Concept Paper

Project Number: 44452 June 2011

India: Catalyzing Sustainable Finance (CSF) Facility

I. THE PROJECT A. Rationale

1. India has a substantial infrastructure deficit with an estimated investment of over a trillion US dollars over the next 5 years to meet this requirement. The Planning Commission of India estimates that over one-third of this investment will need to come through nongovernment sources including the private sector. Considerable attention has recently been focused on creating enabling frameworks, including standard models and documentation, to catalyze commercial finance and private sector participation. The Asian Development Bank (ADB) has engaged with the Government of India through a pioneering Initiative “The ADB-Government of India Public-Private Partnership (PPP) Initiative: Mainstreaming PPPs in India” (PPP Initiative). The PPP Initiative consists of a series of technical assistance (TA) programs grouped together for assisting the government in the development of both (i) enabling frameworks for PPP models as well as, (ii) bankable infrastructure sector model projects through the use of its nonsovereign public sector lending modality to catalyze commercial debt financing. 2. The proposed Catalyzing Sustainable Finance (CSF) Facility is an innovative multi-project, multi-sector lending facility that proposes to leverage ADB funds to create infrastructure projects that are able to attract financing from sources of private capital. The CSF Facility will be focused on infrastructure projects in the following sectors:

(i) basic urban services-water supply and sanitation, solid waste management; (ii) urban transport; (iii) housing for economically weaker sections; (iv) primary and secondary education, especially in underdeveloped urban and rural

areas; (v) primary and secondary healthcare, especially in underdeveloped urban and rural

areas; (vi) agriculture, irrigation, and related logistics; and (vii) projects fostering community involvement and inclusion, such as community

based tourism. 3. There are a number of infrastructure projects in the country that are under development, and which need a quick mechanism of funding. The CSF Facility will prioritize projects in which financing gaps and operating sustainability are the main obstacles, and where the potential to replicate is high. Under its PPP Initiative, ADB is currently engaged in seven TAs aggregating to about US$15.3 million in India that focus on mainstreaming private sector participation and PPP, developing pilot projects that can be taken up by leveraging commercial financing, and building up capacity in central and state departments for implementing PPP projects. The CSF Facility will complement the project pipeline emerging from ADB’s PPP TAs in India (pilot projects that are being developed with ADB assistance) and also create financing models that may be replicated across the sectors.1

4. The CSF Facility will address this requirement for financial support by providing a financing modality, which will provide funding for infrastructure projects in specific subsectors. The use of ADB funds through the CSF Facility will be linked to a number of reform criteria that

1 Appendix 5 indicates the types of projects that are being developed under the ADB-GOI PPP Initiative. While some

of these are already in bid stage and may not be able to draw on the CSF Facility, the list indicates the rationale by which the target subsectors have been identified.

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would act as catalysts to draw commercial finance into infrastructure projects. The CSF Facility will assist subsectors mentioned in paragraph 2, with five key conditions: (i) creation of corporate institutional structures, (ii) accounting and governance reforms, (iii) development of bankable financing models with a focus on lifecycle costs, (iv) commercial financing for a part of the financing requirements, and (v) development of time-bound roadmaps for capital markets and PPP access. The CSF Facility is targeted to challenging sectors and local government levels. The sectors that the CSF Facility is targeting (including those such as housing for economically weaker sections) have been traditionally managed with a focus on infrastructure creation and not service delivery. This has generally resulted in a budgeting exercise where, post construction, the financial sustainability of the service element has not been considered. In a situation where such “lifecycle costs” are not budgeted, it is not possible for a true cost assessment or for explicit computation of subsidies to economically weaker sections. If the conditions mentioned above are met, it would be possible to structure such projects on a financially sustainable basis–this does not imply that projects would become “profitable” but that projects would be structured in a sustainable manner with proper source and use of funds. Funds from the CSF Facility and the government will be leveraged through a sustainable financial and institutional structure. This differentiates the CSF Facility from existing financial intermediaries such as the India Infrastructure Finance Corporation Limited, which generally lend to projects that are relatively large, prepared and bid out, and mostly in the road and power sectors. 5. The proposed CSF Facility is in line with ADB’s country partnership strategy (CPS) for India (2009−2012), which emphasizes infrastructure development (e.g., transport, energy, urban, agriculture, and water resources management). ADB has also committed to help in catalyzing investment and facilitating the private sector’s participation in infrastructure development, among other things, with an objective of providing essential services to the poor, reinvigorating the rural economy, developing human resources, protecting the environment, and bridging the divides between regions, sectors, and genders. The CPS recognizes that one of the key constraints that need to be addressed for achieving these objectives is that of the infrastructure bottleneck and that catalyzing investment through the use of innovative business and financing solutions is the key to addressing this concern. B. Impact, Outcome, and Outputs

6. The CSF Facility’s focus subsectors have traditionally been contracted out by various state and local government departments and agencies. These contracts focus more on infrastructure creation than on sustainable service delivery, with the result that actual service delivery suffers. Since these services are also seen as “public good” functions of the state, there is an “unwillingness-to-charge” on the part of the state, combined with “unwillingness-to-pay” (or inability to pay) for such services. The result is that these services are seen as unviable for attracting private sector participation or market finance. This problem can be remedied if (i) the focus shifts from private financing to providing sustainable infrastructure delivery; and (ii) the government provides the substantive part of the financing and also stands proxy, to the extent required, for user charges. The key impact of the CSF Facility will be increased private sector participation in the delivery of infrastructure services in the target subsectors (or) increased access to commercial finance. Implicit in this is the assumption that projects seeking private sector participation/commercial finance will have to be structured with a project lifetime perspective and be financially sustainable. Following such an approach, the expected outcome is that the CSF Facility will facilitate the government in setting in place a replicable framework for attracting private sector into the financing and delivery of infrastructure services in the target subsectors. The expected outputs are the development of institutional structures for

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infrastructure service delivery in target subsectors, along with standard documentation models for private sector participation in target subsectors. C. Investment and Financing Plans 7. The CSF Facility is a financial intermediation loan to Housing and Urban Development Corporation Limited (HUDCO). The CSF Facility aims to provide funds to a range of projects, and the investment amount per project will be dependent upon the financial sustainability of the specific project. Each project will receive up to 70% of the project cost, capped at $75 million per project, as financing from the CSF Facility.2 At least 10% of the finance will need to be sourced from commercial sources (banks, financial institutions, non-banking finance companies, private investors) and at least 20% from the sponsoring government (national, state, or local). The proportions for financing that have been indicated are a cap for finance from the CSF Facility, and a floor for government and commercial finance. The quantum and sources will be identified during the project structuring for individual projects. Based on expected actual share of financing per project, it is likely that CSF per project will be approximately 45% of project cost. On that basis, the overall investment plan would be $333 million with the private sector share likely to be closer to $100 million, around 30%. Based on a more conservative estimation, the following financing plan is expected as an aggregate across all projects.

