Public Private Partnerships For Urban Infrastructure Sanjay Jaju, Managing Director Infrastructure...

INDIA PPP CAPACITY BUILDING TRUST An initiative supported by IDFC

Public Private Partnerships For Urban

InfrastructureSanjay Jaju, Managing Director Infrastructure Corporation of Andhra Pradesh

17-May-08


Challenges of Urbanization

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Urbanisation

Urban areas contribute 75% of GDP and more than 50% of our population to live in urban areas by 2050.

Rurbanisation of the countryside to pose newer challenges.

Cities would be the key drivers to our economy but…

…unless a focused approach coupled with heavy investment in urban infrastructure is put in…

Urban areas would keep presenting 100000 problems which in essence are 100 problems multiplied 1000 times

4

Growing Demand for Urban Infrastructure

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Multifarious Responsibilities : Limited Resources

Local Government Expenses vary between 20-29% in developed countries while they are only 7-8% in India

Limited revenue base and dependent fiscal Jurisdiction Fairly Large Capital Investment decisions being thrust

upon municipalities Meeting revenue expenditures is a great deal,

increasing capex difficult to meet with its own resources Recourse to Direct Borrowing though essential looks

improbable with poor credits ratings

7

Infrastructure Bottleneck Infrastructure is the biggest bottleneck in ‘India

Growth Story’

Transport system has severe capacity constraints: highways, city roads, airports, seaports and railways

Urban and Utility infrastructure : Huge demand-supply gap in drinking water, sewerage system, drainage and power supply

India needs US$ 480 billion investment in the coming Five Year Plan to meet current Infrastructure needs, at least 20% of this would be for the Urban Sector

Government alone can not bring the desired investment and efficiency: need for Public Private partnership (PPP)

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Existing ScenarioMost towns and cities are growing… Like this!

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Quality of life…

10

Premji raps Karnataka Govt for bad roads,

power situation in Sarjapur

Our Bureau Bangalore , July 18

How we cope, presently


Fund Sources

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Government Funding

Entire investment, construction, operating, and maintenance is by government Direct budgetary devolution (tax-payer money) Debt raised against government guarantees, (and “letters of comfort”) Financing primarily by HUDCO and LIC

Financial requirements are increasing way beyond direct budgetary/ guarantee capacity

State budget deficits and statutory guarantee limits constraining State Gov. funding capacity

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Local Authority Funding

After the 74th Amendment, there is increasingly, funding generated by the ULB Escrowing revenues such as property tax, entry tax/

octroi Selling/ securitizing land

But there is a limit to these numbers…

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Multilateral/ Bilateral Funding

World Bank, ADB, DFID… Based on reform agenda Fairly detailed appraisals done Sectoral or project-wise Generally addresses needs of urban poor

However, for commercial loans, based on Government of India Guarantees as security… Very elaborate and complex processes

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JnNURM

Excellent scheme to lead reform-based financing Presents a new opportunity to:

Establish key reforms And thereby draw investment into key infrastructure

But the scheme is available only to some cities Also focus towards commercial finance, which

will be a significant percentage of the project investment – PPPs are envisaged to be the way forward

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Private Sector Interest?

Urban Infrastructure, has not yet found investor interest in the absence of clear directions on various aspects - Risk, social/ political, Regulatory, cost recovery mechanisms, etc.

Various attempts are being made to convert Urban Service (water, waste-water, Solid waste, etc) into ‘Bankable projects’ This is likely to open a new area for investments And a new breed of ‘Operating’ companies to provide these

services But proper ‘PROJECT DEVELOPMENT’ is the key here…

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Total Private Sector Investments in India’s Infrastructure

Year of Investment Energy Telecom Transport Water and sewage Total

1990 0 0 2 0 2 1991 614 0 0 0 614 1992 13 0 0 0 13 1993 1,051 0 0 0 1,051 1994 311 97 125 0 533 1995 1,008 683 0 0 1,691 1996 1,553 1,229 108 0 2,890 1997 970 3,827 405 0 5,201 1998 1,066 673 296 0 2,035 1999 2,500 1,045 467 0 4,012 2000 2,357 682 100 0 3,139 2001 45 3,445 211 2 4,004 2002 380 4,615 558 0 5,553 2003 825 1,968 505 0 3,298 2004 4,144 3,731 1,117 0 8,992 2005 755 6,201 1,449 0 8,405

