A Legal Perspective On Public Private Partnership In India
Public Private Partnership traces its evidence to ancient Roman Civilization in building, managing and maintaining ports. Eiffel Tower is the most prominent modern day example of Public Private Partnership. But today with the multi facet responsibilities the government is enshrined with and the limited resources, the PPP model is the most feasible option. Especially in a developing country like India where over 30% of the population is below the poverty line at the same time harbouring over a million millionaires (including 2 in the top 10 list). PPP is a contractual arrangement between the public authorities and private parties for a combined social and profit motives with genuine risk allocation.
This paper examines the legal principles pertaining to creating an effective PPP modelprocurement, concessions and competition which are necessary to ensure the core idealsaccountability, transparency, competitiveness and credibility. The author has also put an effort to give an insight into the dimensions of Right to Information and developing the legislative framework for Concession Law in the country.
Infrastructure development is crucial in fostering economic growth of a nation. With increase in globalization certain infrastructure availability has essentially become more of a public amenity which the government seeks to endure for its citizens. In the nation stages of the growth of Indian economy for a number of social, economic and political reasons the involvement of the private sector was very limited in this area. Various stake holders hold different perspectives regarding the concept of public private partnership. Some construe PPP as a mere instance of private investment in governmental undertakings whereas others consider that PPP comprises of all interactions between the public sector and the private sector from investment to policy dialogues and collaboration to private provision of assets and services. The potential fiscal implications of PPP makes the parameters of its designation important e.g. some of the PPPs might involve contingent liabilities for the sponsoring government, in various forms, such as, liabilities towards lenders in case of contract termination or minimum revenue guarantees. The contingent liabilities require the government to make requisite provisions in its budgets. There is public interest involved in PPPs and the need to secure public money demands higher scrutiny of such projects.
Public Private Partnership means an arrangement between a government or statutory entity or government owned entity on one side and a private sector entity on the other, for the provision of public assets and/ or related services for public benefit, through investments being made by and/or management undertaken by the private sector entity for a specified time period, where there is a substantial risk sharing with the private sector and the private sector receives performance linked payments that conform (or are benchmarked) specified, predetermined and measurable performance standards.
The essentials of this definition are a nexus of various other prevailing definitions-
1. An arrangement (agreement/contractual) between government and one or more private partners extending over a long period.
2. The public objectives that government seeks to achieve and the profit/financial reward to the private partner(s) commensurate.
3. Investment or management by private sector.
4. Genuine risk sharing between public sector and private sector (often financial in nature) in such a way that both are best placed to manage and bear risks
5. Provision of assets and services confirming with a pre-determined measurable standards.
Public Private Partnership is an alternative way of public procurement which facilitates in procuring public infrastructure and services through private sector. The modern perspective of PPP goes way beyond the traditional notion of mere private investment substituting for public expenditure to substantial risk sharing and efficient delivery of services.
2. Need and Relevance of Public Private Partnership in India
With time, the government is facing constraints as to mobilization of technological, financial and executive resources. There is an increase in the demands of social infrastructure and related services due to which most of the developing countries are facing financial deficit. Public Private Partnership comes forward as innovative method of sustainable financing in which the private sector is attracted through a mutually beneficial arrangement. Public Private Partnership enables optimum utilization of resources, availability of modern technology, better project design and implementation. These factors combine to deliver effective gains not an immediate outcome of public sector projects. Due to prolonged gestation period, and a practical degree of commercial, social and economic risks involved in the development of infrastructure there appears to be reluctance on the part of both the sectors to absorb all risks and costs of building up such assets. India faces large discrepancies in the demand and supply of socio-economically essential infrastructure and services despite being one of the fastest growing economies of the world.
Over 40% of the population does not have access to electricity and all weather roads. The shortage of infrastructure facilities in India has proved to be the leading obstacle in sustaining and expanding the country’s competitiveness and economic growth.6 The most significant impact is reflected in the low levels of Foreign Direct Investment. The government does recognize such difficulties and emphasizes on the instrumental role played by infrastructure development in the growth of an economy. The intention of the government can well be understood from the diverse programmes employed viz. National Highway Development Program(NHDP), Bharat Nirman Yojna, Jawaharlal Nehru National Urban Renewal Program(JNNURP), etc. But, the unfortunately the fact is that the requirement exceed the limited resources exorbitantly. It was estimated that India needs to increase its Infrastructure Expenditure 8% of the GDP by 2010 in order to sustain an adequate growth rate7 yet the current expenditure on Infrastructure remains to be 6% only. The combined deficit of the State and Union government is round about 10% of the GDP. Moreover the borrowing of the government is restricted by the Fiscal Responsibility and Budgetary Management Act, 2009 which curtails the borrowing capacity of these organs. In the contemporary context the contribution of private sector has become necessary for infrastructure expansion and development.