Table 1: Tentative Investment and Financing Plan Source Amount

($ million) Share of Total (%)

Asian Development Bank 150.00c 70.0 Private Sectora 21.00 10.0 Government (national, state, or local)b

42.00 20.0

Total 213.00 100.0 a Banks, development financial institutions, nonbanking finance companies, or developers. b This component could also be brought in from the private sector, if the project financials are

sustainable. c An amount equivalent to 1.0% of the CSF Facility (i.e., $1.50 million) will be set aside for carrying out

documentation work with reference to institutional structuring, procurement, and safeguards. Source: Asian Development Bank.

D. Indicative Implementation Arrangements

8. The executing agency for the CSF Facility will be the Department of Economic Affairs (DEA), Ministry of Finance. The implementing agency would be HUDCO, which has the necessary experience and wherewithal to manage the CSF Facility. A project implementation unit (PIU) will be created in HUDCO. In addition, a CSF assistance unit (CAU) will be set up in DEA, which has been jointly managing the ADB-DEA PPP Initiative. The CAU in DEA will be responsible for project identification, initial screening for compliance with environmental and social safeguards, and CSF approvals including through a steering committee as may be appropriate. The PIU in HUDCO will carry out the appraisal and safeguards related functions for the specific projects. This joint system will ensure that DEA, which has the clearance and oversight functions for such projects, would be directly involved, ab-initio, in the process and the skills of HUDCO in project appraisal are also leveraged. Appendix 9 indicates the proposed implementation structure.

2 If the amount required to make the project amenable for commercial financing is less, the support shall be restricted

to the actual amount required.

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9. The CSF Facility will be made available to HUDCO to deploy on projects that:

(i) are for the eligible subsectors in paragraph 2, (ii) within the ceiling of percentage of CSF Facility and other financing requirements

in paragraph 7, (iii) have been procured in a transparent manner and in accordance with the

guidelines agreed between DEA and ADB for the CSF Facility, (iv) agree to meet the institutional and reform requirements in paragraph 4, and (v) meets the safeguards requirements of ADB.

10. Funds from the CSF Facility shall be made available to the projects as per the financing plan outlined in para 7. These funds would be in the form of loans to the project, with on-lending terms depending on the project’s ability to sustain its finances as ascertained from the project studies appraised by the CAU and PIU. While HUDCO could have a direct (from project) or indirect (from local or state government revenues) mechanism to recover the loans, ADB shall not be incurring any project revenue risk under the CSF Facility.

II. TECHNICAL ASSISTANCE

11. Under the PPP Initiative, there are seven ongoing TAs for strengthening the concept of private sector participation in India. PPP cells have been supported in 15 states, 6 national ministries, and DEA, where PPP and management information system experts are embedded into nodal departments. Apart from the cells, several projects are being actively developed in each cell including over 30 pilot projects in the most challenging sectors, several of which have already been awarded. The government has a separate project development fund called the India Infrastructure Project Development Fund (IIPDF), which, along with the ADB’s Pilot Projects Initiative (one of the PPP TAs), is used actively in developing projects with private sector participation. Various state governments also have project development funds or dedicated nodal agencies for projects with private sector participation. Therefore, under the CSF Facility, it is not proposed to have a separate project preparatory technical assistance (PPTA). The work done under the ongoing PPP Initiative, PPP cells, IIPDF, and other development efforts of the government and state government would be the basis on which projects would be identified and the funds routed.3 However, there will be an element of due diligence, recommendations for improvement of projects and documentation for institutional structuring, procurement, and safeguards. Accordingly, an amount equivalent to 1.0% of the CSF Facility (i.e., $1.50 million) will be set aside for carrying out such activities, allocated to the CAU in DEA. Assistance under the ongoing ADB PPP TAs will also be explored for the above.

III. DUE DILIGENCE REQUIRED

12. Under the CSF Facility, the proposed mechanism is to set in place a defined list of covenants, stipulations, and processes to enable deployment of funds from the CSF Facility by HUDCO on each project. Other than reviewing and monitoring the adherence to these prescriptions, ADB shall not be involved at the project level or taking a project risk and ADB’s due diligence would not be required on a per-project basis. The national environmental and land acquisition laws and ADB’s safeguards would be summarized into a comprehensive environmental and social management system (ESMS) and built into the CSF Facility as its safeguard management system with clearly stated instructions on its applicability to projects.

3 The projects funded by the CSF Facility would not be restricted to those being developed under the ADB-PPP

Initiative, but would be any project being developed by any agency and referred to DEA.

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Selection criteria for subprojects would include adequate policies, systems, and procedures to assess and monitor social impacts. These selection criteria (including EIRR requirements) would be developed per discussions between ADB, DEA, and HUDCO, and implemented by HUDCO. 13. It is envisaged that the “project development” requirement for posing a project for assistance through the CSF Facility would be supported by existing initiatives such as the IIPDF and ADB’s Pilot Projects Initiative. The preparatory studies include technical assessment, project costing, financial modeling, user willingness-to-pay studies, environmental and social assessment, and project (financial and institutional) structuring.

IV. PROCESSING PLAN

A. Risk Categorization

14. The project risk categorization is derived from the following:

(i) The loan amount for the project is US$150 million; (ii) ADB has a sound record of working in infrastructure sector in India, and has also

been a key participant in the PPP space, on account of ADB’s PPP Initiative with the Government of India. Under its ongoing PPP Initiative with the government, ADB has seven TAs related to PPP in the country, and has also supported PPP cells in many states of the country and several national ministries, including in the DEA;

(iii) The DEA would be the executing agency, and is a department of the Ministry of Finance, Government of India. The DEA anchors all external funding into the government sector in the country, and is also in-charge of setting the frameworks for private sector participation in infrastructure. DEA also manages the viability gap fund of the government, as well as the IIPDF.4 HUDCO, as the implementing agency, has extensive experience in project appraisal and financing and is entirely owned by the Government of India; and

(iv) Safeguards: Financial Intermediary.

