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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


Presentation to the planning board may 2007

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