Public-private partnerships: models, risk and procurement

Detail

1. What a PPP is

• Public-private partnership (PPP): a long-term contract between a public authority (government, NHAI, a port trust) and a private company. The private company provides a public asset or service.
• The private party carries significant risk and management responsibility. This is what makes it a PPP and not ordinary buying.

• Plain government contracting (for example, a firm paid only to build a road) is not a true PPP, because the firm carries almost no long-term risk.

• Concession agreement: the contract that gives the private party (the concessionaire) the right to build, operate or use a public asset and collect revenue.

• The right lasts for a fixed period (the concession period) on set terms.
• The government uses Model Concession Agreements (MCAs). These are standard contract templates, so every project does not start from zero.

2. The core question: who bears which risk?

• A PPP is mainly a decision about risk allocation. The rule: give each risk to the party that can manage it best, at the lowest cost.

Risk	What it means	Example
Construction risk	Delays and cost overruns while building	Steel prices rise and the road costs 20% more
Traffic / demand risk	Fewer users than expected, so less toll or fee income	8,000 cars a day come instead of the 15,000 forecast
Financing risk	Loans cost more or cannot be raised	Interest rates go up during construction
O&M risk	The cost and quality of operation and maintenance	The road surface wears out early
Regulatory / political risk	Changes in law, tariff or policy	The state stops tolls or freezes fees

• Traffic risk is the most important in highways. It explains most of the boom and bust story in section 5.

3. The model ladder: from least to most private risk

Model	Who finances	Who collects tolls	Traffic risk
Engineering, procurement and construction (EPC)	Government, 100%. The contractor designs, buys materials and builds for a fee.	Government	Government (contractor has none)
Hybrid annuity model (HAM) (NHAI, 2016)	Government 40% during construction; developer 60%, repaid as annuities with interest over ~15 years	Government (NHAI)	Government
BOT-Annuity	Developer, 100%. Government pays fixed semi-annual annuities.	Government	Government
BOT-Toll	Developer, 100%	Developer	Developer

• Annuity model (general): the government pays the developer fixed instalments at regular times (an annuity). The developer does not collect user charges. So the developer carries construction and O&M risk, but not traffic risk.
• EPC: the government pays for everything and owns the road from the first day. The contractor is only a builder. This is the least "partnership" of all the models.
• BOT-Toll: the developer puts in all the money and lives or dies by toll income. It carries the most private risk.

Hybrid annuity model (HAM): the mechanics

• Official definition: 40% of the project cost is paid by the Government or executing agency as construction support (a grant) to the developer. The remaining 60% is arranged by the winning bidder during construction [3].
• The developer gets its 60% back with interest, plus O&M payments, as annuities during the operation period [3].
• Toll collection is the job of the Government or Authority. Tolling rights belong to the employer (NHAI) once the stretch is declared open for commercial operation [3].
• The concessionaire does the O&M, but traffic risk is taken by the executing agency (employer) [3].
• Why it is called "hybrid": it mixes EPC (the government pays 40% during construction) with BOT-Annuity (the developer funds 60% and is repaid in instalments).
• Worked example: a ₹1,000 crore road
• NHAI pays ₹400 crore in stages, linked to construction milestones.
• The developer raises ₹600 crore (its own equity plus bank loans).
• After the road opens, NHAI repays the ₹600 crore with interest in annuities over about 15 years, plus O&M payments.
• All toll money goes to NHAI, not the developer.
• Result: the developer needs less capital, and it does not suffer if traffic is low.

4. The BOT family and models for existing assets

• Build-operate-transfer (BOT): the concessionaire finances, builds and operates the asset. It gets its money back through tolls or annuities. Then it transfers the asset to the government at the end of the concession.

