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10-PPT-Jeetendra-Jeetendra-Singh-Singh.pptx
- 1. Public Private Partnerships JeetendraSingh Director (PPP & Infrastructure) Planning Commission
- 2. What we aregoing to cover in this session? • Issues with infrastructure, a natural monopoly; how governments across the world have handled these issues in the past; regulatory regimes • What is PPP ? Why PPP ? How PPP? • Lifecycle of a PPP project • Transaction process in PPP project Award - RFQ, RFP & Concession Award • Bankability of infrastructure concessions; credit enhancement measures • Design of Concession Agreement – international best practices • International experiences in PPP • Cross sectoral examples - power generation & transmission, water & sanitation, highway, rail and airport sectors
- 3. Monopolies & Infrastructure •Monopolies& market power •Governments concerned about Monopolies •Infrastructure – A Natural Monopoly • Economies of scale • Durable & immobile investments • High entry barriers • No close substitutes •Public vs Private provision of infrastructure - changing trends in 19th , 20th & 21st century across countries and sectors • Establishing a credible commitment is an issue
- 4. Public Sector/ Government Private contracts Concession contracts Discretionary Regulation Negotiated Competitive Institutional mechanisms/instruments tohandle monopolies Role of markets in determining prices and quantities Adapted from Regulating Infrastructure, Jose A. Gomez – Ibanez, Harvard Press Price Cap Cost of Service
- 5. Institutional mechanisms/instruments tohandle monopolies contd… Option Benefits Issues Private Contract Commitment Risk of incompleteness Competition: better services & lower costs High transaction costs Enforcement: fair legal system Concession Contract Commitment Risk of incompleteness Competition: better services & lower costs Trust Enforcement: fair legal system Discretionary Regulation Flexible for future unforeseen changes Trust Risk of capture; special interests
- 6. Infrastructure monopolies contd… •Varied solutions over time • Market orientation preferable • Issue of commitment vs flexibility • Discretionary regulation vs regulation by contract
- 7. Solutions to InfrastructureMonopol Sources of instability • Discretionary regulation - Capture • Concession contracts – Incompleteness • Options in case of incomplete contracts • Renegotiate • Live in unhappy situation – bankruptcy/poor service quality
- 8. What is PPP? •Contractual arrangement between government and private sector company • for provision of infrastructure/public service by private sector as per specific performance standards • against pre-determined user charges/grant by the government Cross sectoral examples of PPPs: Toll Roads, Water Supply, Power Generation, Power Transmission, Railway Lines, Airports
- 9. Characteristics of PPPs •Legally enforceable contract • Long term, typically 20 to 30 years or even more; why long term? • Investment of large resources by private sector • User charges for output and not input • Risk transfer from govt to private sector; how much risk to retain and how much to transfer? • Value for Money (VfM)
- 10. PPP – anetwork of contracts
- 11. Why PPP ? •Need for economic growth • Meet people’s aspirations • Need to build infrastructure • Limited government budget; fiscal constraints • Bring additionality in investment • Bring efficiency gains • With predetermined user charges, incentives to reduce wastages and minimize costs • Penalties for not meeting specified outputs • Government benefitted by lower bid price in competitive bidding capturing the efficiency gains
- 12. How PPP? A PPPproject cycle
- 13. Bid process &documents are crucial • PPPs • Large investments • Long duration • High risks • Complexities • Sub - optimal bid documents & process puts project at risk • Large effort required in beginning • Push from the top
- 14. PPP Bidding process •Project preparation & structuring • Consultant selection – single stage, 2 envelope process • Technical Consultant • Legal Adviser • Financial Consultant • Concessionaire selection – 2 stage process • Request for Qualification (RFQ) • Request for Proposals (RFP) • Signing of Concession Agreement (CA)
- 15. Consultant selection iscritical • Poorly structured PPP contract can compromise user interests • Technical, financial & legal issues - complexity • In house expertise not adequate/time constraints
- 16. Consultant procurement • Consultantprocurement different from goods procurement • Combined QCBS based selection procedure • Individual experts matter more than firm • Separate consultants reqd; technical, financial, legal • TOR is important
- 17. Consultant procurement process •Single stage two envelope bidding process • Technical bid • Financial bid • Technical evaluation • Shortlisting • Financial evaluation • Combined score • Selection based on highest Combined score
- 18. Consultant Procurement • Specifytime input of each expert • Discourage substitution of experts -Strong penalty • 1st substitution - 20% fee reduction • 2nd substitution – 50% fee reduction • team leader not be normally substituted • Link Payment to Deliverables • Final 10% payment on successful execution of Concession Agreement
