National PPP Policy 2011 - Draft for Consultation -The PPP Process.

National Public Private Partnership Policy

Draft for consultation

Department of Economic Affairs

Ministry of Finance

Government of India

2011

3. The PPP Process  

3.1 To make the decisions needed to plan, develop, and execute successful PPPs, the process can be broadly divided into four phases, viz., identification stage, development stage, procurement stage and contract management and monitoring stage.  

3.2 Phase 1: PPP identification, covers activities such as strategic planning, project prefeasibility analysis, Value for Money analysis, PPP suitability checks, and internal clearances to proceed with PPP development.  

3.3 Some of the critical drivers are discussed below.

3.3.1 PPP Plan to generate a steady pipeline of PPP projects To make efficient use of existing assets and harness new investments for greater efficiency, the Government shall set out, over a period, a long term vision and plan document for each sector which defines the role of public and private participation. For each financial year, based on a pre-determined and envisaged level of public services to be rendered, different agencies would set out an annual PPP Plan which would identify a shelf of projects flowing from the overall vision and specify the extent of private investment for each project in the Plan.  

3.3.2 Pre-feasibility analysis would be undertaken by the project proponents to assess broad viability of every project envisioned to be procured on a PPP mode. Identification of the key risk factors for the project shall also be undertaken to establish the likely cost and revenue streams of the projects.  

3.3.3 Value for Money Drivers  

Value for Money assessment plays a central role in decision around investment prioritization and in the selection and presentation of the choice of procurement approach. This is particularly relevant to annuity based payment schemes, where a framework is needed to assess whether or not it is the appropriate procurement route given the alternative of more traditional procurement approaches.  

i. Value for Money (VfM) analysis shall be undertaken to support key decisions. At the outset, VfM analysis shall be undertaken to establish whether to develop a project as a PPP project. Subsequently, the VfM analysis should be undertaken to affirm whether to award a PPP contract on the basis of the bids received. A VfM analysis is most eminent upon structuring a PPP by comparing a shadow bid resulting from the financial analysis with a public sector comparator (or costs in case of conventional procurement). ( A brief note on VfM is furnished at Annexure)  

ii. VfM analysis should be conducted for every project in order to ascertain whether the Project being procured as a PPP is in a way offers good Value for Money to the public sector. VfM analysis would be conducted even if no fiscal support is required, as the costs may be recovered through user charges (as there is an obligation to ensure that charges users pay are fair and reasonable).  

iii. VfM assessment would be based on the efficiency savings that can be realized by utilizing the private sector managerial skills, integration and synergy between the design, build and service operation, optimal risk allocation, whole of life costing, innovation, focus on outputs and a robust competitive process to elicit the best bids.  

iv. It is recognized that information availability is a constraint in the formulation of VfM analysis and also that sectors have different characteristics that influence the VfM outcomes. The public sector entities, either directly or through agencies such as PPP Cells, would set in place mechanisms for creation of a database which would facilitate this exercise.

3.3.4 Conformance with State and Sector Legislation  

Before structuring a PPP project, an assessment would be carried out to ascertain whether private participation in the delivery of a public service is permissible under the extant legislations. If the same is not allowed but it is deemed prudent to adopt a PPP framework, suitable modifications/amendments would be made to the legislations.  

3.3.5 Adherence to Processes  

In addition to the above, a project would be deemed suitable for PPP, only if risks could be allocated in such a manner that maximizes the stakeholder benefits and the implementing agency commits to adhere to the process of development, procurement and post award governance of the project. If a project is found not suitable after the PPP suitability assessment, the implementing agency would consider alternative methods of taking up the project including EPC contracts, corporate sponsor, community participation, etc.

