Lalitha Mahal Road, Mysore

PUBLIC PRIVATE PARTNERSHIP

Dr. Amita Prasad IAS

Administrative

Government of Karnataka,

Administrative Training Institute, Lalitha Mahal Road, Mysore-570011

A Guide on

PUBLIC PRIVATE PARTNERSHIP

Under the Guidance

Dr. Amita Prasad IAS Director General

ATI, Mysore

Prepared by : Dr. Ashok Sanganal

Facutly, ATI

Public Private Partnership Administrative Training Institute

Lalitha Mahal Road Mysore

PUBLIC PRIVATE PARTNERSHIP

Dr. AMITA PRASAD, IAS Director General Administrative Training Institute, Mysore

Foreword

A series of steps in the form of policies, programmes and funds for facilitating Public Private Partnership arrangement have been initiated by the State and Central Governments to bridge the gaps in the infrastructure that need huge capital investment. Unlike normal projects, the PPP based projects require careful analysis on value for money, life cycle costs & benefits, risk sharing and overall impact on the economy. Under the initiatives in capacity building and training, the PPP Cell has been established at ATI, Mysore to cater to the training and capacity building needs in the area of public private partnership for the Officers of various Departments of GoK. The PPP is an emerging concept requiring new professional skills and knowledge of project management as compared to the usual and routine projects handled by Government Departments and Officers. Most of the officers who are attending training on PPP at ATI Mysore have expressed the need for a Guide on PPP as they found the PPP concepts and procedures new and not easily understandable. These officers often have requested for a guide giving at one place the relevant and important aspects of PPP explaining in brief the PPP related policy, programmes, concepts, procedures, formulation, PPP Project planning, feasibility analysis, appraisal, implementation, institutional framework, case studies and experiences, FAQs & Quiz and GOs. In order to meet these needs, an attempt has been made by ATI to prepare this guide discussing the above issues & topics in brief. Wherever necessary, suitable examples, illustrations, links and references are indicated to know more details.

Since, preparing and implementing a project under each sector requires specialized and inter disciplinary skills, the Officers in the departments of Agriculture, PWD, Water Resources, Roads, Tourism, Energy, Health Care, Transportation & ULBs would need to develop appropriate competence while developing the PPP plan and projects in their respective sector preferably in consultation with PPP Cell and internal and private consultant experts/transaction advisors. This Book is intended to build initial confidence by enabling the officers to get a first hand experience on how to approach PPP. A few simple worked examples are given wherever necessary. I wish to thank Dr. Ashok Sanganal Faculty ATI, Mysore for preparing the guide and all the Officers for giving suggestions & feedback. I am sure the book will serve as a guide to the officers of the different departments for getting basic knowledge and skills on how to initiate and carry out PPP based projects. We welcome any constructive suggestions for further improvement.

Date : (AMITA PRASAD)

Place : Mysore

Author

This PPP Guide is intended to be used as basic reference material on PPP Project Management. It describes the different aspects, procedures and characteristics of PPP for easy understanding of the Officers/functionaries involved in the PPP Projects/Project Management and for those representing the departments of eligible sectors under PPP who will be attending training at ATI Mysore. The author has reviewed a number of documents, training manuals and reports developed by agencies and authors namely DEA, GoI, Planning Commission of India, IDD Karnataka, RBI, UNCHS, IMF, World Bank, IDFC, IDecK, The India Infrastructure Reports, 11th & 12th Five year plan documents, Policies, Programmes, Guidelines & GOs of GoI & GoK and are gratefully acknowledged. The web sites of DEA, GoI, State Governments and International Agencies are found to be useful. The feedback of the Officers of various departments attending the training on PPP at ATI are taken into account. Dr. Ashok Sanganal has worked in HUDCO, NITK, SIUD and has been working as Faculty at ATI Mysore since 1997.

(Dr Ashok Sanganal) Date: 20-01-2014 Place: Mysore

Dr Ashok Sanganal, BE (Civil-NITK), M Tech (Struct Engg-NITK), Ph D (Infrastructure Projects-IDS), PG Dip (Housing-IHS)), Dip(Trg & Devlpt) Faculty (Appropriate Technology) Master Trainer

CONTENT

Foreword Author

CHAPTER 1 PUBLIC PRIVATE PARTNERSHIP: POLICY, PROGRAMMES AND GOVERNMENT INITIATIVES 1-18 1.1 Introduction 1 1.2 Government of India Initiatives 1 1.3 Global Ranking in PPP 2 1.4 Projected Investment in Infrastructure Development During 11th Plan 3 1.5 Infrastructure Debt Fund 5 1.6 Model Bidding Documents for PPP Projects 6 1.7 Guidelines and Manuals 6 1.8 Roads and Highways 7 1.9 Karnataka State Policy 2007 & Draft Policy 2013 7 1.10 Main Features of the Policy 8 1.10.1 The Karnataka State Infrastructure Development & Regulation Bill 2011 11

1.10.2 Right to Information Act and Execution of Civil Works 11 1.10.3 The Karnataka Industries (Facilitation) Act, 2002 11 1.10.4 Karnataka Transparency in Public Procurement Act – 1999 & Rules 2000 11 1.10.5 Initiatives in Karnataka 11 1.10.6 Touchstone Principles 12 1.10.7 Sectoral Distribution of PPP Projects 13 1.10.8 Schemes for financial support to PPP in infrastructure 13 1.10.9 Viability Gap Funding (VGF) Scheme 13 1.10.10 India Infrastructure Project Development Fund 15 1.10.11 Karnataka Infrastructure Project Development Fund (KIPDF) 15 1.10.12 Which fund should be approached when? 16 1.10.13 National PPP Capacity Building Programme 16 1.10.14 Institutional framework for PPP 16 1.10.15 Clearance / approval processes 17 1.10.16 Summary 17 1.10.17 Questions 18

CHAPTER 2 BASICS OF PUBLIC PRIVATE PARTNERSHIP 19-39 2.1 Definition of PPPs in India 19 2.2 What is not a PPP ? 20 2.2.1 Essential conditions in the definition 20 2.3 Need for PPP 21 2.4 Features of PPP 21 2.5 Implementation Structures 22 2.6 Contract Uncertainties 22 2.7 Difficulty in Demonstrating Value for Money in Advance 22 2.7.1 Commercial viability 23 2.7.2 Benefits to people 23 2.7.3 Benefits to private sector 23 2.7.4 Disadvantages of PSP 23 2.7.5 Characteristics of PPP 24 2.7.6 Pre-requisites for Implementing PPP projects 24

2.7.7 Special Purpose Vehicle 25 2.7.8 Investor Comforts and Incentives 25 2.8.1 Typical risks in W & S Infrastructure PPP Projects 26 2.8.2 Types of PPP 28 2.8.3 PPP Options 29 2.8.4 Characteristics of typical PPP modes in the W&S sector 29 2.8.5 Contractual Framework 30 2.8.6 Contractual Framework of PPP projects 30 2.8.7 Project characteristics that affect the choice of PPP mode 31 2.8.8 Broad Roles & Responsibilities in PPP Projects 32 2.8.9 Other Key Elements of PPP 32 2.8.10 Comparative Table of Highlighting Core Elements that Define PPP 33 2.9 .0 Steps in PPP Project Development Process 34 2.9.1 A Few PPP based projects in Karnataka 34 2.10.0 Public- Private Partnerships in Municipal Services 36 2.10.1 Summary 38 2.10.2 Questions 39

CHAPTER 3 APPRAISAL OF PPP PROJECTS 40-60 3.1 Introduction 40 3.1.1 Technical Appraisal 40 3.1.2 Financial Appraisal 41 3.1.3 Institutional Appraisal 41 3.1.4 Commercial Appraisal 41 3.1.5 Environmental Appraisal 41 3.1.6 Economic Appraisal 42 3.1.7 Legal Appraisal 42 3.2.0 Analytical methods 42 3.2.1 Steps in NPV Calculation 42 3.2.2 Discount rate 42 3.2.3 Internal Rate of Return (IRR) 43 3.2.4 Benefit / Cost ratio (BCR) 43 3.5 Sensitivity analysis 44 3.6 Scenario analysis 44 3.6.1 Using Excel to Determine NPV and IRR 45 3.6.2 Setting up the Spreadsheet with the Cash Flows 45 3.6.3 NPV in Excel 45 3.6.4 IRR in Excel 47 3.6.5 Cost assessment 48 3.6.6 Financial viability and PPP due diligence 49 3.6.7 Typical structure and flows in a financial model 50 3.6.8 Cost of capital 51 3.6.9 Economic feasibility 51 3.6.10 Benefits and costs included in an economic assessment 51 3.7.0 Measurement of non-market benefits and costs 52 3.7.1 Comparison against the next-best alternative investment option 52 3.7.2 A Note on problems that can arise with the EIRR and IRR criteria 53 3.7.3 Part 1: Construct the base PSC Model 54 3.7.4 Construct the base PSC model 54 3.7.5 Case Study: Appraisal Of A Town Level Water Supply Project 55 3.7.6 Analysis of Net Cost Benefit of the Water Supply Project 55

3.7.7 Project Appraisal Report 56 3.8.0 Appraisal of Projects in General 57 3.8.1 Checklist Financial Appraisal of a Infrastructure Development Project-

Corrective Actions-Flow chart 58 3.8.2 TEMPLATE (Indicative) 59 3.8.3 Questions 60 CHAPTER 4 FEASIBILITY ANALYSIS OF PPP PROJECTS & PREPARATION OF PPP PLAN

61-84 4.1.0 Introduction 61 4.1.1 Preparation of PPP Plan 62 4.1.2 Critical Success factors 63 4.1.3 Illustration on Identification of PPP Projects for School Education 64 4.1.4 PPP Planning Approach & Shelf of Projects 64 4.1.5 PPP Toolkit of GoI 67 4.1.6 PPP process 67 4.1.7 Strategic Planning Exercise 68 4.1.8 Pre-feasibility analysis 69 4.1.9 Full feasibility Study and PPP due diligence 69 4.1.10 Environmental Clearance and EIA 71 4.2.0 Social impact analysis / social feasibility 72 4.2.1 Technical feasibility 72 4.3.0 Feasibility Study Report 72 4.3.1 Pre-feasibility report assessment template 73 4.4.0 Full feasibility report template 76 4.4.1 Choosing the best-suited procurement method 79 4.4.2 Checklist of implementation schedule 79 4.4.3 Overview - Level Process Map for the PPP toolkit 81 4.4.4 Generic PPP family decision tree 82 4.4.5 Template (Indicative) 83 4.5.0 Questions 84

CHAPTER 5 DIFFERENT MODES OF PPP 85-96 5.1.0 Approaches 85 5.1.1 Forms of PPP 87 5.1.2 Karnataka PPP Models in Practice 88 5.1.3 Management Contracts 89 5.1.4 Short/ Medium Term Contracts or leases 90 5.1.5 Build Operate Transfer Schemes (BOT) 90 5.1.6 Long Team Lease 91 5.1.7 Concessions 92 5.1.8 Asset Sales 93 5.1.9 Private Sector Financing 94 5.1.10 Project Financing 94 5.2.0 Procurement of services 94 5.2.1 Traditional Public Sector Procurement 95 5.2.2 Private Sector Partnership & Procurement Model 96 5.2.3 Questions 96

CHAPTER 6 INSTITUTINAL CAPACTIY FOR PUBLIC PRIVATE PARTNERSHI P 97-101 6.1.0 Institutional Set up in GoI 97 6.1.1 Functions 97 6.1.2 Institutional Setup in Karnataka 97 6.1.3 Building Capacity 98 6.1.4 Review of institutional capacity for PPP Projects 98 6.1.5 Selecting the Preferred Procurement Process 98 6.1.6 Competitive Negotiations 99 6.1.7 Pre-Qualification 99 6.1.8 Finalizing Contract Terms 99 6.1.9 Stakeholder Engagement 99 6.1.10 Partner Selection 100 6.2.0 Building Strong Relationships through Clear Communication 100 6.2.1 Clear Roles and Responsibilities 100 6.2.2 Procedures 100 6.2.3 Strong Public Administration 100 6.2.4 Summary 101 6.2.5 Questions 101

CHAPTER 7 CASE STUDIES & EXPERIENCES ON PPP 102-138 7.1.0 Key Principles 102 7.1.1 Learning from case examples of successful and failed PPPs in India 102 7.2.0 Examples of successful & Failure PPPs 103 7.2.1 Handling of Land Acquisition 104 7.2.2 Streamlining of Approvals & Clearances 104 7.2.3 Environmentally and Socially responsive development framework 104 7.2.4 Financing Innovations 105 7.2.5 Operations 105 7.2.6 Resolution of Issues through Mutual Discussions 105 7.3.0 Case Studies on PPP 106 7.3.1 Experience of JUSCO water supply project in Mysore 106 7.3.2 Problems faced in PPP in the project 106 7.3.3 Problems in putting through a 24X7 contract 107 7.4 Case Studies on PPP 107

Case Study 1 Municipal Solid Waste Collection and Transportation New Delhi Municipal Council 107 Case Study 2 Sanitary Landfill at Mavallipura Bangalore 109 Case Study 3 Thiruvananthapuram City Roads Improvement Project 111

Case Study 4 Operation and Maintenance of Street Lights in Vijayawada 113 Case Study 5 Indraprastha Apollo Hospital New Delhi 115 Case Study 6 Alandur Sewerage Project 116 Case Study 7 Latur Water Supply Project 121 Case Study 8 Ilembe District Municipality- Siza Water Company (South Africa) 126 Case Study 9 Bangalore MRT 127 Case Study 10 Bus Terminal Redevelopment 128 Case Study 11 Lucknow SWM Project 128 Case Study 12 Road Improvement 128 Case Study 13 Wastewater Treatment 128 Case Study 14 Bus Terminal at Amritsar 129 Case Study 15 Meleka- Manipal Medical College (Malaysia-India) 129

7.5 Issues in Toll Roads and National Highways 130 7.6 Disciplined Planning 131 7.7.0 PPP in Water sector 132 7.7.1 Failed or otherwise disappointing PPPs 133 7.7.2 Failing demand and consumer dissatisfaction 134 7.7.3 Non-compliance with contractual terms 135 7.7.4 Risks faced by private investors in developing countries 137 7.8.0 Summary 138 7.9.0 Questions 138

CHAPTER 8 PROJECT SCHEDULING, IMPLEMENTATION & MONITORING TEC HNIQUES

139-149 8.1.0 Introduction 139 8.1.1 Critical Path Analysis (CPA) 139 8.1.2 Programme Evaluation and Review Technique (PERT Analysis) 139 8.1.3 Steps in Project Scheduling 140 8.1.4 A Gantt chart 140

8.1.5 Drawing a Bar Chart and Network 140 8.2.0 CPM - Critical Path Method 141 8.2.1 Steps in CPM Project Planning 143 8.2.2 Concept of critical path Method (CPM), Trade off between Cost & Time, 144

Activity Crashing 8.2.3 CPM Limitations 144 8.2.4 Program Evaluation and Review Technique (PERT) 144 8.2.5 Steps in the PERT Planning Process 144 8.3.0 Strengths, Weaknesses, Opportunities and Threats (SWOT Analysis) 145 8.4.0 Participation Matrix 146 8.4.1 Key Quality Factors for the Long-Term Sustainability of Projects 146 8.4.2 Characteristics of Performance Indicators in the Public and Private Sectors 147 8.4.3 Reasons for Performance Indicators 147 8.4.4 The Main Components of Performance 147 8.4.5 Three Points for Performance Measurement 147 8.4.6 Economic Analysis of Projects 147 8.4.7 Type of Project Measurable Benefit 148 8.4.8 Summary 149 8.4.9 Questions 149 CHAPTER 9 PPP TENDERING & CONTRACT MANAGEMENT 150-164 9.1.0 PPP Tendering & Contracting 150 9.1.1 Pre-qualification of Bidders 150 9.1.2 How many firms should be pre-qualified? 150 9.1.3 Evaluating Technical capacity 151 9.1.4 Evaluating Financial capacity 151 9.1.5 Other issues related to the organization of applicants 151 9.1.6 Request for Proposal 152 9.1.7 Evaluation criteria: Bid Parameter 152 9.1.8 Evaluating the Bids 152

9.1.9 Letter of Award (the “LOA”) 153 9.2.0 The Concession Agreement 153 9.2.1 Risk Mitigation Framework 153 9.2.2 Rights & Obligations of the parties 154 9.2.3 Project Development and Operations 154 9.2.4 Payment Mechanisms 154 9.2.5 Other Contract Provisions 154 9.2.6 Other Important Agreements 154 9.3.0 PPP Contract Management – Basic Features 155 9.3.1 Contract Management Framework and the PPP Project Lifecycle 156 9.3.2 Contract Management Team and Operating Structure 157 9.3.3 Contract Management Team 157 9.3.4 Skill Set 157 9.3.5 Structure 157 9.3.6 Risk Management Process 159 9.3.7 Service Delivery Management 159 9.3.8 Risk Management 159 9.3.9 Performance Management 160 9.3.10 Contingency Planning 161 9.4.0 Contract Administration 163 9.5.0 Dispute Resolution 164 9.5.1 Forms of Dispute Resolution 164 9.6.0 Implementation Plan – Contract Management 164 9.6.1 Questions 164 CHAPTER 10 FREQUENTLY ASKED QUESTIONS (FAQs) & QUIZ 165-182 Annexure – GOs & Circulars 183-189 Documents Referred

Document Referred 1. Karnataka State Infrastructure Policy – 2007 and Draft Policy-2013 2. Reports of Infrastructure Development Department, GoK 3. Training Manuals/Materials published by the PPP Cell, Dept. of Economic Affairs of

GoI 4. 11th Five year plan document, GoI 5. 12th Five year plan document, GoI 6. PPP toolkit, Department of Economic Affairs, GoI 7. The India Infrastructure Report (1996) & (2012) 8. RBI policy document on PPP 9. i-Deck Reports 10. Report on BMIC 11. UNCHS Document on case studies on PPP 12. World Bank Document on PPP 13. Case Studies of PPP projects in India, DEA, GoI 14. Website of Department of Economic Affairs on PPP Cell 15. Expert Group on the Commercialisation of Infrastructure Projects, New Delhi. 16. Russell D Murphy, Jr. and Andrew Feltenstein, Private Costs and Public Infrastructure: 17. The Mexican Case, WP/01/164, International Monetary Fund, October 2001, Washington. 18. Stephen Harris (2004), Public Private Partnership: Delivering Better Infrastructure Services, 19. Working Paper, Inter-American Development Bank, Washington, DC. 20. Viren Doshi, Gary Schulman, and Daniel Gabaldon (2007), Lights! Water! Motion!,

Strategy+business. 21. World Bank, India-Country Framework Report for Private Participation in Infrastructure,

March 2000, Washington DC.–– India: Building Capacities for Public Private Partnerships, Energy and Infrastructure Unit and Finance and Private Sector Development Unit South Asia Region, June 2006.–– Private Participation in Infrastructure (PPI) Database, Washington DC.–– World Development Report 1994, Infrastructure for Development, Washington

Note : This PPP Guide will be used for reference and easy understanding for the Officers involved in the PPP Projects/Project Management and for the officers representing the departments of eligible sectors under PPP who will be attending training of ATI Mysore. Reference to various documents, Manuals and reports developed by agencies and authors namely DEA, GoI, Planning commission of India, IDD Karnataka, RBI, UNCHS, IMF, World Bank,IDFC, IDecK, The India Infrastructure Reports, 11th & 12th Five year plan documents, Policies, Programmes, Guidelines & GOs of GoI & GoK are gratefully acknowledged.

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CHAPTER 2

BASICS OF PUBLIC PRIVATE PARTNERSHIP

2.1 Definition of PPPs in India The Department of Economic Affairs (DEA) defines PPPs as PPP means an arrangement between a government or statutory entity or government owned entity on one side and a private sector entity on the other, for the provision of public assets and/ or related services for public benefit, through investments being made by and/or management undertaken by the private sector entity for a specified time period, where there is a substantial risk sharing with the private sector and the private sector receives performance linked payments that conform (or are benchmarked) to specified, pre-determined and measurable performance standards. The level of private sector participation in infrastructure can cover a spectrum from short-term service contracts at one end all the way through to full privatization (disinvestment) at the other. Service contracts and disinvestments are generally not considered as PPPs in India. An infrastructure PPP in India is therefore more than just a short-term contract for services with the private sector but does not go so far as to include complete private sector ownership and control. A PPP 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. Public Private Partnership (PPP) is a contract between a public sector institution/municipality and a private party, in which the private party assumes substantial financial, technical and operational risk in the design, financing, building and operation of a project. Traditionally, private sector participation has been limited to separate planning, design or construction contracts on a fee for service basis – based on the public agency’s specifications. Expanding the private sector role allows the public agencies to tap private sector technical, management and financial resources in new ways to achieve certain public agency objectives such as greater cost and schedule certainty, supplementing in-house staff, innovative technology applications, specialized expertise or access to private capital. The private partner can expand its business opportunities in return for assuming the new or expanded responsibilities and risks. PPPs provide benefits by allocating the responsibilities to the party – either public or private – that is best positioned to control the activity that will produce the desired result. With PPPs, this is accomplished by specifying the roles, risks and rewards contractually, so as to provide incentives for maximum performance and the flexibility necessary to achieve the desired results

The Planning Commission of India has defined the PPP in a generic term as “the PPP is a mode of implementing government programmes / schemes in partnership with the private sector. It provides an opportunity for private sector participation in financing, designing, construction, operation and maintenance of public sector programme and projects”. In addition, greenfield investment1 in the infrastructure development has also been given more encouragement in India. Greenfield investment is defined as an investment in a start-up project, usually for a major capital investment and the investment starts with a bare site in a greenfield.

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2.2 What is not a PPP ? The way a PPP is defined in the regulations makes it clear that:

• A PPP is not a simple outsourcing of functions where substantial financial, technical and operational risk is retained by the institution

• A PPP is not a donation by a private party for a public good • A PPP is not the 'commercialisation' of a public function by the creation of a state-owned

enterprise • A PPP does not constitute borrowing by the state.

PPPs can follow a variety of structures and contractual formats. However, all PPPs incorporate three key characteristics: a. A contractual agreement defining the roles and responsibilities of the parties, b. Sensible risk-sharing among the public and the private sector partners, and c. Financial rewards to the private party commensurate with the achievement of pre-specified Outputs. 2.2.1 Essential conditions in the definition 1. Arrangement with Private Sector Entity: The asset and/or service under an arrangement

will be provided by the Private Sector Entity to the public.

2. Public asset or service for public benefit: Has the element of facilities/ services being provided by the Government as a sovereign to its people. To better reflect this intent, two key concepts are elaborated below:

(a) ‘Public Services’ are those services that the State is obligated to provide to its citizens (towards meeting the socio-economic objectives) or where the State has traditionally provided the services to its citizens. For example, provision of security, law and order, electricity, water, etc. to the citizens. (b) ‘Public Asset’ is that asset the use of which is inextricably linked to the delivery of a Public Service. or example, public road which is linked to public transportation. OR, those assets that utilize or integrate sovereign assets to deliver Public Services. For example, right of way on highways, or use of river / water bodies, etc.

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All of these provide strong reasons in favour of using PPPs in India and elsewhere.

2.3 Need for PPP � Economic 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 � 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

2.4 Features of PPP � 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 � 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

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2.5 Implementation Structures Different organizational structures may be used to implement PPP projects. These include:

• Private Sector SPV: The commonest form of implementing PPPs is through a concession or a license granted by the government to a special purpose company / vehicle (SPV) set up by the private investor for implementing the project. The SPV in such a case is entirely owned by the private investor with other strategic / financial investors.

• Joint Venture SPV: An SPV can also be set up as a joint venture with the public sector / government. The majority stake / overall project control rests with the private sector. The public partner could expedite the receipt of statutory approvals and clearances. In such a case, one has to be mindful of the conflict of interest for the government in its roles as an investor in the company and as the statutory authority for the project.

• Section 25 Companies: For certain social infrastructure, SPVs can be set up as not-for-profit entities under Section 25 of the Companies Act. Under this set-up, there are taxation benefits and the private sector may be compensated through a fee for services rendered.

2.6 Contract Uncertainties PPPs often cover a long-term period of service provision (eg. 15-30 years, or life of the asset). Any agreement covering such a long period into the future is naturally subject to uncertainty. If the requirements of the public sponsor or the conditions facing the private sector change during the lifetime of the PPP the contract may need to be modified to reflect the changes. This can entail large costs to the public sector and the benefit of competitive tendering to determine these costs is usually not available. This issue can be mitigated by selecting relatively stable projects as PPPs and by specifying in the original contract terms how future contract variations will be handled and priced. 2.7 Difficulty in Demonstrating Value for Money in Advance Ideally, a project should be procured as a PPP on the basis of a clear demonstration that it provides value for money (VFM) compared with public sector procurement. However, it is difficult to demonstrate VFM in advance due to uncertainties in predicting what will happen over the life of the project and due to a lack of information about comparable previous projects. However, the standard for VFM is different in India to more economically developed countries such as Australia or the UK. In those countries there is a much smaller funding need. In India, many projects procured in the public sector, experience time and cost over runs, and hence it is likely that well-managed private procurements will deliver savings. Furthermore, the funding gap is far greater than the Public Sponsor can meet by itself. In this case, it may sometimes not be a question of public vs. private procurement, but rather the choice between private procurement or none at all. If this is the case then the focus should be on making a careful assessment of alternative project options to be sure that the projects that are selected are the best ones economically and financially.

• The public sector environment is suited to supporting PPPs • The project is suitable to being carried out as a PPP –

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• The potential barriers to successful project implementation have been identified and can be overcome

Given that these conditions are satisfied, the project must be commercially viable for the private sector and offer value for money (VFM) for the public sector 2.7.1 Commercial viability Commercial viability is crucial if the project is to attract a private partner. For a project to be commercially viable does not mean it cannot receive some financial and other support from the public sector. In some cases such support may be necessary, and initiatives such as Viability Gap Funds (VGF) have been established for this purpose. Careful and appropriate risk allocation between the public and private partners is a critical focus of PPP design to achieve value for money. If private partners do not bear the risks that are under their control, their incentives for efficiency will be weakened and PPP benefits may be reduced. The requirements for effective risk transfer and the ability to harness private sector efficiencies means PPPs are best suited to projects for which:

• It is possible to clearly specify the requirements in terms of service outputs – the idea is to capture as much of the private sector efficiencies as possible by allowing scope for bidders to introduce efficiencies through innovations proposed in their bids

• The requirements can be specified so as to enable monitoring of performance against measurable standards and enforcement of penalties where standards are not met

• The requirements of the public sector sponsor are likely to be stable throughout the life of the PPP – the aim is to avoid the need to renegotiate the contract at a later date due to changes to project scope or requirements

2.7.2 Benefits to people o Better quality of service – National Highways, Telecom, Air travel o Decreased user fees – Telecom and Air travel o Happy that Government using taxes not for salaries but for general public – High tax

payers

2.7.3 Benefits to private sector o Return on investment – Paradise Island o Business opportunity – Hotel Metropole, Mysore o Long term involvement and guaranteed income due to lower market risk – BIAL

Airport

2.7.4 Disadvantages of PSP o Only profit – no service – Cable TV, public transport crowded o Private monopoly – Courier services v. Speed Post o Stay till profitable and default o Governments expectations high especially in commercial properties

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2.7.5 Characteristics of PPP • The private sector is responsible for carrying out or operating the project and takes on a

substantial portion of the associated project risks • During the operational life of the project the public sector’s role is to monitor the performance of

the private partner and enforce the terms of the contract • The private sector’s costs may be recovered in whole or in part from charges related to the use of

the services provided by the project, and may be recovered through payments from the public sector

• Public sector payments are based on performance standards set out in the contract • Often the private sector will contribute the majority of the project’s capital costs, although this is

not always the case. It will often be necessary to build or add to existing assets in order to meet the infrastructure needs of the economy and users. However, an important part of the infrastructure PPP concept is that:

• A PPP is focused on outputs, and the outputs of the PPP are infrastructure services, not infrastructure assets.

The reason for the focus on outputs and services rather than assets is to encourage efficient use of public resources and improved infrastructure quality.

A PPP brings the public and private sectors together as partners in a contractual agreement, for a pre-defined period (eg. 30 years) matched to the life of the infrastructure assets used to provide the services. The private partners (investors, contractors and operators) provide specified infrastructure services and, in return, the public sector either pays for those services or grants the private partner the right to generate revenue from the project. For example, the private partner may be allowed to charge user fees or receive revenue from other aspects of the project. The best PPPs will have the public and private partners working together to build and sustain a long-term relationship that is of benefit to all. 2.7.6 Pre-requisites for Implementing PPP projects Certain pre-requisite conditions must be fulfilled in order to use PPPs or derive benefits from their use as a tool for project implementation.

• Enabling authority: The public entity should unambiguously have the enabling authority (that is, legal power) to transfer (to the private party) its responsibility of providing the service in question. This authority may stem from the enabling legislative and policy framework or from an administrative order. The instrument of transfer is through a legally enforceable contract between the authorized public entity and the private party. For example, the Department of Telecom (DoT) could issue Cellular and Basic Services Licences only after appropriate amendments to the Indian Telegraph Act, 1884. The National and State Highways legislation needed appropriate amendments to enable private parties to develop and maintain highways and levy and collect tolls / user fees.

To derive benefits from PPPs projects would need to incorporate the following features:

• Financial obligations: The transfer of responsibility to the private party should be of significant proportions, usually involving large financial investment obligations on part

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of the private party. This would bring in efficiencies in the way projects are financed and could bring down costs for users.

• Performance-based payment: Payment to the private entity for service provided whether paid maximum benefits. Thus, the tenure of the contract would be for periods always in excess of 5 years and may go to 50-60 years as well, depending on the economic life / life cycle of the underlying assets.

2.7.7 Special Purpose Vehicle A Special Purpose Vehicle (SPV), a new company, is set up to implement each project. Usually the sponsoring entity (majority-owing private partner) offers no additional balance sheet support except for the initial equity commitment. The majority of the project obligations are usually addressed through separate contractual arrangements for construction. O&M , supply agreements (for instance, waste supply in a MSW project or fuel supply agreement for a power generation project), off take (purchase of compost for a MSW treatment project or purchase of water / power) and financing – which would mirror the obligations passed on to the SPV under the concession agreement. The benefit of using a SPV structure is that it is a bankruptcy-remove structure. The project and the sponsor are both insulated from each other. The main advantage for the government is that the project is protected from failure of the sponsoring entity. 2.7.8 Investor Comforts and Incentives PPP projects can avail a variety of government incentives.

• Fiscal benefits : PPP projects for sectors that are classified as infrastructure under the Income Tax Act, 1961, can avail a tax holiday of 100% for 10 years in a block of 20 years.

• VGF subsidy: Viability gap funding (VGF) of up 40% of the cost of the project can be availed as a capital grant (for state government sponsored projects, up to 20% would be provided by the central government, with the balance having to come from the state; where another central ministry is the project sponsor it would provide the remaining 20%)

• Foreign direct investment (FDI) : PPP projects are permitted have 74% to 100% of its equity in the form of FDI – depending on the specific sectors.

• Duty free imports : High capacity and modern construction equipment may be imported duty for use in a PPP project.

Long concession periods : PPP projects usually have concession periods of a longer duration. The period can be up to 30 years.

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2.8.1 Typical risks in W&S Infrastructure PPP projects Risk type Description Pre-operative task risks Delays in land acquisition Refers to the risk that the project site (or sites) will be

unavailable or unable to be used within the required time, or in the manner or the cost anticipated or the site will generate unanticipated liabilities due to existing encumbrances and native claims being made on the site. This risk is most relevant to greenfield projects involving treatment and storage facilities

External linkages Refers to the risk that adequate and timely connectivity to the project site is not available, which may impact the commencement of construction and overall pace of development of the project.

Financing risks Refers to the risk that sufficient finance will not be available for the project at reasonable cost (eg, because of changes in market conditions or credit availability) resulting in delays in the financial closure for a project.

Planning risks Refers to the risk that the pre-development studies (technical, legal, financial and others) conducted are inadequate or not robust enough resulting in possible deviations from the outcomes that were planned or expected in the PPP project development.

Construction phase risks Design risk Refers to the risk that the proposed design will be unable to

meet the performance and service requirements in the output specification. It can result in additional costs for modification and redesign.

Construction risk Refers to the risk that the construction of the assets required for the project will not be completed on time, on budget or to specification. It may lead to additional raw materials and labour costs, additional financing costs, increase in the cost of maintaining existing infrastructure or providing a temporary alternative solution due to a delay in the provision of the service.

Approvals risk Refers to the risk that delays in approvals to be obtained during the construction phase will result in a delay in the construction of the assets as per the construction schedule. Such delays in obtaining approvals may lead to cost overruns.

Operation phase risks Operations and maintenance risk

Refers to the risks associated with the need for increased maintenance of assets or machinery over the term of the project in order to meet performance requirements. In a brownfield PPP, where the private partner takes over operation of existing assets, O&M risk is very sensitive to the starting condition of the assets. In this case the private operator's O&M risk is related to the risk of poor or incomplete information about the quality

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of the assets that it will take over. Volume risk Refers to the risk that demand for water or sanitation services

will vary from the initial forecast, such that the total revenue derived from the project over the project life will vary from initial expectations.

Payment risk Refers to the risk that charges for services are not collected in full or are not set at a level that allows recovery of costs. Who bears the payment risk depends on whether the charges for services are paid directly by users, or are paid by the municipality. If charges are paid by the municipality (via taxes) the public sector bears this risk.

Financial risk Refers to the risk that the concessionaire introduces too much financial stress on a project by using an inappropriate financial structure for the privately financed components of the project. It can result in additional funding costs for increased margins or unexpected refinancing costs. Currency risk can also impact on financial risk if the project includes funding denominated in foreign currency.

Performance risk This is a risk that the quality of services delivered will not meet the performance standards agreed in the Concession Agreement. The Concession Agreement should stipulate penalties or compensation terms in this case.

Environmental risk Refers to the risk of environmental damage in excess of what is planned for in the environmental impact mitigation plan. For example, ground water pollution from sewerage release.

Handover risks Handover risk / Terminal value risk

Refers to the risk that the concessionaire will default in the handover of the asset at the end of the project life, or that it will fail to meet the minimum quality standard or value of the asset that needs to be handed back to the public entity. This risk (and terminal value risk) generally relates to concession and BOT type PPPs. However, it may also be relevant to performance based management contracts in which the private partner is responsible for investing in meters.

Other risks Change in law Refers to the risk that the current legal / regulatory regime will

change, having a material adverse impact on the project. Force Majeure Refers to the risk that events beyond the control of either entity

may occur, resulting in a material adverse impact on either party's ability to perform its obligations under the PPP contract. These events are sometimes also called "Acts of God", to indicate that they are beyond the control of either contracted party.

Concessionaire risk Refers to the risk that the concessionaire will prove to be

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inappropriate or unsuitable for delivery of the project, for example due to failure of their company.

Sponsor risk Refers to the risk that the Sponsor will prove to be an unsuitable partner for the project, for example due to poor project management or a failure to fully recognise the agreed terms of the Concession Agreement.

Concessionaire event of default

Refers to the risk that the concessionaire will not fulfil its contractual obligations and that the public Sponsor will be unable to either enforce those obligations against the concessionaire, or recover some form of compensation or remedy from the concessionaire for any loss sustained by it as a result of the breach.

Government event of default

Refers to the risk that the public Sponsor will not fulfil its contractual obligations and that the concessionaire will be unable to either enforce those obligations against the Sponsor, or recover some form of compensation or remedy from the Sponsor for any loss sustained by it as a result of the breach.

2.8.2 Types of PPP

� 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, power - under PPAs. In the UK -prisons, education, health

services, defence related services

� Other Types - Joint ventures, Not-for-Profit vehicles

2.8.3 PPP Options

2.8.4 Characteristics of typical PPP modes in the W&S sectorMODES / FEATURES

Asset ownership during the contract

Distribution or Operations Concessions

Public

BOT – Bulk Water Supply System

Public

BOT –Water Supply Distribution System

Public

BOT – Water Supply Distribution System & Sanitation Network

Public

Performance Public

Characteristics of typical PPP modes in the W&S sector PPP duration

Capital investment focus & responsibility

Private partner revenue risk and compensation terms

Long (e.g. 15-30 yrs)

Brownfield Private

High User Charges

Long (e.g. 15-30 yrs)

Greenfield (Bulk Water Infrastructure) Private

Med-High (could have a Take or Pay Agreement) Bulk Water Charges from ULB

Medium (e.g. 8-10 yrs)

Greenfield Private

Medium Capex Reimbursement by ULB + User Charges + Operator Fee for O&M from ULB

Long (e.g. 15-30 yrs)

Greenfield Private

Medium Not the focus Low / High

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revenue risk

compensation

Private partner role & involvement

User Charges Design, finance, construct, manage, maintain, transfer

(could have a Take or Pay

Charges from

Design, finance, construct, manage, maintain, transfer

Reimbursement by ULB + User

Operator Fee for O&M from

Design, finance, construct, manage, maintain, transfer

Management of all

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based Management Contracts

(e.g. 5yrs) Public Pre-determined fee / Revenue Share, Performance based

aspects of operation and maintenance

Service Management Contract – Metering, Billing and Collection

Public Short (e.g.3-4 years)

Only towards Metering Private

Low Recovery of Investment in meters from Consumers. Fixed Annuity for O&M from ULB

Minimum Capex, Management, Maintenance of Meters, Billing & Collections

2.8.5 Contractual Framework A PPP project operates under a contractual framework, where the intended outcomes are explicitly set out. This contract is called the Concession Agreement. The concession agreement lays out the rights and obligations of both the private party and the public entity, and the consequences in case of non-fulfillment of any obligation. The importance of the contract lies in the fact that it is usually the only tangible security available to both parties in case of non-performance. The contracting parties are usually the government agency (concessioning authority) which is procuring the service, and the private party (concessionaire) that is providing the service. The other parties may include the state government, lenders, and supplies of services. It is important to remember that a concession is a licence, wherein certain rights are enjoyed by the private party in return for performing certain obligations 2.8.6 Contractual Framework of PPP projects

� All intentions need to be set out in a contract � Concession Agreement - bundle of rights & obligations and consequences in case of non-

fulfillment � Usually the only tangible security available � Contracting parties : Government Agency – Concessioning Authority and Private Party –

Concessionaire � Other parties – state government, Lenders, Suppliers of services � A concession is a license – rights enjoyed for obligations performed

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

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2.8.7 Project characteristics that affect the choice of PPP mode The different modes and variants of them will be appropriate to different projects. This will depend in particular on the nature of the service or output required, which in turn depends on the sector and sub-sector, and the political and economic climate in which the PPP will be carried out. New (“Greenfield”) or existing assets – Greenfield developments, which include major capital expenditure to build new infrastructure, have different requirements to the rehabilitation or management of existing assets in Brownfield developments. The scope of potential private sector roles is broader in greenfield projects. The chosen PPP mode will reflect whether the private sector will be responsible for the design, finance and construction of the project (eg : DBO agreement or a variation) or only some of these roles. Ownership flexibility – There may be legal restrictions on public ownership (as is the case in India for highways or port frontages). Other practical issues need to be taken into account in deciding ownership, such as political acceptability (eg due to resistance to public ownership of certain facilities that are seen as providing strategic or ‘vital’ services, such as may be the case in electricity). Restrictions on ownership rule out PPP modes that specifically contain ownership aspects, such as Build-own-operate (BOO) and its variants (eg. BOOT). In this case other options such as lease management contracts, BOT, BTL, could be considered. Lifetime of the asset and scale of capital costs – infrastructure assets that involve large upfront capital costs, such as roads, require long timeframes for cost recovery. Such assets may be suited to long-term contracts (eg BOT, BLT etc). However, long timeframes also bring greater risk of future unknowns. The public sector may be required to take on some of these risks by providing some guarantee to cost recovery in order to attract private sector project finance. For example, for a road project where future traffic volumes are uncertain the PPP might be structured with annuity payments rather than being toll-based, to reduce the revenue risk to the private operator. Alternatively, if long-tenor finance from the private sector is not available public sector financing may need to step into the gap (eg., IIFCL). The willingness or ability of the public sector partner to meet these risks is a further factor to be considered in determining the length of contract. For example, if facilities to support long-tenor debt are not available shorter term contracts with renewal clauses may be appropriate. The nature of the service to be provided and the supporting infrastructure assets – More broadly, the nature of the end-user service itself will tend to favour a type of contracting structure. This is related to the capital cost structure (scale and timing) and the nature of the assets (physically fixed to their location or transportable). Large capital-intensive network infrastructure assets tend to be natural monopolies and require some form of institutional price and quality regulation, either within the terms of contract or by a dedicated regulatory agency.

