Handout External Financing...

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EXTERNAL URBAN INFRASTRUCTURE FINANCING OPTIONS IN THE ASIA-PACIFIC REGION:

Short-Course for City and Municipal Officers

4‐7 December 2012, Kuala Lumpur, Malaysia

KLRTC 25

Cities Development Initiative for Asia (CDIA)

CDIA is a regional initiative established in 2007 by the Asian Development Bank and the Government of Germany, with additional core funding support of the governments of Sweden, Austria and Spain and the Shanghai Municipal Government. The Initiative provides assistance to medium‐sized Asian cities to bridge the gap between their development plans and the implementation of their infrastructure investments. CDIA uses a demand driven approach to support the identification and development of urban investment projects in the framework of existing city development plans that emphasize environmental sustainability, pro‐poor development, good governance, and climate change.

To facilitate these initiatives at city level, CDIA provides a range of international and domestic expertise to cities that can include support for the preparation of pre‐feasibility studies for high priority infrastructure investment projects as one of several elements. www.cdia.asia

CITYNET‐ The Regional Network of Local Authorities for the Management of Human Settlements

CITYNET has the vision of bringing cities together – to learn, to flourish. CITYNET seeks to upgrade urban slums, and promote community participation and equitable distribution of resources. It envisions improved transportation networks, privatisation of public services, and efficient urban systems. The organization works towards efficient budget allocation, revenue enhancement, and education of city officials on effective financial initiatives. It encourages higher standards of innovation in urban environmental management and an unpolluted city environment.

With an aim to help local governments provide better services to citizens, CITYNET is committed to capacity‐building at the city level. Every year, it organises around 25 activities, including seminars and training programmes, which address burning issues in urban planning and development.

With the firm belief that people‐friendly cities are the need of the hour, CITYNET is tirelessly working towards its goal of making cities environmentally sustainable, economically productive, politically participatory, globally connected, culturally vibrant and socially just. http://www.citynet‐ap.org

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Table of Contents

I. COURSE OVERVIEW III

II. OVERVIEW OF FINANCING OPTIONS IV

III. INTRODUCTION V

1. GRANTS & TRANSFERS (NATIONAL, PROVINCIAL, STATE AND ODA) 1

1.1 Summary 1 1.2 Description 1 1.3 Advantages and Disadvantages 1 1.4 Suitable Sectors 2 1.5 Typical Steps: Example of Obtaining ODA Grants and Loans 2

2. GOVERNMENT LOANS 3

2.1 Summary 3 2.2 Description 3 2.3 Advantages and Disadvantages 4 2.4 Suitable Sectors 4 2.5 Typical Steps: Example of Land Bank Philippines 4

3. COMMERCIAL LOANS 6

3.1 Summary 6 3.2 Description: 6 3.3 Advantages and Disadvantages 6 3.4 Suitable Sectors 6 3.5 Typical Steps: Example ‐ Philippines Veterans Bank 6

4. SECTOR ‐ SPECIFIC OR SPECIALIZED FINANCIAL INSTITUTIONS (SFIS) 8

4.1 Summary 8 4.2 Description 8 4.3 Advantages and Disadvantages 8 4.4 Suitable Sectors 8 4.5 Typical Steps: Example India Infrastructure Finance Co. Ltd. (IIFCL) 8

5. PUBLIC PRIVATE PARTNERSHIP 10

5.1 Summary 10 5.2 Description 10 5.3 Advantage and Disadvantages 12 5.4 Suitable Sectors 13 5.5 Typical Initial Steps in PPPs 14

6. CLIMATE CHANGE AND ENVIRONMENTAL FUNDS 17

6.1 Summary 17 6.2 Description 17 6.3 Advantages and Disadvantages 17 6.4 Suitable Sectors 17 6.5.a Typical Steps: Sample Environment Fund (Global/ Regional) 18 6.5.a Typical Steps: Sample Environment Fund (National) 19

7. BILATERAL AND MULTILATERAL BANKS & GUARANTEE FACILITIES 20

7.1 Summary 20 7.2 Description 20 7.3 Advantages and Disadvantages 20 7.4 Suitable Sectors 21 7.5 Typical Steps 21

8. BONDS AND POOLED FUNDS 23

8.1 Summary 23 8.2 Description 23 8.3 Advantages and Disadvantages 24 8.4 Suitable Sectors 24 8.5 Typical Steps: Example Municipal Bond Issue Process 25

GLOSSARY OF TYPICAL FINANCE TERMS 26

ANNEXES 31

Annex 1.a Jawaharlal Nehru National Urban Renewal Mission (JNNURM), India 33 Annex 2.a Town Development Fund, Nepal 33 Annex 2.b Municipal Development Fund: Tamil Nadu, India 34 Annex 2.c Municipal Development Fund Office, Philippines 35 Annex 2.d Local Development Investment Fund (LDIF), Vietnam 35 Annex 3.a Philippine National Bank 36 Annex 4.a Infrastructure Development Finance Co. Ltd. (IDFC) 36 Annex 4.b Infrastructure Leasing & Financial Services Ltd (IF&LS) 38 Annex 5.a Summary Table of PPP Types Advantages/ Disadvantages 40 Annex 5.b Treatment of Risks in PPP projects 43 Annex 5.c Typology of Risks in PPP projects 44 Annex 5.d Selection of the Partner/Operator 45 Annex 5.e Finalization of Contractual Framework & Execution of Agreement 45 Annex 5.f Financial Close of the project 45 Annex 5.g Joint Ventures with Private Partners 46

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Annex 5.h Private Infrastructure Development Group (PIDG) 46 Annex 5.i Equity Fund for Infrastructure: Pan Asia Proj. Devel’t Fund 47 Annex 5. j Standard Chartered IL&FS Asia Infra. Growth Fund 47 Annex 5.k ICICI Venture 48 Annex 6 Examples of Environment Funds 49 Annex 7.a Asian Development Bank 55

Annex 8.a Ahmedabad Municipal Corp. Bond Issue 56 Annex 8.b Philippines LGU Guarantee Corporation Bond Issue 57 Annex 8.c Tamil Nadu Water and Sanitation Pooled Fund 58

REFERENCE MATERIAL & FURTHER READING 60

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i. Course Overview

DAY 1 DAY 2 DAY 3

AM Welcome by CDIA, CITYNET & Kuala LumpurIntroduction and Course Objectives

- Introduction - Course Objective and Overview

Lecture/ discussion - Infrastructure Demand in Asia. - Competitive Cities and Sustainable Urban

Development

RECAP of Day 1 Session Introduction to Day 2 Lecture/ discussion

- Analyzing projects and life‐cycle frameworks in financing options

Exchange City Experience

RECAP of Day 2 Session Introduction to Day 3 Lecture/ discussion

- Credit enhancement tools Overview of some available support opportunities

- Selected CDIA tools & mechanisms

Late AM

Exchange City experience

Presentation/ discussion ‐ Financing options ‐ Government Grants ‐ Government Loans ‐ Commercial Loans ‐ Specialized Financing Institutions ‐ Public‐Private Partnerships ‐ Climate Change/ Environment Funds ‐ Bilateral and Multilateral Development Banks ‐ Municipal Bonds

Introduction to project analysis / case studies: - Project analysis (using Cochin case

study) Project Analysis using Workbook examples

- Using Workbook cases to assess urban infrastructure project for financing options

City Exchange Experience

City Group exercise: Analysing selected municipal project for potential financing options

City Group Presentations: next steps ‐ preparing your city to pursue alternate financing options

Lunch Lunch Lunch

PM Presentation/ discussion on Financing Option (continued)

City Group exercise: Applying the internal assessment tool (analysing city‐readiness to pursue external financing)

Cluster Group exercise- Urban infrastructure project analysis on

opportunities for alternate financing - Group work on 3 scenarios (Group 1:

Economic Infrastructure; Group 2: Environmental Infrastructure; Group 3: Social (pro‐poor) Infrastructure)

City Group Presentations (cont’d): next steps ‐ preparing your city to pursue alternate financing options

Late PM

City Group exercise (continued): Applying the Internal Assessment Tool (analysing city‐readiness to pursue external financing)

Extracting key lessons learnt discussion of results

Cluster Group exercise (continued)

Cluster Group Presentation of analysis: discussion of results

City Group presentation (continued)Wrap up

- Lessons and Take away Awarding Certificates/ Closing

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ii. Overview of Financing Options

Moving from comfort zones to unfamiliar territory

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iii. Introduction

Growing role of cities in national development Urban infrastructure is an imperative for much of economic and social development. However, shortfalls in urban infrastructure are hampering advancement in many developing countries in Asia by undermining competitiveness of cities and inhibiting their social and environmental sustainability. This dampens cities’ ability to properly function as an engine of economic growth. As the MIG Report: India’s urban awakening (April 2010) noted, about 20% of potential economic growth in India is not realized because of the urban Infrastructure deficiencies nation‐wide.

With industrial and service sector activities predominantly in cities and rapidly growing peri‐urban areas the ongoing urbanization process is the spatial expression of this economic transformation. In consequence, urban economic and population growth has been rapid and this is expected to continue, particularly in growing numbers of medium‐sized cities, more than through growth in metropolitan areas. While urban areas occupy about 2% of the land and contain about 45% of the population, approximately 75% of GDP originates in urban areas at present. Hence, the quality and efficiency of Asian cities will determine the region’s long term productivity and overall stability.

Urban Infrastructure financing gap Faced with the pace of change within modern cities, with the forces of a globalizing economy, and with the stress imposed upon urban infrastructure by migration and informal development, incremental approaches to infrastructure development can no longer be pursued. It has been estimated that the annual urban infrastructure requirement (for new infrastructure and replacement/ improvement of existing assets) in the Asian Development Bank’s (ADB) Developing Member Countries (DMCs) is in the order of $100 billion per annum over the next two decades. Current actual investment levels in urban infrastructure in ADB’s DMCs are at about $40 billion, financed for 70% out of national and local government resources, 20% out of private sector resources and 10% out of Official Development Assistance (ODA) resource transfers. While there is thus a quantitative urban infrastructure investment gap of about $60 billion per annum, the quality and focus of current infrastructure investments also requires to be improved in most of the DMCs cities.

The quantitative and qualitative gap in urban infrastructure development is not so much caused by a shortage of investible resources globally, but primarily by an inability of national and local entities responsible for urban infrastructure delivery to reach out to possible financiers (ranging from globally operating pension funds, life insurance companies, global infrastructure funds, international development banks to local development banks and local commercial banks) holding these resources. This in turn is caused very significantly by a shortage of well‐conceptualized urban infrastructure projects attractive for both public and private sector financiers, compounded by a lack of communication between urban infrastructure investment project proponents (particularly local governments) and the above financial institutions, particularly private sector financial institutions – there is a mutual lack of knowledge about urban‐scale investment financing opportunities.

Need for cities to pursue additional financing options The growing responsibility to provide infrastructure without substantial increases to their available funds has resulted in many city governments falling into budgetary deficits and facing rising debt service burdens. Hence, it is not surprising that many infrastructure projects are delayed or poorly maintained.

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Local governments in Asia can no longer take an incremental approach to financing and implementing strategic infrastructure investments that largely relies on grants from senior government levels.

Exacerbating these difficulties, demand for new and improved infrastructure has continued at an unprecedented rate with rapid urban growth. To tackle current and future infrastructure needs, it is imperative for city governments to look for alternative financing options and products to supplement their own sources. However, in order to tap external financing, the financial viability of local governments and their investments projects has to be clearly demonstrated. Given the challenges to access financing for urban infrastructure, it is critical for cities to take proactive steps. An integrated and coordinated approach drawing on the full spectrum of financing products will go a long way in helping cities to be more competitive and pursue more sustainable development. It is imperative now for city governments to look for alternative financing options. However, before tapping external sources, the financial viability of local government has to be enhanced to ensure the repayment of borrowed money.

Target Group The material is designed for local government officers who have only limited knowledge on alternate financing options for their strategic infrastructure investments and want to gain better understanding of the available options and criteria required. Participants should attend in pairs consisting of a finance

officer as well as either a public works officer or planner.

Course Objectives and Content The course offers an introductory orientation aimed to raise awareness and help prepare cities in their efforts to identify alternate external financing products for their infrastructure investment projects. The focus is on assisting local government officers to better understand where opportunities lay for available for financing. The content also looks to enhance understanding of internal institutional capacity needs, expectations on the part of the financiers, and modalities for financing agreements.

As such, while equally important, these materials do not attempt to address internal options to enhance a local government’s financial capacity, nor internal mechanisms to generate additional financing (e.g.: using betterment levies, bonusing, leveraging assets, etc.).

Participants will better understand the range of potential financing options for their urban infrastructure investment projects; be more aware of institutional criteria; better analyse projects for possible financing options; examine external resource opportunities to support city development efforts; and chart initial steps to pursue additional funding products for their infrastructure investments.

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1. Grants & Transfers (National, Provincial, State and ODA)

1.1 Summary

Local governments often apply for, or are provided, grants from the national government to pay for infrastructure projects or improvements. These grants typically carry specific restrictions or guidelines for how the money is to be spent. Grants also might be renewed each year, so local governments can

continue to use these funds for maintaining public facilities and projects. Different processes might apply to national grants, where cities and municipalities may have to apply for grants in a bid‐style process.

1.2 Description

Intergovernmental grants and transfers are the cornerstone of local government financing in most countries, especially as a source control over public finances while providing the mechanism to channel funds to local governments. There are many different forms of grants and transfers. The grants may be relent to any local government for the construction, expansion, operation or maintenance of public utilities and facilities, infrastructure facilities, housing projects, acquisition of real property, and implementation of other capital investment projects.

In additional to own sources for financing such grants, many national government agencies, including those whose functions have been devolved, are

tapped as executing and implementing agencies of Overseas Development Assistance (ODA) typically through sovereign lending. Government agencies and instrumentalities implement these ODAs in the form of programs and projects. Local governments may find opportunities for grants and technical assistance from such government programs or projects. It is often advantageous for local governments to make use of the various forms of technical assistance offered by these programs and projects. Additionally, local governments in some countries are allowed to accept grants directly from donors, without prior approval of the National Government.

1.3 Advantages and Disadvantages

• Grants often form the financial backbone of city‐level development projects and are provided with the fewest restriction or requirements of any financing option.

• When ODA is involved, it is typically bundled with technical assistance and capacity building to equip government staff on project related assistance.

• However, many cities rely exclusively upon such grants from higher level of government to implement development projects, and seldom look to other financing options.

• Development levels in such cities tend to fall behind both the needs and expectations of a growing urban population.

• Tend to create tension between local development objectives and national directions

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1.4 Suitable Sectors

Grants are typically provided for the construction, installation, improvement, expansion, operation and for maintenance of the following: • Public transport • Solid waste management collection and disposal systems • Electrification • Water supply and distribution systems • Schools and education projects • Housing Projects • Hospitals and health facilities • Establishment, development, or expansion of industrial/ commercial and

livelihood projects. • Acquisition of property, plant, machinery and equipment and other similar

accessories

1.5 Typical Steps: Example of Obtaining ODA Grants and Loans

Illustrative flow of ODA loan and grant programming in the case of the Philippines 1. Local Government Unit (LGUs) prepares a project proposal ‐ in consultation

with the Department of Interior and Local Government (DILG), NEDA and/or any other National Government (Line) Agencies (NGA).

2. The Local Development Council evaluates the project proposal for consistency with their Local Development Plan and Investment Program

3. Upon satisfactory evaluation of the proposal, the Local Council endorses the project to the identified ODA granting institution

4. The LGU submits the project proposal to DILG who refers the proposal to the concerned NGAs to check the following concerns:

a. Possible duplication with other proposed/on‐going proposals within 30 days b. Implications to national security 5. The concerned NGA(s) reviews the project proposal within 30 days and

informs the DILG and the LGU of the result of the review 6. Revision of proposal, if conflicts were identified in the review

7. Upon satisfactory completion of the project proposal, the Local Council endorses it to the identified ODA grant funding institution

8. LGU submits the project proposal to the ODA grant funding institution and provides copies of the project proposal to and regularly informs the DILG and the NEDA regarding the status of the proposal

9. LGU coordinates regularly with ODA grant funding institutions in facilitating the evaluation and approval of the local project proposal

10. NEDA coordinates regularly with ODA grand funding institution in facilitating the evaluation and approval of the local project proposal

11. An NGA or higher local or regional government body (i.e., Provincial Development Councils, PDC and RDC) evaluates the project proposal only upon express request of the ODA grant donor and consent of the concerned LGU(s).

