12 indian experience vietnam

7/29/2019 12 Indian Experience Vietnam

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Workshop on Public Private Partnerships in Vietnam

PPP An Indian Experience

Infrastructure Leasing and Financial Services Ltd

Hanoi

June 25, 2008


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Contents

Section I : Infrastructure Leasing & Financial Services Limited

Section II : Private Sector Participation in Infrastructure

Section III : The Road Sector

Section IV : Key Lessons


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Section I: Infrastructure Leasing & Financial Services

Limited


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Infrastructure Leasing & Financial Services

IL&FS is a leading Indian Investment

Banking Institution established by

Government of India agencies in 1987 to

develop and implement infrastructure

projects on a commercial basis and provide

a wide array of value added financial

services IL&FS pioneered the concept of commercial development of infrastructure using the Public

Private Partnership (PPP) Framework

IL&FS has partnered with over 15 State Governments to develop projects on PPP

IL&FS has successfully developed and implemented projects across a range of sectors that

include telecom, power, road, water, port, airport, area development, special economic zones,

environment, social, education etc.

With each project, IL&FS has focused on establishing replicable prototypes


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Domestic Road Sector Projects

0

500

1000

1500

2000

2500

3000

3500

CumulativeLen

gth(km)

0

2000

4000

6000

8000

10000

12000

Cumulative Length (km) (LHS ) Cumulative Project Cost (Rs. C r) (RHS)

Rau

Vadodara

Noida Toll

East Coast

Ahmedabad

North

Thiruvananthapuram

West

Rajasthan Mega

Chennai IT

Andhra Pradesh

Chennai Ennore

Major Grade

Outer Ring Road

Chhattisgarh

Jharkhand

Commissioned

Under

Under


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International Experience In the past few years, IL&FS have been sourcing mandates from outside of India

Beginning with Advisory mandates, IL&FS is now undertaking projects in:

Mexico

Phillipines Indonesia

Spain

Portugal

Several Latin/South American countries


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IL&FS - Infrastructure Projects

Particulars Cost (USD Billion)

Roads/Rail 4.5

Ports 3.0

Water Supply 0.5

Area Development 0.5

Power 16.0

Others 0.5

Total 25


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Section II: Private Sector Participation in Infrastructure


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Benefits of Private Sector Participation

Risk Transfer

Transfer of Design/Solution Risk

Transfer of Financing Risk

Transfer of Construction Risk

Transfer of Market Risk

Transfer of Operations Risk

Making Subsidies more efficient (subjecting them to competition and capital market

scrutiny)


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1

Section III: The Road Sector

The Delhi-NOIDA Toll Bridge- The First large Greenfield BOT Project in Ind


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1

Milestones in Toll Road Development

10

5020

10030

15040

20050

25060

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Rao Pitampur

MoU executed for theGoI announces initial

NHAI Operationalised

Fuel Cess100% FDI

Foundation Stone for

NHAI BOT

Annuity Projects

NHDP

NHDP Phase IV

Phase I - 1990-1995 Phase II 1995-2000 Phase III 2000 - 2005

30000

0

Km

201

25000

20000

15000

10000

5000

Projected Toll Road Growth

Phase IV

Amended Philippines

Dabhol Crisis

Liberalisation Policy

Pipavav the first

Tirupur the first Private Sector

Electricity Act 2003

Securitisation Act 2002

Cochin the first Private

New ExplorationNational Telcom Policy

National Telcom Policy

Entry of IPPs

Power Sector Reforms

State BOT Projects

SEZ Act

Implementation of the first Toll Road in India

The Rao-Pitampur Toll Road

Road Projects undertaken through the

Memorandum of Understanding (MoU) Route

Implementation through Special Purpose

Vehicle (SPVs)

Multilateral Participation

Successes of initial private sectorparticipation in the road sector encouraged

the State Government privatization

initiatives

Initiatives by the Ministry of Road

Transport & Highways (MoRTH)

Establishment of the Central RoadFund

National Highway Development

Programme (NHDP)

Programmes addressing Rural &

District Connectivity

RIDCOR


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1

Early Challenges

Regulatory and Institutional

Government Policy

The lack of an integrated institutional policy and framework for project identification, development and

implementation

The lack of coordination between various Government agencies involved with road sector projects

