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Accelerating public private partnerships in India

Foreword
FICCI
I am happy to share with you the FICCI-E&Y Report on Accelerating PPP in India to be released at the India PPP Summit 2012 organized by FICCI. Indian infrastructure sector is going through a significant transformation. Investment in infrastructure is envisaged to be doubled to US $ 1 trillion during the Twelfth Five Year Plan and about half of this is targeted to be achieved through private sector investment. Indian Government has taken a number of steps to encourage private investment in infrastructure through public-private-partnerships. However, it has been observed that while PPP projects in some sectors have displayed good progress, several others achieved only limited success. Issues relating to project implementation, monitoring and dispute resolution are among the key concerns of the infrastructure developers. To discuss some of the critical issues, FICCI is organising the India PPP Summit 2012 in New Delhi. The summit will also focus on procedural bottlenecks adversely impacting the ability to implement infrastructure projects and timebound execution of PPP projects. As Knowledge Partner for the event, Ernst & Young has prepared a comprehensive Background Paper covering a large number of important areas. The report has been prepared through detailed analysis of several critical factors influencing PPP projects in India. I take this opportunity to thank them for their efforts. At the summit, the speakers, experts and delegates would discuss a wide range of topics pertaining to this important area. I hope you will find this report useful and as always, your suggestions and feedback are welcome.

Hemant Kanoria Chairman FICCI National Committee on Infrastructure

Ernst & Young


India has witnessed a high economic growth in last few years. However, lately it has been facing strong headwinds with growth rate declining from 9 plus to around 7%. Many reasons have been attributed to the slowdown in the economy and lack of adequate and quality infrastructure is undoubtedly one of them. Both federal and provincial governments have been taking number of measures with varied success. Public Private Partnership format, with its mixed success across the globe, has been acknowledged as an essential tool for focused private sector investments in economic and social infrastructure projects. The Indian PPP story has been a mixed bag so far. National Highway Development Program, despite its many challenges in meeting its target, has been successful in attracting huge private sector investments. However, there exists huge untapped potential for PPPs in sectors like Railways, Power- Transmission and Distribution, Education, Health and Urban infrastructure. The degree of use of PPP formats and consequently amount of private sector investments in infrastructure project shows huge variations across various states. The financing of PPPs is also emerging as a challenge as commercial banks are reaching their sector exposure norms. Indian private sector also have capacity constraints to fund gigantic equity requirements hence necessitating higher FDI and more foreign players. Government in order to propel PPPs, which are expected to bring in about 50% of the infrastructure spend of USD 1000 billion in Twelfth Five Year Plan (2012-17) is taking steps to further streamline PPP processes by drafting national PPP policy and development of corporate Bond markets. Many state governments, like Karnataka and Andhra Pradesh have put in place an institutional framework for encouraging PPPs whereas other states are in process of doing so. India PPP Summit 2012, being organized by FICCI, is a platform to bring together policy-makers, regulatory authorities, industry experts and business leaders from the infrastructure sector to join hands in dealing with issues pertaining to implementation, monitoring and financing of PPP projects in the country. This paper focuses on progression of PPPs over the years, existing frameworks and challenges for PPPs in India, state level experience and sector related opportunities, practices followed in other countries, funding options for financing PPPs and recommendations for spearheading the usage of PPPs in India. I am privileged to present the FICCIErnst & Young Report, Accelerating PPP in India, which especially focuses on various aspects of promoting PPPs in India.

Abhaya Krishna Agarwal Executive Director and National Leader Public Private Partnerships Government & Transaction Advisory Services

Contents
1.Public private partnership in India
1.1 Evolution of PPPs 1.2 Current status of PPPs in India 1.3 Common forms of PPP models in India 1.4 PPP policy framework 1.5 Challenges in PPP in India 1.6 State-level experience 1.6.1 Andhra Pradesh 1.6.2 Karnataka 1.6.3 Gujarat 1.6.4 Jharkhand 1.6.5 Chhattisgarh 1.7 International experience 1.7.1 United Kingdom 1.7.2 Australia 1.7.3 Brazil 1.7.4 Philippines

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2. Funding infrastructure through public private partnerships


2.1 Overview 2.2 Meeting the Twelfth Five Year Plan targets

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Accelerating public private partnerships in India ]

2.3 Means of infrastructure funding 2.3.1 Commercial lending 2.3.2 Bonds 2.3.3 External commercial borrowings 2.3.4 Foreign investment funding 2.3.5 Foreign Institutional Investment (FII) 2.3.6 Multilateral agencies lending 2.3.7 Insurance/pension funds 2.4 Grants 2.5 Private sector capabilities

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3. Key Industries/sectors for PPP


3.1 Highways 3.2 Railways 3.3 Power 3.4 Urban infrastructure

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4. Recommendations
4.1 Policy recommendations 4.2 Project development recommendations 4.3 Financing recommendations

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PPP projects take much less time to complete and the Government does not have to bear cost overruns. This will not only enable us to leverage our limited public resources but also improve efficiency of service delivery.
Shri Manmohan Singh, Honorable Prime Minister of India
Source: PM inaugural address at the Conference on Public Private Partnership in National Highways

Accelerating public private partnerships in India ]

1.

Public private partnership in India

A public private partnership (PPP) is an agreement between the government and private sector for the purpose of provisioning of public services or infrastructure. With a common vision in place, the public and private sector bring to the table their own experiences and strengths resulting in accomplishment of mutual objectives. The Government of India (GoI) has been focusing on the development of enabling tools and activities to encourage private sector investments in the country through the PPP format. Private investments amounting to US$150 billion is expected to bridge the infrastructure gap of US$500 billion over the period 2007-20121. As a part of meeting this financing gap, the PPP model is increasingly been seen as a means of harnessing private sector investment and seeking operational efficiencies in the provision of public assets and services. The extent to which the GoI envisages a significant role played by PPP in improving the level and quality of economic and social infrastructure services is increasingly evident from the growing reliance on the PPP model in the recent past.

1.1 Evolution of PPPs2


Phase II: 1991 - 2006 Few notable PPPs could be found as early as 19th century: The Great Indian Peninsular Railway Company (1853) The Bombay Tramway Company's tramway services in Mumbai (1874) PPP models were there in power generation and distribution in Mumbai and Kolkata in the early 20th century Source: PPP in India website Only 86 PPP projects worth INR340 billion were awarded till 2004 (World bank study of 13 states in 2005) Most of the projects were in bridges and roads sector Large-scale private nancing has been limited to Vishakapatnam and Tirupur Phase III: After 2006

Phase I: 19th century and early 20th century

Increasing acceptance of PPP model due to favorable policy reforms and innovative PPP structures Growth in PPP from 450 projects costing INR 2,242 billion in November, 2009 to 758 PPP projects costing INR3,833 billion in July 2011

1.2 Current status of PPPs in India


The PPP India database (Department of Economic Affairs, Ministry of Finance) indicates that 758 PPP projects costing INR3,833 billion3 is awarded/underway status (i.e., in operational, constructional or in stages wherein at least construction/implementation is imminent). There exists significant untapped potential for the use of the PPP model in e-governance, health and education sectors.

