Urban Infrastructure: Issues in structuring bankable projects

Urban Infrastructure: Issues in structuring bankable projects ASCI-World Bank Programme on Strengthening Urban Management (SUM) January 23, 2003

Often heard at seminars … • Small is beautiful • Get your act together • Firm up YOUR objectives first • but recognize that others have their objectives too • Experiment • … but be willing to correct yourself • Stand by your commitments • Do not ignore the ultimate customer/user • Beware of smart/over-confident developers Sounds like preaching? Read on ...

Structure of the Presentation • Select illustrations of PSP in infrastructure • Urban Infrastructure projects • Port sector projects • Road sector projects • Lessons from experience so far • Objectives & Concerns of various stakeholders

Sectors Covered Urban Infrastructure Ports Roads States Covered Power/Telecom omitted 14 10 12 Projects from 10 states Kerala, Karnataka, Tamil Nadu, Andhra Pradesh Maharashtra, Goa, Gujarat, Madhya Pradesh, Chhattisgarh West Bengal, Orissa Rajasthan, U.P., Bihar Illustrations with wide coverage Well, there are lots of cases and a few good lessons!

Ahmedabad Municipal Corporation • AMC became the country’s first municipality to raise bonds from capital markets • Bond raising preceded by an internal restructuring and revenue enhancement measures • Bond proceeds used for water supply schemes • Bonds secured by a charge on octroi revenues of AMC • Utilisation of bond proceeds have been slow as project implementation has been delayed • Lesson: Careful planning & timing is necessary for sustainable project implementation processes

Bangalore Water Supply Project • Private participation was sought for 500 MLD BOOT project by BWSSB • Bidding preceded by technical and demand studies • After pre-qualification, three consortia submitted final proposals • The project was nearly awarded to a consortium led by Biwater International but the bidding process has been questioned and resulted in delays • Lesson: Clear bidding parameters required to be stipulated & process transparency to be ensured

Chhattisgarh - Borai Water Supply Project • Borai Bulk Water Supply Project is set up on BOOT basis as an industrial bulk water supply for Borai Industrial Growth Centre (BIGC) in Durg district, Chattisgarh under concession from CIDC • It is a Project 30 MLD project with a cost of Rs. 420 mn. (including existing assets valued at Rs. 160 mn.) • Radius Water Ltd. promoted by Kailash Engineering is the concessionaire • The first phase (12 MLD) of this project is already operational but there are some hiccups as to drawal rights and further expansion • Lesson: Risk taking ability of the promoter helped this project go quickly through the initial stages.

Chennai Desalination Project • Chennai Metropolitan Water Supply and Sewerage Board (CMWSSB) mooted a project for implementing the tertiary treatment / Reverse Osmosis plant of 50 MLD capacity at Kodungaiyur, Chennai on a Design, Build, Own and Operate basis • The submission dates were postponed a number of times as CMWSSB was not sure of attractiveness to investors • Ultimately it bid out both EPC & DBOO as alternate options • Result: There were only two bids – both on an EPC basis (L&T and BHEL). Meanwhile VA Tech Wabag another party chose to bid for a limited size project on captive basis for CPCL one of the major clients of CMWSSB • Lesson: There is no harm in experimenting but first get your objectives right

Cochin Industrial Water Supply • Mooted by KSIDC, which invited IFC to assist • Basic project preparation was carried out including detailed technical studies as well as demand estimates • Alternate project structures were evaluated • Meanwhile KWA signed an agreement with Cochin Refineries, a major user allowing an off-take of water • Lesson: Co-ordination among government agencies required for project development

Goa Salaulim Water Supply • Goa PWD had invited proposals for water supply project on a BOOT basis (with an option to bid in an alternative innovative format) • BOOT bids were found very costly and then the GoG thought of alternative concession route • The bidder questioned GoG's demand forecast • At present due to successive changes in the Government the process has been temporarily suspended • Lesson: Inadequate homework by the state authorities