3. Public Procurement and Concessions
Public Procurement is acquisition of works, supplies, goods and services by public bodies ranging from routine supplies or services to formal tendering of contracts for infrastructural projects. Each country follows certain core principles of procurement policy- accountability, competitiveness, equality and transparency. The Indian Policy aims at capacity building to manage, procure, maximize benefits, reduction of costs and increasing efficiency trough efficient technology (e – procurement). Te main aim for the procurement policy is to achieve value for money.11 Mere price is not the only variable to be considered. This phrase is inclusive of various other non – cost factors like sufficient quality and use of the procured for purposes intended to. For the purpose of value for money the entire transaction- acquiring, use, holding, and disposal is taken into account. Value for Money is therefore, the combination of price and / or non cost factors to meet the requirements and obligations towards the potential users (community), to provide cost effective public services and optimum utilization of resources. There are various procurement methods and the applicability of a particular method often depends upon the value of the contract. For example, in India the procurement for assets, services etc. exceeding INR 1.2 million ($ 54,000) must be done trough open tendering only.
In traditional public works, concessions and general public procurement (public contracts) were regarded as separate concepts. In public contracts the public authority pays consideration to the private players whereas in concessions the private party receives remuneration directly from the users in the form of fees, etc. The point of argument between various scholars as been whether Public Procurement Law applies to concession agreements? Some are of the point of view that both are distinct and should have separate legal strictures. On the other hand, it is more logical to encompass tem under a single umbrella since the only real point of distinction remains the mode of remuneration. The European Union Procurement Directive 2004/1814 defines concessions as- “the contract of the same type as public works except for the fact that the consideration for the work to be carried consists either solely in right to exploit the work or in the right together with payment”
This directive does not expressly lay down that the government authority cannot pay any remuneration to the private authority. In practice the government does subsidize rates for the public indirectly paying to the private parties the net amount. Another example is of the shadow toll in which the government pays the private parties the price of one kilometer usage of the road per vehicle according to the agreed price structure. Legally such methods of remuneration are sufficient to construe a valid concession agreement.15 It is therefore not necessary for the remuneration to come from a third party or user. In the context of Public Private Partnership (as opposed to traditional context) the distinction between concession PPPs and public works PPPs is blurred and difficult to ascertain. To the contrary distinction is ought to be made between tradition public works and services contracts and PPP- type arrangement.
3.1 Developing Statutory Framework for Concession Agreements
There is a need in a developing country like India to have a legislative framework for regulating concession - type agreements which would incorporate certain core principles which require our notice in order to assist the government bodies especially in relation to privately finance infrastructure projects.
1. Enumerating nature and purpose of projects for which concession may be granted by either listing various categories of projects and defining the rights and obligations of the parties thereto; or providing either of the parties the right to charge fees for the use of the facilities by others and / or other remuneration as agreed upon.
2. Power of the Public Authorities.
3. Such a law should also contain general prepositions of a concession agreement (duration, mode of payment, dispute resolution etc.)
4. Procedure regarding selection of the private party (concessionaire) should be clearly laid down as to proposals, special qualification and evaluation criteria (in the long term, as well), scope of negotiation, limiting the number of bidders etc. This should also include the scope of the government to enter into negotiations with a single party in cases of emergency, national security, exclusive know how and alike and not otherwise.
5. It should also provide for what the concession may be awarded for-
# development of new infrastructure
# or maintenance, expansion and modernisation of existing infrastructure
# only for the delivery of public services.
3.2 Non – Compete element in Concession Agreements
The non – compete clause as proposed by the Central Government is provided to safeguard the concessionaires. Anon-compete clause requires the public partner not to construct competing facilities. Moreover the compensation based proviso requires the private partner to merely exhibit actual harm as a result of such competing construction. Such a provision would lead to restricting the government to construct additional infrastructure as a part of their welfare responsibility. This could also possibly invoke section 3 of the Competition Act, 2002 which expressly prohibits any agreement that would restrict the provision of services. The growth rate of infrastructure would decelerate if the government would have to stop a planned project to facilitate a PPP project. Therefore it is advisable for the government to introduce non-compete clauses on case-by-case merit after critically analysis the long term implications of such arrangement on demand and supply for infrastructural conveniences.
