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Public Private Partnerships For Urban Infrastructure. Sanjay Jaju, Managing Director Infrastructure Corporation of Andhra Pradesh 17-May-08. Challenges of Urbanization. Urbanisation . Urban areas contribute 75% of GDP and more than 50% of our population to live in urban areas by 2050.

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public private partnerships for urban infrastructure

Public Private Partnerships For Urban Infrastructure

Sanjay Jaju, Managing Director

Infrastructure Corporation of Andhra Pradesh

17-May-08

urbanisation
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

multifarious responsibilities limited resources
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
slide7

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)
how we cope presently
How we cope, presently

Premji raps Karnataka Govt for bad roads,

power situation in Sarjapur

Our Bureau

Bangalore , July 18

government funding
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
local authority funding
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…
multilateral bilateral funding
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
jnnurm
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
private sector interest
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…
total private sector investments in india s infrastructure
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

beginnings made
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
pooled finance
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
pooled finance 2

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)
viability gap funding
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
capital market access
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
access to domestic financial institutions
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
ppp some reasons to be optimistic
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
slide25

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
public private partnerships27
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
fund your city f y c
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
public private partnerships29
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
ppp approach
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
key determinants for a successful ppp
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

background issues
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.

development of ppp projects
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
a ppp is not a transfer of responsibility
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
a ppp is more work
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
a ppp is more time
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
then why ppp
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
who is responsible for public services
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
what are the advantages of private sector participation
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.
putting the projects on shelf
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!

identification stage
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

preparation stage
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

partner selection stage
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

project development process
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

different structures

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
three important words
Three important words

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

  • Competition
  • Accountability
  • Transparency
how much time did they take
How Much Time Did They Take?
  • Airports:
    • Started in 1998-99
    • Bidder identified in 2001
    • SHA in 2002
    • Concession/ FC in 2005
how much time 2
How Much Time…(2)
  • (Industrial) Water Supply:
    • Started in 1995-96
    • Bidder identified in 1997
    • Concession in 2003
    • FC in 2004
how much time 3
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…
how much time 4
How Much Time…(4)
  • Bypass Roads
    • Started in 2002
    • Bidder identified in 2005
    • Concession/ FC in 2007
    • Land not yet in place…
why are the projects delayed
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
are funds an issue
Are Funds an Issue?
  • Yes and No
  • YES
    • Project Development Funds
    • Equity
  • NO
    • Commercial debt (sectors other than mentioned above)
inadequate project development
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…
way forward
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…
current situation
Current Situation
  • 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
  • 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

We would have to react before it is too late!

india infrastructure project development fund iipdf
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.
eligible project development costs
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
project development fund
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 basis

The Fund would be utilized to provide support to the state agencies in creating a Bank of PPP’able Projects

way forward66
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
infrastructure categories
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.
areas of engagement
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….
slide70
‘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.