See Annex 1.a for overviews of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM);

Box 1: Local to Local GrantsIn the Philippines, provinces, cities and municipalities may even extend loans, grants or subsidies to other LGUs in amounts not exceeding their surplus funds. LGUs may also jointly contract loans, credits, and other forms of indebtedness for purposes mutually beneficial to them. LGUs may, through appropriate ordinances, group themselves, consolidate, or coordinate their efforts, services and resources for purposes commonly beneficial to them. In support of such undertakings, the LGUs involved may contribute funds, real estate, equipment and other kinds of property and appoint or assign personnel as may be agreed upon by the concerned LGUs through Memoranda of Agreement.

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2. Government Loans

2.1 Summary

Stable source of financing for LGUs Support funding requirements of selected sectors of the economy

Rates are often below market for their clients and requirements are less stringent

Due to concessional natures of loans, processing is different than private sector loans

2.2 Description

National Government Government financing institutions play a pivotal role in sustaining growth and development of a country. Government Finance Institutions (GFIs) provide a stable source of financing for LGUs, as well as small and medium enterprises and microenterprises, livelihood loans, environment‐related projects, socialized housing, schools and hospitals. It also support smaller municipalities in its various efforts of infrastructure or livelihood loans and programs. Unlike their counterparts in the banking industry, GFIs exist to support the funding requirements of selected sectors of the economy. As such, they often offer lower interest rates to their clients and have lower requirements and standards to provide loans. GFIs can charge below‐market rates to LGUs through conduit financing with the national government.

The credit worthiness of the LGU is the main consideration in approving a loan application. Most LGUs also have the power to create indebtedness and to avail of credit facilities to finance local infrastructure and other socio‐economic development projects in accordance with the approved local development plan and public investment program. LGUs may contract loans from any government or domestic private bank and other lending institutions to finance the construction, expansion, operation or maintenance of public facilities, infrastructure facilities, housing projects, acquisition of real property and implementation of other capital investment projects as well as agricultural, industrial, commercial, livelihood projects, and other economic enterprises. Subject to the rules and regulations of the Central Bank and Securities and Exchange.

ODA backed To supplement their own limited resources for providing loans, national governments borrow from international funding agencies like the Japanese Bank for International Cooperation (JBIC), World Bank (WB), German Reconstruction Loan Corporation or Kreditanstalt Fur Wiederaufbau (KfW) and Asian Development Bank (ADB) at concessional rates and favorable terms. These funds are channeled through GFIs, which in turn channel the funds to participating commercial banks or other entities for retail lending or directly to LGUs. The processing of loan applications with GFIs is slightly different from private sector borrowing due to the concessional terms of the financing assistance.

Availability of ODA loans are limited in nature as they are levied against the resources of the national government and although they may be concessional, they form part of the country’s international debt. More specifically, “their interest rates range from 0 to 10 percent, maturity periods from 10 to 50 years, and grace periods from three to 10 years.” So, while the ODA may appear as “grants” at the LGU level, local officials must bear in mind that they are actually loans to be repaid for the entire country.

In recent years, several sub‐national governments have set up specialised financial intermediaries or funds to develop Greenfield infrastructure projects. These funds have often been instituted (and in some cases, part financed) under the auspices of projects funded by the World Bank and other funders. Broadly, there are two types of such intermediaries: 1. Municipal funds and facilities that provide funded products‐ debt and/ or

equity 2. Facilities that offer contingent products – guarantees or insurance.

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Municipal Development Funds Municipal development funds (MDFs) are parastatal institutions that lend to local governments for infrastructure investments. They can evolve to become financial intermediaries focusing on municipal credit. They are essentially financial intermediaries that provide credit to local governments and to other institutions investing in local infrastructure and are normally viewed as transitional instruments toward self‐sustaining municipal credit systems that can access domestic and international capital markets for financing.

Specialized municipal financial institutions in developing countries that lend to Local governments generally obtain their funds from ODA sources, and few have managed to change into institutions that utilize domestic markets to mobilize private funds.

Additional cases can be seen in Annex 2.a Town Development Fund, Nepal; Annex 2.c Municipal Development Fund Office, Philippines; Annex 2.d Local Development Investment Fund, Vietnam


• Easiest way to raise financing, no credit rating required • Local Government needs and interests are understood • Flexibility in financing terms, and works well with various sectors

• Amounts are limited and are often assigned on priority to local governments for projects which meet national development objectives

• Often can be accompanied by technical services from central government


Government loans are typically available to LGUs for the construction, installation, improvement, expansion, operation and for maintenance of the following: • Public transport • Solid waste management collection and disposal systems • Electrification • Water supply and distribution systems

• Schools and education projects • Housing Projects • Hospitals and health facilities • Establishment, development, or expansion of industrial/ commercial and


accessories

2.5 Typical Steps: Example of Land Bank Philippines

Illustrative Example – Land Bank of the Philippines (LBP) Loan Facility Information and Requirements of LBP to LGUs: A credit facility aimed to finance infrastructure and other socio‐economic development projects under the LGU’s local development plan.

Eligible Borrowers: a. Provinces b. Cities c. Municipalities

Box 2: New Directions for Municipal Development FundsThe Tamil Nadu fund of India (see Annex 2.b) is a leading example for structuring of Municipal Development Funds. The investment needs of local governments are far too great to be supported by ODA or other public funds over a long period. Long‐term sustainability suggests shifting to using the domestic capital markets as sources of funds for domestic borrowing. ODA funds could facilitate this by helping to support domestic institutions that tap domestic markets. There are many ways to achieve this. Examples are providing increased security to domestic institutional borrowings through backup guarantees or providing facilities to lengthen repayment period.

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Features: Loan Purpose • Construction, installation, improvement, expansion, operation and/or

maintenance of key local government infrastructure and services

Loan Amount • Based on the requirement of the project but not more than the net

borrowing capacity • The LGU shall contribute at least 25% of the total project cost.

Loan Term • Loan maturity shall be based on the local government’s cash flow but

preferably not to exceed five years.

Interest Rate • Prevailing Market Rate (non‐concessional)

Collateral Requirements • Hold‐out on deposits • Real Estate properties • Machineries and equipment owned by the LGU. • Deed of Assignment on any or all of the following: • of the LGU’s Internal Revenue Allotment (IRA) • LGU’s regular income as sourced from its annual budget, equivalent to

an amount sufficient to service the loan with LBP but in no case exceeding 20% of its regular income.

• Net profits or income from the project or economic enterprise to be financed. This shall be net of all the costs and expenses related to the project.

Processing Requirements • Budget for the current year duly approved by the City council • Audited Financial Statements for the past three years • Feasibility Study / Project Plans

• Standard documentary requirements such as evidences of ownership of offered collateral

For projects involving construction: • Cost Estimates/ Bill of Materials/ Plans and specifications • Work program / schedules duly approved by the local chief executive

and the city/district engineer

For acquisition of machineries and equipment: • List, description and estimated cost of machineries and equipment

based on firm’s quotation • Certification from the dealers / suppliers as to the availability of spare

parts in the local market

Other Financial Services for LGUs • Depository Services • Financial Advisory • Underwriting of Bonds

Box 3: LOGOFIND (Local Government Finance and Development Project) The Local Government Finance and Development Project for the Philippines assists participating LGUs in expanding and upgrading their basic infrastructure, services and facilities, and strengthens their capacities for municipal governance, investment planning, revenue generation, project development and implementation. It also enhances the capabilities of the National Government to provide technical support and long‐term financing to local governments through the Municipal Development Fund (MDF). Loanable Amounts and Charges: Payable up to fifteen (15) years inclusive of a three (3) – year grace period. Interest: Varies for each LGU and depends primarily on the computed maximum loanable amount/LGU paying capacity. Charges: 14% per annum

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3. Commercial Loans

3.1 Summary

Commercial loans are an agreement between the local government (borrower) and private entity lender. Loan agreement governs relationship between the lenders and the borrowers. It determines the basis on which the loan can be

drawn and repaid, and contains the usual provisions found in a corporate loan agreement. It also contains the additional clauses to cover specific requirements of the project and project documents.

3.2 Description:

• Simplest form of obtaining loans for municipalities; repayment period is typically 3‐5 years and may reach up to 12 years, typically shorter than needed for large infrastructure projects.

• Banks primarily rely on deposits to provide loans to municipal governments. Proper portfolio risk management requires that deposit terms be matched with loan terms.

• Rely on standard loan agreements.


• Can accelerate development since borrowing permits a level of investment which is not limited by current fiscal capacity

• Shorter term loan period offered for cities (e.g.: typically 3‐5 years with a maximum of up to 12 years) which does not suit large infrastructure investment projects

• Banks may restrict the use of loan funds or require a pledge of assets in excess of the amount borrowed, which will limit further borrowing by the municipality (e.g.: Various Commercial Banks)

• Excessive borrowing can build up an intolerable burden of debt‐servicing in the future


• Public transport • Solid waste management collection and disposal systems • Electrification • Water supply and distribution systems • Schools and education projects • Housing Projects

• Hospitals and health facilities • Establishment, development, or expansion of industrial/ commercial and


accessories

3.5 Typical Steps: Example ‐ Philippines Veterans Bank

Private Bank Loans to LGUs Aside from the Philippine Veterans Bank, which is technically a private bank, but which has strong links with the government given the nature of its shareholders, no private banks have given direct loans to LGUs in the

Philippines. The Philippine Veterans Bank has approved a total of P723.7 million (USD $17.2 million) for loans to LGUs as of end‐December 2004.

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Standard Requirements for Local Government Units (LGUs) Quick Evaluation Stage –documents needed to quickly evaluate the proposed LGU project and determine an indicative borrowing capacity. • Statements of Income and Expenditures; Balance Sheet; Cash Flow and

Grants received for the Last 3 Years • Interim Statement and Budget for the Current Year • List of Existing Borrowings and Terms and Conditions • Project Brief

Credit Approval Stage: additional documents needed to prepare the account information memorandum and the indicative terms and conditions of the credit facility to obtain the needed credit approval. • Letter of Request for Financial Arrangement specifying the purpose and

amount of the loan • Audited Financial Statement for the last 3 years • Socio‐economic profile and Local Development Plan indicating project’s to

be funded by the loan • Project Study (e.g.: Pre‐feasibility or Feasibility Study) • Proposed Security/Collateral • Tax declaration on land and improvements • Certificate of local government Debt Service, Borrowing Capacity & Paying

Capacity

Post Credit Approval Stage: additional documents needed to release the approved loan

• Signed Loan Agreement, Deed of Assignment and other documents related to the loan

• City council Resolution confirming and ratifying the terms & conditions under the Loan Agreement o the amount for repayment shall be appropriated in the local

government’s annual budget until the obligation, interest and other charges are fully paid and settled.

• Certification signed by appropriate local government official: o All obligations of the LGU will not exceed 20% of the total Central

Grant/ Transfer and other Revenues o The loan obligation entered in the local government’s book of account o Sources of payment are available and not restricted o That the principal and interest repayments will be duly appropriated

• That the project is included in the Local development and annual Investment plans

For Contracted Projects • Certified True copy of the Bidding documents; Notice of Award and

Acceptance by the winning bidder • Certified True Copy of the Notice to Proceed

For Infrastructure • Construction Contract • Bill of Materials • Complete Plans and Specification • Work Schedule and S‐Curve

For additional example, see Annex 3.a. – Philippine National Bank;

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4. Sector ‐ Specific or Specialized Financial Institutions (SFIs)

4.1 Summary

Specialized financial institutions finance infrastructure projects either by direct lending, refinancing or any other means, subject to approval by the government. They act as commercial (non‐banking) entities and charge market‐based fees

and rates. The Central Government has also established sector specific specialized infrastructure financing institutions. Some States have also established state level financial institutions.

4.2 Description

SFIs are institutions that have been established to serve the increasing financial and technical needs of a particular sector. Generally under the administrative control of a Government. (Ex. Power Finance Corporation (PFC)) and are typically non‐banking financial institutions.

For infrastructure, Specialized Urban Infrastructure Financing Institutions act as commercial entities and charge market‐based fees and rates. They finance infrastructure projects either by direct lending, refinancing or any other means, subject to approval by the government. (see examples: Infrastructure Development Finance Company Limited (IDFC) – (see Annex 4.a.), and Infrastructure Leasing & Financial Services Limited (IF&LS) – (see Annex 4.b.)


• Low level of lending by these institutions and/or a growing backlog of applications for loans‐ problem in the supply of capital to municipalities.

• Lengthy internal procedures and/or restrictive investment policies

• May not able to supply adequate amounts of capital to municipalities. • Limited access for cities and municipalities (currently focus is on State and

National levels projects)


• Urban Infrastructure: Transport, Roads & Bridges, Inland Waterways, Seaports, Airports, Water Supply, Sewerage, Solid Waste Management

• Industrial and Commercial Infrastructure: Industrial Parks; Energy; Electricity Generation, Transmission , Electricity Distribution, Oil & Gas Pipelines

• Communications: Telecommunication and IT

4.5 Typical Steps: Example India Infrastructure Finance Co. Ltd. (IIFCL)

In order to be eligible for funding under this Scheme, a project shall meet the following criteria:

The project shall be implemented (i.e. developed, financed and operated for the Project Term) by:

• A Public Sector Company • A Private Sector Company selected under a PPP initiative; or • A Private Sector Company

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Provided that IIFCL shall accord overriding priority for lending under this Scheme to Private Public Partnership projects that are implemented by Private Sector Companies selected through a competitive bidding process.

Provided further that IIFCL can lend directly to projects set up by private companies subject to the following conditions:

The service to be provided by the Infrastructure project is regulated, or the project is being set up under an MOU arrangement with the Central Government, any State Government or a PSU.

IIFCL may fund viable infrastructure projects through the following modes: • Long Term Debt; • Refinance to Banks and Public Financial Institutions for loans granted by

them. • Take out Financing

• Subordinate Debt

Lending to PPP projects

In case of PPP projects, the private Sector Company shall be selected through a transparent and open competitive bidding process.

PPP projects based on standardized/model documents duly approved by the respective government would be preferred. Standalone documents may be subjected to detailed scrutiny by the IIFCL.

Prior to inviting offers through an open competitive bid, the concerned government or statutory entity may seek ‘in principle’ approval of the IIFCL for financial assistance under the Scheme. Any indication given by IIFCL at the pre‐bid stage shall not be treated as a final commitment. Actual lending by IIFCL shall be governed by the appraisal by the Lead Bank carried out before financial closure of the project.

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5. Public Private Partnership

The following are selected excerpt from the CDIA document “Public‐Private Partnership (PPP) Guide for Municipalities, 2010. A copy of the full document can be downloaded from: http://cdia.asia/wp‐content/uploads/PPP‐Guide‐for‐Municipalities‐FINAL‐100609.pdf

5.1 Summary

• For local governments, a well structured partnership with a qualified private sector partner can provide much‐needed finance, limit public risks, and provide cities with far more certainty, while helping to ensure that quality urban services can be provided quickly and efficiently.

• While engaging with the private sector in infrastructure provision might seem complex at first glance, the overall concept of PPP is not a difficult one and can offer many public benefits.

• PPP can work if certain pre‐conditions are met, including commitment and clear vision. Many past problems with PPPs have been due to faulty design and implementation, not necessarily with the concession model and conceptual framework.

• In pursuing a PPP, local authorities must often adapt to a different mindset and role compared to what they assume under a traditional publicly‐

financed project. Perhaps most importantly, projects must be structured in a way that makes them attractive in a free and competitive market. They must be “bankable,” meaning that they must look attractive to bankers and other providers of financing.

• There is more than one way to develop and implement a PPP. Each project is unique and there are endless possibilities. There is a lot of room for creativity, so public authorities should not feel ‘boxed‐in’ by narrowly‐defined contract types.

• One of the most important considerations for local authorities is drafting a good contract with fair provisions for risk sharing and risk mitigation. Understanding the risks will protect both private and public parties to the agreements.

5.2 Description

Broadly speaking, public‐private partnership is a means through which a local authority can engage private partners to develop urban infrastructure (assets) and related services. Although PPPs come in many forms depending on the level of private sector involvement, they generally share some common features: • Various risks are shared between the public and private partners, with each

type of risk allocated to the partner best able to manage it; See Annex 5.a. regarding Treatment of Risks in PPP Projects.

• These risks are allocated through enforceable contracts between the partners, whereby the private partner is bound to add value over a period of time through new investment, provision of services and management, or a combination of both;

• The private partner is paid for the original construction costs and returns on investment, often through the project’s own revenues; and

• The public partner retains final responsibility to its citizens, and retains the right to take back the facility if the contract is not being honored.

Overall, the basic principle is that successful PPPs balance the private partners’ need to make reasonable returns with the public’s need to secure access to facilities and services at a reasonable price.

Not all contractual relationships between the public and private sectors, even those involving infrastructure and provision of services, are “true PPPs.”

PPP is NOT: • PPP is NOT a simple outsourcing of functions or services. To the contrary, in

a PPP, significant, if not full, responsibility is transferred to the private partner(s) for financing, designing, constructing, and operating infrastructure projects.