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Investment in Infrastructure in India, Article base website, http://www.articlesbase.com/investing-articles/investmentin-infrastructure-in-india-4585328.html, accessed 23 December 2011 Facilitating PPP for Accelerated Infrastructure Development in India, Ministry of Finance & Asian Development Bank, December 2006 PPP India Database as of 31 July 2011
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Karnataka, Andhra Pradesh and Madhya Pradesh are the leading states in terms of number and value of PPP projects. At the central level, the National Highway Authority of India (NHAI) is the leading user of the PPP model. PPP projects in India by sector (Total number of projects: 758)*
Airports, 0.7% Urban Development, 20.1% Tourism, 6.6% Education, 2.2% Energy, 7.4% Healthcare, 1.1% Ports, 8.0% Railways, 0.5% Roads, 53.4% Source: PPP India database, *As of July 31, 2011

PPP projects by value of contracts (Total value of contracts: INR3,833 billion)*


Based on INR 100 crore, 2.5% Between INR 100 to INR 250 crore, 5.2% Between INR 251 to INR 500 crore, 14.4%

More than INR 500 crore, 77.9%

In order to select a provider/award a contract a competitive bidding process (either national or international) are followed. International competitive bidding projects accounted for 35% of total investment followed by domestic competitive bidding (26%).

1.3 Common forms of PPP models in India


While the preferred forms of PPP model is the one in which the ownership of underlying asset remains with the public entity during the contract period and project gets transferred back to public entity on contract termination, the final decision on the form of PPP is determined using the Value for Money Analysis.
Modied design-build (turnkey) contracts The design-build contracts yield benets in the form of time and cost savings, efcient risk-sharing and improved quality. The turnkey approach with milestone-linked payments and penalties or incentives can be linked to such kind of contracts. BOT (build-operate-transfer) models The BOT form of model and its variants is the most common form of PPP model used in India accounting for almost two-thirds of PPP projects in the country. The two major forms of BOT models are: User-fee based BOT model: Commonly used in medium- to large-scale PPPs for the energy and transport sub-sectors (road, ports and airports). Annuity-based BOT model: Commonly used in sectors/projects not meant for cost recovery through user charges such as rural, urban, health and education sectors

PPP models supported by the Government

Performance based management/maintenance contracts The PPP models that lead to improved efciency are encouraged in an environment that is constrained by the availability of economic resources. The sectors meant for such form of PPP models include water supply, sanitation, solid waste management, road maintenance etc.

Accelerating public private partnerships in India ]

While there do exist build-own-operate (BOO) models, they are not supported by the GoI due to its finite resources and the complexities in imposing penalties in case of non-performance and estimation of value of underlying assets in case of early termination. Also, the GoI does not recognize the engineering-procurement-construction (EPC) contracts and asset divestitures as PPPs.

1.4 PPP policy framework4


Significant growth in the number of PPPs in the past 15 years has made India one of the leading PPP markets in the world. As a result, a proper PPP eco-system comprising institution, developers, financiers, equity providers, policies and procedures has emerged.

Institutions

Developers

Need for policies and procedures in PPP ecosystem

Financiers

Equity providers

Major policy and institutional initiatives taken: Setting up of PPP Appraisal Committee to streamline appraisal and approval of projects Preparation of PPP Toolkit to improve PPP decision making process Establishment of transparent and competitive bidding processes through model bidding documents Extending nancing support through development funds, VGF, user charge reforms, etc.

In the light of growing PPP trends and policy/institutional intervention, the GoI feels it is imperative to have in place a broad policy framework. Following the Finance Ministers budget 201112 speech to come up with a comprehensive policy, the Ministry of Finance drafted a National PPP policy for soliciting suggestions. The draft National PPP Policy proposes to focus on assisting Central and state Government agencies and private investors by: Undertaking PPP projects through streamlined processes and principles Ensuring adoption of value for money approach through optimization of risk-return allocation in project structuring Attaining apt public oversight and monitoring of PPP projects Developing governance structures to facilitate competitiveness, fairness and transparency

Prominent features of the proposed National PPP policy: The GoI plan to formalize PPPs as preferred implementation models based on the existence of strong track record for those models. It has laid down strong procedures to procure a PPP project. In order to instill transparency in PPP, it will publish separate mandatory disclosures and fair practices, set up dedicated dispute resolution mechanism, develop new market-based products (e.g., pre-bid rating), and explore possibilities of setting up web-based PPP market place.

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National Public Private Partnership Policy Draft for consultation, Ministry of Finance, September 2011
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The PPP process should comprise four phases:


PPP identication stage Consists of strategic planning, project prefeasibility analysis, Value for Money analysis, PPP suitability checks, and internal clearances to proceed with PPP development Development stage Consists of project preparation (including technical feasibility and nancial viability analysis), project structuring, preparation of contractual documents and obtaining of project clearances and approval Procurement stage Consists of procurement and project award PPP contract management and monitoring stage Consists of project implementation and monitoring over the life of PPP project

The GoI is likely to establish MIS for continuous monitoring of the performance of PPP projects. The development of a sustainable PPP program requires a strong and well defined institutional structure: Supporting the creation of nodal agencies such as PPP Cells at the state or sector level. Laying down of appraisal mechanism for PPP projects by the PPP Appraisal Committee (PPPAC)

Creating enabling environment for PPPs:


G oI has a progressive financial support system for PPP projects. Some of the key initiatives include India Infrastructure Project Development Fund (IIPDF), Viability Gap Funding (VGF), resources for annuities/ availability-based payments, long tenor lending, re-financing facility, infrastructure debt funds, etc. The GoI will provide legislative and policy support to develop equity, debt, hybrid structures and appropriate credit enhancement structures. T he GoI will undertake capacity building interventions to develop organizational and individual capacities for identification, procurement and managing PPPs. T he PPP Cell in Department of Economic Affairs will have professionals who provide competencies and technical support to the ministries and other authorities developing PPPs.

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1.5 Challenges in PPP in India5


Regulatory environment There is no independent PPP regulator as of now. In order to attract more domestic and international private funding of the infrastructure, a more robust regulatory environment, with an independent regulator is essential.

Lack of information

The PPP program lacks a comprehensive database regarding the projects/studies to be awarded under PPP. An online data base, consisting of all the project documents including feasibility reports, concession agreements and status of various clearances and land acquisitions will be helpful to all bidders.

Project development

The project development activities such as, detailed feasibility study, land acquisition, environmental/forest clearances etc., are not given adequate importance by the concessioning authorities. The absence of adequate project development by authorities leads to reduced interest by the private sector, mispricing and many times delays at the time of execution.

Lack of institutional capacity

The limited institutional capacity to undertake large and complex projects at various Central ministries and especially at state and local bodies level, hinder the translation of targets into projects.

Financing availability

The private sector is dependent upon commercial banks to raise debt for the PPP projects. With commercial banks reaching the sectoral exposure limits, and large Indian Infrastructure companies being highly leveraged, funding the PPP projects is getting difficult.

While most of the above challenges are being worked upon by the GoI, the limited availability of sources of funding is the biggest bottleneck for the success of the PPP model.

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Infrastructure Challenges in South Asia: The Role of Public-Private Partnerships, ADB, September 2007 Transparency in PPP programme, The Financial Express, October 27 2011 Indian Infrastructure Challenges, IDFC, September 2010
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1.6 State-level experience6


The scenario in each state is different in the context of infrastructure development as each state has the right to promulgate legislations in the areas covered in the state list of the Constitution of India. However, certain states have taken substantial steps to encourage PPP activity. They have created legal frameworks for participation of private sector in the state. States of India and PPP6
Gujarat Maharashtra Andhra Pradesh Karnataka

The top five states account for 58.3% of total value of PPP in India. The major sectors being targeted for PPP format by leading states are roads, ports and airports. Maharashtra, Karnataka and Gujarat average around 11% of the total value of PPP of the country. The bottom 10 states represent only 3.5% of the total value of PPP indicating differences in attractiveness of investment by private sector.

