Role of PPP in Transportation Sector

Submitted by,
Rahul Kumar Singh
Roll No.57 [AB]
 What is PPP (Public private
partnership)?

A public-private partnership (PPP) is a contractual agreement between the

public and the private sectors, whereby the private operator provides
services that have traditionally been executed or financed by a public
institution. The ultimate goal of PPPs is to obtain more “value for money”
than traditional public procurement options would deliver. Although the ex
ante assessment of expected value for money is often extremely complex, in
general a PPP can be said to generate value improvements whenever it
produces/achieves the following advantages:

− reduced life-cycle costs;

− more efficient allocation of risk;
− faster implementation;
− improved service quality; and
− additional revenue.

When compared with in-house delivery by the public sector, the private
provision of a public
service is socially beneficial whenever the net gains from PPPs are greater
than the corresponding net gains from traditional public provision. In a
nutshell, the following relationship must hold true:

PPP net allocative efficiency gains + PPP net productive efficiency

gains > gains with public provision

From a theoretical viewpoint, the main justification for the adoption of a PPP
is the possibility to exploit the management qualifications and the efficiency
of the private sector without giving up quality standards of outputs, thanks
to appropriate control mechanisms from the public party. This result is
achieved by setting up complex contractual arrangements with private
sector operators where the public sector acts as “principal” and the private
operator as “agent”. In principal-agent relationships, the most complex
issues are the precise definition of the tasks assigned to the agent, the
measurement of the agent’s performance, and the extent to which the
principal can control and monitor the agent’s performance for the whole
duration of the contractual relationship. In PPPs, the core principle lies in the
allocation of risk between the two parties: well designed PPPs redistribute
the risk to the party that is the “superior insurer” or the “least cost avoider”,
i.e. the party best suited to control and/or bear the risk.

Public-private partnerships are commonly employed for the provision of

various types of services and infrastructure such as transportation (rail,
metro, roads), energy, telecommunications, water treatment and supply,
waste management, healthcare, criminal
justice (courts and prisons), education facilities (schools, dormitories), and
environmental
management. PPPs generally take the form of a long-term (e.g. 30 years)
agreement between
public and private entities, whereby the private partner commits to perform
some or most of the phases of the service or asset provision.

 PPP : How it evolved ?

Pressure to change the standard model of Public Procurement arose initially
from concerns about the level of public debt, which grew rapidly during
the macroeconomic dislocation of the 1970s and 1980s. Governments
sought to encourage private investment in infrastructure, initially on the
basis of accounting fallacies arising from the fact that public accounts did not
distinguish between recurrent and capital expenditure.
The idea that private provision of infrastructure represented a way of
providing infrastructure at no cost to the public has now been generally
abandoned, interest in alternatives to the standard model of public
procurement persisted. In particular, it has been argued that models
involving an enhanced role for the private sector, with a single private sector
organisation taking responsibility for most aspects of service provisions for a
given project, could yield an improved allocation of risk, while maintaining
public accountability for essential aspects of service provision.

Initially, most public-private partnerships were negotiated individually, as

one-off deals. In 1992, however, the Conservative government of John
Major in the United Kingdom introduced the private finance initiative (PFI) ,
the first systematic programme aimed at encouraging public-private
partnerships. In the 1992 programme, the main focus was on reducing
the Public Sector Borrowing Requirement, although, as already noted, the
effect on the public accounts was largely illusory. The Labour government
of Tony Blair elected in 1997, persisted with the PFI sought to shift the
emphasis to the achievement of "value for money" mainly through an
appropriate allocation of risk.

A number of Australian state governments have adopted systematic

programmes based on the PFI.

 Transportation Sector in India:

• 1- Highways

Size of the Initiatives

With an extensive road network of 3.3 million kilometers, India is the

second largest in the world. Indian roads carry about 61% of the freight
and 85% of the passenger traffic. All the highways and expressways
together constitute about 66,000 kilometers (only 2% of all roads),
whereas they carry 40% of the road traffic. To further the existing
infrastructure, Indian Government annually spends about Rs.18000
crores .

