private public partnership - audit guidelines

8/6/2019 Private Public Partnership - Audit Guidelines

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Private Public PartnershipIn Infrastructure Projects

M.K.Dandeker & Co.,Value Delivered Value Delivered

Auditing Guidelines& Methodology


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Agenda

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PPP An Introduction

PPP Models

Private Sector Government Role in PPP

PPP Audits

Open Forum


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PPP An Introduction

The private sector with its resources, management skills and technology and

The public sector with its regulatory actions and protection of the public interest

PPPs combine thebest of both worlds

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 deliverseconomic development and improvement in the quality of

life

United Nationsdefines publicprivatepartnerships as

PPP infrastructureprojects typically involve

Transfer of public assets,

Delegation of government authority for recovery of user charges,

Private control of monopolistic services and

Sharing risks / contingent liabilities by the government

Private PublicPartnership

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PPP Models

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PPP Models

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BUILD,OPERATEAND

TRANSFER(BOT)

The private partner is responsible to design, build,operate (during the contracted period) and transfer backthe facility to the public sector.

The private sector partner is expected to bring thefinance for the project and take the responsibility toconstruct and maintain it.

The public sector will either pay a rent for using the

facility or allow it to collect revenue from the users.

LEASE,OPERATEAND

TRANSFER(LOT)

A facility which already exists and is under operation, isentrusted to the private sector partner for efficientoperation, subject to the terms and conditions decidedby mutual agreement.

The contract will be for a long period and the asset willbe transferred back to the government at the end of thecontract.

BUILD,OWN,OPERATEANDTRANSFER

(BOOT)

This is a variation of the BOT model, except that theownership of the newly built facility will rest with theprivate party during the period of contract.

The public sector partner will contract to purchase thegoods and services produced by the project on mutuallyagreed terms and conditions.

The project built under PPP will be transferred back tothe public sector partner at the end of the contract period,generally at the residual value

Tthe private partner recovers its investment andreasonable return agreed to as per the contract.

DESIGN,BUILD,FINANCE,OPERATEAND

MAINTAIN(DBFOM)

In this model of PPP the private partner takes the entireresponsibility for the design, construction, finance, operationand maintenance of the project for the period of concession.

The private partner to the project will recover itsinvestment and return on investments (ROI) through theconcessions granted or through annuity payments etc.

The public sector may provide guarantees to financingagencies, help with the acquisition of land and assist toobtain statutory and environmental clearances..

The private sector partner has the right to collect and keepin full or part the project revenue over a specified periodcalled Concession Period.


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Private sector come into the PPParrangements primarily with

a) Profit motive, and

b) With a view to pursuing their business prospects associated with thePPP projects.

The private sector partners have tobring in not only the required financesand suitable technology for the project,but also have to be innovative inapproach.

They must also have excellent projectmanagement and O&M capability andmust be able to demonstrate their commitment to the partnerships.

Private Sector Government of India Role in PPP

The Government of Indias support isavailable for only the following sectors:

a) Roads and bridges, railways,seaports, airports, inland waterways;

b) Power;

c) Urban transport, water supply,sewerages, solid waste management,&other physical infrastructure in urbanareas;

d) Infrastructure projects inspecial economic zones & International

Convention Centers and other tourism infrastructure projects.

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Procedures & Powers


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Degree and Involvement of Private Sector in service ConcessionAgreements*

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* - Source NHAI


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Mode AssetOwnership O&M CapitalInvestmentCommercial

Risk Duration(Years)

ServiceContract

Public Public andPrivate

Public Public 1-2

Management Contract

Public Private Public Public 3-5

Lease Public Private Public Shared 8-15

Concession Public Private Private Private 25-30

BOT / BOOT Private and Public Private Private Private 20-25

Divestiture Private and Public Private Private Private Indefinite

PPP Options - Summarized

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The key features for thesuccess of PPPs in Indiainclude the following:

A stronger policy and regulatory framework , bothat the Centre and States.

Need to developappropriate marketinstruments and capacity toraise long term equity anddebt.

A shelf of bankable PPPprojects.

Better and stronger capacity to manage PPP

projects .

Recipe for successful Public Private Partnerships Projects

The public authority will beexpected to undertake thoroughgroundwork that will involve

a) Clear definition of deliverables& Comparator costs

b)A sound understanding of thelegal framework

c)Factors influencing the choiceof business model

d)Cost and revenue projections

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Public Private Partnership Audit

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Why Audit? Objectives

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W h y ?

To provide unbiased, objective assessment of whether public resources are responsibly and effectively managed to achieve the intended results.

To provide a reasonable assurance to all stakeholders about the wisdom, faithfulness,integrity, economy, efficiency and effectiveness of the PPP arrangement

To ensure that the infusion of the private sector

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

To Secure its minority stake in the project wherethe private sector has a majority

To ensure the work culture frictions between publicand private sectors are ironed out.

To have constant updates on the progress towardsagreed milestones.

