Evolution of Public-Private Partnerships
There has been rapid global economic development over the last 30 years, which has required large investments in the infrastructure sector in almost all countries. Various countries have sought financial alternatives to fund this development, through different procurement models which would not put a burden on the state’s financial resources, and also provide capital within the government’s limited budget. This development has in turn led to the emergence of Public Private Partnership (PPP) as financing tools, which are now being used worldwide to enable major infrastructure projects and generate mutual economic benefits.
Thus, one of the major effects of industrial development and globalization has been the reinvention of the relationship between the public and the private sector. In industrialized economies, increased privatization of public services has occurred through the PPP models, which involve the delegation of service delivery functions to a private party, as a means to tap into efficiency, risk sharing and innovation.
PPPs are understood as different kinds of co-operative arrangements between the private sector and the government (which are essentially long term in nature), for delivering goods or services to the citizens. It has been observed that PPP models provide the benefits of innovation to infrastructure projects which in turn generates more efficiency as compared to traditional procurement methods, leading to wider acceptance of these models across the world.
The Government of India defines PPPs as “a partnership between a public sector entity (sponsoring authority) and a private sector entity (a legal entity in which 51% or more of equity is with the private partner/s) for the creation and/or management of infrastructure for public purpose for a specified period of time (concession period) on commercial terms, and in which the private partner has been procured through a transparent and open procurement system.”
Hence, PPPs can be used for development of sustainable, modern and key public infrastructure which is crucial for a country’s economic development and for meeting the rising demands of the population. This article aims to highlight the issues concerning urban water supply in India, and further analyze the working of PPP models in the water supply sector. In doing so, the author would also focus upon the regulation of PPPs in India and argue for the enactment of a specific PPP legislation.
Regulation of PPPs in India
Traditionally, providing public services to the population and developing infrastructure for public benefit had been the prerogative function of the government alone. However, with economic development, increasing population pressure, and urbanization, the government found itself lacking to adequately address and fulfill the needs of public through traditional means of procurement. These difficulties compelled the Indian government to look towards the private sector so as to generate additional capital and support for infrastructure development in the country. These arrangements are majorly carried out through the PPP model.
With the rising acceptance and usage of PPP models, many countries in the world enacted legislations pertaining to PPPs, fundamentally covering the aspects of procurement, concessions, and competition. Several international guidelines were formulated to provide assistance to countries in forming PPP related laws, the major ones being: “UNCITRAL Guidance on Public-Private Partnership/ Concession Laws (2000)”, “EBRD Core Principles for a Modern Concession Law” and “OECD Principles for Public Governance of Public-Private Partnerships.”
Since PPP involves public procurement of infrastructure through a contractual arrangement between the government and a private enterprise, a sound legal framework is needed to regulate such arrangements in order to ensure effective implementation. Recognizing this need, many countries such as Croatia, Kenya, Egypt, Jordan, and Poland among others have passed specific PPP related laws.
On the other hand, India does not have a specialized law to regulate the procurement process through the PPP model, and has rather relied on its existing framework of laws, like the Indian Contract Act, Competition Act, and other mercantile and commercial laws to govern the implementation of public services projects through PPP models. In addition to these, a specific PPP policy was formulated with the aim of maximizing cost efficiency through implementation of PPP models. However, the question remains; is the existing framework sufficient to deal with the legal issues related to PPP models, in particular the concession agreements between the government and the private sector?
Analysis contained in subsequent sections of this article would clearly highlight that the existing framework is not sufficient to regulate PPP models in India, and there is a need to bring in place a specific legislative framework focused towards regulating concession agreements between the government and the private sector, beyond the existing legislations.
PPPs in the Water Services Sector: Some Preliminary Points
Implementation of PPPs in key infrastructure projects has to be critically analyzed to see how it can bring about greater sustainability and efficiency in providing public services. One such sector is the sector concerning urban water services, which is the focus of this article.
Against this backdrop, privatization of many water services was initiated in India in 1990s, post economic reforms. Many of these early projects were focused on getting significant private investment in the sector in order to augment bulk water supply in the country. However, a significant number of these projects failed due to inadequate enabling legislative frameworks to facilitate private investment, poor project preparation, weak financial capacity of project proponents and political opposition to private sector participation. The first half of 2000s witnessed a shift in focus towards distribution services.
Post 2000s, PPP in water distribution services was implemented in some cities of India and witnessed significant success in so far as their implementation was concerned. Analysis of some of these projects becomes imperative in order to provide an insight into the successes and failures.