Target

• Developing 1000 km of expressways

• Developing 8,737 km of roads, including 3,846 km of national
highways, in the North East
• Four-laning 20, 000 km of national highways
• Four-laning 6,736 km on North-South and East-West corridors
 • Six-laning 6,500 km of the Golden Quadrilateral and selected
national highways
• Widening 20,000 km of national highways to two lanes

Policy

• 100% FDI under the automatic route is permitted for all road
development projects
• 100% income tax exemption for a period of 10 years
• Grants / Viability gap Funding for marginal projects by NHAI.
• Formulation of Model Concession Agreement

Opportunity

Road development is recognized as essential to sustain India’s economic

growth. Road development is a priority sector and the ongoing focus on
the highway infrastructure development is targeted to projected annual
growth of 12-15% for passenger traffic and 15-18% for cargo traffic. The
project has been attracting huge Direct Foreign Investment (FDI).

Outlook

• Annual growth projected at 12-15% for passenger traffic, and 15-

18% for cargo traffic

• Over $50–60 billion investment is required over the next 5 years

to improve road infrastructure

Potential

• Road development is recognised as essential to sustain India’s

economic growth
o The Government is planning to increase spends on road
development substantially with funding already in place
based on a cess on fuel

• A large component of highways is to be developed through public-

private partnerships
o Several high traffic stretches already awarded to private
 companies on a BOT basis
o Two successful BOT models are already in place – the
annuity model and the upfront/lumpsum payment model

• Investment opportunities exist in a range of projects being

tendered by NHAI for implementing the NHDP – contracts are for
construction or BOT basis depending on the section being
tendered.

• A Rs.41,200 crores (US $ 5 billion) project plans to lay 6 lane roads

over 6,500 kms of National Highways on the Design Build Finance
and Operate (DBFO) basis – in Golden Quadrilateral and other high
traffic stretches.

Government Initiative

For a country of India's size, an efficient road network is necessary both

for national integration as well as for overall socio-economic
development. The National Highways (NH), with a total length of 65,569
km, serve as the arterial network across the country. The four-laning the
5,900 km long Golden Quadrilateral (GQ) connecting Delhi, Mumbai,
Chennai and Kolkata is on the verge of completion. The ongoing four-
laning of the 7,300 km North-South East-West (NSEW) corridor is
scheduled to be completed by December 2009. The Committee on
Infrastructure adopted an Action Plan for development of the National
Highways network. An ambitious National Highway Development
Programme (NHDP), involving a total investment of Rs.2,20,000 crore
(USD 45.276 billion) up to 2012, has been established. The main
elements of the programme are as follows:

Steps Taken

• 100 per cent FDI under the automatic route in all road
development projects.
• 100 per cent income tax exemption for a period of 10 years
• Cabinet Committee on Economic Affairs (CCEA) has agreed upon
the National Highways Fee (Determination of Rates and Collection)
Rules, 2008 to establish uniformity in fee rate for public funded
and private investments projects.
 • An increment in the overseas borrowing amount of infrastructure
sectors, to US$ 500 million from US$ 100 million.
• Offering cheaper loans for highway projects that will speed up the
projects worth more than US$ 12. 70 billion under separate
phases of the NHDP.
• The Ministry of Shipping and Road Transport is considering a
‘green corridor' highway project solely for farmers with ‘no toll'
charges that would link rural roads with National Highways. This is
likely to be developed along with the six-lane project under the
NHDP.

2- Railways

Indian Railways is the backbone of the socio-economic growth of India.

World's fourth largest rail network and the second largest in Asia, Indian
Railways has recently attracted immense global attention due to its
successful turnaround to profitability. Indian Railways has been
consistently recording impressive growth rates for the last few years.
The cash surplus before dividend and net revenue are estimated at US$
6.17 billion and US$ 4.53 billion, for 2007-08 respectively. This has
placed Indian Railways in a much better position ahead of many of the
Fortune 500 companies.

India Railway has taken up one of the most ambitious annual plans for
2008-09 with huge investment of about USD 7.91 billion. The plan
includes a total budgetary support of USD 1.66 billion that includes USD
163.33 million from the Central Road Fund. This much ambitious plan is
eying a massive profits of more than USD 20.447 billion for the year
2008-09 .

Government Initiatives

The Indian Railways has initiated one of the most challenging growth
targets for the coming year. This has been claimed on the basis of the
most innovative plans and initiatives thought out by the ministry. Over
past few years Indian Railways has remarkably transformed itself to set
a bench mark in the global level.

