BUILDING BUILDING INFRASTRUCTURINFRASTRUCTURE:INDIAN E:INDIAN EXPERIENCEEXPERIENCE
Arvind MayaramArvind Mayaram
IndiaIndia
YES Summit,Nairobi2006
Infrastructure Deficit In Infrastructure Deficit In India-India-Problem or Opportunity?Problem or Opportunity?
Problem-• The infrastructure deficit – GDP ↓ 1.5-2%• Expenditure on infrastructure inadequate• Result: Infrastructure deficit ↑ which impacts
GDP-vicious cycle
Opportunity-• Growing demand for Infrastructure to support
growth• Need for investment• High returns due to supply deficit• Job creation
Spurt in demand for infrastructureSpurt in demand for infrastructure
12% peaking and 8% non-peaking shortage of power
Major Ports- traffic growth (by weight) 12.4 %, container traffic by more than 20%
Minor Ports- comparative figure 11.3%
Air Transport (for AAI)- aircraft movement (12%), passenger movement (22%), cargo (20%)
Railways: 8% in freight, 6% in passenger traffic
Gross Capital Formation in Gross Capital Formation in InfrastructureInfrastructure
• GCFI in India hovers around 4.5% • GoI striving for a minimum of 8%• To fill the gap, private investment is essential
Estimates of investment necessarybased on projected growth rate and projected GCFI(in US $ billion) US $ 363 billion would be required in the next 5 years alone.
Assumptions:8% growth rate of GDP per annum; GCFI at 8% of GDP.
Year 2006-07 2007-08 2008-09 2009-10 2010-2011
GDP 775837
904 976 1055
Investment necessary
62 67 72 78 84
Investment Needs-Key sectors
Sector
InvestmentCrores
(US $bill in brackets)
To be made by
National Highways
2,20,000(49)
2012
Airports40,000
(9)2010
Ports50,000
(11)2012
Energy5,40,000
(120)2012
The Committee on Infrastructure has estimated the need for funds in some key sectors as given in the table alongside.
Tenth Five Year Plan was projected at Rs. 11,08,800 crore (US $ 246 billion) at 2001-02 prices
Emerging Sectoral OpportunitiesEmerging Sectoral Opportunities((2006-2007 to 2011-2012)2006-2007 to 2011-2012)
• ROADS: 45974 Km National Highways with investment up to Rs. 2,20,000 crore (US $ 49 billion)
• AIRPORTS: 35 non-metro airports, 5 green field airports and
technology upgradation of Rs.40,000 crore (US $ 9 billion) • PORTS: 387 Port and Shipping projects under NMDP of Rs.
1,00,339 cr with substantial private investment (US $ 22.29 billion)
• POWER: 60000 MW capacity addition in power generation, with 7 mega power projects of 28000 MW capacity exclusively for the private sector, translating to Rs. 2,40,000 cr (US $ 53 billion)
• RAILWAYS: Dedicated freight corridors to be developed possibly with PPP: estimated investment Rs.37000 cr (US $ 8.22 billion)
PPPs in IndiaPPPs in India
• Over 10 years experience in India in the development and use of PPPs for delivering infrastructure services
• Progress has been uneven • Main sectors of focus are:
– Basic public services excluding power: transportation (ports, airports, roads, and rail)
– Water and sanitation– Other urban infrastructure (solid waste management,
light rail, bus terminals)
– Any other sector can be added
Measures taken by GovernmentMeasures taken by Government permitting the private sector to exert competitive pressure in all
sectors
progressive levy of appropriate user charges
setting up autonomous regulatory authorities, tariff authorities and quasi-judicial bodies
providing fiscal incentives in terms of “tax holiday” to infrastructure projects, tax incentive to investors providing long-term finance or investing in equity capital
permitting FDI up to 100% on the automatic route in several infrastructure sectors
Encouraging PPP
Providing stable policy environment
Illustrative List of Infrastructure Illustrative List of Infrastructure Sectors with FDI Up to 100%Sectors with FDI Up to 100%
Electricity Generation (except atomic energy)
Electricity Transmission Electricity Distribution Mass Rapid Transport
System Roads and Highways Toll Roads Vehicular Bridges Ports and Harbours Hotel and Tourism Townships, Housing and
Construction Development Projects
Greenfield Airports Power Trading
Encouraging PPP in IndiaEncouraging PPP in India
• Scheme for VGF• Establishment of IIFCL
Viability Gap FundingViability Gap Funding--a novel schemea novel scheme
Seeks to cover PPPs where• Private sector provides
services for a fee under a concession agreement
• Concession granted on the basis of a transparent bidding process
• Bidding parameter is the capital grant sought
• Bidder is assured of a stable environment through a concession agreement
Eligible sectors: transportation,tourism, urban infrastructure, energy, any other sector could be considered with prior approval
Viability Gap FundingViability Gap Funding--a novel schemea novel scheme
• Funding of 20% of Project Cost. Additional 20% can be given by the sponsoring authority
• Empowered Committees set up for quick processing of cases
• Project to be implemented for the project term by Private Sector firm selected by sponsoring public authority through process of open competitive bidding
• Project should provide a service against payment of a pre-determined tariff or user charge
India Infrastructure Finance Company India Infrastructure Finance Company LimitedLimited
To meet long term debt requirement of infrastructure projects
IIFCL will Borrow long term funds on GoI guarantees, from
multilateral organizations etc and lend to identified infrastructure projects in 6 sectors
Lending up to 20% of project cost Covers public sector, PPP, or private sector
IIFCL lending will Ease asset-liability mismatch of FIs through refinance; Lower Long term debt cost due to sovereign guarantees Set benchmarks for market borrowings by other
organizations
Stable Policy Environment Stable Policy Environment Through Model Concession Through Model Concession
AgreementsAgreements
• Direct and indirect political events defined clearly
• Protection provided against such events through provision for extension of concession period or payment of damages
• Conditions precedent with specific timelines and ‘damages’ for non-adherence, which include issues pertaining to land and permits
International experience in PPPs
-
20.0
40.0
60.0
80.0
100.0
120.0
Investment in Infrastructure Projects with Private Participation: Developing Countries ($US bn)
International experience in International experience in PPPs PPPs (contd.)(contd.)
