public private partnerships for urban infrastructure sanjay jaju, managing director infrastructure...
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INDIA PPP CAPACITY BUILDING TRUST An initiative supported by IDFC
Public Private Partnerships For Urban
InfrastructureSanjay Jaju, Managing Director Infrastructure Corporation of Andhra Pradesh
17-May-08
INDIA PPP CAPACITY BUILDING TRUST An initiative supported by IDFC
Challenges of Urbanization
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Urbanisation
Urban areas contribute 75% of GDP and more than 50% of our population to live in urban areas by 2050.
Rurbanisation of the countryside to pose newer challenges.
Cities would be the key drivers to our economy but…
…unless a focused approach coupled with heavy investment in urban infrastructure is put in…
Urban areas would keep presenting 100000 problems which in essence are 100 problems multiplied 1000 times
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Growing Demand for Urban Infrastructure
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Multifarious Responsibilities : Limited Resources
Local Government Expenses vary between 20-29% in developed countries while they are only 7-8% in India
Limited revenue base and dependent fiscal Jurisdiction Fairly Large Capital Investment decisions being thrust
upon municipalities Meeting revenue expenditures is a great deal,
increasing capex difficult to meet with its own resources Recourse to Direct Borrowing though essential looks
improbable with poor credits ratings
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Infrastructure Bottleneck Infrastructure is the biggest bottleneck in ‘India
Growth Story’
Transport system has severe capacity constraints: highways, city roads, airports, seaports and railways
Urban and Utility infrastructure : Huge demand-supply gap in drinking water, sewerage system, drainage and power supply
India needs US$ 480 billion investment in the coming Five Year Plan to meet current Infrastructure needs, at least 20% of this would be for the Urban Sector
Government alone can not bring the desired investment and efficiency: need for Public Private partnership (PPP)
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Existing ScenarioMost towns and cities are growing… Like this!
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Quality of life…
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Premji raps Karnataka Govt for bad roads,
power situation in Sarjapur
Our Bureau Bangalore , July 18
How we cope, presently
INDIA PPP CAPACITY BUILDING TRUST An initiative supported by IDFC
Fund Sources
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Government Funding
Entire investment, construction, operating, and maintenance is by government Direct budgetary devolution (tax-payer money) Debt raised against government guarantees, (and “letters of comfort”) Financing primarily by HUDCO and LIC
Financial requirements are increasing way beyond direct budgetary/ guarantee capacity
State budget deficits and statutory guarantee limits constraining State Gov. funding capacity
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Local Authority Funding
After the 74th Amendment, there is increasingly, funding generated by the ULB Escrowing revenues such as property tax, entry tax/
octroi Selling/ securitizing land
But there is a limit to these numbers…
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Multilateral/ Bilateral Funding
World Bank, ADB, DFID… Based on reform agenda Fairly detailed appraisals done Sectoral or project-wise Generally addresses needs of urban poor
However, for commercial loans, based on Government of India Guarantees as security… Very elaborate and complex processes
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JnNURM
Excellent scheme to lead reform-based financing Presents a new opportunity to:
Establish key reforms And thereby draw investment into key infrastructure
But the scheme is available only to some cities Also focus towards commercial finance, which
will be a significant percentage of the project investment – PPPs are envisaged to be the way forward
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Private Sector Interest?
Urban Infrastructure, has not yet found investor interest in the absence of clear directions on various aspects - Risk, social/ political, Regulatory, cost recovery mechanisms, etc.
