CHAPTER 7

CASE STUDIES AND EXPERIENCES ON PPP

7.1.0 Key Principles
Public private partnerships should adopt the following eight governing principle:
1. The public interest in paramount
2. Good practices in accountability and transparency measures must be maintained
throughout the lifecycle of the project.
3. A PPP project needs to be carefully planned, well-defined in scope and fundamentally
clear in its objectives.
4. The viability of the project needs to be measured against a criteria set by the initiating
partner to assist it in determining it s potential suitability for PPP procurement.
5. The selected PPP model must provide value for money in terms of costs and time
savings with appropriate consideration of risk transfer
6. The PPP tendering process must be competitive, fait and subject to proper due
diligence on the part of the partnership.
7. An urban sector PPP must reflect the needs of the affected community and must
integrate into the project key stakeholders priorities.
8. The project must be responsibly managed throughout the terms of the agreement, with
predictability and priority as determined by the partnership.

The Government of India has now allowed FDI in most infrastructure sectors. Despite this,
PPP in India has not been that successful compared to foreign countries. There are barriers to
PPP implementation in Indian Context. Also past case studies are analysed to learn from
positives and negative aspects of these examples. These learning when implemented would
help India to realize the true potential hidden in Public Private Partnership mode of project
implementation.

7.1.1 Learning from case examples of successful and failed PPPs in India
In PPP, each stage has its unique requirements to be successful. The PPP project can fail due
to failure in one or more stages in the process. However some PPP projects which did not
succeed over the past had one or more prominent faulty stages. Due to this, the failed PPP
project set an example of how not to handle these particular stages.

Similarly, there are examples of PPPs, wherein some stages were accomplished brilliantly.
And the project set an example of how to accomplish these particular stages. Thus, for each
stage and corresponding sub-stages, different PPPs were identified which correctly illustrate
how to (or not to) handle these sub-stages. And finally learning was drawn from these
examples to understand what will make corresponding sub-stages work better.
a) Project Preparation
Comprehensive due diligence Studies & Robust Traffic / Market Projections:

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7.2.0 Examples of successful & Failure PPPs
In the Timarpur Integrated solid waste management project, important steps such as detailed
technical studies, financial and risk evaluation, obtaining regulatory and statutory approvals
were undertaken at the project preparation stage itself. The project implementing SPV was
also incorporated prior to the launch of the bid. This ensured that the actual project
development phase experienced as few hurdles as possible.
• Examples of PPPs where problems were encountered
In The Vadodara Halol Toll Road project, estimating the traffic projections for the project,
the industrial incentives available for the project area were assumed to continue over the
long-term. However, these incentives were eventually withdrawn resulting in a traffic that
was lower than the projected traffic. This resulted in increase in Policy Risk and Revenue
Risk.
Learning: Due diligence studies of technical and legal implications are must to ensure the
smooth progress of a project through the project life-cycle. Also robust traffic assessments
ensure bids submitted by interested private entities are well informed and realistic and the
overall capacity proposed for a project is optimum. They also help to mitigate corresponding
revenue risks.
b) Procurement
Dealing with Speculative Bids:
• Examples of PPPs where problems were encountered
In the Hyderabad Metro project, the government provided commercial development rights for
almost 296 acres of land allocated for the depots and the stations. This opportunity of the
utilization of land on a commercial basis along with the metro project led to widely divergent
bids from the bidders. Finally the award of this project to Maytas was withdrawn. But such
speculative bids exposed the project to the risk of compromising the construction and quality
of the metro project. As the private operator would have had a greater incentive to complete
the real estate development at the cost of the metro.

Learning: While speculative bids should ideally be avoided, if encountered, the public entity
should deal with them without jeopardizing the long term prospects of the project. This could
even mean terminating and re-launching the bid process.

Importance of Lead Consortium Member/Promoter of Concessionaire:

• Examples of PPPs where problems were encountered
In the Hyderabad Metro project the winning consortium of Maytas Metro was badly affected
due to the issues faced by its promoter - Satyam Computer Services. Although the project
was to be implemented by a separate SPV, there was a loss of investor confidence within the
promoters of the project. And eventually, the project failed to achieve financial closure. The
government finally had to withdraw its award and re-launch the bid process.

Learning: The experience and expertise of the lead consortium member or promoter signifies
the concessionaire’s ability to undertake complex projects. Therefore, there should adequate
due diligence in contractually ensuring backing of the concessionaire by the promoter and the
continued involvement of the lead member, at least during the project development stage.

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c) Development
7.2.1 Handling of Land Acquisition :
Examples of Successful PPPs
In the Hyderabad Metro project the government had to handover land to the concessionaire
by the financial closure date. Moreover, 90% of the land had to be handed-over within 120
days from signing of the agreement. To ensure greater planning and focused efforts on land
acquisition by the government; penalties were built in to the contract in case the government
delayed the delivery of the land. To reduce the risk further, the project intended to use
government lands to the possible extent.

Examples of PPPs where problems were encountered

In the Delhi Gurgaon expressway project prior to actually acquiring the land, the government
committed to the promoters for providing a substantial area of land. But there were certain
areas of land that were difficult to acquire, due to the thickly populated surrounding areas of
the expressway. This exposed the government to the risk of not providing the land within
reasonable time, thus impacting the overall schedule of the project.

Learning: It would have been better if uncontrollable risks such as the one incurred above,
were addressed before the project procurement stage itself to ensure smooth functioning of
the project. This could have been achieved by completing the land acquisition process prior
to the project procurement process itself.

7.2.2 Streamlining of Approvals & Clearances:

Examples of Successful PPPs
In the Alandur Sewerage Project the Alandur Municipality took up the responsibility for key
approvals, including road cutting, shifting of services and environmental clearances. The
developer was responsible only of the ‘works’ related approvals. This approach ensured there
was minimum delay in obtaining the necessary permits.

Learning: There should be a single interface for interactions or coordination on all such
approvals to be setup by the government to prevent ensuing delays. This could be in the form
of a lead entity OR a common project steering/ empowered committee taking up the
responsibility of all such formalities. With this, the concessionaire could focus on the core
development issues rather than being entangled in administrative processes.

7.2.3 Environmentally and Socially responsive development framework:

Examples of Successful PPPs to be emulated
In The Vadodara Halol Toll Road project, from the environmental and social assessment of
the project it was concluded that the project would lead to resettlement and rehabilitation of
about 300 families. Thus, to develop different alternatives, intense public consultations were
carried out. Moreover Bypasses were introduced at various critical locations. As a result the
extent of resettlement was reduced to only 10 project affected households.
Learning: Since most of Infrastructure projects have significant social and environmental
impacts; it is necessary that PPPs have an environmentally and socially responsive
development framework. Social and environment impact assessments are mandatory in this
regard. This framework would also help in gathering public support for a PPP project.

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7.2.4 Financing Innovations:
Examples of PPPs to be emulated
The Vadodara Halol Toll Road was another project that utilized several financing methods
such as deep discount bonds with an option of take-out financing, cumulative convertible
preference shares and long term loans as a part of its financing structure.

Learning: It is important for PPP projects to be financially independent to the extent possible
and minimize reliance on government grants or schemes. This is possible through innovative
financing structures. They not only bring down the cost of funds but also tap new sources of
funding. However, care should be taken to ensure that such innovations in financing do not
result in speculative bids during the Procurement stage. Also Since real estate market is very
volatile and cyclical in nature; real estate development should be a smaller component of the
project or alternatively should be separated from the core infrastructure project.

7.2.5 Operations
Favourable Operating Environment:
Examples of Successful PPP
In the Amritsar Inter-state Bus Terminal project, the government issued notifications to the
effect that all intercity buses would be required to pickup and drop off passengers at the new
Inter City Bus Terminal. This effectively reduced the concessionaire’s revenue risk.
Learning: Since by nature PPP projects require the private sector to operate in a public
dominated space, it is important to create a favourable operating environment for the private
sector to function optimally.
7.2.6 Resolution of Issues through Mutual Discussions:
In PPP Projects there is always a likelihood of issues cropping up from time to time between
the government and the public agency. Contracts merely specify the formal mechanism to
deal with such issues. But in some cases solutions can only be identified through mutual
discussions carried out in good faith.
Following table gives the Case studies that are uploaded on the website of Infrastructure
Development Department GoK & the Department of Economic Affairs, GoI. The Officers are
advised to read through the case studies.

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7.3.0 Case Studies on PPP

7.3.1 Experience of JUSCO water supply project in Mysore

Rationale for PPP
• In spite of adequate water availability from a dependable source, citizens do not
receive regular supply: water is supplied for a few hours on alternate days in many
areas
• Significant extraction of ground water from bore wells and mixing up supply with
Cauvery water through the same network
• Associated services like Customer Complaint Management, Billing & Revenue
Collection, Active Leakage, Asset & Inventory Management very poor
• No bulk meters and very few working customer meters
• Significant proportion of network comprises PVC pipes laid at shallow depths and
solvent cement jointed
• Lack of accountability of staff due to politicized system
• Sizeable expenditure from municipal budget with no tangible gains

7.3.2 Problems faced in PPP in the project

• Power Failure during the Supply hours
• Non Performance of deputed employees
• Security of JUSCO Employees
• Political Interference in Daily operations of Water Supply
• Water Distribution Sub stations should be declared as prohibited area

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 • Internal transfer of deputed employees
• Deputation of O&M deputed staff for revenue drive
• MBR Outlet Valve leakage
• Additional Tanker requirement
• Decision required for 24x7 water supply – In line with District Minister’s
instruction

7.3.3 Problems in putting through a 24X7 contract

Overall acceptance to PSP in water
Lack of ownership of initiative across different levels and hence resistance
from different quarters (political, NGOs, employees, public)
Lack of communication to different stakeholders resulting in anxieties and
insecurities
Vested interests and hence resistance

Inadequate planning & preparation

Poor Network & leakage data
Improper estimates of rehabilitation costs
Inadequate availability of bulk water to achieve 24X7
Inadequate time to bid, to execute and to demonstrate performance
Very stiff or unrealistic performance goals

7.4 Case Studies on PPP

Case Study 1 MUNICIPAL SOLID WASTE COLLECTION AND

TRANSPORTATION – NEW DELHI MUNICIPAL COUNCIL
Solid Waste Management

PPP context
The following formed the background for the NDMC Waste Management Concession:

1. The Supreme Court of India made a series of judgements (in the Dr. B L Wadehra versus
Union of India case, 1996 and the case of the writ petition filed by Almitra H Patel, 1998) -
upholding the right of citizens of Delhi to live in a clean city, emphasizing the statutory
obligation of NDMC and the MCD towards waste management and issuing directives
towards efficient management of wastes in the city.

2. As part of the proceedings in the Almitra Patel case, the Supreme Court set up a
Committee in 1996 under the chairmanship of Mr. Asim Burmon to make recommendations
towards SWM in urban areas. Based on the recommendations, the Ministry of Environment
and Forests notified the Municipal Solid Waste (Management and Handling) Rules, 2000.
These rules are time bound, hold the Urban Local Bodies (ULBs) accountable and prescribe
penalties for non-compliance and non-performance.

3. The existing system of waste management through NDMC staff was fraught with issues
such as high manpower and operation costs, inefficiencies in collection and transportation,
technologically archaic equipment and installations, mixing of wastes reducing efficacy of
land fills and treatment plants etc.