• increase in income through advertising on all Rajdhanis, with the

cost of advertising being around US$ 1.26 million per train.

• Introduction of new generation trains that would be fuel-efficient,

recyclable and have low-emission to generate certified emission
reduction credits.

• Construction of a dedicated freight corridor, with an investment of

US$ 81.92 million slated for 2008-09 and US$ 614.40 million for
2009-10.

• Renewal of 44.5 million of PSC sleepers has been set for open line
works.

• Technological up gradation and modernization for higher

operating efficiency

• Development of PPP envisaged in new routes, railway stations,

logistics parks, cargo aggregation and warehouses etc.

• Development of 100 budget hotels with private participation in the

vicinity of railway stations.

• Installation of Wi-Fi for providing wireless access at 500 stations.

• Introduction of marketing rights for advertising on railway tickets

and reservation charts.

• Establishment of integrated logistic parks on unused lands.

• Development of agri-retail hubs, cold storage houses, multi-

purpose warehouses on surplus land with the Railways.

• Training of railway managers to meet future challenges, Indian

Railways is planning to set an international management institute
in New Delhi.

• Renewal over 2941 kilometres (kms), which will require 3,39,288

tonnes of rail steel, and sleeper renewal over 2382 kms.

• Implementation of Dynamic Pricing Policy, Tariff Rationalization,

 Non-Peak Season Incremental Freight Discount Scheme, Empty
flow Direction Freight

• Discount Scheme, Loyalty Discount Scheme and Long-term Freight

Discount Scheme among others to boost its capacity utilization
levels.

The rapid rise in international trade and domestic cargo has

placed a great strain on the Delhi-Mumbai and Delhi-Kolkata rail
track. Government has, therefore, decided to build dedicated
freight corridors in the Western and Eastern high-density routes.
The investment is expected to be about Rs. 22,000 crore (USD
4.525 billion). Requisite surveys and project reports are in
progress and work is expected to commence within a year.

3- Ports
Size of the Initiatives

With 12 major ports and 187 minor ports, 7,517 km long Indian coastline
plays a pivotal role in the maritime transport helping in the international
trade. Traffic handled at major ports during April 2008 to January 2009
is recorded to be 436686 units. The ports in India offer tremendous
scope for international maritime transport both for passenger and cargo
handling.

Target

The Government of India targets to increasing the cargo handling

capacity of major ports by two folds to reach 1.5 billion metric tonnes
(MT) by the year 2012. This will be achieved at an investment of around
USD 25 billion through public-private partnerships. A Crisil research on
Indian ports and maritime transport estimates that ports will grow by
160 per cent over the 2011–12 period. Cargo handling at the major
ports is projected to grow at 7.7% per annum (CAGR) till 2011-12 and
the cargo traffic is estimated to reach 877 million tonnes by 2011-12,
whereas the containerized cargo is expected to grow at 15.5% (CAGR)
over a period of 7 years. The New Foreign Trade Policy envisages
doubling of India’s share in global exports in next five years to
Rs.675000 crores (USD 150 billion). A large portion of the foreign trade
to be through the maritime route: 95% by volume and 70% by value

Approach

Indian Government plans to bring a new orientation to encourage the

private sector to come forward in developing port activities and
operations. The goal is planned to be achieved through numerous
initiatives and policies. Many international port operators are invited to
submit competitive bid for BOT terminals on a revenue share basis,
which has attracted foreign players, such as Dubai Ports International
(Cochin and Vishakhapatnam), Maersk (JNPT, Mumbai) and P & O Ports,
(JNPT, Mumbai and Chennai), and PSA Singapore (Tuticorin). The
National Maritime Development Plan (NMDP) has been set up by the
Indian government to improve facilities at all the 12 major ports in India.
At an investment of about US$ 12.4 billion, by November 2009, many
projects are expected to be completed. This includes ambitious projects,
such as the first phase of the international container transshipment
terminal (ICTT) at Vallarpadam. Kochi port is being developed as a
transshipment hub for India.

Policy

The government has established firm policies, such as 100% FDI under
the automatic route is permitted for port development projects, 100%
income tax exemption for a period of 10 years. A comprehensive
National Maritime Policy is being formulated that will lay down the vision
and strategy for development of the port sector in India till the year
2025. The ceiling for tariffs charged by Major ports/port operators will be
regulated by Tariff Authority for Major Ports (TAMP).