Various attempts are being made to convert Urban Service (water, waste-water, Solid waste, etc) into ‘Bankable projects’ This is likely to open a new area for investments And a new breed of ‘Operating’ companies to provide these
services But proper ‘PROJECT DEVELOPMENT’ is the key here…
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Total Private Sector Investments in India’s Infrastructure
Year of Investment Energy Telecom Transport Water and sewage Total
1990 0 0 2 0 2 1991 614 0 0 0 614 1992 13 0 0 0 13 1993 1,051 0 0 0 1,051 1994 311 97 125 0 533 1995 1,008 683 0 0 1,691 1996 1,553 1,229 108 0 2,890 1997 970 3,827 405 0 5,201 1998 1,066 673 296 0 2,035 1999 2,500 1,045 467 0 4,012 2000 2,357 682 100 0 3,139 2001 45 3,445 211 2 4,004 2002 380 4,615 558 0 5,553 2003 825 1,968 505 0 3,298 2004 4,144 3,731 1,117 0 8,992 2005 755 6,201 1,449 0 8,405
Total 17,891 28,195 5,343 2 51,432
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Beginnings made…
May not be all “success stories”, but: Tamil Nadu
Tirupur, Alandur, TNUDF Pooled Finance Municipal Bond issues
Ahmedabad, Hyderabad, Nashik Urban infrastructure funds – IFCG, Feedback U-Fund and MUIF
Not Successful BATF in Bangalore Water O&M PSPs (attempts!) in Pune, Goa, Bangalore,
Hyderabad
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Pooled Finance
TNUDF sponsored issue, successful in Tamil Nadu USAID (DCA) guarantee for 50% of principal
Karnataka (KUIDFC) pursued similar issue Government of India’s proposed PFDF, also a pointer in
this direction Yet to take off
Issues of listing Trust-financed Bonds (SEBI), would have to be addressed to ensure a market for these instruments
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Pooled Finance… (2)
Proportion of Pooled ULB
Finances
Government Budgetary Support
Debt Service Ratio of 1.3 to
1.5
PFDF/Government
Bond Service Fund
State Intercept
USAID GuaranteeRated Bond Instrument
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Viability Gap Funding
Proposed by Government of India To “Prop-up” marginally viable projects Established and clear guidelines for allocation
Problem may be in the lack of developed and structured projects, that are eligible to claim this assistance
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Capital Market Access
Bond issues of Ahmedabad, Hyderabad, BMP, Nashik etc., have not led to large-scale replication Issues of market appetite, end-use Limited number of ULBs which can access financing
on a standalone basis Pooled Finance seems a more appropriate structure
for small ULBs
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Access to Domestic Financial Institutions
For the Local Body Reluctance of Local bodies to accept FI conditions typically
stipulated to mitigate project risks ULBs have option of (a) FIs assistance (cash flow basis; with
conditions) Vs (b) MLA funding/ Govt. Institutions ( GoI/ State guaranteed; soft push, if any)
ULB prefers the latter to the former (obvious!)
For the Domestic Institution Guaranteed lending (state/ central) is no more risk-free, from
regulatory considerations
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PPP – Some reasons to be optimistic
Realization of need for improvement of Urban Services, and concurrently, the finance needed for doing so
Various precedents are being tried and tested, and experience is maturing But yet a long way to go
Key Words: Not Finance, but Developed Bankable Projects Not Willingness to Pay, but Unwillingness to Charge
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Capacity building of ULB’s Institutional, administrative and managerial Financial Capacity & Independence Reasonable and equitable USER CHARGE collection Property tax reform
Key State-level intermediaries such as INCAP can help the PPP process
Core Issues In Financing Urban Infrastructure
INDIA PPP CAPACITY BUILDING TRUST An initiative supported by IDFC
Public-Private Partnerships
An Overview
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Public Private Partnerships
Public Private Partnership Service, Management, Lease Contracts Concessions BOT (Greenfield Projects) Divestitures and Joint Ventures
Fund Your City as an elementary model to bring in private investments in civic infrastructure
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Fund Your City (“F Y C”) Involve Corporates, NGOs & other citizens in city
development & infrastructure creation/improvement
Areas that can be taken up for sponsorship: Junction Improvements Installation & maintenance of traffic signals Road medians/Traffic islands/Fountains/Street Lights Construction of Foot Over Bridges Painting of road markings Beautification of sidewalks/footpaths Street furniture Construction & maintenance of public toilets and Urinals Beautification of grave yards Slum improvement/adoption
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Public Private Partnerships
Convert a public good into a private good Hive off functions and assets into SPVs with
a clear mandate to run those functions Public Interest essential Willingness to Charge Clarity about risk allocation
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PPP Approach
Lack of Budgetary Resources Need to improve efficiency in service delivery
Need
PPP approach
Attract private investments for infrastructure projects
Goal
Private Sector contribution for: - Financial investments - Best Management practices - Efficiency in service delivery - Efficient use of capital resources
Public Sector contribution limited to: - Providing institutional commitment to project - Project Development & Selection of Developer - Viability gap funding (VGF), if any
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Key Determinants for a Successful PPP Adequate Demand for the services/goods Political commitment to the project Administrative framework and readiness to meet
requirements Partnership of Public (Government) with Private
Sector rather than owner-contractor relationship Provision of information required to take informed
decision to reduce risks and uncertainty Technical, Environmental, Social, Financial, Legal
aspects Bankability of project and project documents
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Background Issues Ability to create a ‘shelf of projects’? Project development requires funds and continuous
support Strengthening the capabilities of the mandated
agency to create experiential learning Standardized processes for Viability support for
projects not viable on stand alone basis No need to reinvent the wheel every time, learn from
peers
Debate has shifted from financing of infrastructure projects to creation of a shelf of projects.
