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The importance of Public Private Partnerships (PPP) in addressing the challenges of providing public services and infrastructure amid increasing population pressures, urbanization, and other developmental needs. It highlights the need for durable and high-quality infrastructure supported by technological innovation, skilled workforce, and excellent project management to drive economic development and sustained growth. The article emphasizes the difficulty faced by governments in bringing together all necessary elements, leading to the exploration of PPPs as a solution to involve the private sector in public investments and service delivery.
The concept of PPPs is described with varying interpretations among stakeholders, ranging from projects with private investment for public benefit to encompassing all forms of interactions and collaborations between the public and private sectors. However, the core feature of PPPs is defined as a contract or arrangement between a government organization and a private company to provide public infrastructure or services with substantial risk transfer and performance-based remuneration for the private sector.
The article further elaborates that PPPs aim to leverage the capabilities of the private sector to complete infrastructure projects efficiently while upholding the welfare of the community and providing reasonable benefits to the private partner. The public sector retains its responsibility to offer goods and services at affordable rates without compromising quality. Both partners, public and private, benefit from balanced risk sharing, transparency, and accountability in all aspects of the PPP arrangement.
The piece includes definitions of PPPs from different sources, such as the Government of India’s Secretariat for the Committee on Infrastructure and the World Bank. It clarifies that a PPP involves the private sector in providing infrastructure assets or services that were traditionally government’s responsibility, with a focus on shared objectives and long-term commitments to quality services.It highlights the mutual benefits of collaboration between the public and private sectors, emphasizing the need for risk sharing, accountability, and value for money to ensure successful PPP projects.
Types of PPP:
1. Institutionalized PPPs: Institutionalized PPPs involve joint ventures (JVs) between public and private sector stakeholders to carry out PPP projects. Both parties share risks and responsibilities to provide public services on a long-term basis. An example of this type is the Bangalore airport, developed through a joint venture of the Airports Authority of India (AAI), Karnataka State Industrial Investment and Development Corporation Ltd. (KSIIDC), and private promoters.
2. Contractual PPPs: Contractual PPPs operate under the concession model, where a public sector unit grants a facility to a private sector partner, who designs, constructs, and operates the PPP project for a specific period. Sometimes, the operation of the facility may be contracted out to another private party. Users of the facility pay charges that accrue to the JV or private sector partner.
Under these PPP models, the following approaches are commonly adopted:
3. Build, Operate & Transfer (BOT): The private partner is responsible for designing, building, operating (during the contracted period), and eventually transferring the facility back to the public sector. The private sector partner finances the project and may collect revenue from users or receive rent payments from the public sector. Examples include national highway projects contracted out by NHAI.
4. Lease, Operate & Transfer (LOT): In this type of PPP, an existing facility is leased to a private sector partner for efficient operation, subject to mutually agreed terms and conditions. After the lease period ends, the asset is transferred back to the government. Examples include leasing educational institutions or hospitals to private sector entities for management and control.
5. Build, Own, and Operate (BOO): The private party builds, operates, and fully owns the facility during the contract period. Most risks related to planning, design, construction, and operation are transferred to the private partner. The public sector agrees to purchase the goods and services produced by the project on mutually agreed terms. After the contract period, the facility may be transferred back to the government.
6. Design, Build, Finance & Operate (Concessions): The private party takes on the responsibility for designing, constructing, financing, and operating or operating and maintaining the project for the concession period. The private participant recovers its investment and return on investments (ROI) through concessions or annuity payments granted by the public sector partner. This model transfers project risks related to design, financing, and construction to the private partner.
7. Operation Concessions: In this PPP arrangement, the private sector partner is responsible for design, financing, and construction and retains the right to collect and keep project revenue over a specified period known as the “Concession Period.” After the concession period ends, the facility may be renewed or returned to the public partner. Examples include road projects, toll bridges, and four-lane/six-lane projects.
These various PPP models offer different approaches to involve the private sector in public infrastructure and service provision, allowing for shared risks, efficient project execution, and long-term benefits to both public and private partners.