Taking into account the above factors, the risk categorization for the project is “Low.” B. Resource Requirements

15. As mentioned in the previous sections, in view of the ongoing PPP Initiative, no additional PPTA funds are sought for the proposed CSF Facility. The CSF Facility is a financial intermediation loan to HUDCO and will be used to finance projects in the target subsectors. ADB will set the parameters for financial bankability, social and environmental safeguard requirements (summarized into the ESMS) for projects to be qualified under the CSF Facility. HUDCO will carry out the due diligence for each project based on the ESMS confirming to national laws and ADB’s Safeguard Policy Statement (January 2009). Willingness to pay and affordability analysis and other studies, as appropriate, would be undertaken by the project sponsor using their own funds for posing to for financial assistance under the CSF Facility, and this is not budgeted under the ADB loan funds. Any additional funds will be sought through the ongoing TAs. Based on the proposed processing schedule, it is estimated that the project preparation will require about 7 person-months of time in 2011 (mission leader, 2 person-

4 For an outline of VGF and IIPDF, please see Appendix 7.

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months; team members, 3 person-months; interdepartmental review, 1 person-month; and management, 1 person month). The resource requirements are indicated in Table 2.

Table 2: Proposed Resource Requirements Item Amount ($) Remarks

Three staff consultants will need to work for 3 person months each to assist in finalizing the social, environmental, and economic and/or financial impact criteria.

50,000 -

Consultants in CAU to assist the DEA: estimated four consultants for 3 yearsa

1,000,000 Out of 1.0% of CSF Facility to be provisioned for this activity

Contingencies for documentation (procurement, institutional, safeguards)

500,000 Out of 1.0% of CSF Facility to be provisioned for this activity

a Only national consultants are envisaged to be deployed. CSF = Catalyzing Sustainable Finance, DEA = Department of Economic Affairs, CAU = CSF assistance unit. Source: Asian Development Bank.

C. Processing Schedule

16. The key processing milestones are provided below:

Table 3: Proposed Processing Schedule Milestones Expected Completion Date Concept clearance June 2011 Fact finding mission June 2011

Staff review meeting July 2011

Board consideration September 2011 Source: Asian Development Bank.

V. KEY ISSUES

17. The key issues that need to be addressed are:

(i) Structuring the facility within HUDCO and discussions with all the relevant ministries;

(ii) Setting in place the covenants, stipulations, and safeguards, under which the CSF Facility funds would be disbursed. In addition, structuring mechanisms to review and monitor the implementation of these;

(iii) Assessing demand for CSF from field visits; and (iv) Development of sound institutional structures at the project level, and ensuring

that these are sustainable and replicable.

Appendix 1 7

APPENDIX 1: BASIC PROJECT INFORMATION Aspects Arrangements Modality Sovereign government loan

Financing OCR

COBP/RCOBP ADB. 2011. Country Operations Business Plan: India

Changes in the project modality: The modality has been changed from multitranche financing facility (MFF) to financial intermediation loan on account of the fact that the construct with private sector participation is unsuitable for the MFF modality. Change in project title: Since the ambit of the project is more to set up replicable structures, and the amount of loan is small in relation to the requirement of the sectors, it is found more appropriate to name it “Catalyzing Sustainable Finance Facility.”

Classification Sector (subsectors): Finance (finance sector development) Themes (subthemes): Private sector development (public-private partnership);

Capacity development (institutional development); Economic growth (promoting economic efficiency and enabling business environment)

Targeting classification: General Intervention Gender mainstreaming category: Category III – some gender benefits Location impact: National Level (High) Safeguards: Financial Intermediary

Risk categorization “Low”

Partnership(s) Not envisaged

Use of a PBA Not envisaged

Parallel PIU Not envisaged

Department and division

South Asia Department (SARD): Public Management, Financial Sector and Trade Division (SAPF)

Mission leader and members

A. Mehta (SAPF, Project Team leader), R. Peri (SAOD, Project Alternate Team Leader), A. Huang (SAPF, Project Team Member)

ADB = Asian Development Bank, ADF = Asian Development Fund, COBP = country operations business plan, MFF = multitranche financing facility, OCR = ordinary capital resources, PBA = programmatic based approach, PIU = project implementation unit, RCOBP = regional cooperation operations business plan.

8 Appendix 2

APPENDIX 2: PROBLEM TREE

Appendix 3 9

APPENDIX 3: PRELIMINARY DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets and Indicators with

Baselines

Data Sources and Reporting

Mechanisms

Assumptions and Risks

Impact

Increased private sector participation in the delivery of infrastructure services in the target subsectors.

By 2015, at least three states adopting a model that includes private sector finance and/or management in provision of infrastructure services in target subsectors

By 2016, evaluation to assess improvement in sustainability and quality of service delivery

State level statistics collated by DEA/Planning Commission

Independent evaluation of sample project(s)

Assumptions

Government remains committed to attract private sector participation in the target subsectors

Key government officials continue in their current positions.

Stable policy environment to attract private sector participation in the target subsectors.

Risks

Private sector participation in the target subsectors is prevented by political compulsions.

Inadequate enabling environment for increasing private sector participation in the target subsectors.

Outcome

Government is able to create replicable frameworks for attracting private sector into the financing and delivery of infrastructure services in the target subsectors.

By 2015, projects in target subsectors successfully financed with private sector participation in financing and/or management. Private sector participation in the delivery of infrastructure services in the target subsectors rises by at least 5% by 2016. Baseline1 2011 - Education (17), Healthcare (8), Urban Development (136) and Tourism (50) – total 211.

State level statistics collated by DEA/ Planning Commission

Assumptions

Private sector interest is present for the target subsectors.

There are sufficient number of projects that can be made viable by proper structuring.

Risks

Project development gets delayed on account of physical issues such as land availability.

Slowing economic growth affecting private sector appetite in financing projects in the target subsectors.

