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PUBLIC PRIVATE PARTNERSHIP MODELS (PPP MODELS)| GS ARTICLES

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Syllabus Section: Economy/ GS Paper III

 

1. BOT model:        

  • A build-operate-transfer (BOT) contract is a model used to finance large projects, typically infrastructure projects developed through public-private partnerships.
  • The BOT scheme refers to the initial concession by a public entity such as a local government to a private firm to both build and operate the project in question. After a set time frame, typically two or three decades, control over the project is returned to the public entity.
  • Under a build-operate-transfer (BOT) contract, an entity—usually a government—grants a concession to a private company to finance, build and operate a project. The company operates the project for a period of time (perhaps 20 or 30 years) with the goal of recouping its investment, then transfers control of the project to the government.
  • BOT projects are normally large-scale, Greenfield infrastructure projects that would otherwise be financed, built and operated solely by the government. Examples include a highway in Pakistan, a wastewater treatment facility in China and a power plant in the Philippines.

2. The Build Operate and Transfer (BOT) Annuity Model:

  • Under BOT annuity, a developer builds a highway, operates it for a specified duration and transfers it back to the government. The government starts payment to the developer after the launch of commercial operation of the project. Payment will be made on a six month basis.

3. BOT Toll Model:

  • In this toll based BOT model, a road developer constructs the road and he is allowed to recover his investment through toll collection. This toll collection will be over a long period which is nearly 30 years in most cases. There is no government payment to the developer as he earns his money invested from tolls.

4. BOOT MODEL:

  • BOOT (build, own, operate, transfer) is a public-private partnership (PPP) project model in which a private organization conducts a large development project under contract to a public-sector partner, such as a government agency. A BOOT project is often seen as a way to develop a large public infrastructure project with private funding.
  • BOOT is sometimes known as BOT (build, own, transfer). Variations on the BOOT model include BOO (build, own, operate), BLT (build, lease, transfer) and BLOT (build, lease, operate, transfer).

5. Engineering Procurement and construction (EPC) Model:

  • Under this system the entire project is funded by the government.
  • The EPC entails the contractor build the project by designing, installing and procuring necessary labour and land to construct the infrastructure, either directly or by subcontracting.
  • Under EPC model the contractor is legally responsible to complete the project under some fixed predetermined timeline and may also involve scope for penalty in case of time overrun.
  • In EPC as all the clearances, land acquisition and regulatory norms have to be completed by the government itself and the private players do not have to get itself involved in these time taking procedures.

6. The Hybrid Annuity Model (HAM):

  • 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.
  • 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.
  • 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.
  • There is no toll right for the developer. Under HAM, Revenue collection would be the responsibility of the National Highways Authority of India (NHAI).
  • By features the HAM is a mix between the existing two models – BOT Annuity and EPC. Hence to understand the HAM, the basic features of the existing PPP models are elucidated first.

7. SWISS CHALLENGE METHOD

  • Swiss Challenge method is one of the ways of awarding government contracts to private players. Without an invitation from government, a private player can submit a proposal to government for development of an infrastructure project with exclusive intellectual  property  rights. 
  • Then government has two options with the proposal.

One, Government can buy the intellectual property rights from the original proponent and call for a competitive bidding to award the project.

Two, Government allows other players with similar capabilities to submit their proposals. If any proposal is better than the proposal of the original proponent, the original proponent is asked to match with the other proposal. If he fails, then it would be awarded to the best bidder.

Strengths of Swiss Challenge Method

The following are the advantages of Swiss Challenge Method

  • This method is very useful for the governments that have limited technical and financial  capacity to develop projects
  • This method promotes innovation and incentivizes to propose new ideas
  • It also reduces transaction cost
  • If the project is awarded to project proponent it can be implemented faster.
  • This method incentivizes private sector participation.
  • This method is Potential route for furthering local projects that are not national priorities.
    Under this methodology,  certainty  of success  is ensured  as at  least one  willing private partner is available right from the beginning.
  • This method results in better project structuring as  the project proponent does a detailed
  • Feasibility and financial  analysis  of  a  project.  The  initial  structuring  by  the  project
  • proponent brings in efficiency and better understanding of financial implication resulting
  • In development of economically sustainable model.
  • The  identification  of  timelines,  identification  of  risks  and  their  allocation  along  with
  • Transparent  bidding  criteria  becomes  easier  for  the  authority  because  the  project
  • Preparation is done in more professional manner.
  • Time and cost  saving in  respect of pre project activities and feasibility studies as these studies have to be conducted in advance by the authority in case of other Public, Private partnership Models. 
  • Benchmarking of project costs, revenues and returns can be done through undertaking necessary technical and financial studies before the bidding stage.

Weaknesses of Swiss Challenge Method

  • There  are  risks  of  insufficient  transparency  and  inadequate  competition  in  the  Swiss Challenge Method.
  • There is no legal validity of using this method when a counter proposal contains different Specifications than the original proposal.
  • There is no symmetry in bidding time given to bidders to prepare counter proposals  in  relation to time taken by originator for preparation 
  • It is very difficult to measure  monetary value  of unsolicited  proposal when contract or project is not given to original proponent.
  • There is no guarantee that that unsolicited bidder won’t withdraw its offer.