3(f)-Open vs Closed Model-Nicholas Henry

Models of Organisation: Closed and Open Models

Read this article to learn about the closed and open models of an organization:

Models of Organisation:

1. Closed Model:

Some organisations fall in the group category of closed model. The closed model includes 

• bureaucratic,
•  hierarchical, 
• formal, 
• rational and 
• mechanistic.

Henry has pointed out that the closed model organisations have the following salient features:

(1) It is believed that in closed models organisation’s internal functioning or conditions do not frequently and rapidly change. In these models mainly routine works are- found and internal conditions are stable.

(2) There is some sort of specialisation but it is found in the centre of organisation.

(3) To transact a job certain means are required and these means are emphasized.

(4) Conflicts may (in regard to many matters) crop up at any level, but these are settled at the central level. This means that there is some sort of centralization.

(5) Responsibility of each employee is clearly stated and it is also emphasized that they cannot avoid their responsibility.

(6) An important characteristic of closed model organisations is there is hierarchical system of organisation and each stage is headed by an officer who enjoys some authority. The hierarchy looks like a pyramid. In the organisations that fall under the category of closed model the hierarchical character resembles the Weberian bureaucracy.

(7) In the closed model organisations only few persons have monopolised the management knowledge and particularly the chief executive knows everything.

(8) The interaction among the people in such organisation is vertical and never horizontal.

(9) In such organisation it is found that the workers are loyal to the organisation and one man.

(10) An interesting feature is in every sphere of the organisation there reigns obedience, command and loyalty.

Weber’s theory of bureaucracy is the best and prominent closed model and about this it has been said that ii is an ideal type. The German sociologist elaborately analysed the bureaucratic theory in great detail and since then it has been an integral part of public administration and executive organ of government.

• Nicholas Henry says that the Weberian bureaucracy is characterised by “Prot­estant Work’ ethic” and hierarchy.
•  Everywhere of the bureaucratic system there is to be found these features. 
• The Weberian bureaucracy also propagates utmost reliance on rules and regulations. 
• In such a system rules and regulations dominate the human face. 
• That is humanity or humanism is subordinate to rules and regulations. 
• In this system employees always emphasise the career-building in service life.
• Scientific Management theory of public administration is also a part of closed model. 
• Henry says: “Scientific management refers to what is more popularly known as time and motion studies”. 
• At the beginning of the twentieth century some famous administrationists propagated the basic ideas of this theory. 
• It is said that the business and engineering schools and factories were the home of this theory.

• The central aspect of this theory is human beings are regarded as “being adjuncts of machine”. 
• The main purpose of this theory is to make men efficient with the help of machine. 
• The most important members of the scientific management school are Frederick Taylor and Gilbreths. 
• In 1911 Taylor published his Principles of Scientific Management. 
• Machine is the central idea of the scientific management and likes and dislikes of workers have no value in management. 
• That is why Henry has said that “scientific management has a distasteful aura”. It is, however, an important theory of closed model.
• The administrative management constitutes a part of closed model. 
• The main architects of this theory are Luther Gulick and Lyndell Urwick. 
• They combinedly published Papers on the Science of Administration. 
• This paper throws sufficient light on the various aspects of public administration or administrative management. 
• Gulick, Lyndall and their large number of followers wanted to establish a principle that the public administration must be based on certain scientific principles and if it is not done the fruits of organisation will remain a far cry.
• According to them management is management and everywhere it is correct. 
• In order to harvest highest amount of fruits the public administration must be scientifically managed. 
• The authors of the administrative management introduced the famous seven principles known as PODSCORB.
• There are few similarities between bureaucratic theory of management and administrative management theory. 
• In the opinion of Henry “both bureaucratic theory and administrative management are primarily concerned with the optimal organisation of administrators rather than production workers”.
• The most interesting aspect of the closed model of public administration is that this model thinks that the organisation or management is separate from the rest of the world. 
• But in real situation this is not true at all. 
• Particularly the bureaucratic theory, though highly popular in public administration, is condemned for its approach to the various aspects of public administration and the role of the bureaucrats. 
• In the present-day world the public administration can never be separated from the environment. 
• Experts are of opinion that bureaucracy is trying to amend its behavior and attitude to outside world.

2. Open Model:

• Opposite to the closed model of organisation is the open model. 
• It is known by different names such as collegial model, competitive model, or free market model. 
• The very names clearly indicate that openness is its central theme and features.
•  There are some theories which fall in the name of open model and these are human relations, organisation development etc.

The principal features of the open model (hereafter only OM) can be stated in the following way:

(1) The organisation of OM are of fluidic structure or nature. It is like an amoeba.

(2) In OM organisations objectives or purposes always get priority, means are not so important.

(3) In OM organisations there are very little that can be called stable. Most of the things are in fluid situation. As a result, the organisation is capable of adjusting with the changes. Orthodox attitude has practi­cally no place in open models.

(4) An important character of such models is specialized knowledge is not confined within limited circle or it is not the property of a particular person. The specialized knowledge is spread among all sections and its purpose is to augment general improvement.

(5) In OM organisations, knowledge is spread among all sections of management so that the whole body can get benefit.

(6) A person is respected not for his status in the organisation but for his knowledge, ability to manage, and professional capacity.

(7) OM organisations always try to adapt themselves with the changed situations.

(8) In such organisations achievement and excellence are rewarded or prioritised. Conservativeness in the sphere of management is generally discouraged. These are the chief characteristics of OM organisations.

Organisation Development:

• It is said that open model (OM) has some sub-fields and organisation development (OD) is one such sub-field. 
• In other words, OD is subsidiary to the open model. What is OD? 
• Let us define it in the following words, “The organisation development, is a planned organisation-wide attempt directed from the top, that is: designed to increase organisational effectiveness and viability through calculated interventions in the active working of organisation using knowledge from behavioral sciences”.
• Every organisation wants progress and the OD stresses that progress must be realized through calculated efforts. 
• The programme for development shall be prepared at the top of the organisation and then it shall be spread in all the sections or branches. 
• The plan for development must proceed in a calculated way. 
• It further asserts that the guidelines for developments shall be collected from different branches of behavioral science.

What are the Objectives of OD?

(1) The first objective of OD is to improve the ability and other qualities necessary for the organisation. The chief aim is all the members of the organisation shall be able to invest their full energy and capacity for the development of the organisation.

(2) It is known to everybody that the persons who work for the organisation are all human beings and, naturally, all have emotions and feelings. Organisation development wants to say that it is the duty of the organisation to take measures for the development of emotions and feelings.

(3) Direct and effective relationship among all members shall, be estab­lished and properly developed so that the organisation can find proper avenues of further progress.

(4) It is quite natural that conflicts or differences of opinion may crop up among the employees or between different sections. It has been suggested by the supporters of OD that no solution or settlement shall be imposed upon the employees or warring sections. In other words, they shall be encouraged to settle all types of dispute among them­selves amicably.

(5) The OD suggests that all the sections of an organisation and all employees shall work unitedly and with a spirit of cooperation. There shall exist a spirit of cooperation and mutual understanding among all.

• It has been suggested by the sponsors of OD esprit de corps (a feeling of pride, fellowship and loyalty uniting the members of a particulars group) shall be developed among the employees and various departments. 
• This is key to progress of the organisation. 
• The suggestions made by the OD can be traced to the concepts of social psychology. 
• Today it is believed that the progress of an organisation is not simply a matter of administration. 
• Human psychology is largely associated with the all-round progress of an organisation and the OD wants to remind us that.
• The application of social psychology further states that physical progress is not simply in a physical world. 
• It has close relationship with psychology. How men work and what they feel about the numerous aspects of the organisation also matter a great deal about the progress of organisation and for that reason the principles and suggestions of social psychology are required to be applied to the working of an organisation.
•  It has been claimed that the application of the principles of social psychology has shown remarkable results.

