PPP-CBE Trg

7/29/2019 PPP-CBE Trg

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Public Private Partnership in UrbanServices

- special reference to tamilnadu on Solid Waste Management Projects

18.03.2013

V.MurugesanAsst Executive Engineer

O/o the CMA,Chennai,[email protected]


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Evolution of New Economic Policy, 1991-Economic Reforms

The Economy of India is the ninth largest in the worldby nominal GDP and the third largest by purchasingpower parity

The independence-era Indian economy (before and a

little after 1947) was inspired by the economy of theSoviet Union with socialist practices, large public sectors,high import duties and lesser private participationcharacterizing it, leading to massive inefficiencies andwidespread corruption.

However, later on India adopted free market principlesand liberalized its economy to international trade underthe guidance of Dr.Manmohan Singh, who then was theFinance Minister of India under the leadership of

P.V.Narasimha Roa, the then Prime Minister.'
http://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Purchasing_power_parity


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Economic Reforms The 1991 Balance of Payments [BOP] crisis forced India

to procure a $1.8 billion IMF loan. The IMF bailoutwounded the pride of a country that had strove above allfor self-sufficiency through its post independencesocialist policies. The bailout announced to Indianpolicymakers and the world the countrys policy failures.

In response to the crisis, the government immediatelyintroduced stabilization measures to reduce the fiscaldeficit.

The government initiated a reversal of the historic

policies of regulation and government intervention Reforms like market determined exchange rates,

liberalization of interest rates, reductions in tariffs, and adismantling of the License Raj.

Efforts to privatize and introduce competition were


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Economic Reforms

Financial Sector - private banks and FI whichleads competition

Fiscal Reforms - Tax on e commerce, VAT,Reduction of subsidy

Investment Sector - opening borders to trades-EXIM Policy Industrial sector - Industrial Policy-Centrally

planned to market driveneconomy, SEZ,

- Govt Industries privatised

Infrastructure Reforms - power,ports,roads,telecom,

Labour Reforms

Agricultural reforms

Privatisation Reforms - PSP, PPP


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PPP?

Public-Private Partnership (PPP) describes a government

service or private business venture which is funded andoperated through a partnership of government and one ormore Private Sector companies.

Public Private Partnership is commonly used to refer to awide range of collaborations between national and sub-

national governments, and the private sector, in order tosupply infrastructure or deliver certain services, providingpublic infrastructure, community facilities and relatedservices that have traditionally been provided exclusivelyby the government

Public Private Partnership is an arrangement between apublic (government) entity & a private (non-government)entity by which services that have traditionally beendelivered by the public entity are provided by the private

entity under a set of terms and conditions that are definedat the outset


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Characteristics of PPP

The public entity should have the enabling authority to

transfer its responsibility enabling legislative & policyframework, administrative order the instrument oftransfer is through a contract

There is usually a significant transfer of responsibility tothe private entity and usually includes financialinvestmentobligations

For a payment to the private entity directly by users or bythe public entity such that - a significant portion of projectrevenues and/ or the payments, are conditional on

achieving pre-specified levels of performance The nature of the relationship is usually long-term -

Concession


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7

Optimal Risk Allocation

Demand Risk is partly mitigated through provisions forchange in duration of concessionboth upside anddownside

Competition from other suppliers limited through avariety of non-compete clauses

Escalation in input costs mitigated through indexationof user charges to inflation

Construction and performance risk to be borne by the

investor

Political risk and force majeure risks borne by theGovernment


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Risk Sharing

A risk is defined as any factor, event or influence thatcould threaten the successful completion of a project interms of time, cost or quality

In a conventional BOQ based implementation : risksplanning, design, construction, environmental & social,

physical damage and financing are evaluated Commercial risks revenue or maintenance costs,

quality, safety of users and general regulatory risks notcritically evaluated this is critical though to a private

investor PPP involves sharing of risks risk allocated to the party

best suited to manage them


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Risk SharingRisk Type Description Allocation Mitigation

