Public Private Partnership

• PPP is a mode of providing public infrastructure and services by Government in

partnership with private sector. It is a long term arrangement between Government
and private sector entity for provision of public utilities and services.
• Public-private partnership arrangements have existed throughout history, but have
become significantly more popular across the globe since the 1980s as governments
attempt to obtain some benefits from the private sector without having to make the
full privatization jump
• Due to limited funding and increasing constraints, many government agencies are
looking into different models of public-private partnership (P3) as a means of
maintaining updated infrastructures without having to make large
investments. There are many different types of public-private partnerships to fit
various construction, operation, ownership, and revenue-generating scenarios.
• These models operate on different conditions on the private sector regarding type of
project (for example, a road or a prison), level of investment, ownership control, risk
sharing, technical collaboration, duration of the project, financing mode, tax
treatment, management of cash flows etc.
• Some Examples: From 1990 to 2009, almost 1,400 PPP arrangements were signed
just in the European Union (EU), representing a capital value of about €260 billion.
Since 2008 – the onset of the global financial crisis – the EU estimates that PPP deals
in the trading bloc have declined by over 40%.

Different Types of PPP

1. Traditional P3s: The public component of the partnership acts as a contracting

officer. It looks for funding and has overall control of the project and its assets.
Almost any partnership between a private contractor and a government entity can
be considered a P3, but some of the most common examples are public road
projects, maintenance of parks, and construction of schools and other public
buildings.

2. Operations and Maintenance P3: With an operation and maintenance P3, the private
component of the partnership operates and maintains the project, while the public
agency acts as the owner of the project. Examples of these contracts include bridges
and tollways.
3. Design Build P3: A design-build P3 is similar to a client-contractor arrangement. The
private partner designs and builds the facility, while the public partner provides the
funds for the project. The public partner retains ownership of the project and any
assets generated through its use.
4. Design-build-operate P3s: they are similar to design-build P3s but include ongoing
operation and maintenance of the property facility or project by the private party.
The public partner acts as the owner of the installation and provides the funds for
construction and operation.If the private partner operates the project only for a
limited time before the facility is transferred to the public partner, the arrangement
is known as a design-build-operate-transfer agreement.

5. Design-build-operate P3: It includes the component of general financing supplied by

the private contractor. With a design-build-finance-operate arrangement, the private
part provides financing and design, then builds, possesses, and operates the facility.
The public partner provides funding only while the project is being used or is active.

6. Build-transfer-operate P3: the private partner builds the facility and transfers it to
the public partner. The public partner then leases operation of the facility to the
private party under a long-term lease agreement.

7. Build-own-operate-transfer P3: the public partner builds, possesses, and operates

the project for a limited time, then the facility is transferred, free of charge and
including ownership, to the public agency.

8. Build-own-operate: The private contractor builds, possesses, and operates the

facility and also has control over profits and losses generated by the facility. This is
similar to a privatization process.

9. Lease P3: It involves the public owner leasing a facility to a private firm. The private
company must operate and provide maintenance for the facility per specified terms,
including additions or a remodelling process.

10. concession P3: the private agency operates and maintains the facility for a specific
period of time. The public partner has power over the ownership, but the private
partner possesses owner rights over any addition incurred while the facility is being
operated under its domain.
PPP Advantages

 They provide better infrastructure solutions than an initiative that is wholly public or
wholly private. Each participant does what it does best.
 They result in faster project completions and reduced delays on infrastructure
projects by including time-to-completion as a measure of performance and therefore
of profit.
 A public-private partnerships ROI might be greater than projects with traditional, all-
private or all-government fulfilment. Innovative design and financing approaches
become available when the two entities work together.

 Risks are fully appraised early on to determine project feasibility. In this sense, the
private partner can serve as a check against unrealistic government promises or
expectations.
 The operational and project execution risks are transferred from the government to
the private participant, which usually has more experience in cost containment .
PPP Disadvantages

 Every public-private partnership involves risks for the private participant, who
reasonably expects to be compensated for accepting those risks. This can increase
government costs.
 When there are only a limited number of private entities that have the capability to
complete a project, such as with the development of a jet fighter, the limited
number of private participants that are big enough to take these tasks on might limit
the competitiveness required for cost-effective partnering.
 Profits of the projects can vary depending on the assumed risk, the level of
competition, and the complexity and scope of the project.

