2. Project Management National Conference 2011 PMI India
Project Management Challenges in
PPPs - the Government as Partner
Sharmila Chavaly
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Contents
1 Author’s Profile..................................................................................................................9
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The Planning Commission of India has estimated a requirement of one trillion
dollars as investment need in core infrastructure sectors in the Twelfth five year
plan to sustain an 8.5-9% growth rate. Of the total, fifty percent has to come from
the private sector. This projection is double what was assessed for the Eleventh
plan of five hundred billion dollars as the total investment requirement, out of
which only one third was to come from the private sector. These figures do not
include the infrastructure requirements in the social, such as education and
health, and other non-core sectors.
With recent surveys anticipating huge global shortfalls in the supply of capital for
investment in infrastructure1, an increase in the number of public private
partnerships (PPPs) is likely to become inevitable in countries like India and
there is need for clarity on the role of the government in such a partnership. A
little over five years ago, when launching the central government’s PPP policy,
Ministry of Finance had identified six basic constraints in the mainstreaming of
PPPs:
a. Inadequate availability of long term equity and debt finance;
b. Inadequate capacity in public institutions and public officials to manage PPP
processes;
c. Inadequate capacity in the private sector (developer/investors and technical
manpower/contractors);
d. Inadequate shelf of bankable infrastructure projects;
e. Inadequate advocacy leading to roadblocks in the acceptance process.
Concerted action has been taken by government since then to address most of
these issues, by way of creating regulatory and policy structures in most sectors,
an “enabling” PPP environment, capacity building powered by technical
assistance from the multi-lateral banks, and the standardisation of documents.
An area that has, however, come in for scrutiny of late has been that of the role
of the government in managing PPP projects. On the one hand, in
departments/ministries that have been slow off the starting blocks, unfamiliarity
with the structure has led to a piquant situation where PPPs tend to be seen as
1
“How the growth of emerging markets will strain global finance”, Richard Dobbs, Susan Lund, and Andreas
Schreiner McKinsey Global Institute, December 2010
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merely a financing tool so that there is a great reluctance to “let go” or cede
management control. There is a suspicion that this would be tantamount to
selling out to the private sector and that it is necessary to hold out and resist this
insidious process. On the other hand, private partners, including financiers, also
view the government with suspicion, seeing an overlap in its dual role as
overseer and partner.
While such views are generally fuelled by lack of experience with PPPs, backed
by the “failure” of some big-ticket PPPs which require bail-outs and,
understandably, get more press than the quieter, steady successes, it is also
reflective of the misconceptions on the role of the public sector in a PPP by not
just the public at large, but by the private partner and, surprisingly, by the public
sector itself.
It is first necessary to lay down when a PPP is deemed to have failed. Failure,
simply put, would be a project in which the laid down outcomes are seen as not
having been met. When PPPs are entered into for the provision of public
services, the role allocated to the public sector partner is, in the most general
sense, to oversee the delivery of services at a pre-defined cost to the level and
quality or standard that the government requires the project to provide (the
outcomes), and to take over the responsibility for monitoring and enforcing such
standards. Pragmatism from years of experience worldwide with PPPs requires
acceptance of the fact that there cannot be a 50-50 evening out of the benefits in
a PPP project. A good project would be one where the private partner makes
good his investment at a price that covers his cost of capital and a reasonable
profit while, for the public sector, it is the realization of predefined goals: for both,
therefore, there is a stated objective of realizing value for their money2. For the
government, which has its own system of oversight, the importance of meeting
public policy goals as well as ensuring that legally and contractually the goals of
fairness, equity and transparency are met cannot be over-emphasized.
Anecdotal evidence from “failed” PPPs in which failure has been attributed to the
government, points to the major accusations against the government partner in
such cases as being:
i. Red tape and bureaucratic hurdles, expensive delays in clearances, over-
caution and a rule-bound approach
ii. Skewed risk-sharing in favour of the public sector
2
“Risk Management, Public Interests And Value For Money In PPP Projects: Literature Review And Case
Studies”; Hossein Darvish, Patrick X.W. Zou, Martin Loosemore, Guo Min (Kevin) Zhang; CRIOCM
International Symposium on “Advancement of Construction Management and Real Estate”, 2006
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iii. A conflict of interest in the government’s role as Regulator, leading to its
over-interference and also distrust by the private partner.
In essence, however, it is these very three accusations that encapsulate the fine
line that the government has to toe when it embarks upon a PPP program.
Though some accusations of delay appear to be completely justified, from a
broader viewpoint the government is ultimately responsible for ensuring that a
public good is not squandered, while also ensuring that a certain level of
services/assets are made available to the public within pre-defined cost limits.
Not all such services will be met through PPPs. However, when the responsibility
is to be discharged through concessioning a private partner, the onus is on the
government to prove that given the alternative, it was the right decision. This
leads the government to first, apportion risks as best as it can to the private
partner, at a cost that it has judged reasonable, after rigorous analysis, especially
when the lack of a robust public sector comparator can lead to the over-valuation
of risks that are transferred to the private sector. It would also take steps to
obligate the private partner, through contract, to pay penalties for any shortfalls
and, more important, provide for step-in/termination in extreme cases. The
starting point therefore is an exhaustive listing of the risks and then apportioning
those risks between the private and the public sectors in an optimum manner.