1 Technology

Performance

Existing technology

unproven in terms ofrevenue service

Private Warranties

2 Revenues Customer

willingness to

pay for service

unknown

Traffic/requisite

parameters andrevenue below

projections

Public and

Private

- Competing/alternative

Projects

- Excessive capital

Maintenance

- Insufficient revenues

to fund ongoing O&M- Investment grade

- Revenue studies

accepted by rating

agencies

-Adequate debt coverage

ratios

- Adequate reserves

- Credit enhancement,Insurance

- Toll adjustment

flexibility

- Careful budgeting

processes and O&M

controls Non-compete

protections


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Risk SharingRisk Type Description Allocation Mitigation

3 Completion Cost and Schedule

Overruns

Private

(Constructi

onContractor)

and Public

- Use of fixed price /

guaranteed maximum

contract- Adequate contingency

funds

- Force majeure

insurance

- Design and

Construction

Management/Oversight by Public

Partners (Which may

be outsourced)

- Financially viable

private partners

4. Political Uncertainties on

public policy and

change in law.

Regulatory

uncertainties.

Funding Support

Public and

Private

- Persuasive and

supported arguments

for the Project.

- Early regulatory

agency involvement.

- Public relations and

Citizen/policymaker

education campaign

- Community engagement and

buy in strategy.


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Risk Sharing

Risk Type Description Allocation Mitigation

5. O&M Costs Excessive costs of

Operation Excessive capital

maintenance

expenditures

Unpredictability of

Costs

Private

(O&M

Contractor)

-Non-recourse

financing

- Minimum guarantees

- Toll adjustment

flexibility

- Credit enhancement

insurance.

- Careful Budgetingprocesses Capital asset

replacement

assurances. Warranties,

incentives, and

penalties

- Financially viable

Private Partners.- Use of fixed price/

guaranteed maximum

pricing, with

escalations and

adjustments overtime.


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Infrastructure Deficit in India

Highways 66,590 Km of NH(2% of network, 40% of traffic): only 12%

Four-lane; 50% Two-lane; and 38% Single-lane

Ports

Inadequate berths, rail / road connectivity and draft are

constraints

Airports Inadequate capacity: Runways, aircraft handling capacity,

parking space & terminal buildings

Railways Old technology; saturated routes: slow average speeds (freight:

22 kmph; passengers: 50 kmph); low payload to Tare ratio (2.5)

Power 13.8% peaking deficit and 9.6% energy shortage; 40% T&D

losses; absence of competition; and inadequate private


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Demand Potential

Ports: 877 million tonnes of traffic by 2011-201215.5% growth expected in containerized traffic

Airports:Passenger and cargo traffic slated to grow at

over 20% annuallyRailways:Freight traffic is growing at close to 10% andpassenger traffic at close to 8% annually

Power:

13% peaking and 8% average shortage of powerannuallyTelecom:

Rural penetration less than 4%


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Revenue Potential

India scores because of its large untapped markets Example: India is a telecom success story despite low

Average Revenue per User- there is comfort innumbers

Power: High revenue recovery recorded in recenttimes with 100% recovery in many cases

High economic growth rate has translated into alarger disposable income and larger spending

capacity Willingness to pay exists provided delivery is of good

quality


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Why PPPs?

Fiscal reasons - Inadequacy of resources leveraging on

lower government funding

Optimal transfer of risks to the entity best suited tomanage the risks

Design, Financing, Construction, Operations andMaintenance all are commercially understood andmanageable

Change of scope, defective designs, time overrun,cost overruns, leakage of revenues, high maintenance

costs Transfer of responsibilities efficiency gain

Appropriate technology, innovative design solutions,project management, better collection practices, lifecycle costing


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Maximizing investment Budgetary constraints

Development of assets of world classstandards

Improved maintenance and management ofassets

Provision of efficient services

Affordable prices through greater competition Risk Sharing

Why PPPs?


