Tuesday, March 29, 2011

The Centre plays the PPP evangelist

Over the years, the central government has been fine-tuning its PPP policy and prodding states and local bodies to take up PPPs. Here's an overview of the Centre's PPP policy and institutional framework.By Kapil Bajaj
The Centre is the primary promoter of PPPs and expects the states to emulate it in policy and institutional framework.
It provides funds to the central and state authorities to hire consultants for PPP project development and has been engaged in ‘capacity building’ of the states and local bodies to help them take up PPPs. The Centre has also engaged credit-rating agencies for pre-bid grading of PPP projects.
Over the last 5-6 years, the Centre has worked on developing a system for promoting, evaluating and approving its own PPP projects and providing support to the PPPs of the states.
(The system for PPPs has evolved separately from the system for the approval of central-sector projects as well as the rules that govern traditional procurement.)
From August 2004 to July 2009, the Committee on Infrastructure (CoI), with the Prime Minister as chairman and 10 other members, including his cabinet colleagues and deputy chair of the planning commission, was the highest decision making body in PPP policy and monitoring of projects.
The CoI was serviced by the ‘secretariat for infrastructure’ in the Planning Commission.
In July 2009, the Centre set up the Cabinet Committee on Infrastructure (CCI), which replaced CoI as the highest decision making body in PPP matters.
The establishment of CCI took away the three-member representation that the plan panel enjoyed in the CoI. The new body, which has 12 Cabinet members in addition to the PM, gives only a ‘special invitee’ status to the deputy chair of the plan panel. (Like the Cabinet and all its committees, CCI is serviced by the Cabinet Secretariat.)
The ‘secretariat for infrastructure’ in the plan panel, however, continues to operate and provide vital policy, appraisal, analysis and support services to the PPPs.
The CCI decides whether or not to grant final clearance to infrastructure-related proposals costing more than Rs 150 crore.
The CCI also decides measures to enhance investment in infrastructure and lays down performance targets for various sectors.
In November 2005, the Centre notified the procedure for approval of PPP projects and set up PPP Approval Committee (PPPAC), hosted by department of economic affairs (DEA) in the ministry of finance (MoF).
Set up on the lines of Public Investment Board (PIB), the PPPAC is chaired by the secretary of the DEA-MoF and has membership of secretaries of the plan panel, DEA-MoF, department of legal affairs (the ministry of law), and the ministry sponsoring the PPP project. The PPPAC secretariat is the ‘PPP Cell’ in DEA-MoF.
Simultaneously, a PPP approval unit (PPPAU) was set up in the plan panel, which prepares ‘appraisal note’ for the PPPAC, providing suggestions for improving the terms of concession agreements.
The PPPAC evaluates PPPs worth Rs 100 crore or more; the projects cleared by PPPAC go for final clearance by CCI (in case of project cost of Rs 150 or more) and other authorities (in case of lesser project cost).
The Centre started viability gap funding (VGF) scheme in 2006 to provide grant of 20 per cent of the total project cost to PPPs that “are justified by economic returns but do not pass the standard thresholds of financial returns.”
An inter-ministerial empowered committee (EC) evaluates projects for VGF. Up to June 2010, the Centre’s VGF commitment was Rs 51,629 crore for 159 central and state projects with total investment of Rs 1,77,365 crore.
Set up in 2006, India Infrastructure Finance Company (IIFCL) raises funds from the market on the strength of central government guarantees.
IIFCL provides 20 percent of project cost both through direct lending to project companies and by refinancing lending institutions. Up to June 2010, IIFCL had sanctioned Rs 21,000 crore for 125 PPPs.
The plan panel has a scheme for providing consultants for PPPs. The MoF manages India Infrastructure Project Development Fund to provide loans for meeting project development expenses, including engaging consultants.
The government has also prequalified about a dozen ‘transaction advisors’ that the project authorities can engage.
Among the fiscal incentives available are 100 per cent exemption on income tax to eligible projects for 10 years and duty-free imports of equipment.
For faster appraisal and approval of PPPs, the Centre has developed model concession agreements (MCAs) and other bid documents for award of contracts. The MCAs include those for national and state highways, port terminals, airports, and urban rail transit systems. Model bid documents include request for qualification (RFQ) for PPPs and request for proposal (RFP) for PPPs.