Total 17,891 28,195 5,343 2 51,432

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Beginnings made…

May not be all “success stories”, but: Tamil Nadu

Tirupur, Alandur, TNUDF Pooled Finance Municipal Bond issues

Ahmedabad, Hyderabad, Nashik Urban infrastructure funds – IFCG, Feedback U-Fund and MUIF

Not Successful BATF in Bangalore Water O&M PSPs (attempts!) in Pune, Goa, Bangalore,

Hyderabad

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Pooled Finance

TNUDF sponsored issue, successful in Tamil Nadu USAID (DCA) guarantee for 50% of principal

Karnataka (KUIDFC) pursued similar issue Government of India’s proposed PFDF, also a pointer in

this direction Yet to take off

Issues of listing Trust-financed Bonds (SEBI), would have to be addressed to ensure a market for these instruments

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Pooled Finance… (2)

Proportion of Pooled ULB

Finances

Government Budgetary Support

Debt Service Ratio of 1.3 to

1.5

PFDF/Government

Bond Service Fund

State Intercept

USAID GuaranteeRated Bond Instrument

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Viability Gap Funding

Proposed by Government of India To “Prop-up” marginally viable projects Established and clear guidelines for allocation

Problem may be in the lack of developed and structured projects, that are eligible to claim this assistance

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Capital Market Access

Bond issues of Ahmedabad, Hyderabad, BMP, Nashik etc., have not led to large-scale replication Issues of market appetite, end-use Limited number of ULBs which can access financing

on a standalone basis Pooled Finance seems a more appropriate structure

for small ULBs

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Access to Domestic Financial Institutions

For the Local Body Reluctance of Local bodies to accept FI conditions typically

stipulated to mitigate project risks ULBs have option of (a) FIs assistance (cash flow basis; with

conditions) Vs (b) MLA funding/ Govt. Institutions ( GoI/ State guaranteed; soft push, if any)

ULB prefers the latter to the former (obvious!)

For the Domestic Institution Guaranteed lending (state/ central) is no more risk-free, from

regulatory considerations

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PPP – Some reasons to be optimistic

Realization of need for improvement of Urban Services, and concurrently, the finance needed for doing so

Various precedents are being tried and tested, and experience is maturing But yet a long way to go

Key Words: Not Finance, but Developed Bankable Projects Not Willingness to Pay, but Unwillingness to Charge

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Capacity building of ULB’s Institutional, administrative and managerial Financial Capacity & Independence Reasonable and equitable USER CHARGE collection Property tax reform

Key State-level intermediaries such as INCAP can help the PPP process

Core Issues In Financing Urban Infrastructure


Public-Private Partnerships

An Overview

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Public Private Partnerships

Public Private Partnership Service, Management, Lease Contracts Concessions BOT (Greenfield Projects) Divestitures and Joint Ventures

Fund Your City as an elementary model to bring in private investments in civic infrastructure

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Fund Your City (“F Y C”) Involve Corporates, NGOs & other citizens in city

development & infrastructure creation/improvement

Areas that can be taken up for sponsorship: Junction Improvements Installation & maintenance of traffic signals Road medians/Traffic islands/Fountains/Street Lights Construction of Foot Over Bridges Painting of road markings Beautification of sidewalks/footpaths Street furniture Construction & maintenance of public toilets and Urinals Beautification of grave yards Slum improvement/adoption

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Public Private Partnerships

Convert a public good into a private good Hive off functions and assets into SPVs with

a clear mandate to run those functions Public Interest essential Willingness to Charge Clarity about risk allocation

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PPP Approach

Lack of Budgetary Resources Need to improve efficiency in service delivery

Need

PPP approach

Attract private investments for infrastructure projects

Goal

Private Sector contribution for: - Financial investments - Best Management practices - Efficiency in service delivery - Efficient use of capital resources

Public Sector contribution limited to: - Providing institutional commitment to project - Project Development & Selection of Developer - Viability gap funding (VGF), if any

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Key Determinants for a Successful PPP Adequate Demand for the services/goods Political commitment to the project Administrative framework and readiness to meet

requirements Partnership of Public (Government) with Private

Sector rather than owner-contractor relationship Provision of information required to take informed

decision to reduce risks and uncertainty Technical, Environmental, Social, Financial, Legal

aspects Bankability of project and project documents

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Background Issues Ability to create a ‘shelf of projects’? Project development requires funds and continuous

support Strengthening the capabilities of the mandated

agency to create experiential learning Standardized processes for Viability support for

projects not viable on stand alone basis No need to reinvent the wheel every time, learn from

peers

Debate has shifted from financing of infrastructure projects to creation of a shelf of projects.