3.4 Phase 2: Development Stage covers project preparation (including technical feasibility and financial viability analysis), project structuring, preparation of contractual documents and obtaining of project clearances and approval. During this stage, activities would be undertaken with the following objectives:  

a. Articulate the scope of the project, implementing agency’s requirements and set forth roles/ responsibilities of the parties;  

b. Establish that the revenue model is robust and sustainable over the project life;

c. Ensure that the underlying risks are defined and appropriately allocated between the contracting parties;  

d. Ensure that the contractual arrangements and documentation accurately reflect the scope of the project, roles and obligations of parties, performance standards, monitoring arrangements, penal provisions, reporting requirements, dispute resolution mechanism and termination arrangements as well as & and effective post award governance mechanisms;

e. Ascertain that contractual arrangements are permissible under the policy, legal and regulatory regime; and  

f. Establish stakeholder buy-in and commitment is ensured throughout the process;  

3.4.1 As part of the project development activities, implementing agencies would undertake studies and investigations relating to technical, market analysis, financial, legal aspects, with the assistance from advisors/consultants wherever required. The output of the project development activities, to the extent feasible, would be made available to the potential bidders during bid process. Some of the core activities critical at this stage are discussed below.  

3.4.2 Economic, Financial and Affordability Assessment  

i. To structure the projects optimally, the implementing agency would evaluate the project from an economic perspective (to ascertain whether the project is warranted – public need), then whether the project generates positive value to the private sector (financial viability), and finally ascertain whether defined viable PPP is better than conventional procurement or which of the defined viable PPPs is most attractive (VfM analysis). All these analyses would be based on the same valuation methodology – calculation of net present value where future benefits (revenues), and costs (capital, O & M), are discounted to reflect the current value.  

ii. Economic analysis would form a key input for decisions regarding the (public) need for a project, and would encompass, in addition to the cash flows and items that have financial impact, other external costs and benefits to the stakeholders, regardless of whether they have any financial impact. The future economic benefits and costs will be assessed and discounted using a discount rate that reflects the systematic risk of the projects.  

iii. Financial analysis would assess whether the project generates sufficient revenues for the capital providers to generate an acceptable rate of return. The future financial benefits and costs (in terms of cash flows) are discounted, using a discount rate reflecting the cost of capital, and which also takes into account the systematic risk of the project.  

iv. Affordability analysis, with respect to both the implementing agency (viz., committed and contingent liabilities, such as land acquisition costs, rehabilitation and resettlement costs, annuity payments, management fees, etc.) and the likely users (tariffs, user charges, etc) would be a critical determinant in addition to the VfM analysis, on whether to take up the project on the PPP mode. It is also an effective tool to establish the reasonableness of assumptions underlying the financial analysis.  

v. Bankability assessment would also be carried out to assess the debt service capabilities of the proposed project structure. A Debt Service Coverage Ratio (DSCR) (a ratio of cash flow available for debt servicing divided by the amount of debt service) is a key measure to assess the credit worthiness of a project . In case the analysis suggest that the project is not bankable, the implementing agency might consider developing credit enhancement mechanisms, such as viability gap funding, capital grant or maintenance grant, alternative revenues structures, including shadow user fees, etc. Such credit enhancement structures would be facilitated through institutional and contractual provisions.  

vi. Existing loans, guarantees, other statutory and contractual liabilities and contingent liabilities affect the fiscal resources of the project proponents and would be considered while structuring PPP contracts.

3.4.3 Value for Money Analysis  

A similar (as adopted for economic and financial analysis) methodology would be utilized for quantitative assessment of Value for Money. The future benefits and costs of applying PPP in comparison with conventional procurement are assessed and discounted using a discount rate reflecting the systematic risk of the project.  

3.4.4 Management of Risks  

i. The Government, through the implementing agencies, shall identify different types and degree of risks during the project life cycle, and configure appropriate mitigation measures. The objective would be to optimally allocate the project risks, rather than maximize their transfer to the private sector. The attempt would be to allocate risks, taking into account the legitimate concerns of the stakeholders, to the entity that is best suited to manage the same.  

ii. In the normal course, the public sector would not retain the risk that the private sector has better ability to bear. However, risks that the public sector is more competent to mitigate/bear in the normal course of its business, such as ensuring availability of unencumbered land for the project or obtaining mandatory clearances of regulatory authorities prior to commencement of the project, would be retained by the public sector.  

iii. The allocation of risk shall be enshrined in the contract document and under normal circumstances shall not be subject to modification after the award of the project. Contractual documentation would provide adequate protection to lenders against non-commercial risks related to force majeure, regulatory changes, contract termination etc. The contract would also prescribe the key performance indicators and output parameters to ensure that the delivery of services adheres with the aspired levels.

iv. To ensure that the projects conform to the guiding principles of PPPs, the Government has notified the Guidelines for Formulation, Appraisal and Approval of Central Sector PPP Projects. The procedure enshrined in these guidelines shall continue to be observed for all central sector projects. States are encouraged to put in place a similar mechanism.  

v. Government, where required, would set out mechanisms for periodic review and reallocation of the risks that could not be transferred for the entire contractual period.  