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4. Analysis of the system suggested that a large proportion of the cost incurred was on
account of collection and transportation – Rs.556 (54%) out of an average cost of Rs.1029
per metric ton (MT). Analysis also indicated that costs could be significantly lower if such
functions were carried out by a private operator.

Project Development
Project Conceptualization
In order to overcome capacity and financial constraints and to develop an efficient SWM
system, the NDMC opted to engage the private sector for managing labour intensive tasks of
collection and transportation of wastes. This was envisaged as part of a larger strategy, where
better segregation would be practised at source, collected at the household level through rag
pickers organized through NGOs, and collected, further segregated and transported separately
to existing landfill and treatment sites by the operator. The project was expected to facilitate
better collection/transportation at lower costs and increase the efficiency of post processing of
wastes.

Project Development
1. The NDMC established an Advisory Committee for facilitating the decision making
process, ensuring stakeholder participation, facilitating approvals and co-coordinating with
various associated departments. The Committee was headed by the Chairman of NDMC and
comprised of the Project Director, various technical advisors and a representative of the
Health Department (Anchor Department).
2. Technical studies were conducted through a Transaction Advisor1 to review the gaps in
existing mechanisms and ascertain the quantum of wastes to be handled by the private agency
in addition to feasibility and value for money analysis.

Infrastructure
Procurement Procedure
The contract was awarded in the form of an 8 year concession for 12 selected circles within
NDMC through a competitive bidding process in 2006. Pre-qualification criteria included
(other than financial profile of company) the experience of bidders in any of the following
criteria:

1. Collection-transportation of at least 20000 tonnes/annum or annual billings of at least

Rs.10 million from collection-transportation of any kind of wastes for each of the last 2
financial years

Handling of a fleet of at least 20 goods vehicles for each of the last 2 financial years
3. Transportation of at least 1 Lakh tonnes per annum of minerals, metals and materials such
as iron ore, steel, coal, sand for each of the last 2 financial years
4. Development of at least one core sector project with a project cost of at least Rs.150
million for government agencies in the last 5 financial years .

The award – based on the lowest quote for tipping fee payable by NDMC (bid parameter) –
was made to M/s Ramky Energy and Environment Limited based on their quote of Rs.468
per MT as the tipping fee.

Lessons Learnt
1. Importance of structuring operator obligations in a way that monitoring is in-built into the
structure and quality services are ensured. In this case the linking of tipping fee with other

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obligations such as maintenance of a certain level of segregation of waste acts as a
monitoring device.

2. While the project has largely been successfully implemented, the expected levels of
segregation have not been achieved. It was expected that a larger city level strategy where
community groups would practice source segregation and undertake primary collection could
be implemented. The efficiency of the private partner to deliver segregated wastes was
contingent upon the efficiency of such a primary system. It was also thought that the private
partner would work actively with the community groups and stakeholders like rag pickers to
ensure that the waste segregation targets are achieved. However, lack of adequate efforts to
operationalise and incentivise such systems, have led to non-achievement of segregation
benchmarks. It is also clear that NDMC also has a critical role to play in this process and
cannot leave it entirely to the private partner.

Note : Refer www.iddkarnataka.gov.in and PPP Cell, DEA, GoI for more details

Case Study 2 SANITARY LANDFILL AT MAVALLIPURA BANGALORE

Solid Waste Management

PPP Context
1. The Ministry of Environment and Forests notified the Municipal Solid Waste
(Management and Handling) Rules in 2000. These rules are time bound, hold the Urban
Local Bodies (ULBs) accountable and prescribe penalties for non-compliance and non-
performance; triggering among other things the need for improved waste disposal practices
such as scientific disposal and sanitary land filling.

2. Total generation of Municipal Solid Waste (MSW) in Bangalore at the time of

commissioning of the project was about 2500 tons per day (including compostable and
recyclable wastes). The city did not have a properly designed system for disposal and the
wastes generated were disposed off at open dumping facilities on the outskirts of the city.
This led to issues such as unhygienic conditions, pollution of ground water due to percolation
of pollutants from the garbage into the earth, nuisance due to scavenging birds etc. There was
clearly a need to implement a scientific disposal system for the city.

Project Development
Project Conceptualization
The project envisaged a simple procedure for handling MSW generated in the city –
rendering the wastes ‘inert’ followed by sanitary landfill of the inert residual matter. The
landfill project was proposed for a capacity of 1000 tons per day spread over two sites. The
first project (subject of this case) was for a 100 acres site at Mavallipura to handle 400 tons of
MSW per day. Engagement with a private partner was 3 expected to bring the required
technical capacity and experience to the project, and the Concessionaire was to be responsible
for design, construction, operation and long term maintenance (20 years when the site would
be operational and 15 years after closure of the site due to saturation) of the land fill. BBMP
undertook the task of delivering the wastes to the site. Since no direct revenues ((except
possible sale of composts and recyclables) were to accrue from the project, it was decided to
pay the Concessionaire on a ‘tipping fee per ton’ basis.

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Project Development
1. Between 2001 and 2004, the Government of Karnataka (GoK) through the BBMP, the
Transaction Advisor1 and the Bangalore Agenda Task Force (BATF), which comprised of a
team of experts in MSW management, undertook activities for setting up scientific land fills
for the waste generated within the City. About 111 acres of land spread across nine sites
within the Bangalore district was available for the purpose (allotted in 2000 by the Revenue
Department, GoK).

2. BBMP conducted several background studies for the project through the Transaction
Advisor including feasibility study, location analysis, capacity and expected duration for
saturation of chosen site, quantum of wastes to be handled by the private player etc.

Preliminary investigations of feasibility of allotted lands for the purpose of developing

landfills revealed that 7 out of the 9 sites could not be used due to various environmental and
social (proximity to existing habitation and public resistance) reasons. The final sites were
decided after conducting detailed Environmental Impact Assessment, commitments from the
BBMP to relocate certain existing functions outside the mandatory 500m buffer zone (as per
MSW 2000 Rules) and after additional acquisition of land since the allotted lands at the
chosen sites was inadequate.

4. Detailed layout and drawings were prepared by the public agency for the land fill site and
the use of the designs was optional for the Concessionaire. In any case the responsibility for
the design was borne by the Concessionaire.

5. Review of the progress of project development activities was carried out on a weekly basis.
The meeting was attended by representatives of BBMP, BATF, and the Transaction Advisor
who discussed the various activities undertaken and action to be taken during the
development stage.

Whenever bottlenecks emerged, the matter would be taken up and resolved at the higher level
with the Commissioner, BBMP or Secretary, Urban Development Department or any other
senior office of the relevant Government Department.

Procurement Procedure
Procurement of the Concessionaire was based on a two stage (RfQ followed by RfP)
competitive bidding process. The final contract was awarded to M/s Ramky Enviro Engineers
Limited in August 2004, based on their lowest quote for tipping fee per ton of residual inert
matter going into the landfill (bid parameter).

Lessons Learnt
1. The failure of the BBMP to hand over committed quantum of land for the sanitary landfill
has resulted in both reduced capacity of the scheme as also reduced revenue expectations for
the private Concessionaire (quantum has reduced but period of concession has remained the
same). Though the issue was resolved amicably it could have had very serious consequences
for the future of the project since the very basis of the revenue forecasts had been changed.
The importance of gaining possession of adequate land before committing to the obligation
cannot be understated.

2. The project also highlights the importance of committed efforts by Public Authorities to
ensure implementation of a project. The procedure of weekly meetings amongst project

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stakeholders to ascertain project progress and regular monitoring and intervention by top
management followed in the case became a trendsetter for all future projects.

3. The project provided a unique opportunity to levy appropriate user charges, create a
revenue stream for future recurring and capital expenses for SWM and create a framework
which would be sustainable for the ULB in the long run. However due to certain logistical
reasons the BBMP has not been to implement such user fees.

4. Importance of proper information, education and communication (IEC) so as to avoid

resistances from other stakeholders. This is particularly important in sectors such as waste
management due to the ‘nuisance’ value and ‘not in my back yard (NIMBY)’ syndrome
associated with its processes.

5. The complaints of the citizens may nevertheless have been justified and as such projects of
this nature should insist on incorporating environmental safeguards and if required insist on
use of more appropriate and safe technologies.

Note : Refer www.iddkarnataka.gov.in and PPP Cell, DEA, GoI for more details

Case Study 3 THIRUVANANTHAPURAM CITY ROADS IMPROVEMENT

PROJECT
Transport Infrastructure
PPP Context
1. Enactment of Kerala Road Fund Act in 2001, making provisions for setting up a ‘Road
Fund’ outside the consolidated fund of the State and constituting a Board for its
administration. The Act also provided for collection of user charges by private companies.
The Road Fund was to be constituted of 10% of motor vehicles taxes, tolls collected under
the Kerala Tolls Act of 1986 and contributions from the Central Road Fund. Rules were
issued in 2003 for carrying out the provisions of the Act.

2. Constitution of the Kerala Road Fund Board (KRFB) in 2004, to mobilize funds for road
infrastructure, approve PPP arrangements and allocate funds (subsidies/annuities) from the
Fund to private players in road projects. The Road Fund formed the primary source of
annuity payments under the Thiruvananthapuram City Roads Improvement Project (TCRIP).

3. All major city roads, including important National Highway Bypasses needed
improvement in terms of widening, improvements in strength of road surface, improvement
of pedestrian pathways and signage.

Project Development
Project Conceptualization
Urban Roads are typically constructed and maintained through small construction contracts
with short liability periods in case of defects. As a result most such projects are fraught with
piece-meal improvements and poor quality of construction, leading to frequent repair and
maintenance of the same stretches of roads.

TCRIP attempted a ‘life cycle’ approach to road improvement, making the Concessionaire
responsible for long term maintenance of the roads, thereby ensuring better quality of
services. The project envisaged expanding, strengthening and upgrading some of the arterial

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roads of the city, keeping in mind the likely growth in traffic over the next decade and was
structured on an annuity (semi annual) basis, since tolling within the city was not feasible.
The annuity was to be paid through the Kerala Road Fund so as to provide additional
assurance to private agencies, as against the normative practice of budgetary allocations
which are made one year at a time.

Project Development
1. Annuity payments to the Concessionaire were to be made from the Road Fund. For this
purpose extensive financial analysis was conducted and plans were prepared in due
consultation with various related departments (including the Finance Department).

2. A Detailed Project Report (DPR) was prepared through a Technical Consultant1 and
involved preparation of technical designs, drawings and estimation of costs.

Procurement Procedure
Procurement of Concessionaire for the TCRIP was based on a two stage (RfQ and RfP)
competitive bidding process. The project was awarded in March 2004 to an SPV called
Thiruvananthapuram Road Development Company Limited (TRDCL) formed between
IL&FS Transportation Networks Limited and Punj Lloyd Limited, based on their quote for
lowest annuity amount (bid parameter).

Lessons Learnt
1. The project highlights the possibility of undertaking unusual urban sector projects – such
as development and maintenance of ‘within city’ road projects through PPP arrangements.
The project also highlights the importance of making the Concessionaire responsible for long
term maintenance of the infrastructure so as to ensure the quality of services obtained through
such arrangements.