Uttar Pradesh

1.6.1 Andhra Pradesh7


Andhra Pradesh is the leading state in terms of PPP projects by number of contracts (96) and value (INR669 billion). It accounts for around 17.5% of the total value8 of PPP contracts in India. The state has been drawing interest for PPP project investment in sectors such as urban development (29%), energy (24%), roads (22%), etc. Prominent projects undertaken HITEC City, Hyderabad Rajiv Gandhi International Airport Gangavaram Port Krishnapatnam Port Hyderabad International Convention Center & an Integrated Township 108 Mobile Emergency Response Service and 104 Mobile Health Service PPP projects in pipeline Hyderabads metro rail project Bridge across River Godavari at Rajahmundry Machilipatnam Port at Machilipatnam Development of four greenfield airports Bus Rapid Transit System in Hyderabad and Vijayawada Diagnostic centers in hospitals at Vishakapatnam, Kurnool, Kakinada and Warangal

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PPP India Database as on 31 July 2011 PPP Cell of Andhra Pradesh, PPP Cell AP website, http://ppp.cgg.gov.in/Login.aspx, accessed 16 December 2011 PPP India Database as of July 31, 2011
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Institutional support The state has set up various institutions to promote infrastructure: Andhra Pradesh Industrial Infrastructure Corporation (APIIC) provides estate infrastructure for the development of industrial areas (IT parks, food processing zones, SEZs, etc.) AP Invest promotes Andhra Pradesh as the favored destination AP Tourism Developement Corporation provides tourism infrastructure to attract tourist inflow Infrastructure Corporation of Andhra Pradesh (INCAP) deals with projects that are of critical importance to the states progress AP Road Development procures road projects in the state AP Urban Finance & Infrastructure Development Corporation provides financial assistance, technial assistane and other guidance State PPP cell acts as a nodal agency for all PPP projects for supporting the states PPP initiatives

Policy reforms Andhra Pradesh was the first state to enact the AP Infrastructure Development Enabling Act, 2001 applicable to all infrastructure projects implemented by the state. The act lays down guidelines for developer selection, illustrates various PPP types, and range of state support to infrastructure projects

Funding initiatives The Government of Andhra Pradesh extends support in the following forms: Direct financial support in the form of states share of viability gap funding (VGF) to promote economically viable projects Exemptions in terms of sales tax, stamp duty and seigniorage fees Asset-based support to provide Government-owned land at concessional lease charges, providing linkage infrastructure to projects Administrative support to get clearances, undertake rehabilitation and resettlement, supply power and water at project site, land requirements

Case study: Major bridge across Godavari


Major bridge across river Godavari costing INR8.1 billion, is the first four lane bridge in Asia under the PPP mode. The scope of the project is to design, build, construct, finance, operate and maintain major bridge across the river Godavari with a total project length of 15 kms. While the construction for the bridge is on, the project got its financial closure in May 2009 and the land acquisition to an extent of 90% is also complete. The project is likely to begin its commercial operations in May 2012 and is expected to yield significant benefits in the form of reduced distance between Eluru and Rajahmundry, reduced time of travel, lower travel costs than earlier and decongestion of traffic. PPP model - The project is on BOT toll basis with the developer being selected through competitive bidding process for a concession period of 25 years. The project will have grant of INR2.1 billion and the remaining shall be raised in the form of equity provided by the developer and debt from the FIs.

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1.6.2 Karnataka9
According to Economic Survey 2010, Karnataka is among the top states in PPP in infrastructure projects. The state has 104 PPP projects of value INR447 billion10. As the knowledge hub of India, it has immense potential for investment in the areas of information technology, biotechnology, textiles, steel and cement. In 2008, the transportation sector bagged the maximum investment on a PPP basis in the state. However, the Government of Karnataka is now targeting new areas for PPP. It has tabled a Bill in Legislative Assembly to develop all ports in the state on a PPP basis and is formulating an integrated energy policy that aims to promote PPP projects in the energy sector. Institutional support The State Government has established the Infrastructure Development Department in 1996. It aims to attract private sector participation in the development of infrastructure projects. The State Government has set up a PPP cell in the Infrastructure Development Department to boost PPP in the state. PPP cell aims at identification, conceptualization and creation of a shelf of projects that can be considered for implementation through the PPP route.

Policy reforms The states New Infrastructure Policy, 2007 aims to provide a fair and transparent policy framework for promotion of PPP in the infrastructure sector in the state. The policy has the provision for consideration of implementing the project first through PPP for all new investments in infrastructure. The State Government decided to establish a single window to facilitate the speedy approval of the projects.

Funding initiatives The State Government has set up a fund called Karnataka Infrastructure Project Development Fund to provide financial assistance to state agencies taking on infrastructure projects under PPP mode. The fund targets investment in railways, airports, ports, roads, urban infrastructure, energy, tourism and industrial infrastructure.

Case study: Bangalore International Airport


The Greenfield Bangalore International Airport, the first PPP airport in the country, is developed on a PPP model with total investment of INR19.3 billion. It is the joint venture between the Airports Authority of India (AAI), Karnataka State Industrial Investment and Development Corporation Ltd. (KSIIDC) and private promoters. The airport is built on international lines with world class facilities along with the capacity to handle 40 million passengers on further development. PPP model - The Bangalore International Airport is being built on BOOT format with Government of Karnataka and Airports Authority of India (AAI) each having 13% equity shares and developer being selected through competitive bidding process for a concession period of 30 years (provision of 30 years extension). The INR19.3 billion financing being done as equity INR31.5 million, state support INR3.5 billion and debt INR12.65 billion.

Geert Dewulf, Ashwin Mahalingam, and Stephan Jooste, The Transition Towards a Sustainable PPP Regime, August 2011 Karnataka Special Ppp On Fast Track, 24 October 2011, Project Monitor, via Factiva, 2011 Economic Research India Pvt. Ltd., distributed by Contify.com Infrastructure Development department website, http://idd.kar.nic.in/ppp-go.html, accessed 12 December 2011 10 PPP India Database as of July 31, 2011
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Gujarat and PPP


G ujarats 40 minor private sector ports handle approximately 80% of cargo handled by all private ports in India. G ujarat possesses first ever private port project in the country. T he only chemical port and tow LNG Terminals have been developed in the PPP format.

1.6.3 Gujarat

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With around 63 projects valued at INR396 billion12, Two air strips have been developed by Gujarat is among the leading states witnessing high private developers. level of PPP activity especially in the sectors of ports and power. Gujarats vision 2010 envisioned development of robust infrastructure in the state primarily through the PPP mode. Similar planning exercise has been undertaken for future projects in the form of Blueprint for Infrastructure, Gujarat-2020. It envisages investment of INR120 trillion by 2020 across infrastructure sectors. Institutional support Gujarat is the first state to build a regulatory framework for PPP through the passing of Gujarat Infrastructure Development Act in 1999. It defines guidelines for the private sector participation in financing, construction, maintenance and operation of infrastructure projects undertaken on a PPP basis in Gujarat. Gujarat Infrastructure Development Board (GIDB) was set up in 1995 to undertake PPP initiatives in the state. Gujarat Infrastructure Development (GID) Act 1999 provides a mechanism for selection of developers to encourage private sector participation.