The prioritization process for project identification based on political reasons rather than economic considerations

Regulation

The absence of effective and autonomous regulatory authority (at arms length with Government) to ensure a level

playing field for all participants and fair dispute resolution

Delays in decisions regarding Government support-both in kind (land for example) and/or investment

Multiplicity of Concession Structures

Different States followed varied Concession Agreements resulting in concurrent prevalence of various models

These different structures impeded wider acceptance by the financial institutions, banks and the capital markets


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1

2

Project Development

Implementation Structures

Absence of structures that effectively allocated duties & responsibilities and rewards & penalties amongst all

project participants

Risk of Revenue Collection and Appropriation

Demand Studies

Low Willingness to Pay

Low Willingness to Charge

Potential Risks arising from the social and environmental impacts of the projects

Financial

Limited Experience of Project Financing, Financial Engineering and Risk Assessment

Limited Confidence amongst Contractors and Investors to take on risks associated BOT business risks

Limited Understanding of the sector and therefore, assignment of highest risk to the projects by the

Lenders

Non availability of Long Term Debt

Negligible Appetite for Project Bonds


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Innovations in Project Development

Project Development

Methodologies for Project identification

Studies to ascertain Demand and Need

Willingness to Pay Surveys

Methodologies for Project Conceptualization

Environment and Social Aspects

Establishment of Feasibility

Securing Revenues

Project Development Fund

The pre-feasibility reports prepared by the government authorities are often inadequate for the

bidders/sponsors to raise funding the Project

The Private Sector may not have the risk appetite to undertake studies for Projects where bankability is

yet to be established

IL&FS recognised the need for a corpus of funds that could help catalyse the Project Development

process by bearing the initial expenses and formed the India Project Development Fund by pooling

resources from institutional investors


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1

2

Environmental and Social Impact Mitigation

To ensure long term sustainability of Projects, it is imperative that the Developer cultivates a relationship with the local

community by:

Undertaking adequate Environment and Social Impact Assessment (ESIA) and Mitigation measures

Ensuring all provisions of the Environment Management Plan and Rehabilitation & Resettlement (R&R) Plan are

met

Example: VHTRL

Structures affected by Project Alignment Resettlement Colony

Religious Structures: Pre-Project Rehabilitation of Religious Structures

Rehabilitation

Resettlement


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3

Securing Revenues

It has been observed that the economic benefits

of infrastructure facilities often outweigh the

financial returns to an investor

In order to make an infrastructure project more

attractive to the private sector, economic benefits

can be captured by way of indirect collections

for:

Ensuring benchmark returns

Providing potential upside to investors

Example: NTBCL

Land Development Rights have been included in

the Concession Agreement for NTBCL

Owing to the construction on the Bridge,

value of this land has increased, making it

amenable to commercial development

Time

Returns

ERR

FIRR

0

+ve

-ve

I i C i R d C S i


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Incresing Capacity - Road Cross Section

7.0 M1.50M1.5M 1.50M 1.5M

3.5% 2.5%2.5%

Hard

Shoulder

Paved

Shoulder

Carriageway Paved

Shoulder

Hard

Shoulder

2.5% 3.5%2.5%

TYPICAL CROSS SECTION

Carriageway7.0m

Paved Width10m

Formation Width13m


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Innovation in Implementation

Design/Solution to be driven by the required

service standards rather than theoretical capacity

The Engineering Solution vs. the Elegant Solution

PCUs 1,50,00030,000 80,000 1,20,00018,000

The Traditional View

The Possible Approach

PCUs 1,50,00030,000 80,000 1,20,00018,000PCUs 1,50,00030,000 80,000 1,20,00018,000 1,50,00030,000 80,000 1,20,00018,000

The Traditional View

The Possible Approach

The East Coat Road


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2

National Highways Under Development

As on January 31, 2008

GQ Port

Connectivity

Others NSEW Phase III A Phase V Total

Total Length (km) 5,846 380 962 7,274 4,815 6,500 25,777

Completed till date (km) 5,647 191 412 1,744 396 3 8,393

Under Implementation (km) 198 183 595 4,577 1,832 135 7,520

Balance length for award

(km)

0 6 20 822 2,552 6,365 9,765

Cost incurred so far (Rs.

