PPP model or Traditional Procurement or Privatisation ? How to Figure which way to go ?



Since the National Monetisation Pipeline ( NMP) as a strategy has been initiated by the NITI Ayog, lot of talks & discussions have emerged in the media where experts from the private sector, public space, and even some economists have shared their opinions regarding this whole concept, whether this is a viable plan or is it only good on paper.

If you ask any private player, he/she will talk about how support from the government plays a major factor in the success of PPP projects, the economist will tell that demand should match the supply for the economic feasibility of the projects and the public sector will respond that ability of the private player to execute the project is most important. So, how does one figure out the key indicators which are important, which can either lead the government to consider traditional procurement or PPP model or Privatisation?

There is so much literature, research papers, management models out there , which talk about several factors, to consider ,to figure out the model of procurement, here are few important ones which basically cover most areas. I have tried to summarise them here to keep it simple .

So basically , in any country or a state, one should analyse the eight (8) parameters to decide whether to go with a Traditional Procurement model or a PPP Model, or just Privatisation.

First, let’s discuss the what procurement models are there to consider.

1. Traditional Public Procurement model – Where the government buys services or asks a private player to deliver a project. No interaction beyond buying a product or completion of construction happens between government & private player. It’s a short duration process.

2. Management contract – Here the private player will run the project, basically will operate & maintain a project for the government.

3. BOT( Build, Operate & Transfer) – The Private player will build the asset, Operate it for some time, and return the asset to the government.

4. Privatisation– The government sells off the asset to the private player, no transfer back of asset.

Parameter 1Existing legal framework – If there is no legal act or a policy in a State or Country, like for instance in Tamil Nadu they have TN Infra Development Act, Similar in Punjab,(Punjab Infra Development Act), if such kind a legal framework is not there, then PPP model should be avoided, the government should build (Finance ) and Operate its assets on its own or privatize the assets.

Parameter 2Political Will: If the State or Federal government is inclined to PPP-based projects, then management contracts or BoT Model of PPP can be initiated, if no will is there, then it’s better to do traditional procurement or privatize the assets. ( No PPP )

Parameter 3. Fiscal Space:  If the government is in a very good fiscal state, then it can go for traditional procurement ( where it buys assets from private players and runs them ), if the financial state is not good, then PPP as a model should be considered ( like Build Operate Transfer or smart management contract ) where the private player will invest the money to build the assets and operate the assets too.

Parameter 4Economic Stability: Is the economic condition of the state or the country is in a good shape?. If it is not , then PPP models are not advisable, because the services will not generate any demand, and cash flows from the project will be highly volatile. So, it’s better to do traditional procurement only.

Parameter 5 Institutional Capability: Is there any capability within the government to write PPP project contracts, monitor PPP projects, to execute the tendering and the bidding process. If yes, then PPP models can be considered else traditional procurement or privatization is the way forward.

Parameter 6. Willingness to pay of users: If the project requires the collection of fee from the users, and there is no willingness to pay, like for instance in Road Projects ( where toll is collected ), then PPP /privatization can’t be considered, Government has to build and operate the assets. If there is will , then either a PPP model could be considered or the assets can be fully transferred to the private player ( Privatisation )

Parameter 7. The ability of users to pay:  If the users can pay the fee that will be charged by the private operator then, PPP or privatization is the way to go else just focus on traditional public procurement ( where government pays for the usage of assets )

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