Organisation as a Unit of Environment:

• Open model of organisation has another aspect and it is called organisation is a unit in its environment. 
• It means that the organisations in public administration are parts of the environment. 
• In other words, both are dependent upon each other. 
• If the influences of environment fall upon the organisation, it adjusts or adapts itself with the changes or influences. 
• Because of this the concept has been named as adaptive system or contingency theory.
• When certain changes take place in the environment and their impacts fall upon the functions of an organisation the latter responds to this change. 
• This idea has been summarised by Nicholas Henry in the following words: “The task environment in organisation theory refers to the forces that surround the organisation and affect, both positively and nega­tively’ the organisation’s ability to fulfill its mission” 
• The experts, after thorough research, have found that the weak or new or flexible organisations are subject to the changes that take place in the environment. 
• It is inevitable because the organisation belongs to OM. 
• Nicholas Henry has referred to the famous TVA (Tennessee Valley Authority) —a famous organisation of the USA.
• A number of persons have conducted research to study the relationship between TVA and the environment and have found that the environment very often influences the various aspects of the TVA. 
• The authority of the TVA has found it necessary to adapt or coopt the influences of environment into the policies or functions of the TVA. 
• Not only TVA, many other organisations are in the same way influenced by the environment. 
• It is said that when the authority drafts the principles and policy of organisation it must take note of this situation.

Reconciling Two Models:

• Nicholas Henry is a vocal spokesman of the differences between open and closed models. 
• But he says that the Western culture does not permit any elongation of the differences between the two models. 
• There are some differences no doubt but in majority of the cases these differences appear to be insignificant. 
• For this reason Henry speaks of some type of synthesis between the two models. I quote a lengthy passage from his book.
• “The essence of the literature of model synthesis is that it starts with the open model and that is it assumes that organisations are spontaneous collectives of people with their own goals and drives who are operating in an uncertain environment but explains organisational behaviour as being motivated by a need to routinise and rationalise the organisation’s internal working and its relation­ships with its environment whenever and whatever possible. This is essentially a Darwinian notion (adapt or die). Another way of saying the same thing is that organisations try to become rational."

Consider the same concept from another perspective organisations try to make all variables predictable. 

• Visualized differently we can perceive that organisations try to achieve closure. 
• Yet another way of expressing the same idea is to say that organisations try to reduce uncertainty”.
•  In this way Henry has made a model attempt to synthesize the two models. 
• In the real world no clear-cut divisions can be drawn between closed and open models though—theoretically—there are differences.

3(f)Nichlas Henry's Model of Synthesis-Open vs.Closed Models

The Threads of Organisations : Theories

Because Organisations are different creatures to different people ,organisation are defined according to the contexts and perspectives peculiar to the person doing the defining.Nevertheless,we can at least posit certain characteristics that are common in all organisations.

Organisations:

• are purposeful,complex human collectivists
• are characteristic by secondary (or impersonal) relationships
• have specialized and limited goals
• are characterized by sustained cooperative activity
• are integrated within a larger social system
• provide services and products to their environment and
• are dependent upon exchanges with their environment.

Organisation theorists using essentially this list of characteristics but stressing different items in it,have produced a vast body of literature on the nature of organisation.This literature can be viewed as a long lanyard plaited of two yarns,each with its own threads.

The Closed Model of Organisations 

Our first yarn is the closed model of organisations ,which goes by many names.Bureaucratic ,hierarchical ,formal,rational and mechanistic are some of them.

Characteristic of the closed Model of Organisations

We rely on a classic analysis in listing the principal features of the closed model of organisations 

• Routine task occur in stable conditions
• task specialization(ie..a division of labor) is central.
• Means (or the proper way to do  job) are emphasized.
• Conflict within the organisation is adjudicated from the top.
• "Responsibility" or (what  one is supposed  to do,one's formal job description is emphasized.
• One's primary sense of responsibility and loyalty is to the bureaucratic  sub unit to which one is assigned (such as accounting department).
• The organisation is perceived as a hierarchy structure(ie ..the structure looks like a pyramid).
• knowledge is inclusive only at the top of the hierarchy (in other words,only the chief executive knows everything).
• Interaction between people in the organisation tends to be vertical (ie..one takes orders from above and transmits orders below),but not horizontal.
• The style of interaction is directed towards obedience,command, and clear super-ordinate/sub-ordinate relationships,
• Loyalty and obedience to one's surprise and the organisation generally are emphasized.
• Prestige is "internalized" that is personal status in the organisation is determined largely by one's formal office and rank.

So runs our closed model of organisations.And its is just that-a model.No organisation meets all twelve of its features in practice.Among organisation that are widely known,the department of Defense likely comes closet to accomplishing the requisites of the closed model,but the Pentagon's exception to the model are obvious ,such as highly unstable conditions during wartime.

There are at-least three theoretical threads that have thrived within the closed model's framework.

 Bureaucratic Theory

The earliest school of the closed model is that of bureaucratic theory ,or the study of the impersonal organisation,execution and enforcement of legal rules in organization. Its best known representation is Max Weber,a remarkable German sociologist who wrote around the turn of the twentieth century. Although "bureaucracy" is common in all sectors ,Weber cast his theory of bureaucracy squarely are

hierarchy
promotion based on professional merit and skill
the development of a career service
reliance on and use of rules and regulations and
personality of relationships and bureaucracy and with their clientele.

To Weber, an impersonal, rule abiding,efficient,merit based career service provided the surest way of fulfilling the public interest in the face of a politically fragmented Germany and an arrogant,powerful,yet somewhat silly Junker c;ass.Weber,in large sense, was not anti-humanist in his thinking as has been alleged,but the effects of the bureaucracy that he so loudly touted could be ,both to the citizens who were governed by the bureaucrats and to the bureaucrats themselves.

Weber's rigidly rational theory was warmly welcomed by the first public administrationist.,who embraced it as an erudite justification of their values,all of which shared an abhorrence with messy politics, Woodrow Wilson closest adviser colonel Edward House,anonymously wrote a novel that memorably express this revulsion.

In it,the president is replaced by an omnipotent "Administrator of the Republic" who resides in a monastic barracks,spurning the distractive fripperies of the White House, and who ends the odious "rule of the bosses." Congress is disbanded in favor creating numerous "boards", each composed of five neutral experts who are charged with reforming the courts,taxes,railroads ,"the unsanitary custom of burial in cemeteries" and anything else that could benefit from a dose of the administrators common sense-in other words ,just about everything.(This perspective remains remarkably persistent;nearly a third of American think that policy-making should be shorn from elected officials and turned over to "non-elected experts".

Scientific Management

Another rivulet of research in the closed model is scientific management, which is the analysis of work flow processes as the means of raising organisational productivity.Scientific management refers to what are more popularly known as time motion studies ; It flourished at the beginning of the twentieth century and remains in use today in industry.

Workers as "Gear Wheels"

 Scientific management overriding concern is to increase production,and it does this by making human beings as efficient as,and more like,machines.To quote one of the school's founders,"it si absolutely necessary for every man in an organisation to become one of a train of gear wheels."

Key representatives of the scientific management include Fredrick Taylor(who gave this school its name with his 1911 volume, Principles of Scientific Management), and Frank and Lillian Giberth. The person as machine perspective,replete with all its discomfiting overtones,is on clear display in Taylor's writings.A notorious example is Taylor declared to be"Stupid...phlegmatic...(and)more nearly resembles in his mental make up  the ox than any other type".
After Taylor analyzed Schmidt's physical movements,he ordered him to change how he moved his body and, as a result of these"scientific" alterations,Schimidt's production went up from twelve and a half tons of pig-iron hauled per day to forty seven tons.
 Similarly the Gilberths developed the concept of the"therblig" each one of which represented a category of 18 basic human motions-all physical activity fell into a therblig class of one type or another.(The scientific management crowd rarely was constrained by modesty,false or otherwise;try reading therblig backward.)