In the “balancing” of risks lies the key to the success of the partnership. This
entails apportioning the risk to the partner best suited to mitigate the risk. Where
a risk can be defined as the likelihood of occurrence of an event that can
adversely affect the outcome of the project, if the probability of occurrence and
the quantitative impact of the occurrence can be assessed with reference to the
asset/service provision, from the government’s point of view, it would mitigate the
risks by assessing the costs of retention of the risk vis-à-vis transferring it to the
private party. This is not “risk avoidance” but the identification, assessment and
optimal management of risks. Contrary to popular belief, mere transfer of all risks
to the private partner is not the solution – that could entail costs that would
devolve on the government and would have to be built into the financial modeling
of the project. The mitigation strategy that the government undertakes analyses
the cost of transferring/retaining/ignoring the risk and, based upon the assessed
costs, the decision taken to minimize the costs to the government as this
translates into better value for money and, ultimately, successful project
implementation.
The process of preparing a government risk management strategy may require a
long lead time in pioneering projects where documents are not yet standardized
and the government analyses the pros and cons of the various alternatives ab
initio. While failure by a private partner dents his reputation, admittedly an
enormous commercial risk, failure by the government partner can have a wider
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impact as damage to the credibility of the government as a partner in a PPP may
impact the cost of financing of PPP projects in the country itself.
Thereafter, in the “procurement” of the private partner, transparency and equity
have to be ensured to prove that no sweetheart deals were struck and that the
government did its due diligence. The agreement between the partners would
have to be comprehensive and painstakingly explicit, including the foresight to
build in conditional re-negotiation clauses where required. The standards of
disclosure required are normally stringent where, erring on the side of caution,
the government partner can have a tendency to over reach unless convinced of
the irrelevance of a requirement. The European Commission, while analyzing
PPPs, states that a “ … well-crafted agreement uses checks and balances to
create co-dependence and transparency, while enabling all the parties involved
to achieve their goals”, that is, a series of checks and balances underlie the
agreement between the partners3. The built-in checks, usually by way of
independent third party audits, do not take away from the fact that the over-sight
role of the public sector partner has to continue as the guardian of the public
good.
This brings in the third accusation, of overlap in regulatory and “partnering” roles.
Many governments implement a PPP through project-specific entities like special
purpose vehicles in which they sometimes have a stake or with which the
contract is entered into. The role of the government as a partner in the
“management” of a PPP project therefore precedes as well as goes well beyond
the project itself. It starts with the identification of the project - a decision that will
have to withstand the scrutiny of audit and vigilance many years down the line. It
continues in the selection of the private partner. It involves participation in the
management as mandated by the contract and, when regulatory problems arise,
taking on the role of protecting the public interest in front of the regulator. In
sectors where independent regulators have been appointed, though they have so
far largely been drawn from government ranks they have largely been rated as
fair and judgments can, and do sometimes, go against the government, as one of
the partners in the PPP.
In the Indian context, the infrastructure assets, even if created with private
investment and by the private partner, are essentially public sector assets and
there is always an element of “public finance”, whether in the form of the
underlying land on which the infrastructure is created and/or with an element of
grant or foregone public revenues. This brings in the statutory audit issue which,
even though not yet settled, is emerging at the centre stage in the PPP debate.
Comprehensive guidelines were issued by the Comptroller & Auditor General of
India to cover aspects of infrastructure PPPs that require statutory audit as they
involve the outgo of public moneys, not as mandated by the Companies Act
3
“Guidelines for Successful Public Private Partnerships”; Directorate-General Regional Policy, European
Commission, March 2003.
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(which may apply to an SPV set up to deliver a PPP) but customized from best
practices worldwide. Central to it is, rightly, the provisions of the Concession
Agreement (CA) signed between the two parties to the PPP contract. C&AG’s
guidelines4 emphasize the importance of encouraging innovation and risk-taking
- that it is “what” has been achieved rather than “how” it has been achieved that
is the focus - and also that they “… while promoting accountability should not
discourage private sector involvement, investment and innovative management
techniques”. The audit perspective would shift from the conventional audit of
expenditure at project completion to one that encompasses the estimation of life
cycle costs and final project delivery. It would check whether PPP is truly the
“best fit” for a project - whether the government will realize “value for money” or
conventional public sector funding would have been more efficient. Thereafter is
the stage of project implementation and service delivery through the concession
period.
While the temptation for Audit to over-extend its ambit has to be rightly resisted
the government partner would also have to take into account the statutory
requirements it has to build into the agreements in keeping with its role as the
custodian of public assets. This is where the role of the government as provider
of public services and assets becomes mildly fungible with that of a super-
regulator (the sovereign) who not only oversees the process of the provision but
also partners with the private sector in the delivery of the service.
Viewing the government as an equal partner in a PPP is, therefore essentially a
flawed concept. The government, by virtue of its basic role as guardian of the
public interest and overseer of the public good, will always have a role that is
larger than that contractually mandated, more so in PPPs in the social sector like
health and education. This in no way detracts from the principle of equity in
contracts, given that it is only the government that is ultimately accountable for a
failure in good governance.
The author is a civil servant. The views expressed are personal.
4
“Public Auditing Guidelines, PPP in Infrastructure Projects”; Comptroller and Auditor General of India, 2009
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1 Author’s Profile
Author’s bio: The author is a civil servant with over two decades
experience, specializing in the transport sector, financing of infrastructure,
PPPs, foreign exchange management and external borrowing. The views
expressed are personal.
schavaly@nic.in
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