2. The need for creating a dedicated funding mechanism, such as the ‘Road Fund’ created in
Kerala for the TCRIP project, to increase the comfort level of the private sector for
participating in such projects - particularly when the payment is structured as a fixed annuity
to be paid by the Concessioning Authority.

3. Importance of structuring operator remuneration in a way that monitoring is in-built into

the mechanism and quality services are ensured. In this case the linking of annuity payments
in O&M phase with factors such as ‘Assured Availability’ of the entire carriageway acts as a
monitoring device.

4. Timely provision of land is one of the key requirements for achieving desired project
outcomes within fixed timelines. In the TCRIP the failure of the PWD to secure and handover
land as per its time commitments has severely affected project outcomes and resulted in
additional financial liability (through compensation) for the Concessioning Authority. The
importance of gaining possession of adequate land before committing to the contractual
obligation cannot be understated.

5. The issue of delay in handover of land also highlights the importance the Concessioning
Authority’s compliance with its own commitments. In this the failure of the PWD has
resulted in extra financial liabilities for the Authority and resulted in wastage of public
money.

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Note : Refer www.iddkarnataka.gov.in and PPP Cell, DEA, GoI for more details

Case Study 4 OPERATION AND MAINTENANCE OF STREET LIGHTS IN

VIJAYAWADA
Street Lighting
PPP Context
1. The Vijayawada Municipal Corporation (VMC) had around 27,000 street lights prior to the
PPP initiative, managed entirely through municipal officials. Capital works were undertaken
through regular EPC contracts and operation and maintenance (O&M) through 60 contractual
staff appointed for the purpose. Funding was through annual budgetary allocations.

2. The Corporation incurred an annual expenditure of Rs.411.18 lakh on energy bills for
street lighting and Rs.53.04 lakh for annual maintenance (material and labour). Overall
expenditure of the ULB on account of energy bills (all services combined) per year was as
high as Rs.12 Crore approximately.

3. As part of its Silver Jubilee celebrations in 2006-07, the ULB set itself the target of
becoming India’s first energy efficient city, and an Energy Conservation Plan was proposed
including proposals to introduce energy saving technology in street lighting.

Project Development
Project Conceptualization
In order to implement an energy-efficient street lighting system, through high quality
equipment and high-end technology, and reduce overall energy expenditure of the ULB, the
VMC decided to adopt a PPP model with an Energy Service Company (ESCO) as the private
partner. An ESCO is a company that develops and operates projects designed to improve
energy efficiency and reduce maintenance costs for facilities. In the Vijayawada case the
ESCO was expected to finance, procure, install and maintain a new system for a period of
five years and achieve power savings in return for a fixed proportion of the savings of VMC
on energy bills. Main features of the project included:

1. Latest and highly advanced lighting panels with self protecting and diagnostic features

2. A central computerized control facility – allowing remote monitoring of the system

including identification of defects

3. Programmable interface allowing auto switch on/off based on inbuilt database of

sunset/sunrise times of the city and adjustments to lighting LUX levels according to traffic
patterns, time of night, voltage fluctuations etc.

4. Transmission of real time information regarding status and condition of lights, energy
readings (through digital energy meters remotely connected with the central data base server),
long term data storage of energy readings (up to 6 months) etc.

Project Development
1. One of the primary hurdles with implementing the project on a PPP basis was the initial
political resistance to the proposal. The Council had reservations against such an effort, due
to a bad precedent of a failed service contract for street lighting given out in 2002-03.

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2. In order to address this through demonstration of actual results, the municipal officials
decided to pilot the new technology, and for this purpose energy saver devices were installed
along a demo road through M/s Servomax India Ltd in 2005. The experiment resulted in 35%
savings in energy consumption.

3. The final strategy to implement the project through an ESCO was based on study visits to
Bangalore to review the Outer Ring Road Energy Saving Project initiated by the Bangalore
Development Authority.

4. An Empowered Committee was constituted for selection of the ESCO and finalization of
appropriate technology for the project. The Committee was comprised of various technical
personnel from the VMC, with the Chief Engineer as the Chairman.

5. The Council finally approved the project in May 2006 vide resolution no. 61, following a
visit (led by the Mayor) to the Nasik Municipal Corporation for studying the performance of
their Energy Saving Project.

Procurement Procedure
Procurement of the ESCO was based on a competitive bidding process initiated in September
2005. Eligibility criteria included the following:
1. Annual turnover of at least Rs.1 Crore in any of the last five years
2. Experience of completing an energy saving project for street lights of at least 1000 KVA
for any ULB or Development Authority

The 5 year O&M concession was awarded to M/s Real Energy, based on their quote for
41.5% savings in power consumption (bid parameter). The ESCO was expected to conduct a
pilot in selected areas for a period of 3 months and the full term was to be granted only upon
successful demonstration within the period.

Lessons Learnt
1. Considering that the entire financial mechanism, specially the revenue for the ESCO was
derived only from energy savings, the project makes a special case for replication in other
ULBs (hardly any ULBs in the country are energy efficient). The ULB does not need to bear
any investment risks and can bring in enormous systemic efficiency and advancement.

2. Making the ESCO responsible for investments ensured the quality of equipment and
systems installed in the project period, since all retrieval was based on the performance of
such installations

3. Rules of the game should be endorsed by both parties right at the inception. While all
issues regarding baseline information and meter reading (4.3 above) were solved amicably
they could easily have derailed the project due to inaccurate revenue forecasts at the ESCO
end.

4. The role of proper IEC, particularly for generating political consensus for implementing
projects on a PPP model cannot be understated. In the Vijayawada case, the precedent of
failed privatization had
substantially weakened the political support for a PPP. However the Authorities persevered,
demonstrated the strength of the scheme though pilots and conducted several meetings with
the councillors leading to the eventual sanction of the project.

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5. One of the key issues that the project did not address at inception is the issue of O&M after
the project period. Considering that the project involved installation and operation of
substantially advanced technologies and systems, the project could have involved existing
ULB staff so as to ensure adequate skill transfer during the implementation period.

Note : Refer www.iddkarnataka.gov.in and PPP Cell, DEA, GoI for more details

Case Study 5 INDRAPRASTHA APOLLO HOSPITAL NEW DELHI

PPP Context
1. Delhi has experienced rapid demographic growth in the last couple of decades leading to
shortfalls in the supply of adequate healthcare services. The gap is particularly acute for
households living below the poverty line (BPL), whose access to advanced and affordable
hospital services is highly constrained.

2. This led to a felt need for upgrading the health-care infrastructure of the city through
modern state-of-the-art facilities, hospitals, pre-medical emergency response systems etc.
with emphasis on ensuring access to the poor. Given the lack of adequate reach of existing
public infrastructure, there was also a felt need to engage with the private sector for meeting
the demand-supply gap.

3. With such an objective as the backdrop, the GNCTD entered formed a JV with the Apollo
Hospital Group (AHG) in 1988 to constitute a Public Limited Company called Indraprastha
Medical Corporation (IMC) Limited. IMC Limited is a listed company with 26% shares each
held by GNTCD and AHG. The JV was chosen as the private partner for the Indraprastha
Apollo Hospital Project.

Project Development
Project Conceptualization
The GNCTD with a vision to provide its citizens with modern hospital facilities, proposed to
develop a multi-speciality hospital through its JV – IMC, which had the technical capacity (in
the form of Apollo Hospital Group as the JV partner) to establish and operate such an
advanced facility. The Government was to provide land and a proportion of the Capital
expenditure (Capex) for the hospital building and the Concessionaire was to contribute
towards the remaining building component and other medical infrastructure and operate the
hospital. In lieu of the contribution of the Government, the hospital was expected to provide
in-patient and out-patient treatment free of cost to poorer citizens of Delhi. Following were
the key features of the proposed facility:

1. Largest Corporate Hospital in India and the fourth largest in the World; spread over
675,000 sq.ft with a capacity of at least 600 beds (with a provision for expansion up to 1000
beds)

2. Wide range of diagnostic, medical and surgical facilities for patients in a wide range of
medical disciplines.

3. Speciality centres such as cardiac centre, cancer centre and a surgical science centre
amongst others.

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4. Large out-patient facility and other facilities such as ambulance (including air ambulance)
services

Lessons Learnt
1. The project though initially well structured in terms of both project viability and protection
of public interests, has not met its objectives (at Government’s end). This is largely due to
lack of a strong monitoring framework. Considering that a very large amount of public
money has been invested in the project it is important to ensure that the social objectives of
the project are fulfilled. The project thus highlights the need for better post contract
management through independent third party monitoring.

2. The GNCTD performs three contradictory roles in this particular PPP arrangement - that of
a Concessioning Authority, that of the project oversight agency and that of an equal partner in
the JV selected as the Concessionaire. The resultant conflict of interest can often impact the
neutrality of monitoring processes and affect project outcomes.

3. The procedures for availing benefits under the project by BPL patients were fairly
complicated with the prospective beneficiary having to carry a signed letter from the Lt.
Governor of GNCTD. Such processes need to be simplified so as to allow target beneficiaries
to avail services without difficulty, as seen in PPPs such as the Chiranjeevi scheme in Gujarat
where possession of vouchers or BPL cards is the only pre-condition.

Note : Refer www.iddkarnataka.gov.in and PPP Cell, DEA, GoI for more details

Case Study 6 ALANDUR SEWERAGE PROJECT

Project Description
The Alandur Sewerage Project (ASP) was initiated in the year 1996 by the Chairman of the
Alandur Municipality (AM). AM, located adjacent to Chennai, forms a part of the Chennai
Metropolitan Area. With a population of around 165,000, the municipality is a residential
suburb of Chennai with predominantly residential and commercial activities. Approximately
one-fourth of its population lives in slums.

Prior to 1996, the town did not have an underground sewerage system and all sewage was
managed with individual septic tanks. The largely unregulated disposal of sewage in storm
water drains was an environmental and health concern for the local residents and was
frequently raised as a political issue. Around 98% of 19,800 households used either septic
tanks or holding tanks collected periodically by tankers and disposed in the low-lying areas
outside the municipal limits.

In 1996, AM announced an ambitious plan to construct an underground sewerage system and

waste water treatment facility with the participation of the private sector, contribution from
the public, and payment to be provided by the city. The proposal was ‘transformational’ as it
involved a service never before made available by the municipality, with financial and
management responsibilities being shared by the municipality, the residents, the private
sector, and state government bodies.

The ASP was designed with the following objectives:

To improve the standard of living of the residents of Alandur (on par with that of Chennai);
To provide the most essential basic facility to all the residents of the town;

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 To eradicate the mosquito menace;
To avoid the recurring expenditure on septic tank cleaning; and
To avoid ground water contamination.
The proposed sewerage system was to be designed for the estimated population of about
300,000 in 2027 and was planned to be completed within a five-year period from its inception
date. The project components included:
A sewerage network consisting of the main sewer line, branch sewer line and manholes;
Construction of a sewage pumping station;
A sewage treatment plant; and
Low cost sanitation

In the initial phase the plant was to treat 12 million litres per day (mld) of sewage supplied to
it by the municipality. The ultimate capacity was to be 24 mld. To plan this complex and
politically challenging project, the AM worked in partnership with the Tamil Nadu Urban
Infrastructure Financial Services Limited (TNUIFSL), the state asset management company
and with USAID’s Financial Institution Reform and Expansion (FIRE) Project.