• PPP is NOT a donation by a private party for public good. In a PPP, the private partner(s) participate with a focus on making business and profit.

• PPP is NOT primarily a privatization or the divesture of state assets and/or liabilities. A PPP agreement, although often renewable, has a finite life, during which the assets remain public and after which the assets normally return to public ownership.

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• PPP is NOT the “commercialization” of a public function through the creation of a state‐owned enterprise. PPP projects transfer certain operational and financial risks to the private partner(s), whereas a state‐owned enterprise performing the same function keeps those risks in the public sector.

• PPP is NOT more borrowing by the local authorities. A principal aim of PPP is to augment public investment capacity by attracting private capital for financially self‐sustaining projects, or components of projects, with borrowings secured as much as possible by the project’s own assets and revenues, not by general public revenues.

There are two main actors in a PPP Project. The first is the local authority in charge or in possession of the facility or infrastructure. They are the ones that contract for the facility and are responsible for the public during the course of the PPP. The second actor is the investor, which is the corporation or private entity willing to participate in the development of the business. In a PPP, there may be several different types of investor partners that contribute debt or equity investments

Characteristics of PPP The following key elements usually characterize PPPs: • Duration: The relatively medium or long duration of the relationship,

involving a contractual relationship between the public partner and the private partner on different aspects of a planned project. During the entire life of the contract, continuous monitoring would ensure efficiencies from long term private sector led asset management.

• Asset financing, life cycle responsibility and ownership: The asset financing or the method of funding the project, in part or full from the public or private sector, sometimes involves complex arrangements between the various players, with the ownership of the assets often reverting to the public sector at the end of the arrangement. Since the private sector is responsible for maintaining the asset through its useful life, it is incentivized to build an asset in a way that optimizes periodic life cycle maintenance costs.

• Performance‐based returns: Emphasis is on the specification and delivery of the services associated with the procured asset rather than the asset itself; so well functioning PPP arrangements often specify payment to be contingent on the operator meeting the set performance standards in service delivery. This is because one of the most important benefits of PPP is the achievable efficiency gains and substantial risk allocation to the private sector rather than just access to private finance.

Output and quality of service specification: The roles and responsibilities of the private and public sectors will differ, and the private sector partner has potential to participate in different stages in the project (design, construction/ rehabilitation, operation, maintenance and funding) depending on the need defined by the public sector. The public sector partner concentrates primarily on defining the outcomes to be attained in terms of public interest, quality of services provided and pricing policy. They may need to provide, on case by case basis, required financial support (e.g. availability payments, minimum revenue guarantees, loan guarantees, viability gap funding, etc). When there is such public funding whether or not to complement user fees, the contracts will directly link the release of such public funding to the actual delivery and availability of services, and the performance aspect would need to be monitored over the whole life of the contract to ensure efficiencies from long term private asset management. Thus the public sector partner also takes responsibility for monitoring compliance of outcomes and managing contingent liabilities. See Annex 5.e. Joint Ventures with Private Partners for a discussion as an alternate means for private sector participation. • Risk allocation to the Private Sector: Risks generally borne by the public

sector in traditional construction or turnkey contracts are distributed between the public partner and the private partner. However, a PPP does

Figure 1: Partnership and Participation must be principles of any PPP

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not necessarily mean that the private partner assumes all the risks, or even the major share of the risks linked to the project. The precise distribution of risks is determined case by case according to the respective ability of the public and private sector partners concerned to assess, control, and cope with the risk. Therefore the most important principle of risk allocation

arrangements in PPP is that risks are disaggregated, quantified and allocated to the party best able to manage each risk. See Annex 5.b. Treatment of Risks in PPP projects and Annex 5.c. for Typology of Risks in PPP projects;

5.3 Advantage and Disadvantages

Potential Benefits in Venturing into PPP • Public funds are stretched further. Involving the private sector to finance

infrastructure projects allows local governments to redirect their limited funds to priority social services or policies.

• Projects are implemented faster. Public sector processes for designing, constructing and financing projects generally take longer than those handled by the private sector, where “time is money”.

• Risks and liabilities are reduced for local governments. Public infrastructure investments often do not live up to expectations because too much risk is placed upon local governments, which often leads to costly and inefficient projects. PPPs can transfer much (not all!) of this risk to the private sector, thereby easing the burden on cities.

• More services can be provided (doing more with limited funds). Most cities lack services and need additional infrastructure. As private investors generally finance the initial construction and operation of PPP infrastructure, city governments can develop more projects with the same budget and borrowings, focusing their resources on those projects that are not appropriate for PPP treatment.

• Better services can be provided. The quality of public services can deteriorate after construction due to lack of maintenance, expertise, and diligence on the part of non‐accountable public operators. In contrast, private operators often have more of a customer‐service orientation, which can lead to higher‐quality services for city residents.

• Accountability is enhanced. PPP services are provided under strict contracts between local authorities and private partners. The local authority sets service levels and then verifies and regulates the quality of the service, with financial incentives for exceeding targets or punishment for under‐performance.

Some of the challenges of PPP can be grouped as per the following: • Cost Recovery: The private sector is motivated to participate in PPPs as it

seeks potential returns from investments. However, revenue from user

charges depends on the ability and willingness of users to pay. Governments have traditionally subsidized user charges. With the involvement of the private sector, cost savings from operational efficiency may not be sufficient to cover the shortfall due to subsidized user charges. On the other hand, increasing user charges may result in public outrage. This can sometimes be avoided through government‐determined price ceilings. However, without appropriate returns commensurate to the risk involved, private sector players will be hesitant to enter into such partnerships.

Figure 2: Value for money ‐ the benefits of bringing the private sector over the traditional approach

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• Foreign Exchange Risk: The majority of infrastructure projects generate revenues in domestic currency. Using foreign currency loans may thus lead to foreign exchange risk. Moreover, domestic capital markets in many Asian countries are underdeveloped and have limited hedging instruments to manage foreign exchange risk.

• Political Risk: Developing countries are constantly reviewing and changing their regulatory frameworks. This deters the private sector from committing huge investments in PPPs. Political instability is considered a major risk by the private sector as it presents a risk of contract cancellation or renegotiation. Failures in previous PPPs also reduce the appetite for private sector investment.

• Weak Governance: Weak governance and corruption can reduce the interest from internationally reputed developers. In the annual Corruption Perception Index 2009, the majority of Asian countries scored below five on a maximum scale of 10, indicating that corruption is a major concern in Asia.

Areas susceptible to corruption include the award of construction contracts, price fixing between public and private sector operators, and the provision of government support in the form of subsidies or guarantees.

• Contingent Liabilities: Many city governments fail to take into account contingent liabilities while entering into PPPs. Contingent liabilities usually arise due to government guarantees to the private partners in a bid to attract private sector financing. However, many governments do not set aside sufficient reserves, so when the liabilities crystallize, they are unable to meet the obligations. Contingent liabilities can also arise when governments agree to a take‐or‐pay contract based on an overestimated demand forecast.

See Annex 5.a. for a Summary Table of PPP Types and their relative advantages and disadvantages


PPP projects are not sector specific but project must be revenue generating, and more suited to transport and water supply type of project. However, investors tend to be more interested in a brownfield project (than Greenfield) due to perceived risk of large infrastructure projects

Sectors in which PPPs have been completed worldwide include:

Transportation • ports, • roads / highways, bridges, • railways, airports, • urban transport facilities: e.g.: mass transit facilities, bus stations, parking

Utilities • water treatment and distribution • sewerage systems and wastewater treatment; • solid waste management • desalinization plants

• energy/power generation, transmission, distribution, street lighting • telecommunications,

Services • hospitals and health services, • school buildings and higher education institutes, • tourism infrastructure and facilities including MICE (meetings, incentives,

conferences and exhibition) facilities, and • Other infrastructure/public sector services such as government buildings,

stadiums, prisons.

A number of agencies are involved in a range of sectors and providing a range of services. Examples can be seen in Annex 5.h. Private Infrastructure Development Group (PIDG); Annex 5.i. Equity Funds for Infrastructure: Pan Asia Project Development Fund; Annex 5.j. Standard Chartered IL&FS Asia Infrastructure Growth Fund; and Annex 5.k. ICICI Venture.

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5.5 Typical Initial Steps in PPPs

Determine if a project is a good candidate for a PPP If a local authority decides to pursue a PPP, they must remember that they are bringing a project to the market requesting for money and skills. To gain access to both, the project must be attractive to potential private partners.

Doing so will require the local government to think like a potential investor. For starters, the borrower for a PPP project will be a private company that typically has limited resources and will be capable of collateralizing only a finite amount of financing with their own assets. Instead, they must largely turn to project finance, meaning that they must rely on the project’s own revenues to repay most of the financing for the investment, as well as to earn a profit. In this way, investors in private entities are able to loan large amounts of money for infrastructure projects, while putting up only a small amount of their own resources and providing no other collateral but the projected income from the project. This is much different than the loans for publicly‐financed projects, which typically require government warranties.

In principle, any infrastructure that can generate revenue can potentially be a good candidate for a PPP. In most cases, a good test is whether the projected

revenue will balance the cost of the project within a reasonable timeframe. To accomplish this, users must be willing to pay for the new or improved services. If not, it does not necessarily mean that a PPP is not feasible, but some other arrangement must be found to compensate the investor.

The entire project as a whole need not generate revenue provided the local authority can “unbundle” the revenue‐generating components and package them on their own. This is a very common practice in many sectors. Examples include parking garages in municipal buildings, tenant businesses at railroad stations, methane outputs from landfills, recyclable scraps in solid waste streams, rolling stock in public transport projects, and treatment plants in water systems.

To successfully unbundle project components, the local authority must be able to “ring‐fence” them, meaning that they must keep revenues from the unbundled component(s) separate from the larger system. This provides more certainty to investors, thereby reducing their risks and increasing the chances that a PPP arrangement can succeed.

Provided a project can be ring‐fenced and the use of the services can be properly measured, a PPP scheme may still be possible even if project costs are not covered directly by user fees. For example, “shadow tolls” are sometimes used in road projects, whereby a local government pays for the service according to the use of the road in lieu of regular tolls paid by individual drivers. Similar arrangements can also be applied to social infrastructure, such as public schools, hospitals, and jails.

View the project from the potential investor’s perspective Before approaching potential investors, local authorities must understand how their project might be perceived on the market and realize that their project must be more “marketable” than other projects that may be competing for investors’ time and money. See Annex 5.d. Selection of the Partner/ Operator.

Potential financiers and sponsors look at projects as businesses. They are careful to analyze all potential risks before they commit to a project and also to structure project contracts to address all of the risks they have identified. In the process, they help ensure that the project will operate as planned and recover all of its costs, despite any risk events that might occur along the way.

Box 4: Key Elements for a Successful PPP • Unwavering commitment is arguably the most important element that a

local government can bring to a PPP. With commitment and vision, viable solutions can almost always be found and challenges overcome.

• Commitment to, and capacity to, handle the procurement process. This starts with a pre‐feasibility study and initial programming of the PPP component(s) of the project, through contract negotiation and award, and all the way to monitoring of day‐to‐day operations;

• Commercial, financial, and economic issues. For instance, traffic and demand forecast must be reliable, and all parties must be able to abide by the PPP contract, etc.

• Technical issues. This includes reliable engineering and other technical assessments.

• Legal, regulatory, and policy framework. A clear and transparent framework helps govern both the pre‐transaction stage (e.g. selection, screening, structuring, tendering, and evaluation) and the post‐transaction stage (e.g. regulation and monitoring). Most important is the PPP contract itself, which will govern the partners in the project.

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Only in the case of full privatization, where an asset is sold or transferred to a private investor, does a public authority give up permanent ownership of a facility. An example at the local level is municipal land transferred to private hands that will serve a public purpose, such as building a hospital. As long as the project is a public service, the local authority retains some level of responsibility.

The process of putting together a successful PPP project requires an approach that might be quite different from what most public authorities have previously practiced in developing standard publicly‐financed projects. Thus, authorities often have to adapt to a completely new mindset and role when they undertake PPP arrangements, requiring them to learn new ways to structure and measure projects and to grasp new concepts, such as viability and bankability. Some of the important differences include the following: • Focus on partnership: the public authority is now looking for a partner, and

the relationship is much different than that with a contractor. Under a PPP, contractual relationships among public and private partners prevail over hierarchical control.

• Market rules: For a PPP, the public sector must make their projects attractive in a free and competitive market, where investors and participants must be enticed to participate, not compelled, persuaded or commanded.

• Unfamiliar bidding processes: Unlike sole sourcing or direct negotiations, a well‐structured competitive process provides bidders with an incentive to submit quality offers (e.g. investment levels, efficiency, technology) at a reasonable price. Local governments may find it difficult to find a reliable company with the necessary experience and skill to develop and finance a PPP project. They will likely look beyond the companies they usually work with and perhaps even open up the search to international bidders. See Annex 5.e. regarding Finalization of Contractual Frameworks & Execution of Contract Agreement.

Figure 3: Perception of project risk from the standpoint of potential PPP investors

9

6

7

Feasibility Study

Contract

Implementation/Operation

5

Project Assessment

Local Authorities Private Sector Company

Pre‐Feasibility Study

Stakeholder Inputs

Bidding

Tender Submission

Negotiation

Figure 4: Basic steps in a PPP Project. The following diagram sets out an overview of the typical PPP implementation process. This process will be used to structure the discussion in this section. The numbers on the diagram denote the relevant sections in the CDIA PPP Guide.

Greenfield projects Brownfield projectsProject to rehabilitate

and extend

Inve

stor

’s le

vel o

f con

trol

Certainty about project’s viability

BT-Build and Transfer; BOT-Build, Operate and Transfer; BTO-Build, Transfer and Operate; BLT-Build, Lease and Transfer; DOT-Develop, Operate and Transfer; ROT-Rehabilitate, Operate and Transfer; CAO-Contract, Add and Operate; BOO-Build, Own and Operate; ROC-Rehabilitate, Own and Operate

+

+-

-

Moderate riskPrivate sector designs, constructs and/ or operates new facilitiesAssets remain indefinitely with the private firmType of contracts: BOO

More riskPrivate sector designs, constructs and/or operates new facilitiesContract for limited periodAssets are returned to the public sectorType of contracts: BT, BOT, BTO, BLT, DOT

Moderate riskPrivate sector rehabilitates and/or operates existing infrastructureContract for limited periodAssets are returned to the public sectorType of contracts: ROT, CAO

Less RiskPrivate sector rehabilitates and/ or operates existing infrastructureAssets remain indefinitely with the private firmType of contracts: BOO

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• More extensive selection standards. For a traditional publicly‐financed project, the technical configuration is defined by the public authority, and the evaluation of bids is usually limited to the background and soundness of the company, the price, and the schedule. In a PPP, the evaluation process is

much different. It involves selecting the candidate that offers the best overall package (e.g. quality of technical solution, value‐for‐money, price, etc.).

See Annex 5.f. regarding Financial Close of the Project.

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6. Climate Change and Environmental Funds

6.1 Summary

Environmental Funds are regional‐, national‐, or community‐based instrument for financing sustainable development or the conservation of biological diversity. Managed by private organizations, and capitalized by grants from

government and donor agencies, the proceeds of debt for nature swaps, and for taxes and fees specifically designated for conservation.

6.2 Description

There are a number of special funds and programs catering exclusively to climate change mitigation and adaptation with a broad spectrum of strategies, programs, policies, projects and enabling measures. At present, there are three primary dedicated multilateral sources of international financing for climate change intervention. • Climate Investment Funds (CIF) were designed by developed and developing

countries and are implemented with MDBs to bridge the financing and learning gap between now and the next international climate change agreement after the Kyoto Protocol. CIFs are two distinct funds: the Clean Technology Fund and Strategic Climate Fund.

• Global Environment Facility – A partnership of 178 countries, international institutions, to address climate change and technology transfer. Since 1991, it has allocated US $ 2.5 billion and leveraged $17 billion in co‐financing.

• Clean Development Mechanism (CDM) –Based Funds. ADB (Future Carbon Fund) and World Bank (Carbon Finance Initiatives) have funds, which will pay part of the proceeds (usually 50%) from the CDM and post‐Kyoto transfers up front rather than on achievement.

Several countries are channeling a considerable amount of their funds through export credit agencies and other public‐private channels. The Climate Investment Funds (CIFs) and the Global Environment Facility (GEF) are the primary multilateral institutions of choice through which other funds will be channeled. ADB is scaling up its financial resources to promote low‐carbon and climate‐resilient growth and is assisting its developing member countries in accessing additional public concessional funds and ensuring DMCs make the most of private finance.


• Cities can gain access on additional funding from (but not limited to) multilateral and bilateral environmental funds. i.e. ‘climate financing’ by using limited public resources and leverage low‐carbon mitigation projects.