Policy reforms GIDB has developed model concession agreements for certain sectors such as ports, urban transport, road and water. In addition, sector-specific policies of the state provide for utilization of PPP.

Funding initiatives The State Government has formulated viability gap funding scheme to provide funds for essential PPP projects. Under this scheme, the State Government provides financial support up to 20% of the cost of PPP project. The funding is provided in the form of a capital grant at the stage of project construction.

Case study: Dahej LNG Terminal


Gujarats Dahej LNG Terminal is the first LNG terminal in India, spread over 48 hectares and is currently under operation stage. Owned by Petronet LNG Ltd. and located at Dahej in Bharuch district of Gujarat, the PPP project is estimated to cost INR23 billion. PPP model - Dahej LNG Terminal PPP is in a BOOT format with contract awarded by the Negotiated MoU method for 30 years. The equity was contributed by Indian oil companies, a France-based company and Asian Development Bank. The project had a debt-equity ratio of 71:29.

(Source: PPP in India and http://www.gidb.org/cms.aspx?content_id=106)

11 The Transition Towards a Sustainable PPP Regime, Geert Dewulf, Ashwin Mahalingam, and Stephan Jooste, August 2011 Major Initiatives, Gujarat Official State Portal, http://www.gujaratindia.com/index.htm, accessed 11 December 2011 Public Private Partnership, Gujarat infrastructure Development Board website, http://www.gidb.org/, accessed 12 December 2011 12 PPP India Database as of July 31, 2011
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1.6.4 Jharkhand
Jharkhand witnessed relatively low PPP activity in infrastructure projects. The state has undertaken nine PPP contracts costing INR17 billion13. The BOT has been the preferred form of PPP type applicable in these projects. The sectors such as urban development and roads have drawn more attention towards PPP in the state. The draft Jharkhand Industrial Policy, 2011 lays down significant emphasis on implementation of the concept of PPP in industrialization especially in infrastructure development/industrial area development/industrial park/ human resource development/service sector etc.14

National Games Housing Complex at Ranchi


Government of Jharkhand (GoJ) envisaged development of a self-contained township at Ranchi with quality infrastructure in the state, supporting and complimenting the 34th National Games. The project entailed development, construction, sale of dwelling units, operation and maintenance (O&M) of around 1,600 dwelling units equipped with all utilities and facilities. The Phase-I of the project (1,200 houses) were to be completed by July 2007, Phase-II (600 houses) by March 2008. The estimated cost of the project is INR25 billion. PPP model - Department of Arts, Culture, Sports & Youth Affairs, of Jharkand leased 56.44 acres of land for five years in lieu of constructed dwelling units. Nagarjuna Urban Infrastructure Company Limited (NUICL) has been involved in development, construction, sale and operation and maintenance (O&M) of the dwelling units.
(Source: PPP Database http://www.pppindiadatabase.com/Screens/frmView.aspx?PROJECTID=R2qxVb@@12/ erI=&AUTHORISEDUSER=N )

Upcoming PPP projects in Jharkhands social infrastructure


PPP for model colleges The state of Jharkhand announced its plans to develop model colleges under the PPP mode to provide better education and increase the gross enrolment ratio.
(Source: http://www.telegraphindia.com/1101206/jsp/ jharkhand/story_13263505.jsp)

Jharkhand announces plan for PPP hospital The state of Jharkhand announced its plans to operate the newly built 500-bed Sadar Hospital at Ranchi in PPP mode with the view to avail qualified and specialist doctors and trained nursing and paramedical staffs.
(Source: http://www.igovernment.in/site/jharkhand-mootsppp-mode-govt-hospitals)

1.6.5 Chhattisgarh
The state of Chhattisgarh recorded relatively low PPP activity in infrastructure projects with only four PPP contracts costing INR8 billion15. All the projects have been undertaken in the roads sector utilizing the BOT-Toll PPP type. Chhattisgarh formulated an industrial policy for the period of 20092014 to focus on PPP. It allows the industrialist to form their own private industrial park for an area of up to 75 acres resulting in speedy acquisition of land. The state government actively supports the PPP method for development of tourism and infrastructure.
13 PPP India Database as of July 31, 2011 14 Jharkhand Industrial Policy 2011, Jharkhand Industry website, jharkhandindustry.gov.in/Jharkhand%20Industrial%20 Policy%202011%2013.9.11.doc, accessed 19 December, 2011 15 PPP India Database as of July 31, 2011
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Upcoming PPPs16
Setting up of Gems & Jewellery SEZ on PPP Chhattisgarh State Industrial Development Corporation Limited plans to set up a Gems and Jewellery SEZ covering 70 acres. The project will be developed on a PPP basis with M/s Ramky Infrastructure Ltd. The project is expected to be completed by 2014 at a cost of INR17.42 billion.
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Sports City in Naya Raipur Naya Raipur Development Authority is setting up a sports city with facilities for aquatic, tennis and indoor stadium on PPP in Naya Raipur over 137 Acres. The private player will build the sports facilities and hand it back to the authority. A 93 acre residential land parcel will cross-subsidize the sports facilities.

1.7 International experience


1.7.1 United Kingdom
PPP activities in the UK started gaining momentum in the 1980s, in a bid by the UK Government to reduce the economys dependence on public sector financing.17 With the support of various initiatives over the years, the PPP model has evolved from a channel to offset the constraints on public sector expenditure, to the preferred model to deliver superior quality services. According to the UK treasury data, 698 private finance initiative (PFI) projects have been signed to be delivered through the PPP route, in various sectors such as education, health, defense, public-housing, IT and transport.18 The PPPs in the UK have been highly successful, with several countries around the world trying to emulate the UK model. According to British National Audit Office (NAO) an assessment of the UK PPP policy in 2009 shows that 65% of the contracts were delivered on time and within the agreed budget.19 1992 PFI 1997 Treasury taskforce 2000 Partnerships UK (PUK) 2007 Infrastructure UK (IUK)

16 Chhattisgarh, Ministry of Foreign Affairs, Kingdom of Thailand website, http://www.mfa.go.th/internet/document/6691. pdf, accessed 19 December 2011 World class education in Chhattisgarh, Dailybhaskar.com website, http://daily.bhaskar.com/article/MP-RAI-soon-worldclass-education-in-chhattisgarh-iiit-likely-to-open-in-state-2142187.html, accessed 19 December 2011 17 Public-Private Partnerships, Government Guarantees, and Fiscal Risk, International Monetary Fund, April 2006, p. 72-76 18 Project Database, PPPForum website, http://www.pppforum.com/projects, accessed 14 December 2011 19 Theorizing Public-Private Partnership Success: A Market-Based Alternative to Government, Paper for the Public Management Research Conference at Syracuse University, June 2011, p. 16
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High level of political commitment: Timely reforms have been introduced by the Government to ensure development of the PPP markets. This includes steps such as PFI, and empowering the National Audit Ofce (NAO) to independently oversee PPPs.

4 Specialized bodies: The creation of specialized bodies such as Partnerships UK (PUK) and the Treasury Taskforce has institutionalized and gave structure to the PPP activities, which has been critical for the success of a PPP program in such a large scale.

Key success factors

Strong policy framework: A proper legal and institutional framework at national, regional and municipal levels is in place, which acts as a safeguard for potential partners. It is ensured that the Government spending is regularly scrutinized and published for the general public. 2

Utilization of taxpayer's money: A proper evaluation tool, along with a program management process, has been put in place. This screening optimizes the project risk, and ensures that they are delivered on time without compromising on the quality.

