Picking the right bidder to take on PPP project risks

The first list of 20 smart cities, selected to receive financial assistance from the government, was announced in January. A number of smart city projects – group housing, solar power, community toilet, etc. – have been identified for implementation under the public-private partnership (PPP) mode.

Risk allocation is a key consideration while deciding the right bidding process for a project and selecting the right bidder. Authorities generally pass all risks to the private sector. This approach has been detrimental to the success and efficacy of PPP projects, as evidenced by the fact that only a few states in India have leaned towards using PPP for developing infrastructure, and for limited sectors such as roads, ports and airports.

Risk identification, allocation and management are crucial in PPP projects, as inefficient and inequitable risk allocation may lead to abandoning of projects. Ideally, for risk allocation to be balanced between the authority and the private sector, risks should be allocated to the party best placed to manage the risk. A robust PPP structure will address the issue of risk allocation. In the smart cities context, some of the key risks and their allocation are outlined below.

Soumya Kanti De Mallik is an associate partner at HSA Advocates. HSA is a full-service firm with offices in New Delhi, Mumbai and Kolkata, and with a correspondent relationship in Bangalore.