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By contrast, some services such as those that are provided on the network (eg municipal buses, electric energy) or solid waste collection, can be subject to market competition. A different contracting structure is possible in this case, including greater opportunity for shorter contracts and periodic competitive re-bidding to maintain pressure on costs. Cost recovery options – Whether the revenue from the PPP will be from a user-charge or a management fee or annuity paid by the public sector has important implications for the nature of the risk sharing. Stability of demand for the services required – long-term PPP contracts are best suited to the provision of infrastructure services which are not expected to change much through time. These projects have lower risk of unforeseeable outcomes compared with projects whose services are subject to change, for example in sectors that are subject to rapid technological change. 2.8.8 Broad Roles & Responsibilities in PPP Projects

� Government Agency � Providing Project Site/ Assets � Environmental Clearances � Specific Obligations (e.g. timely clearances, support infrastructure facilities) � 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

2.8.9 Other Key Elements of PPP � 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 in case of default/ events leading to termination − Protection of debt in the event of termination

� Supporting Provisions

− Dispute Resolution Mechanism − Re-negotiation in good faith

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− Termination as a last resort − Preferential treatment in re-bidding

2.8.10 Comparative Table of Highlighting Core Elements that Define PPP

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2.9 .0 Steps in PPP Project Development Process Project Identification

Technical Feasibility Evaluation

Financial Viability Analysis

Evaluation of Project Structuring Options

Resolution of Project Implementation Issues

Bid Documentation

Bidding Process

2.9.1 A Few PPP based projects in Karnataka

• BIAL • HMRDC • MSW Treatment and landfill at Mavallipura • Madivala Market • Bangalore-Maddur State Highway • NICE Road • Hotel Metropole and Hotel KRS • Hotels & Yatri Niwas across State • CSB to Karnataka Border – Elevated Expressway to E City • KUWASIP • Swachha Bangalore • MCC, Devanahalli

KSRTC and BMTC propose to jointly develop the existing Kempegowda Bus Terminal at Subhashnagar into an Intermodal Transit Center through Private Sector Participation on BOT basis

RTO 1. Nodal Department : Transport Department 2. Computerisation of RTOs/Check Posts in Karnataka

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3. Financing, Supply, Installation and Maintenance of Hardware and Application Software at locations all over Karnataka

4. Private developer to issue smart cards for driving licences and vehicle registration certificates 5. Estimated capital investment of Rs.30 crores 6. Bid process underway

BOT Projects 1. Sandur Bypass 2. Tornagallu-Kudligi, Sandur-Hospet & other roads 3. Ring Road in Bellary City 4. Elevated Corridor for IT City – Bangalore

Mysore 24x7 Water Supply Project Job Description : Conversion of intermittent to 24x7 continuous water supply system

through systematic improvements and network rehabilitation Client : Mysore City Corporation & Karnataka Water Supply & Drainage Board (KUWSDB) Salient Features : Hydraulic modeling, Network design, preparation and implementation

of Capital Investment Plan (CIP)

• Rehabilitation of citywide water distribution network – About 1766 km. of pipeline (dia. 65- 350mm), 14 Booster Pump houses, 14 substations & related electrical works

• Providing house service connections – 1,74,936 • Operation & maintenance of citywide water distribution system for 6 years (2

years post rehabilitation & implementation of 24x7, with fixed & performance linked remuneration

• Billing & Collection leading to increased revenue collections • Establishment and Management of 24x7 Customer Complaint centers

Value [Existing Contract] : Rs. 1620 million Completion Time : 72 Months

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2.10.0 Public- Private Partnerships in Municipal Services

Today our urban local bodies /state authorities are finding that their existing water, sanitation, energy and other urban infrastructures are unable to service their rapidly expanding urban population. In addition, governments realize that their limited financial resources are not sufficient to cover the needed expansion of these services. Even where government do find the resources to subsidize public utilities, service is often poor and sectors of the population largely unserved. It is becoming increasingly clear that government connot meet the continually growing demand for water, waste, waste, energy and other urban services acting alone. Local governments are finding that their tax revenues are not providing sufficient resources to meet these needs, and official development assistance has not been able to fill the gap. It is in this backdrop that we are forced to think of alternate sources of finance, technical excellence and support one of the most viable options is to involve the private sector in the state monopolies. This is done through associations with provate sector on a project-to project basis and generally termed as PSP-private sector participation, PPP-Public private partnerships, PFI-Private finance initiatives etc. these usages though done interchangeably have slight differences in their specific definitions and operational frameworks but for the genera understanding it conveys the meaning of involvement of private sector in public services. The term “private partnership” (PPP) describes a spectrum of possible relationships between public and private actors for the cooperative provision of infrastructure services. The only essential ingredient is some degree of private participation in the delivery of traditionally public – domain services. Private actors may include private businesses, as well as non-governmental organizations (NGOs) and community- based organization (CBOs). Through PPPs, the advantages of the private sector- innovation, access to finance, knowledge of technologies, managerial efficiency, and entrepreneurial spirit- are combined with the social responsibility, environmental awareness, and local knowledge of the public sector in an effort to solve problems. In cities throughout the world, private firms have demonstrated their ability to improve the operation of infrastructure services. However, it is important to bear in mind that private involvement does not provide an automatic solution to urban infrastructure problems. The need for private sector involvement in urban infrastructure development is indisputable in the above context and it has been proven beyond doubt that depending on the option of private participation used it could deliver the required benefits in urban infrastructure projects. Private sector participation could help to bring technical and managerial expertise, improve operating efficiency, large scale injection of capital, greater efficiency in using the capital, rationalization/ cost base tariffs for services, better responsiveness to consumer needs and satisfaction. Though we are clear that private sector participation is necessary and it could bring definite advantages into the system, it would be worth while to look into those critical factors which do or undo the partnership or the successful running of it. The key factors that could be highlighted are clear, government commitment, legal and regulatory capacity, stakeholder involvement, intelligent transaction design, cost-recovery tariffs,

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the right option and a systematic approach. If we may compare the options mentioned above on the basis of parameters like ownership, operations accountability, investment, commercial risk bearing and period of contracts, a general matrix like the following could be drawn. Option Asset

Ownership O & M Capital

Investment Commercial Risk

Duration

Management Contract

Public Private Public Public 3-5 years

Lease Public Private Public Shared 8-15 years Concession BOT

Public Private Private Private 25-30 years

BOOT/BOO Private/public Private Private Private 20-30 years These Options could also be compared by mapping the objectives for which private participation is sought as given below Objective Option

Technical Expertise

Managing Expertise

Operating Efficiency

Invest: in Bulk

Invest: in Distri:

Service Contract

Yes No No No No

Management contract

Yes Yes Some No No

Lease Yes Yes Some No No Concession/ BOT

Yes Some Some Yes No

BOOT/BOO Yes Yes Yes Yes Yes The table highlights the necessity of identifying the objectives clearly before venturing into an option. Here are certain prerequisites for a public private partnership to develop and be sustained successfully the importance and priority of the factors as against the various options is as shown.

Requirement option

Political Commitment

Cost-coverring Tariffs

Regulatory Framework

Good Information

Service Contract Low Low Low Low Management Contract

Moderate Moderate Moderate Low

Lease Moderate High High High BOT Concession Moderate High High High BOOT/BOO High High High High

It is not enough that the support of private sector be sought for the development but it should be well thought out and should be ventured into with adequate preparation and homework. There is a definite process to be followed for Private sector participation in infrastructure development this involves many systematic steps, but to put in general it is four phases. They are project preparation, selecting an appropriate PPP option, soliciting private sector participation, establishing a durable partnership.

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Each of the above phases has its own importance and there is a definite sequence to be followed. In general these steps would include detailed steps as given. Step 1 : Project Preparation The process from conceiving the idea to identifying the potentiality of the project and finding out the financial and economical feasibility of the same would come under this phase. They are conceiving the idea or problem definition, demand assessment, financial feasibility, economic feasibility and project feasibility (Generally a project feasibility report) Step 2 : Selecting an appropriate PPP option This phase would depend on the project/problem in hand which is to be addressed ie, importance of the project, economics of the project, social and environmental back-drop, political and public interest, private sectors interest in terns of investment attractiveness. The steps involved would be structuring the project for private participation, setting the necessary changes/framework for the project, defining the terms of bidding (Bid design) and preparation of documents. Step 3 : Soliciting private sector participation This involves the process of inviting private sector to participate in the project/venture and the subsequent steps of identifying the most appropriate partner in terms of technical and financial parameters. The steps would include pre-qualification, bid process, evaluation and negotiations. Step 4 : Establishing a durable partnership The post bid scenario where the relationship of 10-20 years is maintained in good manner keeping in lines with the spirit of the contract- award of the contact, up keeping of the contractual obligations and considerate views on unforeseen events (Mutually) To sum up one would add that the success of the project would depend finally on getting the different stakeholder rallying for it which requires a high level of awareness and a genuine effort for a consensus. The emphasis on this point is because the relationship is for 20 year where in it is possible that governments change, ideologies change and market dynamics may change but the long-term policies should remain and the commitment given to private sector and public should be honoured. 2.10.1 Summary The concept of PPP is new and emerging requiring different skills and Governance. This chapter has discussed the basic aspects of PPP in the Indian context. The definition, advantages and disadvantages, features, need, roles and responsibilities, risk sharing, characteristics, types of PPP, General steps in PPP and a list of PPP projects initiated in Karnataka State have been described. Broadly speaking, a typical PPP allows a private consortium to assume the financing risk and two or more phases of the project’s life-cycle. This may include the design and construction phases of the project and the subsequent maintenance and operation of the government facility under a carefully contrived long-term lease. This is in contrast to the private sector’s traditional role in infrastructure development where its involvement is limited to providing skilled labour under short-term contracts, with the delivery of the services being solely

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provided by the public authority. It is also important not to confuse PPPs with privatization- a situation where responsibility over the delivery of the public service is fully transferred to the private partner with little or no government oversight. Public Private Partnerships combine two or more of the project’s phases in a single bundle for the private consortium to deliver over the long-ter. This created economics of scale by motivating the private sector to organize its activities in a way that drives efficiencies and maximizes returns on investments.

Public private partnerships are designed so that risk is transferred between the public and private sectors, allocating particular project risk to the partner best able to manage that risk cost-effectively. With financing risk routinely transferred to the private consortium, any delays in meeting the agreed upon timelines can lead to additional costs for the private partner as it alone carries the debt for a longer period of time. Therefore, the private sector has a direct financial interest in ensuring that projects and services are delivered on-time, if not sooner. By bringing together the strengths from the public and private sectors. PPPs have the unique ability to share a diverse range of resources, technologies, ideas and skills in a cooperative manner that can work to improve how urban infrastructure assets and services are delivered to the people.

Public private partnerships represent good opportunities to lower overall project costs.

However, when compared with traditional procurement, the complete PPP process invites additional costs that, if not managed properly, can erode some of the potential economic benefits of this model. A key concern with the long-term committal nature of PPP procurement is that it limits the public sector’s ability to make changes to the contract if unexpected economic or situational challenges arise. In the event that a change is required to either the use of an infrastructure asset, or to the type of urban service offered, PPPs have proven to be inflexible-both in terms of the time and administrative burden associated with altering the contract. 2.10.2 Questions :

1. Define PPP as per DEA & planning commission of India & Discuss the essential conditions in the definition?

2. What are the needs and features of PPP ? 3. Discuss the advantages and disadvantages of PPP ? 4. What are the characteristics of PPP? 5. Discuss the different risks in PPP projects in WS & sanitation ? 6. Discuss the types of PPP ? 7. Explain contractual frame work of PPP ? 8. Discuss the broad role and responsibility in PPP projects ? 9. Explain PPP status in municipal services ? 10. Discuss steps in PPP ?

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CHAPTER 3

APPRAISAL OF PPP PROJECTS

3.1 Introduction Although, we are familiar with tools such as Gantt chart, PERT, CPM, IRR, NPV and others associated with project management. Yet when it comes to real project scenario, we find practical problems which could bring deviations. This is not to suggest that the tools and techniques are inadequate, Project appraisal and evaluation are often referred to together as project assessment. Project appraisal is concerned with assessing, in advance, whether a project is worthwhile and therefore if it should be proceeded with. The process of project evaluation is concerned with assessing, in a retrospective sense, the performance of a project after it has been implemented and completed. Such a process of policy assessment occupies a central place in public policy and management. Many of the issues of public policy and management are about resource allocation, the trade-offs between different policy measures and the impacts of those policy measures on the economy and on society. Management in the public sector is subject to budgetary constraints and often to political pressures; project appraisal techniques may help in the decision process and obtain a more efficient allocation of resources. Gittinger (1982) defines a ‘project’ as ... an investment activity upon which resources – costs – are expended to create capital assets that will produce benefits over an extended period of time and which logically lends itself to planning, financing, and implementing as a Unit. A specific activity, with specific starting point and specific ending point, intended to accomplish a specific objective. The smallest operational element prepared and implemented as a separate entity in a national plan or program. Generally unique in that it is not a segment of an ongoing program, although it may be a ‘time slice’– a portion lasting several years – of a long-term program. The basic purpose of systematic appraisal is to achieve better spending decisions for capital and current expenditure on schemes, projects and programmes. An understanding of discounting and Net Present Value (NPV) calculations is fundamental to proper appraisal of projects and programmes. A good understanding of Cost Benefit Analysis (CBA), Internal Rate of Return (IRR), Multi Criteria Analysis (MCA) and Cost Effectiveness Analysis (CEA) is also essential for economic appraisal purposes. 3.1.1 Technical Appraisal Determines whether the technical parameters are soundly conceived, realistic and technically feasible. Technical feasibility analysis is the systematic gathering and analysis of the data pertaining to the technical inputs required and formation of conclusion there from. The availability of the raw materials, equipment, hard/software, power, sanitary and sewerage services, transportation facility, skilled man power, engineering facilities, maintenance, local people etc., depending on the type of project are coming under technical analysis. This feasibility analysis is very important since its significance lies in planning the exercises, documentation process, risk minimization process and to get approval. Checklist

- Physical scale - Technology used & Type of equipments & Suitability conditions - How realistic is the implementation schedule - Labour intensive method or others

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- Cost estimates of Engineering Data - Escalation are taken care of or not - Procurement arrangement - Cost of operation & Maintenance - Necessary raw material & Inputs - Potential impact of project on human & physical Environment -

3.1.2 Financial Appraisal To determine whether the financial costs and returns are properly estimated and whether the project is financially viable. Following minimum details are determined in the financial appraisal;

1. Total Cost 2. O & M Expenditure 3. Opportunity costs 4. Other costs 5. Returns on Investment over project life 6. NPV 7. CBR 8. IRR

3.1.3 Institutional Appraisal To determine whether the implementing agencies as identified in the report are capable for effective implementation, monitoring, and evaluation of the scheme. Managerial competence, integrity, knowledge of the project, the promoters should have the knowledge and ability to plan, implement and operate the entire project effectively. The past record of the promoters is to be appraised to clarify their ability in handling the projects. Checklist

• Whether the entity is properly organised do the job • Strength to use capability and take initiatives to reach the objectives • Openness to new ideas and willingness to adopt long term approach to extend over

several projects •

3.1.4 Commercial Appraisal The demand and scope of the project among the beneficiaries, customer friendly process and preferences, future demand of the supply, effectiveness of the selling arrangement, latest information availability on all areas, government control measures, etc. The appraisal involves the assessment of the current demand/market scenario, which enables the project to get adequate demand. Estimation, distribution and advertisement scenario also to be here considered into. 3.1.5 Environmental Appraisal To see any detrimental environmental impacts and how to minimise the impacts. Environmental appraisal concerns with the impact of environment on the project. The factors include the water, air, land, sound, geographical location etc.

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3.1.6 Economic Appraisal How far the project contributes to the development of the sector, industrial development, social development, maximizing the growth of employment, etc. are kept in view while evaluating the economic feasibility of the project. 3.1.7 Legal Appraisal To determine whether the project satisfies the legal issues related to land acquisition, title deed, environmental clearance etc. 3.2.0 Analytical methods The recommended analytical methods for appraisal are generally discounted cash flow techniques which take into account the time value of money. People generally prefer to receive benefits as early as possible while paying costs as late as possible. Costs and benefits occur at different points in the life of the project so the valuation of costs and benefits must take into account the time at which they occur. This concept of time preference is fundamental to proper appraisal and so it is necessary to calculate the pre Net Present Value Method (NPV) 3.2.1 Steps in NPV Calculation Step 1. Estimate the cash inflows and outflows on a year-to-year basis. Step 2. Work out the net cash flows for individual years. Step 3. Find out for individual years the discount value of 1 at the given discount rate Step 4. Multiply the net cash flows for each year by the corresponding discount factor. Step 5. Add up the present values In the NPV method, the revenues and costs of a project are estimated and then are discounted and compared with the initial investment. The preferred option is that with the highest positive net present value. Projects with negative NPV values should be rejected because the present value of the stream of benefits is insufficient to recover the cost of the project. Compared to other investment appraisal techniques such as the IRR and the discounted payback period, the NPV is viewed as the most reliable technique to support investment appraisal decisions. There are some disadvantages with the NPV approach. If there are several independent and mutually exclusive projects, the NPV method will rank projects in order of descending NPV values. However, a smaller project with a lower NPV may be more attractive due to a higher ratio of discounted benefits to costs (see BCR below), particularly if there affordability constraints. Using different evaluation techniques for the same basic data may yield conflicting conclusions. In choosing between options A and B, the NPV method may suggest that option A is preferable, while the IRR method may suggest that option B is preferable. However in such cases, the results indicated by the NPV method are more reliable. The NPV method should be always be used where money values over time need to be appraised. Nevertheless, the other techniques also yield useful additional information and may be worth using. The key determinants of the NPV calculation are the appraisal horizon, the discount rate and the accuracy of estimates for costs and benefits. 3.2.2 Discount rate The discount rate is a concept related to the NPV method. The discount rate is used to convert costs and benefits to present values to reflect the principle of time preference. The calculation of the discount rate can be based on a number of approaches including, among others:

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� The social rate of time preference � The opportunity cost of capital � Weighted average method

The same basic discount rate (usually called the test discount rate or TDR) should be used in all cost-benefit and cost-effectiveness analyses of public sector projects. The current recommended TDR is 4%. However, given the recent changes in economic circumstances, the current discount rate needs to be updated. This task will be undertaken by the CEEU and the revised discount rate will be published in section E of the code –Reference and Parameter Values. However, if a commercial State Sponsored Body is discounting projected cash flows for commercial projects, the cost of capital should be used or even a project-specific rate. 3.2.3 Internal Rate of Return (IRR) The IRR is the discount rate which, when applied to net revenues of a project sets them equal to the initial investment. The preferred option is that with the IRR greatest in excess of a specified rate of return. An IRR of 10% means that with a discount rate of 10%, the project breaks even. The IRR approach is usually associated with a hurdle cost of capital/discount rate, against which the IRR is compared. The hurdle rate corresponds to the opportunity cost of capital. In the case of public projects, the hurdle rate is the TDR. If the IRR exceeds the hurdle rate, the project is accepted. There are disadvantages associated with the IRR as a performance indicator. It is not suitable for the ranking of competing projects. It is possible for two projects to have the same IRR but have different NPV values due to differences in the timing of costs and benefits. In addition, applying different appraisal techniques to the same basic data may yield contradictory conclusions. The calculation of the internal rate of return involves the following steps. Step 1. Estimate the cash inflows and cash outflows on a year-to-year basis Step 2. Work out the net cash flows for individual years. Step 3. Select any random discount rate and compute the net present values. Step 4. If the NPV thus arrived at is positive, then select a higher discount rate at which the

NPV may come close to zero. If, however, the NPV is negative, then select a lower discount rate at which the NPV may come close to zero.

Step 5. Repeat the exercise until a discount rate that reduces the net present values to zero is found 3.2.4 Benefit / Cost ratio (BCR) The BCR is the discounted net revenues divided by the initial investment. The preferred option is that with the ratio greatest in excess of 1. In any event, a project with a benefit cost ratio of less than one should generally not proceed. The advantage of this method is its simplicity. Using the BCR to rank projects can lead to suboptimal decisions as a project with a slightly higher BCR ratio will be selected over a project with a lower BCR even though the latter project has the capacity to generate much greater economic benefits because it has a higher NPV value and involves greater scale.

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Benefit-Cost Ratio The benefit-cost ratio is a ratio calculated by dividing the sum of discounted benefits by discounted costs. Steps for calculating the benefit-cost ratio are: Benefit – Cost Ratio = Sum of Discounted Benefits Sum of Discounted Costs Step 1. Estimate the cash inflows and outflows on a year-to-year basis Step 2. Find out for individual years the discount value of 1 at the given discount rate. Step 3. Multiply the cash inflows and cash outflows for each year by the corresponding

discount factor. Step 4 Add up the discounted values of cash inflows and outflows separately. Step 5. Divide the discounted values of cash inflows by cash outflows to obtain the benefit-cost ratio. 3.5 Sensitivity analysis An important feature of a comprehensive CBA is the inclusion of a risk assessment. The use of sensitivity analysis allows users of the CBA methodology to challenge the robustness of the results to changes in the assumptions made (i.e. discount rate, time horizon, estimated value of costs and benefits, etc). In doing so, it is possible to identify those parameters and assumptions to which the outcome of the analysis is most sensitive and therefore, allows the user to determine which assumptions and parameters may need to be re-examined and clarified. Sensitivity analysis is the process of establishing the outcomes of the cost benefit analysis which is sensitive to the assumed values used in the analysis. This form of analysis should also be part of the appraisal for large projects. If an option is very sensitive to variations in a particular variable (e.g. passenger demand), then it should probably not be undertaken. If the relative merits of options change with the assumed values of variables, those values should be examined to see whether they can be made more reliable. It can be useful to attach probabilities to a range of values to help pick the best option. Sensitivity analysis requires a degree of exploratory analysis to ascertain the most sensitive variables and should lead to a risk management strategy involving risk mitigation measures to ensure the most pessimistic values for key variables do not materialise or can be managed appropriately if they do materialise. It is important to take into account the level of disaggregation of project inputs and benefits – sensitivity analysis based on a mix of highly aggregated and disaggregated variables may be misleading. 3.6 Scenario analysis The scenario analysis technique is related to sensitivity analysis. Whereas the sensitivity analysis is based on a variable by variable approach, scenario analysis recognises that the various factors impacting upon the stream of costs and benefits are inter-independent. In other words, this approach assumes that that altering individual variables whilst holding the remainder constant is unrealistic (i.e. for a tourism project, it is unlikely that ticket sales and café-souvenir sales are independent). Rather, scenario analysis uses a range of scenarios (or

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variations on the option under examination) where all of the various factors can be reviewed and adjusted within a consistent framework. A number of scenarios are formulated – best case, worst case, etc – and for each scenario identified, a range of potential values is assigned for each cost and benefit variable. When formulating these scenarios, it is important that appropriate consideration is given to the sources of uncertainty about the future (i.e. technical, political, etc). Once the values within each scenario have been reviewed, the NPV of each scenario can then be recalculated. 3.6.1 Using Excel to Determine NPV and IRR Excel contains a number of built-in financial functions. Two of these, NPV and IRR, help you calculate the value of a proposed capital budgeting investment. The time value of money calculations are integrated with NPV and IRR in Excel. 3.6.2 Setting up the Spreadsheet with the Cash Flows We will consider the following example to walk through the process of using Excel for capital budgeting problems: Spec, Inc. is considering the purchase of a machine that costs 60,000 with an estimated salvage value of 12,000. Operating cash flows are estimated to be 15,000 in year 1, 18,000 in year 2 and 21,000 in year 3. The company's cost of capital is 6.22% and its required rate of return is 8.50%. Enter the cash flows in an Excel worksheet in the following format:

Year 0 Year 1 Year 2 Year 3

Operating Cash Flows

15000 18000 21000

Investing Cash Flows 60000

12000

Total Cash Flows 60000 15000 18000 33000

The format of the cash flows in Excel looks a little different than those shown on a time line. Year 0 is the date the machine is anticipated to be purchased. It is also the beginning of the machine's useful life, the beginning of year 1, because it will start producing income at that point. There is exactly one year of time between year 0 and year 1, and between each of the other years listed. Recall in an earlier chapter that the operating cash flows are expected to occur at the end of the particular year of operations. While four columns appear with amounts in them, the time span is for the useful life, a period of three years. While you can directly type the cash flow amounts into the NPV and IRR wizards, you will find the format above streamlines the process when you need to calculate both NPV and IRR for the same data. A table such as the one above allows to enter the cash flow amounts only once and then cell reference the amounts in the wizard. 3.6.3 NPV in Excel Open a blank worksheet in Excel. From Excel's menu, choose Formulas, then choose Insert Function to display the Function Wizard. Alternatively, you can click the fx icon from the formula bar.2.

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The Insert Function wizard will appear as shown below. Type the label, NPV in the search field. Select NPV from the list displayed.

Click OK to display the Function Arguments Wizard. The wizard displays three fields as shown in the graphic below--rate, value1, and value2. As you move your cell pointer from field to field, the description of the data to be entered into each field appears in the gray area below the fields

. Place the cell pointer in the Rate field and type the required rate of return in a percentage or decimal format. For example, 8.25% should be entered as 8.50% (including the decimal sign) or as a decimal, 0.085. Note this is a different format than the input in the BAII plus calculator.

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To cell reference to the respective cash flows, place the cell pointer in the Value1 field. Hold down the left mouse button, and select cells C6 to E6. It much quicker to cell reference the range of cells which contains the cash flows. One word of caution here: Do NOT cell reference the initial cost (B6) into the wizard. Money paid out today has no interest cost, so we do not discount the year zero cash flow.

Press OK and Excel will display the amount of the present value of all the cash inflows as 55,233.The NPV formula is displayed in the formula bar as: =NPV(0.085,C6:E6) Only the cash flows which occur at the ends of years 1, 2, and 3 are calculated in the function. Because no discounting is applied to money paid out at year 0, we can simply combine the initial cash outflow with the present value of the future cash flows. To calculate the net present value, you must subtract the 60,000 acquisition cost. Because the 60,000 is displayed in cell B6 as a negative (as a cash outflow), you must add the negative amount. To do this, click your cell pointer at the end of the NPV formula in the formula bar, and type + and the cell reference of the year 0 cash flow amount. This will add the negative cash outflow that appears in cell A2 to the positive present value amount of 55.233. =NPV(0.085,C6:E6)+B6 The NPV is (4,767). Common practice is to display amounts to the nearest whole dollar (unless the amount is a unit amount or percentage which require two decimals.) Because the NPV is a negative amount, it tells you that the investment earns less than the company's required rate of return. 3.6.4 IRR in Excel Use the same worksheet and the same cash flows as you did for NPV. Click Insert, then choose Function to display the Function Wizard. Type IRR in the search field. Select IRR from the list displayed. Click OK to display the Wizard. The Wizard displays 2 fields--Values and Guess.2.

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You will cell reference ALL the cash flows, including the cost from the Values field by holding down the left mouse button and selecting cells B6 to E6. Leave the Guess field blank. For most capital budgeting approaches, you may omit the Guess field. When Excel calculates IRR, it does so by trial and error beginning with 10 percent. If trial and error runs more than about 40 seconds and Excel has not found the correct return, it will time out. A 'guess' would give Excel a different percentage to begin with to avoid time outs. You will not see any situations which create time outs in this course. Click OK and Excel displays the answer as 4.31%. Be sure to format the cell as a percentage with two decimal places. If your answer appears as 0, you likely have a cell formatting error. Since 4.31% is less than the company's required rate of return of 10.3%, you should reject the proposed investment since it will earn less than the company desires as its minimum return.

Remember that it is always better to get money as soon as possible because you can invest it and earn interest on it. 3.6.5 Cost assessment A detailed estimate of the capital and operating and maintenance costs (either both or one of these depending on the type of project) needs to be carried out.

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The capital (Capex) cost assessment will be based on the components of the preliminary technical design. The Advisor would base the estimate on prevailing market costs, recent costs for similar work and materials, and their own estimates. Detailed operating and maintenance (Opex) cost estimates would be based on a schedule of activities over the lifetime of the project assets. The type and timing of maintenance will vary depending on the type of project (eg, A water sector project would have different maintenance requirements to a roads project). Operating costs would include an estimate of labour requirements. 3.6.6 Financial viability and PPP due diligence In this stage a quantitative analysis of the financial feasibility of the project using the most promising PPP modal option or options is carried out. This stage also allows an assessment of likely VGF or other public-sector financial assistance requirements (eg IIFCL or state-level PPP finance vehicles). This financial analysis is an important part of the “due diligence” that should be carried out on the PPP project. Although the entire PPP process should be conducted with due diligence it is worth emphasising it at this critical stage. The financial analysis will use information gained from the demand forecasts, technical feasibility, and cost estimates, and will reflect the PPP mode that has been chosen. It should include demand and cost scenarios. A typical structure and information flows in a financial model is shown in the figure and described more below.

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3.6.7 Typical structure and flows in a financial model

A detailed financial analysis model would usually need to be tailored to the particular characteristics of the project. This would be done by transaction advisors unless the Sponsor has this specialist expertise in-house. The inputs to the detailed financial analysis would include the following:

• The life-cycle costs of the project and their timing. These include the estimated capital costs and operating and maintenance (O&M) costs identified in the cost assessment and a depreciation schedule for physical assets

• Revenue options and the associated forecast revenue stream. This will include tariffs (where user-charges are possible), and secondary revenue sources from the project.

• Forecast demand including scenario ranges from the feasibility study • Assumed capital structure (debt - equity mix) of private sector investment vehicle • Debt and repayment schedule • The discount rates for the public sector and private investor consistent with the capital

structure and allocation of project risks • Project specifications (investment timing, lifetime etc)

Sensitivity ranges on assumptions, designed to encourage a careful consideration of probable outcomes and reduce optimism bias. The outputs of the model would include:

• Expected returns from the project illustrated by the NPV, IRR (see below).

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• An assessment of subsidy or viability gap funding requirements where there is a viability gap between the revenue requirement and the revenues that can be raised from users

• Summary financial information including ratio analysis Together these outputs will provide a quantitative assessment of the financial viability of the PPP. The scenario analysis may include different risk allocations and even variations in the PPP mode. This means there can be feedback between this analysis and the risk allocation. 3.6.8 Cost of capital An especially important input to present value analysis is the ‘discount rate’ (or required rate of return) to use. Separate analyses should be applied using different discount rates:.

• In the first analysis, a realistic assessment of commercial discount rate should be used. This will determine what a commercial investor would require in order to invest.

• The second analysis would use the government’s own cost of funds. This may be lower than that applied for private sector investors, particularly at the Central level. However, it is not always the case that the public sector is able to borrow more cheaply than the private sector. State or local governments in particular may face higher rates depending on their credit rating. The appropriate rate should be reflected in the analysis. Click here for a brief explanation of discount rates. The toolkit's PPP Financial Viability Indicator model can be used to carry out a more simplified analysis of the key questions of financial viability and to test these using ‘what-if?’ scenarios. 3.6.9 Economic feasibility A feasibility study may also include an economic analysis of the project. The purpose of economic analysis is to determine whether there is an economic case for the investment decision. This assessment goes beyond the items typically included in a financial analysis. Economic feasibility is interested in:

• the economic benefits from the project • the economic costs of the project • the balance of these expressed in present value terms (the net economic benefit)

Economic costs and benefits are not always the same as financial cost and benefits. Economic analysis includes project impacts that do not have a market price and positive and negative impacts that are experienced by people who are not the direct users of the services. It is in this way that economic analysis casts a broader net than a financial assessment. Accounting tools such as depreciation and capital charges should not be included in an economic analysis. 3.6.10 Benefits and costs included in an economic assessment include:

• Market valuations of the inputs (land, materials, labour etc) to the project, adjusted for any distortions in the market (such as taxes or subsidies)

• The valuation placed on the services by the users. ie, how much would users be willing to pay for the benefit they would receive from the service. This is not necessarily the same as what they would actually be charged

• Secondary or spill-over costs and benefits that have an impact beyond the project itself (sometimes called externalities), for example

o Impacts from the project on the broader economy o Valuations of non-market factors from the social and environmental assessment (social and

environmental externalities)

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The impacts that would need to be considered will vary depending on the nature of the project and the sector. For example, a highways, roads or public transport project will provide direct benefits to the users of the infrastructure or services provided, but will also provide benefits to other road users if congestion on existing roads is reduced. Another example of secondary economic impacts is flow-on effects to the efficiency of the economy as a result of improved infrastructure. Negative environmental externalities from a road project would include increased local pollution along the corridor. However, this should be assessed in the context of positive effects such as improved vehicle running efficiency due to eased congestion. The results of the market analysis and scope, technical, social and environmental feasibility, financial cost assessments, and risk analyses are all inputs to the economic feasibility. They should provide a set of scenarios (sensitivity ranges on the values assumed in the analysis) that can be tested as part of the economic feasibility in order to get an idea of potential variation in the outcome. Specialist advisors would usually be a part of the team engaged to carry out the feasibility. 3.7.0 Measurement of non-market benefits and costs Where some benefits and costs from the project do not have an observable monetary value (eg a market price) a full quantitative analysis would require a monetary value to be estimated. The advisor or analyst who is conducting the economic feasibility study would need to propose and justify the valuation. This should be based on a strong and defensible methodology as the valuation of non-monetary benefits and costs can be very subjective. 3.7.1 Comparison against the next-best alternative investment option Part of an economic case for a PPP investment will be an assessment of the next best alternative investment or expenditure to achieve a similar result. This is used as a benchmark for setting a minimum value of the output from the investment. Definition and valuation of the next best alternative must be proposed and justified by the analyst or advisor. Decision criteria: NPV and EIRR The final output of the economic feasibility assessment will include the Net Present Value (NPV) of the project’s economic costs and benefits. This captures the value today of the costs and benefits that occur over the life of the project. It has the benefit of summarising a lifetime of values into a single figure and allowing easy comparison of value between different projects. Comparisons of the NPVs of different projects are assessed using the same discount rate (required rate of return). An economic internal rate of return (EIRR) is commonly also calculated, which is a similar decision factor to the financial IRR. The EIRR indicates the rate of return at which the present value of the economic costs and benefits of the project are equal. In other words, it is the discount rate for which the net present value is zero. The EIRR should be compared with the socially required rate of return. Projects that are found to have an EIRR that is higher than the socially required rate of return would be said to be economic investments. These may then proceed for detailed analysis of their viability as PPPs. The NPV and EIRR give different sorts of information about a project. The NPV provides a decision criterion on whether the project should proceed at all (in general a project with a negative NPV should not be pursued) and also allows direct comparison of actual value between projects. On the other hand, the EIRR is better suited to being a decision

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criterion only. By allowing a project to be compared against a required rate of return it gives a yes or no answer about whether it is economic. However, the EIRR alone does not give enough information to say whether one project should be pursued ahead of another. This is a value comparison and the NPV should be used. 3.7.2 A Note on problems that can arise with the EIRR and IRR criteria Multiple IRRs are possible for a project whose net benefits change sign more than once over the payment stream. In this case the IRR loses its meaning. The IRR is also not the appropriate indicator for deciding between mutually exclusive projects. This is a situation in which only one of the alternatives can be chosen and once it is selected the other project is no longer possible (for example, if it is a choice between two projects that would use the same site). It is possible for one of the projects to have a higher IRR while the other project has a higher NPV. Since NPV is a measure of value (for a given rate of return) it is the appropriate decision criterion in this case. The higher NPV project should be selected over the higher IRR project. Comparable models To determine which procurement choice is best for a project, a comparative assessment has to be made between delivering the sae service (to the identical output specification) as a conventional public sector procurement or as a PPP. A risk–adjusted public sector comparator(PSC) model and PPP reference model must therefore be constructed for the chosen solution option. These provide costing of each procurement option in the form of a discounted cash flow model adjusted for risk. A PSC model is a costing of a project with specified outputs with the public sector as the supplier. Costs are based on recent, actual costs of a similar project, or best estimates. A PPP reference model is a costing, from first principles, of a project with the identical specified outputs with the private sector as supplier. Comparing the two models enables an institution to assess whether service delivery by the government or by a private party yields the best value for the institution. The three criteria are affordability, risk transfer and value for money. Risk Risk is inherent in every project. Conventional public sector procurement has tended not to take risk into account adequately, often resulting in unbudgeted cost overruns. In a PPP, the risks inherent in the project are managed and costed differently by the private party. The treatment of risk in the project is a key aspect of the value assessment. Affordability and Value for Money Affordability is whether the cost of the project over the whole project term can be accommodated in the institution’s budget, given its existing commitments. Value for money means that the provision of a institutional function by a private party results in a net benefits to the institution, defined in terms of cost, price, quality, quantity, or a risk transfer, or a combination of these. Value for money is a necessary condition for PPP procurement, but not a sufficient one. Affordability is the driving constraint in PPP projects.

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Demonstrating affordability As a preliminary analysis of affordability, the risk –adjusted PSC model is compared with the institutions budget. Then the risk-adjusted PPP reference model is compared with the institution’s budget. If the project is not affordable, the institution may modify the output specifications or may have no abandon the project. The value- for –money test The value for money test is only conducted as part of TA:II when actual private bids are submitted. But an initial indication of whether conventional public sector procurement or a PPP will provide value for money is a requirement for TA:I. The risk-adjusted PSC model provides the benchmark for value for money when compared with the PPP reference model in this feasibility study phase, and when compared with the private bids in the procurement phase.

3.7.3 Part 1: CONSTRUCT THE BASE PSC MODEL What is the base PSC model? The base PSC model represents the full costs to the institution of delivering the required service a according to the specified outputs via the preferred solution option using conventional public sector procurement. The base PSC costing includes all capital and operating costs associated with the project. The public sector does not usually cost these risks, but it is necessary to get this understanding of the full costs to government of the proposed project. Key Characteristics of the PSC model

• Expressed as the net present value (NPV) of a projected cash flow based on the appropriate discount rate for the public sector

• Based o the costs for the most recent, similar, public sector project, or a best estimate • Costs expressed as nominal costs • Depreciation not included, as it a cash flow modle.