• Developing countries can mainstream climate change issues in development planning that gears toward environmental friendly projects, i.e., projects with low carbon emissions.

• Resource constraint • Accessibility of funds • Stringent process and selection procedure‐ application process is long

and tedious • Most international climate finance is channeled through national

governments, and city access to funding remains uncertain


• Energy Efficiency • Renewable Energy • Solid Waste Management

• Sustainable Transport • Urban Greening • Water & Wastewater Management

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6.5.a Typical Steps: Sample Environment Fund (Global/ Regional)

Source: International Financing for City Climate Change Interventions

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6.5.a Typical Steps: Sample Environment Fund (National)

In Indonesia, climate change activities are usually assigned to national agencies, which do not traditionally focus on urban issues. The Figure 5 below depicts the flow of international climate finance in the Indonesian bureaucracy.

Further information on other fund related to climate change is included in Annex 6, in terms of the level of intervention wherein local governments and the private sector, which are partners in the development of city environmental projects, are able to gain access; in terms of the nature of support (grants, loans, co‐financing) that will increase the capacity of cities to access finance.


Figure 5: Indonesia – Flow of international climate finance funds

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7. Bilateral and Multilateral Banks & Guarantee Facilities

7.1 Summary

Multilateral lenders offer concessional finance and aid as well as finance at non‐concessional rates. Concessional finance is offered to countries in accordance with particular conditions related to per capita income and the level of national development. Ex. ADB (see Annex 7.a), World Bank

Bilateral lenders are financial institutions set up by individual countries to finance development projects in developing countries and emerging markets. Ex. JBIC

Official lending also includes bilateral lending through national development agencies such as the United States Agency for International Development (USAID), the United Kingdom’s Department for International Development (DFID), and Germany’s Kreditanstalt für Wiederaufbau (KfW) and Deutsche Investitions‐ und Endtwicklungsgesellschaft (DEG).

Guarantee facilities offer insurance to help protect investors and make projects more attractive for financiers.

7.2 Description

Multi‐ and Bi‐lateral Development Banks and guarantee facilities are among the most widely used mechanisms of extra‐budgetary funding and assistance for infrastructure projects. Established at regional and international levels, such institutions offer funding and advice to projects that may not have access to commercial banks and insurers, primarily owing to a long project term, country risk, an inadequate return rate, or a limited local banking sector.

While some development banks and guarantee facilities offer overlapping services, the two are traditionally differentiated by the development bank focus on lending and the guarantee facility focus on insurance. Grants sometimes feature in bank and agency packages, but as a rule, projects are treated as commercial ventures, with payment/repayment schedules. Both banks and guarantee facilities are mandated to foster ―development (broadly defined as improvement of indicators relating to basic services and human capital). Infrastructure projects are not surprisingly a major focus of activity, given their

typically higher capital costs, steady revenue generation potential, and development effects.

Bank loans, investment, and leasing Loans are the primary instrument of development bank support for infrastructure projects, and are conceptually similar to commercial loans, although they frequently feature below‐market interest rates, longer terms, customized repayment schedules, and a greater degree of technical assistance in realizing the project. As a variant on loans, leasing arrangements are sometimes agreed; in this case, the bank buys an asset and leases it to the contracting party, with a possible ownership transfer at the end of the lease. Banks may also opt for equity participation, traditionally as minority partners, subject to a set of conditions relating to such matters as management and divestment. Similarly, banks may also invest through in‐house or external private equity funds.


Development Banks • Cities or Municipalities can gain access to development banks (typically

through national government) for technical assistance • Price of loans are lower (interest rates) compared to commercial loans.

• Provide loans and grants for advisory services related to infrastructure projects.

• Help borrowers craft an overall project strategy, improve management capability and ready the project for submission to commercial lender

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• Assist in linking the project into other initiatives, as well as in preparing an application for the bank’s own financial products and services.

• They seldom offer sub‐sovereign lending Guarantee facilities • Sell insurance for equity investments and loans in areas deemed too risky

for commercial insurers. • Offer longer‐term coverage (7‐20 years) at annual rates based on the

political, regulatory, and security conditions of the project country, the nature of the project, and the monetary amount involved;

• Policies will reimburse a given percentage of the loan or investment if it fails as a result of those in‐country conditions or other stipulated reasons.

• Plays a key role in corralling capital and additional insurance: their vetting and determination of insurability for a project signals to other lenders, investors, and insurers that the project is worthy of consideration,

• Helps borrower approach new funding and insurance sources


• Most key Infrastructure sectors‐ including transport and communications, energy, water, supply and sanitation, and urban development

• Environmental improvement

• Regional Cooperation and Integration • Finance Sector Development • Education

7.5 Typical Steps

Securing the involvement of bi‐ and multi‐lateral development banks and guarantee facilities (either directly or as part of a mix of financing options) in infrastructure projects often involves the following steps: • Self‐screening by project initiator – initiator determines if there are obvious

mismatches between project profile and bank/agency criteria (i.e.: need for good projects).

• Initiator submits financing/insurance request – submission of high‐level project description and credentials; bank/agency then determines if project is appropriate for detailed appraisal; bank/agency frequently offers to assist in document preparation.

• Formal review process – bank/agency performs intensive due diligence on project, focusing on repayment capability, technical dependability, and development potential; extensive interaction between proponent and bank/agency; site visits possible.

• Adjustment of proposal pursuant to bank/agency findings and willingness; project details may be made public, extent dependent on bank/agency.

• Disbursement of funding, assistance, or coverage is governed by (usually) negotiated terms; the national government of the host country is party to agreements.

The timeframe for the process and each step within it varies dramatically by organization and transaction type, though six months is something of a

minimum. The formal review predictably occupies the largest proportion of time.

Screening criteria At the highest level, development banks and guarantee agencies look for projects that conform to their purview and specialties, often formulated as yes/no, stop/go‐type checks that do not consider the individual merits of the project but rather ensure that the project is prima facie suitable for the bank or agency. These screening criteria typically include: • Project country membership in the bank or agency, or a project location in

the bank or agency’s geographical mandate. • Type of financing, insurance, or assistance sought—does the bank offer it? • Timing/duration of financing and insurance. • Project and initiator profile – public/private, non‐profit/for‐profit,

multinational/domestic, syndicate/solo • Alignment with mission of bank or agency. • Whom does the project benefit? • Urgency of problem addressed by project. • Type of project (sector/subsector). • Size of project.

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Project viability criteria If the project meets these initial criteria, evaluation turns to the soundness of the project ‐ will it likely be able to repay its lenders and investors and achieve its stated purpose in a manner and timeframe consistent with bank and agency conditions and norms? Key criteria often include: Project structure; • Other sources of financing, insurance, and assistance • Quality of project team • Technical and operational feasibility;

o Can permits/authorizations for the project be obtained? o Construction work plans and engineering documents o Availability of equipment, workers, power, and raw material supply o Operating and maintenance plans o Safety and security measures and plans o Benchmarking with similar projects

• Economic viability; o Project/business plan o Market background o Market forecast o Anticipated costs, revenue/funding, and returns – emphasis on cash

flow

o Capital movement/currency restrictions o Benchmarking with similar projects

• Contribution of project to common good; o Positive community/national/regional impact o No negative impact on other communities (no siphoning effects) o Amplifier effects (other sectors and communities benefit) o Anti‐corruption measures

• Identification and mitigation of risk for all project areas; • Alternatives – are there other and better ways of meeting the need

addressed by the project?

Socio‐environmental criteria Given the increasing importance of social and environmental issues as considerations for lending and guarantee coverage, many development banks and guarantee agencies also heavily favour, if not require, projects that can demonstrate: • Minimal social and environmental disruption; • Conformity to relevant international codes; • Mitigation of any anticipated effects; • Use of best available practice and/or technology regarding socio‐

environmental issues; Stakeholder engagement, preferably throughout project life.

Figure 6: Process in obtaining development bank loans and guarantees. Securing the involvement of development banks and guarantee agencies in an infrastructure project often involves the following steps:

Self Screening by Initiator

Initiator Submits Financing/ Insurance Request

Formal Review Process

Adjustment of Proposal

pursuant to bank's findings

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8. Bonds and Pooled Funds

8.1 Summary

Where permitted by legislation, local governments can issue bonds to finance infrastructure items. Bonds include set amounts that investors will receive. While this option might not be available for every infrastructure project, it does represent a common way to fund projects. Local governments might struggle to

issue bonds if they cannot achieve a high bond rating from external agencies. Low bond ratings are a signal to investors that the bonds contain too much risk compared with the promised return.

8.2 Description

When a government wants to raise funds, it can do so by issuing and selling bonds. An investment bank helps government or one of its agencies, to issue and sell new securities. It is usually a division of a brokerage firm, because many of their activities are related When the Government needs funds, it will first discuss the options and possibilities with an investment banker: how much money will be needed, what type of security to sell and any special features it might have, at what price, and how much this will cost the Government.

Municipal Bonds Municipal bonds are an improvement over bank borrowing as the municipality creates a debt instrument with term and conditions that meets its needs and the needs of the investor. The interest rate and repayment period can be negotiated. Use of funds and collateral requirements can meet the needs of both the municipality and the investors. See Annex 8.a. for the example of Ahmedabad Municipal Corporation Bond Issue.

Pooled Fund Pooled Fund – A new entity (a special purpose institution) is created to issue a bond to investors. The proceeds of the investment are passed through a trustee to a number of municipal borrowers. The borrowers use the proceeds for projects, and pledge a stream of income to pay the trustee. The trustee passes the repayments to the debt instrument issuer, which pays the investors. See Annex 8.b. for the example of Tamil Nadu Water and Sanitation Pooled Fund.

Project Bundling An approach under which a mix of urban infrastructure projects are bundled; and the bundle is then posited before the debt market. The projects should be chosen so as to diversify away and mitigate the individual project risks. This can be achieved by choosing projects with robust enough cash flows, which imparts an element of credit protection against revenue shortfall in the other projects.

This method of financing is typically used to leverage investments into smaller municipalities, whose credit worthiness is often suspect, by mixing them with projects from more credit worthy and larger municipalities. It can also be used to finance projects with smaller revenue streams, by bundling them with those having larger revenue streams.

Private Institutional Investors

TNUDF/WSPF ULB Bond

Escrow Account

Credit Enhancements

Market Supply Side

Market Demand SidePrinciple and

Interest

Bond SubscriptionPrinciple and Interest

Bond Proceeds

ULB Revenues/ Project Cash Flows

Figure 7: Illustrative municipal bond model in Tamil Nadu

Source: Commonwealth Secretariat, 2008. Financing Local Government.

ULB Infrastructure Projects

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Municipal Bonds • Attractive for Investors due to special tax‐exempt status of most municipal

bonds, investors usually accept lower interest payments than on other types of borrowing (assuming comparable risk)

• Where capital market is underdeveloped it may be difficult for municipality to establish necessary credit rating

• Attractive source of financing to many municipal entities, as the borrowing rate available in the open market is frequently lower than what is available through other borrowing channels. E.g. Ahmedabad Municipal Bond Issue

• Municipal bonds can be negatively perceived by investors for the following: o Difficult to cash‐in if the issuer is a smaller municipality o Rarely provide the returns the stocks and other riskier asset class

provide

o Typically carry lower interest rates than CDs or Treasury bonds o Investor view that value of investment may fall in cases where

cheaper bonds comes onto the market (investor will have difficulty finding buyers for their bonds at a good price)

Pooled Funding • Works best where a series of municipalities have smaller projects and are

willing to structure the projects in a similar fashion • Provides significant savings in origination costs over each municipality

issuing its own individual bonds • Less of a repayment risk to investors, then a single municipal bond (risk is

spread among all the borrowers in the pool) e.g. Tamil Nadu pooled fund


• Water supply and sewer collection networks water treatment and sewer treatment and disposal

• solid waste disposal sites • roads, bridges and underpasses, parks and recreation facilities, • surface water drainage,

• electrification, slum upgrading projects, • public health care facilities, • public/private education facilities, • commercial/ industrial developments

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8.5 Typical Steps: Example Municipal Bond Issue Process

Institutions

Local Governm

ent

Special Purpose Vehicle

Private Financial A

ctivity

Advisors

Technical

Financial

Im

plementation

Financial Advisors

Underw

riters

Financial Advisors/

Underw

riters/ Bond Lawyers

Issuers

Underw

riters

Trustees

Capital Investment Planning

Project Developm

ent

Identify and Develop

commercially viable projects

Com

pare project cost with

current revenue stream

Decision: to seek debt

Structuring a Bond Issue Decision Required: bond type, size,

terms of issue.

Credit rating carried out to determine

the ability and willingness of the

bond issuer to make full tim

ely paym

enttoinvestors

Structuring the Bidding Process to select underw

riters Through com

petition or negotiated process, an underw

riter is selected based on proposed or negotiated

Bond Docum

entation Preparation Advisors issues N

otice of Sale and Bond Resolution. Bond council issues legal opinion on com

pliance and authority to issue bonds and trustees is contacted to handle and distribute

Bond Issued through Notice of Sale

Underw

riters purchase bond shares and sell them

to public and private

Payment Collected and distributed to

investors

Players Process

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GLOSSARY of TYPICAL FINANCE TERMS

Amortization of Debt‐The process of paying the principal amount of an issue of

securities by periodic payments either directly to security holders or to a sinking fund for the benefit of security holders.

Auction Market‐A market for securities, typically found on a national securities

Audited Statement‐A financial statement which has been examined by an auditor and upon which the auditor has expressed or disclaimed an opinion.

Auditor's Report‐The written report of an independent auditor upon completion of the audit. The auditor's report describes the scope of the auditor's examination and gives or disclaims an opinion as to the fairness of the financial statements. It accompanies the financial statements as a part of the audit report.

Bid‐A proposal to purchase securities at a specified price. With respect to a new issue of municipal securities, the bid specifies the interest rate(s) for each maturity and the purchase price. The purchase price is usually stated in terms of par, par plus a premium or par minus a discount.

Bond Evidence of the issuer's obligation to repay a specified principal amount on a date certain (maturity date), together with interest at a stated rate, or according to a formula for determining that rate. Bonds are distinguishable from notes, which usually mature in a much shorter period of time. Bonds may be classified according to maturity structure (serial vs. term), source of payment (general obligation vs. revenue), method of transfer (bearer vs. registered), issuer (state vs. municipality vs. special district) or price (discount vs. premium).

Bond Proceeds‐The money paid to the issuer by the purchaser or underwriter of a new issue of municipal securities. These moneys are used to finance the project or purpose for which the securities were issued and to pay certain costs of issuance as may be provided in the bond contract.

Bond Purchase Agreement‐The contract between the underwriter and the issuer setting forth the final terms, prices and conditions upon which the underwriter purchases a new issue of municipal securities.

Broker Or Municipal Securities Broker‐A person or firm which acts as an intermediary by purchasing and selling securities (in the case of a "municipal securities broker," municipal securities) for others rather than for its own account. For purposes of the Securities Exchange Act of 1934 the term does

not include a dealer bank. The term is also colloquially used to refer to a municipal securities broker's broker.

Broker/Dealer‐A general term for a securities firm which is engaged in both buying and selling securities on behalf of customers and also buying and selling on behalf of its own account.

Brownfield Investments refer to well established cash‐flowing assets, such as fully operating toll roads. They are perceived to be the lowest return and lowest risk sector of infrastructure investing. The typical Brownfield investment profile is akin to a long‐term bond, with an immediate current coupon and a term of 15 to 30 years or more.

Competitive Bid Or Competitive Bidding‐A method of submitting proposals for the purchase of a new issue of municipal securities by which the securities are awarded to the underwriting syndicate presenting the best bid according to stipulated criteria set forth in the notice of sale. The underwriting of securities in this manner is also referred to as a competitive or public sale.

Contingent Products‐ i.e., Guarantees or Insurance ‐ A guarantee of payment made by a third party, known as the guarantor, to the seller or provider of a product or service in the event of non‐payment by the buyer. Contingent guarantees are normally used when the suppliers do not have a relationship with their counterpart. The buyer pays a contingent guarantee fee to the guarantor, which is generally a large bank or financial institution

Debt limit‐the maximum amount of debt which an issuer of municipal securities is permitted to incur under constitutional, statutory or charter provisions. The debt limit is usually expressed as a percentage of assessed valuation.

Debt Service Reserve Fund‐The fund in which moneys are placed which may be used to pay debt service if pledged revenues are insufficient to satisfy the debt service requirements. The debt service reserve fund may be entirely funded with bond proceeds, or it may only be partly funded at the time of issuance and allowed to reach its full funding requirement over time, due to the accumulation of pledged revenues. If the debt service reserve fund is used in whole or part to pay debt service, the issuer usually is required to replenish the funds from the first available funds or revenues. A typical reserve requirement might be the maximum aggregate annual debt service requirement for any year remaining until the bonds reach maturity. The size

27

and investment of the reserve may be subject to arbitrage regulations. Under a typical revenue pledge this fund is the third to be funded out of the revenue fund.