1 The data is available at DEA’s website http://www.pppindiadatabase.com/.

10 Appendix 3

Design Summary Performance Targets and Indicators with

Baselines

Data Sources and Reporting

Mechanisms

Assumptions and Risks

Outputs

1. Institutional structures for infrastructure service delivery in target subsectors.

2. Standard documentation models for private sector participation in target subsectors

3. Project management systems operational

At least three institutional structures for projects developed using the CSF Facility, which will be operational by 2015 A set of model procurement documentation developed, including service delivery and/or concession agreements: completed by 2013 and adopted by 2014. CSF assistance unit in DEA operational by 2012 PIU in HUDCO carrying out appraisal and safeguards related functions by 2012.

State level statistics collated by DEA/Planning Commission

State level statistics collated by DEA/Planning Commission State level statistics collated by DEA/Planning Commission

Assumptions

Line ministries and state governments cooperate in the process.

Risks

Projects do not move forward on account of administrative or jurisdictional issues. Assumptions Line ministries and state governments accept standard documentation models and replicate them. Risks

Lack of consensus among concerned line ministries to adopt the frameworks/documents as models for replication.

Assumptions

Line ministries and state governments cooperate in the process.

Risks

Projects do not move forward on account of administrative or jurisdictional issues.

Appendix 3 11

Activities with Milestones Inputs 1. Institutional structures for infrastructure service delivery in

target subsectors. 1.1 Initial discussions with DEA and HUDCO for structuring the

CSF Facility 1.2 Preparing options note for CSF Facility 1.3 Finalizing the structure, guidelines, safeguards and

operational methodologies for the CSF Facility and associated institutions.

1.4 Setting in place the institutional arrangements and making the institutions operational

2. Standard documentation models for private sector

participation in target subsectors. 2.1 Identification of projects 2.2 Due diligence on projects, including financial structuring 2.3 Developing standard procurement documentation 2.4 Procurement process, including financial closure 2.5 Assisting institutions in raising commercial finance

3. Project management systems operational.

3.1 Setting up CSF Facility Assistance Unit in DEA 3.2 Setting up PIU in HUDCO

Financial Intermediation Loan: ADB $150.00 million OCR, Sovereign

(Private sector $21.00 million)

(Government-national, state, or local $42.00 million)

ADB = Asian Development Bank, CSF = Catalyzing Sustainable Finance, DEA = Department of Economic Affairs, OCR = ordinary capital resources, PIU = project implementation unit. Source: Asian Development Bank.

12 Appendix 4

APPENDIX 4: INITIAL POVERTY AND SOCIAL ANALYSIS Country: India Project Title: Catalyzing Sustainable Finance Facility Lending/Financing Modality:

Financial Intermediation Loan Department/ Division:

South Asia Department (SARD)/Public Management, Financial Sector and Trade Division (SAPF)

I. POVERTY ISSUES

A. Links to the National Poverty Reduction Strategy and Country Partnership Strategy

The investment supports poverty reduction development goals of the Government of India (the government) and Asian Development Bank (ADB) for India. Poverty reduction and social development through faster and more inclusive growth is the goal of the 11th Five-Year Plan (FYP) of the government. The Planning Commission’s approach paper to the 11th FYP identifies infrastructure bottlenecks and lack of adequate long-term funds for infrastructure as key binding constraints to realizing more equitable and sustainable growth and bridging the division between regions, sectors, and gender. In addition, the same approach paper states that “good quality infrastructure is the most critical physical requirement for attaining faster growth in a competitive world and also for ensuring investment in backward regions.” The thrust of the 11th FYP is to scale up investment in infrastructure from 4.6% to around 9% of gross domestic product in the FYP period. ADB’s country partnership strategy 2009−2012 recognizes that the adoption of ADB’s Poverty Reduction Strategy in 1999 by India to support infrastructure-led poverty reduction in line with the 10th FYP priorities was valid and continues to be relevant for the 11th FYP. The assessment of the country assistance and program evaluation cites evidence that ADB assistance for infrastructure development had an impact on economic growth, which has in turn helped to mitigate income poverty. The key lesson that emerges is that ADB needs to continue its focus on infrastructure development but should increasingly try to mainstream innovative business and financing modalities such as support for public-private partnership infrastructure projects. The intervention seeks to expand the scope of private sector participation into sectors that are generally seen as unviable, but which provide important services to citizens. The objective of involving the private sector is to (i) leverage government finances and (ii) take a “service delivery” approach, rather than a contracting and asset creation approach. B. Targeting Classification

General Intervention Individual or Household (TI-H) Geographic (TI-G) Non-Income MDGs (TI-M1, M2,etc.) The CSF Facility is targeted at the following subsectors:

a. Basic urban services–water supply and sanitation, solid waste management b. Urban transport c. Housing for economically weaker sections d. Primary and secondary education, especially in underdeveloped urban and rural areas e. Primary and secondary healthcare, especially in underdeveloped urban and rural areas f. Agriculture, irrigation, and related logistics g. Projects fostering community involvement and inclusion, such as community based tourism

The services provided under the above subsectors would be directly improving the quality of life to urban and rural poor, whose current inability to pay makes the provision of these services ”unviable” in a financial sense. The key impact on poverty will be through greater affordability of high-quality infrastructure services. With more efficient infrastructure, it is anticipated that the vicious circle of poor services–unwillingness to pay would also be broken, and there would be better compliance with user charge payments. The targeting classification is therefore based on these multiple sectors aspects as “General Intervention.” C. Poverty Analysis 1. If the project is classified as TI-H, or if it is policy based, what type of impact analysis is needed?

Not applicable. 2. What resources are allocated in the PPTA/due diligence?

The project does not envisage a separate PPTA, but shall be based on projects identified under ADB’s PPP Initiative (under its TAs to Government of India), for developing private sector participation. Further, the CSF

Appendix 4 13

Facility will be in the nature of a financial intermediation to the projects, through Housing and Urban Development Corporation (HUDCO).

3. If GI, is there any opportunity for pro-poor design (e.g. social inclusion subcomponents, cross subsidy, pro-poor governance, and pro-poor growth)?

None II. SOCIAL DEVELOPMENT ISSUES

A. Initial Social Analysis Based on existing information: 1. Who are the potential primary beneficiaries of the project? How do the poor and the socially excluded benefit from the project?

