LESSON 6.2 — PPP Models, Institutional Capacity & Infrastructure Pricing
A. Standard Map
| Topic | Governing Source | Exam Focus |
|---|---|---|
| PPP — definition | Public-Private Partnership; risk-shared long-term contract | Definition; key elements |
| PPP models | BOT, BOOT, BOO, BOLT, DBFOT, DBFO, O&M, Concession | Model → risk allocation |
| Concession agreement | The MCA (Model Concession Agreement) — DEA, MoF | Key clauses |
| Viability Gap Funding (VGF) | DEA scheme; up to 20% project cost + 20% state | Cap + structure |
| India PPP examples | NHAI highways, Delhi/Mumbai/Hyderabad metro, ports, airports | Project → model |
| Institutional capacity enhancement | Capacity building, PMUs, project preparation facilities | Approaches |
| Privatization concerns | Equity, regulation, lock-in, asset stripping | Issues to address |
| Infrastructure pricing principles | Efficiency, equity, cost recovery, marginal cost | Pricing rule |
| Tariff structures | Flat, two-part, increasing block, IBT | Structure → social goal |
B. Why It’s Used
Paper II §6 of the TGPSC syllabus continues from Lesson 6.1’s municipal finance into the question of how to fund large urban infrastructure projects — metros, water supply, sewerage, SWM, affordable housing, transit-oriented development — that exceed the borrowing or budgetary capacity of ULBs. Public-Private Partnership (PPP) is the principal such instrument. The Town Planning Assistant will encounter PPP in two ways: (a) as the procurement structure for new infrastructure (the Hyderabad Metro is one of the world’s largest metro PPPs; the Visakhapatnam and Bhadradri power projects; numerous state highways); (b) as a policy lever to attract private capital into affordable housing (PMAY-U’s AFF (Affordable Housing in Partnership) vertical, the ARHC scheme for migrant workers). The exam tests model identification (BOT vs BOOT vs DBFOT), Viability Gap Funding arithmetic, pricing principles, and institutional capacity logic.
C. Mechanism in Words
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A Public-Private Partnership (PPP) is a long-term agreement between a government entity and a private sector party to design, finance, build, operate, and maintain a public infrastructure asset or service, with risks and rewards shared between the partners. Three elements distinguish a true PPP from a simple construction contract: long-term (typically 15–30 years), risk-sharing (the private party bears significant risks, not just construction risk but also demand, operating, and financing risks), and bundling of services (the private party typically handles design + construction + operation + maintenance, not just one phase). A traditional public procurement has the government bearing all risks; a privatisation has the private party bearing all risks; PPP sits in the middle.
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PPP models are defined by who owns the asset at each stage and who is responsible for which phase. BOT — Build-Operate-Transfer: the private party builds the asset, operates it for a defined period to recover investment + return, then transfers it back to the government at the end. The government owns the asset from day one; the private party has the right to use it. BOOT — Build-Own-Operate-Transfer: like BOT, but the private party owns the asset during the concession period, then transfers ownership to the government at the end. BOO — Build-Own-Operate: the private party builds, owns, and operates the asset in perpetuity — no transfer back to government. BOLT — Build-Own-Lease-Transfer: the private party builds and owns, leases it back to the government for operation, then transfers ownership at end. DBFOT — Design-Build-Finance-Operate-Transfer: the most comprehensive bundling — the private party handles all five phases. This is the standard for highway PPPs under NHAI. DBFO — Design-Build-Finance-Operate (no transfer): similar to DBFOT but no transfer clause. O&M contract: the government builds the asset and contracts only operation and maintenance to the private party — this is not strictly a PPP because the private party bears little construction or financing risk.
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The Model Concession Agreement (MCA) is the standardised contract developed by the Department of Economic Affairs (DEA), Ministry of Finance, to govern PPPs. Each sector has its own MCA: NHAI’s highway MCA, MoUD’s metro MCA, the port MCA, the urban transport MCA, and so on. The MCA standardises key clauses: scope of the project, concession period (typically 20–30 years), tariff structure and adjustment mechanism, performance obligations, risk allocation (which party bears which risks), termination clauses, dispute resolution (typically arbitration), and force majeure provisions. Standardisation reduces transaction costs — parties don’t negotiate every clause from scratch — and provides a benchmark for what is “market-standard.” When the exam describes a PPP with a standardised contract, the answer is usually the MCA.