Debt Service Schedule‐A table listing the periodic payments necessary to meet debt service requirements over the period of time the securities are to be outstanding.

Debt service‐the amount of money necessary to pay interest on an outstanding debt, the principal of maturing serial bonds and the required contributions to a sinking fund for term bonds. Debt service on bonds may be calculated on a calendar year, fiscal year, or bond fiscal year basis.

Default‐Breach of some covenant, promise or duty imposed by the bond contract. The most serious default occurs when the issuer fails to pay principal, interest, or both, when due. Other, "technical" defaults result when specifically defined events of default occur, such as failure to perform covenants. Technical defaults may include failing to charge rates sufficient to meet rate covenants or failing to maintain insurance on the project. If the issuer defaults in the payment of principal, interest or both, or if a technical default is not cured within a specified period of time, the bondholders or trustee may exercise legally available rights and remedies for enforcement of the bond contract.

Effective Interest Cost‐The rate at which the total debt service payable on a new issue of bonds would be discounted to provide a present value equal to the amount bid on the new issue.

Effective Interest Rate‐The actual rate of interest earned by the investor on securities, which takes into account the amortization of any premium or the accretion of any discount over the period of the investment.

Equity‐ In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists. In an accounting context, Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock.

Exchange, in which trading in a particular security is conducted at a specific location with all qualified persons at that post able to bid or offer securities against orders via outcry. Very few municipal securities are traded in an auction market system.

Feasibility Study‐A report detailing the economic practicality and the need for a proposed capital program. The feasibility study may include estimates of revenues that will be generated and details of the physical, operating, economic or engineering aspects of the proposed project.

Financial Advisor‐ a consultant who advises the issuer on matters pertinent to the issue, such as structure, timing, marketing, fairness of pricing, terms and bond ratings. A financial advisor may also be employed to provide advice on subjects unrelated to a new issue of municipal securities, such as advising on cash flow and investment matters. The financial advisor is sometimes referred to as a "fiscal consultant" or "fiscal agent."

Flow of funds‐The order and priority of handling, depositing and disbursing pledged revenues, as set forth in the bond contract. Generally, the revenues are deposited, as received, into a general collection account or revenue fund for disbursement into the other accounts established by the bond contract. Such other accounts generally provide for payment of the costs of debt service, debt service reserve deposits, operation and maintenance costs, redemption, renewal and replacement and other requirements.

General Obligation Bond or G.O. bond‐A bond, which is secured by the full faith and credit of an issuer with taxing power. General obligation bonds issued by local units of government are typically secured by a pledge of the issuer's ad valorem taxing power. Such bonds constitute debts of the issuer and normally require approval by election prior to issuance. In the event of default, the holders of general obligation bonds have the right to compel a tax levy or legislative appropriation, by mandamus or injunction, in order to satisfy the issuer's obligation on the defaulted bonds.

Grace Period‐ A grace period is a time past the deadline for an obligation during which a late penalty that would have been imposed is waived. Grace periods, which can range from a number of minutes to a number of days or longer, depending on the context, can apply in various situations, including arrival at a job, paying a bill, for meeting a government or legal requirement, or in many other situations.

Greenfield Investments typically involve more risk than pure Brownfield Investments as they include design and build risk, as well as operating risk. These types of investments are often sold to other investors once the project is completed and stabilized (usually over a four‐to‐five year time line) and is generating consistent cash flow.

Guarantee Facility‐ Guarantee facilities can be deployed to support multiple small‐size projects and transactions under a single umbrella facility. These facilities

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could provide a partial risk guarantee for each individual project through local implementation agency covering a standard set of non‐commercial risks including the government’s commitment in regulatory framework, tariff policy, concession contracts, etc. This scheme would be particularly useful when deployed for a targeted group of projects in the same sector selected by certain eligibility criteria.

Institutional Sales‐Sales of securities to banks, financial institutions, bond funds, insurance companies or other business organizations (institutional investors) which possess or control considerable assets for large scale investing.

Interest Rate‐The annual rate, expressed as a percentage of principal, payable for use of borrowed money.

Interest‐The amount paid by a borrower as compensation for the use of borrowed money.

Investment Grade‐The broad credit designation given bonds which have a high probability of being paid and minor, if any, speculative features.

Issuer‐A state, political subdivision, agency or authority that borrows money through the sale of bonds or notes.

Marketability‐The ease or difficulty with which securities can be sold in the market. An issue's marketability depends upon many factors, including its interest rate, security provisions, maturity and credit quality, plus (in the case of the sale of a new issue) the size of the issue, the timing of its issuance, and the volume of comparable issues being sold.

Maturity or Maturity Date‐The date upon which the principal of a municipal security becomes due and payable to the security holder.

Municipal Securities‐A general term referring to securities issued by local governmental subdivisions such as cities, towns' villages, counties, or special districts, as well as securities issued by states and political subdivisions or agencies of states. A prime feature of these securities is that interest on them is generally exempt from federal income taxation.

Negotiated Sale‐The sale of a new issue of municipal securities by an issuer through an exclusive agreement with an underwriter or underwriting syndicate selected by the issuer. A negotiate sale should be distinguished from a competitive sale, which requires public bidding by the underwriters. The primary points of negotiation for an issuer are the interest rate and purchase price on the issue. The sale of a new issue of securities in this manner is also known as a negotiated underwriting.

Offering Price‐The price or yield at which dealers or members of an underwriting syndicate will offer securities to investors.

Over‐The‐Counter Market‐A market for securities which are traded other than on a national securities exchange. The over‐the‐counter (or "OTC") market is characterized most particularly by a system of dealer market‐making rather than the auction market system common on the securities exchanges. Almost all municipal securities are traded exclusively in the OTC market.

Par Value‐The amount of principal which must be paid at maturity. The par value is also referred to as the face amount of a security.

Pledged Revenues. The moneys obligated for the payment of debt service and other deposits required by the bond contract.

Price‐Price of the bond, generally quoted in terms of percentage of par value (e.g. premium price = 103 % and discount price = 97 % of par value) or in terms of yield to maturity (e.g. yielding 10 ¾ %).

Primary Market‐The market for new issues of municipal securities.

Principal‐The par value of a security payable on the maturity date.

Private Placement‐With respect to municipal securities. a negotiated sale in which the new issue securities are sold directly to institutional or private investors rather than through a public offering. Issuers often require investors purchasing privately placed securities to agree to restrictions as to resale; the investor may provide a signed agreement to abide by those restrictions.

Rating Agencies‐The organizations which provide publicly available ratings of the credit quality of securities issuers.

Ratings‐Evaluations of the credit quality of notes and bonds usually made by independent rating services. Ratings are intended to measure the probability of the timely repayment of principal of and interest on municipal securities. Ratings are initially made before issuance and are periodically reviewed and may be amended to reflect changes in the issuer's credit position.

Registrar‐The person or entity responsible for maintaining records on behalf of the issuer for the purpose of noting the owners of registered bonds.

Rehabilitated Brownfield Investments generally lie on the midpoint of the infrastructure risk/return spectrum. An example of a Rehabilitated Brownfield investment would be the purchase of concession rights for an operating toll bridge that, though currently generating cash flow, requires significant immediate capital improvements for major retrofitting or

29

expansion. This structure is effectively a blend of Brownfield and Greenfield risks and returns.

Secondary Market‐The market for securities previously offered and sold.

Security For The Bonds Or Security‐The specific revenue sources or assets of an issuer which are pledged for payment of debt service on a series of bonds, as well as the covenants or other legal provisions protecting the bondholders.

Syndicate‐A group of underwriters formed to purchase (underwrite) a new issue of municipal securities from the issuer and offer it for resale to the general public. The syndicate is organized for the purposes of sharing the risks of underwriting the issue, obtaining sufficient capital to purchase an issue and for broader distribution of the issue to the investing public. One of the underwriting firms will be designated as the syndicate manager or lead manager to administer the operations of the syndicate.

Transfer Agent‐The person or entity who performs the transfer function for an issue of registered municipal securities. This person or entity may be the issuer or an official of the issuer, or an outside organization employed by the issuer to act as its agent. In certain cases the transfer agent performs only

that part of the transfer function involving the issuance or reissuance of securities certificates in the name of the new registered owner, with the function of maintaining the list of registered owners performed by a separate entity (known as the "registrar"). The entity performing the transfer function may also act in other capacities (e.g., as paying agent) on the issue.

Underwrite or Underwriting‐The process of purchasing all or any part of a new issue of municipal securities from the issuer, and offering such securities for sale to investors.

Yield to Maturity‐The rate of return to the investor earns from payments of principal and interest, with interest compounded semi‐annually at the stated yield, presuming that the security remains outstanding until the maturity date. Yield to maturity takes into account the amount of the premium or discount, if any, and the time value of the investment, as well as the frequency at which interest is paid.

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ANNEXES

33

Annex 1.a Jawaharlal Nehru National Urban Renewal Mission (JNNURM), India

A Government of India Program to fund Urban Local Bodies for development of • Urban Infrastructure and Governance • Basic services to urban poor • Mission launched in 2005‐06 for a period of 7 years • 63 cities identified – most with population exceeding 1 million • Mission imposes Reform Obligations on ULBs seeking funding Reforms include: • Adoption of modern accrual based accounting • Introduction of e‐Governance system • Reforms of property tax making it important source of revenue for ULBs

Many ULBs have put JNNURM to good use for delivering urban infrastructure • City Transport Services Indore • Solid Waste Management project‐‐ Vadodara

• Green Energy generation from Sewerage Surat • Automated Parking System‐ Bangalore • Biogas powered sewage treatment plant‐ Jaipur

Success of JNNURM Utilisation of funds by ULBs for delivering urban infrastructure • Reforms process initiated by ULBs with varying progress

Shortfalls of JNNURM Insufficient leveraging by ULBs in PPP projects • Low progress in developing tariff culture • Low disbursement • Insufficient progress in integrating capital assets creation with O&M • Grants not subjected to competitive processes

Annex 2.a Town Development Fund, Nepal

Established by the TDF Board (1988), notably as a financial intermediary to provide funds to municipalities. TDF has been financed by the Government of Nepal, the International Development Association/World Bank, the German Government and the Asian Development Bank. From the obtained funds, the TDF has provided loans and soft loans for social infrastructure and income‐generating projects and soft loans for small income‐generating projects in low‐income municipalities. Further, it has provided grants for projects in sectors such as sanitation, the environment and education. In 1997, the fund was given more autonomy, discretionary power and authority in providing grants and loans to municipalities and emerging towns.

Objective of TDF: The overall goal of the TDF is the alleviation of economic and social poverty in

the urban sector through long‐term financing for social infrastructure and revenue‐generating projects. The operative objectives of the TDF, which have remained unchanged since its founding, are:

Improvement of basic infrastructure and delivery of public and institutional services in the urban areas through the provision of long‐term financing for priority social infrastructure and revenue‐generating projects;

Strengthening the technical, managerial and financial capability of the municipalities for the identification, implementation and evaluation of urban development projects as well as promoting institutions related to urban development;

Improvement of financial and managerial capacities of other institutions emerging in urban sectors and social development through the provision of long‐term financing.

Over the years, the TDF has proved to be an efficient and reliable agency; today, cities and town approach it not only for financing of local infrastructure, but also to obtain advisory services.

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Annex 2.b Municipal Development Fund: Tamil Nadu, India

In 1988 the Government of Tamil Nadu (GOTN) State in India established a Municipal Development Fund (MUDF). By October 1996, the MUDF had financed over 500 sub‐projects including roads, bridges, street lights, solid waste plants, storm water drains, bus stations, and markets in 90 out of 110 municipalities in Tamil Nadu. It disbursed about Rs.1, 650 million (US$ 63 million at average exchange rate). The MUDF had been generating adequate profits from the satisfactory spread and high rate of loan repayments, which were a result of adherence to well‐defined lending rules and procedures.

Shortfalls of MUDF: Although the MUDF had proven itself as a relatively successful municipal credit scheme, it had a number of shortcomings: (i) its lending capacity was far too small compared to the potential demand for urban infrastructure investment; (ii) it depended entirely on public financing (iii) it was located within the administrative machinery of the Government, and faced potential risks of political influence; and (iv) its staff was not free from the general constraints of the civil service system, such as salary and hiring regulations.

Restructuring of TNUDF: In order to overcome these shortcomings, the GOTN decided to restructure the fund. The major objective of the restructuring was to convert the Municipal Urban Development Fund into an autonomous financial intermediary (called the Tamil Nadu Urban Development Fund (TNUDF)) with the participation of private sector capital and private sector management. The new fund, which is government, owned, is managed outside government by a private fund management company called the TNUIFS. Additionally, a new Grant Fund (GF) was set up to encourage urban infrastructure investments targeted to the urban poor, and to finance technical assistance, resettlement and rehabilitation costs. The grant fund is also managed by the TNUDF.

Objective of TNUDF: At the reorganization, the scope of operations was widened to include urban infrastructure projects sponsored by private investors. The grant fund also finances technical assistance costs for local governments.

The main purpose of the TNUDF is to channel increased financial resources, including private financing, into high priority infrastructure investments, mobilize resources from the capital markets; facilitate the participation of private sector in infrastructure development through direct investment; and improve the financial management of urban local bodies, enabling them to access debt finance from markets. The Government of Tamil Nadu’s equity is restricted to 49 percent in order to facilitate private sector management in investment decisions.

Financing of TNUDF: The participating private institutions have committed US$12 million as their share contribution to the TNUDF. In addition, they have agreed to mobilize US$25 million in the form of co‐financing of sub‐projects of the TNUDF. They have also agreed that they would assist the TNUDF in raising an additional US$25 million from the capital market by underwriting or guaranteeing the TNUDF debt or by providing other credit enhancement/risk participation mechanisms. The ICICI, a major domestic financial institution, is supporting the TNUDF by seconding key management staff. Others are extending technical support to the TNUDF on a project‐by‐project basis.

Success of TNUDF: Bonds issued by TNUDF are not guaranteed by either the state or the national government. Based on its initial three‐year track record, the TNUDF recently was successful in mobilizing Rs 1billion through a domestic capital market issue.

Institutional Challenge: Some of the institutional development and capacity building functions of the former MUDF are being implemented by the Tamil Nadu Institute of Urban Studies (TNIUS) under the supervision of the Department of Municipal Administration and Water Supply (DMAWS). These institutions will strengthen the managerial, financial, technical and procurement capacity of local government units through training and technical assistance. An important element of the institutional development program of the government is to assist local governments in the preparation and implementation of their City Corporate Plan (CCP).

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Annex 2.c Municipal Development Fund Office, Philippines

The Municipal Development Fund was established exclusively for relending to local government units (LGUs) to promote self reliance in pursuing socio‐economic development programs. This fund is capitalized by proceeds of loans and grants from Official Development Assistance (ODA) and second generation funds lodged under the BLGF until the Municipal Development Fund Office (MDFO) was created.

MDFO became an office under the Department of Finance (DOF) in November 1998 through Executive Order 41. MDFO is guided by the MDFO‐Policy Governing Board. Headed by the DOF as Chairman with the National Economic Development Authority (NEDA), Department of Budget and Management (DBM), Department of the Interior and Local Government (DILG), Department of Public Works and Highways (DPWH) and the MDFO Executive Director as Members.

Major Functions include: • Administrator of the Municipal Development Fund‐ Second Generation Fund

(MDF‐SGF) • Fund Administrator of Foreign Assisted Projects (FAPs) for LGUs implemented by

other National Agencies; and • Policy Formulation

Financing Programs include: 1. Disaster Management Assistance Fund (DMAF)‐ The most concessional

financing window being offered by the MDFO, it recognizes the demand to safeguard economic investments of LGUs from the ill‐effects of natural hazards. All LGUs (except Barangays) may access the Fund through its three disaster management categories: (1) prevention and mitigation; (2) relief and response; and (3) recovery and rehabilitation. All proposals are screened based on LGU classification and income levels, financing capacity, subproject types, hazard exposure and disaster management requirement as certified by Authorities.

2. Municipal Development Goals Fund (MDG‐Fund)‐ To support and fund initiatives that directly contributes to the attainment of the country’s commitment to the Millennium Development Goals. Access is offered to 4th to 6th

income class Municipal and Provincial LGUs. The MDFO in collaboration with Department of Interior Local Government oversees implementation of the program.

3. Municipal Development Fund Project (MDFP)‐ A financing scheme offering pure loan to LGUs nationwide to fund implementation of priority projects related to social, environmental, health and economic development.

4. Project Technical Assistance and Contingency Fund (PTACF)‐ to provide optional financing (except highly urbanized cities in Metro Mania) to key Cities and Provinces to address contingency requirements and technical assistance needed for LGU subprojects that are financed by MDFO.

