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Conceptual Framework for PPPs. Presentation to the Planning Board May 2007. PV Ravi Infrastructure Development Corporation (Karnataka) Limited. Definition.

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presentation to the planning board may 2007

Conceptual Framework for PPPs

Presentation to the Planning Board

May 2007

PV Ravi

Infrastructure Development Corporation (Karnataka) Limited

definition
Definition
  • A Public Private Partnership is an arrangement between a public (government) entity & a private (non-government) entity by which services that have traditionally been delivered by the public entity are provided by the private entity under a set of terms and conditions that are defined at the outset
characteristics
Characteristics
  • The public entity should have the enabling authority to transfer its responsibility – enabling legislative & policy framework, administrative order – the instrument of transfer is through a contract
  • There is usually a significant transfer of responsibility to the private entity – and usually includes financial investment obligations
  • For a payment to the private entity – directly by users or by the public entity such that - a significant portion of project revenues and/ or the payments, are conditional on achieving pre-specified levels of performance
  • The nature of the relationship is usually long-term
risk sharing
Risk Sharing
  • A risk is defined as any factor, event or influence that could threaten the successful completion of a project in terms of time, cost or quality
  • In a conventional BOQ based implementation : risks – planning, design, construction, environmental & social, physical damage and financing are evaluated
  • Commercial risks – revenue or maintenance costs, quality, safety of users and general regulatory risks – not critically evaluated – this is critical though to a private investor
  • PPP involves sharing of risks – risk allocated to the party best suited to manage them
why ppps
Why PPPs?
  • Fiscal reasons - Inadequacy of resources – leveraging on lower government funding
  • Optimal transfer of risks – to the entity best suited to manage the risks
    • Design, Financing, Construction, Operations and Maintenance – all are commercially understood and manageable
    • Change of scope, defective designs, time overrun, cost overruns, leakage of revenues, high maintenance costs
  • Transfer of responsibilities – efficiency gain
    • Appropriate technology, innovative design solutions, project management, better collection practices, life cycle costing
other reasons
Other Reasons
  • Enhanced bankability – more rigorous project preparation
  • Incentive to deliver whole life solution – not just asset creation
  • Focus shifts to service delivery – integrated with construction, measurement of quality & payment linked to service delivery
  • Acceleration of programme – time-bound implementation
  • Better overall management of public services – transparency in prioritisation, selection and ongoing implementation
slide7