Variant	Meaning	Key point for the exam
Build-own-operate-transfer (BOOT)	The private party owns the asset during the concession, then transfers ownership	Legal ownership sits with the private party for a time
Build-own-operate (BOO)	The private party owns and operates the asset for ever	No transfer (common in private power plants)
Build-own-lease-transfer (BOLT)	The private party builds and owns, leases the asset to government to recover costs, then transfers	Government pays lease rent
Design-build-finance-operate (DBFO)	The private party designs, builds, finances and operates	Paid through user charges or availability payments (fixed payments for keeping the asset available and working)

• Models for existing (brownfield) assets. These are used to monetise assets, which means turning a working public asset into money now.
• Toll-operate-transfer (TOT): the government auctions the right to collect tolls on, and maintain, an operational road for a fixed period. In return, the winner pays an upfront lump sum.
  • The first TOT bundle (2018) covered 9 national highway stretches, about 681 km. It raised about ₹9,681 crore for 30 years.
  • Why it works: the road already exists, so there is no construction risk. Real traffic data exists, so traffic risk is easier to price.
• Operate-maintain-transfer (OMT): a private party operates and maintains an existing asset, collects user fees, then gives it back.
• Rehabilitate-operate-transfer (ROT): a private party repairs and upgrades an existing asset, runs it for the concession period, then returns it.
• Lease-develop-operate (LDO): a private party leases an existing facility, upgrades and runs it, and pays lease rent. It is used for airports.

5. What went wrong: the BOT-toll boom and bust

• Historical background: Indian railways began in 1853. Colonial-era infrastructure was built mainly to serve British trade and administration (class 11, keec101). Private capital building public transport under government terms is therefore an old idea in India.
• Boom (2000s): a large number of toll roads were awarded under BOT-Toll.
• Bust (around 2012 onwards). Four causes:
• Over-aggressive bids. Developers assumed traffic would be too high, so they bid too high to win.
• Delays in land acquisition and clearances (environment, forest, railway crossings). These pushed up costs.
• Traffic shortfalls. Real traffic was below forecast, so toll income could not repay loans.

• Stressed bank loans. Infrastructure loans turned bad. Weak companies and weak banks hurt each other: the twin balance-sheet problem (see banking-regulation-npas).

• The fix: policy shifted to EPC and HAM. In both models the government takes back traffic risk, and the private party keeps only the risks it can control.

6. Kelkar Committee (2015): revisiting and revitalising PPPs

• The Committee on Revisiting and Revitalising the PPP Model of Infrastructure Development, chaired by Dr Vijay Kelkar, gave its report to the Finance Minister on 19 November 2015 [4].
• Key recommendations (scaffold points plus official additions):
• A renegotiation framework for stressed concessions. Contracts should have some flexibility, while authorities stay protected against moral hazard (the risk that a bidder bids low on purpose because it expects to renegotiate later) [4].
• Independent sector regulators with a unified mandate [4].
• 3P India, an institution to build PPP skills and capacity.
• An Infrastructure PPP Adjudication Tribunal to settle disputes quickly.
• Amend the Prevention of Corruption Act, 1988, so that only mala fide (dishonest) acts by public servants are punished, not honest errors [4].
  • Why this matters: officials feared jail for honest commercial decisions, so they avoided taking any decision. This is called policy paralysis.
• An institutional mechanism like a National Facilitation Committee (NFC) for time-bound clearances during implementation [4].
• Study whether a PPP law would help PPPs grow into new sectors such as health, other social sectors and urban transport [4].
• Discourage the Swiss challenge method.

7. Procurement: the Swiss challenge

• Swiss challenge: a private party makes an unsolicited proposal (one the government did not ask for). The government then puts it to open bidding. The original proponent can match the best counter-offer and win.
• Where it has been used: by some states, and in railway station redevelopment projects.
• The concern:
• The proponent designed the project, so it knows much more than rival bidders (information advantage).
• Rivals get little time and have less information.
• So the contest is less transparent and less competitive. This is why Kelkar discouraged it.

8. Viability gap funding (VGF)

• VGF: a one-time capital grant. It makes a project that is economically justified (good for society) but commercially unviable (the revenue cannot repay the cost) bankable, which means lenders become willing to lend to it.
• Formula logic:
• Viability gap = project cost − the amount that the project's own revenue can support.