Government of Karnataka, in 2003 formulated a policy for uninterrupted supply of water in three cities, through five different sub-projects. This project was called Karnataka Urban Water Sector Improvement Project (KUWASIP). Under this policy, a two-year contract was entered into with water services MNC known as ‘Veoila’. The terms of the arrangement were that the enterprise has to manage the implementation of the improvements of the water supply and to operate the upgraded system. This was an example of a successful case of PPP implementation in water service delivery sector.
But cases of the PPP model being adopted in the water supply sector in Nagpur, Ahmedabad and Mysore among others did not see the same level of success and faced significant problems which could be considered systematic and structural in nature.
Most of these are regulatory issues, as the sector (presently) is completely under the domain of government control, through state and district level authorities. The officials are not adequately trained or willing to cooperate with the executives of the private party. Furthermore, the information about PPPs and standard practices and clauses of the contractual agreements are not available adequately in the public domain. The lack of any guidance and information creates a number of issues related to risk-sharing, exchange of information, calculation of estimated costs and assessment of capabilities. These conflicts usually arise when the private party begins to face losses and does not find assistance from the government and leads to the project being sabotaged. The end result is a loss of public money and degradation of public services.
Issues with Urban Water Supply in India
In India, urban water supply and sanitation services, from source to final consumers are provided by the state government. This is done through the department of Urban Local bodies (ULBs), which are the public health and engineering departments, or city water supply and sanitation boards. Central Government has a limited role in the water sector; mainly related to defining standards and norms for the sector and providing technical guidelines and assistance to state governments. It also intervenes through programs funded by the Ministry of Urban Development, such as Jawaharlal Nehru Urban Renewal Mission (JNURM).
Thus, the funding for the development of major urban water supply projects has been through the internal funds of ULBs or budgetary support of state governments, or even external donor support from multilateral agencies.
Under the existing setup, the efficiency levels of water service delivery were assessed to be largely inadequate. The sector is faced with high levels of operational inefficiencies and infrastructural gaps, due to which the per capital availability in Indian towns is significantly below the required levels. Only 50% of the population is directly connected to distribution networks. There are serious issues of leakages, theft, poor access, low service quality, and higher costs.
Issues Concerning the Implementation of the PPP Model and the Way Forward
To address these serious concerns and develop the sector efficiently, considering its importance to India’s development; huge investments are required in order to scale up the infrastructure and operational efficiencies. This is where the PPP model plays an important part.
To pursue the PPP model, it is important to determine which PPP model would be suitable for the sector. Post the selection of the model, assessment of the relevant sector has to carried out as the sector needs development of an infrastructure framework for every stage of urban water supply to be effective and efficient. Thus, infrastructure for sourcing, storage, purification, distribution, maintenance, and operations is required. PPP policy involves viability gap funding for the project as efficiency also involves financial feasibility and lowering of costs.
This assessment is crucial to determine whether choice of PPP over public funding is better. This is because, even though there are drivers of PPP and its suitability for the water delivery services is an efficient solution to the challenges of the existing system, there are issues and challenges with the adoption of PPP which need to be critically evaluated.
As mentioned earlier, the major criticism surrounding PPP relates to the issue of accountability. There is inadequate information on PPPs in the public domain. It has been observed in past cases that private companies often do not share data in the name of business secrecy.
Critics also argue that the fundamental reason behind inefficiency of PPP models is the increased focus on profit generation as opposed to providing services to public at affordable charges. Furthermore, they contend that PPPs are a mere ploy by governments for contracting out of services, when politically it is difficult to push for privatization.
Another major reason of inefficient implementation of PPP projects is the existence of an overly regulated institutional and legal framework with complex structures and fragmented institutions, wherein it is difficult to attach accountability. Hence, while infrastructure projects through PPP mode require significant investments, it must be acknowledged that investment of capital will not be sufficient and effective in itself, unless the institutional issues are addressed simultaneously.
This is where the role of a specific legislation comes into the picture. A specific legislation would ensure that there is sufficient clarity with regard to institutional issues, which would in turn attach accountability and increase investor confidence. In so far as concession agreements are concerned, the legislation must address issues relating to powers of the public authorities, scope and nature of projects for which concession may be granted, duration and mode of payment, dispute resolution etc.
At present, the private partner faces significant risks due to lacking physical infrastructure as a consequence of which if there is lapse in timely delivery, or the project exceeds cost estimates, or has technical defects, the financial burden will be on the private enterprise.
Thus, certain pre-requisites are required for executing urban water supply projects through the PPP model. Most of these challenges arise due to weak management systems like improper communication and lack of training. The non-availability of data on existing assets creates difficulty in assessing the investment needs and the duration required to improve service and operational efficiencies, which is crucial to the success of the PPPs.
(This post has been authored by Shiksha Srivastava, an LLM (Infrastructure and Business Laws) student at TERI School of Advanced Studies, New Delhi.)
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