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Viability Gap Funding (VGF) is the central government’s scheme to make socially desirable but commercially unviable projects attractive to private investors. Many urban infrastructure projects — metros, urban bus systems, water supply for the poor — generate social returns (reduced congestion, improved health, environmental benefits) that exceed their commercial returns. A purely commercial investor will not finance them at affordable tariffs. VGF bridges this gap: the central government provides a one-time grant of up to 20% of the total project cost, with the state government free to contribute another 20% (so total VGF can reach 40% of project cost). The remaining 60% or more must come from the private concessionaire’s equity + debt, against the project’s future revenue stream. VGF is administered by DEA; eligibility requires competitive bidding, social justification, and financial sustainability post-VGF. Examples: many metros (Delhi Airport Express line, Hyderabad Metro’s funding structure), some NHAI highway sections in low-traffic areas.
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India’s major PPP experience spans sectors. Highways — NHAI’s national highway programme is largely PPP-based (DBFOT, hybrid annuity). Ports — major ports use BOT concessions for container terminals; the Jawahar Nehru Port Trust (JNPT) container terminals are PPP-operated. Airports — Mumbai, Delhi, Bengaluru, Hyderabad were PPP-built and are PPP-operated (GMR, GVK groups); the recent Noida International Airport at Jewar is a greenfield PPP. Urban transit — the Delhi Metro is a public-sector project (DMRC is a PSU), but the Hyderabad Metro is the world’s largest PPP metro (L&T concession, then restructured). Power generation — Ultra Mega Power Projects (UMPPs) were DBFOT; many state distribution reforms are PPP-based. Urban services — water PPPs (Nagpur 24×7 water supply is a flagship), SWM PPPs (Pune, Indore), parking PPPs.
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Institutional capacity enhancement is the work of building the human, organisational, and procedural capacity of government to plan, procure, manage, and monitor PPPs. A PPP that fails — and many do — usually fails because the government side lacked capacity to draft the contract, monitor performance, or enforce terms. India has invested in capacity-building institutions: the PPP Cell in DEA, the Infrastructure Project Development Facility (IPDF) for project preparation financing, the India Infrastructure Finance Company Limited (IIFCL) for long-tenor debt, the IIFCL Projects Limited (IPL) for advisory services, and state-level PPP cells. At the ULB level, capacity is often the binding constraint — most ULBs lack dedicated PPP expertise, so they rely on state-level Project Management Units (PMUs) or external transaction advisors.
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Privatisation of urban services raises legitimate concerns that the planner must address. Equity — private operators may cherry-pick profitable customers (e.g., excluding informal settlements from piped water) without cross-subsidy. Regulation — many Indian states lack independent regulators to enforce service standards and tariff discipline. Lock-in — long-term (20–30 year) concessions reduce government flexibility to adapt to changing needs. Asset stripping — private operators may under-invest in maintenance to maximise short-term returns. Risk transfer illusion — contracts may appear to transfer risk but in practice require government bailouts (the Hyderabad Metro restructuring is a case). The planner’s role is to design PPPs that genuinely transfer risk, ensure equity safeguards (lifeline tariffs, universal service obligations), and build monitoring capacity.
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Infrastructure pricing follows three competing principles. Efficiency pricing — price equal to marginal cost (including externalities) so users face the true cost of their use and allocate resources efficiently. Equity pricing — price to ensure access for the poor (subsidised lifeline rates, cross-subsidies from richer users). Cost recovery pricing — price to recover full O&M plus capital amortisation so the system is financially sustainable. Real-world tariff structures blend these. The increasing block tariff (IBT) is the most common equity-friendly structure for water and electricity: the first block (basic consumption) is priced cheaply (lifeline), and higher blocks are priced at progressively higher rates — so a household using 100 KL/month pays much more per KL than one using 5 KL/month. IBT protects the poor while charging heavy users closer to marginal cost.