The person as machine perspective has a distasteful aura.People are not machines.Before dismissing the scientific managers as exploiters of the working class,however keep in mind that efficiency can serve humane ends as well as any other,and this aspect sometimes is overlooked by critics.Frank Gilberth,for example,applied his therbligs to surgery techniques in hospitals,and the sharply ordered "Scalp!Sponge!" slapped into a surgeon's palm by a hypereffcient nurse is a direct result of Gilberth's operating room studies.Prior to Gilberth's analysis,surgeons rustled around for their own instruments with one hand,evidently holding open the incisions with the other.

Frank Gilberth'w wife ,Lillian held a professorship at Purdue University that was split between its schools of management and Home Economics and gave us kitchen islands,rolling kitchen carts,and cookery's work triangle".As "the mother of scientific management(Taylor is the father of scientific management"-it says so on his tomb stone),she was featured on a U.S.postage stamp,advised six presidents of the united states,and bore Frank,at his request,six boys and six girls-two of whom wrote Cheaper by the Dozen, rollicking account of life in scientifically managed household.

The Lasting Impact of a Fraud?-

A deeper criticism of scientific management is that "there was almost no science to it"Taylor's  Schmidt  was likely fictional , his methodologies were idiosyncratic at best,and he never  published the actual data  on which his theory was based,Whether "Speedy  taylor"
as he was called , was "a shameless fraud is matter of of some debate,but not ,it must be said much." Taylor's sometimes  brutal applications of his theory (the Gilberths were much more humane)brought about strikes by exhausted workers and a  hostile congressional investigation.(Perhaps it should give us pause that Taylor thought public administration to be "on the whole good".

Nevertheless the impact of scientific management was stunning.Taylor was central in organizing America's first graduate school to offer a degree in business (at Harvard 1908); his theories underlay  the Soviet Union's First five year applications by Henry Ford,who," following Speedy Taylor's example,"measured his workers movement on the assembly line with a stopwatch." "the world of management"-including public management  where Taylor's ghost may still haunt the halls of government"-remains deeply Taylorism in its foundations".

Administrative Management

Our final literature of the closed model is administrative management.Administrative management also called generic management ,is the discovery and application of universal,scientific,administrative principles that can improve any organisation's efficiency and effectiveness.Unfortunately for this school, as we explained in Chapter 2,there are no universal,scientific,administrative principles,but some of its adherents nevertheless made some contributions of consequence.

The scholars of administrative management devoted their energies to the discovery of managerial principles that worked in any and all institutional settings -from corporations and clubs,to governments and gulags-and in any and all cultural contexts-from Bostons and Botswana,to Paris and Patagonia.Writers in this stream usually offered up very specific principles of administration:The public administration scholars ,Luther Gullick and Lyndall Urwick listed seven principles;James D Mooney and Aln C. Reiley,in their aptly tittled and influencing work,The Principles of Organisations,found four;another Henry Fayol unearthed fourteen.Among the primer scholars in the management tradition,Mary Parker Follet was one of the few who fudged when it come to enumerating principles of administration,but then she was usually ahead of her time,perhaps because her intellectual roots were deeply planted in public administration.

With the emergence of administration management , a hint surfaced that presaged a revolution in organisation theory,one that ultimately would bluntly question a foundation of its two theoretical predecessors,bureaucratic theory and scientific management.that hint was that underlings and toilers in organisation conceivably might have minds of their own.

It was not much of an inkling,but it is intimated,if perversely,in Mooney and Reiley's Contention that the "indoctrination" of workers is vital to well managed organisations;they thought that the catholic church had done a simply swell job of indoctrination over the preceding 2000 years.the idea that workers could think is much more apparent in Follett's writing who was suggesting power sharing,stakeholder theory,and team building in the 1920s!
Follet's ideas (as channeled through W.Edwards Deming,of total Quality management fame) were implemented by Japanese automakers,who applied the, with enormous success,at least up to a point.Japan's Toyota ,after faithfully following Follet's philosophy for more than fifty years,abandoned it in favor of overtaking General Motors as the globe's biggest automaker(which it did) by embracing "disastrous policies adopted after 2000,when top management's thinking changed in a direction   sharply that,while consistent with that of most other western companies,would never have been tolerated at Toyota's global rolling recalls in 2010 and 2011 to correct safety issues in more than fourteen million vehicles,its largest number ever.(An unprecedented,ten month federal investigation found no electronics problems,but did discover two mechanical malfunctions involving unanticipated acceleration. As Follet exemplifies,the administrative management writers were among the first to express a dawning recognition that subordinated were people(like managers)and could think (almost like managers).This breakthrough provided a basis for organisation theory's next paradigm,the open model.


THE OPEN MODEL OF ORGANISATIONS


As with the closed model the open model goes by many names. Collegial,competitive,free market informal,natural and organic are some of them.
The origins of the open model actually precede those of the closed model by more than a century and a half and can be traced to Count Louis de Rouvroy Saint-Simon,the brilliant French social thinker,and to his protege Auguste Comte,the "father of sociology.Partly as a reaction to the social stultification of the last days of the French kings and the explosiveness of the reluctant Revolution,Saint-Simon and later Comre,Speculated on what the administration of the future would be like.They thought that technology would spawn new professions;that administrators would be appointed on the basis of skill rather than heredity;and the organisation would be created spontaneously ,evolve "naturally",and be a liberating force for humanity.

Characteristics of the Open Model of Organisations

• The principal features of the open model of organisation are
• Non routine tasks occur in unstable conditions
• Specialized knowledge contributes to common tasks(thus differing from the closed model's specialized task notion in that the specialized knowledge possessed by nay one member of the organisations may be applied profitably to a variety of task undertaken by various other members of the organisations).
• Ends (or getting the job done) rather than means are emphasized.
• Conflict within the organisation is adjusted by interaction with peers,rather than adjudicated from the top.
• "Shedding of responsibility"is emphasized (in other words ,formal job descriptions. are discarded in favor of all organisational members contributing to all 
• Conflicting within the organisation is adjusted by interaction with peers,rather than adjudicated from the top.
• "Shedding of responsibility"is emphasized (in other words ,formal job description are discarded in favor of all organisational members contributing to all organisational problems.)
• One's sense of responsibility and loyalty is to the organisation as a whole.
• The organisation is perceived as a fludic netwrok structure(ie..the organisational "looks" like an amoeba)
• knoweldge can be located anywhere in  the organsiation (in other words ,everybody knows something relevant about the organsiation but noone including the chief executive,knows everything).
• Interaction between people in the organisation tends to be horizontal (ie..papers interact with peers),as well as vertical.
• The style of interaction is directed towards accomplishment,"advice"(rather than commands),and is characterised by a "myth of [eergae". which eneverlops even the most obvious superordinated /subordinate relationsgips
• task acheivement and excellance of performance in accopolishing a task are emphaised ,sometimes at the expense of obidience to one's superiors.
• Pretige is "externalised (ie personal status) in the organisation is determined largely by one's professional ability and reputation rather than by office and rank ).

4.16.1-PPP Boxes

B1-
In one sense PPP is the arrangement between the government or state sector and the private sector where private sector can take over on contractual basis the services and functions,traditionally provided by the state.It also means the use of Non-state or Non-Profit bodies for raising funds and pursuing the social services oor the developmental functions.

It indicates the joint partnership between the public sector and the private sector in matters of production and delivery of goods and services. It involves triangular relationships between the state ,Private sector and those who receive the services.And,the 'quasi-corporatism' approach brings the state,civil society,and Market sector together.Goldsmith and Eggers point out that public private partnership can involve relationships among a variety of public ,civil society and market actors and they view this as the government by Networks.