Haldia Industrial Water Supply Scheme • HDA has sought private participation and received over 25 Expressions of Interest • Despite adequate demand many technical issues (salinity, mix of ground water and river water, etc.) remain unresolved • HDA decided against technical study, no project parameters have been set up & may instead go directly for BOT or EPC/O&M contracts (but may not have funds) • Potential investors/bidders are unhappy as there is no progress • Lesson: Project has not been thought through clearly

Nagpur Municipal Bonds • NMC proposed a Rs. 1.17 bn. capital expenditure programme under Pench-III Stage-I project of the Corporation, which envisages capacity creation in the water supply services • Nagpur Municipal Corporation proposed to raise Rs. 0.90 bn. from issue of Bonds to partially meet its requirement, the balance coming from from internal accruals and grants from State Government • With a AA-(SO) rating by CRISIL SBI Capital Markets as arranger could raise only ~ Rs. 0.30 bn. even after extending dates several times. • NMC however carried through with its tariff reforms (water & property taxes) & postponed the implementation till it could generate adequate internal accruals • Lesson: Bhagwan ke pas der hai lekin Andher nahi.

Pune Water Supply Project • Water Supply Project conceived with structuring assistance from USAID • Project conceived as EPC+O&M with funding from funds raised by PMC • Also a separate contract for management of billing & limited collections • Project generated considerable investor interest as careful planning had gone into the project preparation • Bidding Process was terminated prematurely • PMC is now implementing the project on its own • Lesson: Political risk (the power of lobbying groups) in the project was underestimated

Tiruppur Water Supply Project • Project was conceived by IL&FS with support from GoTN, TACID and Industry • Proposed as a BOOT project for sourcing, treatment and supply water mainly to industry with some social coverage • Tiruppur industry comprises of garment exports and willingness to pay is higher • However, the project has taken considerable time to develop resulting in cost escalation • The cost of water for the commercial users has more than doubled during this period • Reached financial closure 8 years after conceiving! • Lesson: Complex projects are difficult to implement and subject to diverse risks

Consider this … the city of Ahmedabad • GIDB has proposed an Integrated Public Transit System for Ahmedabad (IPTS) and appointed a consultant for the studies • AMC became the country’s first municipality to raise bonds from capital markets for various projects (primarily water) • Sabarmati Riverfront Development Corporation (SRFDC) an organisation set up by AMC is proposing a massive area development project with the help of a local not-for-profit organisation (EPC) • Lesson: Lack of integrated project development for the same city (and now watch out Mumbai’s “integrated” development)

Mumbai: non-toll bridge within city • Project conceived as self-financing bridge • 1.5 kms long flyover bypassing three junctions at Andheri on Western Express Highway. • To be financed by selling commercial property under the bridge. • Underground car park, two storeys of commercial property with a six lane carriageway on top. • Project delayed initially due to delay in approvals and later due to litigation over alleged environmental issues; now real estate prices not at high levels. • Lessons: Lack of coordinated efforts, insensitivity to local and environmental issues and non-transparent procedures.

50 flyovers in Mumbai • 50 flyovers to be financed initially through bond issue and recovery through an entry toll (Rs. 20/-) • Tolling commenced sometime back but was met with stiff resistance from Transporters’ Associations and court has put a stay on tolling • MSRDC is fast running out of funds (on account of the flyovers as well as the Express way) but revenues not as per expectations • Now MSRDC would be reimbursed through a fuel cess on all Mumbai Petrol Pumps • Lesson: Realistic assessment of willingness to pay (also, “pay for use” principle flouted)

Kolkata Car Park (Rowden Street) • Kolkata Municipal Corporation (CMC) awarded multi-level automated car park project to Simplex Projects • Project details: • Location: Rowden Street (in the vicinity of Park Street) • Project Cost: Rs. 90 mn. (CMC interest free advance Rs. 30 mn.) • Car Parking: 216 cars at Ground+ 2 levels • Technology: Machinefabriek Aarding BV of Netherlands • Revenues from Car Parking & Advertisements • Performance: Revised estimate for first full year of operations are at 55% of projected as the “no parking zone” has not been fully enforced resulting in lower car parking revenue • Lesson: The corporation needs to stand by its commitments