Government Initiatives
The Government of India has undertaken the the expansion and
modernization of ports on a priority basis as part of its initiatives in the
up gradation of India’s infrastructure achieving the targeted growth
rate. The government has initiated numerous plans, which includes;
• Formulation of a National Maritime Development Policy to
facilitate private investment, improve service quality and promote
competitiveness, and US$ 11.33 billion has been allocated for the
same.

• An investment of more than US$ 9.07 billion will be made by 2015

for 111 Shipping Sector Projects.

• In 2008–09, the Ministry of Shipping is going to launch 10 major

expansion projects at an estimated investment of US$ 1.06 billion,
60% of which is allocated for the Chennai mega container
terminal.

• Permission for 100 per cent foreign direct investment (FDI) for
port development projects under the automatic route.

• 100 per cent income tax exemption is provided for a period of 10

years for port developmental projects.

• Opened up of all the areas of port operation for private sector

participation.

• Increase in the rail connectivity of ports with the domestic market.

• The experience of operating berths through PPPs at some of the

major ports in India has been quite successful. It has, therefore,
been decided to expand the programme and allocate new berths
to be constructed through PPPs. A model concession agreement is
being formulated for this purpose.

• The Government has also decided to empower and enable the 12

major ports to attain world-class standards. To this end, each port
is preparing a perspective plan for 20 years and an action plan for
seven years.

• A high level committee has finalized the plan for improving rail-
road connectivity of major ports. The plan is to be implemented
within a period of three years. Further, changes in customs
procedures are being carried out with a view to reducing the dwell
time and transaction costs. The government has also delegated
powers to the respective Port Trusts for facilitating speedier
 decision-making and implementation. At the same time, several
measures to simplify and streamline procedure related to security
and customs are been initiated.

• The National Maritime Development Programme is expected to

bring a total investment of over Rs.50,000 crore in the port
infrastructure. Such improvement in the scale and quality of
Indian port infrastructure will significantly improve India’s
competitive advantage in an increasingly globalized world.

Policy

• 100% FDI under the automatic route is permitted for port

development projects

• 100% income tax exemption is available for a period of 10 years

• Tariff Authority for Major Ports (TAMP) regulates the ceiling for
tariffs charged by Major ports/port operators (not applicable to
minor ports)

• A comprehensive National Maritime Policy is being formulated to

lay down the vision and strategy for development of the sector till
2025.

Outlook

• Cargo handling at the major ports is projected to grow at 7.7%

p.a. (CAGR) till 2011-12
o Traffic estimated to reach 877 million tonnes by 2011-12
o Containerised cargo is expected to grow at 15.5% (CAGR)
over the next 7 years

• The New Foreign Trade Policy envisages doubling of India’s share

in global exports in next five years to $150 billion (Rs.675000
crores)
o A large portion of the foreign trade to be through the
maritime route: 95% by volume and 70% by value

Potential
 • Growth in merchandise exports projected at over 13% p.a.
underlines the need for large investments in port infrastructure

• Investment need of $13.5 billion (Rs.60,750 crores) in the major

ports under National Maritime Development Program (NMDP) to
boost infrastructure at these ports in the next 7 years
o Under NMDP, 276 projects have been identified for the
development of Major ports
o Public–Private partnership is seen by the Government as the
key to improve Major and Minor ports
o * 64% of the proposed investment in major ports envisaged
from private players

• The plan proposes an additional port handling capacity of 530

MMTA in Major Ports through:
o Projects related to port development (construction of jetties,
berths etc.)
o Procurement, replacement and/or up-gradation of port
equipment
o Deepening of channels to improve draft
o Projects related to port connectivity

• Investment need of $4.5 billion (Rs.20,250 crores) for improving

minor ports

4- Airports
Size

Of a total number of 454 airports and airstrips in India, 16 are

designated as international airports. The Airports Authority of India (AAI)
owns and operates 97 airports. A recent report by Centre for Asia Pacific
Aviation (CAPA), Over the next 12 years, India's Civil Aviation Ministry
aims at 500 operational airports. The Government aims to attract
private investment in aviation infrastructure. India has been witnessing
a very strong phase of development in the past few months. Many
domestic as well as international players are showing interest in the
growth and development of the aviation sector with immense focus on
the development of the airports. Indian private airlines – Jet, Sahara,
Kingfisher, Deccan, Spicejet - account for around 60% of the domestic
passenger traffic. Some have now started international flights. For the
next years to come India is poised with strong focus on the development
of its airport to meet the international standards. The government is
planning modernization of the airports to establish a standard. The
newly developed airports will help releasing pressure on the existing
airport in the country.