PPP structure of the Project

The ASP was the first project in the municipal water sector to be taken through the Public
Private Partnership route in India. The construction of the underground sewerage system in
Alandur town, involving the laying of pipes, construction of pumping station, etc., was done
on a BOQ (Bill of Quantities) basis, and the sewerage treatment plant (STP) on a BOT
(Build, Operate and Transfer) basis. Besides the construction responsibility, the contractor
was also required to undertake the operation and maintenance of the sewerage system for a
period of five years from the date of completion of the construction, on a fixed fee basis. The
collection of tariff and provision of new connections during the O&M phase was to be
undertaken by the municipality directly.

Accordingly, the PPP structure of this complex project was governed by three contracting
mechanisms awarded to one engineering, procurement, and construction (EPC) contractor
selected through a competitive bidding process:

• A Works Contract for construction of the sewage network, using the World Bank’s Contract
for National Competitive Bidding (NCB-W2) as the template;
• An Operations and Management Contract, also using NCB-W2. The selected contractor
would operate and maintain the underground sewerage system for a period of five years on a
fixed fee basis.
• A Lease Contract (in the nature of a BOT Agreement) for the STP, using guidelines from the
International Federation of Consulting Engineers (FIDIC). Through this Agreement, the
contractor would finance, build and operate the STP for a period as proposed in the
contractor’s successful bid. The contractor would be required to recover the investment on
the STP on the basis of a per unit rate payment from the municipality for treatment of sewage
delivered. The municipality agreed to provide a minimum payment level per annum
regardless of the volume of sewage actually delivered. It was designed to cover the
company's minimum fixed operating cost and capital investment. Accordingly, the PPP
structure was technically in the nature of BOT-Annuity.

Following the bid process, the project was awarded to IVRCL Infrastructures and Projects
Ltd in technical collaboration with Va Tech Wabag Technologies Ltd. A Special Project
vehicle (SPV) called ‘First Sewerage Treatment Plant Pvt Ltd’ (First STP) was incorporated

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and was the concessionaire company with whom the BOT Agreement was signed. Once the
project achieved financial closure, First STP Pvt. Ltd signed contracts with IVRCL and Va
Tech Wabag. IVRCL was to carry out the civil works for the project. Va Tech Wabag,
through the electro mechanical contract, was to design the process, supply, install and
commission the equipment. It was also to carry out a contract for operating and maintaining
the facility for 14 years. The land on which the plant was set up was leased by the
municipality to First STP.

Details of Project Financing

Sources of Finance Amount % to total

(in Rs. Crores)
LOAN
Term loan from TUFIDCO 16.20 46.82
Term loan from TNUIFSL 4.20 12.13
GRANTS 1.00 2.89
From TUFIDCO for supervision 3.20 9.24
From GoTN to bridge the gap 8.00 23.12
PUBLIC CONTRIBUTION 2.00 5.78
Deposit collection
Interest from Deposits 34.60 100
TOTAL
Source: Alandur Municipality

Impact of PPP
A brief on the difference made by the ASP, as captured below, illustrates that the ‘value for
money’ brought in by the project far exceeded any monetary consideration:

SL Parameter Situation before PPP Situation after PPP

No. intervention intervention
1. Urban No sewerage system for a 120 km of underground
service population of 165,000 sewerage system, pumping
stations and an STP of 24 MLD
2. Urban Water borne sanitation facilities, Underground sewerage system
service septic/holding tanks for disposal of with direct connection to each
night soil household
3. Urban Unregulated disposal of sewerage Modern sewerage treatment
service in storm water drainage and low plant designed to international
lying areas standards.
4. Environment Open storm water drains stagnating Underground sewerage system
and Health in outer areas of town – has eliminated risk of
environmental and health hazard mosquitoes and related diseases
for the citizens of Alandur and
surrounding areas.
5. Environment Contamination of underground Almost 100% eradication of
and health water sources due to open drains ground water contamination
through underground sewerage
system and waste water
treatment plant.

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 6. Public - Rs. 8 crores out of the capital
participation cost of Rs. 34 crores was
through public contribution
7. Public - Collection of sewerage fee from
participation the public (on a graded structure
amounting to a weighted
average of Rs. 75 per
connection) amounts to Rs. 2
crores per month and covers
both debt repayment and O&M
costs of the AM

Key Learning and Observations

• Beneficiary participatory approach: People’s participation in the project, including the fact
that almost 29% of the project cost was garnered from public contributions, was the most
outstanding aspect and learning from the ASP. The project established that mobilising
people’s participation for infrastructure projects is possible through collective efforts and
transparentprocedures.

The success of the project from the outset depended highly on effective collection of
connection charges and monthly sewer fees as also public acceptance of engaging a private
BOT participant. Community awareness, support and on-going cooperation was, therefore,
critical. The aggressive public outreach campaign conducted by the municipality and GoTN
and the engagement of stakeholders was essential to assure the lending agencies and city
officials that repayment provisions would be met.

• Stakeholder involvement and interdepartmental coordination: Continued involvement of

stakeholders throughout the project ensured timely completion of the project and addressing
of issues even as they arise.

To maintain support for the project, a citizen’s committee was formed and it met frequently
to review the status of the project, monitor performance of the BOT contractor and provide a
forum in which citizens could air their concerns.
The ASP established that close involvement of all stakeholders/departments at the key
decision-making stages of the project, as also for review and monitoring, is critical to
ensuring that the project stays on-track.

• Political will and strong decision making, especially at the grass-root level: The ASP
demonstrated that ‘political will and quick decisions make projects happen’. The political
leadership and strong advocacy for the project provided by the chairman and council of the
municipality proved to be critical element of the success. While strong support for the
sewerage system within Alandur existed, political will was essential to convince the
customers and citizens to pay a significant share of the cost and accept the entry of the
private sector. Throughout the project decision making stages, the members of the
municipality maintained full support for the project.

• Acceptance of fiscal discipline: The term lenders, TNUIFSL and TUFIDCO, placed strict
lending conditions on the municipality, requiring the municipality to accept and implement
strong fiscal discipline measures. TNUIFSL required the municipality to establish a separate
sewer account distinct from the general budget of the municipality, forcing discipline and

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 transparency on the officials managing the system. The municipality was also required to
limit new debts to a certain percentage (typically 30%) of their revenue. GoTN, which
provide loan guarantee, stipulated that any payment made to these entities on account of
default by the municipality would be recovered from the annual transfer of payments from
the municipality to the State Government. Similarly the contractual obligations between the
municipality and the BOT operator forced the municipal government to ensure timely
payment for management and waste water treatment services. Thus, the loan as well as
contractual obligations ensured strong fiscal discipline by the municipal body, by making it
take difficult decisions on capital priorities, closely oversee the sewer system management,
and ensure budgeting of sufficient funds to meet payment schedules

• Implementing an effective fee system: Despite the willingness to pay survey that indicated
that public willingness was far below the tariff requirement to meet the capital and
operational cost of the project, the municipal council, through its rigorous public outreach
measures, managed to impose reasonable levels of connection charges and sewer fee on the
public. The municipality also managed to collect the connection charges fairly well in time to
Pre-empt the need for the TNUIFSL loan. A large part of the success of the municipality in
this aspect sprung from the fact that they provided sympathetic measures that addressed the
concern of the public. For example, the connection deposits were collected in two instalments
as per the convenience of the consumers; the local branch of the Punjab National Bank also
offered financial support to the citizens of Alandur by creating a scheme for lending the
connection deposit amount to them.

• Assurances on payment to the Private Sector Participant: The municipality agreed to

provide the BOT operator a minimum level of income by accepting the ‘take or pay’
condition in the Agreement. Thus, the municipality assumed the risk of minimum payment to
the operator while the private partner assumed all other responsibilities and risks of
financing, constructing and operating the STP for a period of 14 years.

• Access to finance for the municipality: An important aspect of the success of the project
stemmed from concession financing and subsidies from the Government and public-private
entities, established specifically to meet the credit needs of the municipalities without access
to private capital, due to a low or non-existent credit rating. Though almost 30% of the
capital was generated by the municipality from connection fees, grants from GoTN and loans
from TUFIDCO were crucial. The loan agreement from TNUIFSL, while proving to be
unnecessary in the end, was imperative for participation in the finance package by all the
parties.

• Technical and financial assistance: The expertise needed to plan and manage the technical
and financial aspects of the project far exceeded the capacity of the municipality. Assistance
from the other government bodies in the state, the Chennai Corporation, and sources, such as
the USAID’s FIRE project, was critical. TNUIFSL and FIRE played a substantial role in
structuring the project, managing the feasibility studies, and preparing the bid and contract
documents crucial to project success. The review and approval of the engineering reports by
the management committee, consisting of senior officials of the AM, the Tamil Nadu Water
supply and Sewerage Board, Chennai Metropolitan Water Supply and Sewerage Board, and
TNUIFSL, were essential for successful project management.

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• Transparency in bidding and contracting procedures: The transparent approach to the
project, right from inception to selection of contractor/operator and implementation, was
critical to providing the necessary assurance to the private sector bidders on the professional
approach of the municipality. This included strict application of World Bank and FIDIC
processes, oversight and approval of the process by the World Bank. Public participation in
the deliberations of the management committee overseeing the tendering process execution
was also important.

Case Study 7 - LATUR WATER SUPPLY PROJECT

Project Description
Located in the Maratwada region, Latur city is a district headquarter covering an area of
32.56 sq kms and a population of 3.5 lakhs (2001 census). The city is anticipated to witness a
significant decadal growth in population of about 52%.

The Latur Municipal Council (LMC) is responsible for water supply to Latur City. Prior to
May 2005, the primary sources of water supply to the city were 2 weirs on Manjra river that
supplied about 35 million litres per day (mlpd) of water. LMC operated two water treatment
plants and a distribution network covering 350 kms. In addition, the city was also drawing
about 3 mlpd of ground water through borewells and open wells.

Historically, Latur city has faced acute water scarcity. LMC was supplying water to the city
through individual connections as well as public standposts. Of the 26,000 regularised water
connections, majority were unmetered connections along side a significant number of illegal
connections. In addition to limited availability of water, the demand coverage was also low
with only 70% of the population receiving water once a week. The situation was further
aggravated during the summer season.

For the state of Maharashtra, the Maharashtra Jeevan Pradhikaran (MJP) is the nodal agency
responsible for development and regulation of water supply and sanitation. To overcome the
source limitation of Latur city, in May 2005, MJP commissioned a source augmentation
project for the city through the Stage V water supply scheme – a bulk water supply and
distribution project. This included bulk water transmission over 65 kms at a capital cost of
approximately Rs. 130 crores. With the commissioning of this scheme, MJP increased the
total length of the water distribution system of Latur city by an additional 126 kms.

LMC took over this scheme from MJP in 2005 but was unable to operate and maintain it
optimally. Despite ample availability of water, LMC was unable to manage its distribution
network and Latur city was receiving water only once a week. Consequently the percentage
of Non Revenue Water (NRW), which is the difference between the quantity of treated water
in the distribution system and the quantity of water that is actually billed to consumers, was
also very high for LMC. In addition to such operational issues, LMC was also plagued by
low collection efficiencies and constraints on revenue growth through revisions in water
tariffs. Given LMC’s existing liabilities and its inability to raise additional resources of Rs.
17.17 crores for completing the existing water supply system, LMC initially decided to
transfer the Stage V Water Supply scheme to MJP.