The potential primary beneficiaries of the project are the city dwellers and the poor. The CSF Facility has a focus on sectors that are in the nature of immediate infrastructure services (urban transport, health care), as well as on sectors such as education, which are in the nature of investment in human capital. The project will benefit the society with better standards of living and economic growth. While indirect benefits to the poor are more difficult to perceive. The development and maintenance of infrastructure across the country is essential if India aspires to secure the gains from globalization. Improving availability of local and basic social infrastructure is unlikely unless the focus is simultaneously on the (traditionally understood) large infrastructure such as energy generation, national highways, and railways, but also of the “local” infrastructure and basic services that is sought to be targeted in the CSF Facility. Some of the projects targeted in the CSF facility such as basic urban services-water supply and sanitation, housing for the economically weaker sections, primary and secondary health care and education will directly benefit the poor.

2. What are the potential needs of beneficiaries in relation to the project?

The absence of local infrastructure is most critically felt by the poor, who are acutely affected by the impact on their well-being as well as livelihoods. Shocks to the local economy, such as water shortage or breakdown in urban transport systems, are particularly evident to large numbers of people dependent on employment in small enterprises and the informal sector.

3. What are the potential constraints in accessing the proposed benefits and services, and how will the project address them?

None. B. Consultation and Participation

The potential initial stakeholders include the state government, local government, and the population in the area influence of the specific project funded under the CSF Facility.

The CSF Facility will be in the nature of a financial intermediation to the project, through HUDCO. HUDCO will ensure that the subproject sponsor undertake extensive consultation and participation (C&P) throughout the project cycle as detailed in the ESMS. The modality of the C&P required shall be finalized in discussions with the DEA and HUDCO, but shall include workshops and consultations to be held as part of the design and structuring of individual projects that draw upon the CSF Facility. The consultations shall include the environment and social safeguards frameworks, based on which the projects will be designed.

What level of participation is envisaged for project design?

Information sharing Consultation Collaborative decision making Empowerment

Will a C&P plan be prepared during the project design for project implementation? Yes No

The CSF Facility will be in the nature of a financial intermediation to the projects, through HUDCO. Each subproject will prepare a C&P plan in line with ESM requirement.

C. Gender and Development Proposed Gender Mainstreaming Category: Category III – some gender benefits 1. Key Issues: Women will benefit from the investments through the CSF Facility through improved access to various urban infrastructure services and education. The cost of the infrastructure services shall also be affordable. Regular water supply, hygienic living conditions through waste water disposal and solid waste management, proximate

14 Appendix 4

healthcare in urban and rural areas, and educational facilities would not only improve the quality of life of women–since women bear the brunt of the impact of non-availability of such services. An impact assessment of any social related benefits will be submitted by the subproject sponsors to HUDCO for consolidation and transmission to the ADB 2. Does the proposed project/program have the potential to promote gender equality and/or women’s empowerment by improving women’s access to and use of opportunities, services, resources, assets, and participation in decision making?

Yes No

3. Could the proposed project have an adverse impact on women and/or girls or to widen gender inequality? Yes No

III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS

Issue Nature of Social Issue Significant/Limited/ No Impact/Not Known

Plan or Other Action Required

Not known Resettlement Plan Resettlement Framework Environmental and Social Management System Arrangement

None Uncertain

In developing infrastructure, the potential impacts on communities being displaced will have to be evaluated and the resettlement will have to be done in accordance with ESMS.

Involuntary Resettlement

Indigenous Peoples

In developing infrastructure, the potential impacts on the way of life, customs, religious traditions, etc., of communities will have to be evaluated. The mitigations to protect the above impacts, if any, would have to be done in accordance with ESMS.

Not known Indigenous Peoples Plan Indigenous Peoples Planning Framework

Environmental and Social Management System Arrangement

None Uncertain

Labor

Employment Opportunities

Labor Retrenchment

Core Labor Standards

Infrastructure development is expected to result in significant increases in employment opportunities. This would be from a direct employment opportunity on the projects, but more importantly by making time and opportunity available for gainful employment.

Significant Impact Plan Other Action No Action Uncertain

Affordability

The cost of service provided by the projects under the CSF Facility is expected to be affordable, since the funds would be routed into the projects as grants and/or low-cost loans. Further, the emphasis shall be not on asset creation, but on service delivery – so the effective availability of the services is also expected to increase.

No impact Action No Action Uncertain

Appendix 4 15

Other Risks and/or Vulnerabilities

HIV/AIDS Human Trafficking Others (conflict, political instability, etc.), please specify

Plan Other Action No Action Uncertain

IV. PPTA/DUE DILIGENCE RESOURCE REQUIREMENT 1. Do the TOR for the PPTA (or other due diligence) include poverty, social and gender analysis and the relevant

specialist/s? Yes No

The project does not envisage a separate PPTA, but shall be based on projects identified under ADB’s PPP Initiative (under its TAs to Government of India), for developing private sector participation. The CSF Facility will be in the nature of a financial intermediation to the project, as an FI loan to HUDCO.

2. Are resources (consultants, survey budget, and workshop) allocated for conducting poverty, social and/or gender analysis, and C&P during the PPTA/due diligence? Yes No Any resources required shall be drawn from the existing TAs, which have the required flexibility, and not from this project.

16 Appendix 5

APPENDIX 5: INDICATIVE LIST OF PIPELINE PROJECTS

Project Name Brief Overview Status Gyanuday Schools Pilot Projects

A voucher based PPP model developed for rural schools. Five clusters identified for pilot projects to develop greenfield schools in each cluster for rural areas

- Financial structuring completed - PPP structuring completed - Bid process commenced and RfQ stage completed - Over 25 bids received - Issue of viability gap funding from Government of India being resolved - RfP stage post resolution of above Project cost for phase I schools: INR1.5 billion

Shelters for the Homeless Pilot Projects

Accommodation and medical facilities for the homeless in New Delhi city – three pilot projects

- Pilot project locations identified - PPP generic structures developed for pilots and agreed with local government - Scope and financing plans developed for pilots as well as financial models - Approvals ongoing for RfQ criteria at local government level Project cost: INR75 million

Jaipur Metro Rail Pilot Project

Urban connectivity system in city of 34 kilometers

- Approach for PPP and implementation developed and presented to GOR for a new hybrid PPP model for urban transport - Approach paper approved by state government and institutional structures created as recommended for bankability of the project - Transaction advisors in process of developing PPP bid documents - RfQ expected to be launched in April 2010 - Civil works of stage I commenced under a contract with Delhi Metro Rail Corporation Project cost stage I: Rs19.5 billion INR Project cost phase I and phase II: approximately INR95 billion