4. Implications of the Right to Information Act in Public Private Partnership
Public private partnership model has been implemented all over the globe successfully. The reason being the involvement of the private sector provides competitive effectiveness and the participation of the government guarantees credibility, stability, transparency and accountability. But, do the PPP projects fall under the RTI Act, 2005 is a debatable question.
From the perspective on an entrepreneur it would not be reasonable to put PPP projects under the scrutiny of RTI Act, 2005. It would act to the detriment of the purpose of such an arrangement of providing world class facilities to the citizens of and to be gazed upon and halted at every step. But it is often argued that acting in any possible capacity the government, must be subjected the same checks and balances. Mr. Gajendra Haldea, advisor of the Planning Commission suggested the inclusion of PPP under RTI. He contended that such an arrangement could be made possible by inserting an express clause in the concession agreement whereby both the parties would consent to the applicability of RTI Act, 2005. According to the said act it requires only public authorities to provide information. The PPP is neither formed by the Constitution or any statute. The test which applies to PPP is that of the non-governmental organizations which fall under the broad definition of “all bodies owned or substantially financed”. The only authoritative judicial pronouncement on this question of law has been delivered by the Andhra Pradesh High Court in Bangalore International Airport Limited (BIAL) case- PPP formed by the partnership of KSSIDC, AAI and a consortium of private airport operators, is amenable to the RTI Act. The justification provided by the High Court for its finding is this- were the concessions provided to the concessionaire by the state government (including cost of land acquired, uninterrupted supply of power and water etc.) translated into cash flows, the figure arrived at would be a ‘substantial amount’. Bringing PPP under RTI subject to no conditions would be harmful to the efficiency factor that the private player brings in. Perhaps, keeping information as to the public assets and utilization inclusive and excluding the commercial and other financial aspects would best serve the purpose.
In the modern era, it has become necessary for the nations to adopt the Public Private Partnership model to sustain economic growth along with fulfilling social responsibilities. Infrastructure facilities are no longer a luxury for the common man- fly-overs, world class metro trains are just the beginning. Although this system is in practice from Roman times its 21st century implications, institutions and allied mechanisms are in a nascent stage. From the legal perspective a lot is yet to be done in the area of concession laws, competition aspects and the recent dimension of Right to Information. Law is an experienced entity and therefore this concept shall advance in the future to the benefit of one and all.
1) Ministry of Finance (Government of India), Observation Note: Approach Paper on Defining Public Private Partnership, (2010)
2) Decreto Lei 86/ 2003 (Portugal)
3) ASIAN DEVELOPMENT BANK, PUBLIC PRIVATE PARTNERSHIP HANDBOOK (2010).
4) Understanding Public Private Partnerships, Partnerships British Columbia (2003).
5) World Bank Indian Development Policy Review,(2006).
6) Morgan and Stanley, Indian Economics: Infrastructure (2005).
7) Planning Commission of India, Observation Note: An Approach Paper on the Eleventh Five Year Plan, (2006).
8) National Public Procurement Policy Unit, National Public Procurement Policy Framework, Ministry of Finance (Government of India) (2005).
9) USAID, Guidelines for Conducting Public Procurement Procedures in PUBLIC PROCUREMENT MANUAL, (2007).
10) General Financial Rules (GFR): http:/finmin.nic.in/the_ministry/ dept_expenditure/GFRS/GFR2005.pdf (last accessed: 5th September, 2011).
11) S. AEROSMITH, PUBLIC PROCUREMENT IN THE WTO (Kluwer Law International 2003).
12) The European Union Procurement Directive, 2004/18 OJ L 134 (2004).
13) D.LINOTTE & B. CANTIER SHADOW TOLLS. LE DROIT FRANÇAIS À L’ÉPREUVE DES CONCESSIONS À PÉAGES (A.J.D.A. 2000).
14) Sandeep Verma, The “Non-Compete” Clause and Its Alternatives for Use in PPP Concessions,2011 Fin. Express, May 19, 2011 at (2011).
15) Section 3 of the Competition Act, 2002 reads
3. Anti- competitive agreements.-
(1) No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.
(2) Any agreement entered into in contravention of the provisions contained in sub- section (1) shall be void.
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