5. Program Lending (ProLend)‐ Funds lent out to finance development projects of Provinces willing to pursue a policy reform agenda, with clear and well‐defined deliverables to be completed within a time‐bound period.

6. Philippine Water Revolving Fund (PWRF) ‐ to support the long‐term investment requirement of LGUs for water supply and sanitation facilities. It has the unique feature if engaging Private Financial Institutions (PFI) as co‐lenders with the Development Bank of the Philippines using Japan Bank for International Cooperation Funds and credit guarantees from Local Government Unit Guarantee Corporation (LGUGC) and the USAID Development Credit Authority. The MDFO extends standby loans to LGUs in order to lengthen the tenor of PFI loans to make financing affordable to LGU Water Service Providers.

7. Loan Refinancing – to lighten the financial burden of LGUs (specifically lower income class LGUs), wherein savings generated from the supposedly high cost of investment from their original transaction may be used for other developmental purposes.

8. Public‐Private Partnership Fund – Aims to help finance the LGUs needs in closing the gap of inefficiencies in urban services commonly brought about by inadequate manpower, insufficient financial allocations, cost overruns, huge infrastructure cost and absence of accountability in revenue collections, among others.

Annex 2.d Local Development Investment Fund (LDIF), Vietnam

One of the successful case study of this specialized financial institution/ vehicle is LDIFs in Vietnam Scope and Objectives of LDIFs

Given the growing demand for infrastructure development and the consequent need to mobilise sufficient resources, the Government of Vietnam has decentralised responsibilities to improve and develop municipal infrastructure to the provincial governments. In this context, the Local Development Investment Funds (LDIFs) were established as an operational and legal structure for the provincial governments to

36

invest in infrastructure, and to mobilise capital and enter into contracts with the private sector. The key objectives of the LDIFs are to: • Support a conducive legal and operational framework at the provincial level to

develop municipal infrastructure and services, • Attract private sources of financing, equity and debt capital, for developmental

infrastructure and • Enter into contracts and various forms of public‐private partnerships to increase

private sector participation in infrastructure development.

The LDIFs are established by the charters of the respective Provincial People’s Committees (PPCs) that provide each fund’s equity capital and wholly own them. The total provincial government investment channeled through LDIFs increased by approximately 65 per cent from 2002 to 2004. In 2004, the total operating capital of LDIFs in Vietnam was approximately US$300 million. In parallel, LDIF lending increased by approximately 20 times between 1997 and 2004, and the LDIF activities have expanded from simple loans to the establishment of joint stock companies engaged in infrastructure development.

The Ho Chi Minh Infrastructure Fund for Urban Development (HIFU) was the first LDIF established in June 1996. It was the most diverse operation among existing LDIFs and has the largest portfolio of insurance investments. Its equity investments include, among others:

• 25 per cent equity contribution to the Tan Phu Trung Industrial Park in Ho Chi Minh City,

• 16 per cent equity contribution to the first domestically funded water BOO project in Vietnam‐ the Thu Duc Water BOO Corporation and

• 25 per cent equity contribution to the Saigon Medical Investment Joint Stock Company

In addition, HIFU founded the Ho Chi Minh City Infrastructure Investment Joint Stock Company in December 2001, to act as an operating concessionaire of transport projects in Ho Chi Minh City and develop other revenue‐backed municipal infrastructure PPP projects. HIFU has also provided debt financing to various projects across the transport, water, industrial parks, health and educational sectors.

Success of HIFU Since 1996, and given HIFU’s track record, 13 other provincial governments have established LDIFs with the approval and support of the Government of Vietnam. The four most active LDIFs were all incorporated in the last decade and are entrusted with broadly similar mandates as presented above. In addition to the chartered capital contributed by the PPC, LDIFs mobilise loan capital from domestic banks and state‐owned enterprises. The most active LDIFs are making progress in bringing different PPP models, including more sophisticated contracting mechanisms (BOO, BOT etc.) to Vietnam.

Annex 3.a Philippine National Bank

Specialized Lending Programs These loans from government financial institutions aim to help start‐up projects, expansion projects, rehabilitation and relocation projects. Some loans can have maturities as long as 20 years.

Loans to Local Government Units Eligible Borrowers: Local governments of provinces, cities and municipalities Eligible Projects: • Revenue generating or cost saving projects • Projects with significant socio‐economic impact on the community such as public

market, infrastructure, machinery and equipment, etc.

Annex 4.a Infrastructure Development Finance Co. Ltd. (IDFC)

The Infrastructure Development Finance Company Limited (IDFC) is a specialized financial intermediary for infrastructure in the India providing end‐to‐end infrastructure financing and project implementation services.

IDFC is involved in a range of activities, such as business development and execution in different focus areas, such as energy, electricity, oil and gas, coal washeries, integrated transportation, telecommunication and IT, urban infrastructure, health

37

care, industrial and commercial infrastructure, education infrastructure, tourism and others. IDFC also offers services in project financing, credit control, portfolio management, risk management, policy advisory, environment management, and PPP initiatives in various sectors.

Since 2005, IDFC strives to be a financial institution that would meet the diverse needs of infrastructure development. The business verticals include – Corporate Investment Banking, Alternative Asset Management, Public Market Asset Management and the IDFC Foundation.

Sector Priorities • Energy, Electricity Generation and Transmission, Oil & Gas Pipelines • Urban Infrastructure • Solid Waste Management, Water, Real Estate etc • Communications • Telecommunication and IT • Transportation • Roads , Ports , Airports • Industrial and Commercial Infrastructure • SEZ , Industrial Parks

Type of Financial Instruments The financial instruments used to structure project finance include corporate loans, project loans, subordinated debt, and loans against shares, mezzanine finance, and equity. They are categorized in broadly four categories:

1. Senior Debt Financing Senior Debt Financing forms the largest component of IDFC financing portfolio. It is provided through loans or in the form of subscriptions to debentures, making up 56% of the loan portfolio. Senior debt financing is fully secured and has recourse to the project assets in the event of any default. In most cases, senior debt provided is substantially collateralized through documents such as pledge of all or part of the sponsors' equity holding in the borrower or an assignment of rights under the various project contracts. Senior debt financing typically bears fixed rate interest with re‐pricing mechanisms that usually come into effect after five years to adjust to changes in interest rates. Additionally, senior loans may also be re‐priced for changes in the credit quality of the borrower.

2. Mezzanine Products Financing in the form of mezzanine products to strengthen project structures comprised of preference capital and subordinated debt. These products are layered in a firm's capital structure between equity and senior debt and act as an

additional tier to the capital structure and are subordinated in right of payment to senior debt and have only a second charge on the borrower’s assets. These subordinated financing structures carry higher risk as compared to senior debt but have the potential of earning higher returns.

3. Principal Investments Principal equity investments in infrastructure companies provide financing to them and help IDFC to continuously explore opportunities that result in accepting a higher level of risk. Principal investment business plays a key role in generating non‐interest income. These investments could be strategic in nature and IDFC may also make them through their treasury operations. The focus of principal investments is on companies that have high quality sponsorship, good growth prospects and well defined exit opportunities. IDFC has made principal investments in infrastructure‐related companies that are subsequently listed on stock exchanges.

4. Non‐Fund Based Products Through non‐fund based products, IDFC issue guarantees for a project’s performance and payment obligations. IDFC guarantees enhance the credit ratings of the underlying financial instruments and enable projects to secure financing from a wider spectrum of sources. These include borrowings from commercial banks, foreign lenders and the debt capital markets. IDFC also issue guarantees to enable project companies to open letters of credit. Non‐fund based products also consist of Take‐out financing. This product is designed to address the maturity mismatches and the risk appetite of certain categories of lenders, allowing them to participate in infrastructure financing. It also helps IDFC to take over outstanding loans from project lenders after 5 years because of their access to funds with long‐term maturity.

Investment Trends IDFC’s project finance concentrates on four infrastructure sectors — Energy, Transportation, Telecom and IT and Others. Energy and Transportation are the two traditionally dominant sectors. The Energy sector share increased significantly from 38.3% in 2009‐10 to 45.8% in 2010‐11, while that of Transportation increased from 19.8% to 28.7% in 2010‐11. In contrast, the share of Telecom and IT has decreased significantly from 24.4% in 2009‐10 to 15.8% in 2010‐11, while that of Others has reduced from 17.5% in 2009‐10 to 9.7% in 2010‐11. Others include industrial, commercial and tourism, and some equity investments. Source : Website Link : http://www.idfc.com

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Annex 4.b Infrastructure Leasing & Financial Services Ltd (IF&LS)

About IL&FS Infrastructure Leasing & Financial Services Ltd (IL&FS) was incorporated in 1987 with the twin business mandates of commercializing infrastructure projects and setting up value added financial services. IL&FS was promoted by the Central Bank of India (CBI), Housing Development Finance Corporation Limited (HDFC) and Unit Trust of India (UTI). Over time additional institutional shareholders came on board to facilitate IL&FS with the capital base essential for delivery on the business mandates.

IL&FS is the first specialized urban infrastructure financing institution actively involved in providing a wide array of services necessary for successful project completion. These include visioning, documentation, finance, development, management, technology and execution, every aspect of the project management, from concept to execution. IL&FS has made good impact in the fields of Project Finance, Investment Banking, Capital Markets, Retailing, Private Equity, and Trust & Fiduciary

Over the years, building on experience gained in the infrastructure space, IL&FS has widened its operational scope from only development of infrastructure projects to encompass a full range of related activities. IF&FS has following main Group Companies:

IL&FS Infrastructure Development Corporation Limited (IL&FS IDC) is the infrastructural wing of IL&FS serving a wide array of sectors throughout the country. IL&FS IDC is a wholly owned subsidiary of the IL&FS. It aims at providing assistance as Project Developer/ Advisor to develop 'bankable' infrastructure projects through Public Private Partnerships (PPPs) while ensuring induction of best practices benchmarked against international norms. IL&FS IDC offers end‐to‐end solutions to its clients from project conceptualization to its completion. The range of services includes, Project , Project Appraisal, Project Finance, Training & Capacity Building Project/Programme Management Consultancy.

IL&FS incorporated IL&FS Transportation Networks Limited (ITNL) in order to pursue new project initiatives in the area of Surface Transport. IL&FS has domiciled its transport sector investments and resources in this company and now represents itself in this sector through ITNL. The focus of ITNL is to develop and build a pan‐India Surface Transport business. ITNL has accomplished this by leveraging various investment opportunities and also acquiring and managing projects.

IL&FS Environmental Infrastructure & Services Ltd. (IEISL), promoted by IL&FS, focuses on the environment sector. IEISL provides consulting services to project

developers, belonging to public and private sectors as well as financial institutions. IEISL promotes environmental initiatives in the framework of Public Private Partnership.

IL&FS Water Limited (IWL) subsidiary is a Company specialized in providing end‐to‐end solutions in developing and implementing projects in the water and waste water sectors.

It is mandated to develop, finance, operate and maintain water and waste water projects. From concept to execution, IWL houses the expertise to provide the complete array of services necessary for successful project completion i.e. Technology selection, Technical and Commercial feasibility study, Project financing, Project implementation and Project Operations & Maintenance (O&M).

Geographic Area of Operation PAN India, presence in 22 States

Sector Priorities • Transportation • Area Development • Cluster Development • Power • Ports • Water and Waste Water • Urban Infrastructure – Water, Sewerage, Sanitation, Solid Waste, Resettlement

and Rehabilitation, Rehabilitation of Assets • Environment • Education • Tourism • SEZ

Project requirements or criteria • IL&FS has sponsored various projects in the infrastructure sector in association

with a range of partners including both State Governments as well as the Private Sector. IL&FS identifies need‐driven projects (e.g. roads, bridges, power, ports, water supply, area development etc.) which can be commercially viable. IL&FS then uses innovative structural / financial techniques to enhance project viability.

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IL&FS works in the following partnership arrangements Stand‐alone Advisory services • Project Development & Promotion Partnership (PDPP) Agreements for Project

Development Advisory with a 50:50 sharing arrangement for funding the activities

• Joint Venture (JV) / Project Development Company (PDC) for comprehensive Project Development and implementation / monitoring of Projects

Type of Financial Instruments • Debt Syndication • Equity

Debt Syndication The Il&FS Group’s Syndication Desk was started initially for captive financing requirements of various infrastructure projects undertaken by IL&FS. Over the years IL&FS has developed long standing relationships with all leading banks in the country, financial institutions, multilateral agencies, and foreign banks and today is positioned in the debt capital markets as a leading debt arranger.

The services offered are: Project Loans – In the areas of • Infrastructure : Surface Transport, Power, Effluent Treatment & Telecom • Core Manufacturing Sectors : Steel, Cement, Textiles and Paper • Real Estate : High End Malls, Residential Complexes and Luxury Hotels

Corporate Loans: Terms Loans & Working Capital Borrowings, Securitization, Loan Against Receivables, Acquisition Financing.

An understanding of trends and issues impacting projects and companies enables the teams to advise on innovative financing structures. The Team has executed large and complex transactions across sectors within stringent timelines. Over Rs.100 bn debt has been mobilized in recent times

Infrastructure Services Financial Services

IL&FS Infrastructure Development Corporation Limited

IL&FS Securities Services Limited

IL&FS Transportation Networks Limited IL&FS Investment Managers Limited

IL&FS Environmental Infrastructure & Services Ltd. (IEISL)

IL&FS Trust Company Limited

IL&FS Education and Technology Services Limited

ORIX Auto Infrastructure Services Limited

IL&FS Engineering and Construction Company Limited

IL&FS Financial Services Limited

IL&FS Water Limited (IWL)

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Annex 5.a Summary Table of PPP Types Advantages/ Disadvantages

Type of PPP Features Local Government Service Advantages Disadvantages1. Operations

and Maintenance

The local government contracts with a private partner to operate and maintain a publicly owned facility

A broad range of municipal services including water and waste water treatment plants, solid waste removal, road maintenance/ landscape maintenance, arenas and other recreation facilities, parking facilities, sewer and storm sewer systems.

• potential service quality and efficiency improvements• cost savings • flexibility in structuring contracts • ownership vests with local government

• collective agreements may not permit contracting out

• costs to re‐enter service if contractor defaults • reduced owner control and ability to respond to changing public demands

2. Design‐Build

The local government contracts with a private partner to design and build a facility that conforms to the standards and performance requirements of the local government. Once the facility has been built, the local government takes ownership and is responsible for the operation of the facility.

Most public infrastructure and building projects, including roads, highways, water and wastewater treatment plants, sewer and water systems, arenas, swimming pools and other local government facilities.

• access to private sector experience• opportunities for innovation and cost savings • flexibility in procurement • opportunities for increased efficiency in construction • reduction in construction time • increased risk placed on private sector • single point accountability for the owner • fewer construction claims

• reduced owner control• increased cost to incorporate desirable design features or change contract in other ways once it has been ratified

• more complex award procedure • lower capital costs may be offset by higher operating and maintenance costs if life‐cycle approach not taken

3 Turnkey Operation

The local government provides the financing for the project but engages a private partner to design, construct and operate the facility for a specified period of time. Performance objectives are established by the public sector and the public partner maintains ownership of the facility.

This form of public private partnership is applicable where the public sector maintains a strong interest in ownership but seeks to benefit from private construction and operation of a facility. This would include most infrastructure facilities, including water and wastewater treatment plants, arenas, swimming pools, golf courses and local government buildings.

• places construction risk on the private partner• proposal call can control design and location requirements as well as operational objectives

• transfer of operating obligations can enhance construction quality

• potential public sector benefits from increased efficiency in private sector construction

• potential public sector benefits from increased efficiency in private sector operation of the facility

• construction can occur faster through fast‐track construction techniques such as design‐build

• reduced local government control over facility operations

• more complex award procedure • increased cost to incorporate changes in design and operations once contract is completed

• depending on the type of infrastructure, financing risk may be incurred by the local government

4 Wrap Around Addition

A private partner finances and constructs an addition to an existing public facility. The private partner may then operate the addition to the facility for a specified period of time or until the partner recovers the investment plus a reasonable return on the investment.

Most infrastructure and other public facilities, including roads, water systems, sewer systems, water and wastewater treatment plants, and recreation facilities such as ice arenas and swimming pools.

• public sector does not have to provide capital funding for the upgrade

• financing risk rests with private partner • public partner benefits from the private partner’s experience in construction

• opportunity for fast‐tracked construction using techniques such as design‐build

• flexibility for procurement • opportunities for increased efficiency in construction • time reduction in project implementation

• future facility upgrades not included in the contract with the private partner may be difficult to incorporate at a later date

• expense involved in alteration of existing contracts with the private partner

• perceived loss of control • more complex contract award procedure

5 Lease‐ Purchase

The local government contracts with the private partner to design, finance and build a facility to provide a public service. The private partner then leases the facility to the local government for a specified period after which ownership vests with the local government. This approach can be taken where local

Can be used for capital assets such as buildings, vehicle fleets, water and Wastewater treatment plants, solid waste facilities and computer equipment.