Billion)

276 52 - 150 37 2 516


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2

Outlook

States

Approximately 25000 km of state highways are expected to be improved at an expected cost of USD 20 billion over the next

five years

To cater to the increasing vehicular traffic, several cities have announced programs to develop/upgrade over 1000 km of city

roads at an approximate cost of USD 445 million

Capex in the next 5 years- USD 35 billion

National Highways

NHDP V, VI, VII announced

Over 39000 km of National Highway to be bid out at an

estimated project cost of USD 45.2 billion over the next

10 years

Government is in the process of forming a separate

dispute resolution authority. This will also provide an

impetus to the sector

The new NHAI model concession agreement is

expected to transfer onus for land acquisition and utility

shifting to private sector. This may increase cost of

future projects

Phase Length & Nature of

Development

Mode of

Implementation

Total Cost

(USD Bn)

NHDP

I&II

1306 km to be awarded Mix of BOT/EPC 11.64

NHDP III 11,113 km, 4 laning BOT (Toll) 14.48

NHDP IV 20,000 km, 2 Laning

with paved shoulders

BOT (Toll)/ BOT

(Annuity)6.18

NHDP V 6,500 km , 6 Laning BOT (Toll) 9.16

NHDP VI 1,000 km Expressway BOT (Toll) 3.71

NHDP VII Ring Roads, Bypasses,

Underpasses

Mix of BOT/EPC 3.71

SARDP

NE

Special Accelerated

Road Dev. Program for

NE

Mix of BOT/EPC 2.69


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2

Section IV: Key Lessons


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2

The PARADOX

Of

Private Sector Participation

.those who are best able to manage themselves will attract private

sector participation and the rest will be left out in the process

what is necessary is public sector reforms at state and local level


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2

Policy Framework

Infrastructure projects involve complex relationships between the Government,

concessionaires and investors

While Infrastructure is a large opportunity, conditions for investment need to be safe,

favourable and stable in the long run

The private sector requires clear and stable rules of engagement as provided

through a legal framework:

Laws governing concessions and/or privatizations

A clear process for dispute resolution and the ability to enforce contracts

Lender remedies under bankruptcy and insolvency


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2

Concession

Approach to ConcessionHigh

Low High

Value of Transparency & Competitiveness

Opportun

itiesforinnovati

ontoll

Hybrid Approach

(An Unsolicited Bid/

Swiss Challenge/Solution Flexibility)

Hybrid ApproachTransparent and Competitive Approach

(Template Approach)

Flexible and Innovative

Approach

(Negotiation with Credible Agencies)

Concession in the Absence of Regulation!


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2

Regulation

Creation of Monopoly

Private Sector Participation in Infrastructure results in monopoly power in the hands of the

private sector

The need to regulate the quality of service and pricing levels

Structural changes are required to make regulation effective

Protection of the Consumer

One objective of regulation is to ensure that the monopoly provides acceptable service at

specified tariff

Investor Protection

The second important reason for regulation is to protect the investor from policy & political

risk


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2

Project Development

Adequate Project Development is critical given the high costs and risks of infrastructure projects

Private investment tend to crowd in when they sense the opportunity perception is real

Private investors are interested in earning commercial returns for their shareholders within a certain fixed

time horizon

Timely decision making and confidence building are crucial in decision making

Optimal Design

Desired performance levels

Acceptability of the Project by the User

Lower life time costs

Communication

Acceptability of the infrastructure facility by the local community is essential for its success

Information dissemination facilitates interaction with the local community, enabling the service provider to mitigate risks of

local opposition

Demonstrating transparency and accountability helps achieving public trust, support and acceptance


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2

SPVSPV

Concession Grantor

(State/Authority)