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Other Reasons

Enhanced bankability more rigorous project

preparation

Incentive to deliver whole life solution not just assetcreation

Focus shifts to service delivery integrated withconstruction, measurement of quality & payment linkedto service delivery

Acceleration of programme time-boundimplementation

Better overall management of public servicestransparency in prioritisation, selection and ongoingimplementation


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FullPrivatization

Works &

Services

Contracts

Management

&Maintenance

Contracts

Operation &

Maintenance

Concessions

Build

OperateTransfer

Concessions

Low High

Extent of private sector participation

PPP Options


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Concessions

BOT - Build Operate Transfer

BOOT - Build Own Operate Transfer

BOO - Build Own Operate

BOOST - Build Own Operate Share Transfer

BOLT - Build Own Lease Transfer

DBFO - Design Build Finance Operate

OMT - Operate Maintain Transfer


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Types of PPPs Financially free standing projects

Role of public sector - planning, licensing & statutory

procedures; no financial support/ payment bygovernment Revenues through levy of user charges by private sector Toll Roads and Bridges, Telecom services, Port projects, Service Sectors which requires technical expertise-

Processing fee/tipping fee model STPS, MSWMProjects (Processing and Disposal)

Projects where Government procures services Private Sector paid a fee (tipping fee), tariff (shadow toll)

or periodical charge (annuity) by Government for

providing services; payment against performanceno/partial demand risk transfer Risks associated with asset creation (including design)

and O&M transferred to private sectorAccountability to users for service - retained by

Government Roads - annuity/ shadow tolls, power under PPAs.


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Features of PPPs - 1

Genuine risk transfer

All risks pertaining to design, building, financing and

operation transferred to the private entity

Transfer of demand risk depends on the extent to which

the private sector can influence usage Output based Specifications

Contracts specify the service outputs required rather

than asset configuration/mode of service delivery

Emphasis on type of service & performance standards

Private entity incentivised to deliver outputs using

innovation in design, construction, operation and

financing


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Features of PPPs - 2

Whole life asset performance

Private entity takes responsibility & assumes risk

for the performance of the asset and delivery of

service over a long term

Payment for Performance

Revenue/ Payment to private entity is subject to

performance in relation to specific & quantified

criteria enshrined in the contract


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Value for Money

Transfer of risks/ responsibilities under a PPP structureshould result in better value for money for the user Telecom sector mobile phone tariffs from Rs. 16/-

per minute to Re.1/- or 50 paise per minute Tolls paid offset by savings in direct & indirect costs

and value of time Annuity payments public sector comparator value

for money Reduction in environmental risk

Efficiency gain

Savings in cost of project versus overrun

Savings in operating costs

Revenue maximization leakages

Carbon Credit


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Broad Roles & Responsibilities

Government Agency

Providing Project Site/ Assets Environmental Clearances

Supporting Infrastructure and Utilities

Specific Obligations (e.g. dredging)

Regulatory Functions Concessionaire

Designing, Engineering, Financing

Construction/ augmentation / upgradation

Operation and Maintenance Payment and other obligations

Transfer of assets at expiry of concession period

In exchange the concessionaire has the right to receiverevenue tolls or annuity or any other mechanism


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Other Key Elements

Bankability Issues Concessionaires ability to assign rights Lenders step-in rights Charge on project assets and enforceability Critical Events and consequences

Force Majeure Events of Default

Remedial process incase of default/ events leading totermination

Protection of debt in the event of termination

Supporting Provisions Dispute Resolution Mechanism Re-negotiation in good faith Termination as a last resort

Preferential treatment in re-bidding


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What a PPP is not & what it is

PPP is not privatisation or disinvestment PPP is not about borrowing money from the private sector.

