Public-private partnership (PPP)

Public-private partnership (PPP) is a collaborative model that involves both public and private sector entities working together to deliver infrastructure, services, or projects that traditionally have been the sole responsibility of the public sector. As PPP involves full retention of responsibility by the government for providing the services, it doesn’t amount to privatization. PPPs come in a variety of shapes and sizes, depending on the private party’s level of involvement and risk tolerance. Normally, the conditions of a PPP are outlined in a contract or agreement to specify the obligations of each partner and allocate risk.

SIGNIFICANCE OF PUBLIC-PRIVATE PARTNERSHIP

       1. Infrastructure Development

• PPPs play a crucial role in developing essential infrastructure such as roads, bridges, airports, and utilities.
• They help governments leverage private sector expertise and funding to address infrastructure deficits.

2. Efficiency

• The private sector's involvement often brings efficiency and innovation to projects, as they have a profit motive and are incentivized to complete projects on time and within budget.

3. Risk Sharing

• PPPs allow the sharing of risks between public and private entities, reducing the financial burden on the government and ensuring that private partners have a stake in project success.

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. 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.

NEED FOR PUBLIC-PRIVATE PARTNERSHIP

1. Resource Constraints

• Governments, particularly in developing countries, may lack the financial resources to fund large infrastructure projects on their own. PPPs provide access to private sector capital and expertise.

2. Innovation

• Private sector involvement can introduce innovative solutions and technology that may not be readily available within the public sector.

3. Accelerated Project Delivery

• PPPs can expedite project timelines, which is essential for critical infrastructure projects.

TYPES OF PUBLIC-PRIVATE PARTNERSHIP

1. BOT (Build–Operate–Transfer)

• It follows a standard PPP paradigm where the private partner is in charge of designing, constructing, operating (during the agreed-upon period), and handing back the facility to the public sector.
• The project’s private sector partner must provide the funding and assume responsibility for its construction and upkeep (usually a greenfield project).
• The public sector will permit business partners to charge users for services.

2. BOO (Build–Own–Operate)

• In this approach, a private entity will retain ownership of the newly constructed facility.
• The public sector partner consents to buy  the goods and services delivered by the project on mutually acceptable terms and circumstances.

3. BOOT (Build–Own–Operate–Transfer)

• In this BOT form, the project is turned over to the government or a private operator after the agreed-upon period.
• Highway and port construction utilises the BOOT concept.

4. BLT (Build-Lease-Transfer)

• The asset is leased to the public entity for a medium duration and is owned by the private company.
• In this case, the public entity is in charge of financing the investment.

5. BOLT (Build–Own–Lease–Transfer)

• In this strategy, the government grants a building concession to a private company and possibly designs it as well.
• The facility may be owned by a private business, which may then lease it to the public sector and transfer ownership of the facility to the government after the lease term.

6. DBFO (Design–Build–Finance–Operate)

• According to this approach, the private party is solely responsible for the project’s design, building, financing, and operation throughout the concession period.
• In this model, entire responsibility for the design, construction, finance, and operation of the project for the period of concession lies with the private party.

7. LDO (Lease–Develop–Operate)

• In this kind of investment arrangement, the public sector organisation or the government keeps ownership of the newly built infrastructure facility and receives payments under the conditions of a lease with the private promoter.
• It is primarily used for developing airport facilities.

IMPACTS OF PUBLIC-PRIVATE PARTNERSHIP

1. Economic Growth

• PPPs can stimulate economic growth by creating jobs and fostering development in areas where infrastructure is improved.

2. Improved Services

• The quality and efficiency of public services can be enhanced through PPPs, such as healthcare, education, and transportation.

3. Long-term Partnerships

• These partnerships encourage long-term thinking and planning for projects, which can lead to better-maintained infrastructure

 ADVANTAGES OF PUBLIC-PRIVATE PARTNERSHIP

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.

CONCERNS RELATED TO PUBLIC-PRIVATE PARTNERSHIP

      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.

5. Social Equity

• PPPs can lead to concerns about access and affordability, as private entities may prioritize profitability over social considerations.