B2-
As highlighted in Economic survey 2012-13,global experience indicates that PPP work well when they combine the efficiency and risk assessment of the private sector with the public purpose of the private sector.They work poorly when they rely on the efficiency and risk assessment of the government sector and the public purpose of the private sector.India should be careful not to undertake PPPs that don't apportion risks and responsibilities sensibly.Moreover flexibility needs to be built into arrangements so that the contract can be withdrawn and put up for rebid when the private party unperformed. The early success of PPP projects in India was mainly due to the meeting of obligations by the stakeholders in a timely manner as well as implementation of projects over reasonable timelines.However with economic slowdown,lower than expected demand for services and a sharp rise in input costs has started resulting in failure of contracting parties to meet their obligations as stipulated in the PPP agreements.As a result,the infrastructure gap has widened over the last few years A model that depends over private capital may be difficult to implement if the companies executing infrastructure projects are financially stressed and not in position to raise  more funds in the absence of radical restructuring.Further,the execution,operation and maintenance capacities of implementing agencies also need to be assessed and strengthened. The role of banks and financial institutions also need to be assessed and strengthened. The role  of banks and financial institutions also needs to be assessed and strengthened.The role of banks and financial institutions also needs a re look from the due diligence and appraisal perspective.Last but not the least,the ability of PPPs to become an efficient means of delivering public services will also crucially depend on the intention and spirit of all contracteulk parties to honour their respective commitments.  

4.16-PPP

PPP  describes a government service or private business venture  which is funded and operated through a partnership of government and one or more private sector companies.These schemes are referred as PPP or P3.

The PPP Concept : Meaning

• There is no single universally accepted definition of PPP. In many countries PPP programmes are used for traditional services provided by the public sector with the help of private sector through projects.
• Some governments have developed the definitions of PPP according to their functioning,ruling and processing.
• Brazil governments has formulated a PPP law and Article 2 of this law defines that PPP contracts and agreements entered into between government or public and private entities that establish a legally binding obligation to manage services, undertakings and activities in the public interest where the private sector is responsible for financing, investment and management.
• According to Ireland government PPP is an arrangement made between a state authority and involving different combinations of design, construction,operations and finance.
• In South Africa,PPP is defined in law as a contact between a government institution and a private party where the latter performs an institutional function and or uses state property and where substantial project risks are passed to the third party.
• PPP is used in UK as where the private sector is introduced as strategic partner into state owned business that provides a public service.

• In the words of Savas, PPP refers to any arrangement between a government and a private sector in which partially or traditionally public activities are performed by the private sector.
• PPP is policy decision and initiative of the government  at any level to promote public interest and public good.
• In this approach ,participation/partnership/collaboration of the private sector bodies is sought to be harnessed by the government for major or mega development projects because participation and involvement of citizens, voluntary associations , and civil society groups including market players in the process of development is the building block of successful development administration.

• In the words of Nand Dameja, alternatively PPP refers to long term , contractual partnership between the public and private sector agencies,specifically targeted towards financing,designing,implementing, and operating infrastructure facilities and services that were traditionally provided by the public sector.
• This collaborative arrangement is built around the expertise and capacity of project partners.
• Under the arrangement,the private sector participation is helpful in bringing in technical and managerial expertise, improving operational efficiency, infusing financial resources and introducing competitiveness.
• In some types of PPP, the government uses tax revenue to provide capital for investment , with operations run jointly with the private sector or under contract(see contracting out).
• In other types(notably the private Finance Initiative),capital investment is made by the private sector on the strength of a contract with government to provide agreed services.Government contributions to a PPP may also be in kind(notably the transfer of existing assets).
• In Projects that are aimed at creating public goods like in the infrastructure sector,the government may provide a capital subsidy in the form of a one time grant,so as to make to more attractive to the private investors.
• In some other cases, the government may support the project by providing revenue subsidies,including tax breaks or by providing guaranteed annual revenues for a fixed period.

• Typically , a private sector consortium forms a special company called a 'special purpose vehicle' to develop, build, maintain and operate the asset for the contracted period.In cases where the government has invested in the project,it is typically (but not always)allotted an equity share in the SPV.
• The consortium is usually made up of a building contractor,a maintenance company and bank lenders.
• It is the SPV that signs the contract with the government and with the government and with subcontractors to build the facility and then maintain it.
• In the infrastructure sector, complex arrangements and contracts that guarantee and secure the cash flows, make PPP projects prime candidates for project financing.
• A typical PPP example would be a hospital building financed and constructed by a private developer and then leased  to the hospital authority.
• The private developer then acts as landlord, providing housekeeping and other non-medical services while the hospital itself provides medical services.
• While there is no single definition of PPPs,they broadly refer to long-term,contractual partnerships between the public and private sector agencies,specifically targeted towards financing,designing,implementing and operating infrastructure facilities and services that were traditionally provided by the public sector agencies.
• These collaborative ventures are built around the expertise and capacity of the project partners and are based on a contractual agreement,which ensures appropriate and mutually agreed allocation of resources,risks and returns.
• This approach of developing and operating public utilities and infrastructure by the private sector under terms and conditions agreeable to both the government and the private sector is called PPP or P3 or Private Sector Partnerships(PSP)

Salient Feature of PPP

• All projects with private sector participation are not PPP projects.
• Essentially,PPP are those ventures in which the resources required by the project in totality, along with the accompanying risks and rewards/returns are shared on the basis of a predetermined , agreed formula,which is formalised through a contract.
• PPP are different from privatisation.
• While PPPs involve private management of public services through a long term contract between an operator and a public authority,privatisation involves outright sale of a public service or facility to the private sector.
• A typical PPP example would be a toll expressway project financed and construed by a private developer.
• A PPP project is essentially based on a significant opportunity for the private sector to innovate in design,construction,service delivery,or use of an asset.
• To be viable,PPP need to have clearly defined outputs,avenues for generating no-governmental revenues, and sufficient capacity in the private sector to successfully deleiver project objectives.

Fundamental Qualities of A PPP Project

• The Project must be a high priority government planned one.The project must be such that,regardless of the source of public or private capital,the government would still want it to implement quickly.
• Since shared risk allocation is a principal feature of a PPP Project,the private sector must genuinely assume some risk.
• Value should be for both sides,which means government should also genuinely accept some risks and not transfer the entire risk to the private sector and vice-versa.

PPP do not mean reduced responsibility and accountability of the government.

• They still remain public infrastructure projects committed to meeting the critical service needs of citizens.
• The government remains accountable for service quality,price certainty,and cost effectiveness(value for money) of the partnership.
• Government remains actively involved throughout the project's life cycle.
• Under the PPP format , the government's role gets redefined as one of facilitator and enabler,while the private partner plays the role of financier,builder and operator of the service or facility.
• PPP aims to combine the skills ,expertise and experience of both the public and private sectors to deliever higher standard of services to customers or citizens.
• The public sector contributes assurance in terms of stable governance,citizen's support,finacing and also assumes social,environmental and political risks.
• On the other hand,the private sector brings along with it operational efficiencies,innovative technologies,managerial effectiveness,access to additional finances and assumes construction,commercial and operational risks of the projects.

• Privatisation may take several forms some of which are deregulation,divestiture(disinvestment),de-licensing,complete privatisation etc.
• Under deregulation,while retaining the ownership and responsibility for existing public services in its own hand government allows entry of the private sector for development of new assets through contractual relationship.
• This is normally done through 

1. Build,Operate and Transfer(BOT) Or 
2. Build ,Own,Operate and Transfer(BOOT)

• This strategy involves less political commitment and does not entail opposition to change.
• Divestiture paves the way for de-monopolisation of existing state resources like state or public sector enterprises.
• For instance,the State Electricity Boards(SEBs),in the pre-PPP days, held the monopoly in generation,transmission and distribution of electricity in its own hands in India.
• After The PPP policy cam into force,most of these SEBs have been de-monopolised through de-bundling or privastisation of the distribution function as in the Union Territory of Delhi,or generation,transmission and distribution of electricity Boards(SEBs),in the pre-PPP days,held the monopoly in generation,transmission and distribution function as in the Union Territory of Delhi,or generation or both as in the state of Orissa.
• Under complete privatsiation existing government enterprises are fully (100 percent) sold to private sector entities as was the case in the UK during thatcher's regime.