- 19. Deciding the BidParameter • Option 1 – Tariff based bidding (example power purchase agreement) • Specify minimum quality of service • Award the Concession to the Bidder proposing the lowest tariff • Option 2 – Revenue sharing based bidding (example air ports) • Specify minimum service and maximum tariff • Award the Concession to the Bidder who is ready to share the maximum revenue • Option 3 – Viability Gap based bidding (eample transmission/water supply) • Specify minimum service and maximum tariff • Award the Concession to the Bidder asking the lowest grant or offering the largest concession fee
- 20. Concession Agreement &Bankability • A project structured through a sound concession agreement attracts investors, leads to competition and reduces user charge or subsidy • Bankability of infrastructure projects is an issue • Non recourse financing of infrastructure projects - off balance sheet • Concession Agreement should provide support to debt financing • Termination payments • Compulsory buyout in case of government default
- 21. Debt financing supportto PPPs in India • Creation of India Infrastructure Finance Corporation Ltd (IIFCL) in 2006 • IIFCL borrows against sovereign guarantee and lends 30% to infra projects • Creation of Infrastructure Debt Funds (IDFs) in 2011 • Asset Liability mismatch of commercial banks lending to infrastructure projects • Need for credit enhancement • IDFs to raise money through institutional investors, HNIs, insurance and pension funds and refinance commercial bank loans to infrastructure projects after start of commercial operation – roll over the debt
- 22. Concession Agreement Clauses •Scope of the Project • Grant of Concession • Conditions Precedent • To be fulfilled by Authority • To be fulfilled by Concessionaire • Damages for delay • Obligations • Of Authority • Of Concessionaire • Representation & Warranties • Performance Security • Amount • Duration • Appropriation • Release
- 23. Concession Agreement Clauses •Right of Way • Construction of the Project • Monitoring of Construction • Completion Date • Entry into Commercial Service (COD) • Change of Scope • Operation & Maintenance • Key Performance Indices • Availability • Reliability • Independent Engineer
- 24. Concession Agreement Clauses •Financial Close • Grant • Concession Fee • User Fee • Effect of variation on traffic growth • Payment security • Default Escrow • Letter of Credit • Escrow Account • Revenue shortfall loan
- 25. Concession Agreement Clauses •Insurance • Force Majeure • Change in Law • Protection of NPV • Termination • Concessionaire default • Authority default • Substitution • Dispute resolution
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- 27. Research Study The LatinAmerican experience Prof J.Luis Guash, 2004 •Period: 1985 - 2000 •Number of Concessions Analysed: 1000 •Concession Period : 20 to 30 years •Concessions Renegotiated - 41.5% • Electricity – 9.7% • Transport – 54.7% • Water & Sanitation – 74.4%
- 28. Research findings contd…. ProfJ.Luis Guash • Average time to renegotiation – 2.2 years (after award) • Renegotiation in direct adjudication contracts – 8% • Renegotiation in competitively bid concessions – 46% • Who initiated renegotiations • Concessionaire – 61% • Government – 26% • Both parties – 13%
- 29. Research findings contd…. ProfJ.Luis Guash Issues in renegotiations •Tariff adjustments •Investment obligations and schedules •Extension of Concession •Changes in asset base for calculating rate of return •Pass through cost components in tariff
- 30. Latin America Renegotiation results(Guash) • Tariff increase – 62 % • Tariff decrease – 19% • Reduction in investment obligations – 69% • Acceleration in investment obligations – 18% • Increase in cost pass through in tariff – 59% • Extension of Concession period – 38% • Decrease in annual fee to be paid by Concessionaire - 31%
- 31. Key drivers ofrenegotiations (Guash) • Opportunistic behaviour of firms – aggressive bidding • Opportunistic behaviour of governments • Poor Concession design – ambiguities, inadequacy of contract provisions • Political cycles • Lack of understanding of key determinants • Carelessness • Misaligned incentives
- 32. Latin American Experiencewith PPPs World Bank Report, 2004 • Private participation improved performance & led to efficiency gains in the range of 1 to 9% • 63% people in 17 countries in Latin America & Caribbean believe that private participation has not been beneficial • Efficiency gain not transferred in tariff reduction; captured by renegotiation (Argentina: efficiency gain – 1 to 6%, tariff reduction 1% only) • PPP program delayed due to negative perceptions
- 33. Renegotiation - threatto PPP • Guash regards renegotiation as a problem, not a solution, as it vitiates bidding environment • Undermines competitive award process & public trust; welfare loss • Leads to long drawn court cases & disputes; draws attention of Audit and Investigative Agencies • Well designed Concession Agreements should provide possible responses
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