INDIA PPP CAPACITY BUILDING TRUST An initiative supported by IDFC
The PPP ‘Development Process’
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Structure
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For such projects, the focus is on: Commercial viability Rigorous environmental and social assessment Conformity to public standards and transparency Appropriateness of the institutional and legal
framework Contractual framework
Development of PPP projects
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A PPP project DOES NOT Mean that the Government has little or no onus
It’s objective has to be synergy between the private & public sectors Areas such as land acquisition, clearances, utilities,
etc., can still be best done only by the Government
A PPP is not a transfer of responsibility:
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It requires a lot of studies & home-work on the part of all concerned
It involves hard commercial & legislative decisions
It involves a new mind-set, & changes in system
A PPP is more work:
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Detailed Techno-economic studies External decisions involving sponsors,
Government, equity holders & lenders: each to be convinced Investors and Lenders may drive the process, not
the Owner or the Contractor It requires an equitable position, & significant
sales & education effort
A PPP is more time:
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Then why PPP?
Demand – Supply gap - Constraints in financing through budgetary/ other government sources
Improvement in levels of service to users Innovation in designs, project management and
implementation of projects Long-term operations and maintenance of assets Focus on service to users – not just asset creation
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Who is responsible for public services?
Whether the service is provided by private companies or local government, government (local, state or national) retains responsibility for most urban services.
These fundamental responsibilities are not diminished by any PPP process.
However, resources are concentrated towards monitoring and enforcement, thus ‘leveraging’ its resources
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What are the advantages of private sector participation ?
If properly structured and incentivized, the private sector can provide a more efficient or cost-effective service.
The private sector often has better access to capital financing and so it is able to use more efficient equipment.
The private sector may have easier access to specialist skills. For example companies can form joint ventures with international specialist firms.
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Putting the projects on ‘shelf’
Viability Structuring Do-ability
ProjectPreparation
ProcurementStrategy
Bid ProcessManagement
Pre-bid
Bid ProcessManagement
Post-bid
PartnershipManagement
ProjectIdentification
Identification/Assessment
Requires Project Preparation & Partnership Management Inca is the nodal agency mandated to do the above
State need to enhance the involvement of private sector – need a PPP! The challenge is the right model and right process for engagement of
private sector!
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Identification Stage
To convert wish list into a list of projects that are viable and amenable for PPP.
Prelim assessment of the opportunity Prelim assessment of possibility of a
PPP Presence of necessary ingredients –
land, land use, basic approvals
Objective
Activities
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Preparation Stage
Assessing feasibility and structuring the PPP (Value for Money) (Risk Return Ratio)
Assessment of Market opportunity Technical & Financial Feasibility Financial structuring Sharing of risk and Structuring PPP
Objective
Activities
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Partner Selection Stage
To select Private Sector Partner in an open and transparent manner
Technical and financial capability criteria
Equal information sharing and support to all bidders
Rigorous specifications & Contract Efficient and time bound bidding
process
Objective
Activities
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PROJECT DEVELOPMENT
Techno-Economic & Market Assessment
Legal Documentation
Policy amendments and notification
Contractual and Institutional Framework
Track 2
DEVELOPER SEARCH
Expression of Interest
Request for Proposal (RFP)
Pre-Bid Conferences
Proposal Evaluation
Finalisation of Developer
Finalisation of Agreements
Government Approvals,
Facilitation & Decision Making
Project Development Process
MARKETING & COMMUNICATION
One-to-one meetings
Direct Mailers
Media release
Road Shows
Investor’s Conferences
Facilitating Consortia formation
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Small Number Of Profitable Projects
BOT
Larger Number Of Marginally
Profitable Projects
Govt. ‘Leveraged’ Privatisation
Unprofitable, But Imperative
Projects
Budgetary Allocation
Maintenance Works
Dedicated Funds (Road
Fund)
Different Structures
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Three important words
These words are in many ways the three vital ingredients for successful private sec tor participation.
• Competition
• Accountability
• Transparency
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Effective competition can generate the best performances
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Solutions need vision…
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But may be easier than we think…
INDIA PPP CAPACITY BUILDING TRUST An initiative supported by IDFC
The Importance of Project Development
Some Case Discussions
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How Much Time Did They Take?