Mumbai - Car Park at Breech Candy • Municipal Corporation of Greater Mumbai (MCGM) has bid out Car Park cum Commercial Development Project near Breech Candy Hospital on a BOOT basis • Bidding Parameters: • Upfront payment of premium to MCGM • No. of cars & two wheelers that can be parked • Bids received are a veritable mix of combinations of no. of car parks promised and upfront premium payment assured • Current Status: Bidders have been asked to make presentations on their project proposals showcasing the technologies used (capital cost, operating cost & access time) • Lesson: Lack of adequate project preparation to ensure clear & transparent bidding process

Bidding Results (Mumbai Car Park)

Structure of the Presentation • Select experience of PSP in infrastructure • Urban Infrastructure projects • Port sector projects • Road sector projects • Lessons from experience so far • Objectives & Concerns of various stakeholders

Container terminals at Chennai & Kandla & JNPT • In the mid-90s a number of projects were bid out in major ports for private sector • Privatisation of container terminals was awarded to P&O a large international Ports & Shipping group at Kandla, JNPT, Cochin & Chennai • Despite some initial hiccups the JNPT project went through to financial closure. • The Chennai Container Terminal took some further time (in years!) while Kandla became a major controversy leading to a showdown between the Port Trust & MoST. Cochin was not pursued by P&O as some comforts were not forthcoming. • Lesson: The Government was unable to resolve key issues and/or read the real issues in competitive behaviour

Container terminal at JNPT • BOT Project with a world class facility at a cost of Rs. 7.50 bn. • Promoted by one of the world’s leading maritime business group. • JNPT did not allow first charge on project assets to the lenders and other amendments to the concession agreement. So project financing was not available and ultimately the project was financed with the support of sponsor guarantee. Lesson: Despite hurdles, strong promoters can make project happen.

Container Terminals – current status • As everyone is aware, JNPT (P&O) is a major success story • But despite this, and an aggressive lobbying effort by P&O, the new (revised) bidding conditions for the proposed new container terminal at JNPT explicitly disallows bidding or investment by P&O in any form • Cochin Container Terminal now comes as a package of phased development (handing over of existing terminal followed by development of Vallarpadam) • Kandla Container Terminal finally did not proceed • Adani sponsored Mundhra Port is now developing a Container Terminal which may be divested in favour of P&O • Lesson: At times it is difficult for the Government to understand the machinations of the private sector

Dharma port project in Orissa • Proposed green-field port for dry bulk cargo at an estimated cost of Rs. 15 bn. • To be developed on BOOST framework. • Promoted by a JV of an Indian engineering company and two foreign companies. • Significant delays in finalization of changes in concession suggested by lenders. • Meanwhile both foreign sponsors have walked out of the deal – while one firm ran into financial difficulties the other had lost interest due to delays and disagreement with respect to its potential role in O&M for the project • Lesson: Lack of application and push by all parties.

Chemical terminal at Dahej, Gujarat • Greenfield liquid chemical handling facility at an estimated cost of Rs. 8 bn. • Developed on a BOOT framework. • Promoted by a JV of GMB, GIIC and four Indian petrochemical and fertiliser PSUs. • Project physically complete and operational without the concession being signed and without financial closure. • Multiplicity of promoters and speed of response is a key issue. • Lesson: Too many cooks spoil the broth.

Enron, Dabhol & OWMSL • Ocean Sparkle Ltd. based in Hyderabad formed a JV with Weismueller of Netherlands to bid for and win a mandate for providing port services to the LNG Terminal at Dabhol • Project: Comprising of state of the art 4 tugs costing Rs. 800 mn. To be built to the specifications of The DPC’s O&M operator (a subsidiary of Enron) and operate for 20 years • Project reached financial closure despite on-going problems at DPC and the tug-of-war with MSEB • By the time the plant closed down, the tugs were ready for delivery but no Enron to certify! Weismueller agreed to buy the tugs for redeployment and settled loans • Lesson: In large projects, the smaller parties fall by the wayside but are saved only if they have some back-up.

