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ASSIGNMENT NO -4

ON

“INFRASTRUCTURE DEVELOPMENT”

(PGPM – 14)

SUBMITTED TO:

NATIONAL INSTITUTE OF CONTRUCTION MANAGEMENT

& RESEARCH (NICMAR) PUNE.

SCHOOL OF DISTANCE EDUCATION (SODE)

By Mr. abc

(PGDPM) Reg.no.-abc

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INFRASTRUCTURE DEVLOPMENT

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CONTENTS

SR.NO. DESCRIPTION PAGE NO.

1 ASSIGNMENT. 4

2 PUBLIC PRIVET PARTNERSHI: 4

3 OPTION OF PPP: 5

4 WHAT IS BOT? 6

5 CASE STUDY: MUMBAI METRO 9

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ASSIGNMENT: Public Private Partnerships refers to arrangements, typically medium to long term, between the public and private sectors whereby some of the services that fall under the responsibilities of the public sector are provided by the private sector, with clear agreement on shared objectives for delivery of public infrastructure and/ or public services. A PPP is generally a contract or agreement to outline the responsibilities of each Party and clearly allocate risk. In a BOT arrangement, the private sector designs and builds the infrastructure, finances its construction and owns, operates and maintains it over a period, often as long as 20 or 30 years. This period is referred to as the "Concession" period. Such projects provide for the infrastructure to be transferred to the Government at the end of the concession period. There are a number of major parties to any BOT project, all of whom have particular reasons to be involved in the project. The Contractual arrangements between those parties, and the allocation of risks, can be Complex. Explain in detail structuring of BOT projects.

PUBLIC PRIVET PARTNERSHI: A business relationship between a private-sector company and a government agency for the purpose of completing a project that will serve the public. Public-private partnerships can be used to finance, build and operate projects such as public transportation networks, parks and convention centres. Financing a project through a public-private partnership can allow a project to be completed sooner or make it a possibility in the first place. The private sector is playing an increasingly crucial role in the financing and provision of services that were traditionally the domain of the public sector. One of the key reasons is that governments are unable to cope with the ever-increasing demands on their budgets. Most infrastructure expenditures in developing countries have been funded directly from fiscal budgets but several factors such as macroeconomic instability and growing investment requirements have shown that public financing is volatile and, in many countries, rarely meet crucial infrastructure expenditure requirements in a timely and adequate manner. Furthermore, there are efficiency gains arising from innovation, management and marketing skills offered by the private sector and greater incentives for the control of construction, operating and maintenance costs. More so, the provision of additional finance for infrastructure projects enables projects to be brought forward in time, thus generating earlier economic benefits. The diagram below illustrates the continuum of options for involving the private sector in the provision of infrastructure delivery.

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Diagram 1: Range of Private Sector Options

At the left are supply and service contracts, which tend to be of short duration and requireless private commitment than the options higher in the continuum. The private contractor is not directly responsible for providing the service, but instead for per forming specified tasks, such as supplying inputs, constructing works, maintaining facilities, or billing customers. At the left are the longer term arrangements which require significant private sector commitment.

OPTION OF PPP: There is a range of options for involving private sector participation that vary with regards to ownership, operations and maintenance, financing, risk allocation and duration. A summary of these options can be viewed in Table 1. Table 1: Allocation of key responsibilities under the main private sector participation options Option Asset

Ownership

Operations and Maintenance

Capital Investment

Commercial Risk

Duration

Service contract

Public Public and Private

Public Public 1-2 years

Management contract

Public Private Public Public 3-5 years

Lease Public Private Public Shared 8-15 years Concession Public Private Private Private 25-30

years Build Operate Transfer

Private and public

Private Private Private 20-30 years

Divestiture Private or private and public

Private Private Private Indefinite (may be limited by

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license) Service contract Under this option, the private sector performs a specific operational service for a fee, for example meter reading, billing and collection. Management contract In this option, the private sector is paid a fee for operating and maintaining a government-owned business and making management decisions. Lease Under the lease option, the private sector leases facilities and is responsible for operation and maintenance. Concession Under concessions, the private sector finances the project and also has full responsibility for operations and maintenance. The government owns the asset and all full use rights must revert to the government after the specified period of time.