• 2004 and 2005: around 206 PPP deals worth approximately US$52 billion were closed, of which Europe accounts for 152 projects of US $ 26 billion (source: Report of Pricewaterhouse Coopers)
• PPP approach increasingly being adopted in all countries, initially in the transport sector and later extended to health, education, energy, water, waste management
• Globally, PPPs have track record in contributing to new infrastructure investment and improved service delivery (source: World Bank)
• In developing countries despite declines since peak - averages 20% of infrastructure investment through PPP (source: World Bank)
• Evidence suggests broad improvements in efficiency, coverage - impacts on prices and the poor mixed (source: World Bank)
Conditions necessary to attract Conditions necessary to attract investment in infrastructure projectsinvestment in infrastructure projects
• Fewer Entry Barriers• Commercial Viability• Optimal Risk Allocation• Competitive Processes• Transparency in Transactions• Independent Regulation
Benefits of PPP model• Formal risk sharing in PPP-risk doesn’t sit only on
Government books. In public tender risk management with Government
• Job creation in the private sector-better skill formation and outcome orientation
• Projects conceived well & realized well– Approach to project specifications by service and not only by
material characteristics or public entity investment capacity
– Better service to the end user thanks to • Project life maintenance• Cost control• ‘wrong economies’ avoidance during construction & maintenance
– Greater transparency & public information performance indicators
– Management change enabler within public authorities
Role of Governments – what not to do
• Acting like an owner, not a partner• Inappropriate requirements (e.g. insurance of
returns)• Failure to manage information requirements• Cumbersome approvals processes• Under-resourced implementation organization
Three Fundamental Requirements
• Value for Money must be demonstrated for any expenditure by the public sector
• Private sector must genuinely assume risk• The deal must offer enduring value to both
sides
Reduce Process Uncertainty
• Anticipate questions of partnership and have ready answers
• Rigorous project proposal preparation• Demonstrate how PPP would:
– Add value– Give value for money
• Provide a stable partnership face• Changes in parameters of the project to be
kept to the minimum• Acknowledge that a P3 model will evolve over
time
Reduce Bidder Uncertainty
• Develop clear, unambiguous requirements• Resolve strategy debates before going public• Use a transparent, understandable selection
process:– Provide the same information to all proponents– Provide bidders with access to relevant staff– Disclose evaluation/ selection criteria
• Allow proponents freedom for innovation• Anticipate bidders’ need, not just public
requirements
Protecting the Public Interest in the RFP
• Regulatory regime:– Initial rate structure– Future increases
• Develop standards– Timing requirements– Service level standards– Operational standards– Safety standards
• Have policy debates in private
Risk Transfer Strategy
• Risk should be allocated to the party best able to manage the risk
• Aim to achieve optimum risk transfer; Do not transfer risk for its own sake
• Risk transfers cost money• Transfer risks that the private sector can
control and is prepared to assume
Types of ProjectsTypes of Projects
• Roads and bridges• Airports and seaports• Commuter rail, urban transit and parking• Water and wastewater, electricity and gas• Courts, prisons, hospitals, schools, sports
centers• Public sector real estate• Social housing• Agribusiness infrastructure• Tourism infrastructure
Project Implementation Strategies
• Design-build• Design-build-operate• Design-build-finance-operate• Design-build-finance-leaseback• Sale-leaseback• Operations and maintenance• Sell-outsource• Commercialization• Devolution or privatization
Job CreationJob Creation• Job creation in development and long term
maintenance of infrastructure as well as growth of industry and services on account of good infrastructure
• Skill formation: HRD key to job creation-right kind of skills
• Development and maintenance of infrastructure requires higher level skills-technology driven
• Whereas private sector to invest in projects, governments must invest in creation of right skill sets in youth
Thank YouThank You