Both experience to date in India and internationally shows that there is no unique formula for developing a sound PPP framework. However, successful programs are characterized by clear policy and legal frameworks for PPPs, competent and enabled institutions that can appropriately identify, procure and manage PPPs, and efficient oversight and dispute resolution procedures. The center's role in developing capacities for sub-national PPPs needs careful consideration taking into account the size of the country, center-state fiscal and other relations, as well as the variety of experiences so far, with some states having made considerable strides and others having made very little progress.
Oversight of the fiscal costs of PPPs. Regardless of other actions, if there is to be an increase in the use of PPPs the center should work to strengthen oversight of the fiscal costs of PPPs. A priority need would be for the development of guidance on how states should approach the issues posed by PPPs. This should be supplemented by enhancing analysis of the fiscal costs of PPPs in central government, including the monitoring of the impact by PPPs on the fiscal position of the states. Capacity-building efforts should be led by the Government of India (GoI) Finance Ministry, with involvement from the Reserve Bank of India (RBI) as necessary.
Policy rationale. A policy statement covering both the rationale and also the limits to the use of PPPs would help to give the PPP program a clearer political mandate and could also be used to announce more clearly the institutional framework for PPPs. These would be useful at both the national and state level. While broad policies provide an important signal of political commitment, it may also be necessary to translate this into action plans and policies for individual sectors to provide a more precise orientation to encourage line ministries and agencies to pursue and implement PPP programs.
Legal frameworks. Cross-cutting PPP laws do not seem to be needed in India to permit central or state governments to enter into PPPs. Both the center and many states have done so without such laws. Sector specific legislation has of course been used to restructure industries and set up new institutions such as sector regulators. Cross-cutting legislation could however be beneficial by consolidating relevant legal provisions into one law, and legislating the use of certain processes for the procurement, development and regulation of PPP projects which may be better enforced if given the force of law. This might be more important at the state level, where checks and balances and oversight are not as strong as at the center. The legislation already passed by Gujarat, Andhra Pradesh and Punjab provides possible models for other states. The development and passage of legislation also promotes an open debate about the rationale for PPPs and their expected benefits, and thereby can help increase the public legitimacy of PPPs.
Information dissemination and guidance materials. Despite the fact that there are nearly 90 PPPs in India under construction and operation, there is no publicly accessible database providing even the most straightforward information on them. There is also relatively little available in terms of information on the actual contracts used, and little guidance available to government officers on appropriate clauses and conditions to be included in PPP contracts. A number of practitioners in PPPs in India have argued that the lack of standard contracts or standard clauses makes bureaucrats more reluctant to sign off on PPP deals.
There is considerable scope for improving the flow of information regarding PPPs and for providing guidance materials to government officials on the development and implementation of PPPs. Guidance could cover issues related to contract design, procedures for identifying, procuring and managing PPPs, and even model PPP legislation. Information dissemination could cover a publicly-accessible database on PPPs at the national, state and local levels; training materials as well as workshops and other mechanisms to reach politicians, consumers and other stakeholders, so that they are better informed about the nature and structure of PPPs. Information on PPPs could be extended to analysis of successes and failures, case studies and a database on performance of projects.
Standardization and models have the potential to reduce transactions costs and diffuse good practices. There is however a risk that centrally sponsored model contracts could reduce the needed room for flexibility and innovation even where these models are advisory and not mandatory. This risk could be reduced by having guidance provide a range of options where appropriate and also by being guided by a public-private group containing representatives from state as well as central agencies.
Information dissemination and guidance should be led from the center, given the public good nature of these activities. A single central ministry with cross-cutting responsibilities could take the lead in this. Specialized tasks would be contracted out and done by others under the oversight of this unit - for example the development and delivery of training materials would be undertaken by a specialized training institute.
A national PPP unit. Most countries engaged in a broad-based PPP program have felt the need to develop a cross-sectoral PPP unit although the role that this unit plays is sometimes restricted to information dissemination and the preparation of guidance material. The design response to two key issues - the role of a cross-sectoral unit vis-à-vis line ministries and the role of a national unit in sub-national PPPs - will be driven by the business practices within governments and the fiscal, and other, relations between the center and the states. This means that some models which are more centralized, such as those in the UK and South Africa where national level units have a prominent role in sub-national PPPs, will not be workable approaches in India.
At the state level, a dedicated PPP unit can both broaden the PPP program by transferring lessons and experiences across sectors, as well as improve the quality of PPPs by bringing to bear better transactions skills. Particularly where there is not a track record of PPPs, skills are probably best brought in from the private sector to supplement available capacities in the state government.
At the national level, a PPP unit could undertake the information dissemination and guidance roles described above. It could also undertake a transaction advisory role by identifying areas where PPPs could be undertaken by central agencies and ministries, and working with these agencies to conceptualize and bring to the market individual PPPs. However, this role would not be well-suited for sub-national PPPs. A hands-on transaction role in state and municipal PPPs would directly substitute for the development of state-level capacity and would be challenging to do for a large number of deals. Capacities should be developed at the state level, strengthened by the guidance and information provided by the national level unit.
A national level unit undertaking information dissemination, guidance and transactions support to central agencies could be established as a unit within a ministry or agency with cross-cutting functions. This would allow it to be integrated into existing governmental processes of review, and needed transactions skills could be contracted in by hiring consultants on long-term contracts.
If the center were to provide additional funding for PPPs (see para. xxvii below), then the national unit could take on the additional mandate of reviewing these PPPs to assess whether the contractual structure proposed is robust, that risks are efficiently allocated and that projects to be supported by the center are sound. The unit would need to provide clear guidance on what it viewed as being acceptable contract structures, approaches to risk allocation, assessment of affordability and value-for-money, and provider selection criteria.
Additional resources for PPPs. A catalytic role by the center is likely to be needed to expand the usage of PPPs, particularly in states and sectors where they have been less used so far. This would consist, in addition to information dissemination and guidance, of financial resources both to develop PPP frameworks and contracts and to fund government commitments under PPPs. This would help address important constraints to further development of PPPs in the country - namely, weak capacities to identify realistic PPPs and bring them to the market; a lack of willingness to pay for project development; and a lack of creditworthiness on the part of states to provide their financial contribution to PPPs.
A number of PPP units manage funds which defray some of the costs of developing PPPs. There are two arguments for the use of these funds. The first is that many governments new to PPPs do not appreciate the need to spend more on preparation of PPP projects than was spent on developing procurement documents for civil works projects in the same sector. The second is that since PPPs are relatively new, the costs of preparing initial projects may be higher and that with learning some of these will come down. One important issue is the terms on which this fund would be accessed - a matching grant scheme which combines central grant funding with contributions from the state government provides some form of commitment by both parties and can focus resources on projects viewed as priorities by the state government.
The use of PPPs for the delivery of basic services by state and municipal governments would be encouraged by the provision of central funds to support their payments under PPPs. A substantial matching contribution from the government contracting for the PPP would also be important here to provide commitment to the project.
The detailed design of such a PPP fund is beyond the scope of this report and a significant effort would have to go into this to ensure that it is well targeted and efficiently used. It would be important both to ensure that projects supported by the fund are priorities, and that competition for subsidies is used to reduce the demands on public funds. On this last point, it would be far more difficult to size subsidies - and also less transparent - were projects first awarded by state governments and then subsequently the chosen developers approached the fund for support.
As noted above, project design, risk allocation, affordability and value-for-money should also be assessed for these projects to ensure that the center is supporting well-designed PPPs and this could be done by the national PPP unit. There might however be conflict of interest concerns if this unit received a success fee from working on transactions, in which case the involvement of others would be necessary in clearances.