• improved efficiency in construction• opportunity for innovation • lease payments may be less than debt service costs • assignment of operational risks to private sector developer

• improve services available to residents at a reduced cost • potential to develop a “pay for performance” lease

• reductions in control over service or infrastructure

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government requires a new facility or service but may not be in a position to provide financing.

6 Temporary Privatization

Ownership of an existing public facility is transferred to a private partner who improves and/or expands the facility. The facility is then owned and operated by the private partner for a period specified in a contract or until the partner has recovered the investment plus a reasonable return.

This model can be used for most infrastructure and other public facilities, including roads, water systems, sewer systems, water and wastewater treatment plants, parking facilities, local government buildings, airports, and recreation facilities such as arenas and swimming pools.

• if a contract is well structured with the private partner, the municipality can retain some control over standards and performance without incurring the costs of ownership and operation

• the transfer of an asset can result in a reduced cost of operations for the local government

• private sector can potentially provide increased efficiency in construction and operation of the facility • access to private sector capital for construction and operations

• operational risks rest with the private partner

• perceived or actual loss of control• initial contract must be written well enough to address all future eventualities

• private sector may be able to determine the level of user fees, which they may set higher than when under local government control

• difficulty replacing private partner in the event of a bankruptcy or performance default

• potential for local government to re‐emerge as the provider of a service or facility in the future

• displacement of local government employees • labour issues in transfer of local government employees to the private partner

7 Lease‐ Develop‐Operate

or Buy‐Develop‐

Operate

The private partner leases or buys a facility from the local government, expands or modernizes it, then operates the facility under a contract with the local government. The private partner is expected to invest in facility expansion or improvement and is given a specified period of time in which to recover the investment and realize a return.

Most infrastructure and other public facilities, including roads, water systems, sewer systems, water and wastewater treatment plants, parking facilities, local government buildings, airports, and recreation facilities such as arenas and swimming pools.

• if the private partner is purchasing a facility, a significant cash infusion can occur for the local government

• public sector does not have to provide capital for upgrading

• financing risk can rest with the private partner • opportunities exist for increased revenue generation for both partners

• upgrades to facilities or infrastructure may result in service quality improvement for users

• public partner benefits from the private partner’s experience in construction

• opportunity for fast‐tracked construction using techniques such as design‐build

• flexibility for procurement • opportunities for increased efficiency in construction • time reduction in project Implementation

• perceived or actual loss of control of facility or infrastructure

• difficulty valuing assets for sale or lease • issue of selling or leasing capital assets that have received grant funding

• if a facility is sold to a private partner, failure risk exists—if failure occurs, the local government may need to re‐emerge as a provider of the service or facility

• future upgrades to the facility may not be included in the contract and may be difficult to incorporate later

8 Build‐ Transfer‐Operate

The local government contracts with a private partner to finance and build a facility. Once completed, the private partner transfers ownership of the facility to the local government. The local government then leases the facility back to the private partner under a long‐term lease during which the private partner has an opportunity to recover its investment and a reasonable rate of return.

Most infrastructure and other public facilities, including roads, water systems, sewer systems, water and wastewater treatment plants, parking facilities, local government buildings, airports, and recreation facilities such as arenas and swimming pools.

• public sector obtains the benefit of private sector construction expertise

• public sector obtains the potential benefits and cost savings of private sector operations

• public sector maintains ownership of the asset • public sector ownership and contracting out of operations limits any provincial and federal tax requirements

• public sector maintains authority over the levels of service(s) and fees charged

• compared to a Build‐Operate‐ Transfer model, avoids legal, regulatory and tort liability issues

• under Occupiers’ Liability Act, tort liability can be avoided • government control of operational performance, service standards and maintenance

• ability to terminate agreements if service levels or performance standards not met, although facility would continue to permit repayment of capital contributions and loans and introduction of new private partner

• construction, design and architectural savings, and likely

• possible difficulty in replacing private sector entity or terminating agreements in event of bankruptcy or performance default

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long‐term operational savings 9 Build‐Own‐Operate‐Transfer

The private developer obtains exclusive franchise to finance, build, operate, maintain, manage and collect user fees for a fixed period to amortize investment. At the end of the franchise, title reverts to a public authority.

Most public infrastructure services and facilities, including water and wastewater systems, recreation facilities, airports, local government administration and operations buildings, parking facilities and solid waste management facilities.

• maximizes private sector financial resources, including capital cost allowance

• ensures the most efficient and effective facility is constructed, based on life‐cycle costs

• allows for a private sector operator for a predetermined period of time

• the community is provided with a facility, without large up‐front capital outlay and/or incurring of long‐term debt

• all “start‐up” problems are addressed by the private sector operator

• access to private sector experience, management, equipment, innovation and labour relationships may result in cost savings

• risk shared with private sector

• facility may transfer back to the public sector at a period when the facility is “work” and operating costs are increasing

• public sector loses control over the capital construction and initial mode of operations

• initial contract must be written sufficiently well to address all future eventualities

• the private sector can determine the level(s) of user fees (unless the public sector subsidizes use)

• less public control compared to Build‐ Transfer‐Operate structure

• possible difficulty in replacing private sector partner or determining agreements if bankruptcy or performance default

10 Build‐Own‐ Operate

The local government either transfers ownership and responsibility for an existing facility or contracts with a private partner to build, own and operate a new facility in perpetuity. The private partner generally provides the financing.

Most public infrastructure and facilities, including water and wastewater systems, parking facilities, recreation facilities, airports, local government administration and operations buildings.

• no public sector involvement in either providing or operating the facility

• public sector can “regulate” the private sector’s delivery of a “regulated/ monopolistic” service area

• private sector operates the service in the most efficient manner, both short‐term and long‐term

• no public sector financing is required • income tax and property tax revenues are generated on private facilities, delivering a “public good”

• long‐term entitlement to operate facility is incentive for developer to invest significant capital

• the private sector maynot operate/construct the building and/or service “in the public good”

• the public sector has no mechanism to regulate the “price” of the service, unless it is a specifically regulated commodity

• the good/service being delivered is subject to all federal, provincial and municipal tax regulations

• no competition, therefore necessary to make rules and regulations for operations and to control pricing

Source: Public Private Partnership A Guide for Local Government, May 1999, Ministry of Municipal Affairs, British Colombia, Canada

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Annex 5.b Treatment of Risk in PPP projects

Risks in any transaction cannot be eliminated. It always exists for all the parties to the contract. However, risks can be managed to an acceptable level, using the following protocol. 1. Identify the risk: What event or actions would adversely affect the cost,

performance, timing, or viability of a project? (e.g., what would happen to the project if the rate of inflation were to significantly rise than projected)

2. Determine the severity of the risk: What is the specific cost, time delay or reduction in performance if this happens?

3. Allocate the risk: The golden rule is that risk should be managed by the party best able to manage that risk. Shifting risk to party not able to manage that particular risk costs more, and creates even more risk to a project.

4. Mitigate the risk: Determine what must be done to reduce the likelihood of an adverse event, e.g., construct all structures above the 100 year flood elevation to reduce the likelihood of flood damage.

5. Price the risk: Determine the cost of addressing the risk, e.g., the cost of flood insurance.

There are risks associated with different stages of the project development cycle (viz., development phase, construction phase and operation phase). The whole process of PPP project development is a complex, high skilled, time consuming business that requires financial commitments too. Irrespective of which stage of project development one is concerned, the classic way to understand and allocate risks appropriately derives from the protocol mentioned above and the risk management cycle as illustrated below.

Risk identification‐ the process of identifying all the risks relevant to the project. Risk identification from a private sector point of view resident in public sector in the PPP projects are: • Delay in Implementation • Termination Risk • Change in Laws • New impositions • Alternative facilities • Other Contingencies which require Government Support and • Covenants

Infrastructure Risks ‐ Government Assurances for Land, Right of Access From an investor/lender perspective, there are a number of key risks in a PPP project: • Direct project risk • Regulatory and institutional risk • Macro‐economic risks

• Nationalizations and appropriation (political risk) • Risk Management cycle • Monitoring & Review • Risk mitigation • Risk allocation

Risk Identification Risk assessment • Completion delays • Cost overruns • Demand Forecast Risks:

Volumes and toll rates/ fees • Performance Risks :

Technology and Processes • Operations and Maintenance

Risks • Force Majeure ‐ Earthquakes,

Floods, Natural Disasters • Political and Social Risks • Foreign Exchange Risk

Risk assessment‐ determining the likelihood of identified risks materializing and the magnitude of their consequences if they do materialize Risk allocation‐ allocating responsibility for dealing with the consequences of each risk to one of the parties to the contract, or agreeing to deal with the risk through a specified mechanism which may involve sharing of risk Risk quantification‐ calculate the monetary value of risks based on their likelihood, criticality and outcome, as shown in the illustration below Risk mitigation‐ attempting to reduce the likelihood of the risk occurring and the degree of its consequences for the risk taker. Some times „de‐risking� certain aspects of the project enables optimal risk transfer (a point beyond which the efficiency gains of an optimal risk transfer are lost, as illustrated in Box‐1 below). Efficient risk allocation and mitigation are central to bringing infrastructure projects to financial closure and to providing appropriate incentives during construction and operation phase. Projects may still be financeable if some risks are not allocated according to this principle, but costs‐ and ultimately the unitary payments or tariffs‐ will be higher. Sponsors and lenders expect higher rewards for assuming higher risks. Monitoring and review‐ monitoring and reviewing identified risks and new risks as the project develops and its environment changes, with new risks to be assessed, allocated, mitigated and monitored. This process continues during the life of the project.

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Annex 5.c Typology of Risk in PPP projects The main sources of financial risks in major PPP projects are: construction cost overruns induced by, for instance, government, client, management, contractor or accident; increased financing costs, caused by changes in interest and exchange rates and by delays; and lower than expected revenues, produced by changes in traffic volumes and in payments per unit of traffic.

Although less significant, financial risks are also related to costs of operations, maintenance and management. From an economic point of view the main risks are cost overruns, delays and lower realized demand than that assumed during project development stage. Normally people are risk averse and are prepared to pay something (by way of an insurance) to mitigate or eliminate the risks. In practice, different levels of riskiness associated with different types of investment are reflected in different minimum rates of returns, which are required in order to persuade individuals to commit their money.

If private sector investment in infrastructure has to succeed on a sustainable basis, it is critical that the public sector/contracting agencies should reduce both the perception as well as the reality of risk. As already stated efficient risk management

should be based on the principle that the party best able to manage a risk at least cost should mitigate. The structure of a typical risk management matrix (covering some of the risks) is outlined below.

Risk category Specific risks Party responsible • Private Sector • Public Sector • Site risks • Design, Construction & Commissioning • Sponsor & financial Operating • Market • Network and Interface • Industrial relations and civil commotion • Legislative & Government • Policies • Force Majeure • Asset ownership

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Annex 5.d Selection of the Partner/Operator

The selection of a suitable partner to implement the project is an evidently critical activity in the PPP project development process. The choice of a suitable private sector operator determines: ‐ The technical capabilities of the project, and, ‐ The extent of comfort that investors/lenders to the project would have, especially during the construction phase.

The basis for the selection of an operator, including the evaluation criteria would have been established during project development. The detailed process of implementation report would thus form the basis on which a suitable operator would be selected.

The requirement of financial institutions, multilateral agencies and other institutional investors only serves to underscore the importance of transparent international

competitive bidding procedures in the selection of the operator. Projects where the operator and/or goods and services have not been procured in a transparent manner ordinarily find it more difficult to achieve financial close. Where the bidder is selected it is envisaged that each bidder would be provided all relevant project documentation prepared in the project development phase, including the evaluation framework. When a partner has already been selected on a non‐competitive basis it would be necessary to ensure that the goods and services required for the project are procured on a transparent bidding basis.

When all of a project's contracts and financing are complete, and documentation has been executed, and conditions precedent are met.

Annex 5.e Finalization of Contractual Framework & Execution of Agreement

The project contractual agreement forms the core of the PPP project structure. While draft contracts would be prepared at this stage of the project development phase, it would be necessary for the finalization of the agreements to be undertaken after selection of the operator.

During the project development phase, the key requirements of the project would have been identified. These would have been incorporated into the draft contractual documentation. During the selection process of a partner, each bidding partner (bidder) would be provided copies of the draft contracts. At the bidding stage, bidders would be required to submit variation to the contracts, if any, with a view to

standardizing the documents. Bidders would thus be required to submit their formal proposals on the basis of uniform contractual documents.

On the selection of the successful bidder, the contractual documents would be finalized and executed based on the final negotiations. The key contractual agreements that would need to be executed prior to achieving financial close are: 1. The concession agreement 2. The shareholder's agreement 3. Lender's agreement 4. Construction agreement 5. O&M agreement

Annex 5.f Financial Close of the project

A well‐packaged commercially viable infrastructure project would thus need to demonstrate the following: • Bankability • Conformity to environmental and social standards • Contractual framework that is sufficiently comprehensive and which allocates

responsibilities to each of the stakeholders

• Procurement in a transparent manner that ensures that the project is implemented in the most efficient manner

• Demonstrate detailed and comprehensive management perspective.

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Annex 5.g Joint Ventures with Private Partners

• Joint ventures present another alternative for private sector participation in which the government wishes to retain a certain level of control and share of profits while mobilising the efficiencies and financing capacities of the private sector. Since all partners have a vested interest in the venture, there is a strong incentive to optimise the efficiency and performance of the company. Ideally, the technical competencies and business acumen of the private partner can be paired with the local knowledge and social concern of the public sector to deliver quality service to citizens. However, it is important for the company to maintain

independence from the government since the latter is both the owner and regulator. This conflict of interest may lead to potential corruption or manoeuvres to achieve political goals.

• Joint venture presents itself as a suitable modality of private sector participation where the government wishes to retain certain level of control while mobilising the efficiencies of private sector.

Annex 5.h Private Infrastructure Development Group (PIDG)

• Established in 2002 and headquartered in UK. • Multilateral donor‐funded development organization. • Principals comprise Government Agencies and the World Bank. • Promote private‐sector participation in Infrastructure in developing countries. • Project Development Initiatives & Project Financing Initiatives.

“To mobilize private‐sector investment to assist developing countries to provide infrastructure vital to boost their economic growth and combat poverty.” The Private Infrastructure Development Group is a coalition of donors mobilising private sector investment to assist developing countries to provide infrastructure vital to boost their economic development and combat poverty.

In partnership with other donors, local operators and government bodies to deliver badly‐needed infrastructure and to increase funds for development in some of the

poorest countries in the world.

PIDG helps to overcome the obstacles to private sector infrastructure investment through a range of specialised financing and project development facilities and programmes. These have evolved in response to specific conditions within the infrastructure markets of the poorer developing countries. Each facility/programme seeks to provide a unique solution to the market gaps created by insufficient resources, low levels of capital development and poor technical capabilities.

Through facilities and programmes they provide financial, practical and strategic support to help galvanise infrastructure investment where it's needed most. Their efforts complement, rather than replace, traditional funding from aid‐donors and developing country governments, and the projects they fund are rigorously assessed against economic, social and environmental criteria.

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The PIDG facilities and programmes have been designed to improve project development, attract private sector investment and overcome constraints to this investment. These constraints relate to: •Lack of suitable infrastructure projects for investment •High upfront costs of project development •Shortage of long‐term debt •Lack of local currency investment •Inadequate capacity in both public and private sectors As new constraints emerge, we will continue to explore possible responses and solutions through the work of the facilities.

PIDG facilities and programmes: investment overview •Since 2002 to end 2009, PIDG facilities have committed investments of $709.45million across over 40 developing countries. •$583 million of the total committed is in the poorest (DAC I and II) countries (82%)

•$606 million of the total has been invested in Africa (including North Africa and Middle East) •The country most heavily invested in to date is Nigeria (with $135m), followed by Kenya ($76m), Uganda ($65m), India ($55m) and Ghana ($38m) •$204 million has been invested in telecoms, followed by energy/power ($171m), industry ($147m) and airports ($39m)

"...there is evidence that private sector investment is necessary to infrastructure development and poverty alleviation and that private provision can improve the quality and efficiency of services." ‐ DFID (2007) "It is much harder to raise money for a sewage pipe or a motorway than it is to get emergency relief for an orphan ‐ but those are the things that will often help bring lasting change. Ask interested parties in Tanzania what they want most and they say, 'a road from Botswana to Kenya." ‐ The Observer (2008)

Annex 5.i Equity Fund for Infrastructure: Pan Asia Proj. Devel’t Fund

With the demonstrated success of the India Project Development Fund, the Pan Asia Project Development Fund (PAPDF) was established in the year 2006 with a corpus of US$ 45 mio. The mandate is to investment in infrastructure projects and concepts at the project development stage. PAPDF seeks to undertake investment in the Asian region, more particularly in South East Asian region, with a larger focus on India.