D. Core Concept Explanations
C1. PPP models — risk allocation matrix
| Model | Asset ownership during concession | Phases bundled | Demand risk borne by | Examples |
|---|---|---|---|---|
| BOT | Public | Build, Operate | Private | Some highway projects |
| BOOT | Private during concession, then public | Build, Own, Operate, Transfer | Private | Power plants, ports |
| BOO | Private (perpetual) | Build, Own, Operate | Private | Some captive power, STPs |
| BOLT | Private during lease, then public | Build, Own, Lease, Transfer | Public (lease payments) | Some IT parks |
| DBFOT | Public (post-transfer) | Design, Build, Finance, Operate, Transfer | Private (often with VGF) | Most NHAI highways |
| DBFO | Public | Design, Build, Finance, Operate | Mixed | Some urban bus systems |
| O&M contract | Public | Operate & Maintain | Public | Not strictly PPP |
C2. VGF arithmetic — worked
A metro project costs ₹10,000 crore. The private concessionaire’s revenue forecast shows break-even at ₹7,000 crore investment (70% of project cost). The gap = ₹3,000 crore (30%). VGF can cover up to 20% (Centre) + 20% (State) = 40% = ₹4,000 crore. Since the actual gap is ₹3,000 crore < ₹4,000 crore cap, the project is VGF-eligible for ₹3,000 crore (Centre + State split per scheme rules — typically Centre contributes up to 20% = ₹2,000 crore; State contributes the remaining ₹1,000 crore).
C3. Major Indian PPP projects
| Sector | Project | Model | Notes |
|---|---|---|---|
| Airports | Delhi (DIAL — GMR); Mumbai (GVK, then Adani); Bengaluru (BIAL); Hyderabad (GHIAL — GMR) | BOOT-style (long-term O&M concession) | Among the largest PPPs in India |
| Ports | JNPT container terminals; Mundra (Adani); Krishnapatnam | BOT | Container terminals |
| Highways | NHAI programme | DBFOT, Hybrid Annuity Model (HAM) | HAM is a recent innovation — shared financing |
| Metro rail | Hyderabad Metro (L&T) | BOT with VGF | World’s largest metro PPP; restructured |
| Power | Ultra Mega Power Projects (Mundra, Sasan, Krishnapatnam, Tilaiya) | BOOT/DBFOT | Many ran into financial stress |
| Urban services | Nagpur 24×7 water (250 MLD); Pune SWM; Indore SWM | DBFO/O&M | Mixed track record |
| Affordable housing | PMAY-U’s AFF vertical; ARHC scheme | Various | PMAY-AFF subsidises land + infrastructure |
C4. Pricing structures
| Structure | How it works | Strength | Weakness |
|---|---|---|---|
| Flat tariff | Same rate per unit consumed regardless of volume | Simple | Punishes low-volume users; regressive |
| Two-part tariff | Fixed charge + variable per-unit charge | Covers fixed costs | Requires metering |
| Increasing Block Tariff (IBT) | Low rate for first block; higher rates for subsequent blocks | Equity-friendly | Requires metering; can be hard to design |
| Decreasing Block Tariff | Higher rate for first block; lower for subsequent | Encourages industrial use | Disadvantages the poor |
| Seasonal tariff | Different rates by season | Manages peak demand | Complex to administer |
| Time-of-Day (ToD) tariff | Different rates by time of day | Manages peak load | Requires smart meters |
C5. Risk allocation in a typical PPP
| Risk type | Borne by |
|---|---|
| Design / engineering | Private (in DBFOT) |
| Construction | Private |
| Financing | Private (with some government guarantees) |
| Demand / revenue | Private (in toll-based) or shared (in annuity) |
| Operating | Private |
| Force majeure | Shared per contract |
| Regulatory / change in law | Government (usually) |
| Environmental | Private (mitigation) / Government (permitting) |
E. Worked Numericals and Parameter Tables
E1. Concession period computation
A PPP water project has a capital cost of ₹1,000 crore, O&M cost of ₹50 crore/year, expected revenue of ₹150 crore/year. Required return on equity = 15%; debt:equity = 70:30; cost of debt = 9%.