Plans

A projected investment of USD 8.5 billion has been planned for the
development of Indian airports during the 11th plan. Mumbai and Delhi
airports have already been privatized. These two airport are being
upgraded at an estimated investment of US$ 4 billion for the period
2006-16. Development of airport infrastructure is a focus area for the
Government. There has been a significant uptrend in domestic and
international air travel.

AAI has planned a heavy investment of USD 3.07 billion over the next
five years. Out of it 43 per cent will be for the three metro airports in
Kolkata, Chennai and Trivandrum. The rest will be invested in upgrading
other non-metro airports and in the modernization of the existing
aeronautical facilities.

• Passenger traffic is projected to grow at a CAGR of over 15% in

the next 5 years. It is estimated that the data will cross 100
million passengers per annum by 2010
• Cargo traffic to grow at over 20% per annum. over the next five
years, crossing 3.3 million tonnes by 2010
• Major investments planned in new airports and up gradation of
existing airports
• 100% FDI is permissible for existing airports; FIPB approval
required for FDI beyond 74%.
• 100% FDI under automatic route is permissible for greenfield
airports.
• 49% FDI is permissible in domestic airlines under the automatic
route, but not by foreign airline companies.
• 100% equity ownership by Non Resident Indians (NRIs) is
 permitted.
• AAI Act amended to provide legal framework for airport
privatization.
• 100% tax exemption for airport projects for a period of 10 years.
• ‘Open Sky’ Policy of the Government and rapid air traffic growth
have resulted in the entry of several new privately owned airlines
and increased frequency/flights for international airlines.

Initiatives

The Committee on Infrastructure has initiated several policy measures

that would ensure time-bound creation of world-class airports in India. A
comprehensive civil aviation policy is on the anvil. An independent
Airports Economic Regulatory Authority Bill for economic regulation is
also under consideration.

• The policy of open skies introduced some time ago has already
provided a powerful spurt in traffic growth that has exceeded 20%
per annum during the past two years.
• Major airports such as Chennai and Kolkata are also proposed to
be taken up for modernization through the PPP route.
• To ensure balanced airport development around the country, a
comprehensive plan for the development of other 35 non-metro
airports is also under preparation. These measures are expected
to bring a total investment of Rs. 40,000 crore (USD 8.312 billion)
for modernization of the airport infrastructure.
• A Model Concession Agreement is also being developed for
standardizing and simplifying the PPP transactions for airports, on
the analogy of the highways sector.
• This would include upgrading of the ATC services at the airports.
Issues relating to customs, immigration and security are also
being resolved in a manner that enhances the efficiency of airport
usage.
• A greenfield airport is already operational at Bangalore and the
one at Hyderabad, built by private consortia at a total investment
of over USD 800 million, will be operational soon.
• A second greenfield airport being planned at Navi Mumbai is
planned to be developed using public-private partnership (PPP)
mode at an estimated cost of USD 2.5 billion.
• 35 other city airports are proposed to be upgraded through PPP
 mode where an investment of USD 357 million is being considered
over the next three years.

Potential

• High demand for investments in aviation infrastructure.

• Favorable demographics and rapid economic growth point to a
continued boom in domestic passenger traffic and international
outbound traffic.
• Greenfield airport projects planned in resort destinations and
emerging metros such as Goa, Pune, Navi Mumbai, Greater Noida
and Kannur.
• International inbound traffic will also grow rapidly with increasing
investment and trade activity and as India’s rich heritage and
natural beauty are marketed to international leisure travelers.
• Modernisation / upgradation of metro airports – induction of
partners for Chennai, Kolkata expected subsequently
• SME lending, a largely untapped market, presents a significant
opportunity. This accounts for 40% of the industrial output and
35% of direct exports.