WHAT IS BOT? BOT is the terminology for a model or structure that uses private investment to undertake

the infrastructure development that has historically been undertaken by the public sector.5

In a BOT project, a private company is given a concession to build and operate a facility that would normally be built and operated by the government. The private company is also responsible for financing and designing the project. At the end of the concession period, the private company returns ownership of the project to the government (although this need not be the case). The concession period is determined primarily by the length of time needed for the facility’s revenue stream to pay off the company’s debt and provide a reasonable rate of return for its effort and risk. The table provided below reviews the BOT option and its variants, describes some characteristics of these different procurement arrangements and depicts the relationship between these different procurement methods and the financing of the project.

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BOT PROJECT PROCUREMENT STRUCTURES BOT Project Type Characteristics Build Own Operate Transfer (BOOT)

• The service provider is responsible for design and construction, finance, operations, maintenance and commercial risks associated with the project. • The service provider owns the project throughout the concession period • The asset is transferred back to the government at the end of the term, often at no cost.

Build Own Operate (BOO) • Similar to BOOT projects, but the service provider retains ownership of the asset in perpetuity. • The government only agrees to purchase the services produced for a fixed length of time

Design Build Operate (DBO) • A design and construction contract linked to an operation and maintenance contract. • The service provider is usually responsible for financing the project during construction. • The government purchases the asset from the developer for a pre-agreed price prior to (or immediately after) commissioning and takes all ownership risks from that time.

Lease Own Operate (LOO) • Similar to a BOO project but an existing asset is leased from the government for a specified time. • The asset may

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BOT projects, when properly designed, offer significant potential for technology transfer and local capacity building as well as helping develop national capital markets. Advantages and Challenges of the BOT Approach The BOT approach has many potential advantages, some of which have been alluded to above, and is a visible alternative in most countries to the more traditional approach using sovereign borrowings or budgetary resources. These are captured in the box prov ided below. Some challenges that should be taken into consideration include the length of time required to develop and negotiate BOT schemes, the need for a suitable political and economic climate, and a defined regulatory environment. In short, the BOT approach requires an environment that is conducive to private sector investment. The economic costs associated with BOT projects include the following:

• Costs due to imbalance in experience. Governments with little experience in BOT contracts are advised to initiate BOT projects on a manageable scale and seek professional advice to compensate the often greater experience of the private sector.

• User costs imposed for the first time or increased to match market rates. The economic costs of public services, once covered by the Government, then become financial costs for the user.

• Overpriced supplies. Potential conflicts of interest on pricing among the project sponsors must be monitored. Care must be taken to ensure that sponsors who supply goods or services to the project do so on a fully competitive basis.

• High financing costs. Financing costs for BOT projects tend to be high, as the legal fees associated with their contractual arrangements are much higher than those of standard commercial contracts. The complexity of the credit means that lenders need more time than usual to assess a project’s merits and will tend to charge higher fees.

Given the importance of infrastructure investment to national development it is essential that the wider socio-economic costs and benefits associated with a BOT scheme are taken into account when designing the legal framework to promote private sector investment in such projects.

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CASE STUDY: MUMBAI METRO 15.1 Project Description

Toaddressbothpresentandfuturepublictransportationneeds,theGovernmentofMaharashtra

(GOM)throughtheMumbaiMetropolitanRegionDevelopmentAuthority(MMRDA)hasplanned a 146 kilometre

long rail based Mass Rapid Transit System (MRTS) for Mumbai. ThisprojectisthefirstcorridoroftheproposedMRTS.TheVersovaAndheriGhatkoparlineshall

beanelevatedlinewitharoutelengthof11kms,with12stationsandacardepotsituatedatD.N.

Nagar.Thelinewillhaveaminimumcurvatureof100metersandminimumgroundclearanceof5.5

meters.Thelengthandwidthofthecoachesthatshallplyontheroutewillbe22metresand3.2

metres,respectively.Othertechnicalfeaturesoftheprojectinclude25KVACoverheadequipment,

cabsignallingwithautomatictrainprotection,andamaximumspeedof80kmphwithanaverage speed of 33 kmph. MumbaiMetroOneisgoingtorunonadedicatedelevatedcorridorandshallhavehighlevels

ofcomfortforthepassengersviz.fullyair-conditionedworldclasscoaches,provisionforlifts

andescalatorsatstations,modernautomaticfarecollectionsystemandhighlevelsofpassenger security systems. Theexistingsub-urbantrainsconnectthenorthernandsouthernpartsofthecity.Thisprojectwill provideEast-WestrailbasedconnectivitytoCentralandWesternsuburbs.Thetotaltimetaken forthejourneyfromVersovatoGhatkopar wouldbeapproximately21minutes,asagainstatypical time taken of 90 minutes by other modes of transport. 15.2 PPP structure of the Project AconcessionagreementonBOOTbasisforaperiodof35years,includingaconstructionperiodof