- Annual debt service (on ₹700 crore at 9% over 25 years) ≈ ₹75 crore/year
- Equity return requirement (on ₹300 crore at 15%) = ₹45 crore/year
- O&M = ₹50 crore/year
- Total annual cost recovery needed = ₹75 + ₹45 + ₹50 = ₹170 crore/year
- Expected revenue = ₹150 crore/year
- Gap = ₹20 crore/year → project is not viable at this tariff without subsidy or longer concession. Options: raise tariff, extend concession period, VGF.
E2. Increasing Block Tariff
A water utility charges: Block 1 (0–10 KL/month) ₹5/KL; Block 2 (10–25 KL) ₹10/KL; Block 3 (>25 KL) ₹20/KL. A household using 8 KL pays 8 × ₹5 = ₹40. A household using 30 KL pays (10 × 5) + (15 × 10) + (5 × 20) = 50 + 150 + 100 = ₹300. The average per-KL rate for the heavy user = ₹10/KL — 2× the light user. This is the equity logic of IBT.
E3. VGF ceiling
A project cost ₹2,000 crore. Maximum VGF = 20% (Centre) + 20% (State) = 40% = ₹800 crore. The remaining ₹1,200 crore must come from private equity + debt. If the project’s net present value (NPV) of future cash flows is ₹1,400 crore at the discount rate, the project is viable at this VGF. If NPV is ₹1,000 crore, additional support is needed.
E4. Marginal cost pricing
A road has construction cost ₹500 crore, O&M cost ₹5 crore/year. With traffic of 50,000 vehicles/day and 30-year life:
- Annualised capital cost (at 8% over 30 years) ≈ ₹44 crore/year
- Total annual cost = ₹44 + ₹5 = ₹49 crore/year
- Annual vehicle traffic = 50,000 × 365 = 18.25 million
- Marginal cost per vehicle = ₹49 crore / 18.25 million ≈ ₹27/vehicle
If the toll is set at ₹30/vehicle, it approximately covers cost — efficient pricing. If ₹10/vehicle, the project loses money and requires subsidy.
F. Design Criteria
| Parameter | Standard / Typical value | Source |
|---|---|---|
| Typical PPP concession period | 15–30 years | DEA MCA templates |
| VGF ceiling | 20% Centre + 20% State = 40% of project cost | DEA VGF scheme |
| Standard contract | Model Concession Agreement (MCA) | DEA |
| PPP cell location | DEA, MoF + state-level PPP cells | DEA |
| Long-tenor debt lender | IIFCL | IIFCL charter |
| Hyderabad Metro concession | 30+ years | L&T Metro Rail (Hyderabad) concession |
| IBT block structure | Usually 3 blocks (lifeline, normal, premium) | Best practice |
G. Application Zones
- Project preparation — ULB identifies need, prepares DPR, structures PPP or alternative.
- Procurement — competitive bidding (tariff-based, premium-based, or grant-required).
- Contract management — ULB monitors performance against KPIs in the MCA.
- Tariff setting — state regulator (where exists) or ULB sets tariff based on cost-plus or IBT principles.
- Telangana-specific: Hyderabad Metro (L&T concession); HMDA land auctions; GHMC SWM concessions; State PPP Cell.
H. Common Confusions
| Confusion | Reality |
|---|---|
| “PPP is the same as privatisation.” | No — PPP is a long-term contract with risk-sharing; privatisation transfers ownership permanently. |
| “BOT and BOOT are identical.” | No — BOT has public ownership during concession; BOOT has private ownership during concession, then transfer. |
| “O&M contracts are PPPs.” | Not strictly — they don’t transfer construction or financing risk. |
| “VGF can fund any percentage of project cost.” | No — capped at 20% Centre + 20% State = 40% of total project cost. |
| “Increasing block tariff (IBT) penalises the poor.” | No — IBT protects the poor by keeping the lifeline block cheap. |
| “PPP transfers all risk to the private party.” | No — risks are shared; the exact allocation is in the MCA. |
| “Marginal cost pricing is the same as average cost pricing.” | No — marginal cost is the cost of one additional unit; average cost is total cost divided by total units. |
| “The Hyderabad Metro is a public project.” | No — it is the world’s largest PPP metro (L&T concession), though later restructured. |
I. Compare & Contrast
I1. BOT vs BOOT vs BOO
| Dimension | BOT | BOOT | BOO |
|---|---|---|---|
| Ownership during concession | Public | Private | Private |
| Transfer at end | Yes (back to public) | Yes (back to public) | No (perpetual private) |
| Risk borne by private | Higher | Higher | Highest |
| Use case | Public assets (highways) | Time-limited private operations | Permanent private utilities |
I2. PPP vs traditional procurement vs privatisation
| Dimension | Traditional procurement | PPP | Privatisation |
|---|---|---|---|
| Asset ownership | Public | Public or private (varies) | Private |
| Risk allocation | Public | Shared | Private |
| Duration | Short-term contract | Long-term (15–30 yrs) | Permanent |
| Examples | Public works contract | Highway DBFOT; metro BOT | Sale of PSU |
J. Memory Hooks
- “BOT-BOOT-BOO-BOLT-DBFOT” — the five main PPP models in order of complexity.