Outlook

• Passenger traffic is projected to grow at a CAGR of over 15% in

the next 5 years
o To cross 100 million passengers p.a. by 2010

• Cargo traffic to grow at over 20% p.a. over the next five years
o To cross 3.3 million tonnes by 2010

• Major investments planned in new airports and upgradation of

existing airports.

Share of Transport Sector in the National Economy

Year Share of Transport in GDP(%) Share of Transport

in Total Expenditure (%)

1999–2000 5.7 3.2

2000–2001 5.8 4.5
2001–2002 5.8 4.8
2002–2003 6.0 4.1
2003–2004 6.2 3.9
2004–2005 6.4 4.2
Source: Central Statistics Office. Government of India. 2006. National Account Statistics; and CMIE.
2004.
Public Finance. Economic Intelligence Service.

So, India’s transport sector is large and diverse. Good physical connectivity
in the urban and rural areas is essential for economic growth. Since the early
1990s, India's growing economy has witnessed a rise in demand for transport
infrastructure and services.

However, the sector has not been able to keep pace with rising demand and
is proving to be a drag on the economy. Major improvements in the sector
are required to support the country's continued economic growth and to
reduce poverty.

 Role of Private Players

1-Private Sector Participation in Highways

A KPMG report titled 'Opportunities in Infrastructure and Resources in India'

reveals that investments of the order of US$ 500 billion are expected to take
place in the coming years. This development would call for increased
resource requirement, consumer responsiveness, and concern for
managerial efficiency. The private sector will be largely involved both at
construction contracts and(BOT levels. Some major private participation in
this initiative includes.

• Reliance Energy
Three contracts to four-lane 400 kilometers of highway and four-laning
of five national highway projects in Tamil Nadu that covers 400
kilometers and at an estimated cost of more than US$ 762.42 million.

• L&T inter-state Road Corridor Limited

Four-laning of the 76 kilometers highway between Palanpur and
Swaroopgunj on the East-West Corridor.
 • Jaiprakash Associates Ltd (JAL)
Implementing the 165 kilometers long Taj Expressway project, which
connects Greater Noida to Agra at a cost of US$ 554.93 million.

• Lanco Infratech
four-laning of two highways in Karnataka at an estimated cost of US$
247.41 million.

• DS Construction
Development of the Gwalior-Jhansi section on NH-75 that includes four-
laning at a cost of US$ 159.9 million.

• Maytas Infra Private Limited and Nagarjuna Construction

Company Ltd (Joint Venture)
Four-lane the highway from Tindivanam and Pondicherry, at an
estimated cost of US$ 70.09 million.

• Era Constructions India Limited and Karam Chand Thapar &

Bros Limited
Construction of a section of the Delhi-Haryana Border to Rohtak and
four-laning of Gwalior by-pass at a cost of US$ 73.8 million.

• Madhucon Projects
Executing ongoing BOT projects with four toll-based road projects.

2- Public Private Partnership in Railways

With increasing containerization of cargo, the demand for its movement by
rail has grown rapidly. So far, container movement by rail was the monopoly
of a public sector entity, CONCOR. The container movement has been thrown
open to competition and private sector entities have been made eligible for
running container trains. 14 applicants have submitted the application
seeking permission for container train operation, which have been approved.

3- Private Participation in Ports

• A leading private shipyard, ABG Shipyard has decided to set up a

greenfield shipyard in south Gujarat with an investment of USD 255.58
million. The new shipyard will be set up over 300 acres.
 • Gujarat-based Adani group is setting up a ship building and repair yard
at about USD 212.98 million.

• Larsen and Toubro Ltd has chosen Kattupalli port, in Thiruvallur

district, near Chennai, as the location to build the over USD 425.97
million mega- shipbuilding yard.

• Major shipping companies, such as Shipping Corporation of India (SCI),

Great Eastern (GE) and Essar have placed orders worth USD 3.3 billion
for 58 ships in Korea and China.

SCI has placed orders for 32 ships worth USD 1.87 billion and will be further
welcoming bids for its USD 3 billion order of 40 ships. GE has placed an order
worth US$ 780 million for 14 ships, while Essar has ordered 12 ships worth
US$ 630 million. The ships are to be delivered during 2009–12.

4- Public Private Partnership in Aviation

An example:

Greenfield airport - CIAL (Cochin International Airport Ltd.)