The central functions of the PSC model

• Promotes full cost pricing at an early stage • Is a key management tool during the procurement process, assisting the institution to stay

focused on the output specification, costs and risk allocation • Is a reliable way of demonstrating the projects affordability • Provides an initial indication of value for money • Is a consistent benchmark and evaluation tool • Encourages bidding competition by creating confidence in the financial robustness and

integrity of the feasibility process • Is sufficiently robust that the service could be procured conventionally if, at any stage, the

PPP fails to show value for money 3.7.4 Construct the base PSC model Step 1: provide a technical definition of the project Step 2: calculate direct costs Step 3: calculate indirect costs

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Step 4: calculate any revenue Step 5: explain all assumptions used in the construction of the model Step 6: construct the base PSC model and describe its results Step 2: calculate direct costs Direct costs are those can allocate to a particular service. These costs must be based on the most recent public sector project to deliver similar infrastructure or services (including ay foreseeable efficiencies, for examples, regular life-cycle maintenance),or a best estimate where there is no recent comparable public sector project. If there is no comparable project in South Africa, draw on the experience of projects in similar environments in other countries. 3.7.5 Case Study: APPRAISAL OF A TOWN LEVEL WATER SUPPLY PROJECT Pricing and cost recovery in water supply projects has become almost unworkable for the small and medium towns due various reasons. Irregular supply, enormous maintenance and high energy costs, inadequate water treatment, poor recovery, inadequate pricing of water supply to consumers, provision of underground drainage, sewage treatment are some the intricate reasons for not providing minimum supply of water as per the normative standards. Water Supply project implemented by Tiruppur Area Development Corporation, JUSCO and a few city corporations have become sustainable and income generative. Increased efficiency and full cost recovery by billing, metering, technical designs, automation of metering, etc. would help. Billing system covering variable charges for economically weaker sections, commercial, high income groups etc., need to be adopted suitably. Appropriate service providers like SPV could be used. Therefore, a small example of how a town level water supply project can be remunerative even with minimum pricing is illustrated below; Minimum Data

1. PROJECT: Supply of Water to a residents of a town consisting of 10,000 houses 2. Capital Expenditure : Rs. 7 crores 3. Cost of Capital : 10% 4. Operations and maintenance Rs. 25 lakhs per annum 5. Average revenue from each house hold Rs. 150 per month or Rs1.8 crore/year 6. Life of the project: 10 years

With the above data available with us, we can now work out Net Present Values, Benefit Cost Ratio and IRR based on the incomes and expenditure over the period of 10 years as below 3.7.6 Analysis of Net Cost Benefit of the Water Supply Project

Years

Particulars 1 2 3 4 5 6 7 8 9 10 Total

Incremental Revenue (Rs in Crores)

1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8

Incremental cost (Rs in Crores)

0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25

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Net cash flow (Rs in Crores)

1.55 1.55 1.55 1.55 1.55 1.55 1.55 1.55 1.55 1.55

PVIF at 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386

PV of cash flows at 10%

1.41 1.28 1.16 1.06 0.96 0.87 0.80 0.72 0.66 0.60 9.62

PVIF at 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162

PV of cash flows at 20%

1.29 1.08 0.90 0.75 0.62 0.52 0.43 0.36 0.30 0.25 6.5

BCR at 10%=9.62/7=1.37 IRR -10%+(20-10)X(9.62-7)/ (9.62-6.5) IRR-18.40% Return on investment=18.4%-10%= 8.4%

3.7.7 Project Appraisal Report The appraisal of a project would provide the project authorities the following information for taking decision;

I. Does it meet the immediate and long-term objectives? II. How does the project compare with other competing projects?

Project appraisal leads to overall assessment of the project’s chances for success based on the findings of the feasibility analysis. It seeks to establish what will occur, who will gain and lose, when the project’s impacts will occur and the efficiency of the project investments in relation to the benefits derived. The form of the project appraisal process depends on a variety of factors, such as the scale and complexity of the given project, the nature of the organization involved, the availability of professional staff, the importance attached to non-economic factors and so forth. A project appraisal report should cover the following topics.

1. Description of the project proposal and its objectives; 2. Description of the current baseline conditions. 3. Economic and financial appraisal 4. Socio-cultural assessment 5. Environmental assessment 6. Overall assessment of the project proposal (findings of the project appraisal process) 7. Conclusions and recommendations 8. Preliminary framework for project monitoring and evaluation.

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3.8.0 Appraisal of Projects in General

Appraisal -Technical Appraisal to determine whether the technical parameters are soundly conceived, realistic and technically feasible. -Financial Appraisal to determine whether the financial costs and returns are properly estimated and whether the project is financially viable -Institutional Appraisal to determine whether the implementing agencies are capable for effective implementation, monitoring, and evaluation of the scheme. -Environmental appraisal to see any detrimental environmental impacts and how to minimise the impacts.

Legal Appraisal -Legal documentation

Financial Appraisal 1. Loans/Grants 2. Own Sources 3. Subsidies 4. Capital investment 5. O&M investment 6. Cost-Benefit analysis 7. Cost Recovery Mechanism 8. Repayment of Loans

Technical Appraisal -Feasibility -Specifications -technology options -quality and durability -standards -designs etc

Social Appraisal (Social cost and benefits, target group

Project Execution -Tendering -contractor -Schedule -Target -Procurement of materials/equipment - performance - payments - likely hurdles - scope etc

Project Evaluation Documentation Project study Project performance

Monitoring and supervision -Progress reports -Site Inspection -Cost and Time Control -Deviations -Completion Reports

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3.8.1 Checklist :Financial Appraisal of a Infrastructure Development Project- Corrective Actions-Flow chart

Cost of Depreciation

Any other Costs

Financial Appraisal

Total Cost of the Project/Investment

O & M Costs

Remunerative Project Component

Total Costs

Benefits/Returns from Remunerative Projects

Premiums/ Deposits from renting/leasing of commercial shopping/ centres

Income from sale of Sites and services Project

Renting or Leasing of New Bus Stand/Park etc

Any other Incomes from the remunerative project

Incomes over the next 25 years

Cash Flow Analysis for 25 Years

Calculation of NPV/IRR/CBR- Decision to select the project

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3.8.2 TEMPLATE (Indicative) Project Appraisal

Sl No. Name of the Project

1

Need for the Project

2 project proposal and its objectives;

Proposal Objectives

3 Immediate and long-term benefits?

Immediate objectives Long term objectives

4 Description of the current baseline conditions. What would happen in the absence of project? Study Area/Location Environmental Impact Beneficiaries Social costs Legal issues Demand Other Constraints Favourable conditions Etc.

5 Project comparison with other competing projects?

Eg. Alternative options: based on feasibility analysis

6 Economic and financial appraisal • Total Cost • O& M Expenditure • Opportunity costs • Other costs • Returns on Investment

over project life • NPV • CBR • IRR • Medium and Long

term benefits • Financial viability • Recovery of costs

7 Institutional Appraisal Eg. Capability in terms of expertise, personnel, skills, worth, past experience etc.,

8 Legal Assessment Eg. Land, title deed, clearances, NOC etc.

9 Technical appraisal 1. Technology used & Type of equipments & Suitability conditions

2. Hardware, software, Skills, Knowledge, personnel etc.

3. How realistic is the

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implementation schedule 4. Labour intensive method

or others 5. Cost estimates of

Engineering Data 6. Etc.

10 Socio-cultural assessment Social benefits, community development etc.

11 Environmental assessment Environmental impact, benefits, hazards, risks, clearances etc.

12 Overall assessment of the project proposal (findings of the project appraisal process)

13 Conclusions and recommendations

14 Preliminary framework for project monitoring and evaluation.

15 Remarks if any

3.8.3 Questions :

1. List type of appraisal are PPP projects ? 2. Explain the steps to calculate NPV, IRR and BCR ? 3. Discuss the sensitivity analysis, scenario analysis in PPP projects ? 4. How do you take decision based on NPV, IRR and BCR to judge viability? 5. How do you assess economic feasibility & EIRR ? 6. How do you construct the base PSC model? 7. What are contents of appraisal report of project?

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CHAPTER 4

FEASIBILITY ANALYSIS & PPP PLAN

4.1.0 Introduction It is essential to examine the most critical aspects of the project before making commitments on investment. Thus, it is worth spending a small amount of money on an exercise called pre-investment study/formulation. This cost may vary depending on the size of the project. However, during this process, based on the analytical study of the data and other information collected, enables the project sponsoring organization/Department to stop further expenditure at any stage of investigation when the data indicate unfavorable trends. Today’s projects especially in the urban development sector are focused on achieving specific social & economic development objectives. Although, problems galore in all types of projects, it is now increasingly noticed that development projects generated by the local governments, public agencies and Government departments have been faced with unclear output in terms of quality and quantity. The Project Formulation exercise is done with a view to;

1. Understand various dimensions of the project from a very broad angle

2. Facilitate the project authorities to take a decision as to whether it is going to be beneficial for the organization to conduct a detailed feasibility study or not. Otherwise the project idea may be dropped at this stage without proceeding or probing any further.

3. A well formulated project is the one which presents a very unbiased picture of the project idea in more clear-cut terms with regard to all the above factors.

4. The project authorities should use the information generated through the formulation

exercise to identify the deficiencies and gaps and take remedial measures ahead of time.

5. Projects leading to loss in terms of money, time and desired output need immediate

attention. 6. Pre-investment study and investment decision in any project in the government

should become the important function. 7. Preparation of detailed feasibility report should be undertaken only when there are

evidence of number of positive indicators to go for the project. 8. During the pre-investment study, technical assessment, economic appraisal, input

analysis, project design, cost analysis is done to assess whether the inputs that are required for the project implementation are available. Such inputs are identified & quantified so that it becomes an important input for the cost-benefit analysis of the project.

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9. The project has also to be assessed from the point of view of social benefits. Most of the urban development projects are aimed to achieve direct and indirect social benefits. For example, a water supply project for a town has direct benefits such as supplying the required quantity of safe water to the house-holds. At the same time, it has indirect benefits such as reducing the water borne diseases, health improvement of the people, increased work out-put because of improved health etc.

4.1.1 Preparation of PPP Plan The approach to preparation of PPP Plan starts with analysis and selection from the set of possible projects identified in the sector. The PPP process for individual projects begins from this stage. Selected projects that might become PPPs should be analysed for their quality as a project and checked for their suitability to being developed as a PPP:

• Project pre-feasibility analysis • PPP suitability checks

Pre-feasibility analysis is a necessary stage in the evaluation of an individual PPP project. Suitability checks are made to ensure that supporting environment for the project exists and aspects such as legal, institutional and market capacity are well-defined. The purpose is to weed out poorly suited projects early, before more resources are used on developing them as PPPs. For the purpose of suitability checks, the Toolkit developed by the Department of Economic Affairs, Government of India should be utilized. The PPP Plan will have to be prepared preferably for every district in the state integrating all sector-wise projects and the process involves the following basic steps and institutions;

• PPP Cell in the Department of Infrastructure Development at the State Level and District PPP committees will initiate the process of identification of projects in consultation with respective departments, ULBs, PRIs and public agencies.

• A comprehensive survey of need based projects which could be taken up on PPP mode in each district and sector. Take the advice of experts from Government and Private Sector(transaction Advisors) to develop PPP projects.

• An annual PPP plan of each department/ULB/PRI/Public Agency need to be prepared by identifying shelf of projects under each applicable sector as mentioned in the Karnataka Infrastructure Policy 2007. This will done by the PPP Cell in coordination with district committee and experts from Government and Private.

• To prepare a shelf of projects to be offered for PPP and take them forward with assistance of the owner departments through a transparent selection process.

• Screen out projects that cannot be taken up on PPP mode where the Government alone can directly invest, especially in backward regions and which are purely social service oriented.

• Each Department is to prepare a PPP Plan with a Nodal Officer to look after the PPP projects & to coordinate with State PPP Cell.

• Each Dept, in association with State PPP Cell, has to identify, conceptualize & structure probable PPP projects and prepare a concept note including the need & benefits of doing under PPP mode, its main features, VFM (Value for Money) test etc.

• All projects should normally be tested for PPP amenability – for fully state funded projects.

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• The shelf of probable PPP projects is to be placed before the State PPP Cell & State level committee.

• Conduct feasibility analysis and after ascertaining the feasibility and viability, prepare DPR, concessions required, land requirement of VGF, types of State support, VFM analysis.

• To leverage State and Central Govt. funds to support Private investment and to create a conducive environment to utilize the efficiencies, innovativeness and flexibility of Private Sector to provide better infrastructure and service at an optimal cost.

• Setting up of a transparent, consistent, efficient administrative mechanism to create a level playing field for all participants and protect interest of all stakeholders.

• Putting in place an effective and efficient institutional mechanism for speedy clearance of the projects.

• Provide necessary risk sharing framework in the project structure so as to assign risks to the entity most suited to manage them.

• Facilitate capacity building & training of officials through ATI Mysore, iDeck, IDD and other Agencies

• Putting in place an appropriate and robust regulatory / grievance redressal mechanism. • Provision for contingency of failure & abandoning should be made at the

conceptualization/ Project report stage.

4.1.2 Critical Success factors • Favorable Karnataka State Infrastructure policy & frame work • Consensus and political support • Cost recovery & Risk sharing between public and private sector

Some other critical issues:

• The value for money assessment takes into consideration the costs over the life cycle of a project;

• The value for money assessment takes into consideration the risk allocation and focuses on the impact of the risk transfer on the costs to the government or society

• The value for money assessment is based on the principles of discounting i.e it present a net present value of all future cash flows taking into account that future cash flows are less attractive than current cash flows as reflected by the use of a discount rate;

• The value for money assessment. Upon review of bids the value for money assessment is to be updated based on the actual bids.

• Choice of the tender strategy, most notably competitive bidding versus direct negotiations or unsolicited proposals;

• Nature of the tender strategy, in particular the difference between value for money driven tender procedures versus accelerating investments driven tender procedures.

• The coherence of the contract, most specifically the relation between risk allocation specifications and payment mechanism

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4.1.3 Illustration on Identification of PPP Projects for School Education

Policy Outcome Output No child left out Availability of 1 school for

every 20,000 population About 250 schools to be constructed

Free Education for girl child Girl child to be educated free up to 10th class

Fund for offsetting cost of education of girls

Flexible timings for schools for wide outreach

Schools with adaptive timings & Curriculum in order to allow flexibility to girls to study

3-shift policy introduced in schools

No girl left out More schools for girls 33% of schools for girls Retaining and Enhancing GER especially for girls

Primary GER improved to by 10 percentage points every year, 15 PP for girls

Incentivizing retention of students, especially girls

Ensuring adults are educated Adult education to be enhanced

Increasing the number of adult education centres

All schools to be housed in permanent buildings

Decrease in percentage of school without building by 5 % per annum

Increase the construction of schools

4.1.4 PPP Planning Approach & Shelf of Projects

The PPP life cycle refers to the process of conceptualizing a PPP all the way through the termination of a PPP. As such this process includes the following phases;

a. Identification and Organization b. Feasibility and viability c. Analyse and Structure d. Tender and Contracting e. Implementation and Monitoring

Further at the department/agency level, each of the service/work/project being considered for PPP mode need to go through the following stages. • Unbundling/Bundling of Services • Needs Assessment of services to be taken up under PPP and Government • Identify parts amenable to PPP • Select Mode of Privatization - Divestiture assets/Rights are Sold or Transferred for BOT, BOO, BOOT etc.)

• Contracting Out • Financing • Deregulation • Invite Bids

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• Assess the Bidding • Selection of Bids • Preparation of Contract • Award of Contract • Monitoring, Evaluation and Impact Assessment

Once a PPP project is conceived and identified, the key questions that need to be addressed are; 1. Is the project desirable ? 2. Is a PPP achievable ? 3. Is a PPP likely to be attractive ? 4. Does the projects fit within the respective sector policy i.e does the project serves a

purpose & objectives of the sector policy. 5. Does the project has political support 6. Is the project adequately justified i.e. is there a clear rationale for the project 7. Is the possible PPP legally viably i.e. are there no legal impediments to a PPP e.g. is

private participation allowed, is it allowed to charge users and so on; 8. Is the project affordable i.e is there a fall back option should the PPP appear not to be

financially viable or require some level of fiscal support ; 9. Is there sufficient market appetite for the project to ensure an adequate level of

competition for the purpose of competitive pricing? The market appetite is defined by the respective market for infrastructure development the key characteristics of the project most notably ts risk profile and the PPP readiness of the respective constituency ;

The attractiveness of the PPP is defined by the following elements ; 1. Is there the possibility to transfer risks in order to enable the private sector to deliver

value for money ; 2. Is there the possibility to define the specifications in output terms to allow innovative

solutions and consequent value for money ; 3. Does the project have sufficient scale and profit potential to offset the transaction cost,

for both the public sector and the private sector which are commonly higher for PPP than for conventional procurement ;

4. Is there sufficient time for project preparation and the tender and contracting procedures, which may be in the rage of 6 months to 2 years and which are commonly more lengthier than upon conventional procurement ;

5. Is there the possibility to optimize life cycle costing or are the life cycle costs predominantly capital expenditures ;

6. Are there any issues with regard to employee rights or is there the possibility to transfer the operating responsibilities without endangering employee rights.

If a project is assessed as a suitable PPP by the decision maker, the next step is to establish a project environment. The project environment normally includes the following element :

1. Steering Committee comprised of the major public stakeholders to ensure coordination and commitment and with the responsibility to guide the project development and approve the key features proposed;

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2. Project Manager who is to be a seasoned expert in PPP and experienced project manager. The project Manager is to manage the project team and to act as the linking pin between the Project Team and the Steering Committee and the Project manager is the face of the project.

3. Project Team , which is normally to a large extent comprised of transaction advisors and other relevant advisors complemented by some internal staff to ensure alignment with internal procedures and policies.

The senior decision maker should allocate sufficient resources for the establishment of the project environment, possibility supported with financial support from the India Infrastructure Development Fund for which guidelines are available, and should communicate regularly with the members of the Steering Committee and the Project manager. One the project is assessed as suitable and the project environment is in place, he next step is to analyse and structure the PPP. This includes predominantly the following elements ;

1. Design of an appropriate risk allocation framework; 2. Appraisal for an economic, financial, social and environmental perspective to ensure that

the project meets all the respective requirements; 3. Design of an appropriate fiscal support package if necessary to ensure a suitable and

bankable financing structure ; 4. Assessment of the possible value for money from applying PPP in comparison with

conventional procurement. If the outcome of the financial analysis is that the project is not self sustainable, the decision maker need to decide on how to support the bankability of the project i.e. the fiscal support package. There are various options in this respect, most notably:

1. The use of guarantees, which in essence implies a revision of the risk allocation and which will reduce the project risk profile and consequently the required rates of return from the capital providers which are a function of the risk the respective capital providers are taking; in principle, the government would like to avoid guarantees.

2. The use of grants in order to reduce the private financing requirements. Govt. of India and some State Governments have the scheme of Viability Gap Fund which allows for a grant up to 20% of the capital expenditures;

3. The use of in-kind contribution e.g. Land would reduce the private financing requirements;

4. The use of debt facilities, most notably long-term debt, which is relatively scarce in the private financial sector. In india, this facility is provided by the state-owned India Infrastructure Finance Company Ltd.,

5. The use of risk-capital facilities, i.e, the public sector taking an equity stake in the project company. This option is to be considered with due care as it implies that the government will have not less than 3 roles: Contracting authority, regulatory authority and shareholders. These roles all have conflicting interest.

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4.1.5 PPP Toolkit of GoI The Government of India has developed PPP Toolkit a web-based resource that has been designed to help improve decision-making for infrastructure PPPs in India and to improve the quality of the PPPs that are developed. The Toolkit is for use by PPP practitioners across India in both the public and private sectors. It has been designed with a focus on helping decision-making by Project Officers at the Central, State and Municipal levels. Other users, including PPP practitioners in the private sectors, will also find the material useful. 4.1.6 PPP process:

• Phase 1: PPP identification, covering strategic planning, project pre-feasibility analysis, PPP suitability checks, and internal clearance to proceed with PPP development

• Phase 2: Full feasibility, PPP preparation and project clearance, covering project appraisal including a full feasibility study, PPP preparation including draft documents, and in-principle clearance

• Phase 3: PPP procurement, covering procurement, final drafts of bidding documents, final approval and project award

• Phase 4: PPP contract management and monitoring, covering project implementation and monitoring over the life of the PPP

The PPP process

Phase 1 takes place before projects are allowed to enter to the development pipeline. The purpose of Phase 1 is to ensure a quality pipeline of PPPs. This is a very important Phase. Projects that are in Phase 2 or Phase 3 are in the ‘PPP development pipeline’. This means they are under detailed study, development and (if they are good enough) procurement as a PPP. Projects that are successfully developed through to award of a contract to a private bidder then enter the operations Phase, covered in Phase 4. In most cases Phase 4 is the longest Phase in the

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life of a PPP. This Phase is focused on monitoring the terms of the contract to ensure that the infrastructure services are delivered to the agreed standard. For a PPP to be successful the Sponsoring Authority must remain engaged with the project throughout its operating life. The toolkit includes a series of Readiness Checks at key points in the PPP process. At each of these checks the project must prove that it is ready to continue to further development as a PPP. If a project is not ready it must either be improved or it should exit the process altogether to make way for a higher quality project. For this reason, a project is called a ‘potential PPP’ until it has been given final approval by the relevant Authority in Phase 3. A set of tools has been developed to assist the analysis and decision making of potential PPPs. These tools are used at several stages in the PPP process. The tools are: • PPP family indicator tool, to show typical options for PPP mode in the sector, and to give a

starting indication of which PPP ‘family’ might be right for the particular project. PPP Mode Validation tool, to use a risk allocation analysis to help decide further which PPP mode the project is best suited to The PPP Suitability Filter, to test how well suited the project is to being a PPP. Used in Phase 1 during the selection of projects for PPP development.

• PPP Financial Viability Indicator Model, to analyse the key questions of financial viability and test these using ‘what-if?’ scenarios. Used in Phase 1, Phase 2 and Phase 3.

• VFM Indicator Tool, to help check how likely the project is to provide value-for-money to the public sector. This is used in Phase 2 and Phase 3.

• Readiness Filter, to check that all the important steps have been followed and that the

project is suited to further PPP development. Used in all Phases during the Readiness Checks.

4.1.7 Strategic Planning Exercise Preliminary needs assessment study

• The key drivers for planning an infrastructure programme are the service needs of the end-users. An overall needs assessment should be carried out taking account of the types of services users will need, total user demand for those services, and all sources of existing and planned delivery of services.

• Planning for infrastructure services that are provided by assets with long lives should include a needs assessment that covers a correspondingly long period. This requires a holistic view taking account of factors that might affect the level and location of demand, including expected and planned urban and industrial development.

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• Infrastructure services can be defined and measured in total for all users and broken down into totals for specific groups of users. The strategic plan should provide at least a preliminary assessment of needs for user groups that would be served by particular infrastructure assets or integrated systems. These can then be mapped to individual project interventions.

• Defined services in the roads sector would include vehicle kilometres, peak-hour flows.

• Examples of specific user groups include roads sector users of a particular route or corridor, such as commuter traffic, light commercial vehicles, buses, multi-axle vehicles etc.

4.1.8 Pre-feasibility analysis The pre-feasibility of the project should include the following preliminary analysis::

• Needs and options analysis • Legal feasibility • Technical feasibility • Scoping social/environment safeguards analysis • Preliminary financial viability including expectations of required Government financial support • Institutional capability analysis • Identification of next steps required

4.1.9 Full feasibility Study and PPP due diligence Contents of the full feasibility study The analysis and information contained in a feasibility study will in general include those listed below. Each of these is a detailed separate section of the toolkit. Sector specific contents of feasibility studies are given in the tools section. The general contents of a feasibility study include:

• Market analysis and project scope, to assess the need for and appropriate scope of the project, building on the work already done at the strategic planning and pre-feasibility stage. This would include:

o Needs analysis – does the project meet an end-user need? Does it contribute to meeting the objectives of the sponsoring authority? Who will the users be?

o Options analysis – what is the best option for meeting the service need: a no-asset solution, existing assets, or new assets?

o Define the output – what services will the project provide?

o Estimate and forecast demand – what level of demand is there for the outputs / services from

the project, and how much are users willing to pay (what is the value of the demand)?

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• Social and environmental feasibility, including the requirements for impact assessments and for the associated mitigations

• Technical feasibility and technical parameters based on the market analysis, including specification of required facilities and scenarios of project size, for use in preliminary project design

• Risk studies and refined PPP mode – Assessment of the risks associated with the project,

study of which party is best able to bear each risk, and refinement of the PPP mode selected at the pre-feasibility stage

• Preliminary cost assessment, to within a sufficient range based on the technical specification

and assessed project risks • Financial analysis and due diligence, incorporating a projected revenue structure (eg. Proposed

tariff, required annuity) and assessing any need for financial support from the public sector

Economic feasibility – Assessment of overall net economic benefit of the project, incorporating estimated project benefits and costs including non-market factors such as those from the social and environmental assessment.

• Other PPP due diligence activities, including value-for money analysis if data is available

• Project implementation schedule, including an outline of the proposed PPP procurement and award process through to technical and financial close, an outline of the construction schedule and target operation date, and any phasing that is planned for project extensions or ongoing development.

Social and environmental feasibility Infrastructure projects will often have significant social and environmental impacts arising from their construction and operation, which can be both positive and negative. The impacts may include flow-on effects beyond the immediate project area and beyond the people directly associated with the project (secondary impacts). Social impacts on communities affected by the project include, for example, requirements for resettlement and the associated impact on quality of life and livelihoods, and impacts related to environmental alteration (eg on health and livelihoods) Environmental impacts on the project location and in associated areas (eg downstream, ground water or ambient air) include effects on environmental resources due to alterations or pollutants It will often by a mandatory regulatory requirement for assessments of social and environmental impacts to be carried out during infrastructure project development. The scope of social and environmental studies can cover:

• Quantifiable social and environmental costs and benefits • Non quantifiable social and environmental costs and benefits • Options for mitigating adverse impacts and the cost of mitigation.

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The secondary effects should be included in the assessment. Public consultation is often a part of the social and environmental feasibility process. The analysis should identify what type of social and environmental impact studies are needed, and the type of permits and licenses required, and should take into account health and safety standards. This information will assist the sponsor with the preparation of tender documents if the project is taken to market, and will assist bidders with the preparation of risk minimising bids. The final assessment of environmental and social costs and benefits is an input to the economic assessment of the project. Therefore, in addition to being a requirement from a legal and regulatory perspective, the social and environmental analysis is an important part of the assessment of the project’s overall welfare impact, as captured in the economic analysis. 4.1.10 Environmental Clearance and EIA Under Central Government regulation, Environmental Clearance (EC) must be gained for all physical infrastructure projects that meet certain thresholds. An Environmental Impact Assessment (EIA) report is often a key requirement as part of the process of gaining Environmental Clearance. In the recent past an EIA has been a particularly stringent requirement for road related projects (such as Highways). EIA is governed within the EC process. In some cases a preliminary EIA is carried out at the feasibility stage and a complete assessment takes place during procurement. In other cases the full EIA will be carried out as part of or in parallel to the feasibility study. Depending on the regulatory regime, final approval may depend on the EIA being satisfactory and that there are no major adverse environmental impacts which can not be mitigated. The whole environmental clearance process can take a year depending on the complexity of the project. This must be factored into the PPP development plan. Environmental Clearance is regulated at the Centre by the Ministry of Environment and Forests (MoEF), which is the nodal agency. The requirements are specified in MoEF’s draft Environmental Impact Assessment Notification (2006) (the Notification was modified in 2009 but remains in the draft stage). Environmental Clearance is mandatory under the Notification. In addition to formal environmental impact analysis, environmental laws and regulations may also require:

• Mitigation plan • Environmental monitoring plan • Approvals from the State Forest Department or Central / State Pollution Control Boards, if

required

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4.2.0 Social impact analysis / social feasibility Social Impact Assessment (SIA) is a process that provides a framework for prioritizing, gathering, analyzing, and incorporating social information and participation into the design and delivery of projects. It ensures that infrastructure project development is:

• informed and takes into account the key relevant social issues, and • incorporates a participation strategy for involving a wide range of stakeholders

At the micro-level, SIA impacts on individuals, at the meso-level it impacts on collectives (eg, groups of people, institutions, and organizations) and at the macro-level it impacts on social macro-systems (eg, national and international political and legal systems). The stages in Social Impact Assessment are:

• Describe the relevant human environment/ area of influence and baseline conditions • Develop an effective public plan to involve all potentially affected public • Describe the proposed action or policy change and reasonable alternatives • Scoping to identify the full range of probable social impacts • Screening to determine the boundaries of the SIA • Predicting Responses to Impacts. Develop Monitoring Plan & Mitigation Measures

Ideally the SIA should an Integral part of other assessments as shown below.

4.2.1 Technical feasibility A technical description of the engineering and non-engineering aspects of the project would be developed. This would be based on the service definition and sizing in the project scope. This would include:

• Field surveys of the project site, which may include (depending on the project) mapping, topographical and geotechnical surveys,

• Analysis of environmental conditions that impact on the technical design. There may be some overlap between the information collected for this task and for the environmental impact assessment.

• A preliminary technical design of facilities required to provide the project outputs. This should consider alternative design options, taking into account uncertainty in the demand projections and other site-related uncertainties. 4.3.0 Feasibility Study Report The outputs of the full feasibility analysis should be drawn together into a Feasibility Study Report (FSR), which provides the PPP business case. If the feasibility study is supportive of the investment and procurement by PPP the FSR can then be presented to the relevant Appraisal / Clearance Authority for in-principle clearance. The FSR summarises the results of the project feasibility analysis and PPP due diligence. It provides all the information that will be needed for a decision by the appraisal and clearance committees. At a minimum the FSR should contain summaries of the outputs of each component of the feasibility study described above. The contents in this list have been separated into two parts to

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emphasise the point that there should be a particular focus on the PPP aspects of the project. However, the contents of the actual FSR may be arranged differently. The FSR should include the following:

• Support and justification for the project – Results of the feasibility study providing justification for the investment:

o Need for the project – gaps identified in the market analysis that would be filled by the project, policy objectives met by the project, alternatives considered

o Description of the project, including definition of services / outputs it would provide, location, target user group, technologies to be employed, agencies involved and their responsibilities, project timeline, etc

o Social and environmental assessments and planned impact mitigations o Technical description of infrastructure additions required for the project o Benefits and costs of the project and their distribution among key stakeholders, including social

and environmental impacts o Summary of the financial viability of the project o Summary of economic appraisal (benefit / cost analysis) o Project implementation schedule

• Support for procuring the project as a PPP – In addition to the general project feasibility

results, the FSR should include results of the specific PPP due diligence analysis: o Identification of major project risks and their allocation between the public and private partners o Type of PPP proposed including description of likely finance structure o Requirement for government assistance to the project (eg VGF) o Value-for-money (VFM) analysis and result o Other due diligence assessments (legal, market sounding) o Capacity of sponsor to implement the PPP, plan for implementation and PPP management

including capacity building and use of advisors, plan for meeting project development costs

• A section summarizing the justification for the PPP project Projects that are applying for JnNURM funding are required to prepare a Detailed Project Report (DPR), which has similarities to the contents of a FSR. 4.3.1 Pre-feasibility report assessment template The following template should be used for assessment of the pre-feasibility study:

Pre-feasibility task Completed: yes/no? Needs and options analysis Has a needs analysis been carried out? Does the proposed project meet a demonstrated need? Does it meet the objectives of the Sponsoring Authority and wider policy goals? Does the project fit within the strategic plan?

Has an options analysis been carried out? Have alternatives to new asset development been considered (ie, use of existing assets and non-asset solutions)?

Technical and operational practicality

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Has the project site or options for the site options been identified?

Is the project site or at least one of the project site options suitable from technical and operational practicality of the Project Concept?

Has the technical scope of the project been defined? Is the preliminary engineering plan practical? Is the operations and maintenance plan practical? Have the major technical and operational risks to the project been identified?

Has an impact and management strategy been prepared to deal with the major technical and operational risks to the project?

Based on the preliminary analysis, does the Sponsoring Authority consider the Project Concept to be practical?

Environmental and social safeguard activities Has a scoping social impact assessment been done? Has a scoping environmental assessment been done? Financial and economic viability Have all major project cost components (capital, operations, maintenance) of the technical scope of the project been estimated?

Are the assumptions on major project cost components reasonable, can they be justified based on a rationale?

Has a preliminary market demand analysis been done? (Tariffs, Volume)

Are the assumptions on tariff/ prices reasonable, can they be justified based on a rationale? Will the users be willing to pay the proposed tariff/ prices?

Are the assumptions on volume/ quantity of usage reasonable, can they be justified based on a rationale?

Have similar projects that were done in the past been analysed for project cost, tariff/ prices and volume/ quantity of usage?

Are the assumptions in the proposed project comparable to similar projects that were done in the past? If not, then can the assumptions be justified on sound economic rationale?

Has a financial analysis model, such as the Financial Viability model in the PPP toolkit, been used to assess the financial viability of the project?

Have preliminary financial projections been prepared? For a project that is to be developed with private sector participation, has an estimate of required financial support from the public sector been made?

Have the key financial ratios been computed? (for example, NPV, IRR, etc.)

Have the major financial and commercial risks to the project

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been identified? Have the impact and management strategy of the financial and commercial risks to the project been prepared?

Has a sensitivity analysis been undertaken? Does the preliminary financial analysis demonstrate that the Sponsoring Authority will recover its investments along with a reasonable return under reasonable scenarios?

Have the likely economic benefits generated by the project been identified?

Based on the preliminary analysis, does the Sponsoring Authority consider the Project Concept to be financially and economically viable?

Has a strong rationale and recommendation been made by the Sponsoring Authority in the preliminary assessment?

PPP suitability checks Has the Suitability Filter been used to assess the potential of the project as a PPP? What was the result?

If any questions in the Suitability Filter were skipped has this been recorded and justified?

Have all results from the Suitability Filter that indicated “Difficult as a PPP” been recorded and explained in the Report? Has a preliminary risk assessment and risk management plan been prepared to address these issues?

Has a print-out of the Suitability Filter showing answers and results been included in an annex to the Pre-feasibility Report?

Possible arrangements for private sector participation Has the role of the private sector (direct or indirect investment, indicative PPP mode, etc) been identified?

Has a project structure or contractual framework for the PPP arrangement been prepared?

Has the procedure for inviting private sector participation been identified?

Will the procedure encourage competition in the private sector? Have the major legal documentation required to allow participation of the private partner(s) been identified?

Next steps Has an estimate of resources (financial, external expertise) to complete the feasibility study and selection of PPP been made?

Are budgets available for the above? Have all the parties that will be responsible in the next steps, been identified? Such as within sponsor agency, provincial departments and other parties.

Have the roles and responsibilities of involved parties been prepared?

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Is there an agreement amongst involved parties in undertaking their respective roles and responsibilities?

Has the time frame required for completing the feasibility study and selection of PPP been estimated?

Is the time frame reasonable and practical? 4.4.0 Full feasibility report template The standard contents of the full feasibility report have been provided in the Draft PPP Rules, 2012 notified by the DEA. The same should be utilized and has been outlined below: Part A: Executive Summary - This summary should provide of the following information:

• Current service provision, if applicable and future requirements; • A summary of the full list of options; • A summary of the options selection procedure and the options chosen for detailed

examination; • A summary of the comparative findings and justification for the preferred option; and • Highlights of the implementation plan.

Part B: Feasibility Assessment

• Project background: This section should provide a background on the project location, type of infrastructure, the Contracting Authority, previous studies undertaken, and previous approvals received etc.

• Strategic needs assessment, demand assessment and project scoping: This section will analyze current and future needs. An analysis of the user‟s needs should be included.

The following issues should be addressed:

• Existing or envisioned service gaps; • Key stakeholders and their requirements; and • Consultation plan with key stakeholders to ensure that the PPP Project remains

relevant. • Assessment of demand should also be included in this section. Project scoping

Component should determine and define the scope of the PPP Project, outlining the services to be delivered.

• Service standard – output and services: This section will translate the needs identified in the previous step into specific outputs. The following issues should be addressed:

• Impact of the proposed PPP Project on the service gaps identified above and overall objectives the PPP Project aims to achieve;

• Outputs expected from the PPP Project, stated, as far as possible, in measurable and quantifiable terms;

• Support service outputs (the outputs that are not the key drivers of the PPP Projects, but have potential to enhance the PPP Projects value for money); and

• Relevance of the PPP Project to the Contracting Authority’s long-term strategic goals and overall national development plan.

• Market assessment: Once the project outputs have been specified, assessment of the market potential can commence. The purpose of market assessment study is to assist the

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Contracting Authority in deciding how to design, and deliver the PPP Project. The study may address the following elements:

• Description of the industry; current market analysis (current offerings, market players and their capability and appetite);

• Competition (alternative service and product offerings); • anticipated future market potential; • Potential market players and sources of revenues; and • demand projections. • Technical feasibility: This section details how the PPP Project can be delivered (i.e.,

outline technical solution). The study should address the following elements: • Field surveys of the project site, which may include (depending on the PPP Project)

mapping, topographical and geotechnical surveys; • A preliminary technical design of facilities required to provide the project outputs. This

should consider alternative design options, taking into account uncertainty in the demand projections and other site-related uncertainties;

• Materials and other input requirements; • Alternatives (such as those involving usage of existing assets for the PPP Project, rather

than creating new ones; or achieving the desired outputs by some means other than the proposed solution) and their assessment in relation to the possibility of achieving the targets of the PPP Project; and

• Capital expenditure cost assessment and operating and maintenance cost assessment based on the components of the preliminary technical design.

• Financial feasibility: This section provides an estimate of project costs based on recommended technical solution and identifies possible financing solutions. The study should address the following elements:

• Project costs (initial and replacement capital expenditure, cost of upgrades, operational expenditure);

• Start-up capital; • Sources of financing; • Potential revenues; • Estimated returns; and • Consulting costs. • Environment impact: This section should examine environmental considerations,

including details of any environment impact study conducted. Environment management plan

• Legal framework: This section examines the suitability of existing legislative environment for the execution and running of the PPP Project. The study should address the following elements:

• Appraisal of current legislative environment in relation to requirements of the PPP Project;

• Licences and/or requirements that the Concessionaire will need to obtain and/or comply with; assessment of required amendments to the current legislation;

• Legal requirements for the proposed market and organizational structure; and • other legal issues that may inhibit / prevent the development of the PPP Project.

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• Stakeholder consultation findings and public interest evaluation: This section should state the findings of the consultation process with the various stakeholders including but not limited to:

• Users; • Developers; • Community participants; • Citizens likely to be affected; • Financers; and • Other relevant government authorities. • Public sector comparator, value for money and recommendations: This section should

state the reference project and detail the computation of the public sector comparator and resultant value for money for the Contracting Authority (“Value for Money Assessment”). The Value for Money Assessment involves a qualitative assessment and a quantitative assessment, wherever possible:

• Quantitative Assessment involves estimation of the risk adjusted cost of delivering a project through PPP mode as compare to the risk adjusted cost of delivering the same project through the traditional public procurement mode. The same is determined by:

• Specifying clear outputs from the project and comparing the costs and benefits of a PPP Project with the costs and benefits of a publicly financed project, and

• Estimating risk factors which should be applied to the estimates • Comparing the risk adjusted net costs/ benefits of both the PPP Project and a publicly

financed project on the Contracting Authority, and ascertaining the value for money. • Qualitative Assessment: PPP shall be considered as a procurement option if the following

value for money drivers are present: • Sufficient scale and long-term nature: The project represents a major capital investment

with long-term requirements. In determining whether the scale of a project is sufficient, the Contracting Authority should consider the costs to be incurred in procuring the PPP project;

• Complex risk profile and opportunity for risk transfer: The transfer to the Concessionaire of risks associated with provision of the specified services, asset ownership and asset management during the life cycle of the asset;

• Measurable outputs: The nature of the services enables output specifications and a performance-based contract;

• Asset utilization: Reducing costs to the Contracting Authority through potential third-party utilization or through more efficient design to meet performance specifications;

• Competitive process: A competitive market exists and the use of a competitive process encourages the private entity to develop innovative means of service delivery while meeting the Contracting Authority‟s cost objectives.

• Conclusion and recommendations on feasibility assessment: This component should detail the key conclusions and recommendations on the Feasibility Assessment.

Part C: Structuring • Risk assessment: This section should identify all material risks associated with the PPP

Project, specifying the external and project development risks for the Contracting

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Authority, the project risks to be allocated to the private entity and those to be retained by the Contracting Authority.

• Key commercial principles including payment mechanisms: This section should detail the key commercial principles for the PPP Project. These commercial principles would include, inter alia, the payment mechanisms, relief, compensation and force majeure events, default events, termination payments, the Contracting Authority‟s step-in and cure rights and insurance.

• Evaluation criteria for selection of the private entity: This section should detail the evaluation criteria for selection of the Preferred Bidder.

• Implementation plan: This section should detail the activities and timelines during the project development period. It should also state the person or entity responsible for each activity.

• Project resource requirement: This section should detail the resources required during and after the project development period.

• Conclusion and recommendations on structuring: This section should detail the key conclusions and recommendations on the project structuring. Part D: Appendixes

• The Contracting Authority shall include in this section any supporting documents such as a detailed projected financial statement, environment impact assessment study, technical report or review of legal framework.