The Need for PPP Audit:
As the number of PPP projects between the government and private sector increases, the potential for malpractices and misuse of resources also rises. To ensure that these partnerships result in quality service, viable developments, and value for money, it becomes essential to conduct PPP audits. Audits act as a deterrent against wrongdoings and provide reasonable assurance to all stakeholders that public interests have been adequately protected.
Aspects Covered under PPP Audits:
PPP audits cover a wide range of areas and aspects to identify misstatements and misappropriations. The scrutiny includes:
1. Evaluation of the decision process behind choosing the PPP route instead of direct execution.
2. Review of documents related to project formulation, appraisal, and approval.
3. Examination of the private sector partner selection process, bidding, and tendering with emphasis on fairness, transparency, and objectivity.
4. In-depth analysis of project documents, including agreements, financing arrangements, and justification for viability gap funding.
5. Monitoring actual demand and revenue generation against projections, ensuring quality and consistency of service, and assessing the economy to avoid excessive costs.
6. Checking accounting documents, construction records, revenue generation and sharing models, customer protection measures, dispute resolution, and asset transfer arrangements.
PPP Audit Process:
The audit of PPP projects requires a combination of skills and innovative methodologies to target different types of PPP arrangements accurately. The process includes:
1. Detailed review of project documents from initial stages to approval.
2. Verification of contracts, agreements, and legal obligations.
3. Feasibility study and financial analysis.
4. Assessment of transparency and integrity in the bidding process.
5. Auditing construction quality, efficiency, and compliance with standards.
6. Surveys and tests to check revenue projections and customer satisfaction.
7. Safeguarding the value of public money through asset valuation.
Sequential Approach in PPP Audits:
To conduct a logical and comprehensive PPP audit, a sequential approach is followed. This involves analyzing the project formulation and approval process as the first stage, followed by a systematic evaluation of different aspects and components of the partnership arrangement.
Overall, PPP audits are critical in ensuring accountability, transparency, and the achievement of value for money in PPP projects. They play a vital role in mitigating risks, identifying potential issues, and promoting the effective and ethical use of public resources in collaboration with the private sector.
Audit of Project Formulation and Approval:
During the audit of project formulation and approval, the following documents are scrutinized: Strategic Plan, Feasibility Report, Detailed Project Report, Shareholders’ Agreement, State Support Agreement, Operation, Maintenance and Development (OMD) Agreement, Concession Agreement, Technical Operation Agreement, Lease Agreement, Substitution Agreements, Independent Auditor’s Agreement, Escrow Account Agreement, and other subsidiary agreements. The auditor checks if the strategic plan justifies the project’s need and if the feasibility reports align with approved specifications. Cost estimates are reviewed for transparency, and cash flow projections are analyzed to ensure they justify the total capital cost and feasibility of funding. The ROI calculations and approval processes are also checked to ensure proper procedures were followed.
Review of Concession Period:
The auditor reviews the concession granted to the concessionaire in terms of the quantum and the period of the concession. They assess the reasonableness of the concessions, including the magnitude and duration. This includes verifying the selection process of the concessionaire, competitive bidding, upfront disclosure of project parameters, and clarity on revenue sharing with the government. The auditor ensures that the concession agreement is clear, specific, and does not provide room for unintended gains or claims by the private partner.
Checking of Risk Allocation:
The auditor examines the balanced and fair allocation of risks between the parties involved in the PPP arrangement. They check if the risks are allocated to the parties best suited to manage them. The auditor reviews financial risks, revenue risks, government guarantees, and contingent liabilities. They assess substitution clauses and actions to be taken in case of unexpected changes in government policy or economic downturns.
Audit of Financial Risks:
The transfer of financial risks is verified by the auditor to ensure that the private participant bears the agreed-upon risk, and the public sector partner does not retain an excessive portion. The auditor checks the loan terms, financing arrangements, and interest payments to confirm that the cost of financing the project is reasonable. Performance bonds furnished by the private sector partner are thoroughly examined for adequacy and appropriateness.