• VGF fills this gap, up to a fixed limit.

• 2006 scheme (general infrastructure):

• The Centre gives up to 20% of total project cost.
• The sponsoring authority (state or line ministry) can give up to another 20%.

• Worked example: for a ₹1,000 crore project, up to ₹200 crore from the Centre + ₹200 crore from the state or ministry = up to ₹400 crore. The private party funds the other ₹600 crore or more.

• 2020 revamp:

• The CCEA (Cabinet Committee on Economic Affairs) approved continuing and revamping the scheme till 2024-25, with a total outlay of ₹8,100 crore [2].
• It added two sub-schemes for social infrastructure: waste water treatment, water supply, solid waste management, health and education [2].
• For these projects, the Centre gives up to 30% of total project cost, and the state, sponsoring central ministry or statutory body can add up to 30% [2]. (NCERT: "higher shares for social infrastructure".)
  • Worked example: for a ₹1,000 crore hospital PPP, up to ₹300 crore + ₹300 crore = ₹600 crore in VGF.
• Eligible projects must recover at least 100% of operational cost from their own revenue [2].

• Pilot projects get even more support (exact shares: verify).

• VGF in the energy sector:

• Battery Energy Storage Systems (BESS), 2023: 4,000 MWh of BESS projects by 2030-31, with support of up to 40% of capital cost as VGF [6].
• Offshore wind, 2024: total outlay ₹7,453 crore, including ₹6,853 crore for installing and commissioning 1 GW of offshore wind. This is 500 MW each off Gujarat and Tamil Nadu [5].

Prelims Hooks

• HAM: Government 40% as construction support, developer 60% repaid as annuities with interest. Tolls go to NHAI. Traffic risk stays with the government [3].
• Traffic risk on the developer: only in BOT-Toll. In EPC, HAM and BOT-Annuity the government carries it. This is a common trap.
• BOO = no transfer. BOOT and BOLT = transfer at the end of the concession.
• TOT is for existing, operational roads, for an upfront lump sum. First bundle (2018): 9 stretches, ~681 km, ~₹9,681 crore, 30 years.
• LDO is used for airports. ROT means an existing asset is repaired first.
• VGF (2006): Centre up to 20% + sponsoring authority up to 20%. 2020 revamp, social sectors: Centre up to 30% + state up to 30%, total outlay ₹8,100 crore till 2024-25 [2].
• Kelkar Committee (report Nov 2015): 3P India, PPP adjudication tribunal, independent regulators, amend PC Act 1988. It discouraged the Swiss challenge [4].
• Swiss challenge: the original proponent of an unsolicited bid has the right to match the best counter-offer.
• VGF for BESS: 4,000 MWh by 2030-31, up to 40% of capital cost [6]. Offshore wind VGF: 1 GW (Gujarat + Tamil Nadu) [5].

Mains Points

• Risk allocation decides whether a PPP succeeds. BOT-Toll failed after 2012 because the private party carried traffic and land risks it could not control. HAM and EPC fixed this by moving traffic risk back to the state. The trade-off is that the government's fiscal burden and contingent liabilities (payments the government may have to make later) go up.
• Institutions matter more than models. Kelkar's agenda (renegotiation framework, independent regulators, dispute tribunal, protection for honest officials) deals with the real causes of stalled PPPs: slow decisions, disputes and fear of vigilance cases [4].
• VGF as smart subsidy: a one-time, capped grant brings in private efficiency without the government paying the full cost. The 2020 widening to health, education and water, and the use of VGF for BESS and offshore wind, show how PPP tools now serve social and energy-transition goals [2][5][6].
• Asset monetisation (TOT, OMT, LDO) recycles capital. Money from existing roads and airports can fund new projects. Critics raise user-charge hikes, undervalued assets and weak regulation of private monopolies, which links to GS-II governance.