Case study: Advantage PPP - A55 Llandegai to Holyhead Trunk Road


The 101 million A55 Llandegai to Holyhead trunk road has been designed, financed and built by UK Highways A55, a consortium of Carillion Laing and Hyder and is the first trunk road built in Wales under the Private Finance Initiative. It is a key international highway linking Dublin and Ireland more generally with Wales and England and the major markets of Europe. The project proved to be a major achievement for the concessionaire as it delivered the project 6 months ahead of time despite the wettest winters and fuel crisis.

1.7.2 Australia20
The Australian PPP market is one of the most well developed markets for PPP. The initial phase of PPP pertained to infrastructure projects that were modeled on the BOT and BOOT types. However, the focus of PPP shifted to social infrastructure in 2000s. The projects are diverse and relate to hospitals and schools. The market for social infrastructure is expected to continue to develop as there is need for water and energy infrastructure to meet Australias future sustainability requirements. Australia is witnessing significant growth in infrastructure. The infrastructure market is estimated to procure investments worth US$101 billion by 2016. In addition, the devastation caused by the floods in northern Australia exacerbates the massive task of rebuilding damaged infrastructure. Thus, there is requirement of private investment in the country.
Infrastructure Australia Independent statutory advisory council with 12 members from government and private sector National PPP Forum Facilitates cooperation across Australian regional jurisdictions for infrastructure projects through PPP Key national entities for PPP Australian PPP unit Established by Department of Finance and Administration to provide guidance to government agencies on use of PPP

20 Case Studies of Transportation Public-Private Partnerships around the World, Office of Policy and Governmental Affairs, July 2011 Public Private Partnerships, Infrastructure Australia website, http://www.infrastructureaustralia.gov.au/public_private/, accessed 11 December 2011
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Case study: Advantage PPP - Sydney Harbor tunnel


The level of traffic between North Sydney and the Sydney Central Business District led to the development of the tunnel on PPP model (BOOT). The New South Wales Government selected the Sydney Harbor Tunnel Company Pty. Ltd. as the preferred consortium in 1987. The PPP model with ownership of private sector led to significant alleviation of congestion in the area and proved to be successful.

1.7.3 Brazil21
Private investment to build infrastructure has existed in Brazil for a long time. In fact, it was the main form in which majority of the countrys original infrastructure were developed. The first railroads of the country were built by private players under the state licenses. Brazil has one of the longest highway network under private concessions22 in the world indicating co-existence of public and private entities. PPP activities are regulated under the Concessions Law (1995) and the Public Private Partnerships Law (2004). The main drawback of the concession law has been that the users (especially drivers on toll roads) are unwilling to pay for the use of a previously free road. Under the law the contract duration can vary between 5 to 35 years and the contract value should be at least US$11 million.

The Concession Law

Investment is recovered from the revenues collected from the users in the terms of concession (Revenue source = user tariffs) Ideal for long-term sustainable projects

The Public Private Partnership Law

Sponsored concession state is allowed to complement concessionaires revenues (Revenue source = user tariffs + public) Administrative concession Government is responsible for the private partners remuneration (Revenue source = public payments)

The adoption of the two model structure in the PPP law has proven to be effective because: The PPP law allows the payments to be partly or totally funded by the Government. This has helped in attracting private investments in projects that cannot be sustained by the fees charged from the users. The Government has to establish a fund to provide warranty of its obligations under the agreement. The law also provides for the use of alternative mechanisms for disputes resolution, including arbitration.

21 Brazilian PPP Program, Lessons and Challenges, Brazil Ministry of Planning website, http://estatico.buenosaires.gov.ar/ areas/hacienda/pdf/8_mesapanel_vanialucia_lins_souto.pdf, accessed 12 December 2011. An Overview of Concessions and Public-Private Partnerships in Brazil, American Bar Association website, March 2011. Public Private Partnership Unit website, www.ppp.mg.gov.br, accessed 12 December 2011 Privatization and Public-Private Partnership, Barbosa, Mssnich & Arago Advogados website, 2008, p. 4 22 A concession is the right to operate public services or facilities for a fixed period of time, at the concessionaires risk.
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Scope for improvement: Despite certain advantages, few PPP projects have been contracted in the country. Many Government officials are not comfortable with the idea of paying taxpayers money to private investors and are hesitant in implementing such contracts. There are major issues are in the areas of policy formulation, regulation and supervision of contracts. According to the law, the Government cannot make any payment until the private partner provides the service to the users. This creates financing difficulties as the private investor may have to make huge investments in building facilities without receiving any cash flow. Brazil launched Phase two of its Growth Acceleration Program, which estimates to incur public and private investments worth US$526 billion to upgrade the countrys infrastructure in the period 2011 to 2014.

Case study: PPP in Brazil - MG-050 highway


The recovery, expansion and maintenance of the MG-050 highway was the first highway project in Brazil to be executed through PPP. The 372-km long highway entails investment worth US$650 million till 2032. The project is being executed as sponsored concession and the private player has been granted a guarantee by the state-owned Minas Gerais Economic Development Company.

1.7.4 Philippines23
Government of Philippines has been promoting participation of private sector not only in traditional infrastructure projects such as power, transportation and water sectors, but also in non-traditional infrastructure and development sectors such as information and communications technology, health and property development since 1987. PPP enabled resolving of the power crisis in the early 1990s and helped improve road network quality, transport linkages and social services in the country. PPP initiatives have bagged approximately US$19.5billion in the country. The countrys PPP program is a vital component of its development plan. The PPP center is at the helm of affairs of the PPP program. It provides various services and assistance to implementing agencies (IAs), government-owned and controlled corporations (GOCCs), state universities (SUCs), local government units (LGUs) and the private sector in the development and implementation of critical infrastructure projects. In addition, the countrys BOT law recognizes the role of private sector in the development of the country by providing various incentives such as tax exemptions. PPP center serves as an efficient nodal agency for PPP projects of the country. Project Development and Monitoring Facility (PDMF) of the center provides funds for PPP activity. Government is proactive in takings steps to build up support for PPP projects. It has allocated US$6.8 million in the 2011 budget to enable structuring and preparation of PPP projects. In addition, it is developing an interim scheme to provide access to long-term financing for PPP projects until a dedicated infrastructure finance facility can be established.

Case study: Advantage PPP - North Luzon Expressway (NLEX)


In 1990s, the Government of Philippines invited the private sector to undertake the rehabilitation, expansion, and modernization of NLEX. The total cost of the project amounted to US$252.2 million. The private sector undertook the responsibilities of financing the project without the Governments guarantee, building tollway and assuming constructing risk. It resulted in development of the regional agriculture and industry besides providing access to northern and central Luzon.

23 Public Private Partnership Projects, Republic of Philippines, March 2011 The Philippine PPP Program, PPP unit, December 2008
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2.

Funding infrastructure through public private partnerships

2.1 Overview
The development of a good physical and social infrastructure is characterized by significant investment requirements, low operating costs with repayments from revenues generated from the project. The GoI has traditionally been taking the onus of financing, implementation, operations and maintenance of these projects. However, to avoid cost and time overrun and benefit from innovative project structuring and implementation strategies, private sector participation in development of infrastructure is extremely critical. The GoI, cognizant of the fact, is setting the targets for its Twelfth five year plan such that that 50% of the infra spending is met by the private sector.