 If the expertise in the partnership lies heavily on the private side, the government is
at an inherent disadvantage. For example, it might be unable to accurately assess
the proposed costs.

Risk Management
All heavy budget projects come with different varieties of systematic and unsystematic risks
which needs to be taken care of before the start of the project by the various stakeholders
involved. In the case of DIAL, to mitigate such risks, they were identified into majorly five
main categories and then risk reduction measures were taken as required.
These five risk categories are identified as under:
1) Project Risk: All risks that are associated with the overall project start and
operational planning comes under project risk
2) Political Risk: These are the risks associated with the intricacies and involvement of
govt. and political actions in present and future
3) Cost Overrun Risk: Risk associated with increase in costs due to some unforeseen
circumstances and how to avoid them
4) Construction Risk: All the risks associated during the construction phase such as land
acquisition etc.
5) Operational Risk: Operational factors related to financing, future agreements,
sharing of revenue etc.

We will now discuss in detail about each of these risk in relation to the Delhi International
Airport project and steps taken to mitigate them:

Project Risk
 It has been stated that as per EIL’s final audit report, the estimated area at the time
of Financial Closure was 470179 m2, whereas actual area constructed by DIAL is
553887 m2
  The difference in area is 83708 m2. AAI, has observed that EIL has accepted 98% of
the area constructed and had not accepted 10566 m2 which is 2% of the total area
constructed by DIAL, meant for the following purposes:
o 8652 m2 is for the food court and retail area at CIP, Office and Hotel level
o 1914 m2 in the mezzanine level is meant for plant rooms, DIAL BHIS control
room, Transfer area for passengers and stores

 AAI have submitted the area to be considered for the following reason:
o Food Court will increase the commercial activities in the passenger Terminal
Building (PTB), which will enhance passenger facilitation and also fetch
additional revenue
o Even though the plant and control rooms may not have commercial
potential, they would increase the operational efficiency and convenience of
passengers

 Also due to this expansion, all other items estimated in the initial cost increase
proportionately

Political Risk
 There was no political risk as such, however conflict of interest between the centre
and the state govt

 Risk of change in govt and modification in contract or PPP laws at later date

Construction Risk
This type of risk includes matters related to land encroachment, procurement of
additional land if required, removal of obstruction to ensure safety and efficiency and
providing utilities

 An agreement was signed between state govt. and DIAL for such services, known as
State Govt. Support Agreement (SGSA)

 SGSA also provided help in procuring various clearances required to implement the
project as mentioned in OMDA

Cost Overrun Risk

DIAL had taken the following cost overrun mitigation risk measures for the project:

 Benchmarking: Engaging Jacobs to carry out the benchmarking exercise in

compliance with the Schedule 21 of OMDA (Operations, Management and
Development Agreement)
 o The report was however submitted in Feb 2009, when selection of many
contracts had already been accomplished

 Incentivization: To control costs, the contractors usually sign “sharing of pain-gain”

agreement, where penalties are built into contracts by adjusting contractor’s fee
depending upon target and actual costs. However, no such relevant clause was
mentioned in the agreement

 Dis-incentivization: This is another method where contractors are disincentivized to

increase costs by capping their fees at a fixed absolute level rather than a percentage
of base out; in DIAL case it was the latter

 Engaging external Project Management Consultant (PMC): Parsons Brinckerhoff

International Inc was engaged by DIAL as the PMC.
o The scope included giving cost control advice, warning for variance and
assessment of implication on cost for design changes
o KPMG when reviewed three cost monitoring reports provided by the PMC
didn’t find any comparison between a package’s original and final cost
estimate or the analysis for cost escalation or corrective action that would be
taken in the future

Implications:

 The original project cost approved by DIAL and communicated to AAI was 8975 crore

 Final project cost adopted by Airports Economic Regulatory Authority (AERA) was
12502.86 crore (43.25% higher)