Subsequently, LMC resolved to transfer the existing water supply scheme for the entire Latur
city to MJP. Based on the resolution passed by LMC, MJP was given the right to operate the
water supply scheme for Latur city for a period of 30 years. It was responsible for the
operations and maintenance of existing water supply schemes as well as raising finance for

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 completing the water supply scheme through a private operator. MJP was also given the right
to charge water tariff as necessary and collect the revenue from the water users.

MJP eventually floated a management contract tender in March 2006, which was the first
source to tap integrated management contract being executed through a Special Purpose
Vehicle (SPV). For the contract duration, the private entity is responsible for:

• Taking over existing assets from source to tap and providing operations, maintenance and
repair of such resources
• Deploying of operations and maintenance staff, including key employees, on deputation from
MJP and LMC. It would also provide adequate staff to meet network expansion requirements
• Providing a minimum average water supply to residents at adequate pressure and ensuring
24*7 pressurised water supply within 2 years of the contract period
• Increasing piped water coverage through new connections and ensuring 100% metering of
existing connections
• Recovering cost of water supply based on tariffs fixed in the management contract
• Implementing a billing and collection system
• Creating consumer awareness and implementing a consumer redressal mechanism
The project area consists of 3 water sources, 6 pumping stations, 6 electrical installation, 3
water treatment plants, 2 master balancing reservoirs, 95 kms of transmission mains, 10
elevated service reservoirs, 1 ground service reservoir and 476 kms of distribution lines.

PPP structure of the Project

The PPP structure for the project is a performance based management contract for integrated
source to tap water supply management for the Latur city.

• First Agreement between LMC and MJP: MJP entered into an agreement with LMC in
February 2006 under which MJP was awarded the right of use of the water transmission and
distribution assets of LMC. MJP is responsible for water supply to Latur city as well as
operation and maintenance of related assets. Under the agreement MJP has the authority to
charge water tariff and collect related revenue from consumers. This agreement was entered
into for a period of 30 years.

• Management Contract between MJP and LWMC: Based on a competitive bidding

process, MJP awarded the management contract for operation, maintenance and repair to the
consortium consisting of three companies, Subhash Projects and Marketing Ltd., UPL-
Environmental Engineers Limited and Hydro Comp Enterprises. As per the terms of
engagement, an SPV “Latur Water Management Company Ltd.” (LWMC) was created by the
private operator consortium with each partner having an equal stake of 33.3%. MJP entered
into a ten year Management Contract with LWMC in June 2008 for operation, maintenance
and repairs of all assets and resources under the Latur Water Supply Scheme. It included
metering, billing and collection along with all fixed and variable investments relating to the
water supply scheme. The underlying premise of the contract terms were the reduction of
NRW and provision of 24*7 water supply to Latur city within 2 years. Key highlights of
contract terms are given below:

o Role allocation between parties to contract was undertaken such that LWMC would be in
charge of operations and maintenance of assets while MJP would take care of major repairs
and rehabilitation activities.

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o Facilitation of project execution through establishment of SteeringCommittee. The Steering
Committee would comprise the district collector, superintendent of police, chairman of
municipal council, president of municipal council, chairman of water supply committee,
chief officer of LMC, superintending engineer, executive engineer, sub-division engineer of
MJP along with project manager of the Contractor and two of his field persons. The Steering
Committee would meet at least once a month to oversee the issues that may be raised by
LWMC.
o Specification of Performance standards for project execution in terms of minimum
compliance levels were detailed in the contract terms.
o Provision for additional capital expenditure for efficiency improvements and infrastructure
upgrading to be made by LWMC as it considers necessary.
o Collection of Water tariff from the consumer as agreed upon in the management contract.
o Payment of Fixed monthly fees by LWMC to MJP for the contract duration.
o Provision of 70 qualified employees by MJP to LWMC who would work on this project under
the direction and control of LWMC during the contract period. MJP would transfer 15
qualified employees while LMC would transfer 55 employees to LWMC.
o Provision for stability in electricity tariff was provided for in the contract terms to ensure
input cost of electricity would remain within a specified price band. This price band provided
for an incremental electricity tariff increase over the contract term. In the event of increase in
electricity tariff beyond the price band, the terms of the contract ensured that MJP would
compensate the private operator for such an increase. In case of reduction in electricity
tariffs, the differential amount would be passed on to MJP/LMC by LWMC.
o Adoption of a pro-poor strategy wherein billing concessions were provided for slum areas
and the concept of group connections was introduced. To ensure a smoother transition,
concessions were provided to slum dwellers in terms of flat tariffs for the first nine months.
Group connections were introduced for upto 4 households and the identified group leader
would be responsible for collection and payment of all dues.
The management contract that was entered into for Latur water supply was not a typical
water supply management contract but a hybrid version of a management contract with
elements of affermage / concession built into it wherein the private operator was taking on
more that the standard levels of technical and commercial risks of a management contract.
The decision to enter into such a contract with a private party was driven by resource
limitations of LMC to finance and operate the water supply networks.

The rationale for such a structuring of the management contract involving revenue collection
and retention by the private operator rather than fixed payments for services, could also be on
account of the fact that the cash strapped entity LMC or MJP would not have been in a
position to guarantee any fixed payments to the private operator. Hence it decided to allow
the private operator to retain revenues but ensure efficient service delivery by defining the
service level standards and parameters and penalising the private operator in the event that he
was unable to meet predefined standards.

• Tripartite Agreement between MJP, LMC and LWMC: In addition to the above
agreements, a tripartite agreement was entered into between MJP, LMC and LWMC to
ensure efficient execution of the project. As per the terms of this tripartite agreement
o Asset ownership relating to the project was retained by LMC. LMC would remain the sole
owner of the existing water supply and distribution assets as well as additional assets that
would be created by MJP and LWMC under the investment plan specified in the agreement.
MJP would act as a custodian of the assets.

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o Necessary provisions were made to ensure adequate availability of raw water to LWMC for
distribution. In case of scarcity of water in dams, MJP/LMC would provide all necessary
support, including diversion of any funds received from any Governmental Agency to MJP,
as decided by MJP and LMC. Additionally, in case there is any variation in the price of raw
water provided by the irrigation department, MJP/LMC would also absorb the same.
o MJP/LMC would also provide the necessary support to LWMC during the conditions
precedent period with respect to the repair of assets, water regularisation and 100% metering
implementation.
o MJP and LMC would have an equal share in any profit/penalty payable by/to LWMC and
associated with the execution of this management contract.
While all three agreements were to be viewed in conjunction, in case of any inconsistencies,
the terms of the Tripartite Agreement would prevail.

Key Learning and Observations

1. Developing an effective communication strategy: Preliminary identification of key
stakeholders through a communication needs survey greatly helps in developing a
communication strategy to provide a conducive environment for project execution. Creating
the necessary awareness among the consumers to pay for water in exchange for uninterrupted
availability is a key variable to the success of such a delivery mechanism. Since transfer of
the right of use of public assets to a private operator is a politically sensitive issue, necessary
groundwork to facilitate such transition needs to be undertaken by the Government agencies
prior to involvement of private parties. Open and frank discussions on issues relating to the
existing water supply scheme/project and the positive impact of the involvement of the
private operator through improved service delivery would also ensure a quicker buy-in from
the stakeholders to such a management contract arrangement. In case of the Latur Water
Supply project, there was stiff resistance to the project due to apprehensions of price
increases. Hence creating the necessary consumer awareness and having an inclusive
approach to stakeholder interaction, participation and management is the key to success.

2. Identifying a Nodal Agency to facilitate smooth project implementation and

execution: The involvement of an agency with necessary technical knowledge, government
backing and with experience in handling consumer relations in the specific sector would
greatly help in facilitating project execution. In case of Latur Water Supply project, MJP
played a critical role in conceiving the project as well as at implementation stage which
included mediating between private operator and stakeholders at the time of public resistance.
MJP also provided necessary support and protection to the private operator which ensured his
continuance in the project despite severe public opposition. Such nodal agencies which have
government backing could play an important role in facilitating PPP infrastructure
development.

3. Carrying out comprehensive and detailed project preparation activities: Availability of

data on key project parameters is critical to successful bidding of project. In case of a contract
wherein the private operator takes on a significant amount of the commercial risk as in case
of Latur Water Supply Project, the availability of accurate information on the key and basic
variables such as distribution networks and consumers is important. In case of this project,
the network drawings were incomplete and data was inaccurate. The private operator had to
conduct a detailed asset survey and conditions assessment. Additionally a commercial
validation of data through a detailed consumer survey was also required and undertaken by
the private operator.

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4. Undertaking necessary capital expenditure to ensure efficient operability of assets prior
to bidding. A thorough assessment of asset conditions and expected lifecycle of assets should
be undertaken prior to the process of bidding. In addition, sufficient capital expenditure needs
to be incurred by the utility before handing over the operations to a private contractor. It is
pertinent to ensure that the water supply scheme is not plagued by any major operational
issues which would hamper the ability of the private operator to discharge his obligations
under the contract. Most Government agencies may not be in a position to undertake such an
assessment since the primary drivers of such privatization initiatives are the financial
constraints of such agencies as was the case in Latur where LMC was not in a position to
raise finances for future investments. However, provision of funds for such studies and
undertaking the same could potentially improve the ability of such projects to be funded
through the private sector.

5. Developing an efficient and effective risk management mechanism is critical to success

of complex management contracts: Risk identification and mitigation are critical elements
to the success of any contracting structure. In case of Latur, a detailed risk identification
process was undertaken by MJP. Various scenarios were identified and discussions were
undertaken with relevant state officials and industry experts. A risk mitigation framework
was developed for capping the identified risks and these were incorporated into the integrated
management contract. For instance, the contract was structured in such a way that financial
protection was provided to the private operator by ensuring that the estimated income through
water tariff collections is always more than the estimated expenditure during the contract
term. Undertaking such a detailed risk analysis and identification of measures to cap such
risks at the time of developing the management contracts would help improve the confidence
of private sector and inturn may translate into better private participation in projects which
would otherwise be perceived as a high risk.

6. Creating a favourable policy environment by establishing a clearly defined tariff and

metering policy prior to the bidding process. The tariff for the contract duration was
finalised prior to the bidding process, to allow the bidders to quantify the tangible benefits
from undertaking the project. The tariff structure was to see a staggered increase based on the
contract terms. This reduced the revenue risk to an extent.

7. Undertaking flexible project structuring: The Latur Water Supply project is an example of
striking a balance between a pro poor strategy and developing a financially viable project for
the private operator based on operational efficiency improvements.

o Pro poor strategy: The project structuring and contract terms were undertaken keeping in
mind the specific circumstances of Latur city. As mentioned previously, concessions were
provided to slum dwellers for the first nine months of the contract period in terms of a flat
monthly water supply rate. Additionally, public standposts were to be done away with and
affected parties were to be encouraged to take individual or group connections for up to 4
households.

o Financially viable project for private operator: In the case of Latur, an attempt was made to
develop a financially viable model based on operational efficiency improvements. Minimum
performance standards had been set in the contract while increases in revenue could be
achieved by the private operator through improved operational efficiencies. The private
operator was able to successfully bid on the basis of loss reductions in the existing system
along with revenues generated through metered connections. The financial model was based

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 on improvements in operating efficiency and reduction in transmission losses through the
contract period. As mentioned previously, tariff rationalization was undertaken by MJP prior
to bidding. This coupled with the minimization of input risks in terms of electricity and water
costs further strengthened the financial viability of the project.

o Possible changes to minimise opposition: The opposition to this project was both to the
concept of “privatization” as well as billing of water supply services. Prior to this
arrangement, the residents of Latur were not receiving regular water supply and were also not
used to being billed for water supply. To minimise the opposition to such a system, a longer
contract term could have been considered which would have allowed for staggered tariff
increases and would have given the private operator enough time to recover his costs.