The PPP ‘Development Process’

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Structure

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For such projects, the focus is on: Commercial viability Rigorous environmental and social assessment Conformity to public standards and transparency Appropriateness of the institutional and legal

framework Contractual framework

Development of PPP projects

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A PPP project DOES NOT Mean that the Government has little or no onus

It’s objective has to be synergy between the private & public sectors Areas such as land acquisition, clearances, utilities,

etc., can still be best done only by the Government

A PPP is not a transfer of responsibility:

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It requires a lot of studies & home-work on the part of all concerned

It involves hard commercial & legislative decisions

It involves a new mind-set, & changes in system

A PPP is more work:

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Detailed Techno-economic studies External decisions involving sponsors,

Government, equity holders & lenders: each to be convinced Investors and Lenders may drive the process, not

the Owner or the Contractor It requires an equitable position, & significant

sales & education effort

A PPP is more time:

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Then why PPP?

Demand – Supply gap - Constraints in financing through budgetary/ other government sources

Improvement in levels of service to users Innovation in designs, project management and

implementation of projects Long-term operations and maintenance of assets Focus on service to users – not just asset creation

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Who is responsible for public services?

Whether the service is provided by private companies or local government, government (local, state or national) retains responsibility for most urban services.

These fundamental responsibilities are not diminished by any PPP process.

However, resources are concentrated towards monitoring and enforcement, thus ‘leveraging’ its resources

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What are the advantages of private sector participation ?

If properly structured and incentivized, the private sector can provide a more efficient or cost-effective service.

The private sector often has better access to capital financing and so it is able to use more efficient equipment.

The private sector may have easier access to specialist skills. For example companies can form joint ventures with international specialist firms.

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Putting the projects on ‘shelf’

Viability Structuring Do-ability

ProjectPreparation

ProcurementStrategy

Bid ProcessManagement

Pre-bid

Bid ProcessManagement

Post-bid

PartnershipManagement

ProjectIdentification

Identification/Assessment

Requires Project Preparation & Partnership Management Inca is the nodal agency mandated to do the above

State need to enhance the involvement of private sector – need a PPP! The challenge is the right model and right process for engagement of

private sector!

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Identification Stage

To convert wish list into a list of projects that are viable and amenable for PPP.

Prelim assessment of the opportunity Prelim assessment of possibility of a

PPP Presence of necessary ingredients –

land, land use, basic approvals

Objective

Activities

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Preparation Stage

Assessing feasibility and structuring the PPP (Value for Money) (Risk Return Ratio)

Assessment of Market opportunity Technical & Financial Feasibility Financial structuring Sharing of risk and Structuring PPP

Objective

Activities

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Partner Selection Stage

To select Private Sector Partner in an open and transparent manner

Technical and financial capability criteria

Equal information sharing and support to all bidders

Rigorous specifications & Contract Efficient and time bound bidding

process

Objective

Activities

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PROJECT DEVELOPMENT

Techno-Economic & Market Assessment

Legal Documentation

Policy amendments and notification

Contractual and Institutional Framework

Track 2

DEVELOPER SEARCH

Expression of Interest

Request for Proposal (RFP)

Pre-Bid Conferences

Proposal Evaluation

Finalisation of Developer

Finalisation of Agreements

Government Approvals,

Facilitation & Decision Making

Project Development Process

MARKETING & COMMUNICATION

One-to-one meetings

Direct Mailers

Media release

Road Shows

Investor’s Conferences

Facilitating Consortia formation

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Small Number Of Profitable Projects

BOT

Larger Number Of Marginally

Profitable Projects

Govt. ‘Leveraged’ Privatisation

Unprofitable, But Imperative

Projects

Budgetary Allocation

Maintenance Works

Dedicated Funds (Road

Fund)

Different Structures

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Three important words

These words are in many ways the three vital ingredients for successful private sec tor participation.

• Competition

• Accountability

• Transparency

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Effective competition can generate the best performances

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Solutions need vision…

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But may be easier than we think…


The Importance of Project Development

Some Case Discussions

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How Much Time Did They Take?

Airports: Started in 1998-99 Bidder identified in 2001 SHA in 2002 Concession/ FC in 2005

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How Much Time…(2)

(Industrial) Water Supply: Started in 1995-96 Bidder identified in 1997 Concession in 2003 FC in 2004

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How Much Time…(3)

Commercial Complex: Started in May 2002 Bidder identified in June 2004 Government approval June 2005 Concession/ FC in 2006…

SEZ: Started in 2002 Bidder identified in 2003 Land/ Approvals not yet in place…

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How Much Time…(4)

Bypass Roads Started in 2002 Bidder identified in 2005 Concession/ FC in 2007 Land not yet in place…

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Why are the projects delayed?

