EDEN IAS

INVESTMENT MODELS | GS ARTICLES

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>In Public-private partnerships there is collaboration between a government agency and private-sector companies that can be used to finance, build, and operate projects, such as public transportation networks.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><b><u><span style=”font-size:14.0pt”><span style=”line-height:115%”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>India follows three major PPP models:</span></span></span></u></b></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><b><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>1. Build-Operate-Transfer Contract</span></b></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; A build-operate-transfer (BOT) contract is a model used to finance large projects, typically infrastructure projects developed through public-private partnerships.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; BOT projects are normally large-scale, Greenfield infrastructure projects that would otherwise be financed, built and operated solely by the government.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; Under a build-operate-transfer (BOT) contract, an entity&mdash;usually a government&mdash;grants a concession to a private company to finance, build and operate a project for a period of 20-30 years, hoping to earn a profit.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; After that period, the project is returned to the public entity that originally granted the concession.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><b><span style=”font-size:12.0pt”><span style=”line-height:115%”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>2. EPC (engineering, procurement and construction) model:</span></span></span></b></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>Under an EPC contract, the contractor:</span></span></span></span></p>

<ul>
<li style=”margin-left:8px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&nbsp;Designs the installation,</span></span></span></span></li>
<li style=”margin-left:8px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&nbsp;Procures the material and</span></span></span></span></li>
<li style=”margin-left:8px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>Constructs the project and is paid for it by the government.</span></span></span></span></li>
<li style=”margin-bottom:13px; margin-left:8px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>In some cases, the contractor carries the risk for the schedule as well as the budget, in return for a fixed price under what is called a lump sum contract, or a lump sum turnkey contract.</span></span></span></span></li>
</ul>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><b><span style=”font-size:12.0pt”><span style=”line-height:115%”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>3. HAM: Hybrid Annuity Model</span></span></span></b></span></span></span></p>

<ul>
<li style=”margin-left:8px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>In India, the new HAM is a mix of BOT Annuity and EPC models. As per the design, the government will contribute to 40% of the project cost in the first five years through annual payments (annuity). The remaining payment will be made on the basis of the assets created and the performance of the developer.</span></span></span></span></li>
<li style=”margin-left:8px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>Here, hybrid annuity means the first 40% payment is made as fixed amount in five equal installments whereas the remaining 60% is paid as variable annuity amount after the completion of the project depending upon the value of assets created.</span></span></span></span></li>
<li style=”margin-left:8px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>As the government pays only 40%, during the construction stage, the developer should find money for the remaining amount. Here, he has to raise the remaining 60% in the form of equity or loans.</span></span></span></span></li>
</ul>

<ul>
<li style=”margin-bottom:13px; margin-left:8px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>There is no toll right for the developer. Under HAM, Revenue collection would be the responsibility of the National Highways Authority of India (NHAI).</span></span></span></span></li>
</ul>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><b><span style=”font-size:12.0pt”><span style=”line-height:115%”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>Swiss challenge:</span></span></span></b></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>A Swiss Challenge is a method of bidding, often used in public projects, in which an interested party initiates a proposal for a contract or the bid for a project. The government then puts the details of the project out in the public and invites proposals from others interested in executing it. On the receipt of these bids, the original contractor gets an opportunity to match the best bid.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><b><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>Kelkar committee on PPP</span></b><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>: Kelkar committee to evaluate PPP in India was a committee set up to study and evaluate the extant public-private partnership (PPP) model in India.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&nbsp;The committee was set up by India&rsquo;s central government and headed by Vijay Kelkar. The committee was set up following 2015 Union budget of India by the then finance minister of India Arun Jaitley.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><b><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>Amongst the recommendations made are:</span></b></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; Establishment of 3P India.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; Establishment of independent regulating agencies.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; An amendment in the Prevention of corruption act to differentiate between errors of judgment and willful corrupt practices.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; Use the PPP model for airport, port and railway projects.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; Banks and other financial institutions are allowed to issue zero-coupon bonds.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; Banks develop improved capabilities for risk assessment and appraisal.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; To provide for monetization of completed projects.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; Create a procedure to resume stuck projects.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; PPP should only be used for large projects.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; Creation of an inbuilt mechanism for renegotiation.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; Model concession agreements in various sectors are reviewed.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; The public sector undertakings be dissuaded from participating in PPP</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; Road toll be collected electronically</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; Constitution of an Infrastructure PPP Project Review Committee (IPRC) comprising an expert in finance and economics, law, and at least one related technocrat with not less than 15 years experience.</span></span></span></span></p>

<p style=”margin-bottom:13px”><span style=”font-size:11pt”><span style=”line-height:115%”><span style=”font-family:Calibri,sans-serif”><span style=”font-family:&quot;Cambria&quot;,&quot;serif&quot;”>&bull; Construction of an Infrastructure PPP Adjudication Tribunal (IPAT) headed by a former Supreme Court/ High Court Judge with at a minimum of one technical and financial expert each as members.</span></span></span></span></p>

<p style=”margin-bottom:13px”>&nbsp;</p>