Public Private Partnerships For Urban Infrastructure

1. Public Private Partnerships For Urban Infrastructure Sanjay Jaju, Managing Director Infrastructure Corporation of Andhra Pradesh 17-May-08

2. Challenges of Urbanization

3. 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

6. 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)

8. Most towns and cities are growing… Like this! Existing Scenario

9. Quality of life…

10. How we cope, presently Premji raps Karnataka Govt for bad roads, power situation in Sarjapur Our Bureau Bangalore , July 18

11. Fund Sources

12. 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

13. 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…

14. 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

15. 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

16. 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…

17. 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

18. 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

19. 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

20. Proportion of Pooled ULB Finances Government Budgetary Support PFDF/ Government Debt Service Ratio of 1.3 to 1.5 State Intercept Bond Service Fund USAID Guarantee Rated Bond Instrument Pooled Finance… (2)

21. 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

22. 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

23. 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

24. 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

25. Core Issues In Financing Urban Infrastructure • 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

26. Public-Private Partnerships An Overview

27. 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

28. 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

29. 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

30. PPP Approach Goal • Attract private investments for infrastructure projects Need • Lack of Budgetary Resources • Need to improve efficiency in service delivery PPP approach • 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

31. 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

32. 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.

33. The PPP ‘Development Process’

34. Structure

35. Development of PPP projects • 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

36. A PPP is not a transfer of responsibility: • 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

37. A PPP is more work: • 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

38. A PPP is more time: • 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

39. 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

40. 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

41. 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.

42. Putting the projects on ‘shelf’ Project Preparation Partnership Management Project Identification • Requires Project Preparation & Partnership Management • Inca is the nodal agency mandated to do the above Viability Structuring Do-ability Procurement Strategy Bid Process Management Pre-bid Bid Process Management Post-bid Identification/ Assessment 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!

43. Identification Stage • To convert wish list into a list of projects that are viable and amenable for PPP. Objective • Prelim assessment of the opportunity • Prelim assessment of possibility of a PPP • Presence of necessary ingredients – land, land use, basic approvals Activities

44. Preparation Stage • Assessing feasibility and structuring the PPP (Value for Money) (Risk Return Ratio) Objective • Assessment of Market opportunity • Technical & Financial Feasibility • Financial structuring • Sharing of risk and Structuring PPP Activities

45. Partner Selection Stage • To select Private Sector Partner in an open and transparent manner Objective • Technical and financial capability criteria • Equal information sharing and support to all bidders • Rigorous specifications & Contract • Efficient and time bound bidding process Activities

46. PROJECT DEVELOPMENT Techno-Economic & Market Assessment Legal Documentation Policy amendments and notification Contractual and Institutional Framework Project Development Process Track 2 DEVELOPER SEARCH • Expression of Interest • Request for Proposal (RFP) • Pre-Bid Conferences • Proposal Evaluation • Finalisation of Developer • Finalisation of Agreements MARKETING & COMMUNICATION • One-to-one meetings • Direct Mailers • Media release • Road Shows • Investor’s Conferences • Facilitating Consortia formation Government Approvals, Facilitation & Decision Making

47. Larger Number Of Marginally Profitable Projects Unprofitable, But Imperative Projects Small Number Of Profitable Projects Maintenance Works Govt. ‘Leveraged’ Privatisation Budgetary Allocation BOT Dedicated Funds (Road Fund) Different Structures

48. Three important words These words are in many ways the three vital ingredients for successful private sec­tor participation. • Competition • Accountability • Transparency

49. Effective competition can generate the best performances

50. Solutions need vision…