To have controls and checks in place

To provide assurance to investors and other interested parties

To facilitate continuous monitoring and compliance

O b j e c t i v e s


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Timing of PPP Audits

Timing of Audit

LargeProjects

Factors

SmallProject

Large Projects

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, asalso all other risk assessments

With Heavy Investment

Commitment:

Planned and executed evenbefore the completion of the

project

Smaller Magnitude:

Normally after the completion of the project

With limited InvestmentCommitments:

Planned and undertaken at different stages of the project

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The data, records, analysis and the decisionprocess of the government department /public sector agency

Documents and files leading to the formulation, appraisal and approval of theproject.

The process of identifying the privatesector partner, requests for proposals,bidding and tendering process of thecontract with due diligence to fairness,transparency and objectivity.

In-depth analysis of the project documents

Accounts documents, bills, records andschedules relating to the construction, andoversight arrangements

Scope of Public Private Partnership Audit

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

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Value for money considerations and safeguardingthe public interest.

Operation and maintenance of the assets, tariff /toll / user-charges collection and accounting andrevenue 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 valuationof residual assets , decommissioning, disputeresolution 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 sharingarrangements.

Scope of Public Private Partnership Audit..

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Verification of the PPP arrangementto ensure that the public sector agency haseffectively put in place a sound systemto oversee the efficiency and competenceof the project implementationstrictly in terms of the established normsand contract conditions

Actual volume of demand (viz., traffic) andrevenue generation (including fromcommercial developments) against theprojected flow and the arrangements to monitor the trend periodically.

Need to re-adjust the contract period in casethe Rate of Return (ROR) is higher than whatwas projected.

Quality and consistency of service ataffordable cost to the users at large etc.

Scope of Public Private Partnership Audit..

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Documents regarding the project formulation,appraisal and approval , available with the nodalministry, promoting agency.

Data and documents relating to the contractdocuments and concession award originated byand available with the public sector partner.

Data and documents furnished to the publicsector partner by the private contractor andavailable with the former for verification.

Reports submitted by the Independent Engineersand Independent Auditors .

Note: For detailed list, Refer Annexure.

Documents to be Audited

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PPP Auditing Guidelines - Methodology

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METHODOLOGY

Detailed scrutiny of project documents.

Verifying the legal and contractual obligations.

Review of financial modeling and justifications for thegrant of concessions, testing revenue generation usingquantitative techniques.

Assessment of the transparency and integrity of thebidding process.

Financial audit to verify the justification for the viabilitygap funding / annuity payments.

Limited audit of the construction and engineering to verifyquality, innovations, economy and efficiency.

Quality test

Engaging experts to test aspects of quality andstandards, if required.

Survey to test the accuracy of collections againstprojections.

Customer satisfaction level analysis through samplingtechniques.

To ensure safeguarding the value of public money.

AuditingGuidelines

InternationalOrganization of Supreme AuditInstitutions(INTOSAI) provideskey guidelines

INTOSAI hadissued its PPP

AuditingGuidelines in2001, followed bycertaincomprehensiverecommendationsin 2007

C&AGconductsaudits of certain PPPprojects basisINTOSAIguidelines

Customizedguidelines for auditors under C&AG is in theworks and is tocome out shortly


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Client Base in Infrastructure


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Open House

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Thank you

Vignesh Shankar Director and Principal ConsultantHand phone : +91 98840 60005

[email protected]

K.J.Dandeker Managing Partner / Executive Director

Phone : +91 4425220721

[email protected]

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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 appraisedby a Committee comprising Secretary, DEA and the Secretary of the Department sponsoringthe 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 beforethe 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 separatecommittee with Secretary, DEA and the Secretary, Department of Road Transport andHighways (DRTH) has been set up.

It is to be noted that projects costing below the limit of Rs.100 crores will be considered andapproved 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 tothe Committee on Infrastructure for final approval.

Financial Powers of PPPAC

Back

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The sponsoring Ministry may develop individual project proposals for the in-principle clearance of thePPPAC before inviting Expressions of Interest (EOI) from prospective investors.

Then, the sponsoring Ministry may invite EOI, develop the required documents and carry out inter-ministerial 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 ConcessionAgreement (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 beconveyed to the sponsoring Ministry for responses.

The PPPAC will take a view on the Appraisal Note and the propose the same for approval of theCommittee on Infrastructure under the Prime Minister.

Procedure for Formulation and Appraisal of PPP Projects

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The MCA is a carefully drafted legal document which helps thepartners of the project to define and spell out mutual rights andobligations clearly and in specific contractual terms.

The MCA also seeks to achieve an appropriate balance of risks andobligations shared between the partners.

The MCA deals with aspects such asa) the mode of financing the projectsb) mitigating and unbundling of risksc) allocation of risks and rewards,d) phasing of the investment requirements,e) fixing the concession periods andf) forfeiture of the bid security if the concessionaire fails to achieve

financial close within the stipulated period.

Model Concession Agreements (MCA)

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