Case Study 8 - ILEMBE DISTRICT MUNICIPALITY- SIZA WATER COMPANY

(SOUTH AFRICA)
Background
In 1999, Suez Corporation, through a joint venture with Siza Water Company (SWC),
was awarded a 30-year concession contract with the then Borough of Dolphin Coast (BODC)
to become the first private company to manage and implement water and wastewater utility in
the Southern Africa region. High growth projections for the areas, combined with poor stock
of existing infrastructure, financial shortfalls, and lack of experience and managerial capacity
in water provision left BODC to investigate PPP options for alternative service delivery in
1996.
Initially, the partnership was welcomed by the city council and senior levels of
government; however, by 2011, the company began facing significant financial challenges
due to a combination of the following factor: external currency shocks, faltering technology
and incorrect demand estimates for the initial concession design, which grossly overestimated
population growth. Unable to pay its annual fees to the municipality SWC fought for a
renegotiation of the terms of contract and won. The new agreement trimmed down the annual
concession fees paid to the municipality by SWC for five years, increased water prices for the
local community, and cut promised investment in maintaining and upgrading services by
more than half. Following renegotiations, SWC slowly climbed back to profitable numbers
while Suez reportedly obtained a 21 percent return on its investment, mainly due to a fixed
annual fee SWC pays each year.

Key Observations and Issues

A brief overview of this case study presents a mixed picture of the performance
reliability of the water and wastewater partnership. The procurement process initiated a fair
and competitive tender process with SWC chosen only after lengthy evaluation of the
partner’s suitability as outlined by the municipality. Additionally, there appeared to have
been considerable due diligence taken on the part of the partnership to ensure reliability ad
viability in the planning stages of the project. Advisors on both sides were called in to help
consult on complex negotiation and contract issues with the final concession agreement
providing considerable details on matters of price, performance parameters, the rights and
responsibility of various partners, as well as provisions for performance monitoring and
evaluation.

In hindsight, however, it is clear that a greater effort and investment was needed in
testing the information that formed the basis of the contract to ensure better performance and
monitoring of the project. For example, more information was required in the feasibility
studies when evaluating the basis of PPP suitability in the region, particularly with regard to

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the demand data collected in projections. In addition, while the agreement outlined a system
for project oversight by the municipality, it is clear that the public partner did not have the
necessary skills to fulfil this role. An emphasis on providing training for municipal staff so
they could adequately oversee the management of the water utility might have achieved more
reliable service delivery with fewer price increases for the community. Lastly, given that the
contract did not include a specific provision for community consultation; better integration of
stakeholders into the process could have ensured that more adequate information was
available when formulating contract decisions.

It should be noted that to date, community members have expressed considerable

dissatisfaction and mistrust of the partnership’s ability to provide quality water service for the
region. Since the beginning of the concession agreement, there have been several
interruptions of water services with little or no warning, and many communities still suffer
sewage overflow, causing health hazards for surrounding communities. Reported
unresponsiveness on the part of SWC on these, and other community complaint issues are a
pointed concern despite the fact that the company operates a well-equipped call center that
tracks complaints data. Residents also report confusing communication channels on
important information regarding service and other provisions. For instance, policy clarity of
the accommodation of a national free water requirement for the poor, along with conflicting
information regarding the cost and approaches for service delivery, were reportedly poorly
channelled to the community. Greater transparency and accountability on the part of the
partnership, along with meaningful service channels, could have led to a higher level of trust
and acceptance amongst members of the community.

More significantly, this case study illustrates the controversy and difficulty of water
concession partnerships in the developing countries. The concession is now a third complete
and while there have been some high priority investments to the quality of the partnership
since 2001, the partnership cannot yet be considered an unqualified success. Financial
challenges that arose in the beginning of the partnership make it difficult to measure whether
value for money has been achieved for the local population and SWC has yet to meet all of its
obligations in maintain and upgrading basic water series. Therefore, notwithstanding the fact
that the concession today is showing some signs of maturity, expectations from all
stakeholders remain high with a considerable measure of hesitation from the community as to
whether or not the partnership will create new opportunities for the local people, particularly
for the poor.

Case Study 9- Bangalore MRT

• Feasibility studies undertaken in the mid nineties for an elevated rail system for
Bangalore
• Company established by the state government. The joint venture partner was to be
inducted in the company
• Bidding process resulted in selection of an international consortium.
• Detailed studies by consortium established that more viability support was required.
• Protracted negotiations led to cancellation of agreement
• Government company to undertake project, based on studies by Delhi metro which is
having a different configuration
• More than a decade has elapsed, transport systems in the city have seen significant
deterioration.

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Case Study 10 - Bus Terminal Redevelopment
• Feasibility studies undertaken during FY 2003 for redevelopment of an existing bus
terminal (Bangalore)
• Reconfiguration of bus movements, creation of commercial facilities, significant
parking space and plans for relocation of existing shops
• Protracted discussions with stakeholders undertaken
• Transparent bidding process followed & bidder identified (Least concession period) in
December 2003
• Formal approval not yet received for the project. Council approval received after 2
years. State government approval still awaited
• Similar situation for 3 car parks in Delhi proposed by MCD, an integrated landfill in
Thiruvananthapuram

Case Study 11 - Lucknow SWM Project

• Project proposed for setting up a waste-to-energy plant to handle 800 MT per day of
MSW
• Bio-methanation, energy generation and composting
• MoEF grant to the extent of 33% of project cost
• Agreement with municipal corporation for segregated waste
• Issues of inadequate quantum and quality of waste supplied versus ability of plan to
generated power
• No comforts in agreement for financial investors in event of failure
• Protracted negotiation led to closure of unit and sale of loans
• Attempts to restart, but with not much success

Case Study 12 - Road Improvement

Thiruvanthapuram city road improvement program under a performance based
deferred payment framework
o 42 km road widening and improvement ; 3 grade separators
o Project development - Output based specification – details plan for land
acquisition and utility shifting
o Annuity based payment structure from the Kerala road fund
o Concession Agreement signed in March 2004 – land to be handed over by
December 2004
o Land not yet fully handed over
o Contract being re-negotiated

Case Study 13 - Wastewater Treatment

• Setting up of a 60 MLD effluent treatment plant to achieve effective marine disposal
• Serve the industrial areas of Ankleshwar, Panoli and Jhagadia in Gujarat
• A dedicated SPV, Bharuch Eco Aqua Infra Limited, set up by GIDC and industrial
associations of the 3 locations
• Project cost of INR 123 crores funded by equity (INR 36 crores), subsidy from
Ministry of Commerce (INR 63 crores and debt (INR 24 crores, 12 years)
• Secured by charge on project assets and a GIDC guarantee
• Project fully operational and debt effectively being serviced
• Used of subsidies effectively and suitable credit enhancement can make projects
happen.

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Case Study 14- Bus Terminal at Amritsar
• Department of Transport, Government of Punjab and PIDB offer a 12 years BOT
concession for development of an inter-city bus terminal at Amritsar
• Bid won by Rohan Rajdeep Infrastructure (India) Private Ltd
• The project cost of INR 19 crore was funded by equity (INR 7 crore) and debt (INR
12 crore, 11 year tenure)
• Secured by exclusive charge on project assets, pledge of shares and sponsor
guarantees
• Concession documents recognizes substitution rights of lenders
• Project operational and fully servicing debt.

Case Study 15 - MELEKA- MANIPAL MEDICAL COLLEGE (MALAYSIA-INDIA)

Background
Formalized in 1993, Melaka-Manipal Medical College (MMMC) is the first joint
venture partnership in professional education between the Malaysian and Indian
governments. Prior to the agreement, a lack of financial and managerial capacity impeded the
Malaysian government’s ability to meet the rising demand for more well-trained doctors in
Malaysia. Recognizing this deficiency medical students travelled abroad to receive high
quality medical training but at a great financial cost. The objective of the partnership is to
meet the rising demand for more doctors in Malaysia by affording students a access to higher
medical education at a lower price. The University offers students a twinning Bachelor or
Medicine and Bachelor of Surgery Degree with pre-clinical training received at Manipal
University, a private learning institute operating in Manipal, India, and clinical training
awarded in Melaka, Malaysia.

As a partner, the Government of Malaysia donated the hospital and health centres of
medical teaching, some part-time faculty for medical teaching, some part-time faculty for
clinical training, as well as financial assistance to deserving students admitted to the
institution. Additionally, its regulatory bodies, the Medical Malaysian Council and the
National Accreditation Board, partner to supervise and provide advisory services to ensure
educational requirements meet minimal standards of conformity with government
regulations. For its role, a private consortium under the leadership of Manipal Group provides
the infrastructure and educational component for the Mani pal campus in India, along with
the facilities, faculty and management needed to augment patient care at these hospitals and
health care centres.

In 2003, the medical degree which is conferred by Mani pal University was formally
recognized by the Malaysian government and the institution now plays a larger role in
attracting international students to study in Malaysia. Today the university and its programs
are continually expanding and the partnership has helped meet the medical and educational
needs for malayasia’s growing population.

Key Observations and Issues

The choice to invite Manipal Group, along with its flagship university, to partner with
the Malaysian government in the provision of higher medical education was a customary one.
Manipal University has a long history of training Malaysian doctors in India and Manipal
Group enjoys a healthy reputation for being involved in joint venture partnerships both within

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India and abroad. In addition, an enabling economic environment in Malaysia provided great
opportunities for PPPs in the health and education sector: the demand for doctors was high
and was expected to grow as population and affluence rose steadily and the fundamentals of
the economic and political climate remained strong. As such, it seemed only natural that the
partnership between the two countries be formalized.

That being said, the Malaysian government took prudent measures to ensure the
strength and viability of the partnership. Before formalizing the agreement, the Malaysian
government recognized that the role of privately managed institutions like MMMC must “not
be at the expense of proper maintenance of expected norms and standards of teaching’. It was
made clear early on that the intention of inviting the private sector to higher medical
education was to complement, not replace, public medical schools and therefore, the
government set strict criteria for the implementation and monitoring of the partnership in
order to entrench consistency and fairness across the two curriculums. Further to the point,
the regulatory bodies responsible for overseeing MMMC are well-equipped with appropriate
policy and legal powers as well as the resource capacity to adequately monitor and protect the
public interest in the practice of medicine.