2.2 Meeting the Twelfth Five Year Plan targets


The Eleventh Five Year Plan (FYP) period of 20072012 is about to end soon and the GoI is currently drafting the Twelfth FYP. Thus, while the final Twelfth five year plan is yet to see the light of day, the Approach Paper for the Twelfth FYP targets an infrastructure spending requirement of INR40,992 billion (up from infrastructure spending levels of INR9,061 billion and INR20,542 billion during the Tenth and Eleventh FYPs respectively) in order to attain a share of 10% of the countrys GDP. Around 50% of such investment is estimated to come from the private sector, against the average 35.8% contribution that was estimated in the Eleventh FYP. Infrastructure spending estimates across the various FYPs (in INR billion)
45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 -

Planned year-wise infrastructure spending during the Twelfth FYP (in INR billion)
FY2017, 10,395 FY2013, 6,194

20,496 7,429 13,113 20,496 Twelfth Plan (Projected) FY2016, 9,181 FY2014, 7,127

2,252 6,809

Tenth Plan Eleventh Plan (Actual) (Revised) Public investment Private investment

FY2015, 8,095

Source: Planning Commission projections of Investment in infrastructure during the Twelfth Five Year Plan

The Approach Paper24 to the Twelfth FYP further states that while public investment in infrastructure is needed for the overall societal development and wider reach, the PPP-based development needs to be encouraged in all feasible areas. For this, the institutional mechanisms to support this kind of investment deserve strong support. As a result, the GoI has already taken various measures to enhance availability of funds and meet increased level of private sector participation. The next section describes in detail each of the funding sources and the measures taken by the GoI to encourage the use of such source for infrastructure financing.

24 Faster, sustainable and More inclusive Growth An approach to the Twelfth FYP, Planning Commission, GoI
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2.3 Means of infrastructure funding


The following table broadly indicates the various means of funding for an infrastructure project. Sources of funds for PPP25 Forms Debt Domestic sources Equity Domestic commercial banks Domestic term lending institutions Domestic bond markets Specialized infrastructure financing institutions Domestic developers Public utilities Other institutional investors External sources International commercial banks Export credit agencies International bond markets Multilateral agencies International developers Equipment suppliers funds Other international equity investors Multilateral agencies

Lenders perspective

Bank credit: Commercial banks are facing difficulties as they have already reached their lending exposure limits for the infrastructure sector and face the problems of concentration risks and ALM mismatches. Bonds: The bond market in India is highly underdeveloped. The rate at which the bond market in India is growing is considerably slow in comparison to the rate of growth needed by the GoI to build its infrastructure. External Commercial Borrowings (ECBs): ECB lending is highly dependent on the interest rate scenario. Prominent infrastructure companies such as L&T have been increasingly evincing interest in ECBs as an option for infrastructure funding. Multilateral agencies: The World Bank and the Asian Development Bank have launched programs supporting PPP projects in India. The institutions provide technical and financial assistance to facilitate infrastructure development.

The infrastructure sector has been witnessing rising debt equity ratios in the recent years. The senior debt is contributed by both commercial banks and public sector banks. The use of subordinated debt is limited and is used particularly in the road sector. Apart from lending in form of debt financing, the government grants are devised to support economically unviable but feasible projects. The domestic bank credit has been the prime source of debt financing in case of infrastructure projects.

25 Proposed Multitranche Financing Facility India: India Infrastructure Project Financing Facility, Asian Development Bank, November 2007
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2.3.1 Commercial lending


Commercial lenders are the prominent financers for the infrastructure sector of the country. The following table indicates that infrastructure lending of commercial banks grew from INR1,128 billion in 2006 to INR5,266 billion in 2011 registering a growth of approximately 36%. In addition, the share of bank finance extended to infrastructure sector as a percentage of gross bank credit has increased from 2.2% in 2001 to around 13.4% in 2011.26 Bank credit to the infrastructure sector in INR billion Infrastructure sector Primarily comprising Power Telecommunication Roads and Ports 601 184 196 731 194 249 950 380 345 1,244 503 470 1,878 593 735 2,691 1,004 925 2006 1,128 2007 1,433 2008 2,051 2009 2,699 2010 3,798 2011 5,266

Source: Handbook of Statistics on Indian Economy 2010-11

However, many Indian banks are now on the verge of reaching their maximum limits for lending toward the infrastructure sector. With significant number of high investments proposals in the pipeline for the infrastructure sector, the banks are finding it difficult to finance infrastructure projects. One of the key problems faced by banks is the asset-liability mismatch problem, typically of infrastructure projects.27 Challenge of asset-liability mismatch and reaching infrastructure exposure limits The asset-liability mismatch problem arises due to the fact that longer duration loans required by the infrastructure projects need to be financed by shorter duration borrowings. The lending banks are finding it increasingly difficult to provide financing to high-value projects with repayments schedules of up to 15 years in comparison with deposits ranging in maturity period of one to three years. With ALM and concentration risks, the loans are not complete reflection of the project risk and loan pricing controls (for liquidity shortfall and refinancing risk). The low deposit rates have further aggravated the situation as the depositors are unwilling to commit themselves to long-term maturities28.

Infrastructure loans are of 10-15 years duration, while most bank deposits have tenure of one-two years. In the last financial year, not much disbursement took place, and now every bank is sitting on huge sanctions waiting to be disbursed. This is going to create a major problem, as we wont have deposits of equal maturity,
Chairman and Managing Director of a public sector bank
(Source: Business Standard)

26 RBI Annual Report 2010-11, pg51 27 Loan-deposit mismatch may hit bank lending to infra sector, Live Mint website, http://www.livemint. com/2011/02/08224328/Loandeposit-mismatch-may-hit.html, accessed on 4 January 2012 28 Bank face asset-liability mismatch on infra lending, Business Standard website, http://www.business-standard.com/india/ news/banks-face-asset-liability-mismatchinfra-lending/393085/, accessed 29 December 2011
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Lenders perspective

The difference between liabilities and assets varies according to their maturity profile buckets. The table indicates that as the maturity time period increases, the liabilities (deposits and borrowings) surpass the assets (loan and advances and investments). It results in asset liability mismatch for banks. The problem accentuates with infrastructure lending as infrastructure loans are long-term in nature. Table: Maturity profile of selected items of liabilities and assets of four public sector banks (in INR million) as on 31 March 2011 SBI Deposits Over 5 years Borrowings Over 5 years Loan and Advances Over 5 years 1,360,204 363,307 264,986 355,125 287,161 409,693 98,139 101,781 43,550 77,986 1,571,656 538,719 714,426 523,464 377,587 Bank of India Punjab National Bank Canara Bank Total

Investments (at book value) Over 5 years Difference Over 5 years 97,898 26,978 2,822 38,610 20,569 1,600,123 543,334 579,436 597,985 374,098

In the absence of a developed corporate bond market, use of refinancing facility has been suggested to mitigate ALM mismatches. Under this facility, the long-term funds will be borrowed and used to refinance infrastructure loans of banks and specialized NBFCs.