• The process for development of CIAL as a private airport began in

1993, airport was made operational on 10th June 1999.

• Investment Pattern Rs. In Crores

• Govt. of Kerala 52.04 (35% )

• Central PSU (AI, BPCL) 10.25 ( 7% )

• Commercial Banks 8.75 ( 6% )

• Investor Directors and Relatives 55.37 ( 37% )

• Facility Providers (AI,BPCL,SBT) 1.50 ( 1% )

• Public and NRIs 21.00 ( 14% )

 International PPP Models in
Transportation sector

The main models listed by the European Commission are:

• Service contracts are agreements between a public agency and the

private sector
particularly suited for simple, short-term operational requirements. It is a
very limited form
of PPP, where the private party procures, operates and maintains an asset
for a short period
of time. Management and investment responsibilities remain with the public
sector, which
bears the financial risk and residual value risk, but benefits from the
technical expertise of
the private operator and obtains some cost savings, without transferring
control over the
quality of outputs. Service contracts are commonly used for toll collection
services, for the
provision and maintenance of vehicles or other technical sctivities.

• Operation and management contracts are agreements in which the

responsibility for asset
operation and management is passed on to the private sector. The duration
is generally short
but can normally be extended. The private party is remunerated on a fixed
fee basis or on an
incentive basis with premiums linked to specific performance targets. The
public party still
bears the investment risk and the financial risk. This type of contract allows
significant
efficiency gains and investment in technological sophistication, as the
private operator has a
strong interest in improving service quality to reduce both overall costs and
the demand risk
during the operational stage. This type of agreement is particularly suited
during transition
phases that ultimately lead to privatisation. It can also be used to stimulate
greater private
participation in service delivery by setting the conditions for a greater
involvement of the
private sector in a secondary stage.

• In Leasing agreements, the private party purchases the income streams

generated by
publicly owned assets in exchange for a fixed lease payment and the
obligation to operate
and maintain the asset. Since the commercial risk and the demand risk are
transferred to the
private sector, the private agent has an incentive to achieve operational
efficiency. The
private party indeed profits only if it manages to reduce operating costs
while meeting the
designated service level. On the other hand, the public party bears the risks
related to
network expansion (construction), capital improvements and financing.
Leasing is
particularly suited for infrastructures that generate independent revenue
streams, as occurs in
the case of public transport. More complex leasing schemes such as the
BBO, LDO or WAA
(see table below) allocate greater construction risk to the private sector, thus
reducing the
burden for the public party.

• Turnkey procurement or Build-Operate-Transfer (BOT) is an

integrated type of
partnership in which the private party bears the responsibility of designing,
constructing and
operating the asset. The combination of these different responsibilities under
a single entity
fosters greater efficiency gains and removes important maintenance issues
from the public
budget. This integrated scheme obliges the private operator to take into
account the cost of
operating the asset during the design and operation phase and therefore
stimulates a better
planning and management of the service itself. Here again, the public party
bears the
financial risk; however, unlike what occurs in other types of PPP, the public
party
relinquishes its control on important phases of the life-cycle of the asset.
Since the
ownership of the asset generally remains with the public party, the
specification of quality
outputs is essential for achieving the desired results.
The BOT scheme is considered to be particularly suited for water and waste
projects, and
can be declined in a number of variants (BOOT, BROT, BLOT, and BTO)
according to the
specific project needs.

• In Design-Build Finance-Operate (DBFO) schemes, the private partner

designs the service
or the asset according to the requirements set by the public entity, ensures
and finances the
construction/implementation of the asset/service following the design phase,
and finally
operates the facility. At the end of the PPP contract, the service or asset can
be granted back
to the public sector under the terms of the original PPP agreement; in
alternative, the
agreement is renegotiated. DBFO is the most complex type of PPP, since it
guarantees all
the implementation and operational efficiencies of the previous models, but
also provides
for new sources of capital. The most common model is the DBFO
concession where the
private investor designs, finances, constructs and operates a revenue-
generating
Infrastructure in exchange for the right to collect the revenues for a specified
period of time,
generally for 25-30 years. Ownership of the asset remains with the public
sector. This model
is particularly suited for roads, water and waste projects and generally for
services where
user charges can be applied. To the contrary, in a variant termed private
divestiture, the
asset is partially or entirely sold to the private sector, while the government
only maintains a
regulatory role aimed at protecting consumers from monopolistic prices and
output
restrictions. The divestiture can also be partial, if the government maintains
the ownership of
some portion of the asset to ensure a certain standard of service while
transferring a
substantial share of overall costs to the private partner. The DBFO model can
be declined
and adapted in multiple ways to respond to the peculiarities of the service
provided.