Build Operate Transfer Concessions

Management & Maintenance Contracts

Works & Services Contracts

Operation & Maintenance Concessions

Full Privatization

High

Low

Extent of private sector participation

PPP Options

concessions
Concessions
  • BOT - Build Operate Transfer
  • BOOT - Build Own Operate Transfer
  • BOO - Build Own Operate
  • BOOST - Build Own Operate Share Transfer
  • BOLT - Build Own Lease Transfer
  • DBFO - Design Build Finance Operate
  • OMT - Operate Maintain Transfer
types of ppps
Types of PPPs
  • Financially free standing projects
    • Role of public sector - planning, licensing & statutory procedures; no financial support/ payment by government
    • Revenues through levy of user charges by private sector
    • Toll Roads and Bridges, Telecom services, Port projects
  • Projects where Government procures services
    • Private Sector paid a fee (tipping fee), tariff (shadow toll) or periodical charge (annuity) by Government for providing services; payment against performance – no/partial demand risk transfer
    • Risks associated with asset creation (including design) and O&M transferred to private sector
    • Accountability to users for service - retained by Government
    • Roads - annuity/ shadow tolls, power - under PPAs. In the UK -prisons, education, health services, defence related services
  • Other Types - Joint ventures, Not-for-Profit vehicles
features of ppps 1
Features of PPPs - 1
  • Genuine risk transfer
    • All risks pertaining to design, building, financing and operation transferred to the private entity
    • Transfer of demand risk depends on the extent to which the private sector can influence usage
  • Output based Specifications
    • Contracts specify the service outputs required rather than asset configuration/mode of service delivery
    • Emphasis on type of service & performance standards
    • Private entity incentivised to deliver outputs using innovation in design, construction, operation and financing
features of ppps 2
Features of PPPs - 2
  • Whole life asset performance
    • Private entity takes responsibility & assumes risk for the performance of the asset and delivery of service over a long term
  • Payment for Performance
    • Revenue/ Payment to private entity is subject to performance in relation to specific & quantified criteria enshrined in the contract
value for money
Value for Money
  • Transfer of risks/ responsibilities under a PPP structure should result in better value for money for the user
    • Telecom sector – mobile phone tariffs from Rs. 16/- per minute to Re.1/- or 50 paise per minute
    • Tolls paid – offset by savings in direct & indirect costs and value of time
    • Annuity payments – public sector comparator – value for money
  • Efficiency gain
    • Savings in cost of project versus overrun
    • Savings in operating costs
    • Revenue maximization - leakages
basic issues
Basic Issues
  • Striking a balance between differing concerns & objectives of parties
  • Legislative Back up
  • Rights and obligations of parties
  • Identification and allocation of risks
  • Penalties and rewards which would ensure performance
broad roles responsibilities
Broad Roles & Responsibilities
  • Government Agency
    • Providing Project Site/ Assets
    • Environmental Clearances
    • Supporting Infrastructure and Utilities
    • Specific Obligations (e.g. dredging)
    • Regulatory Functions
  • Concessionaire
    • Designing, Engineering, Financing
    • Construction/ augmentation / upgradation
    • Operation and Maintenance
    • Payment and other obligations
    • Transfer of assets at expiry of concession period
  • In exchange the concessionaire has the right to receive revenue – tolls or annuity or any other mechanism
other key elements
Other Key Elements
  • Bankability Issues
    • Concessionaire’s ability to assign rights
    • Lenders’ step-in rights
    • Charge on project assets and enforceability
    • Critical Events and consequences
      • Force Majeure
      • Events of Default
    • Remedial process incase of default/ events leading to termination
    • Protection of debt in the event of termination
  • Supporting Provisions
    • Dispute Resolution Mechanism
    • Re-negotiation in good faith
    • Termination as a last resort
    • Preferential treatment in re-bidding
what a ppp is not what it is
What a PPP is not & what it is
  • PPP is not privatisation or disinvestment
  • PPP is not about borrowing money from the private sector.
  • PPP is more about creating a structure
    • in which greater value for money is achieved for services
    • through private sector innovation and management skills
    • delivering significant improvement in service efficiency levels
  • This means that the public sector
    • no longer builds roads, it purchases miles of maintained highway
    • no longer builds prisons, it buys custodial services
    • no longer operates ports but provides port services through world class operators
    • No longer builds power plants but purchases power
partnership in practice
Partnership in Practice
  • Partners not adversaries – background of mistrust
  • Project should be the focus – “win-win” for both the parties
  • Independent agencies – Independent Engineer - useful during both implementation and operations
  • Government retains ultimate responsibility – uses the private sector to deliver infrastructure services of specified standard
  • Private Financing – can significantly leverage public funds
basic features
Basic Features
  • Conventional financing is asset based – debt provided is usually a percentage of project cost linked to the value of asset cover
  • Project Financing is cash flow based - on the estimated cash flows that are generated by the project
    • “A financing structure that relies on future cash flows of a project as the primary source of its servicing & repayment, with only the project assets, rights and interests being the security”
  • There is little or no recourse to the sponsors
  • Usually large projects - investments are huge & costs of non-completion/ unsuccessful operations - affect many
  • Little tangible security
  • All stakeholders would, therefore, like to see it succeed
project appraisal
Project Appraisal
  • An elaborate project appraisal process – analysis of risks and specification of return expectations (pricing) from investing in the project
  • Cash flow projections based on technical, market and financial analysis
  • Risk mitigated through project contracts and financing agreements or consciously taken after evaluation
  • Structured financing – to meet the characteristics of the project
  • Security and documentation - elaborate
  • Project monitoring and compliance
typical funding sources
Typical Funding Sources
  • Equity Capital
    • Core capital provided by the promoters (developers / contractors)
    • Minority stakes may be taken by financial investors / funds
  • Preference Capital
    • Can be used if suitable changes made to the CA
  • Senior Secured Debt
    • Normally in the form of rupee term loans/ debentures from Indian banks/ institutions
    • Capital market instruments – may be possible after CoD; not too popular yet
    • A variant could be debt with 2nd charge
  • Subordinated Debt
    • Typically with far lesser rights
    • May even be unsecured
  • Challenge is to evaluate how additional resources can be channelised into the sector - insurance funds, pension funds
key project contracts
Key Project Contracts
  • Concession Agreement
  • Project Site Licence Agreement
  • Shareholder/ JV Agreement
  • Substitution Agreement / Direct Agreement
  • State Support Agreement
  • EPC Contract
  • O&M Contract
  • Trust and Retention Agreement
main provisions
Main Provisions
  • Concession Agreement
    • Terms and conditions of undertaking the project
    • Obligations of the parties
    • Tenor of the contract
    • Default provisions and remedies
    • Provision for substitution
    • Force Majeure provisions and remedies
    • Termination and compensation payments
  • State Support Agreement
    • Support during implementation
    • Protection from a competing facility
other key contracts
Other Key Contracts
  • EPC Contract
    • Price Overrun
    • Time Overrun
    • LDs and Bonus provisions
    • Performance security
    • Standards and Specifications
  • O&M Contract
    • Operating Standards
    • Costs
    • Quality of Service
    • Penal provisions
  • TRA Agreement
    • Trapping of all the project cashflows
    • Prioritization of Cash flows
financial analysis
Financial Analysis
  • Elaborate Financial Model capturing these risks – base case analysis
  • Establishes breakeven levels of traffic/ tariffs
  • Assessment under various scenarios – sensitivity analysis
    • Demand / Traffic
    • Tariff / Tolls
    • Inflation
    • Maintenance Costs
  • Financial Ratios
    • Debt Equity Ratio – cash flow impact & level of promoters’ funds
    • Internal Rate of Return (project/ equity)
    • Debt Service Coverage Ratio
    • Loan Life Ratio
    • Project Life Ratio
financing documents
Financing Documents
  • Facility Agreement
    • Financial Terms
    • Project Risk Mitigating Conditionalities
    • General Conditions
  • Inter-Creditor Agreements
  • Security Documentation
basic structure