 The financial gap was met by levy of Development Fees which was 27.32 per cent of
the total capital outlay
OMDA didn’t predict earlier about charging this DF from passengers since the entire
funding was supposed to be done through debt and equity only

Operational Risk
 Right of First Refusal: State Support Agreement (SSA) provided the ROFA to DIAL
with regard to any other airport being planned within the distance of 150 km radius.
o DIAL can win the bid through a competitive bidding process. If unsuccessful, if
its bid is within 10% of most competitive bid, it would be allowed to match it
and win
o Validity given: 30 years
  Clarity in definition of Aeronautical and non-aeronautical services: It differed
between AERA Act and OMDA, thus affecting the calculation of targeted revenue for
tariff fixation

 Maintaining Debt to Equity Ratio: DIAL submitted a proposal to maintain a D/E ratio
of at least 2:1. Further they were restricted to raise fresh equity as this will result in
dilution of the shareholding of AAI/AAI nominees

 High Risk Premium: EIL commented that the risk premium considered by the
principal contractor was high due to high risk of the project, and it was totally borne
by JVC leading to further increased costs

Social Impact
 Following Analysis were done by the National Council of Applied Economic Research
and published in March 2017 report
o Direct economic impacts are the financial and employment changes for all
the existing establishments whose activities are linked to the airport such as
airport employees, freight companies, retailers, facilitators of movement of
passengers and cargo etc.
o Input-output (I-O) framework has been considered as an appropriate
approach to provide an assessment of the multiplier effects
Profile of passengers travelling in terms of gender and their occupation in IGI Airport
through a survey conducted among 3500 travellers
Details of Financing
 All Out of the total capital expenditure of Rs. 12857 crores (AERA has admitted Rs.
12502.86 crore for levy of DF), the promoter’s equity has been Rs. 2450 crore out of
which 26 per cent (i.e. Rs. 637 crore) was contributed by AAI and 74 per cent (i.e. Rs.
1813 crore) was contributed by the other JV partners.
 Out of the capital expenditure of Rs. 12502 crores as accepted by AERA, only 19 per
cent has been promoters’ contribution. Rs. 5266 crores (42 per cent) have come
from loans and Rs. 1471 crore (12 per cent) has come from Security Deposits.
 While, only Rs. 50 Crore has come from internal accruals, Rs. 3415.35 crore (27 per
cent) have come from Airport Development Fees charged on the passengers.
 DIAL submitted a proposal for the funding source that they are required to maintain
a Debt to Equity ratio of atleast 2:1 and they cannot raise further equity if this ratio is
breached below this level. Further, without support of AAI, they are unable to raise
fresh equity as this will result in dilution of the shareholding of AAI/AAI nominees.
 Out of the total capital expenditure of Rs. 12857 crores claimed by DIAL, AERA had
admitted Rs. 12502.86 crores as the total project cost. The funding gap to the tune
of Rs. 3415.35 crores was permitted by AERA to be collected from the passengers
through levy of DF which was not envisaged in OMDA and SSA

Amount (Rs in Crores)

Funding Source

1,200
Equity Capital

1,250
Share Application Money

2,450
Equity Share Capital

3,650
Rupee Term Loan

1,616
Foreign Currency Loan

5,266
Total Debt
 The DIAL's funding source furnished, vide their letter dated 14.01.2011

Revisions in Estimates and Cost Overruns

  The overall cost of the project was estimated as Rs. 9800 crores. However, a cost
over-run of Rs. 1000cr has been incurred including ATC tower. Additional
increase around Rs. 750 crores were due to the construction of more floor space
than originally approved.
 The external consultants, KPMG, an auditor, and public sector company, Engineers
India (EIL), found that spending of around Rs. 1,000 crores appeared to be excessive.
 The major cost increase is due to increase in area/volume of the facilities and
increase in prices of the material during the course of Project execution.
 EIL also commented that due to high risk involved in the project, the percentage of
risk premium considered by the principal contractor and subcontractor were high
which are totally borne by JVC resulting into further increase in Project Cost
 So, with an equity contribution of Rs. 2450 crores, out of which private consortium’s
share Rs. 1813 crores, DIAL got a brownfield airport for 60 years and commercial
rights of land valued at Rs. 24000 crores with a potential earning capacity, according
to estimates, of Rs. 163557 crores.
 The Security related Capex of Rs.139 crore has been considered against cost of
Baggage handling system up to screening stage and Capital cost incurred on
Boundary wall and Chain linking fencing.