PPP is more about creating a structure in which greater value for money is achieved for

services through private sector innovation and management skills delivering significant improvement in service efficiency

levels

This means that the public sector

no longer builds roads, it purchases miles of maintainedhighway no longer builds prisons, it buys custodial services no longer operates ports but provides port services

through world class operators No longer builds power plants but purchases power


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Partnership in Practice

Partners not adversaries background of mistrust Project should be the focuswin-win for both the

parties

Independent agencies Independent Engineer - usefulduring both implementation and operations

Government retains ultimate responsibility uses the

private sector to deliver infrastructure services of

specified standard

Private Financing can significantly leverage public

funds


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Basic Features

Conventional financing is asset based debt provided isusually a percentage of project cost linked to the value ofasset cover

Project Financing is cash flow based - on the estimated

cash flows that are generated by the project A financing structure that relies on future cash flows

of a project as the primary source of its servicing &repayment, with only the project assets, rights andinterests being the security

There is little or no recourse to the sponsors

Usually large projects - investments are huge & costs ofnon-completion/ unsuccessful operations - affect many

Little tangible security


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Project Appraisal

An elaborate project appraisal process analysis ofrisks and specification of return expectations (pricing)from investing in the project

Cash flow projections based on technical, market andfinancial analysis

Risk mitigated through project contracts and financing

agreements or consciously taken after evaluation

Structured financing to meet the characteristics of the

project Security and documentation - elaborate

Project monitoring and compliance


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Key Project Contracts

Concession Agreement Project Site Licence Agreement

Shareholder/ JV Agreement

Substitution Agreement / Direct Agreement

State Support Agreement Engineering Procurement Construction (EPC )Contract

O&M Contract

Trust and Retention Agreement


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Main Provisions

Concession Agreement

Terms and conditions of undertaking the project

Obligations of the parties

Tenure of the contract

Default provisions and remedies Provision for substitution

Force Majeure provisions and remedies

Termination and compensation payments

State Support Agreement

Support during implementation

Protection from a competing facility

Other Key Contracts


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Other Key Contracts

EPC Contract

Price Overrun Time Overrun

LDs and Bonus provisions

Performance security

Standards and Specifications

O&M Contract

Operating Standards

Costs

Quality of Service

Penal provisions

Fi i l A l i


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Financial Analysis

Elaborate Financial Model capturing these risks basecase analysis

Establishes breakeven levels of traffic/ tariffs

Assessment under various scenarios sensitivityanalysis Demand / Traffic

Tariff / Tolls Inflation Maintenance Costs

Financial Ratios

Debt Equity Ratio cash flow impact & level ofpromoters funds Internal Rate of Return (project/ equity) Debt Service Coverage Ratio Loan Life Ratio Project Life Ratio

Fi i D


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Financing Documents

Facility Agreement Financial Terms

Project Risk Mitigating Conditionalities

General Conditions

Inter-Creditor Agreements Security Documentation

B i St t


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Basic Structure

Project SPV

ULB

Lenders

Contractor

JV Partner

MainSponsor

Indep Eng

Debt

Financing

Agreements

Equity

EPC

Agmnt

Annuity/

Tipping

fee

Shhldrs

Agmnt

Concession

Agreement

T ti St t


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Transaction Structure

Government

Project SPV

Invt. Bankers,Technical & Legal

Advisers

Advisers

Invt. Bankers,

Technical & Legal

Advisers

Advisers

UsersOff-take

Contracts

Insurance

Companies

Insurance Policies

EPC

Contractor

EPC Contract

TRA

Agent

TRA/Escrow

Agreement

Concession / Licence

Agreement

O&M

Operator

O&M

Contract

Sponsors

Equity

Financial

Investors

Equity /

Sub-Debt

Lenders

Debt Substitution

Agreement


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37

Governance Structure for PPPs

Constitution of a Committee on Infrastructure (CoI)- Prime Minister is the Chairperson

- Ministers of Infrastructure Ministries; Finance Minister andDeputy Chairman, Planning Commission are members