NHAI

Concession

Agreement

Annuity

JV Partner

Financing Agreements

Shhldr’s Agmnt

Lenders

Project SPV

Equity

Debt

EPC Agmnt

O&M Agmnt

Main

Sponsor

Indep Eng

LE

Contractor

Basic Structure
transaction structure

Advisers

Sponsors

Invt. Bankers,

Technical & Legal

Advisers

Advisers

Invt. Bankers,

Technical & Legal

Advisers

Equity

Concession / Licence Agreement

Financial

Investors

Insurance

Companies

Equity /

Sub-Debt

Insurance Policies

Users

Off-take Contracts

O&M

Contract

O&M

Operator

TRA/Escrow Agreement

TRA

Agent

EPC Contract

Debt

Substitution

Agreement

EPC

Contractor

Lenders

Transaction Structure

Government

Project SPV

implementation structures
Implementation Structures
  • Existing Assets
    • Full Divestiture – UK – Telecom, Steel, Electricity, Ports, Water, Airlines, Airports; so far in India – Modern Foods, BALCO, Hotels
    • Asset Sales/ Leases – airports in Australia
    • BOT/ ROMT Concessions – roads, tourism facilities, berths in ports
    • Management contracts – water assets, ports in Philippines
  • New Assets
    • Implementation by government – followed by OMT concessions – Mumbai-Pune expressway, Ports in Rotterdam, hospitals
    • Implementation through SPVs – Moradabad bypass or port connectivity projects or dedicated freight corridor for railways
    • BOT Concessions – commonest form – roads, ports,
isn t private infrastructure expensive1
Isn’t Private Infrastructure Expensive?

Additions to Cost Benefits

Risk Premium Lower Cost From Efficiency

Example

Public Entity Private Entity

ROI 8% WACC 13.7%

(Debt @ 11% 70: 30 Equity @ 20%)

Cost 105.3 Cost 100

Required Required

Return 113.7 Return 113.7

  • A 5.3% cost overrun (increase in actual project cost) in the public sector is enough to overcome the private sector disadvantage of higher financing cost!
isn t private infrastructure expensive2
Isn’t Private Infrastructure Expensive?