Lenders perspective

Many banks are close to exhausting their internal limits set for infrastructure firms. We may not see the same pace of expansion, in terms of credit disbursement to the infrastructure sector, in the next two years that we have seen in the past two years
R. Ramachandran, Chairman and Managing Director of Andhra Bank

Maximum loan proposals are coming from this (infrastructure) sector. All are big-ticket proposalsBanks will have to see their loan book and see what their headroom available for lending
P.K. Anand, Executive director of Punjab and Sind Bank
(Source: Livemint)

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Take-out financing as a solution: The take-out financing scheme has been developed to deal with issues of hitting sectoral limits, concentration risk and asset-liability mismatch. The takeout financing scheme involves three parties project company, lending company and taking over institution (bank/consortium of banks/FI). Under the scheme, the taking over institution enters an agreement by which the lender transfers a part/whole of the outstanding to the taking over institution on a pre-determined basis. The concept of takeout financing has been accepted as a global practice to release long-term funds for financing infrastructure projects. IIFCL, an SPV formed for the purpose of lending funds to infrastructure projects and supplement other loans from banks and financial institutions, has been recognized as a special agency to extend takeout finance scheme in 2010. A tripartite agreement was signed in September 2011 between IIFCL, LIC and IDFC which allows takeout financing to an extent of 50%29 of the project cost. IIFCL has further increased take-out financing disbursement target by INR50 billion as a result of which the banks and infrastructure developers are expected to get attractive takeout financing deals. Under the new concession in PPP projects, the take-out financing rate is likely to vary from 9.90% to 10.85%. The banks will now be able to seek out takeout financing immediately after the commercial operation date. Also, the BOT projects of NHAI will be eligible for the scheme. These changes will enable banks reduce exposure to existing borrowers and free up their capital and operate within the exposure limits.30

Measures taken by the RBI31


Additionally, the Reserve Bank of India (RBI) has taken a number of regulatory concessions for infrastructure finance: Permitting banks to enter take-out financing arrangement Freedom to issue long term bonds by banks Relaxation of single and group borrower limit for additional credit exposure in the infrastructure sector Flexibility to invest in unrated bonds of companies engaged in infrastructure activities within the overall ceiling of 10% Excluding the promoters shares in the SPV of an infrastructure project to be pledged to the lending bank from the banks capital market exposure Permitting banks to extend finance to fund promoters equity where the proposal involves acquisition of share in an existing company engaged in implementing or operating an infrastructure project in India.

Further, the central bank recently eased the norms by allowing banks to lend 20% of its capital funds to Infrastructure Finance Companies (IFCs).

29 IIFCL, LIC, IDFC enter into MoU for takeout financing, Economic Times website, http://articles.economictimes.indiatimes. com/2011-09-19/news/30175667_1_takeout-financing-iifcl-india-infrastructure-finance, accessed 2 January 2012 30 IIFCL raises takeout fin bar by Rs5,000 crore, DNA website, http://www.dnaindia.com/money/report_iifcl-raises-takeoutfin-bar-by-rs5000-crore_1627878, accessed 20 December 2011 31 K C Chakrabarty: Infrastructure finance experiences and the road ahead, BIS Review, February 2010
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2.3.2 Bonds
The bond market in India comprises issuances by both Central and state governments, public sector undertakings, other government bodies, financial institutions, banks and corporates. However, the corporate bond market currently is highly underdeveloped and lacks liquidity and depth.32

India plans to develop a vibrant bond market to facilitate infrastructure financing, as the source of nearly one-third of the targeted $1 trillion investment in the sector during the Twelfth plan period is not known yet..We want to develop and set up a vibrant bond market in the country to facilitate infrastructure financing.
Pranab Mukherjee Honble Finance Minister of India
(Source: Economic Times)

The corporate debt markets have been constrained by detailed primary issue guidelines, lengthy processes, and absence of long-term investors.

Lenders perspective

The success of governments very ambitious infrastructure programme hinges on developing an adequate bond market
D.H.Pai Panandiker, President, RPG Foundation
(Source: Business Week)

The bond market primarily functions as a private placement market as the public issues of bonds have been found to be difficult, slow, expensive as well as risky. A debt private placement amount of INR5.4 billion was raised in the infrastructure sector during FY09 up from INR4.3 billion in FY08.33 Indian companies are allowed to issue bonds in Indian currency for trading on the corporate bond market in the country according to the existing regulations. Foreign institutional investors are permitted to invest in these bonds up to INR935 billion collectively, with a carve out of INR234 billion for infrastructure projects.34

2.3.3 External commercial borrowings


External commercial borrowings (ECBs) can also serve as an important means of funding debt requirements of the infrastructure project. The number of ECBs extended depends on interest rates in the country. Over the years, they have become cheaper and developers are increasingly viewing them as an alternate source. Some of the regulatory changes implemented to make ECBs an important means of funding include: In May 2011, the RBI permitted IFCs to raise funds through ECBs of up to 50% of net-owned funds without approval.35 In September 2011, the limits to avail ECB under the automatic route has been liberalized as given below:36 Corporates in real sector/industrial sector/infrastructure sector INR35 billion or equivalent as compared to the current limit of INR23.3 billion or equivalent
32 India to set up vibrant bond market: Mukherjee, Economic Times website, http://economictimes.indiatimes.com/markets/ bonds/india-to-set-up-vibrant-bond-market-mukherjee/articleshow/7320944.cms, accessed 20 December 2011 33 Product Innovations for Financing Infrastructure: A Study of Indias Debt Markets, Asian Development Bank, October 2011 34 India to set up vibrant bond market: Mukherjee, Indo-Asian News Service, 19 January 2011, via Factiva 2011 HT Media Limited. 35 ECB norms liberalized for infrastructure finance firms, Live mint, May 2011 36 External Commercial Borrowings (ECB) Rationalisation and Liberalisation, RBI, September 2011
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Corporates in specified service sectors such as hotel, hospital and software INR9.3 billion or equivalent as against the current limit of INR4.6 billion or equivalent The corporate entities in the infrastructure sector can now avail of ECBs for interest during construction (IDC) as a permissible end-use, under the automatic/approval route, as the case may be, subject to IDC being a part of project cost and is capitalized.

The GoI approved fund raising worth INR609.5 billion by companies through external commercial borrowing (ECB) or foreign currency convertible bonds (FCCB) for infrastructure projects in the last two financial years.37 Companies such as L&T Finance are mulling the ECB route for its expansion. L&T Infrastructure Finance raised INR4.2 billion through the ECB window this fiscal and is aiming to raise more funds through this route.38

2.3.4 Foreign investment funding


Foreign direct investment (FDI) FDI of up to 100% is permitted in greenfield infrastructure projects under the automatic route. In the case of existing projects, FDI under the automatic route is permitted up to 74% and FIPB approval is required beyond 74%. FDI gained a prominent role in infrastructure financing in the recent years. Total FDI increased from US$5.03 billion in 200203 to US$27.02 billion.39 Over the next two years, India could attract FDI worth US$80 billion. The infrastructure sector as a percentage of total FDI increased significantly from around 4% in 200203 to around 16.7% in 201011.40 Going by these trends, FDI could significantly contribute to financing infrastructure in India.

2.3.5 Foreign Institutional Investment (FII)


The GoI is reportedly in talks with the regulatory authorities to allow infrastructure finance companies to issue bonds to foreign investors for the purpose of raising infrastructure finance in the country. The GoI had earlier raised the limit on FII investment in corporate bonds of duration of more than five years issued by companies in this sector.41

2.3.6 Multilateral agencies lending


Institutions such as the World Bank and the Asian Development Bank also provide funds to finance PPP infrastructure projects.