Haldia – Berth 4A for coking coal • Haldia Port bid out development of Berth 4A for handling coking coal imports required by steel plants • ISPL was awarded the contract and they simultaneously approached project financiers and Steel Authority (a likely major off-taker) • Despite considerable delays, ISPL was able to reach a 20 year contract with SAIL for using their facility for importing coking coal, an important ingredient in Steel Production • Project lenders unsuccessfully sought a number of amendments to the Concession Agreement (essentially in line with the Model Agreement drafted by IDFC for MoS) • Lesson: Small project, long off-take contract, viability beyond doubt; a formula for success

Noida Toll Bridge • Project comprises a 6-lane bridge over Yamuna river and approach roads costing Rs. 4.00 billion. • Flyover at Ashram road junction required for smooth traffic flow from the project delayed. • Traffic significantly lower than appraisal estimates. • Average daily collection is Rs. 0.27 million(Debt service liability about Rs. 1.70 million/day) • Lesson: Co-ordinated development of linkages and accurate traffic estimation key for project success.

Coimbatore By-pass • By-pass on NH-47 developed by L&T on BOT basis • Toll-free alternative available to local traffic • Subsequent to the award of the project, scope enlarged to include strengthening of Attupalam bridge before the by-pass • Toll-free alternative no longer available • Hence local opposition to toll collection • Earlier, willingness to pay did not capture such an event • Lesson: Project structure should be sensitive to local traffic

Durg by-pass • By-pass on NH-6 developed by Sancheti group on BOT basis • Toll-free alternative available to local traffic. • Project scope includes a river bridge and ROB. • NHAI provided sub-debt and limited shortfall guarantee. • Project completed almost as per schedule. • No local opposition to toll collection. • Project in operation for two years. • Lesson: Being first project, project reached closure with help of financial support from NHAI.

Delhi-Gurgaon Expressway Project • Originally conceived in mid 1990s, CIDB, Malaysia was to be mandated in 2000 to complete this project as part of govt-to-govt initiative, but the proposal sought a grant of Rs. 1.20 bn. from NHAI, and was thus rejected. • This year the project bid out by NHAI for Capital Subsidy (Grant) received a number of bids promising premium instead and was awarded to Jaiprakash Industries-D.S.Construction consortium which offered the highest Rs. 615 mn. Premium • The project is adversely affected by recent Court order on ban of polluting vehicles (non-CNG trucks/busesa) entering New Delhi • Lesson: Classic case of the nature of risks in infrastructure projects. Who is right CIDB or Jaiprakash?

Mattancherry Bridge at Cochin • First BOT bridge project in Kerala State; GCDA acted as the sponsor authority • Other agencies involved - KSIDC, CPT, Cochin Corporation and PWD • Project was offered on a BOT basis and bid for concession period. At bidding stage Traffic studies, technical studies & draft concession agreement was given to bidders • Project has been awarded to Gammon India • Lesson: Initial investment on project preparation yields high returns

PPP in NHDP The NHDP has been partially successful in attracting private sector investment.

Construction Contract Rs. 280 mn. Per Km. This is an item rate contract (not FTFC EPC) Add a further Rs. 80 mn. (Pre-op, IDC, Fees, etc.) At Rs. 360 mn. per km. this is still far lower than ….. Annuity Project Cost Rs. 500 mn. per km. A typical BOT project (either annuity or toll based) Rs. 500 mn. per km. Mumbai Pune Expressway cost was Rs. 16 bn. (as per contractors’ bids) and now on completion it is Rs. 22 bn. Reliance had quoted Rs. 30 bn. including 1000 hectares of land acquisition PPP or not to P(rivatise) Now add Rs. 140 mn. for escalation due to extra work to get Rs. 500 mn. Add now for 15-20 years of repairs & maintenance No further addition, Project cost still Rs. 500 mn. per km. Project cost still Rs. 500 mn. per km.