Additions to Cost Benefits

Risk Premium Lower Cost From Efficiency

Example

Public Entity Private Entity

ROI 8% WACC 13.7%

(Debt @ 11% 70: 30 Equity @ 20%)

Cost 100 Cost 95

Required Required

Return 108 Return 108

  • A 5% reduction in project cost (efficiency) by the private sector is enough to overcome the higher financing cost!
key question
Key question
  • What should be the framework to induce the private entity make the investments needed to provide efficient service to the end user?
    • Investments decided by the investor or driven by the market, i.e. the consumer
    • Private entity has a stronger case for state support if it makes investments determined by the State
    • Demand risk – how much passed on?
  • Extricate the public entity from making commercial decisions on individual projects, wherever possible
  • Public entity’s role from being a planner, financier & manager to facilitator & regulator
the right balance
The Investor wants

Monopoly rights

Full pricing freedom

State support for social obligations/ viability considerations

The Investor needs

Initial risk mitigation support - can be pre-defined

Stable environment - regulatory and policy framework

State support for social obligations/ viability considerations – can be transparently determined

The Right Balance
some indian examples 1
Some Indian Examples - 1
  • Roads
    • BOT Concessions for toll roads and bridges (NHAI, state governments) (OMT Concessions in future)
    • Annuity payment based concessions – highways, urban roads (NHAI/ state governments)
  • Solid Waste Management
    • Engineered landfills – tipping fee linked payments (Bangalore, Trivandrum)
    • SW Collection and Transportation (MCD/ NDMC)
  • Port Concessions
    • Major Ports – container berths (JNPT, Chennai, Kochi, Tuticorin, Vizag, Kandla); bulk cargo berths (Marmagao, Haldia, Ennore, New Mangalore)
    • Minor Ports –Pipavav, Mundra, Kakinada
some indian examples 2
Some Indian Examples - 2
  • Water Supply and Sanitation – Bulk water supply systems in Tirupur and Vizag
  • Tourism Facilities – hotels, tourist facilities, PWD rest houses – Karnataka & Kerala
  • Bus Terminals/ Parking Facilities
    • Bus terminals – Dehra Dun, Amritsar, Jullundur
    • Parking + commercial complexes – NDMC/ DDA/ MCD/ Bangalore
international experience 1
International Experience - 1
  • Toll Roads (Chile, Mexico, Hungary, Poland); Ports (Argentina, Philippines, Sri Lanka)
  • Airports (Australia, Greece, Germany)
  • Roads in UK under DBFO program
  • Private Finance Initiative of UK – diverse areas
    • Dorset Police Service - $ 40 million contract for refurbishment of police stations, construction of a divisional headquarters building, maintenance, janitorial & waste management services
    • Nottinghamshire, Police Fleet Management Contract - ($ 180 million over 25 years) – driver slots - usage of a vehicle for a 24 hour period
    • Durham & Dunstead Hospital Project, Durham – 30 year, $ 155 million hospital services contract – to construct and operate health care facilities + ancillary services
    • Stoke-On-Trent Grouped Schools Project – a $ 250 million project involving 122 schools – refurbishment and maintenance contract
international experience 2
International Experience - 2
  • Louis Trichardt Maximum Security Prison Project, South Africa – a $ 270 million project – largest prison facility (also UK and Australia)
  • Full fledged water concessions in Argentina (Buenos Aires) and Philippines (Manila); Management contract for water supply & sanitation in Johannesburg, South Africa
  • Rural Pay Phones, Peru – against payment of a subsidy – based on a system of monitoring of service standards
on the table in karnataka
On the Table in Karnataka
  • Airport Rail Link
  • Core Ring Road
  • Airport Expressway
  • BMRDA Townships
  • Minor airports
  • Tourism Properties
  • IMTC (Kempegowda)
  • Mega Convention Center, Bangalore
  • Bypass roads
  • Truck terminals
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