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[Answered] What is public-private partnership (PPP)? Discuss various advantages and issues related to public-private partnership (PPP) in India.

Demand of the question Introduction. What is public-private partnership (PPP)? Body. Discuss various advantages and issues related to public-private partnership (PPP) in India. Conclusion. Way forward.

According to World Bank, public-private partnership (PPP) is a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance.  Public-private partnerships typically are long-term and involve large corporations on the private side. Some of the commonly adopted forms of PPPs include build-operate-transfer (BOT), build-lease-transfer (BLT), design-build-operate-transfer (DBFO), operate-maintain-transfer (OMT), etc. A key element of these contracts is that the private party takes on a significant portion of the risk.

Various advantages of public-private partnership (PPP):

  1. Access to private sector finance: India has a very large infrastructure need and an associated funding gap. PPPs can help both to meet the need and to fill the funding gap. PPP projects often involve the private sector arranging and providing finance. This frees the public sector from the need to meet financing requirements from its own revenues (taxes) or through borrowing.
  2. Better infrastructure: They provide better infrastructure solutions than an initiative that is wholly public or wholly private. By shifting the responsibility for finance away from the public sector PPPs can enable more investment in infrastructure and increased access to infrastructure services.
  3. Increased transparency in the use of funds: A well-designed PPP process can bring procurement out from behind closed doors. The PPP tender and award process based on open competitive bidding following international best practice procedures lead to transparency.
  4. Less delays: They result in faster project completion and reduced delays on infrastructure projects by including time-to-completion as a measure of performance and therefore of profit.
  5. Risk distribution: Transfer of risks is the most important advantage of PPP projects. In PPP projects, there is a possibility to transfer most or all of the risks to the private entity. The private entities explore opportunities, even though they involve risks.
  6. Constant cash flow: The state budget is formed of fixed budgets for each ministry. Major investments are temporary modifications of the budget of a ministry, and this problem can be difficult to deal with within the budgetary process. Avoiding major investments by having a constant cash flow is an important driver when the state looks at the advantages of PPP.

Various issues related to public-private partnership (PPP) in India:

  1. Uncertainties: PPPs often cover a long-term period of service provision (eg. 15-30 years). Any agreement covering such a long period into the future is naturally subject to uncertainty. If the requirements of the public sponsor or the conditions facing the private sector change during the lifetime of the PPP, the contract may need to be modified to reflect the changes. This can entail large costs to the public sector.
  2. Policy and regulatory gaps: Inadequate regulatory framework and inefficiency in the approval process have been considered as serious disincentives for developers and contractors. For example, more than two years were needed for the Gujarat Pipavav port project to receive the necessary clearances after achieving financial closure. Moreover, most of the large projects involve dealings with various ministries where coordination remains inefficient.
  3. Crony capitalism: In many sectors, PPP projects have turned into conduits of crony capitalism. It is worth noting that a large chunk of politically connected firms in India are in the infrastructure sector, which have used political connections to win contracts in the past.
  4. Renegotiation: While private firms accept stringent terms of PPP contracts initially, they lose no opportunity for renegotiating contracts, in effect garnering a larger share of public resources than originally planned. Rather than being an exceptional clause, renegotiation has become the norm in PPP projects in India.

Way forward:

  1. Checking Viability: PPPs should not be used to evade responsibility for service delivery to citizens. This model should be adopted only after checking its viability for a project, in terms of costs and risks. Further, PPP structures should not be adopted for very small projects, since the benefits are not commensurate with the costs.
  2. Risk allocation and management: Public-Private Partnership PPP contracts should ensure optimal risk allocation across all stakeholders by ensuring that it is allocated to the entity that is best suited to manage the risk. A generic risk monitoring and evaluation framework should be developed covering all aspects of a project’s life cycle.
  3. Strengthening governance: The Prevention of Corruption Act, 1988 should be amended to distinguish between genuine errors in decision making and acts of corruption by public servants.
  4. Strengthening institutional capacity: A national-level institution should be set up to support institutional capacity building activities and encouraging private investments with regard to PPPs. Independent regulators must be set up in sectors that are going for PPPs. An Infrastructure PPP Adjudication Tribunal should also be constituted. A quick, efficient, and enforceable dispute resolution mechanism must be developed for PPP projects.
  5. Strengthening contracts: The private sector must be protected against such loss of bargaining power. This could be ensured by amending the terms of the Public-Private Partnership PPP contracts to allow for renegotiations.

The success of Public-Private Partnership to a large extent depends on optimal risk allocation among stakeholders, the environment of trust and robust institutional capacity to timely implementation of PPP projects. To foster the successful implementation of a PPP project, a robust PPP enabling ecosystem and sound regulatory framework is essential.

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