PAPDF has committed to seven investments aggregating US$ 39 mio. These investments cover varied infrastructure sub‐sectors ‐ gas distribution, logistics, e‐governance and waste management. Given the robust deal flow witnessed by PAPDF in the last 2 years, a successor fund would be planned in the medium term.

Annex 5. j Standard Chartered IL&FS Asia Infra. Growth Fund

Standard Chartered IL&FS Asia Infrastructure Growth Fund (SCI Asia), is a Fund jointly raised by IL&FS and Standard Chartered Bank (SCB). SCI Asia will invest in high‐growth infrastructure assets in the rapidly expanding Asian markets, primarily in India and China. SCI Asia has already built a portfolio of over US$ 250 million of attractive seed assets, comprising operating toll roads, power plants, water treatment projects, waste management services etc.

SCI Asia provides an excellent platform to partner with two of Asia's premier financial and infrastructure institutions with an experienced local team of infrastructure and private equity expert. The Fund has had liquidity events in two of its investments.

Investment Trends

IL&FS Group has configured itself to business requirements. These have aided IL&FS in spreading its expertise across a variety of sectors, nationwide. Please follow the links for trends of services offered by IL&FS • Transportation • Area Development • Cluster Development • Power • Ports • Water and Waste Water • Urban Infrastructure • Education • Tourism • Environment

Urban Infrastructure of IL&FS:

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• Hop‐On‐Hop‐Off (HOHO) Bus Services Delhi • Integrated Urban Infrastructure Development in Nanded • Jawaharlal Nehru National Urban Renewal Mission • National Games Village, Hyderabad • Rehabilitation & Resettlement Programme for Mumbai Urban Transport Project

• Thiruvananthapuram Bus Terminal Project • Thiruvananthapuram City Road Improvement • Thiruvananthapuram Street Lighting Project

Annex 5.k ICICI Venture

ICICI Venture is one of the major private sector financial services group in India. ICICI Venture has launched its new Infrastructure focused Private Equity fund, called Indian Infrastructure Advantage Fund. The Fund invests in various sub‐sectors of infrastructure such as power, roads, ports, airports, railways, telecom and urban and social infrastructure. The Fund's investment is either directly into projects or in holding companies associated with infrastructure assets with a preference to invest by way of structured minority stakes.

Sector Priorities • Power • Telecom • Roads, Ports, Airports, Railways • Urban Infrastructure

• Water • Waste Management • Education

Type of Financial Instruments ICICI Bank provides a wide range of services including the following:

• Rupee term loans • Foreign currency term loans • External Commercial Borrowings • Subordinated debt and mezzanine financing • Export Credit Agency backed funding • Non fund based facilities like Letter of Credit, Bank Guarantee, etc. • Equity funding

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Annex 6 Examples of Environment Funds


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51


52


53


54


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Source: International Financing for City Climate Change Interventions, March 16, 2011

Annex 7.a Asian Development Bank

The Asian Development Bank (ADB) is an international development finance institution for the Asian and Pacific region. The Bank provides loans and technical assistance grants to the public and private sectors in support of economic and social development projects in its developing members in the region. It has 63 members, 45 from the Asian and Pacific c region and 18 from other parts of the globe.

Focus of Development Cooperation The project loans provided by ADB have been directed to key investment priorities (rural and urban infrastructure, agricultural and environmental management, health, education and social welfare, etc) consistent with the poverty alleviation goals of the Government. The ADB has provided major program loans, which have been helpful in

supporting the Government’s budget and implementing key policy and institutional reforms in priority sectors (i.e., capital markets, power, grains and environment).

The technical assistance from ADB has been important source of funds for policy and institutional reform studies, institutional capacity building and project preparation activities to beef‐up the capital assistance pipeline.

Bank lending in the Philippines currently concentrates on the following 3 areas: 1. Program and sector loans to support changes in government policy 2. Infrastructure investment funds 3. Rehabilitation of the environmental

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For 2004 – 2006, ADB’s resources will be directed to projects that emphasize poverty reduction, human development and economic growth, while maintaining previous priorities such as agriculture, education and health, infrastructure development in power and transportation, environmental management, housing and urban development, and governance.

ADB is an international development finance institution whose mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Headquartered in Manila, and established in 1966, ADB is owned and financed by its 67 members, of which 48 are from the region and 19 are from other parts of the globe.

ADB provides resources directly to National Government Agencies (NGAs), Government Owned and Controlled Corporations (GOCCs), and Government Financial Institutions (GFIs), since these are supported by sovereign guarantee from the Government of the Philippines.

LGUs, can, however, benefit from ADB through NGAs or fund conduits such as GFIs and the Municipal Development Fund (MDF). Many LGUs are beneficiaries of ADB's ongoing projects for LGUs being implemented by the Government and the various fund conduits. Potential LGUs may access these funds by coordinating directly with the implementing agencies.

Products and Services: ADB provides assistance to the its member countries by providing loans, and technical assistance that are usually grants. Loans support development projects in

sectors and areas agreed upon by both ADB and the Government. Besides project loans, ADB also provides program and sector loans, which support policy, sector, and institutional reforms.

Terms ADB offers its public and private sector borrowers LIBOR‐based loan (LBL) carrying a floating lending rate that consists of a six‐month LIBOR and a spread fixed over the life of the loan. ADB's lending rate for Government loans is LIBOR+0.60 ADB spread, usually with a repayment period of 20 years including a grace period of 4‐5 years. ADB also charges a front‐end fee of 1% and annual commitment fee of 0.75% computed on the scheduled undisbursed portion of the loan.

ADB extends technical assistance (TA) in three forms: • Project Preparatory TA (PPTA) which helps in project preparation and detailed

engineering • Advisory TA (ADTA) which aids in institutional strengthening, sector and policy

studies, and non‐project‐related human resource development • Regional TA (RETA) which assists development activities covering many countries

in the region/sub‐region.

ADB also administers, on behalf of the Government of Japan, the Japan Fund for Poverty Reduction, which provides resources to innovative pilot projects designed to reduce poverty.

Annex 8.a Ahmedabad Municipal Corp. Bond Issue

Ahmedabad, the commercial capital of the Indian state of Gujarat, is the largest city of the state and the seventh largest city in India. During the early 1990s, the financial situation of the Ahmedabad Municipal Corporation (AMC) was under severe strain. In late 1994, AMC launched a major effort to improve collection of octroi and property taxes while at the same time taking an important step to professionalize its workforce. For the first time in India, the city recruited certified chartered accountants and recent graduates with MBAs. At the request of AMC, USA began to provide targeted technical assistance to the city and build its capacity in municipal accounting and financial management, project management and non‐tax revenue generation that would improve the AMC’s overall financial position.

In addition to technical assistance to improve AMC’s overall financial position, USAID funded an urban environmental mapping exercise, which produced a series of city maps focusing on water supply, sewerage systems and other municipal services. The utility of the maps was to demonstrate, for example, the correlation between areas underserved by sewers and those with a high incidence of gastroenteritis. This was followed by an analysis of environmental risks which identified and ranked a variety of urban environmental health threats such as water pollution in terms of their severity, impact, mitigation costs and other factors. Through discussions with policy‐makers, academics, community leaders and other stakeholders, an action plan was developed to combat the risks identified.

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Once the city was ready with infrastructure investment requirements, USAID, in association with Bombay‐based Infrastructure Leasing and Financial Services, Ltd. (IL&FS), worked with AMC to prioritize its investment proposals, conduct detailed financial analysis of proposed investments, and assist in the technical and financial aspects of a water supply and sewerage project. Project development was accomplished through working sessions that reviewed and updated feasibility studies, established project costs based on current and projected materials and labor estimates, and devised an implementation plan that brought together the technical and financial engineering to identify when funds were needed for technical inputs and scheduled borrowings and bond issues accordingly.

In 1996, Ahmedabad became the first urban authority in India to request and receive a rating for a municipal bond issue for water and sewerage expansion. Credit Rating and Information Services, Ltd., India’s premier credit rating agency (which also

received USAID support to form a municipal rating department), assigned Ahmedabad an “A+” rating (out of a possible rating of AAA) for a bond issue of Rs. 1,000 million (US$29 million) which was more than sufficient to go to market. AMC appointed IL&FS as the investment banker for the bond issue that was developed as a structured obligation (SO) with the escrow of octroi revenue of AMC (which was to be monitored by an independent trustee) and a special covenant on additional revenue mobilization. With such a structure in place, the bond rating was enhanced to “AA (SO).” Ahmedabad’s water and sewerage projects were subsequently financed through proceeds from the bond issue, AMC’s own revenue, a loan from IL&FS using funds made available through USAID’s Urban and Environment Guaranty Program and other financial institutions including the Housing and Urban Development Corporation and the Life Insurance Corporation of India. Ahmedabad’s local government has learned to use bonds as a financial tool to raise investments for its capital investment priorities and scheduled the issue of its third bond.

Annex 8.b Philippines LGU Guarantee Corporation Bond Issue

The greatest portion of funding for Philippine municipalities, cities and provinces previously came in the form of grants from the Government of the Philippines or subsidized credit from government‐owned banks. In 1996, however, continuing budget deficits encouraged the national government to institute credit policy reform designed to phase out government subsidized credit and all government directed programs. At the same time, they implemented a decentralization program whereby local authorities have assumed a growing share of the financial responsibility for their capital improvements. Increasingly, municipal financing must be mobilized from private domestic sources through more efficient local credit markets.

The Manila‐based Local Government Unit Guarantee Corporation (LGUGC) is a domestic financial institution established to encourage the flow of private capital to creditworthy municipal infrastructure projects. LGUGC is a public‐private joint venture owned by the Development Bank of the Philippines (49 percent) and the Bankers Association of the Philippines (51 percent). Its goal is to provide a market‐based guarantee fund for loans to local authorities targeted at sustainable, financially sound infrastructure projects that can repay debt in a timely manner.

LGUGC offers guarantees to private investors and lenders on local government infrastructure projects that meet its underwriting criteria. The criteria feature a screening process that results in a

uniform system of local government credit rating countrywide. Over time, it is expected that an increasing number of LGUs will take actions to receive a favorable credit rating and design self‐sustaining infrastructure projects. USAID’s Development Credit Authority (DCA) provides a partial guarantee of LGUGC’s guarantees on local infrastructure project financing. The first LGUGC project co‐guarantee was the local currency equivalent of a US$8 million bond issue for Puerto Princesa City to finance low‐income housing and related infrastructure. LGUGC’s pipeline of projects that are likely candidates for the DCA co‐guarantee include water systems and solid waste facilities.

Credit Guarantees against LGU default

Credit rating/Due diligence

Pays FIs in case of default

Provides

LGUGC Local Government Units,Other Borrowers

Financial Institutions

Pays back

Call on guarantee in the case of default

LGUGC Guarantee System

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Annex 8.c Tamil Nadu Water and Sanitation Pooled Fund

Since 1988, the Government of Tamil Nadu has been implementing the Tamil Nadu Urban Development Project (TNUDP), financed by the International Development Agency (IDA) and the World Bank. The TNUDP is a major multi‐sector, multi‐town urban development project, of which one component was the Municipal Urban Development Fund (MUDF). This fund was established to provide debt finance to city governments on a pilot project basis.

The successful track record of MUDF encouraged the state government to partially privatize the fund, with a view to attracting private capital into urban infrastructure and facilitate better performing municipalities to access capital markets. In 1996, the state government invited three local financial institutions, ICICI Bank, Housing Development Finance Corporation and Infrastructure Leasing & Financial Services Limited, to purchase 51% of the MUDF and convert it into a trust, the Tamil Nadu Urban Development Fund (TNUDF), with a private fund manager to deploy resources of the trust. Accordingly, TNUDF was established as a trust under the Indian Trusts Act as an infrastructure development financial intermediary to finance urban infrastructure requirements throughout the state.

In order to facilitate small and medium towns’ and cities’ access to the domestic capital market, a Water and Sanitation Pooled Fund (WSPF) was organized as a pure debt fund. WSPF acts as a bond bank with a reserve fund coming from the state government. The funds raised by bond issues are disbursed as sub‐loans to the participating municipalities. An asset management company, Tamil Nadu Urban Development Infrastructure Financial Ltd., 51 percent owned by private investors and 49 percent by the state government, manages the trust.

For the purpose of debt service, the WSPF requires municipalities to maintain an amount equivalent to their respective one year debt service payments in short term fixed deposits of AAA corporate or highly liquid investments, such as government securities or treasury bills. The cash flow/bank account (also known as current account) of the local authorities will be escrowed to the extent that, at a minimum, amount equivalent to one year principal and interest is available in the escrow account, 90 days prior to the due date of debt servicing.

Apart from this escrow, a separate Debt Service Reserve Fund (DSRF) has been established and maintained by the state government in the form of low risk, short term fixed deposits. The amount of the DSRF will be equivalent to 1.6 times the principal and interest payments due to bondholders. In case of default of the escrow mechanism, the DSRF will be automatically triggered for servicing the bondholders.

Through a government order, state government will replenish the DSRF, if necessary, by intercepting state disbursement of transfer funds to the municipalities.

As a final means to ensure repayment to bondholders, up to fifty percent of the outstanding principal and interest payments are guaranteed by one or more Indian financial institutions, while up to 50 percent of these payments are guaranteed by USAID’s Development Credit Authority.

With up to 50 percent of the bond issue repayments guaranteed by a strong, private sector financial institution, and up to another 50 percent guaranteed by the full faith and credit of the U.S. Government, Indian credit rating agencies and institutional investors view these bonds as attractive investment opportunities.

The Water and Sanitation Pooled Fund issued its first bond in November, 2000. The first bond was the first non‐guaranteed, unsecured bond issue by a financial intermediary in India with urban municipal cash flow as its repayment basis. The

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bond issue of US$ 21.3 million was oversubscribed by $1.3 million, carried an interest rate of 11.85 per cent and a 5 year term and was considered to be a tremendous success. WSPF issued a second bond in December of 2002 in the amount of approximately $6.47 million. It was allotted to bond holders on December 20, 2002.

Bondholders are three banks and two private provident funds. The second bond issue was a great success in for it carries an interest rate of 9.20 per cent per annum compared with the 11.58 percent of the first and a term of 15 years compared to the 5 year term of the first. It is the first privately‐placed infrastructure bond with a 15 year term.

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Reference Material & Further Reading

Asian Development Bank. 2008. Managing Asian Cities. Manila. See

http://www.adb.org/Documents/Studies/Managing‐Asian‐Cities/default.asp Asian Development Bank, Strategy 2020. See

http://www.adb.org/sites/default/files/Strategy2020‐print.pdf Cities Development Initiative for Asia, 2010. Linking Cities to Finance: Overcoming

Bottlenecks to Financing Strategic Urban Infrastructure Investments. See http://www.cdia.asia/wp‐content/uploads/Linking‐Cities‐to‐Finance‐Background‐Paper.pdf

Cities Development Initiative for Asia, 2012. International Financing Options for City Climate Change Interventions. http://www.cdia.asia/wp‐content/uploads/International‐Financing‐Options‐for‐City‐Climate‐Change‐Interventions1.pdf

Cities Development Imitative for Asia, 2009. PPP Guide for Municipalities. See http://www.cdia.asia/wp‐content/uploads/PPP‐Guide‐for‐Municipalities2.pdf

Cities Development Initiative for Asia, 2011. Incentivizing Asia’s Urban Future. Background paper for a High‐level round table. See http://www.cdia.asia/wp‐content/uploads/Incentivizing‐Asias‐Urban‐Future.pdf

Commonwealth Secretariat, 2008. Financing local government. www.thecommonwealth.org/publications

Developing Public‐Private Partnerships in Local Infrastructure and Development Projects, A PPP Mnaual for LGUs, Vol. 2. See: www.ppp.gov.ph/wp‐content/uploads/2012/07/PPP‐Manual‐for‐LGUs‐Volume‐2.pdf

GIZ, 2012. Financing Local Infrastructure – Linking Local Governments and Financial Markets

Lufkin, J. February 2010. The Infrastructure Gap: Creating a Market Foundation for the Infrastructure Market. See: www.irei.com/web/securedownload/Luftin)Market_Perspective_TIREL‐AP_Feb2010.pdf

OECD. 2003. Innovations and Solutions for Financing Water and Sanitation. See www.oecd.org/dataoecd/16/42/22145238.pdf

Society for Development Studies. 2012. Mapping the Infrastructure Landscape in India.

USAID. 2005. Municipal Finance: Increasing Local Government Resources. www.tcgillc.com/tcgidocs/paper_billand.pdf

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