In many aspects the institution today is regarded as exemplifying a true partnership

between the two countries and the private sector. Good governing principles, combined with
a realistic approach towards PPPs on the part of the Malaysian government has allowed for
greater accountability and transparency to occur. Manipal Group has expressed to work with
the public sector in Malaysia and the cooperative and prudent efforts by the partners seems to
facilitate a participatory process on the ground. The partnership has also worked to spread the
cost of education between the two sectors. The Government of Malaysia provides subsidies to
the existing private school program by funding some student enrollment and providing
teaching supports while Manipal absorbs the cost of delivering medical education to students.
This cost sharing feature has worked to eliminate institutional start-up expenses for the
Malaysian government while better positioning the private partner to accrue financial gains in
the future. More significantly, the incremental cost-savings for each partner has allowed more
accessible for Malaysian students, many of whom would otherwise not be afforded the
opportunity to study medicine.

7.5 ISSUES IN TOLL ROADS AND NATIONAL HIGHWAYS

The Government of India has undertaken to create an enabling framework for private sector
participation in the development of the National Highways network. There are, however, certain
issues limiting greater participation of the private sector in the development of road projects through
the PPP route. Some of the issues include the following:

The current policy of offering the project first on BOT (Toll), then on BOT (Annuity) and then on
engineer procure and construct (EPC) contract is likely to introduce delay in the implementation of
the project since government approval is required at each stage. In case of the BOT (Toll) model, the
degree of risk exposure to the concessionaire is high and the private sector is reluctant to take high-
risk exposure. On account of this, there has been very low private sector participation in bidding of
projects that are to be developed through BOT (Toll) route. Though BOT (Annuity) exposes the
concessionaire to a lower level of risk, the cost of the project procured through the BOT (Annuity)
route is higher. The cost of private capital is comparatively higher compared with the sovereign cost
of borrowing.

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 The bidding process for PPP road projects has been standardized with the introduction of
model RFQs and RFPs. There has been a lack of investor interest in the PPP road projects on account
of certain clauses in both the model documents. For instance, as per the model RFQ, only six
applicants will be short-listed for the bidding stage based on their respective aggregate experience
score. And, as per the model RFP, the bidder will be ineligible for bidding if the bidder was: (1) pre-
qualified for the bid stage (second stage of bidding process) in relation to eight or more projects, (2)
declared as the selected bidder for undertaking four or more projects, or (3) unable to achieve
financial close for two projects within the stipulated time during the period of two months preceding
the bid due date.

As per the MCA, risk allocation has been based on the underlying principle of allocating the
risks to the parties best suited to manage them. However, there are certain risks such as land
acquisition risk, which in spite of being allocated to the party best suited to manage the risks, has been
a major cause for delay in timely completion of the project.

7.6 Disciplined Planning

A disciplined approach to planning outlining a sound roadmap for implementation
early on in the process is essential. Initial time spent fully exploring objectives and core
values regarding the purpose of the project and how it intends to benefit the public will avoid
missteps later in the process. This can also provide a degree of certainty and reassurance to
all parties involved.

The ultimate success of public-private partnerships will be determined by their impact on

sustainable development relative to their cost to the benefits. However, such partnerships
cannot go ahead unless they yield a positive rate of return over their duration from the
individual perspective of all participants. A number of PPPs in developing countries
unravelled in the last five years in the face of public protests, investor withdrawal or
government dissatisfaction. It is not clear whether these projects were well conceived from a
developmental viewpoint, but they obviously failed to satisfy the success criteria of their
individual participants.

Among the potential benefits of PPPs mentioned in the introduction, both efficiency gains
and additional funding should be directly felt by consumers (at least if the latter is used to
making services more widely available), who weigh these benefits against possibly higher
prices and connectivity fees.

Special problem arises from the fact that consumers are a heterogeneous group – for instance
when a PPP leads to a broader coverage of services, coupled with higher tariffs charged on
the existing consumers. The success criterion of private investors or contractors is relatively
straightforward. They look for their participation to show positive rates of return – or, as it is
often expressed, to “generate a sufficient cash flow” – within a given period following their
entry, while safeguarding their initial investment.

The public sector is arguably the one that is confronted with the most complex set of success
criteria. On the one hand, it has interests that conform with those of the consumers insofar as
it is also in the interest of the public sector that the availability of utilities services is boosted
and that they are provided more efficiently. On the other hand, it has to contrast this not only
with the cost to the public but also to the affordability of services more generally; to the
distributional aspects of tariff changes; and to the possible social costs associated with
efficiency gains.

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Efficiency gains
Cost of over staff, waste owing to insufficient attention to cost-recovery pricing and tariff
collection, and a tendency to view the government, rather than consumers, as their real client.
By reducing employment levels, moving to sustainable pricing policies and driving a wedge
into political patronage, private investors have often dramatically improved efficiency.
Private sector in infrastructure improves

7.7.0 PPP in Water sector

A decade of experience with public-private partnerships based on an innovative contract
and with financial and technical assistance from international donors shows how PPPs can be
used both to improve services and to expand coverage of infrastructure in a low-income
country. The Senegal experience also highlights the importance of a government with the
political will and commitment to carry out reforms and to address the issue of accessibility of
infrastructure services by the poor.

In the early 1990s, prior to reforms, little more than one half of Senegal’s urban
population had access to a safe supply of piped water. Another 42 per cent were dependent on
public fountains and the rest on vendors. In rural areas, only 65 per cent of the population had
access to any form of safe and reliable water. Drinking water quality in the cities was poor
and supply erratic. Poor collection rates and mounting debt meant that the public operator –
though relatively efficient by African standards – had barely enough resources for operations
and maintenance, with little left over for future investments.

Since reforms in 1995, the amount of water supplied has increased by 20 per cent and the
number of connections by 35 per cent. Consumers have also seen a more rapid response to
complaints, longer hours of service and better quality water. From the point of view of the
government and the investor, water losses have been reduced and bill collection has
improved. The private operator, a French company, lost money in each of the first two years
but has since turned a profit. It is the first water company in Africa to be awarded the ISO
9001: 2000 certification signifying that it meets a set of international quality management
standards. The State holding company which owns the assets and undertakes investment is
well on its way to achieving financial equilibrium and has been successful in borrowing in
private capital markets.

The choice of contract for the water sector was the result of a year-long “process of
planning and design in order to put in place an innovative arrangement of contracts,
9
incentives and institutions”. Aided by international donors, this process helped to develop
institutional expertise within the government and to build a consensus for private
participation. To avoid the kind of political backlash seen in other countries, the government
retained ownership of the assets through a State holding company, as well as decision-making
powers in setting tariffs. The type of contract chosen was of the affermage or hybrid lease
kind under which the private operator is paid a fee for the quantity of water produced and
sold. The operator collects the revenue from users and forwards it to the holding company
after deducting its fee, unlike a concession where the operator would retain the full amount of
the tariff. Commercial risks are lower under the afterimage contract because the fee is
independent of actual tariff levels. The fee structure also includes an incentive to reduce
leakages and increase the rate of tariff collection.

One advantage of this form of contract is that, in theory, it does not require a
sophisticated regulatory framework since all necessary provisions are built into the contract.

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In practice, it is not so simple and requires cooperation and flexibility on the part of all
parties. For example, when it was discovered that initial asset valuations and cost estimates
proved erroneous, early renegotiations restored the financial health of the operator.

An important goal of the reform process was to increase accessibility for the poor through
targeted subsidies. These included subsidised connections, the construction of public
fountains in areas where connections were not yet available and subsidised tariffs at low
levels of consumption. Under this latter system, tariffs increase with the quantity of water
consumed, with all households receiving a lower tariff on the first ten cubic metres of water.
Heavy users and business and government clients in effect subsidise low volume users. Such
targeting is not necessarily effective, since “household water consumption is a notoriously
poor proxy for poverty status”. Not only are the very poorest still dependent on the relatively
expensive public fountains, but they might also share a connection with other poor families,
thus pushing up their average tariff. But since all targeting methods have certain drawbacks,
this method at least has the advantage of simplicity and transparency.

7.7.1 Failed or otherwise disappointing PPPs

Between 1990 and 2003, 91 projects worth USD 27 billion were cancelled, representing only
three per cent of total PPPs and of total investment – a relatively small share given the crises
to which many prominent developing countries have been subjected since the mid-1990s. A
more complete picture can be obtained by including projects which are distressed in the sense
that at least one partner has requested termination or the project has been submitted to
international arbitrage. Cancelled and distressed projects amount to five per cent of projects
and nine per cent of investment. The discrepancy between these two shares suggests that
larger projects have a greater likelihood of encountering difficulties.

The greatest number of troubled projects has been in the energy sector, followed by toll
roads and telecommunications. As a share of total investment in each sector, water and
sewerage has had the least favourable experience with over one third of investment in
cancelled or distressed projects. In contrast, the telecommunications sector has one of the
highest success rates in terms of investment in on-going projects. By number of projects there
is little difference in the failure rates, ranging from four per cent for management and lease
contracts to seven per cent for concessions. Measured by investment value, however,
concessions are three times more likely to fail than greenfield projects and twice as likely as
divestitures. While this might suggest that concessions are inherently more risky, it seems
more likely that they are preferred in those sectors with the greatest political sensitivity since
they allow the host government to retain ownership of infrastructure assets. The greater
failure rate is thus more an indication of the sectors in which concessions are used than the
legal form of the project itself. Most failed projects have tended to be terminated relatively
early in their life, on average four and a half years after financial closure.

It is more common for a project to be renegotiated than to be cancelled outright.

Renegotiations of contracts are commonplace in business, so from a corporate perspective
having to renegotiate a set contract can be construed as a commercial risk. However, when
the opposite contractual party is the regulatory authority, distinctions between the political
and commercial spheres can get blurred. In fact, the government has in the past been far more
likely than private firms to initiate renegotiations. Among the factors that influence the
likelihood of renegotiations are the opacity of the original tendering process, the lack of
expertise in the public sector leading to the terms of individual contracts being belatedly
understood and the absence of independent regulators.

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Excluding telecommunications, over for forty per cent of concessions in Latin America
between 1989 and 2000 were renegotiated, including over 70 per cent of those in the water
11
sector. In the region’s water and transport sectors, 58 per cent of renegotiations were
initiated by the government, compared with only one third by private investors. It can of
course be argued that contracts lasting 15 to 30 years are perhaps bound to encounter
changing and unforeseen circumstances, but 60 per cent of all renegotiations took place
within the first three years of the concession.

Finally, over time the value of investments which are either cancelled or subject to
termination proceedings or international arbitration in any given year has dropped
precipitously from a peak of USD 13 billion in 1997 to only USD 500 million in 2003. This
trend suggests that the financial crises of the late 1990s may have run their course in terms of
deleterious effect on project profitability.

A frequently heard complaint about the early phases of PPP projects is that host country
authorities lack the administrative capacity to deal properly with the process of evaluating
and awarding contracts. Civil servants may have a good technical understanding of their
sector, but little knowledge of complex financial transactions such as those involved in BOT
projects. At any given point, there are a significantly larger number of projects under
negotiation than those beginning operations, and many potential projects, complete with
Memoranda of Understanding, are abandoned after lengthy negotiations. According to one
estimate of 860 potential greenfield investments, only 98 (11 per cent) were concluded.

Even when projects reach the stage of negotiations, potential investors often encounter
delays. Since the development phase of private infrastructure projects absorbs between two
13
and five per cent of total projects costs, these delays can be costly for both parties. In the
assessment of a recent study, “…completing better preparation of transactions before inviting
investors to participate can help reduce processing delays and the related opportunity costs
for investors.”