5years,hasbeenawardedbytheMMRDA.Undertheconcessionagreement, theoperatorhasto

design,finance,construct,operate,ownandmaintainthefirstcorridorandtransfertheownership and assets at the

end of the concession period. ASpecialPurposeVehicle(SPV)namedMumbaiMetroOnePrivateLimited(MMOPL)hasbeen

formedwithRelianceEnergyLimited,VeoliaTransportandMMRDAholdingequitystakesof69%,

5% and 26%,respectively. Thisprojectwasoneofthefirstprojectsinmasstransportationsystemsbeingimplementedon

aPPPbasisinMaharashtra.Thegovernmentthusfelttheneedtocloselymonitortheprojectand

tooka26percentstakeintheSPVimplementingtheproject.Thisallowedthegovernmentto have 3 members on the

board of the SPV and ensured that it would be able to effectively monitor

andinfluencedecisionsonfinancing,designandconstructionfortheproject.TheMMRDAwill

contributeequitytothetuneof` 134croreforthis26percentstakeintheSPVduringthe construction phase of the

contract.

Theassetsoftheprojectincludetheviaduct, stations, bridges, depot, rollingstock, signalling system,tractionandSupervisoryControlandDataAcquisition(SCADA)system,communicationssystems,trackwork,farecollectionsystem,etc.AlltheseareownedbytheSPV.Theassetsshallbe constructedorprocuredthroughcontractorsandequipmentsuppliers.Forexampl e,thesignalling systemshallbeinstalledbySiemenswhilethecommunicationssystembyThalesInc.andtherolling stockshallbeprocuredfromCSRNanjing.Thelandforthedepothasbeentakenonalongterm

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leasewhichisrenewablefromtheownersoftheland.TheSPVholdstheexclusiverightstodevelop and use the land for the MRTS Project 15.3 Current Status TheconstructionhascommencedfromFebruary,2008andtheprojectachi evedfinancialclosurein

October 2008.The completion date for the project construction is expected by mid 2011. Atpresent,theconstructionoftheviaductisunderw aywith773pilesbeingdugup.Theconstruction

oftheDepot,SubstationandStationshasalsocommencedalongtherouteoftheproject.Workhas

alsocommencedontheconstructionof2overheadbridgesatAndheriStationandtheWestern Express Highway.

15.4 Financing Information Thetotalprojectcostisestimatedat`2,356crores.Theprojectshallbefinancedonthebasisof aViability Grant

of`650 crores contributed by the Government of India (`470 crores being 20%

oftheprojectcost)andGovernmentofMaharashtra(`180croresbeing7.5%oftheprojectcost).

Theremainderistobefinancedby 70%debt,30%equity.TheprivateoperatorandMMRDA shall provide equity

contribution of`466 crores in proportion of their equitystake.The private

operatorhasalsoarrangeddebtof`1240croresfortheproject.Thishasbeentiedupfroma consortium of banks

ledby IDBI,Corporation Bank,KarurVysya bank,Canara Bank,Indian Bank andOrientalBankofCommerce.

IIFCL(U.K.)isprovidingtheforeigncurrencyloanforthe project.

15.5 ProcessAnalysis Conceptualisation and Feasibility TheGovernmenthadbeenexploringtheviabilityofvariousmasstransitsystemsthatareefficient,

economicallyviableandenvironmentfriendly.Inthiscontext,adetailedfeasibilitystudywascarried

outundertheIndo-GermanTechnicalCo-operationbyentrustingtheconsultancyworktoTEWET in association

with DE-Consult &TCS,during 1997-2000. ThestudyrecommendedamasstransitcorridorfromAndheritoGhatkoparaspotentiallybankable

andeconomicallyviable,afterexamininganumberofalternativecorridorsandalignments.Itwas then decided to

bid out the project on PPP basis. Tomanagethetransactionprocess,aconsortiumconsistingofLouisBergerastechnicalconsultants,

PriceWaterhouseCoopers(PWC),MasonsandEconomicLawPracticeswasappointedin2003-04 to assist MMRDA.

