Based on the guidance of Mr. Ajay Saxena – Field Expert, Head PPP Cell, MITRA
What is PPP and Why is it Needed?
Public–Private Partnership (PPP) is a collaboration between the government and the private sector where both work together to provide public infrastructure or services.
In this model:
Government – Policy, approvals, land availability, monitoring Private Partner – Fund mobilization, construction, operation, and maintenance
Why it’s needed:
To reduce pressure on public finances To complete projects faster To utilize private sector’s technical expertise and management efficiency To ensure long-term maintenance of assets
Examples: Pune Metro, Delhi–Gurugram Expressway, Mumbai Monorail – all implemented under PPP models.
PPP Project Life Cycle
Planning – Prepare DPR, funding plan, feasibility assessment Financial Closure – Secure debt and equity, open escrow account Construction Phase – Complete work in 2–3 years; delays reduce revenue years and attract penalties Operations Phase – Revenue generation, service delivery, maintenance End of Concession Period – Project handed back to government or renewed
Concession Period
Determined based on asset life, not just cost recovery. Example: 2 years construction + 20 years revenue = 22 years concession period. If road capacity is exhausted in 12 years, concession cannot exceed 12 years.
VGF (Viability Gap Funding)
Used when project costs cannot be recovered within the defined concession period. Provided after equity is exhausted and in proportion to loan disbursement. Objective – Ensure the required IRR (Internal Rate of Return) to make the project viable for investors.
Key Factors to Keep in Mind for PPP Projects
1. Clear Agreements and Documentation
Appointed Date is not just after LOA but after both parties fulfill pre-conditions (land handover, financial closure). Contracts should clearly define scope of work, timelines, payment terms, penalties, and dispute resolution mechanisms.
2. Financial Feasibility – NPV, IRR, WACC
NPV (Net Present Value)
Meaning: Present value of all future cash flows, adjusted for the time value of money.
Formula:
NPV = \sum_{t=1}^{n} \frac{CF_t}{(1 + r)^t} – C_0
CF_t = Expected cash flow in year t r = Discount rate (usually WACC) C_0 = Initial investment Decision Rule: NPV > 0 → Project is profitable
Example:
Investment = ₹1,000 Cr, annual revenue for 5 years = ₹300 Cr, Discount rate = 10% → NPV = ₹137 Cr (positive, project viable).
IRR (Internal Rate of Return)
Meaning: The discount rate at which NPV = 0. Represents the project’s internal profitability.
Formula:
0 = \sum_{t=1}^{n} \frac{CF_t}{(1 + IRR)^t} – C_0
Decision Rule:
IRR > WACC → Accept IRR < WACC → Reject
Example:
If IRR = 14% and WACC = 11.8%, IRR > WACC → Project is financially attractive.
WACC (Weighted Average Cost of Capital)
Meaning: Average cost of debt and equity, used as a discount rate for NPV.
Formula:
WACC = \frac{(Kd \times D) + (Ke \times E)}{D + E}
Kd = Cost of debt Ke = Cost of equity D = Debt amount E = Equity amount
Example:
Kd = 10%, Ke = 16%, Debt : Equity = 70 : 30
WACC = \frac{(0.10 \times 70) + (0.16 \times 30)}{100} = 11.8\%
PPP Decision Rule:
WACC = Minimum acceptable return If NPV > 0 and IRR > WACC → Approve the project Else → Reject
3. Construction Phase Planning
Timely completion is critical; delays reduce concession revenue period and profitability.
4. Monitoring and Quality Control
Regular inspections, quality checks, safety protocols, and environmental compliance are essential.
5. Revenue and Tariff Planning
Tariffs (tolls/user charges) must be transparent and citizen-friendly. Annual escalation rates (e.g., WPI-based) should be pre-defined in contracts.
Urban PPP Project Examples
Pune Metro – Reduced traffic congestion, improved public transport capacity. Navi Mumbai International Airport – Land and approvals by government, funding and execution by private partner. Nagpur Waste-to-Energy Plant – BOT model project turning waste into electricity.
Conclusion
PPP is not just a contract—it’s a long-term partnership. With accurate financial calculations (NPV, IRR, WACC), clear contract terms, and a focus on public interest, PPP projects can accelerate infrastructure growth, improve urban services, and drive India’s economic development.
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