A two-stage competitive bidding for award of contracts has been laid down. RFQ is the pre-qualification stage and RFP is the stage when the financial bids of prequalified bidders are evaluated and winning bidder is selected.
The Centre has been publishing policy documents, reports and manuals on PPPs, such as financing plan for ports, Delhi-Mumbai and Delhi-Howrah freight corridors, measures for operationalising open access in the power sector, an approach to regulation in infrastructure, and the manual of specifications and standards for two-laning of highways, etc.
Over the years, the Centre has set up regulators in the power, telecom, ports and civil aviation sectors in pursuit of its PPP policy and amended/enacted laws to facilitate PPPs.
At the state level, about 24 state/UT governments have set up PPP cells; some states have also passed laws enabling PPPs in provision of infrastructure.
PPP conception, evaluation and approval
A broad categorization has been made between central-sector PPPs costing Rs 100 crore or more and those that cost less than that threshold.
(A) The following procedure is followed for PPPs that cost Rs 100 crore or more.
1. Project identification: The sponsoring ministry/PSU identifies the PPP project, undertakes preparation of feasibility studies, project agreements, etc. It’s free to hire legal, financial and technical consultants.
2. Inter-ministerial consultations: The sponsoring ministry may discuss the project in an inter-ministerial consultative committee, whose comments may be incorporated into the proposal for consideration of PPPAC. The PPPAC may also seek the participation of other ministries/departments.
3. ‘In principle’ approval of PPPAC
(a) The sponsoring ministry submits its proposal to the PPPAC secretariat (PPP Cell) and a term-sheet containing the features of the proposed project agreements.
(b) The PPPAC meets within three weeks to consider the proposal.
(c) If the project is based on the MCA, ‘in principle’ clearance is not necessary. In such cases, PPPAC approval may be obtained before inviting the financial bids (RFPs) as detailed below.
4. Pre-qualification of bidders: After the ‘in principle’ clearance of PPPAC, the sponsoring ministry may invite RFQ to be followed by short-listing of pre-qualified bidders.
5. Drawing up project documents: The documents to be prepared include the concession agreement and other associated agreements.
6. Appraisal/approval of PPPAC
(a) Invitation to submit financial bids (RFP) should include a copy of all the agreements that are proposed to be entered into with the successful bidder. The sponsoring ministry needs to get the draft RFP cleared by the PPPAC before inviting the financial bids.
(b) The proposal for seeking PPPAC clearance is to be sent to the PPPAC secretariat along with copies of all draft project agreements and the project report.
(c) The plan panel forwards its ‘appraisal note’ to the PPPAC secretariat. The ministry of law and any other ministry involved will also forward comments to the PPPAC secretariat within the stipulated time period. The PPPAC secretariat will forward all the comments to the sponsoring ministry for submitting a written response to each of the comments.
(d) The concession agreement and supporting documents, along with the PPPAC memo, will be submitted for consideration of PPPAC. The PPPAC will take a view on the ‘appraisal note’ and on the comments of different ministries, along with the response from the sponsoring ministry.
(e) The PPPAC either recommends the proposal for approval of the ‘competent authority’ (with or without modifications) or request the sponsoring ministry to make necessary changes.
(f) Once cleared by the PPPAC, the project is put up to the ‘competent authority’ for final approval.
7. Invitation of bids (RFP): Financial bids are invited after final approval of the ‘competent authority’, but can also be invited after PPPAC clearance. (For Rs 75 crore-Rs 150 crore project cost, the ‘competent authority’ is the minister in charge of the sponsoring ministry and the minister of finance. For a project costing Rs 150 crore or more, the competent authority is the CCI.)
(B) The evaluation and approval of PPPs that cost less than Rs 100 crore is as follows.
Type of proposal
Financial limits
Appraisal forum
Approval forum
All PPP projects of central ministries and PSUs
Less than Rs 25 crore
The sponsoring ministry or department
Secretary of the ministry or department
From Rs 25 crore to Rs 100 crore
Standing finance committee or SFC*
Minister in charge
*The SFC consists of the sponsoring ministry’s secretary in the chair and the financial adviser and a joint secretary as members; also included is a representative of the department of legal affairs of the ministry of law.

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