MCM 715 JV & Privatization

PPP - Introduction
Debopam Roy

What can be the different modes of

Infrastructure Provision?

Modes of Infrastructure
Provision
Government Public
Local
Department Enterpris Bodies
e

Public
Ownership

Service Turnkey O&M/ Concession Divesture Market

Contract
provision
Contract Mgmt.
/BOO
Contract

Private
Ownership

Government Department
Traditional method of providing infrastructure
services
the Government owns the facility
Responsible for designing, financing, building
and operation
Mostly the construction is done by private
contractors through item based construction
contracts
Examples : Department of Surface Transport;
PWD

Public Enterprise
A partially autonomous statutory body or
Government undertaking company
Corporatized and commercialized
operations
Under government control and ownership
May outsource certain functions and
services
Eg: State Electricity Board

Local Bodies
Autonomous Public Bodies.
Not part of State & Central Government
Projects may be financed from State /
Central Funds or from the Bodys own
income (Local Taxes)
Projects mostly executed by a private
contractor
Example: PMC, PCMC

Service Contract
Specific services associated with
infrastructure may be contracted out to private
firms
Overall responsibility for operations and
maintenance is retained by the public agency
The contractor may be paid based on piece
rate, fixed fee, or cost plus
Example: cleaning contract in Indian Railways

Turnkey/EPC Contract
A private contractor designs and builds the
facility
financed, owned, and operated by the
Government
The contractor is paid a fixed fee by the
Government
Example: Coal Handling Plant at NTPCs
Barh Thermal Power Plant, given on turnkey
basis to L&T ECC by NTPC, a public
enterprise

Management Contract
A private partner operates and maintains a
publicly owned facility
Under a management contract with the sponsoring
government, which owns the facility.
The facility could be leased to the private firm,
whereby it pays a lease fee and collects user
charges.
Example: Indira Gandhi Rashtriya Udan Academy
has entered into a management contract with CAE
Inc, a Canada based company.

Concession
The private party finances and builds the infrastructure facility
Manages (i.e. operate and maintain) the service for a certain
period of time (called concession period)
It recuperates its initial investment, maintenance cost, cost of
financing and profits
The facility is returned back to the government and all rights
of concessionaire cease to exist
Concession being in the middle of the spectrum, best
exemplifies a Public Private Partnership
Most common form of Private participation in Indian
Infrastructure sector
Depending on the type of ownership, this may be further
subdivided into different formats used in different countries at
different times

Formats of Concessions BOT & Variants

BOT
Build Operate Transfer
The basic and most common form of concession
The facility is owned by the Government or Public enterprise, but
financed and built by the private party which operates and
maintains it for the concession period
The private sector organization agrees to finance, design, and
build a facility at its own cost, and is given a concession, usually
for a fixed period, to operate the facility and collect tolls or other
revenues from its operation before transferring the facility back
to the government at the end of the concession period
This arrangement is designed such that the private investors
earn sufficient revenues during the operational phase of the
project to service the debt, cover its working capital and
maintenance costs, repay its equity investors, and provide a
reasonable profit for its investors

Formats of Concessions BOT & Variants

Build-Own-Operate-Transfer (BOOT)
The service provider is responsible for design and
construction, finance, operation, maintenance, and
commercial risks associated with the project. It owns
the project through out the concession period. The
ownership title may increase the creditworthiness of
the promoter for arranging debt finance. This model is
used for power projects all over the world

Build-Transfer-Operate (BTO)
Facility is financed and built by public sector, leaving
maintenance and operation to private sector. This
arrangement has proved popular for water projects

Formats of Concessions BOT & Variants

Design-Build-Finance-Operate (DBFO)
Arrangement is BOT in essence. This is a model that has
proved to be hugely popular in UK road construction industry

Build-Own-Lease-Transfer (BOLT)
Private sector finance, design, build and retain the legal
ownership of a facility for a stipulated period of time but host
government leases it back for operation. This model is suitable
for railway transport system

Rehabilitate-Operate-Transfer (ROT)
This is suitable for existing infrastructure with low capacity or
poor performance

Variants of BOT
Lease-Own-Operate (LOO)
The existing asset is leased from the government for a specified
period of time. The asset may require renovation and rehabilitation

Annuity Scheme
Facility is financed, built, maintained, and operated by the private
sector. Project promoter, however, recouped its investment through
annuity payments made by the granting authority. This variant is
used in road sector. Project promoter does not assume the
commercial risk and the annuity payments are not linked with the
level of traffic using the facility

