ensure efficiency, competition, and transparency in provision of public goods and services.
• Focus on welfare objectives of public service and the linked value for money (VFM) proposition, whilst ensuring viability and bankability for private enter­prise commensurate to risk involved.

Where we need to get

The PPP agenda needs a serious relook with a fresh impetus since India is yet to mature into a viable PPP market place addressing, amongst others needs for (1) clarity and certainty in FDI and sectoral policies and sector strategies; (2) resolving regulatory implementation hurdles like land acquisition, environment; (3) sophisti­cation in structuring roles, responsibilities and risks in PPP projects moving away from one-shoe-fits-all appr­oach; (4) focus on the public element of the goods on services without ignoring the viability and sustainability; (5) contract monitoring with risk/reward linked to suit­able VFM outcomes; and (6) mech­anism for addressing unforeseen developments (such as coal supply shortages, global financial crisis, sharp rise in input cost due to change in law outside India) to secure the public goods and services including renegotiations; and (7) effective dispute resolution mechanism.

Stage-wise decision guidance

The policy provides for development, planning and execution of a PPP in four stages: identification, develo­pment, procurement, contract management and monitoring.

At the threshold, it is necessary to first decide as to whether a project must be developed as a PPP project at all. Next, the project must be evaluated from an eco­nomic perspective regarding whether the project is req­uired as a public good/service. Once that threshold is crossed, then it is necessary to freeze the procurement process comprising the bid and selection process inclu­ding the role-responsibility-risk allocation matrix for the lifecycle of the contract including issues like default, termination, potential renegotiation et al. This frame­work will then be put through affordability and bankability evaluation (including the debt service capa­bilities) with respect to both the implementing agency and the likely users to establish the reasonableness of assumptions underlying the financial analysis of the pro­posed project structure. The said financial/economic eva­luations are underpinned by the valuation metho­dology, calculating net present value.

Value for money concept: Such diligence from a VFM standpoint is likely to enhance investor confidence and create a stream of bankable projects. In the recent past, achieving financial closure for projects has been challenging, for a variety of reasons, such as the global credit crisis, sub-optimal risk allocation and the absence of a VFM analysis. With the emerging Euro-credit crisis looming large over the market, VFM, affordability and bankability analyses with a robust risk allocation will go a long way in providing access to finance on competitive terms, thus inducing investor confidence. Both VFM out­comes and affordability analyses would be relatively new concepts when introduced in India and a fund­amental element of its success would be the capacity and pre­paredness of the procuring/concession-granting agencies to undertake these in a robust business-like manner.

Design principles

Some of the principles of decision and design in this behalf are as follows:

• Existing laws may be evaluated to ensure that it facilitates private participation and brings suitable amendments where necessary.
• The scope of the project must be clearly articulated and reflected in the project contract, which should be vetted with respect to the legal, regulatory and policy regime.
• Encourage and facilitate PPPs with optimal allocation of risk such that it seeks to maximise user benefit and stakeholder returns.
• The private sector project proponent must be sele­cted through a fair, transparent, competitive selection process.  
• To ensure objectivity and efficacy, the concession shall be structured such that there are:

1. Pre-determined measurable outcomes and effici­ent governance during the project-cycle.  
2. Performance-linked payments of user charges to the concessionaire with inbuilt incentive and penalty mechanism to reward efficiency and disi­ncentivise inefficiency.
3. Efficiency in deploying private sector investment.
4. Clearly spelt out budgetary outlays for conti­ngent government liabilities for the project.  

• For speedy and efficient implementation of a project:

1. The procuring/implementing agency should end­eavour to obtain all necessary approvals for a pro­ject from agencies concerned.
2. Government should establish a Management Information System (MIS) for PPP projects.
3. The evaluation will be tabulated and summarised for use in improving the quality of service del­ivery levels and sustainability of PPP projects in the future.

• Post-award negotiations should be permissible only in rare uncontrollable circumstances that have cha­nged the original risk-allocation, after approval from the competent authorities and/or sectoral reg­ulators for the same. Such re-negotiations shall be subject to audit.

A defined set of PPP guidelines are proposed to be notified in respect of matters of identification and pro­curement processes, critical clauses of a PPP contract (such as dispute resolution, force majeure, termination), monitoring of projects and management of contracts.  
Efficacy: The PPP policy is directionally correct in addressing issues required to attain PPP objectives for efficacious infrastructure development in the years ahead. If implemented effectively, this would in fact propel PPP projects in social sectors like rural infra­structure, municipal infrastructure and primary health care in a viable manner. Ministry of Rural Development is already at the final stage of awarding 7-8 such pilot rural cluster projects to leading Indian corporates under the PURA scheme. Similarly, municipal projects are beginning to get implemented through sub-sovereign financing from multi-laterals to municipal bodies thro­ugh the aegis of Ministry of Finance. Once the first few get implemented, they are likely to whet the appetite of Indian corporate sector and foreign investors.

But the devil lies in the detail. Its success largely dep­ends on whether a framework is evolved and imp­lemented that actualises the objectives of (1) efficiency, compe­tition, and transparency in provision of public goods and services; and (2) balance between the welfare objectives and economics while keeping focus on the public goods/service.

Some important concerns to watch out for while det­ailing the PPP blueprint are:

• Each infrastructure sector has its own peculiar socio-economic-political ground realities and goals. Within a sector project-specific scale, scope and via­bility variations exist. It is crucial that the framework provides for flexibility without compromising on probity. Prescribing inflexible industry specific mod­els/contracts is tempting but bound to frustrate the end objectives.  
• A robust consultation process is necessary to engage various stakeholders in evolving a robust PPP fra­mework which should be characterised by:  

1. Robust industry-specific norms and risk-matrices guiding project-specific structuring.  
2. Identify broad guidelines to address market and sectoral realities.
3. Develop robust valuation norms underlying the bidding process and the contract design which are realistic and aligned to attain the end obje­ctives of a sector. For example, revaluation of ass­ets when the goal is affordable universal ser­vice, will artificially inflate the user charges by front loading.  
4. Each project must be based on a transparent stage-wise role-responsibility-risk matrix to addr­ess issues like VFM, bankability, affordability and efficiency.
5. With the primary objective of ensuring the pub­lic good/service, evolve a fair, transparent and equitable decision-framework and mechanism to determine (1) which projects should be renego­tiated, (2) on what basis and within what para­meters should they be renegotiated, (3) how will the project's defined VFM, bankability, afford­ability and efficiency base be preserved/restored, and (4) align the mechanism to the uncontroll­able dynamic Indian and global mar­ket scenarios while safeguarding against under­served harm or windfall.
6. Project monitoring agencies must go beyond inf­ormation collation to analyse and publish the data. This could be helpful in removing inform­ation asymmetry, facilitating benchmarking of performance, facilitate effective implementation of the project with mid-course periodic analysis of the projects.
7. Evaluate the various alternate Indian and global mechanism available to evolve a suitable dispute resolution mechanism which is based on efficacy, expertise, objectivity and business-like decisions with safeguards against capture and bias.

The authors are partners with JSA. Views are personal.