4.4.1 Choosing the best-suited procurement method Before applying for in-principle clearance for the project the Sponsor should decide which procurement method would be best suited. A number of different methods are available. Which one is most appropriate for a particular project will depend on the project characteristics? It is generally accepted best practice to procure PPP projects via an open, competitive bidding process. Competition encourages innovation and efficiency and ideally should be as strong as possible . Several different competitive bidding options are available. Having decided on the bidding strategy it is also necessary to choose a bidding process. This covers the basis for selection and the number of stages in the bid process. 4.4.2 Checklist of implementation schedule

No. Information to be covered in the implementation schedule Included? (yes, no)

1 In-principle clearance timeline:

1A First draft of tender documents and other key project documents (eg, EoI, RFQ, RFP)

1B Application for in-principle clearance for the PPP

2 Pre-qualification and final document preparation timeline:

2a Issue RFQ

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2b Pre-qualification of bidders

2c Final draft of tender documents, and feedback on bid documents from bidders for complex / new sector projects

3 Application for Final Approval of the PPP

4 Procurement and award timeline:

4a Issue RFP, allowing adequate time to respond to bidder queries

4b Evaluation of bids

4c Negotiation and award

5 Technical and financial closure timelines:

5a Detailed technical studies and planning

5b Obtaining clearances

5c Arranging and finalising finance

5d Concessionaire Event of Default

6 Engineering, procurement and construction (EPC) activities and timeline (for projects that involve a capital expenditure component)

6a Detailing each major milestone through the EPC process

7 Post-construction activities

7a Such as surveys and commissioning facilities

8 Expected date for commencement of operations

9 Major milestones in the operating lifecycle of the project

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4.4.3 Overview - Level Process Map for the PPP toolkit

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4.4.4 Generic PPP family decision tree

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4.4.5 TEMPLATE (Indicative)

• Name of the project • Location of Project • Justification for the Project • Unbundling of Project

Identify parts amenable to PPP

1. Identify Service/Project 2. Break the service into pieces 3. Identify parts amenable to PPP

eg. Water Supply can be broken into • Source of supply • Headworks • Purification • Supply to distribution network • Metering and Collection of charges • Operation and Maintenance

Solid Waste Management Can be broken into

• Door to door collection and segregation • Secondary storage • Transportation • Processing and recovery • Landfilling

• Select Mode of Privatisation for each part or whole of the project Type of PPP (BOT, BOOT, BOLT, OMT etc.)

- Divestiture of assets/Rights are Sold or - Transferred for BOO, BOOT etc.)

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4.5.0 Questions :

1. Why is project formulation exercise important ? 2. What are the steps in the preparation of PPP plan ? 3. How would a Government Department prepare PPP Project Plan” 4. Explain the steps in PPP process as per PPP toolkit of GoI ? 5. What are the tasks in pre-feasibility study? 6. How do you justify a PPP project based on feasibility study? 7. Explain the steps to be followed in conducting full feasibility study? 8. How do you structure a PPP project? 9. Explain PPP toolkit and PPP family decision tree ?

• Financing

� Total cost � Source of Financing � Phasing of Investment � Returns on Investment � IRR, BCR, NPV at 12% etc. � Social & other environmental benefits

• Screening of Project through GoI PPP Toolkit Yes/No

Whether Pre Feasibility study is done? Whether Full Feasibility study is done?

• Deregulation • Invite Bids

Type of bidding option Open bidding, E-tendering etc.

• Assess the Bidding • Selection of Bids • Preparation of Contract • Award of Contract • Monitoring, Evaluation and Impact Assessment

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CHAPTER 5 DIFFERENT MODES OF PPP

5.1.0 Approaches While it is commonly cited that a ‘true’ form of PPP is a collaborative model where both the private and public sectors agree to share the risks and rewards of a particular project, there are a variety of approaches that illustrate the possible power-sharing and decision-making arrangements. A Partnership with the private sector can fall under a consultative approach whereby the government seeks our expert advice from the private sector or community groups. There are also contributory arrangements which are identified as ones where the public sector provides funding to the private partner that is in turn responsible for carrying out the development and management of the project. Last, under community development approaches, the private and public sectors come together in a particular community and jointly contribute their strengths to achieve a common goal. PPPs, in the broadest sense, can cover all types of collaboration across the interface between the public and private sectors to deliver policies, services, and infrastructure. The term PPP refers to a wide range of arrangements with simple arrangement such as management contract on one extreme of the spectrum, while arrangements such as full privatization or divestiture remain on the other extreme of the spectrum. Various approaches are in use to classify the arrangements between the two extremes of the spectrum. One of the approaches is to refer to the wide variety of arrangements based on the involvement of the private and public sectors in the various phases of project life cycle (Pakkala 2002). However, the most common way of referring to the different arrangements is based on the extent to which the responsibilities and risks are transferred from public sector to private sector. Figure 1 shows the risk transfer continuum and the characteristics of the various PPP models. The risk transfer to the private sector increases as we move from maintenance management to divestiture (Hammami et al. 2006). Critical risks such as market risk are completely transferred to the private sector in PPP models such as BOT and divestiture.

Design –Build The private sector designs and builds infrastructure to meet public sector performance specifications, often for a fixed price, so the risk of cost overruns is transferred to the private sector (Many do not consider Design-Build Models to be within the spectrum of PPPs). Finance only A private entity, usually a financial service industry, funds a project directly or uses various mechanisms such as long-term lease bond issues

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Operation and maintenance Contract A private operator, under contract, operates a publicity owned asset for a specified term. Ownership of the asset remains with the public entity. Build Finance The private sector constructs an asset and finances the capital cost only during the construction period. Design Build Finance Operate The private sector designs, builds and finances an assets and provides hard facility management or maintenance service under a long-term agreement Design-Build –Finance-Maintain-operate The private sector designs, builds and finances an assets, provides hard and/or soft facility management services as well as operates under a long term agreement. Build-own-operate The private sector finance builds owns and operates a facility or services in perpetuity. The public constraints are stated in the original agreement and throughout on-going regulatory authority Concession A private sector concessionaire undertakes investments and operates the facility for a fixed period of time after which the ownerships reverts back to the public sector. Forms of PPP in utilities The different forms are identified based the services such as design, finance, build, manage or maintain infrastructure projects. Such partnerships can take many forms, depending upon the exact allocation of risks and responsibilities. These include:

Service Contract. The private sector provides a bundle of specific services to a public utility, but the public sector retains overall operational responsibility. Service contracts can in practice take many forms, but two of the most common ones are:

1. Management support. The private operator supplies the public authority with human and technical resources for a fee. It provides technical know-how on all operational and financial aspects of project management remaining within the jurisdiction of the public authority.

2. Operation and Maintenance (O&M) The private operator is in charge of daily maintenance of the facilities. The private operator is paid for its services by the public authority according to specific and qualified performance criteria. Delegated management contracts In his type of contracts the public sector retains overall ownership of the assets, but delegates the responsibility for their operation to a private operator for a definite (often long) period of time. Two of most commonly seen models are:

− Lease agreement. The private operator manages the services for a period (often five to fifteen years) and is responsible for maintaining and renewing the facilities according the terms of the contract. In this capacity, it takes charge of all personnel and existing assets but is not responsible for

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financing new facilities. The public authority remains responsible for all new investment and compliance to existing norms. The private operator invoices the end-users directly. − Concession. The public authorities fully entrust the private operator with management of the services and all necessary investment for a period of 20 years or more. The private operator invoices the end-users directly, the public authorities retaining strict control over service terms as well as all key decisions related to applicable rates and targets.

Construction support In the most wide-ranging form of PPP contracts the private operator is involved in the design and construction phases of new infrastructure and carries at least some of the risks associated therewith. Some of the main forms of construction support have been:

− Build Design Operate (BDO). The public authorities entrust the private operator for a fixed period of time with design, construction and operation of new facilities which remain the property of the public authorities. The private operator assumes the risks linked to design and management of the facility. It is paid a fee by the public authorities and commits to an overall cost for the facility’s construction and operation.

− BOT (Build Operate Transfer). The private operator designs, finances and builds infrastructure. While formal ownership of the assets is assigned to the government, the private sector operates the project long enough to service any debt incurred and to earn a suitable return.

− BOO (Build Own Operate): In contrast to the BOT case, the private investor retains ownership and control of the project.

The forms of PPP differ in terms of the allocation of ownership, investment and commercial risk between the private and public sector. First, the two main considerations for seeking private participation in infrastructure are efficiency and funding. Where it remains public, only efficiency gains can be hoped for. Second, in the case of failing PPPs, it is frequently a matter of concern whether the commercial risk rests with the public or the private sector. 5.1.1 Forms of PPP

Operation & maintenance Ownership Investment Commercial risk Duration (years) Management support

Public and private Public Public Public 1-2

O&M Private Public Public Public 3-5

Leasing Private Public Public Semi-private 8-15

Concession Private Public Private Private 20-30

BDO Private Public Public Private 20-30

BOT / BOO Private Public / private Private Private 20-30

The main modes of entry for private participation in infrastructure have been: • Joint ventures. The public and private sectors jointly finance, own and operate a project to provide infrastructure. Risks and responsibilities are shared according to the division of ownership between the investors and depending on any contractual agreements between or among partners.

• Greenfield projects. These involve new projects usually built and operated by the private sector which takes on the commercial risk. Political and exchange rate risk can sometimes be shared with the public sector. Such projects can take many forms, but the most common are BOT and BOO. Others include Build-Own-Operate-Transfer (BOOT), Design-Build-Finance-Operate (DBFO) and Build-Lease-Transfer (BLT).

• Divestiture or asset sale. State assets are privatised either through public offerings of shares or through the direct sale of the assets themselves. The State retains responsibilities as regulator and sometimes customer and might subsidise certain activities which are socially desirable but unprofitable for a private company to undertake (such as the provision of services to the poorest segments of society or to remote regions). Forms of private participation where the State entirely dissociates itself from a utility cannot be properly described as PPPs.

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5.1.2 Karnataka PPP Models in Practice There are range of PPP models that allocate a responsibilities and risks between the public and private partners in different ways. Depending on the nature of the project, the contractual structure/agreements used for new projects would include inter-alia: (as per Infrastructure Policy ‘07) � Build-and-Transfer (BT): a contractual arrangement whereby the concessionaire

undertakes the financing and construction of a given infrastructure or development facility and after its completion turns it over to the Government Agency or Local Government unit concerned, which shall pay the proponent on an agreed Schedule its total investments expended on the project, plus a reasonable rate of return thereon. This arrangement may be employed in the construction of any infrastructure or development project, including critical facilities which, for security or strategic reasons, must be operated directly by the Government.

� Build-Lease-and-Transfer (BLT): a contractual arrangement whereby a concessionaire

is authorized to finance and construct an infrastructure or development facility and upon its completion turns it over to the government agency or local government unit concerned on a lease arrangement for fixed period after which ownership of the facility is automatically transferred to the government agency or local government unit concerned.

� Build Operate and Transfer (BOT): a contractual arrangement whereby the

concessionaire undertakes the construction, including financing, of a given infrastructure facility, and the operation and maintenance thereof. The concessionaire operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges not exceeding these proposed in its bid or as negotiated and incorporated in the contract to enable the concessionaire to recover its investment, and operating and maintenance expenses in the project. The concessionaire transfers the facility to the Government Agency or Local Government unit concerned at the end of the fixed term.

� Build-Own-Operate-and-Transfer (BOOT): a project based on the granting of a

concession by a Principal (the Union or Government or a local authority) to the concessionaire, who is responsible for the construction, financing, operation and maintenance of a facility over the period of the concession before finally transferring the facility, at no cost to the Principal, a fully operational facility. During the concession period the promoter owns and operates the facility and collects revenue in order to repay the financing and investment costs, maintain and operate the facility and make a margin of profit.

� Build-Own-and-Operate (BOO): a contractual arrangement whereby a concessionaire is

authorized to finance, construct, own operate and maintain an infrastructure or development facility from which the proponent is allowed to recover its total investment , operating and maintenance costs plus a reasonable return thereon by collecting tolls, fees, rentals or other charges from facility users.

� Build-Operate-Share-Transfer (BOST): a contractual arrangement whereby a

concessionaire is authorized to finance, construct, operate and maintain, share a part of the revenue and transfer the infrastructure facility at the end of the period. The proponent is

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allowed to recover its total investment, operating and maintenance costs plus a reasonable return thereon by collecting tolls, fees, rentals or other charges from facility users.

� Build-Own-Operate-Share-Transfer (BOOST): a contractual arrangement whereby a

concessionaire is authorized to finance, construct, own operate and maintain, share a part of the revenue and transfer the infrastructure facility at the end of the period. The proponent is allowed to recover its total investment, operating and maintenance costs plus a reasonable return thereon by collecting tolls, fees, rentals or other charges from facility users.

5.1.3 Management Contracts Contracting with private sector organizations is a common type of PPP model within local government. The purpose of management contracts in to contract out all or most of a service function of the local government to private sector organizations in order to obtain efficiency gains. In these arrangements the contractor assumes operational responsibility with freedom to make day-to-day management decisions but does not assume significant commercial risk. Usually the contractor has no direct legal relationship with consumers but may provide working capital. Payments to the contractor may be fixed or proportional to certain performance criteria, such as volume or coverage. For example, if the contract includes billing and collection the contractor may not get paid unless collections exceed a set minimum level. These contracts can be implemented where the local government does not have the necessary skills or resources to deliver the service, or where the local government believes the service could be delivered at a lower cost and with greater efficiency by an outside organization. They can relate to all or part of a local government service or to functions within a particular service. The contracts with the private sector specify performance standards and give remedies to the local government for non performance, including cancellation of the contract for serious breaches of the terms. These contracts represent relatively low risk to the public sector and the initial benefits are limited to efficiency gains in service delivery. Advantages

• It involves the private sector in a limited way in the operations of local government. This allows local government to maintain effective control of the service, while obtaining savings and efficiency gains through private sector involvement.

• The fixed sum or performance related payment to the contractor limits local government’s cost exposure.

• It separates service delivery functions from regulation and monitoring activities that are retained by local government.

• Efficiency gains can be maximized by transparent competitive tendering.

Disadvantages • The local government may not be capable of effectively monitoring the contractor’s

performance. • There is a risk of non-performance by the contractor leaving the local government to

bear the cost of remedying the breach.

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5.1.4 Short/ Medium Term Contracts or leases The local government grants full operational responsibility to the private sector lessor, while retaining ownership of the assets, responsibility for capital expenditures and replacement of major works. The private sector contractor leases the existing facilities and is responsible for all normal operation and maintenance costs and may be required to provide necessary working capital. The contractor needs to be reasonable assured of the security of their contract in order to ensure a reasonable return on any investment (eg in plant and equipment). Hence the duration tends to be medium term (3-5 years) but may be longer depending on the extent of the investment. The lease contract may include incentives for efficient operations and can also include penalties for poor performance. Other provisions can provide for the revision of privce/lease instalment payments. This form of PPP is attractive to the private sector since the risks are limited. Limited risk should provide more competition from potential contractors- to the benefit of local government and its consumers. As with management contracts the degree of risk transfer to the private sector is limited and financial benefits to the public sector are also restricted. Advantages

• Comparatively low commercial risk to potential lessees, thereby attracting competitive tendering, to the advantage of the local government.

• The contractor preserves the local authority’s financial resources where the lease requires significant investment in working capital.

• Lessee’s business acumen will set the standard for the operation of the service on the termination of the lease.

• Specialist skills may be passed on to local government employees who work closely with the lessee.

Disadvantages • The local government is still required to fund the capital cost of improvements to the

leased assets/ infrastructure. • Particular care is required in setting performance targets to ensure local government

derives some share of increased efficiency gains.

5.1.5 Build Operate Transfer Schemes (BOT) There are a number of variations to this type of arrangement eg BOO. ( Build, Own, Operate); BOOT, (Build, Own, Operate, Transfer); DBFO (Design, Build, Finance, Operate); and ROT (Renovate, Operate, Transfer). Each of these models has their own specific elements and characteristics that may be combined to produce a model suitable for the particular requirements of a given project. These schemes are designed specifically for the financing, construction, operation and maintenance of capital-intensive infrastructure projects such as roads, bridges, hospitals etc by the private sector. Their principal purpose is to fund major necessary infrastructure additions and expansion from private sector sources and enable the investor to recover its

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investment, together with a reasonable rate or return over a particular period, after which time the assets are transferred to the government agency or the local government. The terms of these schemes are usually quite long and depending on the economics of the project can be up to 25 years. The private operator builds the facility, takes the construction and technical risk and recovers capital and return on capital through operating the facility and charging for its output over the contract term. Revenues are collected either directly from users in projects such as toll roads, or indirectly via the local government body. At the end of the term ownership and responsibility for operation is transferred to local government. BOTs are usually financed by the private sector using limited recourse project finance insulating the public sector from much of the commercial risk of the project. Depending on the commercial attractiveness of the project, market risks may need to be underpinned by off- take guarantees in the form of take or pay contracts. Contracts may contain provision relating to adjustments to tolls/fees etc charged by the contractor to wholesale or retail consumers and will usually require local government approval of any changes outside the terms of the contract. Contracts may include performance indicators, quality standards, and provide for remedies in the case of non- performance by the contractor. Performance bonds may need to be posted by the contractor Advantages

• The private sector provides the funds to construct and improve important public infrastructure, and absorbs the construction, technical and operating risk

• Depending on the attractiveness of the investment and competition by the private sector for the project, some or all of the market risk may be transferred to the private sector.

• Private sector commercial practices will bring effectiveness and efficiency into the operation and maintenance of the newly constructed facility.

• Important community infrastructure assets remain (ultimately in the ownership of the local government).

Disadvantages • Local Government can be exposed to commercial risk in the case of failure of the

development vehicle or company. • It can be difficult in practice to remove a poorly performing private sector partner

5.1.6 Long Team Lease A private sector lessee is usually made responsible for the operation and maintenance of assets subject to a long-term lease. Other terms and conditions vary, but usually the lessee charges for services and assumes some of the market risk. The terms relating to the lease rental can very significantly but normally there is some form of lease liability that the lessee will assume. This largely determines the extent that responsibilities are shared between the lessor and the lessee for the funding of additional capital expenditure on improvements, but the basis of charging for services will impact on these considerations. Up front payments to the lessor for the lease will depend on the same matters. In the affirmage lease, local government as lessor, funds all the capital developments. Local government may receive an up front payment for the lease and an annual lease rental.

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Improvements, if funded by the lessee, fall back to the ownership of the lessor at the end of the lease period. Residual value payments to the lessee are negotiable and depend to a large extent on which party funds the improvements and the basis on which the lessee charges users. Performance criteria (eg for coverage and quality) and the basis of charging for services are included as conditions of the lease. Advantages

• Depending on the contract, the private sector contractor may provide some of the capital to improve and expand the local government facility over the term of the lease.

• The private sector assumes certain risks to a greater or lesser degree, eg construction and technical risk may be fully assumed and the market risk shared.

• The infrastructure assets remain the property of the local government, and improvements funded by the lessee revert on the termination of the lease. The lease can be made to terminate in the event of fundamental non-performance.

• Price setting procedures and any resetting mechanisms can be negotiated as terms of the lease. Local government may receive an up front payment for the lease and and annual lease rental.

• Existing local government staff who transfer to the contractor for the duration of the lease may acquire private sector commercial skills.

Disadvantages • The long term of these contracts, and possible lack of competition in the sector mean

that it is important to ensure that performance targets, pricing reviews and contestable structures and put in place in advance to provide an incentive to perform.

• Abalance needs to be obtained between the payment to local government for the lease, either up front, annual rental or both, and consumer prices.

• Regular inspection of asset management programs needs to be carried out to monitor the condition of assets. Anticipated expenditures at the end or the contract can be funded by small adjustments in consumer prices that compound over the lease, or by residual payments. Unexpected expenditure can be handled by residual payments or contract extensions.

5.1.7 Concessions The fundamental difference between a concession and a long-term lease is that there is no annual rental. The private sector concessionaire purchases the right to use the assets and charge consumers over a long – term period, without incurring the lease liability. This entitles the concessionaire to the income stream resulting from the asset use. It has some of the characteristics of an asset sale, except that ownership does not pass. The price paid for a concession and that for assets should be similar, depending on the length of the concession and the private sectors required rate of return, as cash flows and asset values towards the termination of the concession period are heavily discounted. Terms and conditions vary, depending on the attractiveness of the concession and the private sector’s perception of risk. The concessionaire may assume all market risk, but may require some sort of guarantee (eg a take or pay agreement). Take or pay agreements are common if the concession is one to supply a retail network, where the concessionaire has to rely on another party to generate market income. It is normal for concessionaires to assume all capital and working capital funding responsibilities, which usually takes the form of limited recourse project finance. It is common for concession contracts to specify regulatory matters

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particularly those related to pricing. New and improved infrastructure assets return to the ownership of local government at the end of the concession period. Advantages

• The private sector concessionaire provides all the capital to develop or improve the public infrastructure facility over the term of the concession.

• The private sector assumes certain risks to a greater or lesser degree, eg construction risk, technical risk, and market risk.

• The infrastructure assets remain the property of the local government, and improvements funded by the concessionaire revert on the termination of the concession. The concession can be made to terminate in the event of non- performance

• Price setting procedures can be negotiated as terms of the concession. • Local government usually receive an up front payment for the concession.

Disadvantages

• Performance targets, pricing reviews and contestable structures need to be put in place to provide an incentive to perform.

• A high payment to local government for the concession increases the pressure to raise consumer prices. This ability to pass on costs is made easier in monopolistic sectors. A balance needs to be obtained.

• Regular inspection of asset management programs needs to be carried out to monitor the condition of assets. Anticipated expenditures at the end of the contract can be funded by small adjustments in consumer prices that compound over the lease, or y residual payments. Unexpected expenditure can be handled by residual payments or contract extensions.

5.1.8 Asset Sales This is in effect the full or partial privatization of a public sector service or facility to release the potential of public sector assets by exploiting private sector finance and management, and other private sector skills and capabilities. These efficiency gains must be balanced against the need to safeguard any continuing public sector interest in such assets, and to ensure the taxpayer receives value for money, both at the time of the sale and by sharing in any future growth in the value of the asset. There is probably little controversy over asset sales in the non-strategic and competitive sector, especially if it eliminates commercial risk and conflict of interest for local government. However, strategic asset sales have substantial political implications. Consideration of the regulatory environment for such sales is essential. A concession can give local government the power to review consumer pricing. An asset sale situation gives no such capabilities to local government, and regulatory measures need to be relied upon. The realization of funds through the sale of a concession should be not greatly different from funds realized through the sale of the same assets. It should be noted that asset sales could include the sale of LATESs. In this regard it is important to consider the setting up of LATE with a concession in regard to the local government asset, rather than an asset transfer, anticipating a future sale of the LATE.

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Advantages • By selling the underlying assets the local government can focus on other more

important assets concerned with public service delivery. • It eliminates commercial risk and conflict of interest for local government. • In the non-strategic and competitive sector service delivery could result in efficiencies

through private sector ownership and operation that would be passed on to consumers. • The local government will realize funds from the sale that can be used in other

activities for the benefit of its constituents.

Disadvantages • Where the local government no longer controls the delivery of a service to its

constituents, there is a risk that a private sector operator could abuse its position, particularly in the strategic and monopolistic sectors. Accordingly strict oversight or regulatory function will need to be put in place by local government.

• There are substantial political and legal issues in connection with asset sales in the strategic sectors.

5.1.9 Private Sector Financing Private financing initiatives through public private partnerships represent a new approach to procurement. They involve the private sector entering into a long-term contract to deliver services and finance any new assets and services required. This represents a fundamental shift from the public sector procuring a service instead of an asset. This represents a shift in the role of the public sector from being an asset owner to being an enabler and purchaser of services and guardian of the interests of the general public. Private financing allows the transfer of significant funding and business risk from the public sector to the private sector contractor. 5.1.10 Project Financing Each PPP structure has its own project finance requirements. These range from coverage of operating costs to the full construction cost of new infrastructure. Public sector objectives will determine the appropriate structure for any individual project. The responsibilities of the private sector for costs under each model is summarized below: PPP Structure Operating

Costs Maintenance Costs

Working Capital

Ongoing Capex

Construction Capex

Management Contracts

X X*

Short/Medium term Contracts

X X X*

BOT/BOOT/DBFO X X X X X Long Term Lease X X X X* Concessions X X X X X* * Optional financing depending on contractual arrangements. 5.2.0 Procurement of services Privately financed projects are usually structured as financially free-standing projects where the private sector supplier designs, builds finances and then operates (DBFO contracts) an asset and covers the costs entirely or partly through direct charges on the users of the asset. Public sector involvement is limited to enabling the project to go ahead through assistance

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with planning, licensing and other statutory procedures. In some transactions public sector support is received in the form of a revenue underwrite or guarantee of minimum usage. The objectives of private finance are to use private sector innovation, to generate new synergies between the design and operation of assets, and to take advantage of private sector commercial discipline, so helping to modernize public services and deliver better value to the public. By giving the private sector the responsibility for providing, maintaining and operating an asset, the public sector’s motivation is to define a standard of high quality and effective service delivery, leaving the private sector to determine the way in which to deliver such services. It is necessary to define clearly the expectation of the private sector partner from the outset for example through a robust performance regime. It is also important to ensure there is a proper and appropriate allocation of risks between the public and private sectors, so as to deliver real improvements in the quality of service provided, and value for the ratepayer or taxpayer. Key advantages or private sector financing include:

• Access to private capital by local government • Ability to construct new infrastructure without placing undue pressure on existing

public resources: • Enables the public sector to finance large assets ‘off balance sheet’ therefore not

affecting public sector capital spending limits; • Allows risks to be shared; • The overall lifetime cost of the project is likely to be lower

The following sections compare a typical public sector procurement model with an alternative privately funded development. 5.2.1 Traditional Public Sector Procurement Traditionally the public sector has managed the procurement and operation of infrastructure assets from conception to the end of their useful operating life. Each stage of the development of a project through design, construction and commissioning has been tendered out to specialist firms closely supervised by public sector employees. The public sector has tended to specify its requirements in detail at each stage using detailed functional and technical specifications intended to deliver a given performance outcome. The traditional financing model has been characterized by:

• Central funding on the public sector entities’ balance sheet; • Security taken by lenders over the entities’ assets; • Obligation of ratepayers and tax payers to meet immediate construction osts • And /or the cost of borrowing to fund projects; • Ongoing operating maintenance costs funded by ratepayers for the life of the project; • Little or no direct revenue collection from users of the project

This funding model raises a number of issues for the public sector, in particular exposure of ratepayers to significant commercial risks associated with the projects:

• The public sector must meet in full the project cost at the time of construction • The public sectors, and ultimately ratepayers, are exposed to project cost over runs for

construction including any for project delays;

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• The public sectors is also exposed to any escalation in operating costs over the life of the project;

• Ratepayers are obliged to fund the project whether or not they use it or benefit from it; • The ability to achieve savings and encourage innovation is restricted by the

prescriptive nature of the sequential tendering process. 5.2.2 Private Sector Partnership & Procurement Model Private sector financing can be applied to situations where major infrastructure investment is required. It is particularly applicable to concession arrangements, Build Operate Transfer and long-term lease of assets requiring substantial capital expenditure. It is generally not applicable to outsourcing situation or the letting of management contracts or leasing existing assets. Private sector project financing techniques have been applied to a wide variety of public infrastructure developments overseas including roads, bridges, hospitals and schools. The structure of each project differs with the private sector taking a greater role in the ongoing operation of road and bridges while operation and management of hospitals and schools remains a public sector responsibility. The main characteristics of project financing are:

• Establishment of a special purpose vehicle company to build, finance and operate the project;

• Limited recourse debt funding raised directly by the vehicle company and secured only on the assets and cashflows of that company;

• Revenues collected directly from users; • Construction and operational risks carried by the project company; • No requirement for the public sector to fund up front capital or development costs; • No exposure of the public sector to cost over runs during construction or operation.

This funding model provides a number of benefits to the public sector in terms of risk transfer and efficiency in the provision of infrastructure. There is however a number of issues that needs to be addressed during the establishment phase and managed through the life of the project to ensure that the benefits are realized and deliver value to the public:

• The financial robustness of the vehicle company needs to be tested and monitored through the life of the project;

• Ratepayers are not obliged to pay for infrastructure they do not use or benefit from; • The volume risk, particularly traffic volumes for bridge and road projects, needs to be

managed to make the project attractive to the private sector; • Mechanisms to avoid or limit monopoly behavior or excess returns to the private

sector need to be established; • Pricing for the use of infrastructure needs to be established and confirmed at an early

stage to avoid later exposure of users to increases; • Mechanisms to avoid the public sector becoming liable for costs of delays during the

consenting and environmental approval processes need to be put in place.

5.2.3 Questions :

1. What are the different modes of PPP ? 2. Explain the advantages and disadvantages of different modes of PPP? 3. Explain project financing through various means and discuss the advantages of

private sector financing ?

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CHAPTER 6

INSTITUTINAL CAPACTIY FOR PUBLIC PRIVATE PARTNERSHIP 6.1.0 Institutional Set up in GoI The Department of Economic Affairs (DEA) is the overall incharge of all PPP based project initiatives of central sectors. The Public Private Partnership (PPP) Cell set up by the DEA is responsible for matters concerning Public Private Partnerships, including policy, schemes, programmes and capacity building and all other matters relating to mainstreaming PPPs. The projects are being scrutinised for viability and technical & financial assistance through the PPP Cell. 6.1.1 Functions

1. Matters relating to examination and approval of all Central sector PPP projects, in all sectors costing more than Rs.100 crore and less than Rs.250 crore and under NHDP costing Rs.250 crore or more and less than Rs.500 crore.

2. Matters and proposals relating to clearance by Public Private Partnership Appraisal Committee (PPPAC).

3. Matters and proposals relating to the Scheme for Financial Support to Public Private Partnerships in Infrastructure- Viability Gap Funding (VGF) Scheme

4. Matters and proposals relating to the Scheme for India Infrastructure Project Development Fund.

5. Developing multi-pronged and innovative interventions and support mechanisms for facilitating PPPs in the country, including Technical Assistance programmes from bilateral and multilateral agencies on mainstreaming PPPs and support to State and local governments.

6. Managing training programmes, strategies, exposures for capacity building for PPPs. 7. Subject of advocacy for greater acceptability towards PPPs. 8. Institution building for mainstreaming PPPs. 9. Matters relating to management of PPP related information,

including www.pppinindia.com and www.pppindiadatabase.com 10. Other policy/Parliament related matters concerning PPP

6.1.2 Institutional Setup in Karnataka

• At present the projects under PPP mode are being identified and developed by the respective departments and local bodies. The GoK has established the Infrastructure Development Department (IDD) as the nodal agency.

• As per the state infrastructure policy 2007, a district PPP committee will be established under the chairmanship of DC with representatives from NGOs/Private and Government Departments.

• The single window agency (SWA) under the chairmanship of Chief Secretary as been established

• The Infrastructure Development Department (IDD) is established to play a significant role in the areas of developing air, rail and maritime connectivity for the state and in promoting increased private investment in public infrastructure through Public Private Partnership (PPP).

• The Government of Karnataka (GoK) has announced the new Infrastructure Policy 2007. It has also set up a “PPP Cell” in the IDD. The PPP Cell is headed by the Principal Secretary – IDD. iDeCK provides technical advice and support to PPP Cell.

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The PPP Cell engages consultants as and when necessary. The PPP Cell is the nodal agency to receive proposals in respect of Public Private Partnership (PPP) projects and place them before the SWA for consideration and approval. The PPP Cell also helps various state Departments/Agencies in different stages of project development cycle.

• Administrative Training Institute , Mysore has set up a PPP Cell for conducting training programmes, workshops and documentation. All the officers of the State Government representing the eligible sectors / departments initiating PPP projects are trained.

6.1.3 Building Capacity

To intensify and deepen the capacity building of public functionaries at the State and municipal level and to integrate the capacity building programme on PPPs in the ongoing programmes at the State level, a comprehensive National PPP Capacity Building Programme has been developed by Department of Economic Affairs (DEA), which has been rolled out at the State level in collaboration with KfW German Development Bank. Under it, eight different programmes have been conducted and 155 Trainers of Trainers (ToTs) have been covered. 15 States and two Central Training Institutes viz. Indian Maritime University and Lal Bahadur Shastri National Academy of Administration have rolled out training programmes on PPPs and have trained over 700 public functionaries who deal with PPPs in their domain.

The first step in the implementation process is to set clear guidelines that determine which government department or agency, a project team skilled in a delivering a PPP should take on the responsibility for the planning procurement, and negotiation stages of the project, in addition to establishing a role in performance monitoring. Unless the government is deeply experienced in contracting PPPs, it will also be necessary to hire a multi-dimensional team of advisors skilled in legal, financial, economic, and sector specific areas to support the capacity of the team through the many PPP processes and procedures. 6.1.4 Review of institutional capacity for PPP Projects Refining the Scope of the Project With a tea in place, priority shifts to refining the scope of the project. More diligent quantification and understanding of the project’s goals and objectives, its public need, and its risks, along with the sophisticated allocation of those risks, better prepares the project for the PPP procurement process. The public sector should also have established a schedule that lists timeframes for the initiation of each phase of the project with established key milestones. 6.1.5 Selecting the Preferred Procurement Process Entering into the procurement phase, some decisions regarding the preferred method should be made. Generally speaking, there are two main methods of procurement: competitive negotiation and pre-qualification. The choice of method is based on a range of factors, but is mainly distinguished by the level of competition and input required for the project. Whichever method is chosen, the procurement package must include standardized bidding documents, procedures for the announcement and subsequent evaluation of private sector bids, and a method for awarding contracts. Exposing the project to a fair, open and transparent procurement process is fundamental to the formation of a strong building block upon which bidders will build their submissions. As mentioned, there are two primary methods of procurement:

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6.1.6 Competitive Negotiations When this method of procurement has been issued, typically the public partner is less interested in new ideas and inputs and more focused on cost savings. The public sector teds to have rigidly defined scope and thus selects a fitting group of bidders to a open negotiation process where typically pressure is put on them to offer the best price. While this method tends to be quick and less expensive than pre-qualification, where a “ fully competitive” process takes place, it may limit the public sector’s ability to view other, potential cost-effective, or design enhancing approaches to project delivery. 6.1.7 Pre-Qualification This bidding process, usually a two-stage process which includes a request for qualification (RFQ) and a request to proposals (RFP), is typically adopted by the public agency to try ad harness the innovative to help it identity how to best meet project objectives. In order to attract international bidders and increase competition, the public agency publishes and widely disseminates the RFQ document. The document outlines with specificity the skills and market knowledge required for the project to help limit the number of private parties eligible to participate further in the process. Interested candidates match the requested qualifications but only the top bidders are invited to respond to the RFP stage, which marks final partner selection. Unlike the competitive negotiations process which tends to select a partner based on price, the public sector here aspires to attract bidders who can provide the best overall value to the project. It is important that governments take advantages of the early procurement process and use it as an effective two-way communication tool between the public and private bidders to finalize what needs to be provided. Care should be taken to help identify any issues either party may have as typically, the terms of the finalized contract are based on the specifications addressed in this stage. 6.1.8 Finalizing Contract Terms Ideally, the bulk of the contract should be sorted out during the bid process; however, final contract negotiations present the last opportunity to discuss any final issues between the two sides. One of the main goals of the PPP contract is to appropriately harness the expertise and the efficiency of the private partner without compromising the delivery of service for the public taxpayer. To accomplish this, the public agency is encouraged to ensure desirable outcomes by putting appropriate control mechanisms in place in addition to including highly specific contract terms and conditions that establish duties, proper allocation and management of risk performance targets, rules for changing contract conditions and procedures for dispute resolution and performance auditing. There should also be technical and financial evaluations that include clear date on the level of service being provided, specified timeframes for project mobilization, as well as financial formulas with regard to capital expenditures and revenues. 6.1.9 Stakeholder Engagement Moving forward with the implementation process, a key consideration the partnership must address is the need for on-going communication and engagement with stakeholders. The importance of stakeholder relations should not be overlooked and communication activities with these groups should not end with contract award. In fact, early identification and on-going involvement of key stakeholder groups and their interests greatly increase the chance of PPP success, particularly in urban sectors traditionally under the purview of governments. Therefore, as the PPP moves into implementation as mentioned, both parties should have

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comprehensive communication plan that establishes strong ties with interested members of the community and includes mechanisms for dialogue and stakeholder consultation. Meeting the needs of growing urban populations through successful planning and implementation of a PPP approach requires measures beyond the establishment of appropriate legal, regulatory, and financial structures. In fact, many partnership problems stem from non-technical challenges that arise in the working relationships between the range of actors involved, such as a lack of project leadership and insurmountable communication issues. This section maintains that successful PPPs show a high level of commitment in the following key organizational and administrative areas. 6.1.10 Partner Selection Whether initiated by the government or the private partner, well-organized PPPs begin by identifying the central problem, then seeking out the right partners to help solve it. For the public authority, choosing the lowest bidder in the tendering process is not always the best method for partner selection. A candidate with years of experience in the urban area being considered, along with a shared vision of the project’s goals, is important factors in identifying the right partner. 6.2.0 Building Strong Relationships through Clear Communication Fundamentally important to the functioning of the partnership will be its ability to build and maintain a deep level of trust among all partners and stakeholders. Ensuring that each party is exposed to on-going communication channels that relay timely and reliable information about the project is instrumental to effective relationship building and trust management. Experience shows that a well-structured comprehensive communication plan that includes a strong public consultation policy will guide communications activities across the full range of project participants. If successfully implemented, the plan can positively affect the working relationship between all parties. 6.2.1 Clear Roles and Responsibilities A well crafted written agreement that formalizes the relationship between all parties clearly delineates roles and responsibilities for each partner and puts in place a system of checks and balances to create co-dependency and transparency substantially increases the probability of success of the partnership. 6.2.2 Procedures Since not all contingencies can be foreseen in the planning stages of a partnership, it is critically important for the partnership that both the private and public sectors agree on key management procedures early on in the formation of the relationship. At the most basic level, there needs to be clear procedures in place for decision-making, solving problems, managing conflicts, and performance evaluation. 6.2.3 Strong Public Administration Indeed, asking a private consortium to deliver government services places more, not less, responsibility in the hands of the public administration. As a result, PPPs demand a strong(yet flexible) public administration one that is able to quickly adapt and respond to a wide array of changing circumstances. Ensuring that there is strong in house expertise to administer projects, as well as adequate practices for hiring outside experts on technical legal and financial matters in an asset. This requires managers who are trained and skilled not only in managing the complex web of relationships, but also skilled in negotiation, contract

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management, risk analysis and others (see figure 4) furthermore an institutional mechanism should be established to coordinate the activates of the public authorities responsible for issuing approvals, licenses and permits or any other authorization required for the implementation of the urban sector PPP. Without the internal capacity to facilitate these functions quickly and effectively, risk of project failure is increased for the partnership. Required Government in House Skills for PPPs

• Negotiation skills • Mediation • Arbitration • Contract law • Project Management • Performance Auditing and Quality control • Public Process • Private Sector Finance • Risk Management

The presence of strong leadership within the organization is another key element for a successful partnership. A strong leader can ensure clear direction and communication for all partners involved, hold partners accountable, as well as provide strategic focus and direction to planning. Although the presence of a strong leader is important on all sides, it is imperative that the leadership does not reflect the narrow goals of any one partner. Partnerships should be about joint responsibilities, shared problems and solutions, and mutually divided resources, risks and rewards. 6.2.4 Summary The Government of India and the State have created adequate institutional structure to proactively identify and develop PPP projects in the area of Agriculture, Urban Infrastructure, Tourism, Air, Rail, Roads and Rural Infrastructure etc. The departments and public agencies of the Government are given awareness on PPP approaches. The PPP plan, shelf of projects under each sector need to be developed. To do this, the IDD GoK, has initiated several measures of creating PPP Cell, transaction advisors, training cell at ATI. Training programmes are conducted regularly for all the departments who are identified under PPP sector. The officers are oriented on identification, feasibility, structuring, financing, bidding. Implementation and monitoring of projects. 6.2.5 Questions :

1. What are institutional set up for PPP in GoI and there functions? 2. Describe the institutional set up in Karnataka for PPP ? 3. Explain the steps in selecting preferred procurement in PPP projects? 4. What are the capacity requirements for Government to initiates PPP projects ?