Uttarakhand Rural Hospitals Pilot Project

Developing diagnostic facilities for remote areas of Uttarakhand

- Financial and PPP structuring completed - Approval for structures and preliminary discussions with stakeholders completed - RfQ stage of bid process completed and bidders shortlisted - RfP stage bid documents under approvals process at state government at present Project cost: INR170 million

Appendix 5 17

Project Name Brief Overview Status Aurangabad Non Revenue Water Reduction Pilot Project

Improving water loss levels and coverage in the entire city through a PPP in the entire water value chain

- Financial and PPP structuring completed - Approval for structures and preliminary discussions with stakeholders completed - RfQ stage of bid process completed and bidders shortlisted - RfP stage of bid process completed and bidders shortlisted - Negotiations on at present Project cost: approximately INR7.9 billion

Delhi Hospitals Project

Three greenfield hospitals to be developed in outer Delhi

- Clusters have been identified - Preliminary structuring complete - RfQ documents in final stages of development Project cost: INR3 billion

Vijayawada BRTS Project

Improving urban connectivity through a public transport system

- Initial financial model on financing ability of corporation prepared - Bus Rapid Transit System technical report underway - Preliminary discussions being developed on PPP and financing plan approach Project cost: INR9 billion

Rajasthan Pilots for 24 by 7 Water

Improving water distribution in selected zones of three cities

- Preliminary PPP and financial approach developed - Pilot zones identified with GOR - Transaction advisors for pilots in process of being engaged for PPP structuring and bid process management Project cost: pilot cities INR400 million

Community Linked Tourism for Inclusive Growth, Andhra Pradesh

Improving tourism infrastructure and community opportunities and participation

- Conceptual model developed and in early stages of approval as a pilot PPP project Project cost: not applicable

Bangalore Metro Line 2

Expansion of the metro rail system for the city under a PPP approach

- Technical report for the project in final stages of completion - Financing plan and PPP approaches in process of being developed Project cost: INR110 billion

Note: The above list shows projects being developed under the joint ADB-GOI PPP Initiative. Projects are subject to change given fast changing timelines and PPP processes. All projects are confidential and in sensitive bid processes and sponsors can only be approached with express approvals of the Government of India PPP Cell. BRTS = bus rapid transit system, GOR = Government of Rajasthan, PPP = public-private partnership, RfP = request for proposal, RfQ = request for qualification.

18 Appendix 6

APPENDIX 6: NOTE ON PUBLIC-PRIVATE PARTNERSHIP INITIATIVE 1. Under the Public-Private Partnership (PPP) Initiative, there are seven ongoing technical assistance projects for strengthening the concept of private sector participation in India. These are listed in the table below:

Ongoing TAs in India for PPP TA

Number Title Date Amount

($ million) 4890 Mainstreaming PPP at State Level December 2006,

supplementary June 2008

5.0

4993 Mainstreaming PPP at Central Ministries in GOI

November 2007 2.0

7152 PPP pilot projects

October 2008 2.0

7342 Supporting PURAa September 2009

1.5

7441 Assisting in Framework Development for Mainstreaming PPP

December 2009 1.0

7463 Sustaining Initiative for Mainstreaming PPP

December 2009 0.8

7625 Deepening Capacity Building for Mainstreaming PPP

October 2010 3.0

Total 15.3 a Provision of Urban Amenities in Rural Areas (PURA), a scheme of the government for infrastructure services. GOI = Government of India, PPP = public-private partnership, TA = technical assistance. Source: Asian Development Bank.

2. Background. Government of India (GOI) has noted the need for both investments and efficiencies to be brought into infrastructure development in the country, suffering from a growing demand-supply deficit. It had been estimated that over $500 billion was needed just between 2007 and 2012 for infrastructure development, of which traditional government funding could only meet around 70% of resources. Hence, the need for PPPs on an accelerated scale. 3. Key challenges for PPPs. Availability of funds was not the key challenge for PPPs, rather the lack of a pipeline of PPP projects especially at local and state government levels was. The reason for this was mainly a lack of capacity and awareness at government–especially local and municipal government levels–in terms of PPP processes, policies, structures, and models. 4. Scope of ADB support. The Asian Development Bank (ADB) thus commenced its support to the GOI in 2006 in an innovative initiative, the “ADB-GOI PPP Initiative: Mainstreaming PPPs in India” (the Initiative). The Initiative has over the last few years thus focused on a number of value chain aspects of the PPP enabling framework, mainly, (i) capacity building right down to local government levels; (ii) institutionalization of skills, processes, and policies; (iii) development of sector specific tools and models; (iv) development of pilot or model PPP projects for replication; and (v) assistance at national level for policy development, risk processes, and funding tools implementation. This range of activities is therefore

Appendix 6 19

comprehensive, embedded in local governments and across the country, and with a high visibility and impact 5. Implementation architecture. Under the Initiative, PPP architecture has been created for the country, which is the basis of the PPP activities being undertaken. PPP Cells have been created at 15 state governments and 6 central line ministries, each headed by a government official and supported by ADB consultants in PPPs, finance, and management information systems. This is overseen by a central PPP Cell at the Department of Economic Affairs (DEA PPP Cell) in close coordination with an ADB PPP Cell created at ADB’s India office under a PPP Focal Point.

PPP Architecture

Anouj MehtaSenior Infrastructure Finance Specialist,

ADB

ADB PPP Focal Point for India

Capacity Building ActivitiesCapacity Building Activities

Developing PPP Policy Across Developing PPP Policy Across StatesStates

Institutionalization of PPP SkillsInstitutionalization of PPP Skills

Improving Improving SectoralSectoral PPP FocusPPP Focus

Developing PPP Enabling Developing PPP Enabling Funds and InstrumentsFunds and Instruments

Developing PPP Pilot ProjectsDeveloping PPP Pilot Projects

IN Operation Since 2007IN Operation Since 2007…….