Various PPP Forms and Formats

In a PPP,the private partner could be a private company, a consortium, or a non-governmental organisation(NGO).Typically a PPP project involves a public sector agency and a private sector consortium which comprises contractors, maintenance companies,private investors and consulting firms.

The consortium often forms a special company or a special purpose vehicle.

The SPV signs a contract with the the government and with the sub-contractors to build the facility and then maintain it.
To enable the flow of private funds and resources into public infrastructure and services,the PPP is ope-rationalised through a contractual relationship between a public body(the concerning authority) and a private company(the concessionaire).
 This partnership could take many contractual forms,which progressively vary with increasing risk,responsibility and financing for the private sector.However,the most common partnership options are-

1.Service Contract

• A public authority like Central/state/local government contracts out the provision of specific services connected with the felt needs of the infrastructure concerned -roadways,railways,airways,waterways,ports,energy/power and telecommunication to a private provider(company) for a specific time period(normally less than five years) in return for a management fee.
• However,the government agency retains the overall responsibility for the operation and containment of the system except for the particular contracted services and it bears all the commercial risks.
• The government also owns and finances the fixed assets and provides the working capital.
• The management fee or compensation to the private firm is generally on the basis of 

1. time,
2. lump sum fixed fee,
3. or cost plus.
4. or physical parameters(like number of water bills sent out,number of bed rolls supplied etc.).

• In the case of railway,the contracted service may take the form of ticketing ,bed rolls,cleaning, food catering,billing,collection for water and electricity supply.

Service Contract Under a service contract, the government (public authority) hires a private company or entity to carry out one or more specified tasks or services for a period, typically 1–3 years. The public authority remains the primary provider of the infrastructure service and contracts out only portions of its operation to the private partner. The private partner must perform the service at the agreed cost and must typically meet performance standards set by the public sector. Governments generally use competitive bidding procedures to award service contracts, which tend to work well given the limited period and narrowly defined nature of these contracts. Under a service contract, the government pays the private partner a predetermined fee for the service, which may be based on a one-time fee, unit cost, or other basis. Therefore, the contractor’s profit increases if it can reduce its operating costs, while meeting required service standards. One financing option involves a cost-plus-fee formula, where costs such as labor are fixed, and the private partner participates in a profit-sharing system. The private partner typically does not interact with the consumers.

The government is responsible for funding any capital investments required to expand or improve the system. Box 3 shows Malaysia’s experience with service contracts for water leak reduction.

Potential strengths 

• Service contracts are usually most suitable where the service can be clearly defined in the contract, the level of demand is reasonably certain, and performance can be monitored easily. 
• Service contracts provide a relatively low-risk option for expanding the role of the private sector. 
• Service contracts can have a quick and substantial impact on system operation and efficiency, and provide a vehicle for technology transfer and development of managerial capacity. 
• Service contracts are often short term, allowing for repeated competition in the sector. 
• The barriers to entry are also low given that only a discrete service is up for bid. 
• Bidding maintains pressure on contractors to maintain low costs, while the low barriers to entry encourage participation in the competition. 

Potential weaknesses 

• Service contracts are unsuitable if the main objective is to attract capital investment.
• The contracts may improve efficiency and thus release some revenue for other purposes, but the contractor is not under an obligation to provide financing. 
• The effectiveness of the contractor may, in fact, be compromised if other sources of financing (from government or donors, for instance) do not materialize. 
• The fact that the contractor’s activities are discrete and segregated from the broader operations of the company may mean that there is no broader or deeper impact on the system operations, only discrete and limited improvements. 
• The public sector remains in charge of tariff setting and assets, both of which are politically vulnerable and critical to sustain the system.

Service Contract for Leak Reduction in Malaysia 

Sandakan is a city of about 450,000 inhabitants in the Malaysian state of Sabah. The State of Sabah has had one of the highest levels of non-revenue water (NRW) in Malaysia. In the 1990s, the level was calculated at almost 60% of system input volume. In the spring of 2003, Jabatan Air Sabah (Sabah Water Board) let an NRW reduction contract that was aimed at reducing real or physical losses from two directions, improving and expanding the current active leakage control activities, and replacing the mains with the highest burst frequencies. This contract was for a period of 30 months and was undertaken by Hal-crow Water Services in partnership with a Malaysian company, Salcon Engineering. In July 2005, the project was successfully ended. During the course of the project, about 2,100 leaks were located and repaired. At the end of June 2005, physical losses have been reduced by almost 17.5 million litres per day (Mld) against the target of 15 Mld. About 11 Mld have been saved through active leakage control and 6.5 Mld by replacement of mains. This represented a savings of 20% of the total volume of treated water produced. The physical activities were paired with a training program to ensure sustainability of the efforts. In 2006, Salcon signed a contract for phase two of the contract. The scope of work includes providing core NRW team and technical personnel to carry on with the NRW reduction work, such as pipe replacement, setting up of district metered zones, active leakage detection, leak repairs, consumer meter replacement, pressure management, and network modelling. Source: Pilcher, Richard. 2005. A Practical Approach to Developing a Sustainable Water Loss Reduction Strategy in Sandakan, Sabah, Malaysia. Hal-crow Water Services, Rocfort Road, Snodland, Kent ME6 5AH, United Kingdom.

2.Management Contract

• The private partner performs specific tasks under a mangemnet contract of a period of three to five years in return for a payment from the government. 
• In this type of PPP,the government owns the assets,invests its capital and bears the commercial risks.
• This arrangement,though similar to the service contract,permits the private operator to take day to day decisions and holds him responsible for operating and maintaining the system,but it does not make the private partner responsible for any capital risks.

• A management contract expands the services to be contracted out to include some or all of the management and operation of the public service (i.e., utility, hospital, port authority, etc.). 
• Although ultimate obligation for service provision remains in the public sector, daily management control and authority is assigned to the private partner or contractor. 
• In most cases, the private partner provides working capital but no financing for investment. 
• The private contractor is paid a predetermined rate for labor and other anticipated operating costs. 
• To provide an incentive for performance improvement, the contractor is paid an additional amount for achieving pre-specified targets. 
• Alternatively, the management contractor can be paid a share of profits. 
• The public sector retains the obligation for major capital investment, particularly those related to expand or substantially improve the system. 
• The contract can specify discrete activities to be funded by the private sector. 
• The private partner interacts with the customers, and the public sector is responsible for setting tariffs. 
• A management contract typically, however, will upgrade the financial and management systems of a company and decisions concerning service levels and priorities may be made on a more commercial basis. 

Potential strengths 

• The key advantage of this option is that many operational gains that result from private sector management can be made without transferring the assets to the private sector. 
• The contracts are less difficult to develop than others are and can be less controversial. 
• The contracts are also relatively low cost as fewer staff are dispatched to the utility from the private operator. 
• Management contracts can also be seen as interim arrangements, allowing for modest improvements while more comprehensive contracts and structures are developed. 
• Similarly, a management contract can be structured to phase-in increasingly extensive involvement of the private sector over time and as progress is demonstrated. 

Potential weaknesses 

• The split between the obligation for service and management, on the one hand, and financing and expansion planning, on the other, is a tricky one. 
• There is a risk that the management contractor does not enjoy the autonomy or the authority (over the labor force, for instance) required to achieve deep and lasting change. 
• If the operator is paid a portion of profits or given an incentive payment, safeguards are required to prevent inflation of reported achievements or deficient maintenance of the system to increase profits.

3.Lease

• Under this type of PPP,the government enters into a long term lease agreement with a private company or builder to develop and operate an expanded facility with its((private company)own fund. 
• In this arrangement , the private entity/lease rental to the government,is entitled to keep the revenue to recover its investment plus a reasonable return during the lease period and assumes the operational risks.
• When the government of India decided to modernise the Delhi and Mumbai international airports,it leased the Delhi Airport to private company called Delhi International Airport Limited(DIAL) and the Mumbai Airport to GMR.

• Under a lease contract, the private partner is responsible for the service in its entirety and undertakes obligations relating to quality and service standards. 
• Except for new and replacement investments, which remain the responsibility of the public authority, the operator provides the service at his expense and risk. 
• The duration of the leasing contract is typically for 10 years and may be renewed for up to 20 years. Responsibility for service provision is transferred from the public sector to the private sector and the financial risk for operation and maintenance is borne entirely by the private sector operator. 
• In particular, the operator is responsible for losses and for unpaid consumers' debts. 
• Leases do not involve any sale of assets to the private sector.  
•  Under this arrangement, the initial establishment of the system is financed by the public authority and contracted to a private company for operation and maintenance. 
• Part of the tariff is transferred to the public authority to service loans raised to finance extensions of the system. 
• An affermage is similar, but not identical, to a lease contract. 
• Unlike a lease where the private sector retains revenue collected from customers and makes a specified lease payment to the contracting authority, 
• an affermage allows the private sector to collect revenue from the customers, pays the contracting authority an affermage fee, and retains the remaining revenue. 
• The affermage can be more appealing to the private partner as it reduces some risks associated with low-cost recovery in sales. 
• The affermage fee is typically an agreed rate per every unit sold

Potential strengths 

• Under lease and affermage contracts, the private partner’s profits depend on the utility’s sales and costs. 
• The key advantage of this option is that it provides incentives for the operator to achieve higher levels of efficiency and higher sales. 
• The principal drawback is the risk of management reducing the level of maintenance on long-lived assets, particularly in the later years of the contract, in order to increase profits. 
• Further, the private partner provides a fee to cover the cost of using the assets although the private partner does not provide investment capital. 

Potential weaknesses 

• The key issue in moving from service and management contracts to a lease is that the contractors’ revenues are derived from customer payments and, hence, the question of tariff levels becomes increasingly sensitive. 
• This may require structuring and revising complex tariff arrangements. 
• In addition, the responsibility for capital investment remains with the government and no private investment capital is mobilized

4.Concession(BOOT,BOT)   

•  A private entity is awarded a concessionaire or franchise by government to finance,build , own and operate a facility. 
• In return,the franchise (private player) gets the right to collect user fee for a specified period,the ownership of the facility is transferred to government. 
• For instance,the Delhi-Noida-Delhi(DND) Expressway was built,operated and transferred (BOT) to the Government of National Capital Territory of Delhi by a reputed Japanese Company.

• A concession makes the private sector operator (concessionaire) responsible for the full delivery of services in a specified area, including operation, maintenance, collection, management, and construction and rehabilitation of the system. Importantly, the operator is now responsible for all capital investment. 
• Although the private sector operator is responsible for providing the assets, such assets are publicly owned even during the concession period. 
• The public sector is responsible for establishing performance standards and ensuring that the concessionaire meets them. 
• In essence, the public sector’s role shifts from being the service provider to regulating the price and quality of service. Table 4 and Box 6 are samples of infrastructure concessions. 
• The concessionaire collects the tariff directly from the system users. 
• The tariff is typically established by the concession contract, which also includes provisions on how it may be changed over time. 
• In rare cases, the government may choose to provide financing support to help the concessionaire fund its capital expenditures. 
• The concessionaire is responsible for any capital investments required to build, upgrade, or expand the system, and for financing those investments out of its resources and from the tariffs paid by the system users. 
• The concessionaire is also responsible for working capital. 
• A concession contract is typically valid for 25–30 years so that the operator has sufficient time to recover the capital invested and earn an appropriate return over the life of the concession. 
• The public authority may contribute to the capital investment cost if necessary. 
• This can be an investment “subsidy” (viability gap financing) to achieve commercial viability of the concession. 
• Alternatively, the government can be compensated for its contribution by receiving a commensurate part of the tariff collected

Potential strengths 

• Concessions are an effective way to attract private finance required to fund new construction or rehabilitate existing facilities. 
• A key advantage of the concession arrangement is that it provides incentives to the operator to achieve improved levels of efficiency and effectiveness since gains in efficiency translate into increased profits and return to the concessionaire. 
• The transfer of the full package of operating and financing responsibilities enables the concessionaire to prioritise and innovate as it deems most effective. 

Potential weaknesses 

• Key drawbacks include the complexity of the contract required to define the operator's activities. Governments also need to upgrade their regulatory capacity in relation to tariffs and performance monitoring. 
• Further, the long term of the contracts (necessary to recover the substantial investment costs) complicates the bidding process and contract design, given the difficulty in anticipating events over a 25-year period. 
• This drawback may be countered by allowing a periodic review of certain contract terms in the context of the evolving environment. 
• There is additional risk that the operator will only invest in new assets where it expects payback within the remaining period of the contract unless provisions for these events are set out in the contract. 
• Because of the long-term, comprehensive nature of the contracts, they can be politically controversial and difficult to organise.
•  It is argued that concessions provide only limited competition given the limited number of qualified operators for a major infrastructure network. 
• There is also concern that concessions not set out monopoly terms but provide room for additional operators where this is in the best interest of certain groups of consumers and the concessionaire cannot provide equivalent service

• BOT and similar arrangements are a kind of specialized concession in which a private firm or consortium finances and develops a new infrastructure project or a major component according to performance standards set by the government. 
• Figure 8 illustrates the BOT contract structure.
• Under BOTs, the private partner provides the capital required to build the new facility.  
• Importantly, the private operator now owns the assets for a period set by contract—sufficient to allow the developer time to recover investment costs through user charges. 
• The public sector agrees to purchase a minimum level of output produced by the facility, sufficient to allow the operator to recover its costs during operation. 
• A difficulty emerges if the public sector has overestimated demand and finds itself purchasing output under such an agreement (“take–or–pay”) when the demand does not exist. 
• Alternatively, the distribution utility might pay a capacity charge and a consumption charge, thus sharing the demand risk between the public and private partners. 
• BOTs generally require complicated financing packages to achieve the large financing amounts and long repayment periods required. (See Box 7). 
• At the end of the contract, the public sector assumes ownership but can opt to assume operating responsibility, contract the operation responsibility to the developer, or award a new contract to a new partner. 
• The distinction between a BOT-type arrangement and a concession—as the term is used here—is that a concession generally involves extensions to and operation of existing systems, whereas a BOT generally involves large "greenfield" investments requiring substantial outside finance, for both equity and debt. 
• However, in practice, a concession contract may include the development of major new components as well as extensions to existing systems, and BOTs sometimes involve expansion of existing facilities. 
• There are many variations on the basic BOT structure including build–transfer–operate (BTO) where the transfer to the public owner takes place at the conclusion of construction rather than the end of the contract and 
• build–own–operate (BOO) where the developer constructs and operates the facility without transferring ownership to the public sector. 

• Under a design–build–operate (DBO) contract, ownership is never in private hands.
• Instead, a single contract is let out for design, construction, and operation of the infrastructure project. 
• The questions of ownership and the timing of the transfer are generally determined by local law and financing conditions, and the number of possible permutations is large. (See Box 8). 

• With the design–build–finance–operate (DBFO) approach, the responsibilities for designing, building, financing, and operating are bundled together and transferred to private sector partners. 
• DBFO arrangements vary greatly in terms of the degree of financial responsibility that is transferred to the private partner. 

Potential strengths

•  BOTs have been widely used to attract private financing to the construction or renovation of infrastructure. 
• BOT agreements tend to reduce commercial risk for the private partner because there is often only one customer, the government. 
• The private partner must be confident however that the purchase agreement will be honored .
• An advantage to DBFO projects is that they are financed partly or completely by debt, which leverages revenue streams dedicated to the project. 
• Direct user fees (like tolls) are the most common revenue source. 
• However, other sources of finance in the road sector, for instance, might include lease payments, shadow tolls, and vehicle registration fees. 
• 
  

Potential weaknesses 

• BOTs have a project-specific application so they are potentially a good vehicle for a specific investment, but with less impact on overall system performance. 
• It can be difficult to link the increases in production brought about by a BOT with commensurate improvements on the demand side. 
• While initial capital construction costs may be reduced through the private sector’s experience, private debt may be an expensive substitute for public financing where a take–or–pay agreement is in place.
• The benefit of competition is limited to the initial bidding process and these contracts are often renegotiated during their life. 
• The tender documents and processes require careful design and adequate time.

BOT(Toll) and BOT(Annuity)

• Under BOT(Toll)construction,maintenance and toiling form part of the concession and budgetary support is restricted to a an upfront grant to the concessionaire(developer) determined through competitive bidding.
• As against this,under BOT(Annuity)construction and maintenance from part of the concession;
• the concessionaire relies on annual payments determined by competitive bidding and made out of budgetary allocations spread over a period.
• In the former,toll collections are with the concessionaire,while in the latter , the government retains the toll collections.

• Under BOT(Toll),traffic/commercial risks are borne by the concessionaire,while government bears the traffic and revenue risks under BOT(Annuity),as the concessionaire is entitled to receive annual payments. 
• As such,BOT(toll) is akin to concession,management and lease contract.
• Moreover,under this model the private developer raises loans at a higher rate of interest than if the government was to raise the same loan amount,the risk of tariff and revenue fluctuations is borne by the government.
• 
  
• In India,the planning commission has recommended BOT(toll)model as first choice followed by Engineering Procurement Concession(EPC)basis.
• The ministry of shipping ,road transport and highways favour BOT(Annuity) method because the private developers have taken projects on annuity basis,met the completion targets the disputes and arbitration for EPC contracts is higher than for BOT projects.
• The per km cost of annuity project is reported to be 22 percent higher than EPC projects.

Municipal Bond Scheme

In it,Municipal Authority raises funds from the market like the commercial enterprises and the infrastructure is developed. Access of the municipal bodies to market capital or funds is its.Now in India too,in some places -say Ahmadabad (Gujarat)-its use is made,though initially Municipal Bond Market was used in USA and in 1975 New-York city was the first one to use it.

Co-Production

It is the participation by volunteers in the production of Goods and Services.

Selling Out:

Some of the organisations may be sold not to the private sector .
In light of more alternative,more avenues for participation may be created.

Franchising

State may provide the support and give assurance to service groups,but private sector may deliver the services.

Joint-Venture

• Joint ventures are alternatives to full privatization in which the infrastructure is co-owned and operated by the public sector and private operators.
•  Under a joint venture, the public and private sector partners can either form a new company or assume joint ownership of an existing company through a sale of shares to one or several private investors. 
• The company may also be listed on the stock exchange. 
• A key requirement of this structure is good corporate governance, in particular the ability of the company to maintain independence from the government. 
• This is important because the government is both part owner and regulator, and officials may be tempted to meddle in the company’s business to achieve political goals. 
• From its position as shareholder, however, the government has an interest in the profitability and sustainability of the company and can work to smooth political hurdles. 
• The private partner assumes the operational role and a board of directors generally reflects the shareholding composition or expert representation.
• The joint venture structure is often accompanied by additional contracts (concessions or performance agreements) that specify the expectations of the company. 
• Joint ventures also take some time to develop and allow the public and private partners considerable opportunity for dialogue and cooperation before the project is implemented. 
• Under the joint venture structure, both public and private partners have to be willing to invest in the company and share certain risks. Figure 9 is the typical joint venture contract’s structure.

Potential strengths 

• Joint ventures are real partnerships of the public and private sectors that match the advantages of the private sector with the social concerns and local knowledge of the public sector. 
• Under a joint venture, all partners have invested in the company and have an interest in the success of the company and incentives for efficiency. 

Potential weaknesses 

• Government’s dual roles as owner and regulator can lead to conflict of interest. 
• Joint ventures also have a tendency to be directly negotiated or to follow a less formal procurement path, which can lead to concern for corruption. 

PROGRESS OF PPP PROJECTS IN INDIA

The recent economic downturn reinforced the need for entering infrastructure investment for greater productivity and growth.this in turn underscored the importance of PPPs in effectively harnessing the required resources. PPPs offer a number of advantages in terms of leveraging public capital to attract private capital and undertake a larger number of infrastructure projects,introducing private sector expertise and cost-reducing technologies as well as bringing in efficiencies in operation and maintenance.Hence,more than their fiscal implications,PPPs are tools to fulfil the basic obligations of governance to provide better infrastructure services(with large externalities),by increasing the accountability of the private sector as a service provider.

Yet,attracting private capital through PPP is neither easy nor automatic.a key pre-requisite is to lay down a policy ,legal and regulatory framework that assures a fair return for investors,protects the interests pf users,especially the poor,and assumes quality supply at reasonable cost.For this purpose,it is important that issues relating to the overarching PPP policy,incorporating inter alia the models to be used,contract documents to be adopted,procurement strategies and templates to be employed and mechanisms for financial structuring to be considered,are clearly outlined abinitio at the level of the sponsoring agencies,including state governments.

The government of India is promoting PPPs as an effective tool for bringing private sector efficiencies in creation of economic and social infra-structure assets and for delivery of quality public services.By end March 2014 there were over 1300 projects in the infrastructure sector with a total project cost(TPC) of Rupees 6,94,040 crore.These projects are at different stages of implementation ie..bidding,construction and operational.

1)Viability Gap Funding for PPP Projects:

Under the scheme for financial support to PPP in infrastructure (Viability gap funding) schemes-178 projects have been granted approval with a TPC of 88,697 crore rupees and VGF support of 16,894 crore, of which 1455 crore has been disbursed.

2)Support for Project Development of PPP Projects.

The India infrastructure Project Development fund(IIPDF) was launched in December 2007 to facilitate quality project development for PPP projects and ensure transparency in procurement of consultants and projects.So far 53 projects have been approved with IIPDF assistance.

3)National PPP capacity Building programme: 
The national PPP capacity building programme was launched in December 2010,and has been rolled out in 16 states and 2 central training institutes,ie..the Indian Maritime University and Lal Bahahdur Shashtri National Academy of administration. The roll out in the respective institutes commenced in 2011-12.So,far  160 training programmes have been conducted to train over 5000 public functionaries who deal with PPPs in their domain.

4) Online tool-kits for PPP projects-
for five sectors are available on the Department of Economic Affairs,Ministry of Finance,website on PPPs ie..www.pppinindia.com.The PPP toolkit is a web-based resource that has been designed to help improve the quality of infrastructure PPPs in India and to improve the quality of infrastructure PPPs in India and to improve the quality of infrastructure PPPs that are implemented in India.

Public-Private Partnership(PPP) Cell

The PPP cell,Department of Economic Affairs,Ministry of Finance is the Secretariat for Public-Private-Partnership Appraisal Committee(PPPAC) for appraisal and approval of central Sector PPP Projects,and Empowered Institution(EI) for the projects posed for viability Gap Funding(VGF) support and India Infrastructure Project Development Fund(IIPDF).The meetings of PPPAc and Empowered Committee are held under the chairmanship of secretary,economic affairs.Besides,the PPP Cell is also responsible for matters concerning Public Private Partnerships,including policy,schemes,programmes and capacity building.

Approval of Central Sector PPP Projects

The PPPAc has been constituted with the approval of cabinet Committer on Economic affairs to establish an appraisal and guideline for PPP projects in the central sector on the lines of the PIB. The PPPAc is chaired by secretary,Economic Affairs with Secretaries of Department of Expenditure,Department of legal affairs,Planning commission and the sponsoring Ministry/department as members.Since its constitution in January 2006,the public private partnership appraisal committee(PPPAC) has granted approval tp 275 central project proposals with TPC of Rupees 3,07,228.47 crore.