Audit of Viability Gap Funding (VGF):
Auditors carefully assess the actual funding gap for the project, considering the total capital cost, revenue generation projections, tariff/toll structure, rate of return, and cash flow. Viability gap funding provided by the government is checked to ensure it aligns with the guidelines and terms set forth for deserving cases.
Audit of Tariff/Toll/User Charges:
The auditor reviews the tariff, toll, or user charges applicable to the infrastructure facility created under the PPP arrangement. They ensure that the charges are in line with regulations set by independent authorities or relevant statutes. The auditor also verifies that the return on investment for the private partner does not exceed established norms or industry standards, where applicable.
Audit of Total Project Cost:
The auditor closely examines the Total Project Cost (TPC) as it determines various aspects of the PPP, including construction, operation, and management costs, debt-equity mix, user charges, viability, financing pattern, financial and economic rate of return. The auditor ensures that the TPC includes only essential items and adheres to accounting standards, avoiding intentional inflation of costs.
Audit of Bidding and Evaluation: The auditor critically evaluates the selection process of the private participant to ensure transparency and integrity. They verify if proper procedures were followed from the beginning, ensuring fair competition and value for public money.
Audit of Construction of the Project: The focus of this audit is on the quality of the end product. Independent auditors appointed on behalf of the public sector partner monitor the project activities, ensuring timely completion, adherence to standards, and compliance with specifications. The public auditor reviews the documents, test reports, and qualifications in the final report to check for discrepancies and adherence to guidelines.
Audit of Monitoring of the Project Construction Activities: The audit of project construction activities involves checking the compliance and expenditure data to ensure they are proper and reasonable. The auditor also reviews the performance of the independent auditor, verifying their reports, guidelines, and accountability.
Audit of Commercial Development: When PPP projects lead to commercial developments, the auditor examines the cost incurred and revenue generated from these facilities. The audit focuses on the benefits to the project partners and the justification of such commercial openings.
Audit of Operation, Maintenance & Development and the Collection of Revenue: In PPPs, the private partner handles the Operation, Maintenance, and Development (OMD) of the facility. The auditor checks the terms and conditions of the concession agreement related to OMD, TPC, cost of O&M, taxes, ROI, and user charges. Cash flows and data from the public audit are used to assess the reasonableness of user charges, concession periods, and justification for contracting. The auditor verifies the accuracy and faithfulness of statements of accounts, traffic/user charge information, and other data provided by the private sector partner. They may seek clarifications and assurances from functionaries in case of doubts.
Overall, the PPP audit process is comprehensive and covers various critical aspects to ensure transparency, value for public money, and successful execution of the PPP projects for the benefit of the community.
Conclusion:
Public-Private Partnerships (PPPs) have become an essential means to address the growing infrastructure needs and deliver public services efficiently. However, to ensure that these partnerships truly provide value for money and benefit all stakeholders, including the public, private partners, and end-users, PPP audits play a crucial role.
PPP audits are comprehensive and involve examining various aspects of the partnership, from project formulation and approval to construction, operation, and revenue generation. Auditors must ensure transparency, fairness, and adherence to regulations throughout the process. They also evaluate the allocation of risks, financial viability, and commercial development to prevent any misuse or malpractices.
Customer satisfaction is of utmost importance in PPPs, and auditors should verify that the project brings technological excellence, innovation, and reliable services to the users. Grievance redressal mechanisms should be in place to address user concerns effectively.
One of the most challenging tasks in PPP audits is the valuation of assets and infrastructure facilities transferred to the private partner. The auditor must carefully verify the value of land, facilities, and other assets provided to ensure proper accounting and future decision-making.
The findings and conclusions of the audit report should be supported by evidence and discussed with all stakeholders. The audit recommendations help guide future actions and improvements in existing PPP partnerships.
Overall, PPP audits act as a safeguard against wrongdoings, ensuring that PPPs fulfill their objectives of providing value for money, promoting innovation, and delivering high-quality services to the public. With proper monitoring and evaluation, PPPs can continue to be an effective tool for infrastructure development and public service delivery in the future.
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