Bruno CarrascoDirector, ADBBruno CarrascoDirector, ADB

1 1 ADB PPP Cell & DEA PPP CellADB PPP Cell & DEA PPP CellNew Delhi, IndiaNew Delhi, India

ADB PPP Back Office TeamADB PPP Back Office TeamManila, PhilippinesManila, Philippines1 1

1 1 ADB PPP Cell & DEA PPP CellADB PPP Cell & DEA PPP CellNew Delhi, IndiaNew Delhi, India

ADB PPP Back Office TeamADB PPP Back Office TeamManila, PhilippinesManila, Philippines1 1

15 State Government cells

• Andhra Pradesh • Assam• Chattisgarh (twn)• Gujarat• Haryana• Karnataka• Maharashtra• Madhya Pradesh• Orissa

• Punjab• Rajasthan• Tamil Nadu• Uttaranchal• Himachal Pradesh (new)• Delhi (new)• Bihar (not yet twinned))

THE ADB THE ADB -- Government of India Government of India PPP TeamPPP Team

THE ADB THE ADB -- Government of India Government of India PPP TeamPPP Team

Government of India PPP Focal Point

Rajesh KhullarJoint Secretary, DEA

Aparna Bhatia, Director, DEA PPP Cell

6 6 Central Line Ministry cellsCentral Line Ministry cells

• Urban Development• Rural • Roads• Home Affairs• Shipping• Tourism• Finance

6. Enabling facilities created. In addition to the above PPP Cells, under the Initiative, a number of facilities have been created including, (i) a transaction advisory panel of prequalified firms, (ii) a legal advisory panel, and (iii) a project development facility for developing pilot projects in challenging sectors. 7. Capacity building and institutional development impacts. The Initiative has had a visibly strong impact across the country with over 50 PPP workshops held on all aspects of PPPs to over 3,000 government officials in the last 3 years. PPP databases and websites have been created for almost every state government and represent the visible face of PPPs in India. PPP policies have been drafted for almost every state government and are in various stages of approval. PPP guidelines and process documents have been created for a number of states. A

20 Appendix 6

PPP definition at the national level as well as a policy framework is in final stages of development, which shows the impact of the Initiative at the very highest level of policy formulation in the country. 8. Sectoral impacts. Under the Initiative, specific assistance has been focused on developing PPP models, toolkits, processes, and awareness in the urban water and sanitation, rural, health, education, and urban transport sectors. Aside from workshops on best practices in these sectors, toolkits have been developed for several of the sectors as well as model PPP project structures created which are already being replicated. 9. Pilot projects impact. While initially focused on only developing around 23 pilots, the demand for assistance under this activity has been overwhelming with over 30 PPP pilots being developed in challenging sectors of which several are in bidding and some have already been successfully awarded to the private sector such as Kolhapur Sanitation, Aurangabad Water Project, etc. The continued growth in this pipeline is the strongest testament to the impact the Initiative has had across India. 10. Knowledge dissemination. Aside from the workshops disseminating best practices and sector and PPP knowledge across government departments, a number of branded knowledge products have also been initiated under the Initiative for disseminating knowledge on projects and sectors and include, (i) “Bulletin 3P”, a periodic newsletter; (ii) “Case Study”, project specific information for projects already successfully awarded; (iii) “Notes from the Field”, information on projects in bid stages; and (iv) “Knowledge Series” on sectors and larger issues such as Health and Education PPPs, Water PPP Toolkit, etc. A biannual PPP workshop for disseminating projects, processes, and policies at an international level has also been commenced entitled, “PPP X-Change”. 11. Project pipeline. The overall impact of the Initiative is clear from the large project pipeline that has emerged across the state and central PPP Cells since the Initiative commenced. Over 500 PPP projects are in the pipeline across the state and central PPP cells with several already awarded. Over 250 PPP projects1 have been assisted already by the ADB supported PPP Cell at the DEA in rolling out PPP schemes including viability gap funds, PPP appraisal committee approvals (for risk assessments on central projects) and the India Infrastructure Project Development Funds scheme (IIPDF). Over 30 pilot projects are in structuring under the challenging sectors pipeline with several already in advanced bidding stages.

1 These projects are not directly being developed by ADB, but in the various state and central ministries where PPP

cells are operational.

Appendix 6 21

PPPAC, 170VGF, 82

IIPDF, 35

12. Overall and next steps. The Initiative has had a significant impact in the country over the last 4 years across states, sectors, and project sponsors. Increasingly, more and more local governments are requesting for further assistance in creating more PPP Cells and developing more pilot projects or in developing PPP or vision policies for the state or sectors. Based on the PPP work, projects were also identified for further assistance by ADB through the nonsovereign lending modality to assist in creating bankable projects (which is being structured for projects in metro rail and bus rapid transit systems in Bangalore and Pimpri). A need has also been identified for several of the PPP projects emerging from the Initiative to receive viability or bankability enhancing assistance through sovereign loans from ADB in the form of a quick-disbursing loan facility linked to reforms to improve bankability and governance. To address this need, the proposed Catalyzing Sustainable Facility loan is being currently processed by ADB.

22 Appendix 7

APPENDIX 7: PUBLIC-PRIVATE PARTNERSHIP INITIATIVES IN INDIA 1. Government of India has placed substantial emphasis and reliance on Public-Private Partnership (PPP) as a means of addressing the infrastructure deficit. Fund investment of over $494 billion has been conceived of according to the 11th Five Year Plan (2007−2012), and it is estimated that about 25−30% of infrastructure investment would be from the private sector. In the 12th Five Year Plan (2012−2017), the proportion of private sector investment in infrastructure is being proposed at an even higher number. 2. Development and use of PPPs for delivering infrastructure services has now at least 11 years of precedence in India, with the majority of projects coming in the last 5 years. Policies in favor of attracting private participation as well as innovation with different structures have met with varying degrees of success. Some sectors like telecommunications, power, and ports and roads, have done very good progress compared to limited success in other sectors. Some states have undertaken far more PPPs than others, and a much heavier use of PPPs in some sectors than others. As per current projects in DEA’s database, there have been at least 450 PPP projects where a contract has been awarded and projects are underway in the sense that they are either operational, have reached construction stage, or at least construction/ implementation is imminent. The total project cost is estimated to be about $48 billion. 3. There are several initiatives by the government, to encourage and standardize PPP projects. These are briefly mentioned below:1

(i) Documentation. Government of India has developed a large set of standard

(model) documents for PPP projects. These include Request for Qualification (RfQ), Request for Proposal (RfP), concession agreements, terms of reference for consultants, etc.

(ii) Panel of transaction and legal advisors. This is a panel shortlisted by the government, where government departments and agencies at the central and state level can directly call for price bids for specific works without going through a separate qualification process.