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CHAPTER 7

CASE STUDIES AND EXPERIENCES ON PPP

7.1.0 Key Principles Public private partnerships should adopt the following eight governing principle:

1. The public interest in paramount 2. Good practices in accountability and transparency measures must be maintained

throughout the lifecycle of the project. 3. A PPP project needs to be carefully planned, well-defined in scope and fundamentally

clear in its objectives. 4. The viability of the project needs to be measured against a criteria set by the initiating

partner to assist it in determining it s potential suitability for PPP procurement. 5. The selected PPP model must provide value for money in terms of costs and time

savings with appropriate consideration of risk transfer 6. The PPP tendering process must be competitive, fait and subject to proper due

diligence on the part of the partnership. 7. An urban sector PPP must reflect the needs of the affected community and must

integrate into the project key stakeholders priorities. 8. The project must be responsibly managed throughout the terms of the agreement, with

predictability and priority as determined by the partnership. The Government of India has now allowed FDI in most infrastructure sectors. Despite this, PPP in India has not been that successful compared to foreign countries. There are barriers to PPP implementation in Indian Context. Also past case studies are analysed to learn from positives and negative aspects of these examples. These learning when implemented would help India to realize the true potential hidden in Public Private Partnership mode of project implementation.

7.1.1 Learning from case examples of successful and failed PPPs in India

In PPP, each stage has its unique requirements to be successful. The PPP project can fail due to failure in one or more stages in the process. However some PPP projects which did not succeed over the past had one or more prominent faulty stages. Due to this, the failed PPP project set an example of how not to handle these particular stages.

Similarly, there are examples of PPPs, wherein some stages were accomplished brilliantly. And the project set an example of how to accomplish these particular stages. Thus, for each stage and corresponding sub-stages, different PPPs were identified which correctly illustrate how to (or not to) handle these sub-stages. And finally learning was drawn from these examples to understand what will make corresponding sub-stages work better.

a) Project Preparation

Comprehensive due diligence Studies & Robust Traffic / Market Projections:

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7.2.0 Examples of successful & Failure PPPs

In the Timarpur Integrated solid waste management project, important steps such as detailed technical studies, financial and risk evaluation, obtaining regulatory and statutory approvals were undertaken at the project preparation stage itself. The project implementing SPV was also incorporated prior to the launch of the bid. This ensured that the actual project development phase experienced as few hurdles as possible.

• Examples of PPPs where problems were encountered

In The Vadodara Halol Toll Road project, estimating the traffic projections for the project, the industrial incentives available for the project area were assumed to continue over the long-term. However, these incentives were eventually withdrawn resulting in a traffic that was lower than the projected traffic. This resulted in increase in Policy Risk and Revenue Risk.

Learning: Due diligence studies of technical and legal implications are must to ensure the smooth progress of a project through the project life-cycle. Also robust traffic assessments ensure bids submitted by interested private entities are well informed and realistic and the overall capacity proposed for a project is optimum. They also help to mitigate corresponding revenue risks.

b) Procurement

Dealing with Speculative Bids:

• Examples of PPPs where problems were encountered

In the Hyderabad Metro project, the government provided commercial development rights for almost 296 acres of land allocated for the depots and the stations. This opportunity of the utilization of land on a commercial basis along with the metro project led to widely divergent bids from the bidders. Finally the award of this project to Maytas was withdrawn. But such speculative bids exposed the project to the risk of compromising the construction and quality of the metro project. As the private operator would have had a greater incentive to complete the real estate development at the cost of the metro.

Learning: While speculative bids should ideally be avoided, if encountered, the public entity should deal with them without jeopardizing the long term prospects of the project. This could even mean terminating and re-launching the bid process.

Importance of Lead Consortium Member/Promoter of Concessionaire:

• Examples of PPPs where problems were encountered

In the Hyderabad Metro project the winning consortium of Maytas Metro was badly affected due to the issues faced by its promoter - Satyam Computer Services. Although the project was to be implemented by a separate SPV, there was a loss of investor confidence within the promoters of the project. And eventually, the project failed to achieve financial closure. The government finally had to withdraw its award and re-launch the bid process.

Learning: The experience and expertise of the lead consortium member or promoter signifies the concessionaire’s ability to undertake complex projects. Therefore, there should adequate due diligence in contractually ensuring backing of the concessionaire by the promoter and the continued involvement of the lead member, at least during the project development stage.

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c) Development 7.2.1 Handling of Land Acquisition : Examples of Successful PPPs In the Hyderabad Metro project the government had to handover land to the concessionaire by the financial closure date. Moreover, 90% of the land had to be handed-over within 120 days from signing of the agreement. To ensure greater planning and focused efforts on land acquisition by the government; penalties were built in to the contract in case the government delayed the delivery of the land. To reduce the risk further, the project intended to use government lands to the possible extent.

Examples of PPPs where problems were encountered

In the Delhi Gurgaon expressway project prior to actually acquiring the land, the government committed to the promoters for providing a substantial area of land. But there were certain areas of land that were difficult to acquire, due to the thickly populated surrounding areas of the expressway. This exposed the government to the risk of not providing the land within reasonable time, thus impacting the overall schedule of the project.

Learning: It would have been better if uncontrollable risks such as the one incurred above, were addressed before the project procurement stage itself to ensure smooth functioning of the project. This could have been achieved by completing the land acquisition process prior to the project procurement process itself.

7.2.2 Streamlining of Approvals & Clearances: Examples of Successful PPPs In the Alandur Sewerage Project the Alandur Municipality took up the responsibility for key approvals, including road cutting, shifting of services and environmental clearances. The developer was responsible only of the ‘works’ related approvals. This approach ensured there was minimum delay in obtaining the necessary permits.

Learning: There should be a single interface for interactions or coordination on all such approvals to be setup by the government to prevent ensuing delays. This could be in the form of a lead entity OR a common project steering/ empowered committee taking up the responsibility of all such formalities. With this, the concessionaire could focus on the core development issues rather than being entangled in administrative processes.

7.2.3 Environmentally and Socially responsive development framework: Examples of Successful PPPs to be emulated In The Vadodara Halol Toll Road project, from the environmental and social assessment of the project it was concluded that the project would lead to resettlement and rehabilitation of about 300 families. Thus, to develop different alternatives, intense public consultations were carried out. Moreover Bypasses were introduced at various critical locations. As a result the extent of resettlement was reduced to only 10 project affected households.

Learning: Since most of Infrastructure projects have significant social and environmental impacts; it is necessary that PPPs have an environmentally and socially responsive development framework. Social and environment impact assessments are mandatory in this regard. This framework would also help in gathering public support for a PPP project.

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7.2.4 Financing Innovations: Examples of PPPs to be emulated The Vadodara Halol Toll Road was another project that utilized several financing methods such as deep discount bonds with an option of take-out financing, cumulative convertible preference shares and long term loans as a part of its financing structure.

Learning: It is important for PPP projects to be financially independent to the extent possible and minimize reliance on government grants or schemes. This is possible through innovative financing structures. They not only bring down the cost of funds but also tap new sources of funding. However, care should be taken to ensure that such innovations in financing do not result in speculative bids during the Procurement stage. Also Since real estate market is very volatile and cyclical in nature; real estate development should be a smaller component of the project or alternatively should be separated from the core infrastructure project.

7.2.5 Operations Favourable Operating Environment: Examples of Successful PPP

In the Amritsar Inter-state Bus Terminal project, the government issued notifications to the effect that all intercity buses would be required to pickup and drop off passengers at the new Inter City Bus Terminal. This effectively reduced the concessionaire’s revenue risk.

Learning: Since by nature PPP projects require the private sector to operate in a public dominated space, it is important to create a favourable operating environment for the private sector to function optimally.

7.2.6 Resolution of Issues through Mutual Discussions:

In PPP Projects there is always a likelihood of issues cropping up from time to time between the government and the public agency. Contracts merely specify the formal mechanism to deal with such issues. But in some cases solutions can only be identified through mutual discussions carried out in good faith.

Following table gives the Case studies that are uploaded on the website of Infrastructure Development Department GoK & the Department of Economic Affairs, GoI. The Officers are advised to read through the case studies.

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7.3.0 Case Studies on PPP

7.3.1 Experience of JUSCO water supply project in Mysore Rationale for PPP

• In spite of adequate water availability from a dependable source, citizens do not receive regular supply: water is supplied for a few hours on alternate days in many areas

• Significant extraction of ground water from bore wells and mixing up supply with Cauvery water through the same network

• Associated services like Customer Complaint Management, Billing & Revenue Collection, Active Leakage, Asset & Inventory Management very poor

• No bulk meters and very few working customer meters • Significant proportion of network comprises PVC pipes laid at shallow depths and

solvent cement jointed • Lack of accountability of staff due to politicized system • Sizeable expenditure from municipal budget with no tangible gains

7.3.2 Problems faced in PPP in the project

• Power Failure during the Supply hours • Non Performance of deputed employees • Security of JUSCO Employees • Political Interference in Daily operations of Water Supply • Water Distribution Sub stations should be declared as prohibited area

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• Internal transfer of deputed employees • Deputation of O&M deputed staff for revenue drive • MBR Outlet Valve leakage • Additional Tanker requirement • Decision required for 24x7 water supply – In line with District Minister’s

instruction

7.3.3 Problems in putting through a 24X7 contract � Overall acceptance to PSP in water

� Lack of ownership of initiative across different levels and hence resistance from different quarters (political, NGOs, employees, public)

� Lack of communication to different stakeholders resulting in anxieties and insecurities

� Vested interests and hence resistance

� Inadequate planning & preparation � Poor Network & leakage data � Improper estimates of rehabilitation costs � Inadequate availability of bulk water to achieve 24X7 � Inadequate time to bid, to execute and to demonstrate performance � Very stiff or unrealistic performance goals

7.4 Case Studies on PPP

Case Study 1 MUNICIPAL SOLID WASTE COLLECTION AND TRANSPORTATION – NEW DELHI MUNICIPAL COUNCIL

Solid Waste Management

PPP context The following formed the background for the NDMC Waste Management Concession: 1. The Supreme Court of India made a series of judgements (in the Dr. B L Wadehra versus Union of India case, 1996 and the case of the writ petition filed by Almitra H Patel, 1998) - upholding the right of citizens of Delhi to live in a clean city, emphasizing the statutory obligation of NDMC and the MCD towards waste management and issuing directives towards efficient management of wastes in the city. 2. As part of the proceedings in the Almitra Patel case, the Supreme Court set up a Committee in 1996 under the chairmanship of Mr. Asim Burmon to make recommendations towards SWM in urban areas. Based on the recommendations, the Ministry of Environment and Forests notified the Municipal Solid Waste (Management and Handling) Rules, 2000. These rules are time bound, hold the Urban Local Bodies (ULBs) accountable and prescribe penalties for non-compliance and non-performance. 3. The existing system of waste management through NDMC staff was fraught with issues such as high manpower and operation costs, inefficiencies in collection and transportation, technologically archaic equipment and installations, mixing of wastes reducing efficacy of land fills and treatment plants etc.

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4. Analysis of the system suggested that a large proportion of the cost incurred was on account of collection and transportation – Rs.556 (54%) out of an average cost of Rs.1029 per metric ton (MT). Analysis also indicated that costs could be significantly lower if such functions were carried out by a private operator. Project Development Project Conceptualization In order to overcome capacity and financial constraints and to develop an efficient SWM system, the NDMC opted to engage the private sector for managing labour intensive tasks of collection and transportation of wastes. This was envisaged as part of a larger strategy, where better segregation would be practised at source, collected at the household level through rag pickers organized through NGOs, and collected, further segregated and transported separately to existing landfill and treatment sites by the operator. The project was expected to facilitate better collection/transportation at lower costs and increase the efficiency of post processing of wastes. Project Development 1. The NDMC established an Advisory Committee for facilitating the decision making process, ensuring stakeholder participation, facilitating approvals and co-coordinating with various associated departments. The Committee was headed by the Chairman of NDMC and comprised of the Project Director, various technical advisors and a representative of the Health Department (Anchor Department). 2. Technical studies were conducted through a Transaction Advisor1 to review the gaps in existing mechanisms and ascertain the quantum of wastes to be handled by the private agency in addition to feasibility and value for money analysis. Infrastructure Procurement Procedure The contract was awarded in the form of an 8 year concession for 12 selected circles within NDMC through a competitive bidding process in 2006. Pre-qualification criteria included (other than financial profile of company) the experience of bidders in any of the following criteria: 1. Collection-transportation of at least 20000 tonnes/annum or annual billings of at least Rs.10 million from collection-transportation of any kind of wastes for each of the last 2 financial years Handling of a fleet of at least 20 goods vehicles for each of the last 2 financial years 3. Transportation of at least 1 Lakh tonnes per annum of minerals, metals and materials such as iron ore, steel, coal, sand for each of the last 2 financial years 4. Development of at least one core sector project with a project cost of at least Rs.150 million for government agencies in the last 5 financial years . The award – based on the lowest quote for tipping fee payable by NDMC (bid parameter) – was made to M/s Ramky Energy and Environment Limited based on their quote of Rs.468 per MT as the tipping fee. Lessons Learnt 1. Importance of structuring operator obligations in a way that monitoring is in-built into the structure and quality services are ensured. In this case the linking of tipping fee with other

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obligations such as maintenance of a certain level of segregation of waste acts as a monitoring device. 2. While the project has largely been successfully implemented, the expected levels of segregation have not been achieved. It was expected that a larger city level strategy where community groups would practice source segregation and undertake primary collection could be implemented. The efficiency of the private partner to deliver segregated wastes was contingent upon the efficiency of such a primary system. It was also thought that the private partner would work actively with the community groups and stakeholders like rag pickers to ensure that the waste segregation targets are achieved. However, lack of adequate efforts to operationalise and incentivise such systems, have led to non-achievement of segregation benchmarks. It is also clear that NDMC also has a critical role to play in this process and cannot leave it entirely to the private partner. Note : Refer www.iddkarnataka.gov.in and PPP Cell, DEA, GoI for more details

Case Study 2 SANITARY LANDFILL AT MAVALLIPURA BANGA LORE Solid Waste Management

PPP Context 1. The Ministry of Environment and Forests notified the Municipal Solid Waste (Management and Handling) Rules in 2000. These rules are time bound, hold the Urban Local Bodies (ULBs) accountable and prescribe penalties for non-compliance and non-performance; triggering among other things the need for improved waste disposal practices such as scientific disposal and sanitary land filling. 2. Total generation of Municipal Solid Waste (MSW) in Bangalore at the time of commissioning of the project was about 2500 tons per day (including compostable and recyclable wastes). The city did not have a properly designed system for disposal and the wastes generated were disposed off at open dumping facilities on the outskirts of the city. This led to issues such as unhygienic conditions, pollution of ground water due to percolation of pollutants from the garbage into the earth, nuisance due to scavenging birds etc. There was clearly a need to implement a scientific disposal system for the city. Project Development Project Conceptualization The project envisaged a simple procedure for handling MSW generated in the city – rendering the wastes ‘inert’ followed by sanitary landfill of the inert residual matter. The landfill project was proposed for a capacity of 1000 tons per day spread over two sites. The first project (subject of this case) was for a 100 acres site at Mavallipura to handle 400 tons of MSW per day. Engagement with a private partner was 3 expected to bring the required technical capacity and experience to the project, and the Concessionaire was to be responsible for design, construction, operation and long term maintenance (20 years when the site would be operational and 15 years after closure of the site due to saturation) of the land fill. BBMP undertook the task of delivering the wastes to the site. Since no direct revenues ((except possible sale of composts and recyclables) were to accrue from the project, it was decided to pay the Concessionaire on a ‘tipping fee per ton’ basis.

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Project Development 1. Between 2001 and 2004, the Government of Karnataka (GoK) through the BBMP, the Transaction Advisor1 and the Bangalore Agenda Task Force (BATF), which comprised of a team of experts in MSW management, undertook activities for setting up scientific land fills for the waste generated within the City. About 111 acres of land spread across nine sites within the Bangalore district was available for the purpose (allotted in 2000 by the Revenue Department, GoK). 2. BBMP conducted several background studies for the project through the Transaction Advisor including feasibility study, location analysis, capacity and expected duration for saturation of chosen site, quantum of wastes to be handled by the private player etc. Preliminary investigations of feasibility of allotted lands for the purpose of developing landfills revealed that 7 out of the 9 sites could not be used due to various environmental and social (proximity to existing habitation and public resistance) reasons. The final sites were decided after conducting detailed Environmental Impact Assessment, commitments from the BBMP to relocate certain existing functions outside the mandatory 500m buffer zone (as per MSW 2000 Rules) and after additional acquisition of land since the allotted lands at the chosen sites was inadequate. 4. Detailed layout and drawings were prepared by the public agency for the land fill site and the use of the designs was optional for the Concessionaire. In any case the responsibility for the design was borne by the Concessionaire. 5. Review of the progress of project development activities was carried out on a weekly basis. The meeting was attended by representatives of BBMP, BATF, and the Transaction Advisor who discussed the various activities undertaken and action to be taken during the development stage. Whenever bottlenecks emerged, the matter would be taken up and resolved at the higher level with the Commissioner, BBMP or Secretary, Urban Development Department or any other senior office of the relevant Government Department. Procurement Procedure Procurement of the Concessionaire was based on a two stage (RfQ followed by RfP) competitive bidding process. The final contract was awarded to M/s Ramky Enviro Engineers Limited in August 2004, based on their lowest quote for tipping fee per ton of residual inert matter going into the landfill (bid parameter). Lessons Learnt 1. The failure of the BBMP to hand over committed quantum of land for the sanitary landfill has resulted in both reduced capacity of the scheme as also reduced revenue expectations for the private Concessionaire (quantum has reduced but period of concession has remained the same). Though the issue was resolved amicably it could have had very serious consequences for the future of the project since the very basis of the revenue forecasts had been changed. The importance of gaining possession of adequate land before committing to the obligation cannot be understated. 2. The project also highlights the importance of committed efforts by Public Authorities to ensure implementation of a project. The procedure of weekly meetings amongst project

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stakeholders to ascertain project progress and regular monitoring and intervention by top management followed in the case became a trendsetter for all future projects. 3. The project provided a unique opportunity to levy appropriate user charges, create a revenue stream for future recurring and capital expenses for SWM and create a framework which would be sustainable for the ULB in the long run. However due to certain logistical reasons the BBMP has not been to implement such user fees. 4. Importance of proper information, education and communication (IEC) so as to avoid resistances from other stakeholders. This is particularly important in sectors such as waste management due to the ‘nuisance’ value and ‘not in my back yard (NIMBY)’ syndrome associated with its processes. 5. The complaints of the citizens may nevertheless have been justified and as such projects of this nature should insist on incorporating environmental safeguards and if required insist on use of more appropriate and safe technologies. Note : Refer www.iddkarnataka.gov.in and PPP Cell, DEA, GoI for more details

Case Study 3 THIRUVANANTHAPURAM CITY ROADS IMPROVEM ENT PROJECT

Transport Infrastructure PPP Context 1. Enactment of Kerala Road Fund Act in 2001, making provisions for setting up a ‘Road Fund’ outside the consolidated fund of the State and constituting a Board for its administration. The Act also provided for collection of user charges by private companies. The Road Fund was to be constituted of 10% of motor vehicles taxes, tolls collected under the Kerala Tolls Act of 1986 and contributions from the Central Road Fund. Rules were issued in 2003 for carrying out the provisions of the Act. 2. Constitution of the Kerala Road Fund Board (KRFB) in 2004, to mobilize funds for road infrastructure, approve PPP arrangements and allocate funds (subsidies/annuities) from the Fund to private players in road projects. The Road Fund formed the primary source of annuity payments under the Thiruvananthapuram City Roads Improvement Project (TCRIP). 3. All major city roads, including important National Highway Bypasses needed improvement in terms of widening, improvements in strength of road surface, improvement of pedestrian pathways and signage. Project Development Project Conceptualization Urban Roads are typically constructed and maintained through small construction contracts with short liability periods in case of defects. As a result most such projects are fraught with piece-meal improvements and poor quality of construction, leading to frequent repair and maintenance of the same stretches of roads. TCRIP attempted a ‘life cycle’ approach to road improvement, making the Concessionaire responsible for long term maintenance of the roads, thereby ensuring better quality of services. The project envisaged expanding, strengthening and upgrading some of the arterial

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roads of the city, keeping in mind the likely growth in traffic over the next decade and was structured on an annuity (semi annual) basis, since tolling within the city was not feasible. The annuity was to be paid through the Kerala Road Fund so as to provide additional assurance to private agencies, as against the normative practice of budgetary allocations which are made one year at a time. Project Development 1. Annuity payments to the Concessionaire were to be made from the Road Fund. For this purpose extensive financial analysis was conducted and plans were prepared in due consultation with various related departments (including the Finance Department). 2. A Detailed Project Report (DPR) was prepared through a Technical Consultant1 and involved preparation of technical designs, drawings and estimation of costs. Procurement Procedure Procurement of Concessionaire for the TCRIP was based on a two stage (RfQ and RfP) competitive bidding process. The project was awarded in March 2004 to an SPV called Thiruvananthapuram Road Development Company Limited (TRDCL) formed between IL&FS Transportation Networks Limited and Punj Lloyd Limited, based on their quote for lowest annuity amount (bid parameter). Lessons Learnt 1. The project highlights the possibility of undertaking unusual urban sector projects – such as development and maintenance of ‘within city’ road projects through PPP arrangements. The project also highlights the importance of making the Concessionaire responsible for long term maintenance of the infrastructure so as to ensure the quality of services obtained through such arrangements. 2. The need for creating a dedicated funding mechanism, such as the ‘Road Fund’ created in Kerala for the TCRIP project, to increase the comfort level of the private sector for participating in such projects - particularly when the payment is structured as a fixed annuity to be paid by the Concessioning Authority. 3. Importance of structuring operator remuneration in a way that monitoring is in-built into the mechanism and quality services are ensured. In this case the linking of annuity payments in O&M phase with factors such as ‘Assured Availability’ of the entire carriageway acts as a monitoring device. 4. Timely provision of land is one of the key requirements for achieving desired project outcomes within fixed timelines. In the TCRIP the failure of the PWD to secure and handover land as per its time commitments has severely affected project outcomes and resulted in additional financial liability (through compensation) for the Concessioning Authority. The importance of gaining possession of adequate land before committing to the contractual obligation cannot be understated. 5. The issue of delay in handover of land also highlights the importance the Concessioning Authority’s compliance with its own commitments. In this the failure of the PWD has resulted in extra financial liabilities for the Authority and resulted in wastage of public money.

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Note : Refer www.iddkarnataka.gov.in and PPP Cell, DEA, GoI for more details

Case Study 4 OPERATION AND MAINTENANCE OF STREET LIGHTS IN VIJAYAWADA Street Lighting

PPP Context 1. The Vijayawada Municipal Corporation (VMC) had around 27,000 street lights prior to the PPP initiative, managed entirely through municipal officials. Capital works were undertaken through regular EPC contracts and operation and maintenance (O&M) through 60 contractual staff appointed for the purpose. Funding was through annual budgetary allocations. 2. The Corporation incurred an annual expenditure of Rs.411.18 lakh on energy bills for street lighting and Rs.53.04 lakh for annual maintenance (material and labour). Overall expenditure of the ULB on account of energy bills (all services combined) per year was as high as Rs.12 Crore approximately. 3. As part of its Silver Jubilee celebrations in 2006-07, the ULB set itself the target of becoming India’s first energy efficient city, and an Energy Conservation Plan was proposed including proposals to introduce energy saving technology in street lighting. Project Development Project Conceptualization In order to implement an energy-efficient street lighting system, through high quality equipment and high-end technology, and reduce overall energy expenditure of the ULB, the VMC decided to adopt a PPP model with an Energy Service Company (ESCO) as the private partner. An ESCO is a company that develops and operates projects designed to improve energy efficiency and reduce maintenance costs for facilities. In the Vijayawada case the ESCO was expected to finance, procure, install and maintain a new system for a period of five years and achieve power savings in return for a fixed proportion of the savings of VMC on energy bills. Main features of the project included: 1. Latest and highly advanced lighting panels with self protecting and diagnostic features 2. A central computerized control facility – allowing remote monitoring of the system including identification of defects 3. Programmable interface allowing auto switch on/off based on inbuilt database of sunset/sunrise times of the city and adjustments to lighting LUX levels according to traffic patterns, time of night, voltage fluctuations etc. 4. Transmission of real time information regarding status and condition of lights, energy readings (through digital energy meters remotely connected with the central data base server), long term data storage of energy readings (up to 6 months) etc. Project Development 1. One of the primary hurdles with implementing the project on a PPP basis was the initial political resistance to the proposal. The Council had reservations against such an effort, due to a bad precedent of a failed service contract for street lighting given out in 2002-03.

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2. In order to address this through demonstration of actual results, the municipal officials decided to pilot the new technology, and for this purpose energy saver devices were installed along a demo road through M/s Servomax India Ltd in 2005. The experiment resulted in 35% savings in energy consumption. 3. The final strategy to implement the project through an ESCO was based on study visits to Bangalore to review the Outer Ring Road Energy Saving Project initiated by the Bangalore Development Authority. 4. An Empowered Committee was constituted for selection of the ESCO and finalization of appropriate technology for the project. The Committee was comprised of various technical personnel from the VMC, with the Chief Engineer as the Chairman. 5. The Council finally approved the project in May 2006 vide resolution no. 61, following a visit (led by the Mayor) to the Nasik Municipal Corporation for studying the performance of their Energy Saving Project. Procurement Procedure Procurement of the ESCO was based on a competitive bidding process initiated in September 2005. Eligibility criteria included the following: 1. Annual turnover of at least Rs.1 Crore in any of the last five years 2. Experience of completing an energy saving project for street lights of at least 1000 KVA for any ULB or Development Authority The 5 year O&M concession was awarded to M/s Real Energy, based on their quote for 41.5% savings in power consumption (bid parameter). The ESCO was expected to conduct a pilot in selected areas for a period of 3 months and the full term was to be granted only upon successful demonstration within the period. Lessons Learnt 1. Considering that the entire financial mechanism, specially the revenue for the ESCO was derived only from energy savings, the project makes a special case for replication in other ULBs (hardly any ULBs in the country are energy efficient). The ULB does not need to bear any investment risks and can bring in enormous systemic efficiency and advancement. 2. Making the ESCO responsible for investments ensured the quality of equipment and systems installed in the project period, since all retrieval was based on the performance of such installations 3. Rules of the game should be endorsed by both parties right at the inception. While all issues regarding baseline information and meter reading (4.3 above) were solved amicably they could easily have derailed the project due to inaccurate revenue forecasts at the ESCO end. 4. The role of proper IEC, particularly for generating political consensus for implementing projects on a PPP model cannot be understated. In the Vijayawada case, the precedent of failed privatization had substantially weakened the political support for a PPP. However the Authorities persevered, demonstrated the strength of the scheme though pilots and conducted several meetings with the councillors leading to the eventual sanction of the project.

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5. One of the key issues that the project did not address at inception is the issue of O&M after the project period. Considering that the project involved installation and operation of substantially advanced technologies and systems, the project could have involved existing ULB staff so as to ensure adequate skill transfer during the implementation period. Note : Refer www.iddkarnataka.gov.in and PPP Cell, DEA, GoI for more details

Case Study 5 INDRAPRASTHA APOLLO HOSPITAL NEW DELH I

PPP Context 1. Delhi has experienced rapid demographic growth in the last couple of decades leading to shortfalls in the supply of adequate healthcare services. The gap is particularly acute for households living below the poverty line (BPL), whose access to advanced and affordable hospital services is highly constrained.

2. This led to a felt need for upgrading the health-care infrastructure of the city through modern state-of-the-art facilities, hospitals, pre-medical emergency response systems etc. with emphasis on ensuring access to the poor. Given the lack of adequate reach of existing public infrastructure, there was also a felt need to engage with the private sector for meeting the demand-supply gap.

3. With such an objective as the backdrop, the GNCTD entered formed a JV with the Apollo Hospital Group (AHG) in 1988 to constitute a Public Limited Company called Indraprastha Medical Corporation (IMC) Limited. IMC Limited is a listed company with 26% shares each held by GNTCD and AHG. The JV was chosen as the private partner for the Indraprastha Apollo Hospital Project. Project Development Project Conceptualization The GNCTD with a vision to provide its citizens with modern hospital facilities, proposed to develop a multi-speciality hospital through its JV – IMC, which had the technical capacity (in the form of Apollo Hospital Group as the JV partner) to establish and operate such an advanced facility. The Government was to provide land and a proportion of the Capital expenditure (Capex) for the hospital building and the Concessionaire was to contribute towards the remaining building component and other medical infrastructure and operate the hospital. In lieu of the contribution of the Government, the hospital was expected to provide in-patient and out-patient treatment free of cost to poorer citizens of Delhi. Following were the key features of the proposed facility: 1. Largest Corporate Hospital in India and the fourth largest in the World; spread over 675,000 sq.ft with a capacity of at least 600 beds (with a provision for expansion up to 1000 beds)

2. Wide range of diagnostic, medical and surgical facilities for patients in a wide range of medical disciplines.

3. Speciality centres such as cardiac centre, cancer centre and a surgical science centre amongst others.

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4. Large out-patient facility and other facilities such as ambulance (including air ambulance) services Lessons Learnt 1. The project though initially well structured in terms of both project viability and protection of public interests, has not met its objectives (at Government’s end). This is largely due to lack of a strong monitoring framework. Considering that a very large amount of public money has been invested in the project it is important to ensure that the social objectives of the project are fulfilled. The project thus highlights the need for better post contract management through independent third party monitoring. 2. The GNCTD performs three contradictory roles in this particular PPP arrangement - that of a Concessioning Authority, that of the project oversight agency and that of an equal partner in the JV selected as the Concessionaire. The resultant conflict of interest can often impact the neutrality of monitoring processes and affect project outcomes.

3. The procedures for availing benefits under the project by BPL patients were fairly complicated with the prospective beneficiary having to carry a signed letter from the Lt. Governor of GNCTD. Such processes need to be simplified so as to allow target beneficiaries to avail services without difficulty, as seen in PPPs such as the Chiranjeevi scheme in Gujarat where possession of vouchers or BPL cards is the only pre-condition. Note : Refer www.iddkarnataka.gov.in and PPP Cell, DEA, GoI for more details

Case Study 6 ALANDUR SEWERAGE PROJECT Project Description The Alandur Sewerage Project (ASP) was initiated in the year 1996 by the Chairman of the Alandur Municipality (AM). AM, located adjacent to Chennai, forms a part of the Chennai Metropolitan Area. With a population of around 165,000, the municipality is a residential suburb of Chennai with predominantly residential and commercial activities. Approximately one-fourth of its population lives in slums. Prior to 1996, the town did not have an underground sewerage system and all sewage was managed with individual septic tanks. The largely unregulated disposal of sewage in storm water drains was an environmental and health concern for the local residents and was frequently raised as a political issue. Around 98% of 19,800 households used either septic tanks or holding tanks collected periodically by tankers and disposed in the low-lying areas outside the municipal limits. In 1996, AM announced an ambitious plan to construct an underground sewerage system and waste water treatment facility with the participation of the private sector, contribution from the public, and payment to be provided by the city. The proposal was ‘transformational’ as it involved a service never before made available by the municipality, with financial and management responsibilities being shared by the municipality, the residents, the private sector, and state government bodies. The ASP was designed with the following objectives:

� To improve the standard of living of the residents of Alandur (on par with that of Chennai); � To provide the most essential basic facility to all the residents of the town;

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� To eradicate the mosquito menace; � To avoid the recurring expenditure on septic tank cleaning; and � To avoid ground water contamination.

The proposed sewerage system was to be designed for the estimated population of about 300,000 in 2027 and was planned to be completed within a five-year period from its inception date. The project components included:

� A sewerage network consisting of the main sewer line, branch sewer line and manholes; � Construction of a sewage pumping station; � A sewage treatment plant; and � Low cost sanitation

In the initial phase the plant was to treat 12 million litres per day (mld) of sewage supplied to it by the municipality. The ultimate capacity was to be 24 mld. To plan this complex and politically challenging project, the AM worked in partnership with the Tamil Nadu Urban Infrastructure Financial Services Limited (TNUIFSL), the state asset management company and with USAID’s Financial Institution Reform and Expansion (FIRE) Project. PPP structure of the Project The ASP was the first project in the municipal water sector to be taken through the Public Private Partnership route in India. The construction of the underground sewerage system in Alandur town, involving the laying of pipes, construction of pumping station, etc., was done on a BOQ (Bill of Quantities) basis, and the sewerage treatment plant (STP) on a BOT (Build, Operate and Transfer) basis. Besides the construction responsibility, the contractor was also required to undertake the operation and maintenance of the sewerage system for a period of five years from the date of completion of the construction, on a fixed fee basis. The collection of tariff and provision of new connections during the O&M phase was to be undertaken by the municipality directly. Accordingly, the PPP structure of this complex project was governed by three contracting mechanisms awarded to one engineering, procurement, and construction (EPC) contractor selected through a competitive bidding process:

• A Works Contract for construction of the sewage network, using the World Bank’s Contract for National Competitive Bidding (NCB-W2) as the template;

• An Operations and Management Contract, also using NCB-W2. The selected contractor would operate and maintain the underground sewerage system for a period of five years on a fixed fee basis.

• A Lease Contract (in the nature of a BOT Agreement) for the STP, using guidelines from the International Federation of Consulting Engineers (FIDIC). Through this Agreement, the contractor would finance, build and operate the STP for a period as proposed in the contractor’s successful bid. The contractor would be required to recover the investment on the STP on the basis of a per unit rate payment from the municipality for treatment of sewage delivered. The municipality agreed to provide a minimum payment level per annum regardless of the volume of sewage actually delivered. It was designed to cover the company's minimum fixed operating cost and capital investment. Accordingly, the PPP structure was technically in the nature of BOT-Annuity. Following the bid process, the project was awarded to IVRCL Infrastructures and Projects Ltd in technical collaboration with Va Tech Wabag Technologies Ltd. A Special Project vehicle (SPV) called ‘First Sewerage Treatment Plant Pvt Ltd’ (First STP) was incorporated

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and was the concessionaire company with whom the BOT Agreement was signed. Once the project achieved financial closure, First STP Pvt. Ltd signed contracts with IVRCL and Va Tech Wabag. IVRCL was to carry out the civil works for the project. Va Tech Wabag, through the electro mechanical contract, was to design the process, supply, install and commission the equipment. It was also to carry out a contract for operating and maintaining the facility for 14 years. The land on which the plant was set up was leased by the municipality to First STP. Details of Project Financing Sources of Finance Amount

(in Rs. Crores) % to total

LOAN Term loan from TUFIDCO 16.20 46.82 Term loan from TNUIFSL 4.20 12.13 GRANTS 1.00 2.89 From TUFIDCO for supervision 3.20 9.24 From GoTN to bridge the gap 8.00 23.12 PUBLIC CONTRIBUTION 2.00 5.78 Deposit collection Interest from Deposits 34.60 100 TOTAL Source: Alandur Municipality Impact of PPP A brief on the difference made by the ASP, as captured below, illustrates that the ‘value for money’ brought in by the project far exceeded any monetary consideration:

SL No.

Parameter Situation before PPP intervention

Situation after PPP intervention

1. Urban service

No sewerage system for a population of 165,000

120 km of underground sewerage system, pumping stations and an STP of 24 MLD

2. Urban service

Water borne sanitation facilities, septic/holding tanks for disposal of night soil

Underground sewerage system with direct connection to each household

3. Urban service

Unregulated disposal of sewerage in storm water drainage and low lying areas

Modern sewerage treatment plant designed to international standards.

4. Environment and Health

Open storm water drains stagnating in outer areas of town – environmental and health hazard

Underground sewerage system has eliminated risk of mosquitoes and related diseases for the citizens of Alandur and surrounding areas.

5. Environment and health

Contamination of underground water sources due to open drains

Almost 100% eradication of ground water contamination through underground sewerage system and waste water treatment plant.

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6. Public participation

- Rs. 8 crores out of the capital cost of Rs. 34 crores was through public contribution

7. Public participation

- Collection of sewerage fee from the public (on a graded structure amounting to a weighted average of Rs. 75 per connection) amounts to Rs. 2 crores per month and covers both debt repayment and O&M costs of the AM

Key Learning and Observations

• Beneficiary participatory approach: People’s participation in the project, including the fact that almost 29% of the project cost was garnered from public contributions, was the most outstanding aspect and learning from the ASP. The project established that mobilising people’s participation for infrastructure projects is possible through collective efforts and transparentprocedures. The success of the project from the outset depended highly on effective collection of connection charges and monthly sewer fees as also public acceptance of engaging a private BOT participant. Community awareness, support and on-going cooperation was, therefore, critical. The aggressive public outreach campaign conducted by the municipality and GoTN and the engagement of stakeholders was essential to assure the lending agencies and city officials that repayment provisions would be met.

• Stakeholder involvement and interdepartmental coordination: Continued involvement of stakeholders throughout the project ensured timely completion of the project and addressing of issues even as they arise. To maintain support for the project, a citizen’s committee was formed and it met frequently to review the status of the project, monitor performance of the BOT contractor and provide a forum in which citizens could air their concerns. The ASP established that close involvement of all stakeholders/departments at the key decision-making stages of the project, as also for review and monitoring, is critical to ensuring that the project stays on-track.

• Political will and strong decision making, especially at the grass-root level: The ASP demonstrated that ‘political will and quick decisions make projects happen’. The political leadership and strong advocacy for the project provided by the chairman and council of the municipality proved to be critical element of the success. While strong support for the sewerage system within Alandur existed, political will was essential to convince the customers and citizens to pay a significant share of the cost and accept the entry of the private sector. Throughout the project decision making stages, the members of the municipality maintained full support for the project.

• Acceptance of fiscal discipline: The term lenders, TNUIFSL and TUFIDCO, placed strict lending conditions on the municipality, requiring the municipality to accept and implement strong fiscal discipline measures. TNUIFSL required the municipality to establish a separate sewer account distinct from the general budget of the municipality, forcing discipline and

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transparency on the officials managing the system. The municipality was also required to limit new debts to a certain percentage (typically 30%) of their revenue. GoTN, which provide loan guarantee, stipulated that any payment made to these entities on account of default by the municipality would be recovered from the annual transfer of payments from the municipality to the State Government. Similarly the contractual obligations between the municipality and the BOT operator forced the municipal government to ensure timely payment for management and waste water treatment services. Thus, the loan as well as contractual obligations ensured strong fiscal discipline by the municipal body, by making it take difficult decisions on capital priorities, closely oversee the sewer system management, and ensure budgeting of sufficient funds to meet payment schedules

• Implementing an effective fee system: Despite the willingness to pay survey that indicated that public willingness was far below the tariff requirement to meet the capital and operational cost of the project, the municipal council, through its rigorous public outreach measures, managed to impose reasonable levels of connection charges and sewer fee on the public. The municipality also managed to collect the connection charges fairly well in time to Pre-empt the need for the TNUIFSL loan. A large part of the success of the municipality in this aspect sprung from the fact that they provided sympathetic measures that addressed the concern of the public. For example, the connection deposits were collected in two instalments as per the convenience of the consumers; the local branch of the Punjab National Bank also offered financial support to the citizens of Alandur by creating a scheme for lending the connection deposit amount to them.

• Assurances on payment to the Private Sector Participant: The municipality agreed to provide the BOT operator a minimum level of income by accepting the ‘take or pay’ condition in the Agreement. Thus, the municipality assumed the risk of minimum payment to the operator while the private partner assumed all other responsibilities and risks of financing, constructing and operating the STP for a period of 14 years.

• Access to finance for the municipality: An important aspect of the success of the project stemmed from concession financing and subsidies from the Government and public-private entities, established specifically to meet the credit needs of the municipalities without access to private capital, due to a low or non-existent credit rating. Though almost 30% of the capital was generated by the municipality from connection fees, grants from GoTN and loans from TUFIDCO were crucial. The loan agreement from TNUIFSL, while proving to be unnecessary in the end, was imperative for participation in the finance package by all the parties.

• Technical and financial assistance: The expertise needed to plan and manage the technical and financial aspects of the project far exceeded the capacity of the municipality. Assistance from the other government bodies in the state, the Chennai Corporation, and sources, such as the USAID’s FIRE project, was critical. TNUIFSL and FIRE played a substantial role in structuring the project, managing the feasibility studies, and preparing the bid and contract documents crucial to project success. The review and approval of the engineering reports by the management committee, consisting of senior officials of the AM, the Tamil Nadu Water supply and Sewerage Board, Chennai Metropolitan Water Supply and Sewerage Board, and TNUIFSL, were essential for successful project management.