Projections and Valuations

 Aeronautical and Cargo revenue are major sources of income
 Total Revenue CAGR of 12.53%
(in crores)
 WACC is coming out as 7.07 %
Equity 2450
 Debt to Equity Ratio of 4.25 Debt 10407
 Time period of 12 years
 An NPV of INR 4224.5 million
 Expected increase in passenger movement of 6.26 % Cost of Equity 11.60%
on yearly basis Cost of Debt 6.00%
 Cargo movement to increase at 7.18% on yearly basis WACC 7.07%
 The project has an IRR of 23.8%
 Cost of equity is 11.6% and cost of debt 6% respectively
Time Period 12 yrs

All costs in INR millions

Revenue Projections 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total Aeronautical Revenue 508.9 545.7 633 761.5 887.6 1057.6 1247.2 1477.4 1433.3 1385.2 1330.2 1271.5
Cargo Revenue 300.9 328.5 347.4 374.1 410.4 462 519.1 584.1 657.4 739.8 831.7 930.9
Total Trading Concession Revenue 193.9 252.2 317 360.4 505.9 632.2 783.7 923.7 1018.7 1136.5 1354.3 1494.1
Total Rent and Service Revenue 97.2 101.1 111.1 118.5 137.2 191.7 199.3 280.9 300.2 306.3 317.2 338.7
Total Other Income 48 52.2 30.2 126.3 211.5 252.2 370 440.2 476.5 611.7 684.8 701.5
Total Revenue 1148.9 1279.7 1438.7 1740.8 2152.6 2595.7 3119.3 3706.3 3886.1 4179.5 4518.2 4736.7

Cost Projections 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Staff Costs Variable 310 355.2 405.4 412.6 439.8 468.7 499.8 532.8 568 605.9 646.1 689.2
Voluntary Retirement Scheme Costs Fixed 0 0 0 0 0 0 0 0 0 0 0 0
Repairs and Maintenance Variable 46.7 57.8 63.9 67.6 106.1 95 97.6 97.6 97.6 97.8 171.1 173.2
Consumption of Stores and Spares Variable 5 5.2 5.4 5.7 5.9 6.1 6.5 6.7 7 7.2 7.6 7.8
Net Electricity and Water Charges Variable 57.8 61.5 65.2 87.4 134.3 142.4 151.1 160.2 170 180.4 191.3 202.6
Rent Rate and Taxes Fixed 13.5 13.5 13.5 26.1 26.1 26.1 30.4 30.4 30.4 37.6 37.6 37.6
Insurance Premium Fixed 25.9 29.1 33.5 39.6 47.8 82.2 92.6 104.3 107.8 113.7 120.7 139.3
Rehabilitation Expenses Fixed 0 0 0 0 0 0 0 0 0 0 0 0
Other Operating Expenses Variable 212 233.5 257.6 298.5 351.1 393.5 459.1 530.9 563.9 610.4 662.2 703.5
Depreciation and Amortization 10.9 324 92.6 82.2 168.9 288.9 295.4 302 302 304.1 364.6 592.8
Total Operating Expenses 681.8 1079.8 937.1 1019.7 1280 1502.9 1632.5 1764.9 1846.7 1957.1 2201.2 2546
NOPAT 467.1 199.9 501.6 721.1 872.6 1092.8 1486.8 1941.4 2039.4 2222.4 2317 2190.7
Capital Expenditure 622 2443 1513.5 1611.7 0 247.4 0 823.7 253.7 1508 173.9 173.9

FCFF -144 -1919.1 -919.3 -808.4 1041.5 1134.3 1782.2 1419.7 2087.7 1018.5 2507.7 2609.6

NPV (Discounting at WACC) ₹ 4,224.49

IRR 23.80%
Refrences:

 https://www.thebalancesmb.com/public-private-partnership-pros-and-cons-844713
 https://www.thebalancesmb.com/public-private-partnership-types-845098