- “BOT public, BOOT private-then-public, BOO private forever” — ownership sequence.
- “VGF = 20 + 20 = 40” — Centre 20%, State 20%, total 40% of project cost.
- “MCA = standard contract” — DEA-developed Model Concession Agreement.
- “IBT = equity-friendly” — Increasing Block Tariff protects low-volume users.
- “Efficiency vs equity vs cost-recovery” — three competing pricing principles.
- “IIFCL = long-tenor debt; PPP Cell = advisory” — key institutions.
- “Hyderabad Metro = world’s largest metro PPP” — anchor case.
K. Revision Ladder
| Order | Item | Time |
|---|---|---|
| 1 | Memorise PPP definition + the three distinguishing elements | 20 min |
| 2 | Memorise the 6 PPP models with ownership/risk allocation | 45 min |
| 3 | Memorise VGF ceiling + structure (20+20=40) | 15 min |
| 4 | Memorise the major Indian PPP examples by sector | 45 min |
| 5 | Memorise the 6 tariff structures | 30 min |
| 6 | Practise concession period and VGF arithmetic | 30 min |
| 7 | Memorise the risk allocation table | 30 min |
| 8 | Practise IBT computation | 20 min |
| 9 | Map Telangana-specific PPPs (Hyderabad Metro, HMDA land) | 30 min |
L. Exam Traps
| Trap | Correct response |
|---|---|
| Question equates PPP with privatisation. | False — PPP is a long-term contract with risk sharing; privatisation is permanent ownership transfer. |
| Question pairs BOT with private ownership during concession. | False — BOT has public ownership during concession; BOOT has private. |
| Question lists VGF ceiling as 50% or higher. | False — max 20% Centre + 20% State = 40%. |
| Question lists O&M contracts as a PPP model. | Not strictly — O&M contracts don’t transfer construction or financing risk. |
| Question states IBT penalises low-volume users. | False — IBT protects them via the lifeline (cheap first) block. |
| Question pairs Hyderabad Metro with public procurement. | False — it is a PPP (L&T concession), though later restructured. |
| Question pairs BOO with transfer back to government. | False — BOO is perpetual private ownership; no transfer. |
| Question lists marginal cost = average cost. | False — they differ when costs are not constant per unit. |
M. Answer-Writing Cues
- For PPP definition questions, give the three distinguishing elements: long-term, risk-sharing, bundled services.
- For model questions, give model + ownership + risk allocation + example: “Under BOOT (Build-Own-Operate-Transfer), the private party owns the asset during the concession period, bears most risks, and transfers ownership back to the government at the end — typically used for ports and power plants.”
- For VGF questions, give ceiling + structure: “Viability Gap Funding (VGF), administered by DEA, provides up to 20% of project cost from the Centre, with the state free to add another 20%, for a maximum total of 40% of project cost.”
- For pricing questions, give structure + equity implication: “The Increasing Block Tariff (IBT) protects low-volume users via a cheap lifeline block while charging progressively higher rates for higher consumption.”
N. PYQ Integration
Pattern questions only:
Pattern question 1 — PPP model
Q. Under a BOT (Build-Operate-Transfer) model, the asset is owned by:
– (A) The private party perpetually
– (B) The government throughout, with private operation ✓
– (C) The private party during concession, then transferred back
– (D) A joint venture company in perpetuity
Ans: (B). BOT — public ownership throughout; private has the right to operate. (BOOT has private ownership during concession.)