In addition to these variants, there are other variants like

Finance, Build-Own-Operate-Transfer (FBOOT), Build-OwnOperate-Subsidies-Transfer (BOOST), and Build-RentTransfer (BRT) which are reported but not used frequently

Divesture / BOO
Divesture schemes sell off shares of a
public enterprise to private interests, but
the public sector retains control of different
dimensions of industry structure like entry
and exit.
BOO or Build Own Operate are
authorization to build a new asset where
the service provider retains ownership for
perpetuity

Market Provision
Market provision means deregulation and
introduction of competition in the
infrastructure sector
Example: Indian Aviation Sector

Forms of Private Sector Participation

Characteristics

Maintenance &
Management

Service Contract

Turnkey

Definition

Service fee from

Government

Maintain fee from

Government

Design & Build fixed

fee from Government

Management expertise
required

Low

Medium

High

Asset ownership

Public

Public

Public

Cost recovery of
investment

Fixed government
payment

Fixed government
payment

Fixed government
payment

Major capital
investment

Public

Public

Public

Commercial risk

Public

Public

Public

Duration

1-2 years

2-10 years

Only for construction

period

Contractual
arrangement

Simple

Simple

Medium

Scale of private
investment

Very low

Low

Considerable-for short
period

Forms of Private Sector Participation

Characteristics

Operate &
Maintain

Lease

BOT Concessions

Divestitures
Finance, Design,
Construct, Own,
Maintain and
Operate

Definition

Maintain and
operate

Maintain and
Operate

Finance, Design,
Construct, Maintain and
operate

Management
expertise required

Medium

Medium

High

High

Asset ownership

Public

Public

Public

Public/Private

Cost recovery of
investment

Government
receives licence
fee and some
annual revenue

Government
receives some
annual revenue

Government may or may

not invest, major
recovery from project
revenues

Recovery from
project revenues

Major capital
investment

Public

Public

Private

Private

Commercial risk

Shared

Shared

Private

Private

Duration

2-10 years

8-15 years

25-30 years

Infinite (may be
limited by license)

Contractual
arrangement

Medium

Medium

Complex

Complex

Scale of private
investment

Medium

Medium

High

High

WHO ARE THE

STAKEHOLDERS

The stakeholders of PPP Project

The stakeholders of PPP Project

Government
grants concession for the construction and
operation
monitor the progress and operation of the project
ensuring that the required product is achieved on
time and appropriate safety standards are met
Concession agreement will deal with such issues
as land rights for the project, future development,
monetary and environmental controls and the
degree of risk assumption by the government
Indian Players

The stakeholders of PPP Project

Concessionaire
The project company is generally a wholly
owned subsidiary of the promoter or a joint
venture between the sponsors or a SPV
It is responsible for securing finance,
procuring the design and construction of the
project, the operation of the project during the
concession period and the eventual transfer
back to the Government
Indian Players

The stakeholders of PPP Project

Sponsors
The sponsors invest in the project in the form
of equity
The main sponsor can be a specialized
infrastructure developer or an EPC contractor/
O&M contractor/major supplier of the project
In some cases, there is only a single sponsor
company and the project company is a wholly
owned subsidiary of the project company
Indian Players

The stakeholders of PPP Project

Lenders
Banks and other financial institutions or
multilateral agencies lend money or extend
credit to the project company under relevant
legislation
The source of finance is mainly governed by the
strength of the local financial market and project
loans will usually be on a non-recourse or
limited resource basis.
Indian Players

The stakeholders of PPP Project

Contractor/Supplier/Operator
They can also be sponsors with equity
participation
The EPC contractor, O&M contractor and the
supply contractor are the major categories.
Often contractors ultimate interest in
participating in the project is not necessarily
the same as the interest of other investors.
Indian Players

The stakeholders of PPP Project

Consultants
Independent Consultant : They are technical
consultants who act as a regulator for the
project. Their responsibilities include approving
the designs submitted by concessionaire,
quality control, and primary dispute resolution
Transaction Advisor: They are companies with
expertise in financing, and shaping of
infrastructure projects and they are involved
during development phase of the project

The stakeholders of PPP Project

Consultants
DPR consultant: They help in preparing the
scope and primary design of the project.
PMC consultant: They help the
concessionaire in planning and control of the
project.
Technical consultant: The EPC contractor
employs a host of technical consultants to do
the detailed design for the project.

The stakeholders of PPP Project

Users
Land-owners
Local Community

PPP Framework
Government
Sponsor(s)

Consultant

Concession Agreement
Shareholders
Agreement

PROJECT CO

EPC Contract

Loan Agreement

O&M Contract

Banks/FIs

User

Toll

O&M Contractor

EPC Contractor

Supply
contract

Supplier