 Issues when deciding whether or not

a P3 is right

• Need, level and form of government support. The balance

between the economic feasibility and the financial ‘bankability’ of a
project would require some kind of support from the public entity. To
the extent that it is possible to specify the minimum parameters which
must be complied by the private sector (in terms of possible social
obligations and quality of service), the contribution of the public entity
must be structured in a way of reducing interference with the
construction, maintenance and management of the transport
infrastructure by the private entrepreneur. As a public-private
partnership, however, the private-public scheme should permit the
sharing of both the risks and the up-side potential of the investment
(i.e., the possible extra surplus revenues). These characteristics would
favor an initial contribution from the government in the form of a grant
(with specified shares in the possible surpluses) or in the form of equity
(with no management power). The justification for this government
contribution must be proved through the evaluation of the economic
 worth of the project (and hence the added benefits to the society of
the project).

• Ultimate fiscal impact of project investment. In addition, the

structuring of the project should include an analysis of the net fiscal
impact of the project, taking into consideration all the additional tax
revenues which would accrue to the government as a consequence of
carrying out the project by the private sponsor. In this manner, a
project which may require the government participation may prove, in
addition, an additional source of tax revenue from the additional
construction or corporate profits, or from the added contribution of the
users (for instance, in terms of added taxes from gasoline consumption
or other fees) who would not travel if the infrastructure is not
constructed (latent demand).

• Distribution of benefits. Furthermore, taking into consideration all of

the costs, benefits and cash flows of the project, the benefits that
accrue to each one of the stakeholders (government, users, sponsors)
can be calculated, for the purpose of estimating the distribution of the
net benefits/costs. For this exercise, it may also be possible to discern
among groups of users (like, for a road, among trucks, buses, or
private automobiles) and assess the support the project would be
expected to receive from those various groups. If a group is
particularly disadvantaged from the construction of the transport
infrastructure, resistance from that group will likely take place.

• Risks of economic and financial returnss. The calculation of the

economic and financial feasibility of the project to the extent possible
should be undertaken using risk analysis techniques in order to
ascertain the likelihood that the project may not end up being feasible
economically or financially. (See Figure 2 for an schematic
representation of this type of analysis.) This analysis requires the
estimation of the probabilistic variation of the main input values, which
may be the subject of disagreement, but a reasonable approximation
can be made from past experiences and with the consensus of a
representative sample of stakeholders.

• Performance indicators. Finally, the structuring of the project should

include the definition of a set of performance indicators that can allow
both the public and private sectors to monitor the achievement of a
 mutually agreed set of objectives. This exercise should be undertaken
following what is called a ‘logical framework exercise,’ specifying the
assumptions that underlie the definition of the dated indicators and the
means of verifications. By monitoring the achievement of the
objectives, the private and public sectors would establish a continuous
dialogue and allow for a justified adjustment to the initial investment
and operational performance.

The outcome of those considerations should bring additional insights

on how to improve the interactions among the stakeholders in order to
reduce the risks as perceived by each stakeholder (and for the project as
a whole), and subsequently spur the development of transport
infrastructure at the quality and quantity required by the users’ demand.

 Summary

Creating world class transportation system is of earnest importance to

progress economically. Though government spending on infrastructure is
humongous so far as the budget allocated is concerned. But it is not possible
to maintain a pace that is needed without the help of private enterprise. Also
it provides financial flexibility to the government. PPP in creating
transportation system will soon be order of the day.

Recognising that strengthening the capacities of different levels of

government to conceptualise, structure and manage PPPs will lead to more
and better PPPs, Department of Economic Affairs is facilitating
mainstreaming Public Private Partnerships through Technical Assistance from
Asian Development Bank. The primary objective is effective
institutionalization of the PPP cells to deliver their mandate through provision
of 'in-house' consultancy services to each of the selected entities at the
Center and State level.