Pattern question 2 — VGF ceiling
Q. The maximum Viability Gap Funding (VGF) for an infrastructure project, combining central and state contributions, is:
– (A) 20% of project cost
– (B) 30% of project cost
– (C) 40% of project cost ✓
– (D) 50% of project cost
Ans: (C). Up to 20% Centre + 20% State = 40% of project cost.
Pattern question 3 — IBT
Q. The Increasing Block Tariff (IBT) is preferred for water and electricity supply to households because it:
– (A) Charges the same rate to all users
– (B) Protects low-volume (typically poor) users via a cheap first block while charging higher rates for higher consumption ✓
– (C) Maximises revenue by charging heavy users less
– (D) Eliminates the need for metering
Ans: (B). IBT is the equity-friendly tariff structure.
Pattern question 4 — MSQ
Q. Which of the following are distinguishing features of a Public-Private Partnership (PPP)?
– (A) Long-term contract ✓
– (B) Risk-sharing between public and private parties ✓
– (C) Bundling of design, construction, and operation ✓
– (D) Permanent transfer of asset ownership to private party
Ans: (A), (B), (C). Permanent ownership transfer is privatisation, not PPP.
Pattern question 5 — Numerical
A water utility charges: Block 1 (0–10 KL/month) ₹4/KL; Block 2 (10–25 KL) ₹8/KL; Block 3 (>25 KL) ₹15/KL. A household using 20 KL pays:
– (A) ₹80
– (B) ₹100
– (C) ₹120 ✓
– (D) ₹160
Ans: (C). (10 × ₹4) + (10 × ₹8) = ₹40 + ₹80 = ₹120.
O. Mini-Check — Lesson 6.2
- Define PPP and state its three distinguishing elements.
- Differentiate BOT, BOOT, and BOO by ownership.
- What is VGF, and what is the maximum total contribution (Centre + State)?
- What is the Model Concession Agreement (MCA), and which government body develops it?
- State three major Indian PPP projects by sector.
- List the three competing pricing principles.
- What is IBT, and why is it considered equity-friendly?
- List four risks allocated in a typical PPP and who typically bears each.
- State two institutions that support PPP capacity in India.
- Is the Hyderabad Metro a public project or a PPP? Name the private party.
Answers:
1. Public-Private Partnership — a long-term agreement between government and a private party to design/finance/build/operate/maintain an asset. Three distinguishing elements: long-term, risk-sharing, bundled services.
2. BOT — public ownership throughout; BOOT — private ownership during concession, then transfer; BOO — perpetual private ownership, no transfer.
3. Viability Gap Funding — one-time central grant for socially desirable but commercially unviable projects. Maximum 20% Centre + 20% State = 40% of project cost.
4. The Model Concession Agreement (MCA) is the standardised contract template developed by the Department of Economic Affairs (DEA), Ministry of Finance, to govern sector-specific PPPs.
5. Any three: Airports (Delhi-DIAL, Mumbai, Hyderabad-GHIAL); Ports (JNPT terminals); Highways (NHAI DBFOT/HAM); Metro rail (Hyderabad Metro); Power (UMPPs); Urban services (Nagpur water, Pune/Indore SWM).
6. Efficiency (marginal cost), equity (lifeline), cost recovery (O&M + capital).
7. Increasing Block Tariff — first block cheap (lifeline), higher blocks at progressively higher rates. Equity-friendly because it protects low-volume (typically poor) users.
8. Construction — private; Financing — private (with limited government guarantee); Demand — private (toll) or shared (annuity); Force majeure — shared per contract; Regulatory change — government.
9. DEA PPP Cell; IIFCL (India Infrastructure Finance Company Limited); IIFCL Projects Limited (IPL); state-level PPP cells. Any two.
10. PPP — the Hyderabad Metro is the world’s largest metro PPP, originally concessioned to L&T (L&T Metro Rail Hyderabad).
Module 6 complete. Next: Module 7 — Urban Governance & Management. Lesson 7.1 covers ULB history, structure, good governance; Lesson 7.2 covers the 74th CAA, local and participatory planning.