Toll-based BOT Annuity Scheme Grant/Capital Subsidy Reverse Grant/Premium O&M/Tolling Contracts Real-estate linked project Many state level projects 6 projects awarded Jaipur-Kishengarh (NHAI) Many projects in M.P. Delhi-Gurgaon 4-lane NHDP stretches Mumbai-Pune Exp. Way Mahakali Flyover, Mumbai Vivekanand Flyover, Kolkata Bangalore-Mysore Infrastructure Corridor PPP in roads are maturing

Comparison of Expressways dev.

Some case studies ..1 • East Coast Road vs. Tiruppur & Noida Toll Bridge • Durg Bypass vs. Jaipur-Kishengarh • Bhiwandi Bypass vs. Mumbai-Pune Expressway • Dhamra vs. Haldia berth 4A & Kakinada • Small is beautiful

Some case studies ..2 • Coimbatore Bypass (sensitivity to local traffic) • Mumbai Entry Point Tolls (user pay principle challenged) • Noida Toll Bridge (international class but low turnout) • Do not ignore the ultimate customer/user

Some case studies …3 • AMC Bonds (Utilisation of proceeds) • City of Ahemedabad (GIDB vs. SRFDC) • Cochin Industrial Water Supply (KSIDC vs. KWA) • Haldia Development Authority’s Water Supply Project • Get your act together

Some case studies …4 • Goa Salaulim Water Project (BOOT or Concession) • CMWSSB’s Chennai Desalination Project (EPC or BOT) • Mumbai Car Park (upfront payment or no. of cars) • Firm up YOUR objectives first

Some case studies …5 • Mattancherry Bridge (insisted on upfront payment but later relented) • NHAI’s Palasit Panagarh (rebid after initial high bids) • Durg Bypass (selected weak promoter but later extended guarantee & sub-debt support) • MMRDA’s Convention Centre (bidding failed twice) • Experiment but be willing to correct yourself

Some case studies …6 • Jaipur-Kotputli Toll Collection Operations • Mahakali Flyover (PIL & subsequent developments) • NOIDA’s Dadri Bridge (UPSBC upstages Simplex) • Bidding for Container Terminals in the country • Beware of smart/over-confident developers

Some case studies …7 • Kolkata Car Park (enforcement of no-parking zone) • BOT Roads in general (timely toll notification) • Road Bypasses (enforcement of ban on through traffic) • Tax benefits under 10-23 (g) (delays/denial of Certificate) • Enron !!!!! • Stand by your commitments

Summary: Some practical lessons • Small is beautiful • Do not ignore the ultimate customer/user • Get your act together • Firm up YOUR objectives first • but recognize that others have their objectives too • Experiment • … but be willing to correct yourself • Beware of smart/over-confident developers • Stand by your commitments Still sounds like preaching?

Some practical approaches • Institutionalize your approach through a vehicle • PIDB, GIDB, I-Deck, I-Kin, I-Win, APIIF, MPIDB, CIDC • Find a champion & give him a long tenure • First develop small & medium projects to demonstrate success • … then replicate • Give importance to good project preparation • … and not just to announcing good sounding projects • Keep the bidding simple & evaluate on just one key parameter • Hire advisors to help!

Need for PSP • Private Sector Participation is sought to essentially bring in: • Private capital • Private management • New & better technology • The modality of PSP critically depends on exact objectives sought to be achieved

Economic/Political Reasons Policy of privatisation Fostering competition Commercial principles Pay-for-use culture Political bottlenecks in tariff restructuring or reduction in subsidies Management Reasons Better management of all resources & operational efficiency Improved level of service and responsiveness to users Financial Reasons Budgetary priorities and constraints Additionality of funds Better utilisation of financial resources Other reasons New and better technology Involvement of users and other stake holders Environmental requirements Why private sector participation?

Urban Infrastructure: Issues in structuring bankable projects