Empowered Sub-Committee of CoI chaired by Dy.Chairman, Planning Commission and represented byMinistries

Secretariat for CoI in the Planning Commission

Ministries retain their role but work closely with CoI todevelop & implement the vision for world-classinfrastructure

Greater reliance on inter-ministerial & inter-disciplinarydialogue to enrich outcomes & eliminate conflicts of


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Instruments of Governance

PPPs integrated in the planning process

Constitution of Inter-Ministerial Committees (IMCs) underchairmanship of Cabinet Secretary/ concerned Secretary

Specified tasks are assigned to IMCs with an agreed timeframe

Involvement of experts in formulation of programmes &processes

Consultations with stakeholders, including users &investors

Simplification & standardisation of documents & processes


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PPP Appraisal Committee:- Appraises & recommends all PPP projects of the Central

Government

- Chaired by the Finance Secretary

- Appraisal Unit in the Planning Commission

Empowered Committee/ Institution- Approves proposals for Viability Gap Funding (upto 20% of capital

costs)

- Chaired by Secretary/ Addl. Secretary, Department of EconomicAffairs

- Appraisal Unit in the Planning Commission

India Infrastructure Finance Company (IIFC)- Raises funds against sovereign guarantees

Instruments of Governance


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40

Important Reports under Implementation

Model Concession Agreements in highways, rail & ports,sewage Treatment Plants, MSWM Projects

Guidelines for Pre-Qualification of Bidders (RFQ)

Guidelines for Invitation of Financial Bids (RFP)

Guidelines for formulation, appraisal & approval of PPPProjects

Guidelines for financial support to PPP projects

Scheme for financing infrastructure projects through the IIFC

Financing Plan for National Highway Development


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Manual of Specifications and Standards for two lanehighways

Report on Restructuring of NHAI

Financing Plan for Airports

Report on the Delhi-Mumbai & Delhi-Howrah FreightCorridors.

Report on Road Rail Connectivity of Major Ports.

Report on streamlining of Customs procedures at Ports.

Report on streamlining of Customs procedures at airports

Important Reports under Implementation

P bli P i t P t hi


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Public Private Partnership

Infrastructure projects might not be financially viable on

their own;

Public Private Partnership to bring in private sectorresources and techno-managerial capabilities;

Viability Gap Funding foro Roads, railways, seaports, airports;o Powero Water supply, sewerage, solid waste disposal in urban areas;o International convention centres.

Funding in the form of capital grant, Operation &Management support, interest subsidy, etc.

Support linked with predefined milestones.

St t k b G t


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Steps taken by Government Viability Gap Funding (VGF) arranged through various schemes

India Infrastructure Finance Company Limited (IIFCL)

India Infrastructure Initiative ($ 5 bn. Fund) India Infrastructure Project Development Fund

Jawaharlal Nehru National urban renewal Mission (JNNURM)

PPP cells- PPP appraisal committees

Transaction Advisors

Training and Information Kits

Standard Bidding procedures

Model Concession Agreement

Permission to foreign financial institutions and multilaterals to raise financialresources

Encouraging development of new instruments such as grading of PPPprojects/SPV rating by the major credit rating companies

GOI have provided assistance to the tune of Rs.2500 crores under 12th FinanceCommission for SWM

IncomeTax relief has also been provided to waste mgt agencies and Tax freemunicipal bonds have been permitted by GOI

Technical Advisory Group on SWM has been constitutedand Technical Manual on SWM has been prepared.