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• Transparency in bidding and contracting procedures: The transparent approach to the project, right from inception to selection of contractor/operator and implementation, was critical to providing the necessary assurance to the private sector bidders on the professional approach of the municipality. This included strict application of World Bank and FIDIC processes, oversight and approval of the process by the World Bank. Public participation in the deliberations of the management committee overseeing the tendering process execution was also important.

Case Study 7 - LATUR WATER SUPPLY PROJECT Project Description Located in the Maratwada region, Latur city is a district headquarter covering an area of 32.56 sq kms and a population of 3.5 lakhs (2001 census). The city is anticipated to witness a significant decadal growth in population of about 52%. The Latur Municipal Council (LMC) is responsible for water supply to Latur City. Prior to May 2005, the primary sources of water supply to the city were 2 weirs on Manjra river that supplied about 35 million litres per day (mlpd) of water. LMC operated two water treatment plants and a distribution network covering 350 kms. In addition, the city was also drawing about 3 mlpd of ground water through borewells and open wells. Historically, Latur city has faced acute water scarcity. LMC was supplying water to the city through individual connections as well as public standposts. Of the 26,000 regularised water connections, majority were unmetered connections along side a significant number of illegal connections. In addition to limited availability of water, the demand coverage was also low with only 70% of the population receiving water once a week. The situation was further aggravated during the summer season. For the state of Maharashtra, the Maharashtra Jeevan Pradhikaran (MJP) is the nodal agency responsible for development and regulation of water supply and sanitation. To overcome the source limitation of Latur city, in May 2005, MJP commissioned a source augmentation project for the city through the Stage V water supply scheme – a bulk water supply and distribution project. This included bulk water transmission over 65 kms at a capital cost of approximately Rs. 130 crores. With the commissioning of this scheme, MJP increased the total length of the water distribution system of Latur city by an additional 126 kms. LMC took over this scheme from MJP in 2005 but was unable to operate and maintain it optimally. Despite ample availability of water, LMC was unable to manage its distribution network and Latur city was receiving water only once a week. Consequently the percentage of Non Revenue Water (NRW), which is the difference between the quantity of treated water in the distribution system and the quantity of water that is actually billed to consumers, was also very high for LMC. In addition to such operational issues, LMC was also plagued by low collection efficiencies and constraints on revenue growth through revisions in water tariffs. Given LMC’s existing liabilities and its inability to raise additional resources of Rs. 17.17 crores for completing the existing water supply system, LMC initially decided to transfer the Stage V Water Supply scheme to MJP. Subsequently, LMC resolved to transfer the existing water supply scheme for the entire Latur city to MJP. Based on the resolution passed by LMC, MJP was given the right to operate the water supply scheme for Latur city for a period of 30 years. It was responsible for the operations and maintenance of existing water supply schemes as well as raising finance for

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completing the water supply scheme through a private operator. MJP was also given the right to charge water tariff as necessary and collect the revenue from the water users. MJP eventually floated a management contract tender in March 2006, which was the first source to tap integrated management contract being executed through a Special Purpose Vehicle (SPV). For the contract duration, the private entity is responsible for:

• Taking over existing assets from source to tap and providing operations, maintenance and repair of such resources

• Deploying of operations and maintenance staff, including key employees, on deputation from MJP and LMC. It would also provide adequate staff to meet network expansion requirements

• Providing a minimum average water supply to residents at adequate pressure and ensuring 24*7 pressurised water supply within 2 years of the contract period

• Increasing piped water coverage through new connections and ensuring 100% metering of existing connections

• Recovering cost of water supply based on tariffs fixed in the management contract • Implementing a billing and collection system • Creating consumer awareness and implementing a consumer redressal mechanism

The project area consists of 3 water sources, 6 pumping stations, 6 electrical installation, 3 water treatment plants, 2 master balancing reservoirs, 95 kms of transmission mains, 10 elevated service reservoirs, 1 ground service reservoir and 476 kms of distribution lines. PPP structure of the Project The PPP structure for the project is a performance based management contract for integrated source to tap water supply management for the Latur city.

• First Agreement between LMC and MJP: MJP entered into an agreement with LMC in February 2006 under which MJP was awarded the right of use of the water transmission and distribution assets of LMC. MJP is responsible for water supply to Latur city as well as operation and maintenance of related assets. Under the agreement MJP has the authority to charge water tariff and collect related revenue from consumers. This agreement was entered into for a period of 30 years.

• Management Contract between MJP and LWMC: Based on a competitive bidding process, MJP awarded the management contract for operation, maintenance and repair to the consortium consisting of three companies, Subhash Projects and Marketing Ltd., UPL-Environmental Engineers Limited and Hydro Comp Enterprises. As per the terms of engagement, an SPV “Latur Water Management Company Ltd.” (LWMC) was created by the private operator consortium with each partner having an equal stake of 33.3%. MJP entered into a ten year Management Contract with LWMC in June 2008 for operation, maintenance and repairs of all assets and resources under the Latur Water Supply Scheme. It included metering, billing and collection along with all fixed and variable investments relating to the water supply scheme. The underlying premise of the contract terms were the reduction of NRW and provision of 24*7 water supply to Latur city within 2 years. Key highlights of contract terms are given below:

o Role allocation between parties to contract was undertaken such that LWMC would be in charge of operations and maintenance of assets while MJP would take care of major repairs and rehabilitation activities.

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o Facilitation of project execution through establishment of SteeringCommittee. The Steering Committee would comprise the district collector, superintendent of police, chairman of municipal council, president of municipal council, chairman of water supply committee, chief officer of LMC, superintending engineer, executive engineer, sub-division engineer of MJP along with project manager of the Contractor and two of his field persons. The Steering Committee would meet at least once a month to oversee the issues that may be raised by LWMC.

o Specification of Performance standards for project execution in terms of minimum compliance levels were detailed in the contract terms.

o Provision for additional capital expenditure for efficiency improvements and infrastructure upgrading to be made by LWMC as it considers necessary.

o Collection of Water tariff from the consumer as agreed upon in the management contract. o Payment of Fixed monthly fees by LWMC to MJP for the contract duration. o Provision of 70 qualified employees by MJP to LWMC who would work on this project under

the direction and control of LWMC during the contract period. MJP would transfer 15 qualified employees while LMC would transfer 55 employees to LWMC.

o Provision for stability in electricity tariff was provided for in the contract terms to ensure input cost of electricity would remain within a specified price band. This price band provided for an incremental electricity tariff increase over the contract term. In the event of increase in electricity tariff beyond the price band, the terms of the contract ensured that MJP would compensate the private operator for such an increase. In case of reduction in electricity tariffs, the differential amount would be passed on to MJP/LMC by LWMC.

o Adoption of a pro-poor strategy wherein billing concessions were provided for slum areas and the concept of group connections was introduced. To ensure a smoother transition, concessions were provided to slum dwellers in terms of flat tariffs for the first nine months. Group connections were introduced for upto 4 households and the identified group leader would be responsible for collection and payment of all dues. The management contract that was entered into for Latur water supply was not a typical water supply management contract but a hybrid version of a management contract with elements of affermage / concession built into it wherein the private operator was taking on more that the standard levels of technical and commercial risks of a management contract. The decision to enter into such a contract with a private party was driven by resource limitations of LMC to finance and operate the water supply networks. The rationale for such a structuring of the management contract involving revenue collection and retention by the private operator rather than fixed payments for services, could also be on account of the fact that the cash strapped entity LMC or MJP would not have been in a position to guarantee any fixed payments to the private operator. Hence it decided to allow the private operator to retain revenues but ensure efficient service delivery by defining the service level standards and parameters and penalising the private operator in the event that he was unable to meet predefined standards.

• Tripartite Agreement between MJP, LMC and LWMC : In addition to the above agreements, a tripartite agreement was entered into between MJP, LMC and LWMC to ensure efficient execution of the project. As per the terms of this tripartite agreement

o Asset ownership relating to the project was retained by LMC. LMC would remain the sole owner of the existing water supply and distribution assets as well as additional assets that would be created by MJP and LWMC under the investment plan specified in the agreement. MJP would act as a custodian of the assets.

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o Necessary provisions were made to ensure adequate availability of raw water to LWMC for distribution. In case of scarcity of water in dams, MJP/LMC would provide all necessary support, including diversion of any funds received from any Governmental Agency to MJP, as decided by MJP and LMC. Additionally, in case there is any variation in the price of raw water provided by the irrigation department, MJP/LMC would also absorb the same.

o MJP/LMC would also provide the necessary support to LWMC during the conditions precedent period with respect to the repair of assets, water regularisation and 100% metering implementation.

o MJP and LMC would have an equal share in any profit/penalty payable by/to LWMC and associated with the execution of this management contract. While all three agreements were to be viewed in conjunction, in case of any inconsistencies, the terms of the Tripartite Agreement would prevail. Key Learning and Observations

1. Developing an effective communication strategy: Preliminary identification of key stakeholders through a communication needs survey greatly helps in developing a communication strategy to provide a conducive environment for project execution. Creating the necessary awareness among the consumers to pay for water in exchange for uninterrupted availability is a key variable to the success of such a delivery mechanism. Since transfer of the right of use of public assets to a private operator is a politically sensitive issue, necessary groundwork to facilitate such transition needs to be undertaken by the Government agencies prior to involvement of private parties. Open and frank discussions on issues relating to the existing water supply scheme/project and the positive impact of the involvement of the private operator through improved service delivery would also ensure a quicker buy-in from the stakeholders to such a management contract arrangement. In case of the Latur Water Supply project, there was stiff resistance to the project due to apprehensions of price increases. Hence creating the necessary consumer awareness and having an inclusive approach to stakeholder interaction, participation and management is the key to success.

2. Identifying a Nodal Agency to facilitate smooth project implementation and execution: The involvement of an agency with necessary technical knowledge, government backing and with experience in handling consumer relations in the specific sector would greatly help in facilitating project execution. In case of Latur Water Supply project, MJP played a critical role in conceiving the project as well as at implementation stage which included mediating between private operator and stakeholders at the time of public resistance. MJP also provided necessary support and protection to the private operator which ensured his continuance in the project despite severe public opposition. Such nodal agencies which have government backing could play an important role in facilitating PPP infrastructure development.

3. Carrying out comprehensive and detailed project preparation activities: Availability of data on key project parameters is critical to successful bidding of project. In case of a contract wherein the private operator takes on a significant amount of the commercial risk as in case of Latur Water Supply Project, the availability of accurate information on the key and basic variables such as distribution networks and consumers is important. In case of this project, the network drawings were incomplete and data was inaccurate. The private operator had to conduct a detailed asset survey and conditions assessment. Additionally a commercial validation of data through a detailed consumer survey was also required and undertaken by the private operator.

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4. Undertaking necessary capital expenditure to ensure efficient operability of assets prior to bidding. A thorough assessment of asset conditions and expected lifecycle of assets should be undertaken prior to the process of bidding. In addition, sufficient capital expenditure needs to be incurred by the utility before handing over the operations to a private contractor. It is pertinent to ensure that the water supply scheme is not plagued by any major operational issues which would hamper the ability of the private operator to discharge his obligations under the contract. Most Government agencies may not be in a position to undertake such an assessment since the primary drivers of such privatization initiatives are the financial constraints of such agencies as was the case in Latur where LMC was not in a position to raise finances for future investments. However, provision of funds for such studies and undertaking the same could potentially improve the ability of such projects to be funded through the private sector.

5. Developing an efficient and effective risk management mechanism is critical to success of complex management contracts: Risk identification and mitigation are critical elements to the success of any contracting structure. In case of Latur, a detailed risk identification process was undertaken by MJP. Various scenarios were identified and discussions were undertaken with relevant state officials and industry experts. A risk mitigation framework was developed for capping the identified risks and these were incorporated into the integrated management contract. For instance, the contract was structured in such a way that financial protection was provided to the private operator by ensuring that the estimated income through water tariff collections is always more than the estimated expenditure during the contract term. Undertaking such a detailed risk analysis and identification of measures to cap such risks at the time of developing the management contracts would help improve the confidence of private sector and inturn may translate into better private participation in projects which would otherwise be perceived as a high risk.

6. Creating a favourable policy environment by establishing a clearly defined tariff and metering policy prior to the bidding process. The tariff for the contract duration was finalised prior to the bidding process, to allow the bidders to quantify the tangible benefits from undertaking the project. The tariff structure was to see a staggered increase based on the contract terms. This reduced the revenue risk to an extent.

7. Undertaking flexible project structuring: The Latur Water Supply project is an example of striking a balance between a pro poor strategy and developing a financially viable project for the private operator based on operational efficiency improvements.

o Pro poor strategy: The project structuring and contract terms were undertaken keeping in mind the specific circumstances of Latur city. As mentioned previously, concessions were provided to slum dwellers for the first nine months of the contract period in terms of a flat monthly water supply rate. Additionally, public standposts were to be done away with and affected parties were to be encouraged to take individual or group connections for up to 4 households.

o Financially viable project for private operator: In the case of Latur, an attempt was made to develop a financially viable model based on operational efficiency improvements. Minimum performance standards had been set in the contract while increases in revenue could be achieved by the private operator through improved operational efficiencies. The private operator was able to successfully bid on the basis of loss reductions in the existing system along with revenues generated through metered connections. The financial model was based

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on improvements in operating efficiency and reduction in transmission losses through the contract period. As mentioned previously, tariff rationalization was undertaken by MJP prior to bidding. This coupled with the minimization of input risks in terms of electricity and water costs further strengthened the financial viability of the project.

o Possible changes to minimise opposition: The opposition to this project was both to the concept of “privatization” as well as billing of water supply services. Prior to this arrangement, the residents of Latur were not receiving regular water supply and were also not used to being billed for water supply. To minimise the opposition to such a system, a longer contract term could have been considered which would have allowed for staggered tariff increases and would have given the private operator enough time to recover his costs.

Case Study 8 - ILEMBE DISTRICT MUNICIPALITY- SIZA WATER COMPANY (SOUTH AFRICA)

Background In 1999, Suez Corporation, through a joint venture with Siza Water Company (SWC), was awarded a 30-year concession contract with the then Borough of Dolphin Coast (BODC) to become the first private company to manage and implement water and wastewater utility in the Southern Africa region. High growth projections for the areas, combined with poor stock of existing infrastructure, financial shortfalls, and lack of experience and managerial capacity in water provision left BODC to investigate PPP options for alternative service delivery in 1996. Initially, the partnership was welcomed by the city council and senior levels of government; however, by 2011, the company began facing significant financial challenges due to a combination of the following factor: external currency shocks, faltering technology and incorrect demand estimates for the initial concession design, which grossly overestimated population growth. Unable to pay its annual fees to the municipality SWC fought for a renegotiation of the terms of contract and won. The new agreement trimmed down the annual concession fees paid to the municipality by SWC for five years, increased water prices for the local community, and cut promised investment in maintaining and upgrading services by more than half. Following renegotiations, SWC slowly climbed back to profitable numbers while Suez reportedly obtained a 21 percent return on its investment, mainly due to a fixed annual fee SWC pays each year. Key Observations and Issues

A brief overview of this case study presents a mixed picture of the performance reliability of the water and wastewater partnership. The procurement process initiated a fair and competitive tender process with SWC chosen only after lengthy evaluation of the partner’s suitability as outlined by the municipality. Additionally, there appeared to have been considerable due diligence taken on the part of the partnership to ensure reliability ad viability in the planning stages of the project. Advisors on both sides were called in to help consult on complex negotiation and contract issues with the final concession agreement providing considerable details on matters of price, performance parameters, the rights and responsibility of various partners, as well as provisions for performance monitoring and evaluation.

In hindsight, however, it is clear that a greater effort and investment was needed in

testing the information that formed the basis of the contract to ensure better performance and monitoring of the project. For example, more information was required in the feasibility studies when evaluating the basis of PPP suitability in the region, particularly with regard to

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the demand data collected in projections. In addition, while the agreement outlined a system for project oversight by the municipality, it is clear that the public partner did not have the necessary skills to fulfil this role. An emphasis on providing training for municipal staff so they could adequately oversee the management of the water utility might have achieved more reliable service delivery with fewer price increases for the community. Lastly, given that the contract did not include a specific provision for community consultation; better integration of stakeholders into the process could have ensured that more adequate information was available when formulating contract decisions.

It should be noted that to date, community members have expressed considerable

dissatisfaction and mistrust of the partnership’s ability to provide quality water service for the region. Since the beginning of the concession agreement, there have been several interruptions of water services with little or no warning, and many communities still suffer sewage overflow, causing health hazards for surrounding communities. Reported unresponsiveness on the part of SWC on these, and other community complaint issues are a pointed concern despite the fact that the company operates a well-equipped call center that tracks complaints data. Residents also report confusing communication channels on important information regarding service and other provisions. For instance, policy clarity of the accommodation of a national free water requirement for the poor, along with conflicting information regarding the cost and approaches for service delivery, were reportedly poorly channelled to the community. Greater transparency and accountability on the part of the partnership, along with meaningful service channels, could have led to a higher level of trust and acceptance amongst members of the community.

More significantly, this case study illustrates the controversy and difficulty of water

concession partnerships in the developing countries. The concession is now a third complete and while there have been some high priority investments to the quality of the partnership since 2001, the partnership cannot yet be considered an unqualified success. Financial challenges that arose in the beginning of the partnership make it difficult to measure whether value for money has been achieved for the local population and SWC has yet to meet all of its obligations in maintain and upgrading basic water series. Therefore, notwithstanding the fact that the concession today is showing some signs of maturity, expectations from all stakeholders remain high with a considerable measure of hesitation from the community as to whether or not the partnership will create new opportunities for the local people, particularly for the poor.

Case Study 9- Bangalore MRT

• Feasibility studies undertaken in the mid nineties for an elevated rail system for Bangalore

• Company established by the state government. The joint venture partner was to be inducted in the company

• Bidding process resulted in selection of an international consortium. • Detailed studies by consortium established that more viability support was required. • Protracted negotiations led to cancellation of agreement • Government company to undertake project, based on studies by Delhi metro which is

having a different configuration • More than a decade has elapsed, transport systems in the city have seen significant

deterioration.

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Case Study 10 - Bus Terminal Redevelopment • Feasibility studies undertaken during FY 2003 for redevelopment of an existing bus

terminal (Bangalore) • Reconfiguration of bus movements, creation of commercial facilities, significant

parking space and plans for relocation of existing shops • Protracted discussions with stakeholders undertaken • Transparent bidding process followed & bidder identified (Least concession period) in

December 2003 • Formal approval not yet received for the project. Council approval received after 2

years. State government approval still awaited • Similar situation for 3 car parks in Delhi proposed by MCD, an integrated landfill in

Thiruvananthapuram

Case Study 11 - Lucknow SWM Project • Project proposed for setting up a waste-to-energy plant to handle 800 MT per day of

MSW • Bio-methanation, energy generation and composting • MoEF grant to the extent of 33% of project cost • Agreement with municipal corporation for segregated waste • Issues of inadequate quantum and quality of waste supplied versus ability of plan to

generated power • No comforts in agreement for financial investors in event of failure • Protracted negotiation led to closure of unit and sale of loans • Attempts to restart, but with not much success

Case Study 12 - Road Improvement

Thiruvanthapuram city road improvement program under a performance based deferred payment framework

o 42 km road widening and improvement ; 3 grade separators o Project development - Output based specification – details plan for land

acquisition and utility shifting o Annuity based payment structure from the Kerala road fund o Concession Agreement signed in March 2004 – land to be handed over by

December 2004 o Land not yet fully handed over o Contract being re-negotiated

Case Study 13 - Wastewater Treatment

• Setting up of a 60 MLD effluent treatment plant to achieve effective marine disposal • Serve the industrial areas of Ankleshwar, Panoli and Jhagadia in Gujarat • A dedicated SPV, Bharuch Eco Aqua Infra Limited, set up by GIDC and industrial

associations of the 3 locations • Project cost of INR 123 crores funded by equity (INR 36 crores), subsidy from

Ministry of Commerce (INR 63 crores and debt (INR 24 crores, 12 years) • Secured by charge on project assets and a GIDC guarantee • Project fully operational and debt effectively being serviced • Used of subsidies effectively and suitable credit enhancement can make projects

happen.

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Case Study 14- Bus Terminal at Amritsar • Department of Transport, Government of Punjab and PIDB offer a 12 years BOT

concession for development of an inter-city bus terminal at Amritsar • Bid won by Rohan Rajdeep Infrastructure (India) Private Ltd • The project cost of INR 19 crore was funded by equity (INR 7 crore) and debt (INR

12 crore, 11 year tenure) • Secured by exclusive charge on project assets, pledge of shares and sponsor

guarantees • Concession documents recognizes substitution rights of lenders • Project operational and fully servicing debt.

Case Study 15 - MELEKA- MANIPAL MEDICAL COLLEGE (M ALAYSIA-INDIA)

Background Formalized in 1993, Melaka-Manipal Medical College (MMMC) is the first joint venture partnership in professional education between the Malaysian and Indian governments. Prior to the agreement, a lack of financial and managerial capacity impeded the Malaysian government’s ability to meet the rising demand for more well-trained doctors in Malaysia. Recognizing this deficiency medical students travelled abroad to receive high quality medical training but at a great financial cost. The objective of the partnership is to meet the rising demand for more doctors in Malaysia by affording students a access to higher medical education at a lower price. The University offers students a twinning Bachelor or Medicine and Bachelor of Surgery Degree with pre-clinical training received at Manipal University, a private learning institute operating in Manipal, India, and clinical training awarded in Melaka, Malaysia. As a partner, the Government of Malaysia donated the hospital and health centres of medical teaching, some part-time faculty for medical teaching, some part-time faculty for clinical training, as well as financial assistance to deserving students admitted to the institution. Additionally, its regulatory bodies, the Medical Malaysian Council and the National Accreditation Board, partner to supervise and provide advisory services to ensure educational requirements meet minimal standards of conformity with government regulations. For its role, a private consortium under the leadership of Manipal Group provides the infrastructure and educational component for the Mani pal campus in India, along with the facilities, faculty and management needed to augment patient care at these hospitals and health care centres. In 2003, the medical degree which is conferred by Mani pal University was formally recognized by the Malaysian government and the institution now plays a larger role in attracting international students to study in Malaysia. Today the university and its programs are continually expanding and the partnership has helped meet the medical and educational needs for malayasia’s growing population. Key Observations and Issues The choice to invite Manipal Group, along with its flagship university, to partner with the Malaysian government in the provision of higher medical education was a customary one. Manipal University has a long history of training Malaysian doctors in India and Manipal Group enjoys a healthy reputation for being involved in joint venture partnerships both within

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India and abroad. In addition, an enabling economic environment in Malaysia provided great opportunities for PPPs in the health and education sector: the demand for doctors was high and was expected to grow as population and affluence rose steadily and the fundamentals of the economic and political climate remained strong. As such, it seemed only natural that the partnership between the two countries be formalized. That being said, the Malaysian government took prudent measures to ensure the strength and viability of the partnership. Before formalizing the agreement, the Malaysian government recognized that the role of privately managed institutions like MMMC must “not be at the expense of proper maintenance of expected norms and standards of teaching’. It was made clear early on that the intention of inviting the private sector to higher medical education was to complement, not replace, public medical schools and therefore, the government set strict criteria for the implementation and monitoring of the partnership in order to entrench consistency and fairness across the two curriculums. Further to the point, the regulatory bodies responsible for overseeing MMMC are well-equipped with appropriate policy and legal powers as well as the resource capacity to adequately monitor and protect the public interest in the practice of medicine. In many aspects the institution today is regarded as exemplifying a true partnership between the two countries and the private sector. Good governing principles, combined with a realistic approach towards PPPs on the part of the Malaysian government has allowed for greater accountability and transparency to occur. Manipal Group has expressed to work with the public sector in Malaysia and the cooperative and prudent efforts by the partners seems to facilitate a participatory process on the ground. The partnership has also worked to spread the cost of education between the two sectors. The Government of Malaysia provides subsidies to the existing private school program by funding some student enrollment and providing teaching supports while Manipal absorbs the cost of delivering medical education to students. This cost sharing feature has worked to eliminate institutional start-up expenses for the Malaysian government while better positioning the private partner to accrue financial gains in the future. More significantly, the incremental cost-savings for each partner has allowed more accessible for Malaysian students, many of whom would otherwise not be afforded the opportunity to study medicine. 7.5 ISSUES IN TOLL ROADS AND NATIONAL HIGHWAYS

The Government of India has undertaken to create an enabling framework for private sector participation in the development of the National Highways network. There are, however, certain issues limiting greater participation of the private sector in the development of road projects through the PPP route. Some of the issues include the following: The current policy of offering the project first on BOT (Toll), then on BOT (Annuity) and then on engineer procure and construct (EPC) contract is likely to introduce delay in the implementation of the project since government approval is required at each stage. In case of the BOT (Toll) model, the degree of risk exposure to the concessionaire is high and the private sector is reluctant to take high-risk exposure. On account of this, there has been very low private sector participation in bidding of projects that are to be developed through BOT (Toll) route. Though BOT (Annuity) exposes the concessionaire to a lower level of risk, the cost of the project procured through the BOT (Annuity) route is higher. The cost of private capital is comparatively higher compared with the sovereign cost of borrowing.

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The bidding process for PPP road projects has been standardized with the introduction of model RFQs and RFPs. There has been a lack of investor interest in the PPP road projects on account of certain clauses in both the model documents. For instance, as per the model RFQ, only six applicants will be short-listed for the bidding stage based on their respective aggregate experience score. And, as per the model RFP, the bidder will be ineligible for bidding if the bidder was: (1) pre-qualified for the bid stage (second stage of bidding process) in relation to eight or more projects, (2) declared as the selected bidder for undertaking four or more projects, or (3) unable to achieve financial close for two projects within the stipulated time during the period of two months preceding the bid due date. As per the MCA, risk allocation has been based on the underlying principle of allocating the risks to the parties best suited to manage them. However, there are certain risks such as land acquisition risk, which in spite of being allocated to the party best suited to manage the risks, has been a major cause for delay in timely completion of the project.

7.6 Disciplined Planning A disciplined approach to planning outlining a sound roadmap for implementation early on in the process is essential. Initial time spent fully exploring objectives and core values regarding the purpose of the project and how it intends to benefit the public will avoid missteps later in the process. This can also provide a degree of certainty and reassurance to all parties involved. The ultimate success of public-private partnerships will be determined by their impact on sustainable development relative to their cost to the benefits. However, such partnerships cannot go ahead unless they yield a positive rate of return over their duration from the individual perspective of all participants. A number of PPPs in developing countries unravelled in the last five years in the face of public protests, investor withdrawal or government dissatisfaction. It is not clear whether these projects were well conceived from a developmental viewpoint, but they obviously failed to satisfy the success criteria of their individual participants. Among the potential benefits of PPPs mentioned in the introduction, both efficiency gains and additional funding should be directly felt by consumers (at least if the latter is used to making services more widely available), who weigh these benefits against possibly higher prices and connectivity fees.

Special problem arises from the fact that consumers are a heterogeneous group – for instance when a PPP leads to a broader coverage of services, coupled with higher tariffs charged on the existing consumers. The success criterion of private investors or contractors is relatively straightforward. They look for their participation to show positive rates of return – or, as it is often expressed, to “generate a sufficient cash flow” – within a given period following their entry, while safeguarding their initial investment. The public sector is arguably the one that is confronted with the most complex set of success criteria. On the one hand, it has interests that conform with those of the consumers insofar as it is also in the interest of the public sector that the availability of utilities services is boosted and that they are provided more efficiently. On the other hand, it has to contrast this not only with the cost to the public but also to the affordability of services more generally; to the distributional aspects of tariff changes; and to the possible social costs associated with efficiency gains.

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Efficiency gains Cost of over staff, waste owing to insufficient attention to cost-recovery pricing and tariff collection, and a tendency to view the government, rather than consumers, as their real client. By reducing employment levels, moving to sustainable pricing policies and driving a wedge into political patronage, private investors have often dramatically improved efficiency. Private sector in infrastructure improves

7.7.0 PPP in Water sector A decade of experience with public-private partnerships based on an innovative contract

and with financial and technical assistance from international donors shows how PPPs can be used both to improve services and to expand coverage of infrastructure in a low-income country. The Senegal experience also highlights the importance of a government with the political will and commitment to carry out reforms and to address the issue of accessibility of infrastructure services by the poor.

In the early 1990s, prior to reforms, little more than one half of Senegal’s urban

population had access to a safe supply of piped water. Another 42 per cent were dependent on public fountains and the rest on vendors. In rural areas, only 65 per cent of the population had access to any form of safe and reliable water. Drinking water quality in the cities was poor and supply erratic. Poor collection rates and mounting debt meant that the public operator – though relatively efficient by African standards – had barely enough resources for operations and maintenance, with little left over for future investments.

Since reforms in 1995, the amount of water supplied has increased by 20 per cent and the

number of connections by 35 per cent. Consumers have also seen a more rapid response to complaints, longer hours of service and better quality water. From the point of view of the government and the investor, water losses have been reduced and bill collection has improved. The private operator, a French company, lost money in each of the first two years but has since turned a profit. It is the first water company in Africa to be awarded the ISO 9001: 2000 certification signifying that it meets a set of international quality management standards. The State holding company which owns the assets and undertakes investment is well on its way to achieving financial equilibrium and has been successful in borrowing in private capital markets.

The choice of contract for the water sector was the result of a year-long “process of

planning and design in order to put in place an innovative arrangement of contracts,

incentives and institutions”.9

Aided by international donors, this process helped to develop institutional expertise within the government and to build a consensus for private participation. To avoid the kind of political backlash seen in other countries, the government retained ownership of the assets through a State holding company, as well as decision-making powers in setting tariffs. The type of contract chosen was of the affermage or hybrid lease kind under which the private operator is paid a fee for the quantity of water produced and sold. The operator collects the revenue from users and forwards it to the holding company after deducting its fee, unlike a concession where the operator would retain the full amount of the tariff. Commercial risks are lower under the afterimage contract because the fee is independent of actual tariff levels. The fee structure also includes an incentive to reduce leakages and increase the rate of tariff collection.

One advantage of this form of contract is that, in theory, it does not require a

sophisticated regulatory framework since all necessary provisions are built into the contract.

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In practice, it is not so simple and requires cooperation and flexibility on the part of all parties. For example, when it was discovered that initial asset valuations and cost estimates proved erroneous, early renegotiations restored the financial health of the operator.

An important goal of the reform process was to increase accessibility for the poor through targeted subsidies. These included subsidised connections, the construction of public fountains in areas where connections were not yet available and subsidised tariffs at low levels of consumption. Under this latter system, tariffs increase with the quantity of water consumed, with all households receiving a lower tariff on the first ten cubic metres of water. Heavy users and business and government clients in effect subsidise low volume users. Such targeting is not necessarily effective, since “household water consumption is a notoriously poor proxy for poverty status”.

Not only are the very poorest still dependent on the relatively

expensive public fountains, but they might also share a connection with other poor families, thus pushing up their average tariff. But since all targeting methods have certain drawbacks, this method at least has the advantage of simplicity and transparency. 7.7.1 Failed or otherwise disappointing PPPs Between 1990 and 2003, 91 projects worth USD 27 billion were cancelled, representing only three per cent of total PPPs and of total investment – a relatively small share given the crises to which many prominent developing countries have been subjected since the mid-1990s. A more complete picture can be obtained by including projects which are distressed in the sense that at least one partner has requested termination or the project has been submitted to international arbitrage. Cancelled and distressed projects amount to five per cent of projects and nine per cent of investment. The discrepancy between these two shares suggests that larger projects have a greater likelihood of encountering difficulties.

The greatest number of troubled projects has been in the energy sector, followed by toll roads and telecommunications. As a share of total investment in each sector, water and sewerage has had the least favourable experience with over one third of investment in cancelled or distressed projects. In contrast, the telecommunications sector has one of the highest success rates in terms of investment in on-going projects. By number of projects there is little difference in the failure rates, ranging from four per cent for management and lease contracts to seven per cent for concessions. Measured by investment value, however, concessions are three times more likely to fail than greenfield projects and twice as likely as divestitures. While this might suggest that concessions are inherently more risky, it seems more likely that they are preferred in those sectors with the greatest political sensitivity since they allow the host government to retain ownership of infrastructure assets. The greater failure rate is thus more an indication of the sectors in which concessions are used than the legal form of the project itself. Most failed projects have tended to be terminated relatively early in their life, on average four and a half years after financial closure.

It is more common for a project to be renegotiated than to be cancelled outright. Renegotiations of contracts are commonplace in business, so from a corporate perspective having to renegotiate a set contract can be construed as a commercial risk. However, when the opposite contractual party is the regulatory authority, distinctions between the political and commercial spheres can get blurred. In fact, the government has in the past been far more likely than private firms to initiate renegotiations. Among the factors that influence the likelihood of renegotiations are the opacity of the original tendering process, the lack of expertise in the public sector leading to the terms of individual contracts being belatedly understood and the absence of independent regulators.

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Excluding telecommunications, over for forty per cent of concessions in Latin America between 1989 and 2000 were renegotiated, including over 70 per cent of those in the water

sector.11

In the region’s water and transport sectors, 58 per cent of renegotiations were initiated by the government, compared with only one third by private investors. It can of course be argued that contracts lasting 15 to 30 years are perhaps bound to encounter changing and unforeseen circumstances, but 60 per cent of all renegotiations took place within the first three years of the concession.

Finally, over time the value of investments which are either cancelled or subject to termination proceedings or international arbitration in any given year has dropped precipitously from a peak of USD 13 billion in 1997 to only USD 500 million in 2003. This trend suggests that the financial crises of the late 1990s may have run their course in terms of deleterious effect on project profitability.

A frequently heard complaint about the early phases of PPP projects is that host country authorities lack the administrative capacity to deal properly with the process of evaluating and awarding contracts. Civil servants may have a good technical understanding of their sector, but little knowledge of complex financial transactions such as those involved in BOT projects. At any given point, there are a significantly larger number of projects under negotiation than those beginning operations, and many potential projects, complete with Memoranda of Understanding, are abandoned after lengthy negotiations. According to one estimate of 860 potential greenfield investments, only 98 (11 per cent) were concluded.

Even when projects reach the stage of negotiations, potential investors often encounter delays. Since the development phase of private infrastructure projects absorbs between two

and five per cent of total projects costs, these delays can be costly for both parties.13

In the assessment of a recent study, “…completing better preparation of transactions before inviting investors to participate can help reduce processing delays and the related opportunity costs for investors.”

The lack of administrative capacity, taken together with the sectoral and regional concentration of utilities companies mentioned earlier, creates a risk that bidding may not always be fully competitive. A World Bank study on the transport sector estimates that the typical number of bidders for a concession or greenfield project in the transport sector is two to three.

While competition can be fierce even between two bidders, it seems unlikely to be

sufficient in many cases – especially given the diminishing interest of these firms in developing countries. At the very least, such competition is considerably improved by the presence of foreign bidders.

Another area where bidding might not be fully competitive concerns the construction phase of the project. It is estimated that six companies control 50 per cent of this market and sixteen

share 90 per cent of construction projects.16

But since private companies often construct infrastructure for the public sector as well, this potential problem is not the result of private participation per se.

7.7.2 Failing demand and consumer dissatisfaction Purely commercial failures involving investors critically misjudging the market or underestimating their production costs have been relatively rare. Examples include some large-scale projects in transport and telecommunications, where demand forecasts turned out to be unfounded. For example, several projects involving toll roads in Mexico were cancelled

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after the actual use turned out to be only one half of the predicted volumes. While such risk rests properly with the private participants, they nevertheless point to a need for improved data collection, not only on the actual demand for the specific service and shape of the network, but as well on the position of potential competitors.

Once the firm has invested, the primary concern is cash flow: generating revenue, enforcing collection and setting tariffs at cost-recovery levels. Investors wish to be free to realise profits without government interference, but if they encounter difficulties in collecting revenue or public hostility to raising tariffs, they expect the government to be responsive to their needs. It is in the face of such difficulties that the extent of government commitment to private participation in infrastructure becomes critical. Private operators can neither adequately enforce collection nor raise tariffs abruptly such as during a currency crisis without the support of the government. The emphasis on cash flow suggests that renegotiations and cancellations are not just, or even mainly, a regulatory problem. Investors have been known to put up with numerous frustrations in their dealings with host governments as long as the project earns a satisfactory return. Many conflicts between private and public partners arise because a macro shock, such as a massive devaluation, means that the project is no longer profitable or – in cases where the investor has a guaranteed return indexed to the exchange rate – no longer affordable for the government.

In sectors where services had historically been subsidised and/or the collection of tariffs lax (e.g. in electricity or water) private investors have confronted opposition to price increases and have faced difficulties in tariff collection. As regards the price levels, the largest water concessions in developing countries, in Buenos Aires and Manila, ran into difficulties when

major devaluations triggered tariff increases which were politically infeasible to implement.17

In Cochabamba, Bolivia, tariff increases of 35 per cent set off widespread popular unrest which resulted ultimately in the cancellation of the project.

7.7.3 Non-compliance with contractual terms The issue of public resistance cannot, in practice be separated from that of compliance with contractual terms. Consider the example of Argentina, one of the most popular destinations for investors in the 1990s. A water concession to the French company Suez “worked well until the steep fall of the peso in early 2002. Suez then pulled out and went to arbitration after the authorities did not agree to higher charges to offset the devaluation.”

Largely as a result of

the devaluation of the peso, there were 28 proceedings against Argentina under the International Convention for Settlement of Investment Disputes (ICSID) as of early 2004.

Ill-

feelings tend to linger for years after the devaluation. Out of ten foreign investors in the power sector in Argentina in 2002 surveyed by the World Bank, nine were very dissatisfied with their investment experiences and only one was satisfied. This compares with neighbouring Chile where five out of eight respondents were very satisfied with their experience and only one very dissatisfied.

Possible solutions to the serious problem of

exchange rate risk are provided later.

Similar problems have been encountered where the public sector acts as the main direct purchaser of utilities services. One example is power purchase agreements, with the government agreeing to purchase electricity at specified tariffs usually indexed to the exchange rate. These contingent liabilities for the government have in several cases proven to be unsustainable in the face of macroeconomic shocks, which helps explain why contracts are

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often renegotiated in the wake of a financial crisis. Moreover, in many countries the continuing state control over transmission and distribution has meant that the full benefits of private participation in this sector have not been realised, notably with respect to efficiency in downstream activities and to expanding coverage to poorer areas.

Host governments have equally complained of “frequent conflicts with operators in complying with contract clauses… abandonment of the concession by the operator or the taking over of the concession by the government as a result of claimed bankruptcy of the operator, discontent with price levels and services, poor attention to users and, particularly, the perceived high incidence of renegotiation of contracts shortly after the award of the concession, often in detriment of consumer welfare.”

These problems are not unfamiliar in

OECD countries either. Infrastructure providers, especially where greenfield investment is concerned, have been known to understate the expected costs in order to win contracts and subsequently claim “special circumstances” to demand an adjustment of contractual terms. Many governments provision against such practices, or build safety mechanisms into contracts, but developing country authorities may face financial and other difficulties in emulating such practices. It appears that the large number of PPPs that have left the contractual parties dissatisfied indicates that either developing country authorities, or investors (or both) may have had too high expectations to what could be achieved. Conceivably, some contracts have been granted under circumstances (e.g. subject to corrupt practices or contingent upon political links between home and host governments) that made them susceptible to changes in the political environment. But the large majority of bona fide PPPs have also suffered from inflated or unrealistic expectations. Many governments in developing countries have seen private investors simply as a source of financing to be used to supplement dwindling public funds. In doing so they have failed to recognise the minimum expectations, including to the legal and regulatory systems, that companies have to the business environment and without which they are unlikely to maintain their commitment. Conversely, utilities companies may have relied overly on contracts and failed to realise that developing country authorities lack the capacity to underwrite large risks – including the consequences of macroeconomic shocks and public upheavals – that they have come to take for granted in their home countries. The best that developing country authorities, acting on their own, can do to enhance the chances of successful PPPs is developing a better knowledge of the obstacles, take steps to address these and prepare better all levels of the public administration before embarking upon such partnerships. Based on a study by Sader (2000) and the Camdessus Report, which focused on the experience with partnerships in the water sector, the main obstacles within developing countries would seem to include (their relative importance has been the subject of recent empirical research

• Conflicting aims. Often one objective (that is, one PPP project) has been expected to serve several policy objectives, from financial, to macroeconomic, to social, to environmental. Protests by local communities and non-governmental organisations against individual projects have rebounded on investors rather than the initiating authorities.