Possible Reasons? Finance Inadequate Project Development

Hasten to bid? Approval structures/ processes not being in place

Plug-and-play approach? Social/ Environmental reasons

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Are Funds an Issue?

Yes and No YES

Project Development Funds Equity

NO Commercial debt (sectors other than mentioned above)

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Inadequate Project Development

Hasten to set up project/ bid Bidders/ lenders then start asking for data/

studies Thin slice method to get all the DPRs done

Re(negotiation) of project and contract parameters along the way

All parties feel let down…

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Way Forward…?

Not to rush into a Project bid/ implement approach Get frameworks/ approvals/ funds in place before doing so Capacity building and reform should go ahead Now there is enough project experience/ expertise to set up

a “precedent” basis Adequate project preparation

Funding required to do so Not too many “money bags” waiting to invest into

infrastructure…


How INCAP & it’s Partners Can Help

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A nodal agency INCAP created for this purpose most equipped to do it

Infrastructure Development enabling act and APIA PPP Cell in the Finance Department

Current Situation

We would have to react before it is too late!

Inability of the Departments caught up with their regular work to think out of box and conceptualize PPP projects

Engagement without accountability for success Consultants funding program Project reports not translating into action

Governments not able to commit resources – financial and human for project development

Risk aversion of officers in view of allegations of malpractices

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India Infrastructure Project Development Fund (IIPDF) A Separate Project Development Fund created by GOI

for the accelerated Infrastructure Development in the country with a corpus of Rs.100.00 Crores to quicken the process of project preparation.

Project proposals for quality Project Development activities submitted by the Sponsoring Authorities i.e., Central Ministries, State Government Public Sector Undertakings and any statutory body created for the Infrastructure Development are eligible to secure financial support

In the form of interest free loan to the extent of 75% of the Project Development costs of PPP Project.

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Eligible Project Development Costs

Feasibility Studies Environment Impact Studies Financial Structuring Legal Reviews Development of Project Documentation

Concession Agreement Commercial Assessment Studies (including traffic

studies, demand assessment, capacity to pay assessment)

Grading of projects etc. required for achieving Technical Close of such projects, on individual or turnkey basis

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Project Development Fund

Inca has set up a dedicated close ended (5 years lock in) Project Development Fund

Fund being utilized to meet the costs of project development on a recurring basis and would get success fee from the bid out projects

Multilateral and reputed institutions without any conflicting positions in project development being invited

IFC, ADB, IDFC has already joined the fund World’s best consultants put on board for various activities GOI’s PDF would also be utilized to sustain this activity on a

continuous basisThe Fund would be utilized to provide support to the state

agencies in creating a Bank of PPP’able Projects

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Way Forward

MOU with the Department/Agency for developing select PPP projects

Handholding the Projects till they reach Culmination

Building Capacities within for long term Sustainability of the PPP Initiatives

Minimal Service Fee, Performance linked Success Fee

Advisory and Backend support Role, Decision making still with the concerned Department

End to End Solution

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Infrastructure categories Group A: Rural Infrastructure

Irrigation, rural connectivity (roads, power, IT), cold chains and mandis, drinking water.

Group B : Core Infrastructure Transportation (roads, railways, airports, sea ports, inland waterways);

energy (generation, transmission, distribution). Group C : Urban Infrastructure

Water, sanitation, sewerage, LRT/MRT/MTS, city-energy distribution, terminals and logistics parks.

Group D : Land- Intensive SEZs, industrial parks, new townships, industrial cluster development, IT

parks. Group E : Social Infrastructure

Healthcare, education, leisure and entertainment, retail, tourism, housing, exhibition and convention centers, hospitality.

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Areas of Engagement

Solid Waste Management

Maintenance Functions

Water Supply, Sewerage

Urban roads (improvement and maintenance)

City bypasses

Truck & Bus Terminals

Commercial real-estate development

Street Furniture

Almost anything and everything….

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The Challenge is to make the behemoth move…..

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‘You may be disappointed if you fail, but you are doomed if you don’t try’.

time to put our acts together….

Thanks for your time.

Public Private Partnerships For Urban Infrastructure Sanjay Jaju, Managing Director Infrastructure...

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