Box 2: Criticality of robust legal contracts  

A clear legislative and regulatory foundation enabling the public entities/utilities to enter into PPP contracts and arrangements is desirable, to secure:  

1. A transparent and objective process for selection of infrastructure projects taking into consideration concessionaire concerns about ‘Value for Money’ and welfare consideration. In doing so, the process design must be consistent with the governing framework for public procurement;  

2. A clearly defined approval, compliance and performance monitoring jurisdiction. This is especially relevant in relation to the rights of local and other authorities such as the Development Authorities, Municipal Authorities and Panchayat Raj Institutions;  

3. A clear definition of the role, responsibility and rights of various parties in the governing instruments including the scope of public service, service standards, pricing, and scope of governmental intervention or assistance ;  

4. The participation of private parties in ownership and/or management of public assets and/or delivery of public utility services;  

5. The vesting in such private party, the power to -

(a) Collect, retain and appropriate revenue to meet reasonable expenses incurred in implementation of the PPP project including a pre-determined/ agreed return on the funds employed; and

(b) Seek revision of the charges and/or collection in terms of the concession agreement, in order to facilitate business planning and financing.  

6. The role of the Concessionaire in maintaining and managing the PPP asset/services and in controlling access to and usage of the infrastructure facility; and,  

7. The scope of bankability and securitization of the Concession, Project Assets and revenue (including assignability) so that the Concessionaire is in a position to avail affordable debt finance by securing lenders.

3.5 Phase 3: Procurement stage would cover procurement and project award.  

Transparent, accountable, non-discriminatory, competitive and timely procurement processes would be followed so as to encourage maximum participation by private sector and to imbibe public confidence in the procedure. The PPP rules notified by the Government would define the norms and procedures for procuring PPP projects.  

3.5.1 The bid documents used for procurement of private sector entities may comprise one or more of expressions of interest, request for qualifications, and request for proposals. Technical proposals would be invited, depending on the complexity of a project, to assess the ability of the private entity of their appreciation of the desired outcomes. Financial proposals would ideally be in the form of a single objective parameter.  

3.5.2 The Government has prescribed the bid process and the model bidding documents (viz., model Request for Qualification and model Request for Proposal) for PPP projects in infrastructure sector, through notifications issued from time to time. The implementing agencies shall observe the prescribed process or take necessary approvals of the competent authority on the process, relevant to their sector, proposed to be undertaken prior to commencement of the bid process.  

3.5.3 A web based market places, including e-tendering and auction would be promoted based on the project requirements to promote wider participation and transparency in the process.  

3.5.4 Draft contract agreement2, containing provisions on the roles and obligations of the parties, performance standards and monitoring arrangements, reporting requirements, penalty conditions, force majeure conditions, dispute resolution mechanism and termination arrangements, shall be provided to the prospective bidders as part of the bid documents.  

3.5.5 Timelines to be followed during the procurement process would be indicated by the procurement entity in the bidding documents. In order to minimize delays, the procurement entity would endeavor to obtain all necessary approvals for a project from the agencies concerned in a timely manner.  

3.5.6 Procuring entities would, on best efforts basis, facilitate all necessary clearances for speedy implementation of a PPP project.

Box 3 : Provision for Competitive Dialogue in exceptional circumstances to bring in innovation and design flair from the private sector  

In complex contracts where an implementing agency is unable to objectively establish the exact project parameters needed to achieve project objectives, due to a number of possible technological, legal and /or financial options for developing a project, a competitive dialogue process might offer a solution to arrive at clarity on the optimal project scope. This would involve the working together of an implementation agency with likely bidders to explore all possible technical, commercial and legal options and arrive at the optimal solution through an iterative procedure. The dialogue ends when the authority can identify the solution or solutions which meet its needs. Any such exercise must still be followed by the development of appropriate base financial and project models by the implementing agency and a competitive, fair and transparent tendering process avoiding discrimination or bias towards any single party. Bidders then submit tenders based on the solution resulting from the dialogue. Competitive Dialogue cannot be considered as a default position, and must be used with prior approval of competent authority.  