Procurement TheprojectwasapprovedbytheGovernmentofMaharashtrainAugust2004andglobalbidswere

invitedinthesamemonthfortheprojectthroughanExpressionofInterest(EoI).Almost150 bidders responded to

the EoI and a pre-bid meeting was held in November 2004. The suggestions of prospective bidders were incorporated in the agreements being prepared for

theproject.Thebidprocessconductedwasessentiallyatwostagebid-process,i.e.technical and financialstage. Only those consortia whose technical bids met the technical criteria were allowed to submit

financialbids.Technicalbidswereinvited fortheprojectinMay2005.Theconsortiathatsubmitted bids were:

• Hindustan Construction Company and RITES

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• Reliance Energy Limited and Connex-France

• ShaktikumarSacheti Limited and Lingkaran Metro

• Siemens, L&T, Gammon, BEML • IL&FS and ITDThailand and Unity Infraprojects

The consortia which qualified to submit financialproposals were: • Reliance Energy Limited and Connex-France • Siemens, L&T, Gammon, BEML • IL&FS and ITDThailand and Unity Infraprojects FinancialproposalsweresubmittedinJanuary2006onlybytheRelianceEnergyandIL&FSconsortia. The Siemens

consortium withdrew their bid. Afterthebidprocess, negotiationscommencedwiththelowestfinancialbidder, i.e. Reliance

EnergyandConnexFranc e.VeoliaTransportandHongKongMRTweretheothermembersofthe

consortiumprovidingtechnicalknow-how.FromFebruarytoM ay2006negotiationswerecarried out with the

lowest financialbidder. TheREL-ledconsortiumexpectedanEquityIRRof26%butthegovernmentwasabl etonegotiate foralower

returninlinewithinternationalexperience.Theconsortiumfinally agreedonanEquity IRR of 15% on their

investment.This brought down theVGF to `650 crores. AnapplicationforVGFwassubmittedtotheGovernmentofMaharashtrainJune2006afterthe

successfulbidderwaschosen.Theprojectfaceddel aysinobtainingapprovalforViabilityGap

Funding(VGF)astheprojectwasconceptualizedbeforethemodelconcessionagreementwas

putinplace.ItsconcessionagreementwasbasedonthemodelconcessionagreementofNational HighwaysAuthority

of India. Moreover,thePublicPrivatePartnershipAppraisalCommittee(PPPAC)atthecentralgovernment

levelhadnotbeenconstitutedtillthattimeandonlytentativeguidelineswereinplaceforthePPP

agreements.Therefore,atthattimevariousoptionstoobtaingrantfundingwereexploredincluding

obtaininggrantfundingthroughtheJnNURMscheme.However,theJnNURMfundswerecapped

at10%oftheprojectcost.TheissuewasfinallyresolvedbygrantofVGFintheformofaspecial

onetimegrantgiventothestate.TheGoIagreedtogiveaspecialgrantof20%oftheprojectcost.

Inaddition,theGoMapprovedagrantof7.5%ofprojectcost.Thedocumentationandapproval

processtooksometimeandthe formal approval forVGFof`650croreswasobtained muchlater by January 2009.

Development ThedevelopmentphaseoftheprojectwasinitiatedinparalleltotheVGFapprovalprocess.Major milestones

achieved in the development phase are presented below: • The SPV was incorporated in December 2006. • TheEngineeringandProjectManagementConsultants,aconsortiumofParsonsBrinkerhoff

(USA) and Systra SA (France) joined the team on February 14,2007 • SigningoftheConcessionAgreementandSharehol dersagreementtookplaceonMarch

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7,2007 • MMOPLandGovernmentofMaharashtraenteredtheStateSupportAgreementonApril

20,2007 • Construction commenced on February 8, 2008 • Financial Closure for the project completed on October 3, 2008 Allmajorcontractsfortheprojecthavebeenawarded.Atpresent,90%oftheRightofWayhasbeen

handedovertoMMOPL.Utilities,mapping,conditionsurvey,andtheworkforutilityshiftinghas beencompleted.

70%ofthefoundationworkhasbeencompleted.Girderlaunchinghasstarted

atcertainstretches.TheconstructionoftheDepot,SubstationandStationshasalsocommenced

alongtherouteoftheproject. Workhasalsocommencedontheconstructionof2overhead bridges atAndheri Station

and theWestern Express Highway.