The lack of administrative capacity, taken together with the sectoral and regional
concentration of utilities companies mentioned earlier, creates a risk that bidding may not
always be fully competitive. A World Bank study on the transport sector estimates that the
typical number of bidders for a concession or greenfield project in the transport sector is two
to three. While competition can be fierce even between two bidders, it seems unlikely to be
sufficient in many cases – especially given the diminishing interest of these firms in
developing countries. At the very least, such competition is considerably improved by the
presence of foreign bidders.

Another area where bidding might not be fully competitive concerns the construction phase
of the project. It is estimated that six companies control 50 per cent of this market and sixteen
16
share 90 per cent of construction projects. But since private companies often construct
infrastructure for the public sector as well, this potential problem is not the result of private
participation per se.

7.7.2 Failing demand and consumer dissatisfaction

Purely commercial failures involving investors critically misjudging the market or
underestimating their production costs have been relatively rare. Examples include some
large-scale projects in transport and telecommunications, where demand forecasts turned out
to be unfounded. For example, several projects involving toll roads in Mexico were cancelled
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after the actual use turned out to be only one half of the predicted volumes. While such risk
rests properly with the private participants, they nevertheless point to a need for improved
data collection, not only on the actual demand for the specific service and shape of the
network, but as well on the position of potential competitors.

Once the firm has invested, the primary concern is cash flow: generating revenue, enforcing
collection and setting tariffs at cost-recovery levels. Investors wish to be free to realise profits
without government interference, but if they encounter difficulties in collecting revenue or
public hostility to raising tariffs, they expect the government to be responsive to their needs.
It is in the face of such difficulties that the extent of government commitment to private
participation in infrastructure becomes critical. Private operators can neither adequately
enforce collection nor raise tariffs abruptly such as during a currency crisis without the
support of the government.

The emphasis on cash flow suggests that renegotiations and cancellations are not just, or
even mainly, a regulatory problem. Investors have been known to put up with numerous
frustrations in their dealings with host governments as long as the project earns a satisfactory
return. Many conflicts between private and public partners arise because a macro shock, such
as a massive devaluation, means that the project is no longer profitable or – in cases where
the investor has a guaranteed return indexed to the exchange rate – no longer affordable for
the government.

In sectors where services had historically been subsidised and/or the collection of tariffs lax
(e.g. in electricity or water) private investors have confronted opposition to price increases
and have faced difficulties in tariff collection. As regards the price levels, the largest water
concessions in developing countries, in Buenos Aires and Manila, ran into difficulties when
17
major devaluations triggered tariff increases which were politically infeasible to implement.
In Cochabamba, Bolivia, tariff increases of 35 per cent set off widespread popular unrest
which resulted ultimately in the cancellation of the project.

7.7.3 Non-compliance with contractual terms

The issue of public resistance cannot, in practice be separated from that of compliance with
contractual terms. Consider the example of Argentina, one of the most popular destinations
for investors in the 1990s. A water concession to the French company Suez “worked well
until the steep fall of the peso in early 2002. Suez then pulled out and went to arbitration after
the authorities did not agree to higher charges to offset the devaluation.” Largely as a result of
the devaluation of the peso, there were 28 proceedings against Argentina under the
International Convention for Settlement of Investment Disputes (ICSID) as of early 2004. Ill-
feelings tend to linger for years after the devaluation. Out of ten foreign investors in the
power sector in Argentina in 2002 surveyed by the World Bank, nine were very dissatisfied
with their investment experiences and only one was satisfied. This compares with
neighbouring Chile where five out of eight respondents were very satisfied with their
experience and only one very dissatisfied. Possible solutions to the serious problem of
exchange rate risk are provided later.

Similar problems have been encountered where the public sector acts as the main direct
purchaser of utilities services. One example is power purchase agreements, with the
government agreeing to purchase electricity at specified tariffs usually indexed to the
exchange rate. These contingent liabilities for the government have in several cases proven to
be unsustainable in the face of macroeconomic shocks, which helps explain why contracts are

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often renegotiated in the wake of a financial crisis. Moreover, in many countries the
continuing state control over transmission and distribution has meant that the full benefits of
private participation in this sector have not been realised, notably with respect to efficiency in
downstream activities and to expanding coverage to poorer areas.

Host governments have equally complained of “frequent conflicts with operators in

complying with contract clauses… abandonment of the concession by the operator or the
taking over of the concession by the government as a result of claimed bankruptcy of the
operator, discontent with price levels and services, poor attention to users and, particularly,
the perceived high incidence of renegotiation of contracts shortly after the award of the
concession, often in detriment of consumer welfare.” These problems are not unfamiliar in
OECD countries either. Infrastructure providers, especially where greenfield investment is
concerned, have been known to understate the expected costs in order to win contracts and
subsequently claim “special circumstances” to demand an adjustment of contractual terms.
Many governments provision against such practices, or build safety mechanisms into
contracts, but developing country authorities may face financial and other difficulties in
emulating such practices.

It appears that the large number of PPPs that have left the contractual parties dissatisfied
indicates that either developing country authorities, or investors (or both) may have had too
high expectations to what could be achieved. Conceivably, some contracts have been granted
under circumstances (e.g. subject to corrupt practices or contingent upon political links
between home and host governments) that made them susceptible to changes in the political
environment. But the large majority of bona fide PPPs have also suffered from inflated or
unrealistic expectations.

Many governments in developing countries have seen private investors simply as a source of
financing to be used to supplement dwindling public funds. In doing so they have failed to
recognise the minimum expectations, including to the legal and regulatory systems, that
companies have to the business environment and without which they are unlikely to maintain
their commitment. Conversely, utilities companies may have relied overly on contracts and
failed to realise that developing country authorities lack the capacity to underwrite large risks
– including the consequences of macroeconomic shocks and public upheavals – that they
have come to take for granted in their home countries.

The best that developing country authorities, acting on their own, can do to enhance the
chances of successful PPPs is developing a better knowledge of the obstacles, take steps to
address these and prepare better all levels of the public administration before embarking upon
such partnerships. Based on a study by Sader (2000) and the Camdessus Report, which
focused on the experience with partnerships in the water sector, the main obstacles within
developing countries would seem to include (their relative importance has been the subject of
recent empirical research

• Conflicting aims. Often one objective (that is, one PPP project) has been expected to
serve several policy objectives, from financial, to macroeconomic, to social, to
environmental. Protests by local communities and non-governmental organisations
against individual projects have rebounded on investors rather than the initiating
authorities.
• Award procedures. The award procedures often lack transparency and are not based on
objective evaluation criteria. Corruption has been a problem – in general, and in the

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 specific context of awards. Also, some projects have been compromised by official
preference for local participation, preferred sub-contractors or suppliers and the
employment of weakly qualified local staff.
• Regulatory frameworks. A weak legal environment necessarily leads to concerns for
non-state underwriters of long-term contracts. Existing legislation in many countries
was designed to define public sector responsibility in infrastructure and is
inadequate in a situation of private participation. In addition, human capital such as
relevant regulatory expertise is in short supply in many countries without much
experience in privately operated utilities.
• Public governance. Many private investors have had to contend with conflicting public
authorities, for instance central versus sub-national governments, or regulatory
bodies versus ministries. In addition, non-existent or inexperienced regulators
created avoidable uncertainty about price and tariff setting.
• Existing service providers. Where incumbent service providers, often state owned,
remain in the market they are often the subject of preferential treatment. This goes
hand in hand with a tendency, in many countries, to invite private participation in the
absence of a commitment to overall sectoral liberalisation.
• Political commitment. In countries where the rule of law is not firmly entrenched
governments have reneged on contracts signed by previous administrations. There
also have been several cases of governments reneging on contractually agreed terms
(e.g. the right to levy cost-recovering tariffs) in the fact of public dissatisfaction

7.7.4 Risks faced by private investors in developing countries

Design and construction risk: Given the size of many infrastructure projects, cost overruns
and delays are common, especially if there are subsequent modifications to the design as a
result of political or environmental concerns. The private sector typically bears this risk, even
when the project will ultimately be run by a public entity.

Operating risk: When the private firm takes over the assets of a previous provider, usually
the public sector, the quality of such assets is never completely known in advance. In the
water sector, for example, most assets are underground. This risk can be reduced if the
private operator initially enters the market through an operations and maintenance contract
with the public sector provider.

Commercial risk: As with any investment, demand might not prove sufficiently robust at
price levels necessary to ensure long-run profitability or might be subject to a
macroeconomic shock. This risk is greatest in those areas where there has not previously
been an infrastructure provider and hence potential demand is unknown or where tariffs were
formerly subsidised and collection poor. In some contractual arrangements, the government
accepts responsibility for tariff collection or agrees to buy the infrastructure service from the
PPP at a fixed price. While this reduces the risk for the investor, it opens the way for almost
certain renegotiations if a crisis means that the government can no longer afford its financial
obligations.

Regulatory risk: Very few developing countries have a well-established and autonomous
regulatory agency to deal with infrastructure. With no track record, such agencies might not
apply regulations in a consistent pattern, especially if those laws and regulations are
themselves untested.

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Political risks: The support of the national government is often cited as a crucial factor in the
success of a project. If this support wanes in the face of popular discontent at the cost of
private provision or if a new regime disavows certain policies of its predecessor, the private
operator might find that contractual obligations of the government are no longer being
honoured. Political risks might also involve litigation or bureaucratic barriers.

Currency risk: Perhaps the greatest risk to the profitability of a project involves the risk of
devaluation. Infrastructure projects in developing countries are often financed in part through
international lending. These debt repayments, together with payments of dividends, must be
made in foreign currencies while profits usually accrue in the local currency. As a result, any
sudden devaluation can completely modify the profitability of a project. This was the case for
many PPPs in the 1990s, notably in Latin America and Southeast Asia, and helps to explain
the diminished enthusiasm for such projects on the part of the international investment
community.

7.8.0 Summary
There are projects which have yielded good results and there are projects which have not
reached up to the desired objectives and outcomes. The above experiences and case studies
reveal the fact that there are yet many hurdles and deficiencies in the public sector to
formulate and implement projects based on PPP concept. It is necessary to create conducive
environment for the private sector to make investment in the public infrastructure with the
main intention of delivering services to the people. The GoK has initiated the process by
framing a policy in 2007. The GoI has also prepared the policy and programmes to encourage
PPP projects by extending subsidy or grant through the schemes of VGF etc.

7.9.0 Questions

1. What are key principles on which PPP projects are developed?

2. Describe the examples of successful and PPPs in India?
3. List the case studies on PPP as given in the website of DEA & IDD?
4. What are the lessons learnt from Solid waste management case study of DMC?
5. Discuss the Sanitary land fills case study of Bangalore?
6. Describe Thiruvananthapuram city roads improvements projects?
7. Explain a case study of O&M of streets lights in Vijayawada?
8. Describe case studies of Apollo Hospital, Alandur Sewerage Projects & Latur Water
supply and the lessons learnt?
9. Discuss the case studies of Ilembe District Municipality and Meleka-Manipal
College?
10. Discuss the issues Toll roads and National Highways in India?
11. Describe the factors for failed PPPs in Developing countries?
12. What are factors to be considered to enhance the chances of successful PPPs?
13. Explain the risks faced by the private investors in the developing countries ?

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