Concession Grantor

(State/Authority)Construction

Contractor

Construction

Contractor

O&M

Contractor

O&M

Contractor

ShareholdersShareholders LendersLenders

UsersUsersState GovernmentState Government

ConstructionContract

ConcessionAgreements

ShareholdersAgreements

State SupportAgreement

Contracts forIE/LE/IA

FinancingAgreements

O & MContract

ConsultantsConsultants

Imp lementa t ion St ruc t u re

Service


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SPVSPV

Concession AgreementConcession AgreementConstruction

Contract

Construction

Contract

O&M

Contract

O&M

Contract

Shareholders AgreementShareholders Agreement

Project Site Lease

Deed / Subst itution

Agreement /

Escrow Agreement

Project Site Lease

Deed / Substitution

Agreement /

Escrow Agreement

Service /Supply

Agreements

Service /Supply

AgreementsState Support AgreementState Support Agreement

Contract for IE/LE/IAContract for IE/LE/IA

Pro jec t Agreements


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SPV

With Lenders

SPV

With Lenders

Common Loan Agreement

Or

Individual Loan Agreements

Common Loan Agreement

Or

Individual Loan AgreementsConsent AgreementConsent Agreement

Inter-creditor

Agreement

Inter-creditor

Agreement

Debenture Trust

cum Mortgage Deed

Debenture Trust

cum Mortgage Deed

Security Agency

Agreement

Securi ty Agency

Agreement

Escrow Agreement/Trust and Retention Agreemen

Escrow Agreement/Trust and Retention Agreement

Undertakings forNon disposal of shareholding \

Cost Over run

Undertakings for

Non disposal of shareholding \

Cost Over run

Indenture of Mortgage /Jt. Deed of Hypothecation /

Pledge Agreement

Indenture of Mortgage /Jt. Deed of Hypothecation /

Pledge Agreement

Financ ing Agreement s

M t f A L U L i C


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3

Management of A Long User Learning Curve

The Users are not used to paying an economic price for infrastructure service,

therefore there is an initial low willingness to pay

The users need to be made aware of the tangible benefits of the facility through:

Public Relations exercise

Workshops

Handouts and Advertisements

Inaugural/frequent user discounts may have to be offered to incentivise the Users

to try outthe facility

The Users need to experience benefits for word-of-mouth publicity

Ri k d R t


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3

Risk and Return

Assessment of all project risks and appropriate mitigation mechanisms (including

domiciling of risk) is crucial to deliver an economically efficient project

Commercial attractiveness of an investment is evaluated at two levels

They should commensurate with risks

They should be comparable with other investment opportunities

Providing opportunities for the private sector to enjoy benefits of commercial returnshould be structured within the above constraints or goals

Government Support


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3

Government Support

Infrastructure projects require substantial support from government entities:

Financial Commitments

Time-bound Clearances

The viability and sustainability of PPP projects critically hinge on adhering to cost, time and

quality, therefore government decisions should be expeditious

Augmentation of Government Capacity is required for fast and consistent decision making

Public Private Partnerships (PPPs) for infrastructure creation can extend for long periods of time and

involve complex financial, risk and performance arrangements

Specialized skills are required to conceptualize and evaluate infrastructure projects

The government needs to be attuned to private sector requirements and international best practices for

development of policies and frameworks that facilitate PPP


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Conclusions

Conclusions


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Conclusions

With the growth of the Economy there is a demand for increasing capacities and enhanced levels of service

in the core infrastructure sectors of power, transport, and telecommunications

The infrastructure challenge before the Government today may seem overwhelming. However, the

Government has realized that inaction is simply not an option

Given the fiscal constrains, increasingly more projects will be undertaken using the BOT format

In order to sustain the growth momentum, active participation will be required from Government and the

Private Sector

PPPs alone are not a panacea. Rather, they are one tool that the Government has at its disposal for

facilitating infrastructure deliverya tool that requires careful application

By making the best use of the full range of delivery models that are available and continuing to innovate

learning from failure instead of retreating from it the Government can maximize the likelihood of meeting its

infrastructure objectives

The interest of the investment community can only be maintained if there is a perception of long-term value

in the Projects

Therefore, it is critical for the government to effectively engage the private sector by creating and maintaining

an enabling environment for the creation of infrastructure


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Thank You

CONTACT

K Ramchand, President and CEO, IL&FS Transportation Networks Limited, Mumbai-INDIA

E-mail id - [email protected] Tel : +91-22-26593020 Fax : +91-22-26527056

Websites - www.ilfsindia.com or www.itnlindia.com

12 indian experience vietnam

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