Some Examples 1


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Some Examples - 1

Roads

BOT Concessions for toll roads and bridges (NHAI,state governments) (OMT Concessions in future)

Annuity payment based concessions highways,urban roads (NHAI/ state governments)

Solid Waste Management

Engineered landfills tipping fee linked payments(Coimbatore, Madurai, Namakkal, Salem, Bangalore,Trivandrum)

SW Collection and Transportation (MCD/ NDMC, mostof the ULBs in TN)

Port Concessions

Major Ports container berths (JNPT, Chennai, Kochi,Tuticorin, Vizag, Kandla); bulk cargo berths(Marmagao, Haldia, Ennore, New Mangalore)

Minor PortsPipavav, Mundra, Kakinada


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Some Examples - 2

Water Supply and Sanitation Bulk water supplysystems in Tirupur and Vizag

Tourism Facilities hotels, tourist facilities, PWD resthouses Karnataka & Kerala

Bus Terminals/ Parking Facilities Bus terminals Dehra Dun, Amritsar, Jullundur

Parking + commercial complexes NDMC/ DDA/MCD/ Bangalore


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Failures in PPP- Reasons

Most PPP failures can be attributed to inadequate or non-existent

feasibility studies, including unrealistic forecasts and undefined public

contribution of funds.

Poor legal framework and enforcement

Weak institutional capacity and PPP strategy Unrealistic revenue and cost estimations

Lack of thorough financial and economic analysis

Inappropriate sharing of risks

Lack of competitive procurement Public resistance (willingness to pay not assessed)


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PPP in TamilNadu

Tamil Nadu Water Investment Company Limited (TWIC), a joint venture betweenthe state government and Infrastructure Leasing and Financial Services (IL&FS),has been set up with the express mandate to develop infrastructure projects withprivate participation, emphasizing water and sanitation. The path-breakingsanitation project at Tirupur

Tamil Nadu Urban Development Project (TNUIFSL) is a state government project

with assistance from the World Bank. Part of its strategy is to enhance institutionaldevelopment by building and strengthening financial and managerial capacities inULBs. Under this project, the TamilNadu Urban Development Fund, the first privateinstitutional arrangement in the country, has been established to assist municipalitiesin raising funds from markets to finance specific infrastructure projects

Tamil Nadu Road Development Company Ltd (TNRDC) is the third institutionalarrangement established as a joint venture between Tamil Nadu IndustrialDevelopment Corporation (a government of Tamil Nadu undertaking) and IL&FSfor developing road-sector initiatives under the public private partnership format.

Its first project was the 113 kilometer- long tolled East Coast Road (ECR), whichhas set benchmarks in both quality of construction and maintenance.

PPP i T ilN d


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There are two types of public-private partnerships that have emerged with respectto urban infrastructure:1. Involvement of NGOs in provision of public services like solid waste

collection, processing and disposal.- Pammal,Kulithalai (Exnora International)

2. Private firm or agency enters into an agreement / contract to provide

the services-The New Tiruppur Area Development Corporation was formed as aSpecial Purpose Vehicle Company under the Indian Companies Actto undertake water supply and sewerage projects in Tiruppur

-The Government of India, Government of Tamil Nadu, Tiruppur Municipality,and ILFS as promoters have assumed complete responsibility forimplementing the project over 30 years

-Alandur UGSS project became a model and it is studied by Academicians,Policy makers, ULB officials of different states and countries, electedrepresentative of Urban Local bodies of various state and countries

PPP in TamilNadu

T ilN d


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Sl.No ULBsEst. Cost

(Rs in Cr.)

1 Coimbatore Corporation 96.51

2 Madurai Corporation 74.23

3 Salem Corporation 30.00

3 Namakkal Municipality 3.58

4Alandur,Pallavapuram&TambaramMunicipalities 44.21

Sl.No ULBs

1 Tiruchy Corporation

2 Erode Corporation3 Udumalpet Municipality

4 Pollachi Municipality

5 Coonoor Municipality

6 Mettupalayam Municipality

TamilNadu


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CASE STUDIES

Coimbatore Solid Waste Management Facility

Madurai Solid Waste Management facility Salem Waste Management facility Namakkal Waste Management facility IWMUST projects

Tiruchirappalli Corporation Erode Corporation Coonoor Municipality Pollachi Municipality Mohanur Model Thudiyaloor Model Pammal Model

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