2 Wherever Model Concession Agreement has been notified by the Government of India, the same would be used by the implementing agency. Model Concession Agreement(s) are documents approved by the Minister-in-Charge of the concerned Ministry/Department, after obtaining concurrence of all such Ministries/Departments, as are required to be consulted in terms of Rule 4 of the Government of India (Transaction of Business) Rules. Such concurrence should be obtained at the level of the Minister-in-charge of the consulted Departments and in case of disagreement between the departments; the matter can be placed before the Cabinet in accordance with the usual procedure.  

3.6 Phase 4: PPP contract management and monitoring stage, covers project implementation and monitoring over the life of the PPP project. Contract management is not a passive box ticking/reporting exercise: it is an active process that involves a wide range of skills. Projects are not static, conditions change and the capability of the public authority at the interface with the private sector party is therefore crucial. The contract manager needs to be empowered to take action responsively and effectively only escalating up the chain issues that cannot be managed at the project interface. This calls for effective and efficient governance processes and people with the right mix of skills (or at time access to skills) including project management, commercial expertise and negotiation skills;

3.6.1 The Government and the implementing agencies shall endeavor to ensure timely and smooth implementation of the project. The implementing agency shall put in place a suitable contract administration framework for monitoring project performance milestones over the contract period.  

3.6.2 The project implementing agency shall establish appropriate mechanisms for project monitoring such as Project Monitoring Unit (PMU) and inter-department committees that would oversee project implementation, facilitate coordination between departments and render assistance during events of dispute resolution or arbitration. The contract management teams identified would be well prepared and resourced in advance of the contract management stage. In particular, those charged with managing the contract would have a close knowledge and understanding of the relevant terms of the contract, especially, where relevant, the performance criteria and payment mechanisms;  

3.6.3 The dispute resolution mechanism would be in accordance with contract conditions and applicable legislation. The implementing agency shall endeavor to speedily resolve and dispose disputes during the contract period through appropriate mechanisms including mediation processes.  

3.6.4 The Government recognizes that appropriate capacity is critical to effectively undertake project monitoring and, therefore, appropriate human resources and management systems would be established for the above.  

3.7 Management Information Systems  

In order to continuously monitor the performance of the PPP projects over the project life cycle, the Government would establish the MIS for PPP projects. The evaluation of the PPP projects would also be tabulated and summarized so as to utilize the same for improving the quality of service delivery levels and sustainability of PPPs in the future. The database of the projects would not only contain information on the ongoing projects but also set out frameworks for monitoring them during various stages of the project cycle. The database would be so developed so as to generate information for undertaking VfM analysis. PPP Cells would be responsible to set up MIS systems and disseminate information to Government agencies from time to time so as to effectuate suitable policy changes based on the previous experience of managing PPP projects.  

3.8 Post Project Award Negotiations  

It is acknowledged that including conditions in a PPP contract that allow a party to negotiate post award and execution is not advisable, and to the extent possible, the contract must cover all possible aspects that would required subsequent adjustments. Hence, modifications in the contractual terms should be rare events and subject to the following principles:  

3.8.1 The implementing agency must justify that risk sharing at allocation stage has significantly changed due to rare circumstances beyond the control of the parties.

3.8.2 Any such post award negotiations would be undertaken in the spirit of adhering to the VfM analysis established during the project development process.

3.8.3 The implementing agency would obtain prior approval of the sector regulator (if any), the appraising entity and the authority granting approval to the investment decision in the project before effecting any change in the contract.  

3.8.4 All negotiations shall be undertaken in a transparent manner aimed at generating awareness among the stake holders about the original bid and contractual conditions, the proposed changes and justifications, thereof. The transparency herein would include mandatory disclosure by both parties.  

3.8.5 All such negotiations and contractual modifications would be subject to audit, including stage audit, by the authorities.