• Award procedures. The award procedures often lack transparency and are not based on objective evaluation criteria. Corruption has been a problem – in general, and in the

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specific context of awards. Also, some projects have been compromised by official preference for local participation, preferred sub-contractors or suppliers and the employment of weakly qualified local staff.

• Regulatory frameworks. A weak legal environment necessarily leads to concerns for non-state underwriters of long-term contracts. Existing legislation in many countries was designed to define public sector responsibility in infrastructure and is inadequate in a situation of private participation. In addition, human capital such as relevant regulatory expertise is in short supply in many countries without much experience in privately operated utilities.

• Public governance. Many private investors have had to contend with conflicting public authorities, for instance central versus sub-national governments, or regulatory bodies versus ministries. In addition, non-existent or inexperienced regulators created avoidable uncertainty about price and tariff setting.

• Existing service providers. Where incumbent service providers, often state owned, remain in the market they are often the subject of preferential treatment. This goes hand in hand with a tendency, in many countries, to invite private participation in the absence of a commitment to overall sectoral liberalisation.

• Political commitment. In countries where the rule of law is not firmly entrenched governments have reneged on contracts signed by previous administrations. There also have been several cases of governments reneging on contractually agreed terms (e.g. the right to levy cost-recovering tariffs) in the fact of public dissatisfaction

7.7.4 Risks faced by private investors in developing countries Design and construction risk: Given the size of many infrastructure projects, cost overruns and delays are common, especially if there are subsequent modifications to the design as a result of political or environmental concerns. The private sector typically bears this risk, even when the project will ultimately be run by a public entity. Operating risk: When the private firm takes over the assets of a previous provider, usually the public sector, the quality of such assets is never completely known in advance. In the water sector, for example, most assets are underground. This risk can be reduced if the private operator initially enters the market through an operations and maintenance contract with the public sector provider. Commercial risk: As with any investment, demand might not prove sufficiently robust at price levels necessary to ensure long-run profitability or might be subject to a macroeconomic shock. This risk is greatest in those areas where there has not previously been an infrastructure provider and hence potential demand is unknown or where tariffs were formerly subsidised and collection poor. In some contractual arrangements, the government accepts responsibility for tariff collection or agrees to buy the infrastructure service from the PPP at a fixed price. While this reduces the risk for the investor, it opens the way for almost certain renegotiations if a crisis means that the government can no longer afford its financial obligations. Regulatory risk: Very few developing countries have a well-established and autonomous regulatory agency to deal with infrastructure. With no track record, such agencies might not apply regulations in a consistent pattern, especially if those laws and regulations are themselves untested.

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Political risks: The support of the national government is often cited as a crucial factor in the success of a project. If this support wanes in the face of popular discontent at the cost of private provision or if a new regime disavows certain policies of its predecessor, the private operator might find that contractual obligations of the government are no longer being honoured. Political risks might also involve litigation or bureaucratic barriers. Currency risk: Perhaps the greatest risk to the profitability of a project involves the risk of devaluation. Infrastructure projects in developing countries are often financed in part through international lending. These debt repayments, together with payments of dividends, must be made in foreign currencies while profits usually accrue in the local currency. As a result, any sudden devaluation can completely modify the profitability of a project. This was the case for many PPPs in the 1990s, notably in Latin America and Southeast Asia, and helps to explain the diminished enthusiasm for such projects on the part of the international investment community. 7.8.0 Summary There are projects which have yielded good results and there are projects which have not reached up to the desired objectives and outcomes. The above experiences and case studies reveal the fact that there are yet many hurdles and deficiencies in the public sector to formulate and implement projects based on PPP concept. It is necessary to create conducive environment for the private sector to make investment in the public infrastructure with the main intention of delivering services to the people. The GoK has initiated the process by framing a policy in 2007. The GoI has also prepared the policy and programmes to encourage PPP projects by extending subsidy or grant through the schemes of VGF etc. 7.9.0 Questions

1. What are key principles on which PPP projects are developed? 2. Describe the examples of successful and PPPs in India? 3. List the case studies on PPP as given in the website of DEA & IDD? 4. What are the lessons learnt from Solid waste management case study of DMC? 5. Discuss the Sanitary land fills case study of Bangalore? 6. Describe Thiruvananthapuram city roads improvements projects? 7. Explain a case study of O&M of streets lights in Vijayawada? 8. Describe case studies of Apollo Hospital, Alandur Sewerage Projects & Latur Water

supply and the lessons learnt? 9. Discuss the case studies of Ilembe District Municipality and Meleka-Manipal

College? 10. Discuss the issues Toll roads and National Highways in India? 11. Describe the factors for failed PPPs in Developing countries? 12. What are factors to be considered to enhance the chances of successful PPPs? 13. Explain the risks faced by the private investors in the developing countries ?

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CHAPTER 8

PROJECT SCHEDULING, IMPLEMENTATION & MONITORING TECHNIQUES

8.1.0 Introduction This section will introduce various analytic techniques. Although they are cited separately, they are all linked: Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis, Problem Tree and Logical Framework Analysis are all built into the development of the project cycle. This includes the setting of project objectives to meet defined problems and the establishment of an analytical framework. In the appraisal and evaluation of the project cycle, financial and economic analysis and impact analysis have a role to play. Other techniques that may be used in project identification and preparation include methods that are used in operational research. These methods are not considered in this course in great depth but they include network, critical path (CPA) and programme evaluation and review technique (PERT) analysis and linear, non-linear programming and other optimisation techniques. The project planning and project cycle techniques that are examined in Unit 1 are useful in that they adopt a logical approach from project identification through to project monitoring and evaluation. However, once the project is operational there are other techniques that concentrate on planning and scheduling individual project components or jobs. One of the basic techniques, used on large engineering, production and physical infrastructure projects, is network analysis or critical path analysis (CPA).

8.1.1 Critical Path Analysis (CPA) Critical Path Analysis is the organised application of systematic reasoning to planning, scheduling and controlling practical situations where many separate jobs, which make up the whole task, can happen simultaneously, almost simultaneously or in sequence such that it is difficult intuitively to establish the relationship between the separate jobs or project components.CPA identifies three phases: • Planning Phase – this clarifies the objective of the project and the arrangement of project tasks into an order of precedence. Some tasks will be carried out in parallel, others in series. • Scheduling Phase – this develops from the planning phase and converts the plan into a feasible and readily implemented schedule, having analysed the path with reference to the optimum use of available resources such as time, human resources and equipment. • Control Phase – this develops from the scheduling phase and allows actual progress to be monitored and corrections to be made to ensure adherence to the schedule or modified schedule. 8.1.2 Programme Evaluation and Review Technique (PERT Analysis) Another component of network analysis is Programme Evaluation and Review Technique (PERT). PERT analysis differs from CPA in that it allows for uncertainty by building into the project scheduling time constraints for each activity, including:

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8.1.3 Steps in Project Scheduling

1. Develop Work Breakdown Structure(WBS) to establish work elements constituting the project

2. Determine Interdependency among various work elements or activities/tasks and accordingly define logical sequence of the activities

3. Quantify each work element in terms of time/other resources requirements 4. Find out constraints, if any, external(e.g., Government policies, law and order

problem, inadequacies of infrastructure etc.). and internal(e.g., poor choice of site, inadequacies in agreement with other stakeholders such as consultants etc.)

5. Review the work elements, their inter dependencies and quantification in light of the identified constraints

6. Develop a flow path of activities satisfying the logic of interdependency and constraints

7. Develop a time schedule of activities satisfying the logic of the flow path and time duration of the activities.

Work Breakdown Structure (WBS) � First step toward a work plan � Helps to identify the tasks in a project � The concept of the WBS is simple: in order to manage a whole project, one must

manage and control each of its parts

8.1.4 A Gantt chart is a horizontal bar chart developed as a production control tool in 1917 by Henry L. Gantt, an American engineer and social scientist. Frequently used in project management, a Gantt chart provides a graphical illustration of a schedule that helps to plan, coordinate, and track specific tasks in a project. It is a simple and widely used method of working out and displaying the knotty problem of who does what and when. Typically it is used in a project where a number of people are working on interlinked tasks. 8.1.5 Drawing a Bar Chart and Network For the following problem, we can draw a Bar chart and Network

Activity Designation Immediate Predecessor

Duration

A (1-2) None 2 B (2-3) A 5 C (2-4) A 7 D (2-5) A 3 E (3-5) B 1 F (5-6) D,E 6 G (4-6) C 3 H (6-7) F,G 3

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Bar Chart for the above Example Activity/ Duration(Weeks)

5 10 15 20

A

B

C

D

E

F

G

H

17Weaks

Total duration of the project is 17 weeks as seen from the bar chart 8.2.0 CPM - Critical Path Method DuPont developed a Critical Path Method (CPM) designed to address the challenge of shutting down chemical plants for maintenance and then restarting the plants once the maintenance had been completed. Complex project, like the above example, require a series of activities, some of which must be performed sequentially and others that can be performed in parallel with other activities. This collection of series and parallel tasks can be modeled as a network. CPM models the activities and events of a project as a network. Activities are shown as nodes on the network and events that signify the beginning or ending of activities are shown as arcs or lines between the nodes. As a Planning and Scheduling Tool:

� It is a formal, graphic means of determining the relationship between the activities (tasks) in a project.

� It enables systematic isolation of activities comprising the critical elements that set the duration of a project.

� It helps the project manager analyze a project before, during, and after operations.

� The greatest asset of CPM is its portrayal of critical activities, giving the project manager forewarning of where he or she might expect schedule problems.

� The core of CPM is a network diagram that represents the manager's best effort at efficient planning and scheduling of project activities.

� The network diagram consists of arrows (activities) and circles (events). Activities represent work and consume resources and time; events do not, rather

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they mark points in time when activities begin or finish. The length of an arrow has no relevance.

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8.2.1 Steps in CPM Project Planning 1. Specify the individual activities. 2. Determine the sequence of those activities. 3. Draw a network diagram. 4. Estimate the completion time for each activity. 5. Identify the critical path (longest path through the network) 6. Update the CPM diagram as the project progresses. 1. Specify the individual activities All the activities in the project are listed. This list can be used as the basis for adding sequence and duration information in later steps. 2. Determine the sequence of the activities Some activities are dependent on the completion of other activities. A list of the immediate predecessors of each activity is useful for constructing the CPM network diagram. 3. Draw the Network Diagram Once the activities and their sequences have been defined, the CPM diagram can be drawn. CPM originally was developed as an activity on node network. 4. Estimate activity completion time The time required to complete each activity can be estimated using past experience. CPM does not take into account variation in the completion time. 5. Identify the Critical Path The critical path is the longest-duration path through the network. The significance of the critical path is that the activities that lie on it cannot be delayed without delaying the project. Because of its impact on the entire project, critical path analysis is an important aspect of project planning. The critical path can be identified by determining the following four parameters for each activity: • ES - earliest start time: the earliest time at which the activity can start given that its precedent activities must be completed first. • EF - earliest finish time, equal to the earliest start time for the activity plus the time required to complete the activity. • LF - latest finish time: the latest time at which the activity can be completed without delaying the project. • LS - latest start time, equal to the latest finish time minus the time required to complete the activity. The slack time for an activity is the time between its earliest and latest start time, or between its arliest and latest finish time. Slack is the amount of time that an activity can be delayed past its earliest start or earliest finish without delaying the project. The critical path is the path through the project network in which none of the activities have slack, that is, the path for which ES=LS and EF=LF for all activities in the path. A delay in the critical path delays the project. Similarly, to accelerate the project it is necessary to reduce the total time required for the activities in the critical path.

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6. Update CPM diagram As the project progresses, the actual task completion times will be known and the network diagram can be updated to include this information. A new critical path may emerge, and structural changes may be made in the network if project requirements change. CPM Benefits • Provides a graphical view of the project. • Predicts the time required to complete the project. • Shows which activities are critical to maintaining the schedule and which are not. 8.2.2 Concept of critical path Method (CPM), Tradeoff between Cost & Time, Activity Crashing In this method of network analysis, it is assumed that activity durations are deterministic, i.e. known with certainty. Such projects are of repetitive and non- complex in nature, e.g. stereotyped construction project. This can be successfully applied for projects employing fairly stable technology, with well-established database, which are relatively time, though deterministic, is not fixed, and varies according to changes in resources assignment to the respective activity. By analyzing the network and utilizing the quantified time-cost relationship, we try to determine the project schedule, which minimizes or rather optimizes the total cost. We know that any reduction in the duration of the critical activities (called crashing of the activities), suitably, would result in reduction of the project duration. Main focus in CPM is tradeoff between cost and time of project completion. Such activity crashing would , in most cases, involve deployment of increased resources, e.g. manpower, construction plant “& equipment, materials, etc., with attendant increase in the direct cost of the activity on the other hand, reduction on project duration would simultaneously result in decrease in indirect cost of the project (overhead items, viz. project establishment cost and other preoperative expenses which have direct relationship with the project duration) Trade off tries to minimize total cost or project duration or to adjust the duration to match the project cost with budget/ funds and/ or other resource constraints. 8.2.3 CPM Limitations While CPM is easy to understand and use, it does not consider the time variations that can have a great impact on the completion time of a complex project. CPM was developed for complex but fairly routine projects with minimum uncertainty in the project completion times. For less routine projects there is more uncertainty in the completion times, and this uncertainty limits its usefulness. 8.2.4 Program Evaluation and Review Technique (PERT) The Program Evaluation and Review Technique (PERT) is a network model that allows for randomness in activity completion times. PERT was developed in the late 1950's for the Navy's Polaris project having thousands of contractors. It has the potential to reduce both the time and cost required to complete a project. 8.2.5 Steps in the PERT Planning Process PERT planning involves the following steps: 1. Identify the specific activities and milestones. 2. Determine the proper sequence of the activities. 3. Construct a network diagram.

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4. Estimate the time required for each activity. 5. Determine the critical path. 6. Update the PERT chart as the project progresses. 8.3.0 Strengths, Weaknesses, Opportunities and Threats (SWOT Analysis) SWOT analysis is a very basic evaluative tool. It is the analysis of an organisation’s strengths and weaknesses and the opportunities and threats that it faces. While strengths and weaknesses tend to concentrate on the internal characteristics of an organisation, opportunities and threats are more orientated at looking at the external resource, financial, economic and competitive environment. SWOT analysis may be used at any point within the project cycle. SWOT analysis is used in the private sector when considering a company or organisation’s competitive position in a particular market.

Example An international manufacturer of dairy products is considering investing in a dairy plant to manufacture pasteurised milk and cheese products in Kenya. The manufacturer will wish to know the strengths and weaknesses of this plant compared to existing and potential producers in the country, as well as competition from imported products. The manufacturer will look at a number of factors before deciding to invest in the plant. This will include current milk production within the country, the pricing policy for milk where there is government intervention and, of course, estimated current and projected demand for milk and dairy products. Other issues will include the internal production costs and market price for milk as well as the possibilities for importing powdered milk, which may provide difficult competition for a local production facility. A SWOT analysis by the manufacturer will play an important role in the overall project evaluation. preparation of an action plan for environmental management in a coastal zone of Brazil where there is a need to balance environmental protection with economic and social development, including poverty alleviation; there is a major issue of balancing environmental management with the main sources of income generation – fisheries and natural resources extraction, agriculture, small business development and tourism Balancing the advantages and disadvantages of investing in centralised health service delivery as opposed to investment in lower cost decentralised healthcare delivery based on rural clinics and preventative medicine. In each of these projects, SWOT analysis was carried out early in project preparation to assess how a project or development programme should use strengths in a project area (natural resource base, skills, stakeholder commitment) and deal with weaknesses (poor infrastructure, low skills base, low access to basic services). In the medium to long term, project planners need to take into account opportunities (market opportunities such as the demand for project production, the development of a new port or airport) and threats (competition from other countries in the same sector or competition from other regions within the same country, technological change, economic shocks such as changes in oil and other world commodity prices).

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8.4.0 Participation Matrix Inform Consult Partnership Delegate Control Inform Consultant Partnership Delegate Control Identification

Planning

Implementation

Monitoring and

evaluation

Source: ODA (1995) The appropriate role for each stakeholder group will vary according to the stage reached by the project and according to the nature of the project. Potts (2002) argues that stakeholder analysis is particularly important for projects where some degree of participation is expected from the beneficiaries in the design and/or the operation of the project. According to Potts, it can be used to gain a better understanding of the interests and needs of the various stakeholder groups affected, as well as to assess their capability to enhance or threaten project implementation. Stakeholder analysis may help to avoid major mistakes up front, by for example, revealing if a project has weak ownership that might threaten its implementation. It may also suggest strategies for overcoming opposition. It may also be useful in displaying the impacts of a project that are non-quantifiable, and also to display the distributive impacts of a project. The drawbacks to stakeholder analysis are that the data underlying the analysis is both subjective and context specific, and determination of support or opposition to a project cannot be calculated simply by adding up the groups supporting or opposing a project. While stakeholder analysis may assist in the process of making a decision as to the acceptability or not of a project, there are no clear guidelines as to how such an analysis can be used in this regard. 8.4.1 Key Quality Factors for the Long-Term Sustainability of Projects

Ownership by beneficiaries

involvement of target groups and beneficiaries in project design involvement of target groups and beneficiaries in project execution

Policy support quality of the relevant sector policy within a country commitment of government to continuation of project services after external/donor finance

Appropriate technology

whether technologies applied in the project can be maintained in the long run

Socio-cultural issues does the project take account of local cultural norms and attitudes?

do project beneficiary groups have appropriate access toproject services and benefits during and after project implementation?

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Gender equality how does the project take into account the specific needs and interests of women and men?

is there sustained and equitable access by women and men to services and infrastructure as well as contributing to the reduction of gender inequalities?

Environmental protection

the extent to which the project will preserve or damage the environment and therefore support or threaten longer term benefits

Institutional and management capacity

the ability and commitment of the project implementation agencies to deliver the project/programme and to continue to provide products and services beyond external finance/donor support

8.4.2 Characteristics of Performance Indicators in the Public and Private Sectors Definition of Performance Indicator = ‘Progress towards the achievement of corporate objectives’ 8.4.3 Reasons for Performance Indicators

• Cost reduction and more efficient allocation of resources • Motivation of employees through the use of rewards/incentives. • To maintain organisational competitiveness.

8.4.4 The Main Components of Performance

• Economy – cost reduction without reducing quality • Efficiency – financial ratio between outputs and inputs • Effectiveness – the extent to which the objectives have been met.

8.4.5 Three Points for Performance Measurement

• Input Stage – staff, buildings, goods (cost measures) • Output Stage – service or good that the organisation produces • Outcome Stage – indirect products of services/production process – such as

Customer satisfaction, health of community.

8.4.6 Economic Analysis of Projects If the objective of the project is to invest in human capital or increase productivity, the project should be designed and appraised utilizing methodologies similar to those employed in capital investment projects, that is, ERR and NPV and benefit-cost ratio. In these cases, it is assumed that the correct implementation of project inputs will result in predetermined outputs that will generate measurable impacts (or outcomes) on the target population’s such as increased literacy, increased earnings, decreased morbidity and mortality, etc.2 Cost benefit analysis provides a consistent basis for comparing alternative investments within sectors and across sectors. In addition, it strives to demonstrate that the project’s investment will generate sufficient benefits to repay the cost of the investment.

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8.4.7Type of Project Measurable Benefit Type of Project Measurable Benefit

Municipal Maintenance Increase in municipal income through reinforcement and improvement in management and revenue collecting capacity

Urban Roads Reduction of transport time Decrease in vehicle operating costs Decrease in vehicle maintenance and repair costs

Marketplaces and Transport Stations

Increase in market and transport station revenue

Water Supply Incremental revenue earned from the sale of water (a proxy for customers’ willingness to pay)

Land Development for Housing Increase in rental value after project

Project Implementation

Inadequate Technical and Accounts Staff

Land Acquisition Poor Co-ordination

Finances

Adequate Technical and Accounts Staff

• Land Pooling. • Land Bank by

ULB • Participation

of Land Owners in the Project

• Guided Land Development

Government to evolve guidelines for coordinated project implementation

Single Window clearance at district and state level

Budgets of each to be prepared keeping the development works of other departments

State and Central Share to be released together

Create Separate Account for schemeoject

Create Revolving Fund

State Guarantee to ULB for Institutional Loan

Use tools Gantt chart, CPM/PERT Networks

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8.4.8 Summary The officers in the departments need to be equipped with sufficient skills and competence to plan, schedule and implement the projects. The time and cost over run particularly in PPP projects would lead to risk and arbitration. The use of CPM, PERT, Gantt, MS Project etc., are necessary for all types of projects to monitor and control the tasks as per the schedule. Both public and private parties should work towards optimum cost and time in order to reduce the wastage so that the benefits reach the people at desired charges or fees for the services rendered by the project. In this chapter the techniques are explained with the illustration and examples. 8.4.9 Questions

1. Explain the use of Gantt chart CPM & PERT networks in planning, implementation & monitoring of projects ?

2. How do we save cost and time using CPM method ? 3. What are steps in PERT planning process? 4. How do you conduct SWOT analysis? 5. What are the problems of project implementation? 6. What are factors of long term sustainability of projects? 7. What are the characteristics of performance indicators in the Public & Private sectors?

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CHAPTER 9

PPP TENDERING & CONTRACT MANAGEMENT 9.1.0 PPP Tendering & Contracting Provision of essential infrastructure services to users on a long term basis. Thus the selection of a credible project sponsor (the private partner) assumes paramount importance. A bidder lacking in sufficient technical and financial capacity can jeopardize the project and compromise the quality of services that the government is committed to provide. Considering the above, Government of India has standardized and adopted the two – stage bidding process for selection of project sponsors for PPP projects. The typical bidding process involves:

• Stage 1: Request for qualification (RFQ) which aims at short – listing and pre-qualifying applicants who will be asked to submit financial bids at the RFP stage.

• Stage 2: Request for Proposal (RFP) which aims at inviting financial bids from the short-listed bidders.

In order to ensure transparency and lend predictability to the entire process of selecting the bidder, the Government of India through the Ministry of Finance (Department of Expenditure) and the Planning Commission (Committee on Infrastructure) have developed a Model RFQ and Model RFP document. 9.1.1 Pre-qualification of Bidders The objective of the pre-qualification stage is to ensure that only the firms that have the requisite Technical and Financial capacity to operate the concession successfully compete for the project. The process further ensure that no firm lacking the requisite capacity gets selected primarily by undercutting and quoting a lower financial bid. The key issues that need careful consideration of the public authority while designing the pre-qualification process can be summarized as follows:

a) How many firms should be pre-qualified? b) What should be the evaluation criteria and accordingly what information should be

sought from the applicants ? c) Other issues relating to the organization of the applicants.

9.1.2 How many firms should be pre-qualified? This question assumes signification as the response of the bidders can vary from project to project and it is difficult to anticipate. As a result the public authority faces the conflict whereby:

• On the one hand, the number of pre-qualified bidders may not be adequate for ensuring real competition in bidding.

• On the other hand, a large number of short-listed bidders may discourage the credible investors from spending time and money necessary for making competitive PPP bid as they consider the competition to be diluted by inclusion of smaller firms with comparatively less experience.

In order to deal with the above, the Model RFQ recommends an approach whereby first the applicants are pre-qualified based on a comparatively low threshold and then some of the pre-qualified firms are short-listed on the basis of their ranking determined through an experience score. The financial bids at the RFP stage are invited only from the short- listed firms. The

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approach of short-listing is better as it provides an opportunity to choose amongst the very best while increasing the chances of having an adequate number of bidders. What should be the evaluation criteria? The principles for determining the eligibility criteria be formulated keeping in mind the conflict between having too few or too many bidders. Also to encourage greater participation from investors, the information sought at RFQ stage should not require the applicants to incur significant expenses. The information sought should be restricted to technical and financial capabilities that are relevant to the project. Generally the criteria for short-listing the bidders is categorized into: 9.1.3 Evaluating Technical capacity: For the purpose of evaluating the technical capacity of a bidder, its experience and track record in building infrastructure projects should be considered. This can be measured either from the construction work undertaken/ commissioned by him, or from revenues of PPP projects, or from both, during a pre-determined number of years preceding the date of application. The technical capacity of a bidder can be assessed on the following parameters: 1. Project experience on PPP projects in the specified sector; 2. Project experience on PPP Projects in the core sector ; 3. Construction experience in the specified sector; and 4. Construction experience in the core sector. The weightage for each of the above categories should be pre-determined and specified in the RFQ document. A minimum score comprising the threshold capacity may be specified as a condition of eligibility. 9.1.4 Evaluating Financial capacity: In order to evaluate the financial capacity, the applicants should have a net worth equivalent to 25 per cent of the estimated capital cost of the project for which the bids are to be invited. This would ensure that pre-qualified applicants have sufficient financial strength to raise the equity and debt necessary for undertaking the project. In the exceptional cases, the public party may also prescribe a minimum annual turnover and/or net cash accruals as an indication of the Applicant’s cash flows and financial health.

9.1.5 Other issues related to the organization of applicants While assessing the capacity of the applicants party should prevent against issues such as potential collusion or cartelization among bidders or inclusion of some members only for the purpose of meeting the pre-qualification criteria. In this regard, the RFQ document should contain provisions relating to disqualification in case there is a Conflict of Interest among bidders or certain additional requirements applicant should comply with in case the applicant is a consortium. Further, the RFQ document should also specify whether the technical capacity net worth of an 9.1.6 Request for Proposal

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The Government of India has standardized and adopted the two – stage bidding process for selection of project sponsors for PPP projects. The stage 2 covers the Request for Proposal (RFP) which aims at inviting financial bids from the short –listed bidders. In order to prepare their bids, the pre-qualified bidders are expected to conduct a careful assessment of the capital and operational costs of implementing the project and also the likely revenue streams from the project. Generally, along with the RFP Documents the bidders are provided with the Bidding Documents, comprising:

• The Feasibility Report: The feasibility report is provided to the bidders only as a preliminary reference so as to assist them in preparing their bids. The bidders are encouraged to carry out their own surveys, investigations and other detailed examination before submitting their bids. Further, costs associated with the preparation of the bids are to be borne by the bidders. The feasibility report is not binding on the authority and does not confer any rights on the bidders.

• Draft Concession Agreement: The bidders are also provided a Draft concession agreement which details the rights and obligations of both the parties as well as payment mechanisms associated with the project. We shall be discussing this in detail in our next section.

9.1.7 Evaluation criteria: Bid Parameter Based on the model RFP, the financial offer in terms of their lowest grant/highest premium should be the sole criteria for selecting the bidder. The concession period and the other terms of the project shall be pre-determined and clearly specified in the draft concession agreement. In case of exceptionally complex projects where the bidders may be required to submit their technical proposals and plans, these should be invited either at the qualification stage or at an intermediate stage preceding the RFP. This is recommended because carrying out technical evaluation at the RFP stage would result in comparing significantly different proposals on a common set of parameters, which is a difficult and a costly exercise. 9.1.8 Evaluating the Bids: The RFP document should provide a checklist of requirements which each of the bids should Meet so as be considered responsive to the RFP, Only the responsive bids should be considered further for evaluation. The “Tests of responsiveness’ generally include parameters such as the bid being received in the specified format; bid is accompanied by power of attorney, bid security etc. The RFP should also clearly specify the procedure that will be followed in case bidders quote the same amount of premium or the highest bidder withdraws or is rejected due to any reason. Other matters: The RFP document also provides instructions to the bidders related to the following matters:

• Change in composition of the consortium: RFP should mention whether a change in composition of the consortium is permitted at the Bid stage and if it is permitted then under what situations or conditions.

• Change in ownership: Generally, the bidder is required to inform the public party if there is a change in control of any consortium member or an associate whose Technical and financial capacity was taken into consideration for the purposes of short-listing. In such a

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situation the authority can disqualify the bidder or withdraw the Letter of Award from the selected bidder.

• Conflict of interest, Bid security etc: RFP document should also contain provisions relating to Conflict of interest among the bidders as discussed under the RFQ section. Further it must specify the requirements related to submission of the Bid security and the events in which such Bid security shall be forfeited. We will discuss each of these elements in detail in the module.

9.1.9 Letter of Award (the “LOA”): The selected bidder shall be issued as letter of Award by the public party. Generally the selected bidder is required to execute the concession agreement within a period of 30 days of award of LOA. 9.2.0 The Concession Agreement A Concession is a bundle of rights conferred on the private in return of certain specified obligation to be undertaken by them. A Concession Agreement is the central document in a PPP arrangement which clearly establishes the rights and obligations of both the procuring authority and the private concessionaire. Furthermore, the Concession Agreement also addresses the issues that are typically important for limited recourse financing of infrastructure projects such as mitigation and unbundling of risks; allocation of and rewards; termination etc. The Government of India has over the last decade formulated the model concession Agreements (MCA) for several sectors. The MCAs have served as the basis of standardization of Contract terms and conditions. On a project specific basis the contract terms could be appropriately customized with the major elements and the framework of the MCA kept in place. The key clauses of a Concession Agreement can be explained by grouping them using a framework structured around six areas. These are:

• Risk Mitigation Framework; • Rights & Obligations of the Parties • Project Development & Operations; • Payment Mechanisms; • Other Contract Provisions; and • Other important Agreements

9.2.1 Risk Mitigation Framework Risk analysis and allocation has been previously discussed in the feasibility analysis (Analysis & Structuring phase of the life cycle). However, risk is a running theme and needs to be documented and reflected in the various clauses of the concession Agreement. The concession Agreement is to be structured so as to ensure that the risk allocation finalized in the structuring phase is reflected in the contract and the public party is not unintentionally taking back a risk which it had intended to be allocated to the private party. Further the concession agreement also provides for various clauses to mitigate risks, such as extension of the concession period in the event of lower than expected growth in traffic. From the government perspective contingent liability risks are additionally inherent in certain such as termination payments. 9.2.2 Rights & Obligations of the parties

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The concession agreement clearly lists out the rights and obligation of both the parties. It also mentions certain conditions precedent which must be fulfilled for party to be obligated to perform its functions. In case of a delay in fulfillment of the conditions precedent the parties shall be liable to pay damages. 9.2.3 Project Development and Operations The provisions relating to development and operations in the concession agreements for PPP Projects primarily focus on the ‘what’ rather than the ‘how’ in relation to delivery of services by the concessionaire. The technical parameters are mainly based on the output specifications whereby only the core requirements of design, construction and O&M are mentioned and the concessionaire is given the flexibility to innovate. The main provisions related to construction and operation of the infrastructure in a concession agreement include:

• Provisions dealing with the access to the site, the right of way and protection of the site

• Provisions related to the construction of the project facilities which are generally limited to definition of the concessionaire’s obligations to perform the construction works. The concession agreement also provides the authority right to monitor the progress and ensure that it conforms to the provisions of the agreement.

• Provisions for the operation and maintenance of the facility as well as quality and safety standards, including identifying the key performance indicators that must be achieved to meet the requisite levels of performance.

9.2.4 Payment Mechanisms Payment mechanisms in a concession agreement typically cover provisions related to:

• The concessionaire’s obligations to raise funds for the project; • His right to receive grants it is eligible for, from the public party; • Obligation to pay to the public party the payments in form of premium; • His right to demand, collect and appropriate fare from the user (where applicable)

Some other key provisions are related to the requirements of an escrow account, insurance, accounts and audit etc. 9.2.5 Other Contract Provisions Some other key provisions covered in a concession agreement relate to issues such as Force majeure; Termination on account of either parties default; Change in Law; suspension of concessionaire’s rights etc. The MCAs classify the force majeure events into three categories, namely, Non political events; Indirect political events; and political events. It further mentions the time and cost implications due to occurrence of any of these events. Though a rare event, the Concession agreement should clearly provide for how the payments will be computed in the event of termination, whether due to default of either party or due to any other reason such as force majeure. 9.2.6 Other Important Agreements PPP arrangements are generally complex and often require a range of supporting agreements in addition to the concession agreement. Some of the other important agreements are financing agreements with the lenders, escrow agreement, construction and O & M contract, substitution agreement, shareholder’s agreement etc. It must be noted that no default under any of the other agreements shall excuse the concessionaire from its obligations liabilities to the government under the concession agreement.

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9.3.0 PPP Contract Management – Basic Features With the growing emergency of PPP form of investment in infrastructure project, the efficient contract management during the implementation phase will be critical to ensure that project meet the desired objectives and provide value for money. A number of PPP projects fail on account of limited and ineffective contract management. Inefficient contract management has a significant negative impact in overruns; c) reputational impact on the public sector due to disputes that may arise with private party. The process of contract management goes beyond purely administering the contract. It involves a) defining the processes and procedures required to meet contractual obligations; b) developing good working relationships; c) monitoring the private sector performance to ensure that it meets the project objectives while providing VfM; d) monitoring and managing risks associated with the project. The key elements of the contract management function include

• Service Delivery management • Contract Administration • Relationship Management

Form the time of issue of letter of award to the end of the contract term, there are a number of specific activities to be performed by the contract authority. The contract management team will be responsible for performing such activities and a detailed contract management plan should be drawn up which should define the key process, procedures, role and responsibilities, escalation procedures for the contract management process. The contract management plan is a compendium of individual plans such as service delivery, contract administration and relationship management plans which work together to assist the public sector in ensuring that the private party performance its obligation as per contractual terms and VfM for the project is maintained. While the contract should include provisions for the contract management approach required by the Government entity, in practice many aspects of the approach will depend upon the skill, judgment and creativity of the Contract Manager and the Contract Management team. The success of a project to a large extent will be dependent on the following enabling factors.

• The participants should approach the project in the spirit of partnership. • Contract Management team and especially the Contract Manager should have to

requisite skill sets to effectively monitor and manage the project and the relationship. • Project Objective supported by a well structured contract that explicitly details the

allocation of risks, quality of service required, value for money and procedures for communication and dispute resolution.

• Arrangements for service delivery continue to be satisfactory to both the Government entity and the private party.

• Expected PPP benefits, value for money and innovation are being realized • Disputes are resolved at the appropriated level through the partnership management

system without recourse to external dispute resolution • Changing service delivery requirements are anticipated, and variation procedures are

used to minimize any negative consequences and maximize any opportunities brought about by change.

9.3.1 Contract Management Framework and the PPP Project Lifecycle

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Contract Management defines the processes which assist parties to contract in meeting their respective obligations with respect to service delivery and in turn meeting the project objectives. It involves building a good working relationship between government and the private party that will continue throughout the life of the contract. Given the dynamic nature of business environment, another dimension of contract management is to anticipate future risks/hurdles by managing proactively rather than merely react to situations as they arise. The mechanism of risk transfer will depend on the nature of the PPP project and has to be agreed to by the parties to contract. Hence the essence of contract management is efficient risk management. The objective of contract management for PPP projects is for government to obtain the service laid down in the output specifications of the contract and to ensure ongoing affordability, value for money and that risks that have been transferred to the private sector stay transferred to the private sector. This means maximizing the efficiency, effectiveness and economy of the services described in the contract, balancing costs against risks and actively managing the government – private sector service provider partnership. Contract management also strives to achieve continuous improvement in performance by both parties over the life of the contract. The need for mandating strong contract management procedures, particularly in developing countries, arose during the latter portions of the 20th century, when it became clear that large, international PPP service provides, particularly in the water and sanitation sector, had a signified bargaining advantage over their government counterparts when it came to the implementation of a particular contract. Several instances arose where, within a short period of time after the contract was executed, the private sector service provider would immediately undertake negotiations to amend the contract, on terms very much more favourable to them. Many government agencies, who had already turned over the service provision infrastructure to the private sector service providers, felt they had no alternative but to accede to this demands. Often the result was a “new” contract that was unaffordable to the government and in which significant risks has been transferred back to it. Several such contracts were either transferred or many were cancelled. The contract management should focus on the service delivery requirements to be achieved by the private party through the use of effective mechanisms for quality assurance, sport checking, performance monitoring and corrective action. In managing the Contract, the institution needs to maintain a balance between excessive or too little control and regulation during the term of the project agreement. The success of the project would depend on the strategy adopted by the institution. Excessive control and regulation of private party could interfere with the process of innovative service delivery from the private party while limited control could lead to increase in risk to the institution of divergence of service delivery from project objectives. The approach followed in managing contracts would be largely dependent on the sector in which the PPP project operates the risk profile of the project and the particular phase of contract has been reached. Thus, in projects or situations where the consequences of 9.3.2 Contract Management Team and Operating Structure This section looks at the contract management structure and reporting relationships recommended by the Planning Commissions of India 9.3.3 Contract Management Team

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For PPP projects, the contract management team typically consists of a range of specialists and technical advisors who will support the contract manager in the contract management function. The team works towards ensuring that the project runs smoothly through the contract term. The overall size and complexity of the project would be the key variable in determining the size and skill sets required by the contract management team. The contract management function could be performed by a single individual or a complex multifunction team. The size and composition of the team will evolve through the project lifecycle. 9.3.4 Skill Set The team size, composition, deployment and resource allocation for team would be decided by the contract manager in consultation with the contract director. The range of skill and expertise would be dependent of the specific project requirements and the project stage, Broadly the nature of skills required include.

• Knowledge of the subject matter • Design and construction • Business and product assurance • Facilities and services management • IT (especially, but not only for IT projects) • Statutory safety and regulatory responsibilities • Legal and regulatory • Finance

9.3.5 Structure The structure of the contract management team would also be dependent on the specific project requirement. Contract Management will need to act as the primary nodal agency for managing and coordinating all activities related to contract management. An indicative structure of a control management team is presented in the Exhibit 3 that follows. In addition to the Contract Management Team of the Government entity, the private party would so establish a counterparty team. Identifying, documenting of the necessary reporting and communication channels should be undertaken prior to contract commencement.

• Contract Administration: This involves outlining administrative process required to manage all procedural and documentation issues specified in the contract

• Relationship Management: This related to managing the structure of authority and accountability within the Service Delivery framework as specified in the Contract to ensure efficient service delivery.

• Relationship Management

The process of Contract Management pervades the entire PPP project lifecycle. The process of contract management starts at the procurements stage itself with inputs being provided to the procurement team. However the primary responsibility of the contract management team begins after the letter of Award is issued to the successful bidder

• Obtain internal approvals • Appoint a negotiations committee • Obtain bid bonds or guarantees from

Pvt Party • Receive or make payments as per RFP • Obtain any corporate actions required

for the private legal entity to sign • Prepare draft contract management

plan • Take other project specific actions as

identified

• Enter into tri partite agreements, in case of VGF projects, and other agreements, such as State Support as may be required

• Facilitate Lead Financial institution in submission of project appraisal report to GoI

• Fulfill all conditions precedent land acquisition ; notifications ; approvals

• Ensure that the private sector fulfils its conditions precedent. Incl. Financial

Mutual Trust

Communication Channels

Objectives are

understood

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The broad categories of risks which may likely to impact a PPP project are:

• Project risks contractually allocated to the Government They are risks that arise on account of contractual obligations implied by the law and are explicitly allocated to the Government entity.

• Risk arising from issues not resolved at the time of signing Contract At the procurement stage, the procurement team will make an attempt to identify and allocate all risks associated with a project. Since the business environment is dynamic in nature, it is likely that certain risks may not have been identified and hence not allocated to respective parties. Certain risks may also not be resolved during the negotiation stage and hence were not allocated. The contract management team would try to minimize the impact of such unresolved risks on the project.

• Risk borne by the Government entity These represent the residual risk to the

Government entity

• Risk associated with changes proposed to contract terms During the PPP project lifecycle, it is likely that some changes may be proposed to the contractual terms which would lead to certain new risks arising which could impact the project.

9.3.6 Risk Management Process Risk Management activities begin early in the procurement stage. This function is the primary responsibility of the procurement team. The contract manager/team supports them in this exercise.