(iii) Viability gap fund. The scheme aims to ensure wide spread access to infrastructure provided through the PPP framework by subsidizing the capital cost of their access. Meeting the funding gap to make economically essential projects commercially viable would obviate the need for government funding for such projects and allow private sector participation in the projects, thus facilitating private sector efficiencies in infrastructure development. The scheme 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. The scheme provides total viability gap funding up to 20% of the total project cost. The government or statutory entity that owns the project may, if it so decides, provide additional grants out of its budget up to further 20% of the total project cost. Viability gap funding under the scheme is normally in the form of a capital grant at the stage of project construction.2

(iv) India Infrastructure Project Development Fund. For providing financial support for quality project development activities to the states and the central ministries, a corpus fund titled “India Infrastructure Project Development Fund”

1 Further details are available at www.infrastructure.gov.in and www.pppinindia.com 2 Further details at http://pppinindia.com/pdf/scheme_Guidelines_Financial_Support_PPP_Infrastructure-english.pdf

Appendix 7 23

(IIPDF), with initial contribution of Rs.100 Crore (about $20 million) has been set up. Although it is envisaged as a revolving fund and would get replenished by the reimbursement of “investment” through success fee earned from successfully bid projects, should there be a need, it can be supplemented in subsequent years through budget support. The IIPDF would assist ordinarily up to 75% of the project development expenses. The assistance from IIPDF would ordinarily be in the form of interest free loan. On successful completion of the bidding process, the project development expenditure would be recovered from the successful bidder. The IIPDF’s primary objective would be to fund potential project development expenses of PPP projects including costs of engaging consultants and transaction advisor, thus increasing the quality and quantity of successful PPPs and allowing informed decision making by the government based on good quality feasibility reports. The IIPDF will assist projects that closely support the best practices in PPP project identification and preparation as set out in guidance to be issued by the Department of Economic Affairs from time to time.3

(v) Financial institutions. The government has, over time, developed a number of financial institutions to provide financial assistance to infrastructure projects. IL&FS was set up by public sector banks, IDFC by the government, and more recently India Infrastructure Finance Company Limited has been set up to provide long-tenure funds.4

(vi) Sector specific policies. For key sectors (evolved over time), the government has set in place detailed policies for structuring and bidding of projects on a PPP format. These include national highways, ultra-mega power projects, telecom, major ports, and railways.

(vii) Regulators. At the Government of India level, a number of regulatory authorities have been set up having jurisdiction over PPP projects in the sectors. The regulators are in telecom, electricity, airports, and major ports.

4. Many state governments have also set in a large number of initiatives for PPP:

(i) infrastructure acts and policies covering PPP; (ii) PPP nodal agencies, generally domiciled in finance or infrastructure

departments; (iii) entities that develop and anchor PPP projects; and (iv) project development funds.

3 Further details at http://pppinindia.com/pdf/scheme_Guidelines_India_Infrastructure_Project_Development_Fund-

English.pdf4 For further details, see http://pppinindia.com/financing.php.

24 Appendix 8

APPENDIX 8: HOUSING AND URBAN DEVELOPMENT CORPORATION LIMITED A. About HUDCO

1. Housing and Urban Development Corporation Limited (HUDCO) is a public sector company fully owned by Government of India for financing of housing and urban infrastructure activities in India. HUDCO was incorporated on 25 April 1970 under the Companies Act 1956. The cardinal objective of HUDCO is to undertake housing and urban infrastructure development programs in the country, provide long-term finance for construction of houses for residential purposes in urban and rural areas, and finance or undertake the setting up of the new or satellite towns and industrial enterprise for building material. HUDCO services and product portfolio can be classified into following five categories: (i) Housing, (ii) Urban infrastructure, (iii) Building technology promotion, (iv) Research and training, and (v) Consultancy.

HUDCO’s Services and Product Portfolio

Source: HUDCO.

Appendix 8 25

B. Financials and Portfolio

2. HUDCO has an equity base of about Rs.2000 Crore ($435 million), and is a profitable undertaking, making over Rs.400 Crore ($86 million) profit in 2009 and 2010, on a turnover of about Rs.2400 Crore ($420 million). 3. A snapshot of HUDCO’s portfolio is given in the table below:

Status of Projects as of 31 May 2011 (Cumulative)

Number of Projects 16,364 Number of Projects Completed 13,865 Project Cost (Rs. In Crores) 553,743 $120 billion Loan Amount (Rs. In Crores) 118,008 $26 billion Loan Released (Rs. In Crores) 73,274 $16 billion

Source: HUDCO. 4. As of 31 May 2011, HUDCO had taken up over 1,600 projects in urban infrastructure, with the balance of the 16,000 being in housing (urban, rural, and economically weaker sections), sanitation, land development, and so on. HUDCO’s experience in lending to urban and social projects is extremely robust. 5. HUDCO is also authorized to issue bonds to retail (public) and the Government of India gives certain tax exemptions to the holders of these bonds. HUDCO’s bonds are (local) rated “MAA” by ICRA and “CARE AA+(FD)” by CARE. C. Corporate Governance

6. HUDCO has a board of seven directors. The chairman and managing director is Mr. V.P Baligar, a senior officer of the Indian Administrative Services. There are two other senior officers nominated from the Government of India (the line ministry for HUDCO is the Ministry of Housing and Urban Poverty Alleviation). In addition, there is one functional director, and three independent directors, who are eminent persons from the urban development domain, including Mr. Nasser Munjee who is also the chairperson of the Development Credit Bank, promoted by the Aga Khan Fund for Economic Development (AKFED). 7. HUDCO is a government company and the entire equity is held in the name of the President of India and its nominees who have been holding shares on behalf of the President of India. However for mobilization of funds, bonds/debentures are issued from time to time and are listed on the stock exchanges. HUDCO has its own code of conduct and ethics in compliance of the Department of Public Enterprises guidelines, which is placed on the website of the company. HUDCO complies with the requirements of the companies act in terms of board meetings, audit committee, remuneration committee, audit, and disclosures. 8. Based on the sustained performance and profitability of HUDCO, the Government of India conferred the status of Mini Ratna to HUDCO in 2004−2005 which provides for larger autonomy for HUDCO with powers to invest in equities as well as to form special purpose vehicles, joint ventures, and subsidiaries.

26 Appendix 9

APPENDIX 9: IMPLEMENTATION STRUCTURE The proposed implementation structure is indicated in the chart below: