Private Public Partnership In Infrastructure Projects

Auditing Guidelines & Methodology

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Value Delivered

Agenda

PPP An Introduction PPP Models Private Sector Government Role in PPP PPP Audits Open Forum

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PPP An Introduction
United Nations defines public private partnerships as
Innovative methods used by the public sector with the private sector who bring their capital and ability to deliver projects on time and to budget, while the public sector retains the responsibility to provide these services to the public in a way that benefits the public and delivers economic development and improvement in the quality of life The private sector with its resources, management skills and technology and The public sector with its regulatory actions and protection of the public interest

Private Public Partnership

PPPs combine the best of both worlds

Transfer of public assets,

PPP infrastructure projects typically involve

Delegation of government authority for recovery of user

charges,

Private control of monopolistic services and Sharing risks / contingent liabilities by the government

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PPP Models

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PPP Models

B IL ,O E A EA D U D PRT N

L AE P R T A D E S ,O E A E N T A SE T RNFR A facility which already(LO) exists and is under operation, is

The private partner is responsible to design, build,

T A S E (B T R N F R O)

operate (during the contracted period) and transfer back the facility to the public sector. The private sector partner is expected to bring the finance for the project and take the responsibility to construct and maintain it. The public sector will either pay a rent for using the facility or allow it to collect revenue from the users.

entrusted to the private sector partner for efficient operation, subject to the terms and conditions decided by mutual agreement.

The contract will be for a long period and the asset will

be transferred back to the government at the end of the contract.

B IL ,O N P R T A DT A S E U D W,O E A E N R N F R (B O) OT

D S N U D IN N E P R T A D E IG ,B IL ,F A C ,O E A E N M IN A (D F M A T IN B O )

This is a variation of the BOT model, except that the

In this model of PPP the private partner takes the entire

ownership of the newly built facility will rest with the private party during the period of contract.

responsibility for the design, construction, finance, operation and maintenance of the project for the period of concession.
The private partner to the project will recover its

The public sector partner will contract to purchase the

goods and services produced by the project on mutually agreed terms and conditions.
The project built under PPP will be transferred back to

investment and return on investments (ROI) through the concessions granted or through annuity payments etc.
The public sector may provide guarantees to financing

the public sector partner at the end of the contract period, generally at the residual value
Tthe private partner recovers its investment and

agencies, help with the acquisition of land and assist to obtain statutory and environmental clearances..

The private sector partner has the right to collect and keep

reasonable return agreed to as per the contract.

in full or part the project revenue over a specified period called Concession Period.

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Private Sector Government of India Role in PPP

Private sector come into the PPP arrangements primarily with a) Profit motive, and b) With a view to pursuing their business prospects associated with the PPP projects.

The Government of Indias support is available for only the following sectors: a) Roads and bridges, railways, seaports, airports, inland waterways; b) Power;

The private sector partners have to bring in not only the required finances and suitable technology for the project, but also have to be innovative in approach. They must also have excellent project management and O&M capability and must be able to demonstrate their commitment to the partnerships.

c) Urban transport, water supply, sewerages, solid waste management, &other physical infrastructure in urban areas; d) Infrastructure projects in special economic zones & International Convention Centers and other tourism infrastructure projects. Procedures & Powers

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Degree and Involvement of Private Sector in service Concession Agreements*

* - Source NHAI

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PPP Options - Summarized

Mode Asset Ownership O&M Capital
Investment Commercial

Risk

Duration (Years)

Service Contract Management Contract Lease Concession BOT / BOOT Divestiture

Public Public

Public and Private Private

Public Public

Public Public

1-2 3-5

Public Public Private and Public Private and Public

Private Private Private Private

Public Private Private Private

Shared Private Private Private

8-15 25-30 20-25 Indefinite

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Recipe for successful Public Private Partnerships Projects

The key features for the success of PPPs in India include the following:
A stronger policy and

The public authority will be expected to undertake thorough groundwork that will involve
a)Clear definition of deliverables

regulatory framework, both at the Centre and States. Need to develop appropriate market instruments and capacity to raise long term equity and debt. A shelf of bankable PPP projects. Better and stronger capacity to manage PPP projects.

& Comparator costs legal framework

b)A sound understanding of the c)Factors influencing the choice

of business model

d)Cost and revenue projections

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Public Private Partnership Audit

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Why Audit? Objectives

? Why

s ctive Obje

To Secure its minority stake in the project where

To provide unbiased, objective assessment of

the private sector has a majority

To ensure the work culture frictions between public

whether public resources are responsibly and effectively managed to achieve the intended results.
To provide a reasonable assurance to all

and private sectors are ironed out. agreed milestones.

To have constant updates on the progress towards To have controls and checks in place To provide assurance to investors and other

stakeholders about the wisdom, faithfulness, integrity, economy, efficiency and effectiveness of the PPP arrangement
To ensure that the infusion of the private sector

interested parties

agency into the project has resulted in improving the value for money for the government, as Private Sector has easier access to Funds.

To facilitate continuous monitoring and compliance

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Timing of PPP Audits

The quantum and magnitude of the project - especially the volume of the concession The financial commitments of the public sector partner. The time frame for the completion/ concession period of the project, as also all other risk assessments

With Heavy Investment Commitment:

Factors Large Projects

Planned and executed even before the completion of the project

With limited Investment Commitments:

Planned and undertaken at different stages of the project

Timing of Audit

Smaller Magnitude:
Normally after the completion of the project

Large Projects

Small Project

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Scope of Public Private Partnership Audit

The audit of PPPs by the SAI may cover the aspects of the project indicated hereunder

The data, records, analysis and the decision process of the government department / public sector agency Documents and files leading to the formulation, appraisal and approval of the project. The process of identifying the private sector partner, requests for proposals, bidding and tendering process of the contract with due diligence to fairness, transparency and objectivity. In-depth analysis of the project documents Accounts documents, bills, records and schedules relating to the construction, and oversight arrangements

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Scope of Public Private Partnership Audit..

Value for money considerations and safeguarding the public interest. Operation and maintenance of the assets, tariff / toll / user-charges collection and accounting and revenue sharing arrangements, escrow accounts. Quality and standards of the service, customer protection, dispute resolution and asset transfer arrangements etc. End of the project operations including valuation of residual assets, decommissioning, dispute resolution mechanism, etc. System to verify the accuracy and reliability of reporting the results. Economy in the cost of operations and avoiding "padding" of costs, revenue sharing arrangements.

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Scope of Public Private Partnership Audit..

Verification of the PPP arrangement to ensure that the public sector agency has effectively put in place a sound system to oversee the efficiency and competence of the project implementation strictly in terms of the established norms and contract conditions Actual volume of demand (viz., traffic) and revenue generation (including from commercial developments) against the projected flow and the arrangements to monitor the trend periodically. Need to re-adjust the contract period in case the Rate of Return (ROR) is higher than what was projected. Quality and consistency of service at affordable cost to the users at large etc.

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Documents to be Audited

Documents regarding the project formulation, appraisal and approval, available with the nodal ministry, promoting agency. Data and documents relating to the contract documents and concession award originated by and available with the public sector partner. Data and documents furnished to the public sector partner by the private contractor and available with the former for verification. Reports submitted by the Independent Engineers and Independent Auditors.

Note: For detailed list, Refer Annexure.

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PPP Auditing Guidelines - Methodology

METHODOLOGY
Detailed scrutiny of project documents.
International Organization of Supreme Audit Institutions (INTOSAI) provides key guidelines C&AG conducts audits of certain PPP projects basis INTOSAI guidelines

Verifying the legal and contractual obligations. Review of financial modeling and justifications for the

grant of concessions, testing revenue generation using quantitative techniques. bidding process.

Assessment of the transparency and integrity of the

Auditing Guidelines

Financial audit to verify the justification for the viability

gap funding / annuity payments.

Limited audit of the construction and engineering to verify

quality, innovations, economy and efficiency.

INTOSAI had issued its PPP Auditing Guidelines in 2001, followed by certain comprehensive recommendations in 2007

Quality test
Customized guidelines for auditors under C&AG is in the works and is to come out shortly

Engaging experts to test aspects of quality and

standards, if required. projections.

Survey to test the accuracy of collections against Customer satisfaction level analysis through sampling

techniques.

To ensure safeguarding the value of public money.

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Process of the audit of PPP

Collection of Data & Information Audit of Construction phase (Incl. monitory system) Engagement of experts & Arrangement of quality checks Audit of O&M arrangements, Revenue generation, sharing of tariff toll, Customer satisfaction.

Selection of Audit objectives

Audit Planning

Team Selection & Deployment Exit conference Research & Study by the audit team Findings, Conclusions & Reporting Entry Conference Draft audit report process & Approval Audit of Docs. Related to project formulation & Approval Management letters, Draft audit report to Dept./Entity

Audit of all PPP Contracts

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Client Base in Infrastructure

Open House

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Thank you

M.K.Dandeker & Co.,

Vignesh Shankar
Director and Principal Consultant Hand phone : +91 98840 60005 vignesh@dandekercapital.com

K.J.Dandeker
Managing Partner / Executive Director Phone : +91 4425220721 kjdandeker@dandekercapital.com

Financial Powers of PPPAC

The guidelines of the MOF, for Public Private Partnership (PPP) Projects are a) For Projects costing more than Rs.100 crores but less than Rs.250 crores will be appraised by a Committee comprising Secretary, DEA and the Secretary of the Department sponsoring the project. b) only projects in excess of this limit will be appraised by the PPPAC. where the capital cost or the underlying value of assets are more than Rs.100 crores were to be brought up before the PPPAC. For appraisal of individual projects under the National Highway Development Authority (NHDA) which are of Rs.250 crores or more but less than Rs.500 crores, a separate committee with Secretary, DEA and the Secretary, Department of Road Transport and Highways (DRTH) has been set up. It is to be noted that projects costing below the limit of Rs.100 crores will be considered and approved by the Expenditure Finance Committee / Standing Finance Committee (EFC/SFC) of the Ministry concerned. After the clearance of the relevant committees, the sponsored projects would be submitted to the Committee on Infrastructure for final approval.

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Procedure for Formulation and Appraisal of PPP Projects

The sponsoring Ministry may develop individual project proposals for the in-principle clearance of the PPPAC before inviting Expressions of Interest (EOI) from prospective investors. Then, the sponsoring Ministry may invite EOI, develop the required documents and carry out interministerial consultations. It is to be noted that the concession agreements finalized for the purpose of inviting financial bids should be cleared by the PPPAC before technical and financial bids are invited. However, in-principle approval of the PPPAC will not be required for duly approved Model Concession Agreement (MCA).

Appraisal by / Approval of PPPAC Request for Proposal (RFP) to submit financial bids should be accompanied by all agreements

After formulating the draft RFP, the sponsoring ministry will seek the clearance of the PPPAC These will be reviewed by the PPP Cell, PPPAU and Ministries concerned and their observations will be conveyed to the sponsoring Ministry for responses. The PPPAC will take a view on the Appraisal Note and the propose the same for approval of the Committee on Infrastructure under the Prime Minister.

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Model Concession Agreements (MCA)

The MCA is a carefully drafted legal document which helps the partners of the project to define and spell out mutual rights and obligations clearly and in specific contractual terms. The MCA also seeks to achieve an appropriate balance of risks and obligations shared between the partners. The MCA deals with aspects such as the mode of financing the projects mitigating and unbundling of risks allocation of risks and rewards, phasing of the investment requirements, fixing the concession periods and forfeiture of the bid security if the concessionaire fails to achieve financial close within the stipulated period.

a) b) c) d) e) f)

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