Procurement Phase

Risk Management Planning

Risk Identification

Risk Assessment

Monitoring Phase

New Risk Identified

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• Risk Management Planning involves identifying the approach to be followed in undertaking risk management activities. It is importance in ensuring sufficient resources allocation to risk management activities

• Risk Identification to arrive at a long list of all potential risks to a project. It is an iterative process as new risks are likely to be identified during the PPP project lifecycle

The Planning Commission Guidelines for Monitoring PPP projects clearly lays down the roles of both tiers of the PPP monitoring process and the formats for reporting on PPP performance. 9.3.7 Service Delivery Management The objective of service delivery management is to ensure service meets the standards specified in the contract and in turn the project objectives and that costs associated with the project do not exceed that estimated at procurement stage. Service delivery management covers two basic areas

• Risk Management • Performance Management

Each of these sub functions are discussed in details in the subsequent sections 9.3.8 Risk Management It involves appropriate action t keep all risks to the project at a level acceptable to the Government entity. Identifying allocation and management of risk is and integral part of the procurement stage. The contract management plan should be able to capture this risk management strategy and plan. The strength and adequacy of the risk management strategy is typically gauged in the subsequent stages of the project lifecycle based on its ability to manage identified risks, monitor, identifying and manage new risks. Government entity would still be required to provide the service to meet its institutional objectives. Contingency planning thus aids the Government entity in being prepared for such situations. Such an incident could be on accounts a service disruption caused by private party default or without private party default. It could also be caused by default on account of private party without any service disruptions. The main contingency planning tools are:

• Business Continuity Plan should mitigate the impact of disruption in service delivery on the key stakeholders such as the Government entity and end users. While the disaster recovery plan aims at restoring critical service functions following an event which has a catastrophic impact on the project. In developing the business continuity and disaster recovery plans, the contract management team should keep in

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mind that the plans would need to be implemented at short notice and under significant pressure

• Step in Plan is based on the contractual provisions which allow the Government entity to “step in” certain circumstances and temporarily enter or take control of the private party’s facilities used in providing the services. In case the contract provides for such “step in” right, a step in plan should be developed by the contract management team in conjunction contracting parties in the event “step in” clause in invoked. The business continuity and default plan will take over from where the step in plan ends.

• Default Plan would come into affect when the default clause of the contract is

invoked. The default plan should be developed in a manner similar to and in conjunctions with the business continuity and step in plans.

Contingency planning is especially important to PPP projects as it may now always be possible to fully transfer the responsibility of service delivery for PPP projects will still rest with the Government. 9.3.9 Performance Management The performance management system plays an important role in allowing the Government entity to quantity benefits and costs of service delivery, clearly service and their deliverables and ensure that service provided comply with the identified business requirements The key issues to consider while developing a performance management system are

• Reporting requirement frequency during the construction period would be different from the operating period.

• Nature of monitoring and reporting The monitoring and reporting requirement will be governed by the type of project and delivery structure For e.g. the financial reporting requirements for a special purpose vehicle would be different from a corporate finance structure where a substantially publicly traded company carrying out the project on its own books leads to the creation of a projects risk register which documents all projects risks during the PPP project lifecycle.

• Risk Assessment / Analysis involve determining the probability of a risk occurrence and gauging the impact of such risk on the PPP project. This could be a quantitative or a qualitative exercise based on the specific requirements of the project.

• Risk Response/Management Plan which would provide for allocation of risk between the contracting parties based on who is able to manage the risk best. It would also include risk mitigation strategies which would minimize the impact of risk on the project. The four main risk management strategies are avoid, transfer, mitigate or a accept. Based on the nature of risk and impact on the project any one of these risk management strategies can e adopted. A risk matrix helps the contract management team in documenting the risk management strategy adopted for each risk.

• Risk Monitoring and Control is also an iterative process and would be undertaken through out the PPP project lifecycle.

This process of continuous monitoring of risk helps in identifying new risks that are likely to arise in during the subsequent stages of project execution. Each step in the risk management process provides a specific output towards the development of a risk management plan. In addition, it is important that there is specific and documented role allocation for each step in the risk management process.

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Risk monitoring and reporting structures used by contracting authority would depend on duration, size and complexity of PPP projects. The basics of risk monitoring are that the risk management plan should be in place prior to implementation stage and there should be a continuous process of review and implementation. The review of the risk management process should check the ability of the risk management process to track identified risk; efficiency of reporting new risk and documentation of risk managed for future reference. A number of tools and techniques are used to monitor risks. Close monitoring of project execution and performance data should be undertaken to identify and control any new risks likely to arise. Trend/Variance analysis can be undertaken on project related data to understand the severity and frequency of variance. Risk management plan which has been documented in the procurement phase will be put into action by the contract management team in the implementation and monitoring phase of project development. Risk monitoring also is more critical in case where the impact of the project is higher on the exchequer as in case of VGF projects, Annuity based projects. Clear documentation of the risk monitoring and escalation procedure should be shared with all contracting parties and key stakeholders. Strict adherence to the procedures laid down will ensure minimizing the negative impact of a risk materializing and at the same time reduce the possibility of conflict between stakeholder. 9.3.10 Contingency Planning To minimize the impact of unforeseen events the contract management team should design and develop the necessary contingency plans. Contingency plan relates to events which are likely to cause a disruption in service delivery. In the event that the private party fails to deliver the services as specified in the contract the Government entity may face significant reputation damage and this failure could inconvenience end users. Additionally force majeure conditions could potentially relive the private party from its obligation although the • Review of performance monitoring and taking corrective action. The monitoring systems

established should allow the Government entity in reviewing the performance of the private party against the baseline requirements specified and also aid in taking corrective action where required. The corrective action should be in line relevant provisions of the contract and should consider the severity and impact of deviation from baseline requirements. The application of formal warmings’ penalty deductions step-in and other responses should be undertaken in a manner that is likely to achieve the best result from the Government entity’s point of view. An overly rigid approach may jeopardise continuing service delivery to end users, while too much lenience could encourage the private party to commit further breaches. • Effecting performance improvement measures. It aims at improving service delivery quality and value for money in a manner that benefits both parties to agreement. Since PPP contracts generally tend to of larger duration there could be changes to baseline performance requirements which could be on account of technological changes or improvement in productivity. The payment mechanism can capture the incentives to private parties for such improvement. For example, a fixed payment system which would mean any reduction in costs on account of productivity improvement would reflect in higher margins for the private party.

The key performance indicators (KPIs) are an effective tool which can be used by the contract management team in performance monitoring. It is based on developing specific

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indicators which capture the performance requirement of the PPP project. These performance requirements are developed and refined into measurable indicators and target values are set for each of these indicators. These target value act as a benchmark for comparison of actual perform and the contract management team can report any deviations from the same. While defining the KPIs it is important that they are simple, measureable, achievable, relevant and times i.e. timeframe for achievement. • Level and type of action required based on the monitoring and reporting The monitoring system need to focus attention of the Government entity on the key areas The various steps in performance management include

• Development of a performance management model which will form part of the contract should include

o Baseline level of performance that meets the service delivery specifications. The baseline determined should be reasonable and measureable. Performance measures and any improvements in the same are tracked against the baseline performance.

o Performance monitoring systems monitoring of performance would happen at three levels. The most basic level would be systematic self-monitoring through a quality management system. The second would be a review of the quality management system by the Government Entity or a third party. The third means would be end user feedback on the quality effectiveness of service delivery. The contract should specify the form of reporting for monitoring of performance.

o Penalties associated with not meeting baseline requirement. The consequences of

the private party failing to meet the baseline requirements should be specified in the contract and any such situation should be handled as per the terms of the contract.

• Details a performance management plan in the contract management plan. The

performance management plan should details the performance management model developed in the previous step and also provide the reporting requirements. The key elements of the performance management plant are

o Reporting requirements of the private party with respect to self-monitoring o Performance monitoring system that would be used by the Government Entity and/or

independent third parties to review the private party’s quality management system o Mechanisms that would be used to solicit end user feedback o Government officials responsible for monitoring affordability, service delivery, value

for money, quality and performance improvement o Estimate of the resource that the Government entity would allocate to manage the

private party performance

• Establish performance monitoring system Contract manager should implement the various performance monitoring systems that had been identified as a part of the performance management system. The objective of the performance monitoring systems should be to regularly check progress of project against established milestones, hold progress meeting and discuss performance report, check that all performance conditions and clauses in the contract are acted upon, develop effective mechanism for feedback, review third party monitoring reports and maintain comprehensive documentation on performance monitoring.

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• Small works variations The small works variations procedures is designed to provide an

efficient mechanism for dealing with additional capital works required by Government Entity.

• Variations initiated by Government entity Such variations should be limited to changes

to the services requirement, the specified constraints on inputs, and the limits or scope of the project insurance.

• Private Party variation if the private party wished to introduce a variation it must submit

a private party variation proposal to the Government entity, setting out the details of the variation and the likely impact of the variation on the contract particularly in relation to unitary charge payments.

9.4.0 Contract Administration It involves developing process and procedures to keep the contract and related documents up to date, ensure that all documentation relating to the contract are consistent and easily accessible to all stakeholder. An essential element of Contract Administration is the maintenance and updating of the Contract Management Plan. As incase of most contract management functions, the contract administration system size and complexity would be dependent on the requirements of the project. For large and more complex projects a more formal document management system enabled with formal change control procedures could be implemented. Knowledge management is thus a major component of contract administration activities. The tasks involved in knowledge management.

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9.5.0 Dispute Resolution

9.5.1 Forms of Dispute Resolution Form Time Cost Binding Adversarial Special features Negotiation Varies Low No No Can continue throughout

dispute resolution process Expert Determination Quite fast Moderate Not unless

agreed to Yes Normally follows directly

after negotiations Mediation Fast Low Not unless

agreed to No

Conciliation Fast Low Not unless agreed to

No Often within the scope of mediation

Arbitration Fairly slow Fairly high Yes Yes Litigation Slow High Yes Yes

9.6.0 Implementation Plan – Contract Management Key Tasks Target Date Responsibility Institution Budget 1. Development Phase

• Establish partnership management structure

• Establish performance monitoring system • Arrange staff transfers • Survey end user requirements • Other

2. Deliver Phase • Conduct quality assurance review • Prepared performance report • Review and revise the PPP • Agreement management plan • Conduct regular review meetings • Other

3. Exit Phase • Evaluate exit options • Review PPP agreement termination/

expiry conditions • Other

Questions: 1. Describe the steps in PPP tendering? 2. Explain contact Management for PPP projects? 3. Discuss the Risk Management in PPP projects?

Judicial Courts Refer under Exceptional

Circumstances

Refer for Arbitration

Independent 3rd Party Mediation

Settle disputes at level of contract Director and Chief Executive of Private

Settle disputes at level of contract Manager and Project Manager of Private Partner

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CHAPTER 10

FREQUENTLY ASKED QUESTIONS (FAQs) & QUIZ 1: What is a Public Private Partnership? A. A Public Private Partnership (PPP) is a contractual arrangement between the public and private sectors with clear agreement on shared objectives for the delivery of an asset or service that would otherwise have been provided through traditional public sector procurement. 2 : What is the policy of Government of Karnataka on private investments and public

private partnerships in infrastructure projects? Ans: The present infrastructure policy of Government of Karnataka encourages private investments in 10 infrastructure Sectors (as defined under para 13 of Infrastructure Policy 2007)

• Agri-Infrastructure • Education • Energy • Healthcare • Industrial Infrastructure • Irrigation • Public Markets • Transport & Logistic • Urban & Municipal Infrastructure

The Government of Karnataka is actively promoting public private partnership in all above sectors

3 : What are the accepted investment models for infrastructure projects? Ans : Several types of investment models such as (as per para 23 of Infrastructure Policy 2007)

• Build-and-Transfer (BT) • Build-Lease-and-Transfer (BLT) • Build-Transfer-and-Operate (BTO) • Build Operate and Transfer (BOT) • Build-Own-Operate-and-Transfer (BOOT) • Build-Own-and-Operate (BOO) • Build-Operate-Share-Transfer (BOST) • Build-Own-Operate-Share-Transfer (BOOST) • Build-Own-Lease-Transfer (BOLT) •

Depending on the nature of each project the StateGovernment will decide upon the nature of the contractual agreement. 4. Whether State Government will participate in equity of such projects? Ans: State Government may consider making an investment in a particular infrastructural project if it will facilitate speedy implementation and based on the project's strategic nature. In Bangalore International Airport Project which has been built on BOT basis, Government of Karnataka has taken 13% equity shares.

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5. What is the type of support / clearance procedure for such investments in infrastructure projects ?

Ans: Depending on the investment in an infrastructure project State Level Single Window Agency (investment below Rs.50 crores) or State High Level Clearance Committee (investment above Rs.50 crorres) clears the project in a time bound fashion with assurance to support the project at all levels as per the commitment made in the clearance letter. 6. What are the incentives / encouragements for investments in infrastructure projects ? Ans: As per infrastructure policy of Government of Karnataka, the project would be allowed to charge user fees (tolls, port dues etc.) during the the concession period. Incentives and support such as tax holidays, tax exemptions, Viability Gap Fund, etc., have been provided under the purview of the Govt. of India. (refer Schedule III of Infrastructure Policy 2007) 7. Whether the investor can charge user fees ? Ans: Yes, the investor will be allowed to charge user fees (tolls, court dues etc) during the concession period. (refer Para 19 & 20 of Infrastructure Policy 2007) 8. Are there any examples of success stories in public private partnership investment? Ans : Following are the examples of successful Public Private Partnership investments.

• Bangalore International Airport Ltd., Devanahalli. • Four Laning of Bangalore-Mysore Road ( Bangalore-Maddur Section) • Sanitary Landfills in Bangalore

9. What are the procedure for offering the projects in infrastructure sector? Ans: Generally infrastructure projects from the concerned departments will be offered to the private sector through open competitive bidding or Swiss Challenge Route. (refer Para 27 & 31 of Infrastructure Policy 2007) 10. Who are to be contacted for further details and information? Principal Secretary Infrastructure Development Department Room 28, Vikasa Soudha Bangalore-560001 INDIA Ph: 91-80-22282366, 91-80-22035085 Fax: 91-80-22280605 Director Infrastrcture Development Department Room No. 08, Vikasa Soudha Bangalore-560001 INDIA Ph: 91-80-22034070 Chief Executive Officer Infrastructure Development Corporation (Karnataka)Ltd RMV extn Sadashivnagar Bangalore-560001 INDIA Ph: 91-80-23613015, 91-80-23613014

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Deputy Secretary- I Infrastrcture Development Department Room No. 24, Vikasa Soudha Bangalore-560001 INDIA Ph: 91-80-22034149 Deputy Secretary- II Infrastrcture Development Department Room No. 412, Vikasa Soudha Bangalore-560001 INDIA Ph: 91-80-22034768 11. What is Public-Private- Partnership Database? The PPP database is collection of project information on PPP projects under taken in India. The database maintains, on regular basis, data initially on the following sectors:

• Airports • Education • Health Care • Ports • Power • Railways • Road • Tourism • Urban Development

The data for the same is collected and collated from various PPP nodal agencies of the government and from project owners or investors. 12. What does the database contain? The database contains general information about the project like, location, sector, type of PPP project, status, , bidding information (such as contract award method, contract signing date, financial closure etc.), project benefits and costs, legal instruments and financial information about investor holdings and, total debt and equity etc The database captures all the PPP projects on the sectors below from 1996 in India and is updated regularly with any new development in the existing and under-construction projects. The new projects are updated as and when they are in the public domain. The database covers only those projects that are approved by the Government of India, State governments or local bodies. 13. Has the government formed any approval committee for PPP projects? The Cabinet Committee on Economic Affairs (CCEA) in its meeting of 27th October, 2005 approved the procedure for approval of public private partnership (PPP) projects. Pursuant to this decision, a Public Private Partnership Approval Committee (PPPAC) was set up comprising of the following:

• Secretary, Department of Economic Affairs (in the Chair) • Secretary, Planning Commission • Secretary, Department of Expenditure;

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• Secretary, Department of Legal Affairs ; and • Secretary of the Department sponsoring a project.

The Committee would be serviced by the Department of Economic Affairs, who has set-up a special cell for servicing such proposals. The Committee may co-opt experts as necessary. 14. Has government provided any guidelines for appraisal/ approval of PPP projects? Different guidelines for different categories of central sector PPP projects have been issued by the government from time to time. These are: a. Guidelines for formulation, appraisal and approval of Public Private Partnership (PPP) Projects costing less than Rs.100 Crore b. Guidelines for formulation, appraisal and approval of Public Private Partnership (PPP) Projects (i) Of all sectors costing more than Rs.100 crore and less than Rs.250 crore (ii) Under NHDP costing Rs.250 crore or more and less than Rs.500 crore c. Procedure for approval of PPP Projects and Guideline for formulation, appraisal and approval of Public Private Partnership (PPP) Projects in Central Sector 15. How do Public Private Partnerships work? A. The essence of a PPP project is that the private sector will do one or more of the following:

• provide private finance to fund the project • enter into a long term [greater than 5 years] service contract • undertake the design and construction of an asset on the basis of an output

specification prepared by the public sector and designed to meet broad performance targets

• enter into a joint venture arrangement with the public sector to provide a service or asset

16. Are there different types of Public Private Partnerships? A. Public Private Partnerships can come in different forms, but to be successful they must provide:

• long term ‘value for money’ for the exchequer • ensure that environmental and public health and safety standards are maintained • the public interest is fully protected

For more information, please go to the Irish Government’s Public Private Partnership (PPP) websitehttp://www.ppp.gov.ie/

17. What are the benefits of PPPs? A. For the private sector, PPP projects provide an opportunity to participate fully in major infrastructural development and to contribute new ideas to the design and construction of works. PPP also allows for the best of public and private sector management skills to work together in the delivery of services for public benefit. 18. You’ve said you will provide protection against regulatory risk. What exactly do you mean? Regulatory risk arises when there is a statutory regulator involved and there are changes in regulations affecting pricing or other changes imposed on the private proponent, which do not reflect its investment expectations (as reflected in the Financial Model).

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For PPP Projects, the concession agreements between the government and the project proponent may indicate a pre-agreed parametric formula or whatever mechanism dealing with changes in prices to maintain predictability of project cashflows during the concession period. The regulatory risk normally arises when government intervenes with price setting that deviates from what is contemplated in the contract. Since this is entirely within the government’s control, it has to take on the difference. Moneys may have to be set aside for this (contingent liability). 19: What will the role of external advisors be in the project development process? External advisors may be hired to assist in the structuring of PPP projects, and in giving transaction advice throughout the PPP process.There is no prohibition against outsourcing of project development services to external advisors or consultants. Hiring their services is demand-based or as deemed necessary. However, one of the usual problems with external advisors is weak transition and transfer of capabilities to the IA/LGU personnel themselves after the term of contract by the consultants.External advisors shall assist IAs/LGUs in conducting business case or pre-FS of PPPs, FS preparation, contract preparation and detailed engineering. Business case shall include initial study of project’s potential financial and economic viability. External advisors shall further assist until a project is bid out or awarded for implementation. 20: Will the government hire external advisors during the bidding process? What will their role be? It is possible for IAs to hire external advisors during the bidding process as may be deemed necessary. Given the complexity of PPPs, external advisors need to be hired during the bidding process specifically for preparation of bid docs and re-hired (hiring may not be all throughout the process) upon opening of bids to assist IAs/LGUs evaluate the bid submissions. This is to ensure that the bidding rules are strictly followed by all. 21: What criteria will the government use to determine whether to bid projects out on a PPP basis? These basic principles are considered:

• excludability/non-excludability of project benefits (generally and theoretically, the public sector should provide goods which are non-excludable such as national defense because it is difficult to charge end-users; the private sector may provide excludable goods such as private goods and club goods because it is reasonably priced and possible to prevent other potential consumers (e.g. those who have not paid for the good or service) from actually consuming the good or service;

• competition and price contestability (if prices to end users are cheaper when provided by the private sector (PS), then PS may finance the project); and

• Cost recovery components/bankability of the project – if fees, charges and tolls may be imposed, it is a general indication that private sector may provide the service. On the above efficiency gains, PPP may be pursued. 22: Based on what criteria will the government prioritize the selection of certain projects over others? The selection criteria includes consistency with the sector’s development plan/masterplan, prospects for bankability/viability, readiness of the project in terms of completion of studies, and level of government support required for the project.

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The projects identified for bidding are those that the IAs considered as highly implementable. This means that the project feasibility studies have been recently updated, the IA’s identified these as their priority projects, there is not much issue on government funding, and the projects are initially determined as financially viable for private financing.

23 : What is Project Development ?

Ans : A ) Efforts made by Sponsoring Authority in identifying and structuring of Project which includes carrying out the feasibility studies, financial structuring, legal reviews (including environment studies) and development of project documentation, including concession agreement, commercial assessment studies etc.

24:VGF GAP Funding ? Ans : VGF: Viability Gap Funding means a grant one-time provided by the Public Sector (Central Government / State Government) for Financial Support to PPPs in Infrastructure, with the objective of making a project commercially viable

25: What do you mean by Transaction Advisors ? Ans : Consultants hired through a transparent system of procurement by the sponsoring authorities to assist them in designing the project and/or providing technical, financial and legal input for the project design, and providing advice for the management of the process of procuring the private sector partner for the PPP project

26 : Has government of India provided any guidelines for appraisal approval of PPP projects ? Ans : Different guidelines for different categories of central sector PPP projects have been issued by the government from time to time. These are: a. Guidelines for formulation, appraisal and approval of Public Private Partnership (PPP) Projects costing less than Rs.100 Crore b. Guidelines for formulation, appraisal and approval of Public Private Partnership (PPP) Projects (i) Of all sectors costing more than Rs.100 crore and less than Rs.250 crore (ii) Under NHDP costing Rs.250 crore or more and less than Rs.500 crore c. Procedure for approval of PPP Projects and Guideline for formulation, appraisal and approval of Public Private Partnership (PPP) Projects

27 : Does the government extend financial support for PPP projects ? Ans : The Scheme for Financial Support to Public Private Partnerships (PPPs) in Infrastructure. (Viability Gap Funding Scheme) of the Government of India provides financial support in the form of grants, one time or deferred, to infrastructure projects undertaken through public private partnerships with a view to make them commercially viable. It is a Plan Scheme administered by the Ministry of Finance. Suitable budgetary provisions are made in the Annual Plans on a year-to- year basis for the scheme.

28 : Has the government provided any funds for the scheme ? Ans : To address the financing needs of these projects, various steps have been taken like setting up of India Infrastructure Finance Company and launching of a Scheme to meet Viability Gap Funding (VGF) of PPP projects. Setting up of infrastructure funds are also being encouraged and multilateral agencies such as Asian Development Bank have been permitted to raise Rupee

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bonds and carry out currency swaps to provide long term debt to PPP projects.

29 : What is India Infrastructure Project Development Fund ? Ans : For providing financial support for quality project development activities for PPP projects to the the Central and the State Governments and local bodies, Scheme and Guidelines of of India Infrastructure Project Development Fund (IIPDF), have been notified The IIPDF would assist ordinarily up to 75 per of the project development expenses. On successful completion of the bidding process, the project development expenditure would be recovered from the successful bidder.

30 : What is the purpose of the IIPDF fund ? Ans : The procurement costs of PPPs and particularly the costs of transaction advisors, are significant and often pose a burden on the budget of the Sponsoring Authority. Department of Economic Affairs (DEA) has identified the IIPDF as a mechanism through which Sponsoring Authority will be able to source funding to cover a portion of the PPP transaction costs, thereby reducing the impact of costs related to procurement on their budgets. From the Government of India s perspective, the IIPDF must increase the quality and quantity of bankable projects that are processed through the Central or States project pipeline.

31: What is Viability Gap Funding scheme ? Ans : The scheme aims at supporting infrastructure projects that are economically justified but fall short of financial viability. Support under this scheme would be available only for infrastructure projects where private sector sponsors are selected through a process of competitive bidding. The total Viability Gap Funding under this scheme will not exceed twenty percent of the Total Project Cost; provided that the Government or statutory entity that owns the project may, if it so decides, provide additional grants out of its budget, but not exceeding a further twenty percent of the Total Project Cost.

32 : How is the government funding done under Viability Gap Funding ? Ans : The government will provide a Viability Gap Funding (VGF) which shall not exceed 20 per cent of the Total Project Cost; provided that the Government or statutory entity that owns the project may, if it so decides it will provide additional grants out of its budget, but not exceeding a further 20 per cent of the Total Project Cost. VGF under this scheme will normally be in the form of a capital grant at the stage of project construction. Proposals for any other form of assistance may be considered by the Empowered Committee and sanctioned with the approval of Finance Minister on a case-to-case basis.

33 : What are the eligibility criteria for getting support under the VGF scheme ? Ans : The project should be implemented i.e. developed, financed, constructed, maintained and operated for the Project Term by a Private Sector Company to be selected by the Government or a statutory entity through a process of open competitive bidding; provided that in case of railway projects that are not amenable to operation by a Private Sector Company, the Empowered Committee may relax this eligibility criterion. (b) The PPP Project should be from one of the sectors mentioned above (See question 4) (c) The project should provide a service against payment of a pre-determined tariff or user charge. (d) The concerned Government/statutory entity should certify, with reasons: That the tariff-user charge cannot be increased to eliminate or reduce the viability gap of the PPP That the Project Term

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cannot be increased for reducing the viability gap; and That the capital costs are reasonable and based on the standards and specifications normally applicable to such projects and that the capital costs cannot be further restricted for reducing the viability gap.

34 : What is the procedure for getting Viability Gap funding ? Ans : Project proposals may be posed by a Government or statutory entity which owns the underlying assets. The proposals shall include the requisite information necessary for satisfying the eligibility criteria specified above. Projects based on standardized/model documents duly approved by the respective Government would be preferred. Stand-alone documents may be subjected to detailed scrutiny by the Empowered Institution. The Empowered Institution will consider the project proposals for Viability Gap Funding and may seek the required details for satisfying the eligibility criteria. Within 30 days of receipt of a project proposal, duly completed as aforesaid, the Empowered Institution will inform the sponsoring Government/statutory entity whether the project is eligible for financial assistance under this Scheme. In case the project is based on standalone documents (not being duly approved model/standard documents), the approval process may require an additional 60 (sixty) days. In the event that the Empowered Institution needs any clarifications or instructions relating to the eligibility of a project, it may refer the case to the Empowered Committee for appropriate directions. Notwithstanding the approvals granted under this scheme, projects promoted by the Central Government or its statutory entities are approved and implemented in accordance with the procedures specified from time to time. In cases where viability gap funding is budgeted under any on-going Plan scheme of the Central Government, the inter-se allocation between such on-going scheme and this scheme is determined by the Empowered Committee.

35 : When is VGF disbursed ? Ans : The VGF is disbursed only after the private sector company has subscribed and expended the equity contribution required for the project and is released in proportion to debt disbursements remaining to be disbursed thereafter.

36 : How is the grant-subsidy disbursed for the approved projects ? Ans : A Grant under the VGF scheme is disbursed only after the Private Sector Company has subscribed and expended the equity contribution required for the project and is released in proportion to debt disbursements remaining to be disbursed thereafter.

37: What is the aim of establishing India Infrastructure Finance Company ? Ans : The need for providing long-term debt for financing infrastructure projects that typically involve long gestation periods is imminent since debt finance for such projects should be of a sufficient tenure that enables cost recovery across the project life. Indian capital markets, however, are deficient in long-term debt instruments. Therefore IIFC is set-up to bridge this gap. 38. Has the government given any guidelines for approval/ appraisal of PPP projects? Different guidelines for PPP projects below Rs. 100 crore, above Rs 100 crore but below Rs. 250 crores and NHDP projects above Rs. Rs. 250 crores but below Rs. 500 crores have been notified by the government time to time. 39. What is the applicability of the guidelines issued by Finance Ministry? These guidelines apply to all PPP projects sponsored by Central Government Ministries or

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Central Public Sector Undertakings (CPSUs), statutory authorities or other entities under their administrative control. The procedure specified herein will apply to all PPP projects with capital costs exceeding Rs.100 crore or where the underlying assets are valued at a sum greater than Rs.100 crore. For appraisal/ approval of PPP projects involving a lower capital cost/ value, detailed instructions are issued by the Department of Expenditure. 40. Who are not covered under these guidelines? Ministry of Defense, Department of Atomic Energy and Department of Space are not covered under the purview of these guidelines. 41. What is the procedure for approval of Central sector PPP projects below Rs. 100 crore? The sponsoring Ministry identifies the projects to be taken up through PPPs and undertake preparation of feasibility studies, project agreements etc, with the assistance of legal, financial and technical experts as necessary. A Request for proposals (RFP) along with copy of all the agreements that are proposed to be entered with the successful bidder is sent by the Administrative Ministry to SFC/EFC for seeking approval before financial bids are invited. The proposal seeking clearance of SFC/EFC is circulated to all the members of SFC/EFC in the format specified along with copies of all draft project agreement and project report. Planning Commission appraises the project proposal and forward its appraisal Note to the Administrative Ministry. Ministry of Law and any other Ministry/ Department involved will also forward written comments to the Administrative Ministry within the stipulated time period. The SFC/EFC takes a view on the Appraisal Note and on the comments of different ministry and the Administrative ministry. SFC/EFC either recommends the proposal for approval of the competent authority (with or without modifications or requests the Administrative Ministry to make necessary changed for further considerations of SFC/EFC. Once cleared by the SFC/EFC, the project is put to the competent authority for approval. 42. What is the procedure for approval of PPP projects above Rs. 100 crore but less than Rs. 250 crore and project under NHDP costing Rs. 250 crore but less than Rs. 500 crore? The Government vide notification No. 10/32/2006-inf dated April 2, 2007 modified the guidelines for approval as given under the notification vide No.2/10/2004-Inf dated November 29, 2005. Accordingly, RFP (Request for Proposals), i.e. invitation to submit financial bids must include a copy of all the agreements that are proposed to be entered into with the successful bidder. After formulating the draft RFP, the Administrative Ministry would seek clearance of the SFC. The proposal for seeking clearance of SFC is circulated to all members of SFC in the format specified along with copies of all draft project agreements and the Project Report within one week of receipt. Planning Commission appraises the project proposal and forwards it’s Appraisal Note to the Administrative Ministry. Ministry of Law and any other Ministry/Department involved also forward written comments to the Administrative Ministry. The SFC takes a view on the Appraisal Note and on the comments of different Ministries,

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along with the response from the Administrative Ministry. SFC either recommends the proposal for approval of the Committee or requests the Administrative Ministry to make necessary changes for further consideration of SFC. Once cleared by the SFC, the project is put up for approval of the Committee mentioned below. The Committee either recommends the proposal for approval of the competent authority or requests the Administrative Ministry to make necessary changes for further consideration of the Committee. Once cleared by the Committee, the project is put up to the competent authority for approval. Financial bids are invited after approval of the competent Authority has been obtained. The competent authority for each Project will be the same as applicable for normal investment proposals costing more than Rs.100 crore. However, pending approval of the Competent Authority, financial bids can be invited after the approval/clearance by the Committee. 43. For projects above Rs. 100 crore but less than Rs. 250 crore who will

approve/appraise the projects? For appraisal of PPP projects of all sectors of cost greater than Rs.100 crore but less than Rs.250 crore, a Committee has been set up comprising of the following:

(a) Secretary, Department of Economic Affairs (b) Secretary of the Ministry /Department sponsoring the project

44. For projects above Rs. 250 crore but less than Rs. 500 crore who will

approve/appraise the projects? For appraisal of projects under NHDP of cost Rs.250 crore or more but less than Rs.500 crore the Committee is as follows: (a) Secretary, Department of Economic Affairs (b) Secretary, DORTH Initially the projects will be appraised by the Standing Finance Committee (SFC). The composition of SFC is as follows:

Secretary of the Administrative Ministry Chairman Financial Adviser Member Joint Secretary of the concerned Division Member Representative of the Department of Legal Affairs Member

Representative of Planning Commission and any other Ministry/Department are also invited, if required. SFC either recommends the proposal for approval to the Committee as given above or requests the Administrative Ministry to make necessary changes for further consideration of SFC.

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Quiz 1. What does PPP stands for a. Public Private Partnership b. Public People Partnership c. Public Place Partnership d. None of the above

2. PPP incorporate following characteristic a. Contractual agreement b. Risk sharing among the public & private partners c. Financial rewards to the private party based on achievements/ output d. All of the above

3. When was the Karnataka State Infrastructure Policy implemented? a. 16th July 2008 b. 16th July 2007 c. 16th July 2009 d. 16th July 2010

4. The VGF scheme is meant for

a. Viability Gap in PPP projects b. Projects are not commercially viable but socially viable c. Providing grant / subsidy to the extent of 20% d. All of the above

5. IIDF is meant for developing projects for PPP

a. Yes b. No

6. The Government Department can seek exemption under KTPP Act for suitable projects taken up on PPP mode under “SWISS CHALLENGE” a. Yes b. No

7. PPP has following advantages a. Access to private sector finance b. Transferring risk to the private sector & increased transparency c. No responsibility to public sector d. a & b

8. PPP envisages a. Reduced user fees & better quality of service to people b. Profit & return on investment private party c. Sometimes only profit & private monopoly d. All of the above

9. Generally PPP is required a. When government has less resources & funds b. When government could not manage the project on its own c. When government has better capacity to manage

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d. a & b

10. In management contract capital investment in the project is made by private

party a. True b. False

11. The duration of BOT project is normally between 25 to 30 years a. True b. False

[

12. The commercial risk in case of service & management contracts lies with public entity

a. True b. False

13. Commercial risk in case of concession & BOT projects lies with private party a. True b. False

14. The duration of service contract would normally be between 1 to 3 years a. True b. False

15. In any PPP project penalties & rewards are important to ensure performance

a. True b. False

16. In some of the major PPP based projects Government agency needs to a. Ensure necessary environmental & other clearances b. No need to provide any support to private party c. Have clear regulated functions d. a & c

17. Viability Gap Funding (VGF) scheme of Government of India considers a. All types of projects b. Only PPP projects c. Only Public projects d. None of the above

18. Under VGF scheme following sector is eligible a. Urban transport, Airports, water supply & other infrastructure project b. Bridges, Roads, Water supply, Sewerage & Solid waste management c. Housing schemes d. a & b

19. The objective of India Infrastructure Project Development Fund (IIPDF) is to

a. Encourage PPP & assist states

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b. Assist all schemes c. Only profit based projects d. None of the above

20. In case of IIPDF scheme ------- % equity is with private partner a. 40% b. 51% or more c. 61% d. None of the above

21. Unbundling, Identifying parts amenable to PPP, selecting mode of privatization are important steps in PPP

a. True b. False

22. The process of PPP involves a. PPP identification b. PPP preparation project clearance & procurement c. Contract management & Monitoring d. All of the above

23. Government of India has developed web based resource tool kit for decision making & to improve quality of PPP development

a. True b. False

24. Following are the tool for analysis of PPP project a. PPP family indicator tool b. PPP mode validation tool c. PPP suitability filter d. All the above

25. Assessment of risks with the projects, capacity to bear the risk & subsequent

refinement of PPP mode at prefeasibility stage is an important step a. True b. False

26. Environmental clearance must be obtained for all physical infrastructure project that meet certain thresholds

a. True b. False

27. EIA( Environmental Impact Assessment) is required to be carried out for giving Environmental Clearance

a. True b. False

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28. EC (Environmental Clearance) is mandatory EIA notification of MOEF (Ministry Of Environmental Forest ) for all major i nfrastructure projects taken up on PPP mode

a. True b. False

29. In principle clearance for any PPP based project is given only after full feasibility analysis & FSR to the concerned clearance authority

a. True b. False

30. Before applying for in principle clearance, the sponsor should decide which procurement method would be best suited

a. True b. False

31. One of the following is a key constraint in PPP initiation a. Lack of shelf credible, bankable infrastructure projects b. Enabling policy & regulatory frame work c. Incapability of public institution to manage PPP process d. All of the above

32. In case the project is funded by more than one source, the financial analysis is carried out using a. Weighted average cost of capital for each project b. More than the weighted average c. Less than the weighted average d. None of the above

33. Project is acceptable if a. NPV is positive b. NPV is negative c. NPV is Zero d. None of the above

34. Project is acceptable if BCR is more than 1 a. True b. False

35. Internal Rate of Return (IRR) indicates a. Net return on investment in the project b. No return on investment in the project c. None of the above d. Only b

36. Social cost benefit analysis helps a. Selecting financially remunerative project b. Selecting socially remunerative project c. In knowing whether social benefits exceed its social cost

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d. b & c

37. Time discounting of cash flows means a. Calculation of the present value of cost & benefits during the project life b. It is the method of reducing to a comparable base the costs & benefits that

accrue at different intervals c. a & b d. None of the above

38. Which of the following is especially useful for monitoring project progress against plan?

a. Gantt charts. b. Capacity loading graphs. c. Network diagrams. d. Flow diagrams. e. All of the above.

39. Bar chart does not show priorities a. True b. False

40. Which of the following is not a reason to reduce project completion time? a. Avoid penalties for late completion. b. Reduce new product development time to market. c. Gain incentives for early completion d. Release resources for other projects e. Eliminate project critical path

41. For the following problem, What is the total duration

Activity Designation Immediate Predecessor

Duration

A (1-2) None 2 B (2-3) A 5 C (2-4) A 7 D (2-5) A 3 E (3-5) B 1

a. 19 b. 30 c. 17 d. 9

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42. In the network diagram arrows & circles indicate activities & events respectively

a. True b. False

43. In critical path, early event time & late event time at the tail of the activity

are equal a. True b. False

44. Total float in an activity is calculated as a. Late finish –Early finish b. Late finish –Early start c. A &B d. None of the above

45. In project management PERT refers to (a) Project Energy Rating Time (b) Project Energy Rating Terms (c) Petroleum Energy Revolutionary Technology (d) Program Evaluation and Review Technique.

46. Significance of critical path a. Activities on it cannot be delayed without delaying the project b. Longest duration path through the network c. Activities on it have no slack/freetime d. None of the above

47. Which of the following are benefits of the network analysis approach?

a. Allows progress to be monitored against plan b. Derive error free forecasts. c. Avoid need to use structured approach d. Eliminate need for management judgment e. None of the above

48. You have used estimates made by your team members and applied the Critical path method to compute a Network logic diagram for your project. Then you found out that it cannot be sufficiently optimized for scarce resources and fast progress towards a given deadline. What should you do next?

a. Apply resource leveling heuristics to uncritical activities only. b. Reduce estimates on duration and work efforts by an adequate percentage. c. Apply Three-point estimation and Critical chain project management. d. Remove physical constraints and replace hard logic with soft logic.

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49. A Gantt chart indicates: (Note: more than one answer is correct.) a. The sequence of activities. b. Elapsed time of different activities on project c. Activities occurring in parallel. d. Overall elapsed time on project e. None of the above.

50. A project can be considered to have failed if it: (Note: more than one answer is correct.) a. Does not meet the business requirements b. Does not meet the users' requirements c. Was significantly over budget. d. Overran significantly on estimated delivery date e. None of the above

51. What is the Internal Rate of Return (IRR) of a project? a. The time period needed to pay back the investment from a project when future

income is discounted. b. The inherent discount rate or investment yield rate produced by the project over a

pre-defined period of time. c. The rate of negative risk that can be accepted for a project without turning the

Expected net present value negative. d. The expected benefit from a project’s deliverable calculated as a percentage of

the original investment over a specified time period. 52. Which is not true in regard of RoI (Return on Investment) for a project? a. It defines the cumulated net income from an investment at a given point in time

or during a defined period. b. It includes investment, direct and indirect costs and may include allowances for

capital cost, depreciation, risk of loss, and/or inflation. c. It is most commonly stated as a percentage of the investment or as a

dimensionless index figure. d. It is the time when cumulated net income is equal to the investment.

53. A project being evaluated by an agency has a cost of capital of 12%. Initial investment is Rs 1,00,000 benefits as below Year Benefit

Year 1 25,000

Year 2 40,000

Year 3 40,000

Year 4 50,000

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54. The value of the BCR is

a. 1.75 b. 1.145 c. 2.3 d. 0.45

55. Rule for BCR for a project is a. BCR > 1 accept b. BCR = 1 in different c. BCR < 1 reject d. All of the above

56. Assumed is a discount rate of 5% per year. Looking at the present values of

the benefits of these projects in the first 3 years, what is true? a. Both projects are equally attractive b. The first project is more attractive by app. 7%. c. The second project is more attractive by app. 5%. d. The first project is more attractive by app. 3%