15.7 Key Learning and Observations 1. Expeditingthebidprocessiscriticaltoensuringagoodresponsetotheproposal:The

entirebidprocessforchoosingthesuccessfulbiddertookmorethan2years.Thisled

toalessernumberofbidderstobidfortheproject.Similarhurdleswereexperienced

inthebidprocessfortheMetroLine2astheconcessionagreementwasbasedon

themodelconcessionagreement.Thisagreementhoweverhadtobetailoredforuse

forimplementationofametrosystem.Thesedelaysresultedinonlyonebidderfinally submitting a bid for the

project.

2. DelayinObtainingVGFapproval:Therewassubstantialdel ayinobtainingapprovalfor

VGFfromtheGovernment.Whilethiswasattributedtothemodelconcessionagreement

notbeinginplace,thePPPAppraisalCommitteenotbeconstitutedandonlytentative guidelineswithrespectto

VGFapprovalbeingavailableatthetime,thisissuewasa deterring factor for developers and is also likely to have

impacted the level of interest in the Phase 2 bid. 3. Delayinapprovalscanpotentiallyderailtheproject:Therewasadel ayinobtaining

approvalsfortheoverbridgethatpassedovertherailwaylinefromtherailwayauthorities.

Thishadthepotentialofdelayingtheprojectschedule.Thiswasduetotherailways exploringthe

feasibilityofanotherprojectinvadingthepathofthemetroline.Howevera quick resolution of this issue ensured

that work was able to continue.It is recommended that authorities be cognizant of all other upcoming

infrastructure projects that have the potential to affect operations of the planned project while bidding out

such projects and resolve the same prior to the appointment of a developer.

4.LandAcquisitionprocesscanleadtoissuesintheproject:Thegovernmentcommittedthat

thelandfortheprojectwhichessentiallyconsistsoflandallocatedforthedepotwouldbeprocuredasperthel andprocu

rementscheduleprovidedintheagreement.However,this

landwasunderprivateownershipandunderdispute.Thisexposedthegovernmenttothe risk of land not being

available for the depot thereby bringing in a possibility of derailing

theproject.Theissuewasfinallyresolvedbytheprivateownerofthelandagreeingto allocate 75% of the land for

the development of the project on the condition of the

governmentgrantinghimtherighttotheFloorSpaceIndex(FSI)availableovertheentire

plotoflandfor25%oftheland.Thislandhasbeenprovidedonanominalleaserentto the concessionaire for the

concession period.It is recommended in the future concerns

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suchastheseareaddressedbeforetheprojectprocurementstageitselftoensuresmooth functioning of the project. 5. ClearSpecificationsonAssetTransferontermination:Ontheterminationoftheproject

throughtheeffluxoftime,5yearsbeforetheexpi ryoftheconcessionperiodasurveyof the assets would be carried

out to determine whether they are in working condition as

givenintheagreement.Thesurveyistobecarriedoutbyanindependentengineerbased

onascheduleofspecificationsontheconditionofassets.However,thescheduleinthe

concessionagreementdoesnothaveclearandrobustspecifications.Thereisthusarisk of a difference of opinion

between the concessionaire and the government and this can

potentiallyleadtoadispute.Thegovernmentcouldmanagethisbetterbyincorporating clearand

robustspecifications ontheconditionit would wanttheassetsto behanded over to the government. 6. PublicSupportfortheproject:Foraprojectofthismagnitude,itisimportantforthe

governmentagencytogarneradequatepublicsuppo rttoensuresmoothimplementation. MMRDA

ensuredadequatepublic support for land acquisitionandroadexpansion activities

byadialoguewiththeaffectedindividuals.Despitetheseefforts,theprojectwas susceptible to delays and similar

difficulties are also being experienced in phase 2 of the project. 7. RoleofGoodProjectPreparation:Theviabilitygapfundingusedintheproject(`650crore)

makesupasignificantcomponent(27.5percent)oftheprojectcost.Thisprojectcosthas

beensharedbetweenthecentralandstategovernments.Theinitialquotesubmittedby

thesuccessfulbidderquotedanamount(`1250crore)whichwassubsequentlyrevisedto thecurrentfigure

throughnegotiations.Thus,thereisanincreasedneedforgoodproject preparation prior to the procurement

process to ensure that the fair bids are received for the projects.Thiswould eliminate private operators

colluding with each other and/or speculative bids.