Viability Gap Funding for PPP Projects

A unique characteristics of infrastructure projects is that the positive externalities caused by projects cannot be captured by project revenues alone.Hence,a project may be economically essential but commercially unviable. Such projects ,which are marginally viable or unviable, can be made financially attractive though a grant.The scheme for financial support to PPPs in infrastructural(viability gap funding scheme) provides VGF support to PPP projects upto 20% of the total Project cost(TPC) of the project.Under the scheme since its constitution,178 projects have been granted approval with TPC of rupees 1,455.47 crore has been disbursed as Viability Gap funding(VGF). A budget provision of Rupees 670.00 crore for BE 2014-15 and for Rupees 10,000 crore for the 12th FYP(2012-17) have been made based on the requirements indicated by the sponsoring authorities of the projects as well as the number of projects already granted approval.

Development of PPP Toolkits

The Government of India has been developing several enabling tools to promote PPPs. These tools are vital to catalyze investments for building new infrastructure and improve the efficient operation and management of assets over their lifetime and ensure real focus on service delivery. With a view to supporting and guiding urban local bodies(ULBs) in the development of PPP Projects, a water supply toolkit and urban local bodies (ULB) in the development of PPP projects, a water supply toolkit and urban transport toolkit were launched in January 2010.The toolkit act as a ready reference guide to all ULBs in the country and aim to ensure widespread access to infrastructural financing through the PPP framework.For the purpose of preparation of the toolkit,service level assessment of 16 sample cities in the state of Maharashtra was undertaken.


The toolkit has been developed after a review of existing PPP documentation and draws experience from existing PPP projects such as the performance based management contract in Latur,concession for water supply and sewage in Salt Lake city bus transport in Indore.Term sheets have been drafted for each PPP structure based on the learning of the documentation review and the study of concession contracts.Each term sheet contains a brief reference guide for understanding the key clauses applicable under the specific PPP Structure.the clauses presented  in the term sheet aim at guiding a service provider in drafting a contract for the selected PPP structure for the identified projects in urban water supply/urban transport sectors.
The toolkit details the key processes such as steps involved in identification of suitable PPP structure and processes involved in implementation ;preparatory work for to be done for the identification of a PPP structure;viability assessment of projects identifies on PPP basis;identification and allocation of risks amongst the public entity and private operator /developer and selection of a suitable contract structure;and procurement process to be followed if the ULB decides to implement the project on a PPP basis.

3P India

 An institution to provide support to mainstreaming PPPs called 3P India with a corpus of Rupees 500 Crore,was announced in the budget Speech for 2014-15.work for establishing the institution is in progress.

PPP Pilot Initiatives

The Department of Economic Affairs is support central Ministries,State Governments and urban local bodies in structuring PPP Projects in challenging sectors.The object of the initiatives is to develop robust PPP Projects  and successfully bid them to establish their replication potential in the sectors concerned.The pipeline of projects is across sectors and includes projects currently under bid process,projects where bid documents are ready for launch to the market and projects where we are in development /planning phase.the project/sectors are-

i)Lonavala Water Supply Project for 24*7 Supply

ii)Mumbai Solid Waste Management (MSW) and Waste to Energy(WTE)Project

iii)A controlled Atmosphere(CA)Based Storage Value Chain.

iv)Siarmal Opencast Coalfield Project.

vi)Pura(Provision of Urban amenities in Rural areas)

vii)Health

viii)Education.

An Analysis  of the creation of infrastructure in physical terms indicates that while the achievements in some sectors have been remarkable during the eleventh Plan as compared to the previous FYP ,there has been some slippages in some sectors.The success in garnering private sector investment in infrastructure through the PPP route during the Pan has laid solid foundation for a substantial step up in private sector funding in coming years.PPPs are expected to augment resource availability as well as improve the efficiency of infrastructure service delivery.During the Plan,administrative ministries and other government agencies have adopted the standardised model concession agreements and bid documents to streamline and accelerate the decision making is a fair,transparent and competitive manner.Several State governments and local bodies have also rolled out PPP Projects.

The Planning Commission,in its approach paper,has projected an investment of over 45 lakh crore rupees during the twelfth Plan(2012-2017) ,it is projected that at least 50% of this investment will come from private sector as against the 36 percent anticipated in the Eleventh Plan; and public sector investment will need to increase to over 22.5 Lakh crores rupees as against an expenditure of 13.1 lakh crores during the eleventh Plan.Financing Infrastructure will,therefore,be a big challenge in the coming years and will require some innovative ideas and new models of financing.

Benefits and Strengths

The emergence of PPPs is seen as a sustainable financing and institutional mechanism with the potential of bridging the infrastructure gaps .PPPs primarily represent value for money in public procurement and efficient operation.Apart from enabling private investment  flows,PPPs also deliver efficiently gains and enhanced impact of the investments.The efficient use of resources, availability of modern technology, better project design and implementation , and improved operations combine to deliever efficiency gains and enhanced impact of the investments.

The efficient use of resources,availability of modern technology,better project design and implementation,and improved operations combine to deliver efficiency and effectiveness gains which are not readily produced in public sector  projects also lead to faster implementation ,reduced life cycle costs,and optimal risk allocation.

Private management also increases accountability and incentives performance standards and maintenance of required service standards.Finally,PPPs result in improved delivery of public services and also promote public sector reforms.

The foremost benefit of adopting the PPP model is the ability to access capital funding from the private sector,considering that funding is getting increasing reluctance in both the public and private sector to absorb all the costs and assume all the risks of building and operating these.

PPP strengths and Weakness

• Robust and dynamic structure
• Government is in an enabler role
• Government ownership is high
• Governance Structure ensures consumer and public interests are safeguarded
• Commercial interest protected
• Domicile risks to parties that are well equipped to deal with them.
• transparent and well conceived contacts.
• Documentation recognises rights and responsibilities of all projects related parties
• Concerns of all stakeholders addressed
• Involves participation of a large number of institutions ,government ,politicians ,banks financial institutions ,investors,contractors,consumers,NGOs etc. Since the private sector assumes the risks of non performance of assets and realises its returns if the assets perform,the PPP process involves a full scale risk appraisal.This results in better cost estimation and better investment decisions.

PPPs are not an unqualified success.despite the growing interest in and adoption of PPPs,they have been facing criticism from civil society organisations,public interests groups,media,and other stakeholders.Wide publicity of some of the problematic PPPs has raised concerns about the role of the private sector in public services.Lacks of trust in the private sector with public service,tariff increases,layoffs,and poor stakeholder management have contributed to this wariness.The detractors also accuse PPPs of high procurement costs,which deter small companies and curtail competition. However,many PPP experts attribute the failure of some of these projects to faulty ,rushed ,non competitive and non transparent application of the PPP principles.

To make PPP model viable and sustainable ,the government will have to continue to safeguard public interest and monitor the performance of private sector generally and privatised undertakings in particular. The determination and commitment of Government will have to be matched by readiness and co-operation from the private sector will have to be transformed into a smart partnership of co-operation and complementary that emphasises win-win situations.The drive towards diversified growth must be led by the private sector,which is expected to display the qualities of good corporate citizenship including the promotion of citizen empowerment.The public sector will have to progressively diminish its role in the provision of marketable goods and services and will rather seek to facilitate and,where necessary ,regulate the operation of business by the private sector.

The government must ensure that privatisation should not lead government to curtail any of its core responsibility which include good governance,safety and welfare of its citizens.The process must be carried out with a human face and efforts be made to safeguard national interests.It is hoped that a healthy public private partnership shall foster inclsuive growth and social empowerment besides contributing to improved service delivery and good governance.