Airports: Started in 1998-99 Bidder identified in 2001 SHA in 2002 Concession/ FC in 2005
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How Much Time…(2)
(Industrial) Water Supply: Started in 1995-96 Bidder identified in 1997 Concession in 2003 FC in 2004
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How Much Time…(3)
Commercial Complex: Started in May 2002 Bidder identified in June 2004 Government approval June 2005 Concession/ FC in 2006…
SEZ: Started in 2002 Bidder identified in 2003 Land/ Approvals not yet in place…
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How Much Time…(4)
Bypass Roads Started in 2002 Bidder identified in 2005 Concession/ FC in 2007 Land not yet in place…
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Why are the projects delayed?
Possible Reasons? Finance Inadequate Project Development
Hasten to bid? Approval structures/ processes not being in place
Plug-and-play approach? Social/ Environmental reasons
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Are Funds an Issue?
Yes and No YES
Project Development Funds Equity
NO Commercial debt (sectors other than mentioned above)
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Inadequate Project Development
Hasten to set up project/ bid Bidders/ lenders then start asking for data/
studies Thin slice method to get all the DPRs done
Re(negotiation) of project and contract parameters along the way
All parties feel let down…
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Way Forward…?
Not to rush into a Project bid/ implement approach Get frameworks/ approvals/ funds in place before doing so Capacity building and reform should go ahead Now there is enough project experience/ expertise to set up
a “precedent” basis Adequate project preparation
Funding required to do so Not too many “money bags” waiting to invest into
infrastructure…
INDIA PPP CAPACITY BUILDING TRUST An initiative supported by IDFC
How INCAP & it’s Partners Can Help
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A nodal agency INCAP created for this purpose most equipped to do it
Infrastructure Development enabling act and APIA PPP Cell in the Finance Department
Current Situation
We would have to react before it is too late!
Inability of the Departments caught up with their regular work to think out of box and conceptualize PPP projects
Engagement without accountability for success Consultants funding program Project reports not translating into action
Governments not able to commit resources – financial and human for project development
Risk aversion of officers in view of allegations of malpractices
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India Infrastructure Project Development Fund (IIPDF) A Separate Project Development Fund created by GOI
for the accelerated Infrastructure Development in the country with a corpus of Rs.100.00 Crores to quicken the process of project preparation.
Project proposals for quality Project Development activities submitted by the Sponsoring Authorities i.e., Central Ministries, State Government Public Sector Undertakings and any statutory body created for the Infrastructure Development are eligible to secure financial support
In the form of interest free loan to the extent of 75% of the Project Development costs of PPP Project.
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Eligible Project Development Costs
Feasibility Studies Environment Impact Studies Financial Structuring Legal Reviews Development of Project Documentation
Concession Agreement Commercial Assessment Studies (including traffic
studies, demand assessment, capacity to pay assessment)
Grading of projects etc. required for achieving Technical Close of such projects, on individual or turnkey basis
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Project Development Fund
Inca has set up a dedicated close ended (5 years lock in) Project Development Fund
Fund being utilized to meet the costs of project development on a recurring basis and would get success fee from the bid out projects
Multilateral and reputed institutions without any conflicting positions in project development being invited
IFC, ADB, IDFC has already joined the fund World’s best consultants put on board for various activities GOI’s PDF would also be utilized to sustain this activity on a
continuous basisThe Fund would be utilized to provide support to the state
agencies in creating a Bank of PPP’able Projects
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Way Forward
MOU with the Department/Agency for developing select PPP projects
Handholding the Projects till they reach Culmination
Building Capacities within for long term Sustainability of the PPP Initiatives
Minimal Service Fee, Performance linked Success Fee
Advisory and Backend support Role, Decision making still with the concerned Department
End to End Solution
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Infrastructure categories Group A: Rural Infrastructure
Irrigation, rural connectivity (roads, power, IT), cold chains and mandis, drinking water.
Group B : Core Infrastructure Transportation (roads, railways, airports, sea ports, inland waterways);
energy (generation, transmission, distribution). Group C : Urban Infrastructure
Water, sanitation, sewerage, LRT/MRT/MTS, city-energy distribution, terminals and logistics parks.
Group D : Land- Intensive SEZs, industrial parks, new townships, industrial cluster development, IT
parks. Group E : Social Infrastructure
Healthcare, education, leisure and entertainment, retail, tourism, housing, exhibition and convention centers, hospitality.
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Areas of Engagement
Solid Waste Management
Maintenance Functions
Water Supply, Sewerage
Urban roads (improvement and maintenance)
City bypasses
Truck & Bus Terminals
Commercial real-estate development
Street Furniture
Almost anything and everything….
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The Challenge is to make the behemoth move…..
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‘You may be disappointed if you fail, but you are doomed if you don’t try’.
time to put our acts together….
Thanks for your time.