Asian Development Bank42


The GoI started a PPP initiative called Mainstreaming PPPs in India in collaboration with ADB. It commenced in 2007 to enable PPPs by focusing on all activities relating to various parameters such as process standardization, sector tools, development funds and projects development.43 ADB also provides support to India in structuring of potential PPP through its support in the form of Technical Assistance (TA).The support provided by the institution is in the following forms: Public sector loans to states or municipalities for financing grants/equity support Public sector loans to IIFCL that further grant funds for project companies Private sector loans to project companies Provision of guarantee to commercial lenders.

37 http://www.projectsinfo.in/News.aspx?nId=tqS7Qlvq+Qa2afymafoMpg== 38 L&T Infra launches tax-free bonds; mulls ECB route for funds, Business Line website, http://www.thehindubusinessline. com/industry-and-economy/banking/article2656496.ece, accessed 22 December 2011 39 Department of Industrial Policy and Promotion, India FDI Fact Sheet April 2011 Pg4 40 RBI Annual Report 2010-11 pg70 41 http://www.moneycontrol.com/news/business/govt-aims-to-ease-fii-entryinfra-finance-bonds-sources_579707.html 42 Country Operations Business Plan, ADB, December 2010 43 Theoretical Framework, ADB website, http://www.adb.org/India/PPP/about.asp, accessed 2 January 2012
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ADBs TA support for the Indian PPP program identified more than 30 pilot projects across challenging sectors such as urban, health, education, power distribution and the rural sector. It is supporting approximately 452 PPP projects across the country through the PPP cells.

World Bank
World Bank support intends to increase the availability of long-term financing for infrastructure PPP projects in India. It will help IIFCL to stimulate the development of a long-term local currency debt financing market for infrastructure in India. The International Bank for Reconstruction and Development (IBRD) has provided a Line of Credit (LoC) of INR58 billion to IIFCL for infrastructure projects. In addition, World Bank project (20092015) regarding IIFCL support is expected to bring around 150 new PPPs to financial closure, resulting in a four-fold increase in the amount of private capital available. Such a financing will support a number of PPP projects, mainly in the roads, power and ports sectors.

2.3.7 Insurance/pension funds


Pension funds can serve as an alternate source of finance for infrastructure projects as they provide long-term streams of income, constancy, predictable cash flows, lower default rates, diversification of project and societal benefits. The GoI plans to allow infrastructure companies to raise finances from both domestic and foreign insurance and pension funds by launching infrastructure debt funds (IDFs). IDFs can be setup as a trust or a company. To attract off shore funds into IDFs, the Ministry of Finance proposed that withholding tax on interest payment on borrowing by IDFs will be reduced from 20% to 5%. Also income of IDFs will also be exempt from income tax.

The government clears policy impediments to enable life insurance companies and pension funds, which have funds for 20-30 years at their disposal, to invest in the infrastructure sector.
Suggested by KC Chakrabarty, Deputy Governor, RBI (Source: The Times of India)

Setting up of India infrastructure debt fund


The GoI has laid down the format for INR500 billion infrastructure debt fund with 50% participation from foreign banks and multilateral agencies and the remaining being contributed by the state-owned FIs. The fund is expected to lend to any infrastructure project, which is based on PPP.

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2.4 Grants
Grant is the amount, which a project awarding authority provides to the project sponsor in order to support the financial viability of a project. Projects that are not commercially viable on their own require a fund support from the GoI. The GoI introduced Viability Gap Fund to provide catalytic assistance and support, especially for regions and sectors where PPPs are difficult.

Viability Gap Funding


Financing: Providing 20% of project cost Additional 20% can be allowed by the sponsoring authority, if required Transportation (rail, roadways, seaport, highways) Power/ Energy Urban infrastructure (water supply, sewage, solid waste management) Tourism (international convention centers) Special Economic Zones

Eligible sectors:

Current status: The total Viability Gap Funding (VGF) outlay for the Eleventh Five Year Plan (20072012) had been estimated at INR69.73 billion. In the FY1011 alone, INR4.80 billion was provided as VGF. The total approvals for VGF grant till now are INR82.89 billion for projects that have been granted In-principle/final approval. The actual level of VGF amount of these proposals will be known once the bidding process is completed.
(Source: Outcome budget FY1112, Ministry of Finance, pg 3)

The coverage of VGF scheme is also being considered for expansion in case of education and health sectors. Also, the state governments (such as UP Government) are undertaking development projects through VGF to make them profitable for promoters.

2.5 Private sector capabilities


Private sector is slated to play an important role in providing funds for development of infrastructure in the country. It is expected to finance 50% of investment of US$1 trillion in infrastructure projects in the country during the period 201217. The Planning Commission states that apart from the highway and power sectors, the following areas can also leverage Indias private sector capabilities during the Twelfth FYP.44 Civil aviation: Private sector contributed to the modernization of airport infrastructure. The new Mumbai airport is expected to be developed on PPP model. Private sector capabilities can also be leveraged for development of other airports in the country. Higher education: Private sector growth in higher education needs to be facilitated through utilizing innovative PPP models. Skill development: Upgrading of ITIs through the PPP model and participation of private sector in financing, service delivery, and training of trainers. Housing: Scope of affordable housing for weaker sections can be expanded through participation of private sector.

44 An Approach to Twelfth Five year plan, Planning Commission, October 2011


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Urban infrastructure: There are significant opportunities for private sector in the fields of urban renewal and management, drinking water supply, waste water recycling, treatment of municipal sewerage wastage and treatment or urban sewerage. Health care services: PPP arrangements can be utilized to finance health care services and to strengthen the secondary and tertiary health care systems in the country.

In India, majority of equity in infrastructure projects is contributed by project developers, with the next-largest contributor being the public sector. The private sector consortium along with public agency contributes equity depending on the terms of contract while debt is sourced from an outside agency. According to World Banks Private Participation in Infrastructure database, India stands second only to China in terms of number of PPP projects and is second to Brazil in terms of investments. PPP projects in India require a minimum shareholding commitment from sponsors of projects amounting to 51% of the equity up to second year of commencement of operations. The equity capital is entirely provided by project sponsors out of their existing balance sheets. There is also placement of minority equity stakes with Engineering Procurement and Construction (EPC)/O&M contractors besides strategic investors who are likely to benefit from the projects operations. A private player in a PPP project can be a private company, a consortium of private interests or a Non Government Organization (NGO). Private sector plays the role of designing, construction, operation and maintenance of the project. Private players are also responsible for providing equity of the PPP project. They, in turn, can tap the primary market to raise capital via an IPO issue. However, private developers have limited amount of capital, tied up for long term in infrastructure projects. They rely on private equity investors to decrease promoters risk. Private equity witnessed around 241 deals worth INR266 billion in the infrastructure sector in 1H11. Table: Capital raising of infrastructure companies and PE investments in infrastructure IPO/FPO Number of issues 4 9 12 21 3 INR billion 62 46 66 206 10 PE Number of deals 7 10 40 77 48 INR billion 4 28 115 341 184

2004-05 2005-06 2006-07 2007-08 2008-09

Source: Financing Infrastructure, IDFC Series

The investment is contributed by both domestic and foreign players. However, the domestic players dominate the scenario of PPP projects in India. Table: Prominent private players in Indian Infrastructure Domestic players Major domestic players Larsen & Turbo Transportation Infrastructure Ltd. Small domestic players DS Constructions Sadbhav Engineering Limited MSK Projects (India) Limited Total
Source: Shodhganga

Investment (INR billion) 35 3 21 2 65

Number of projects 10 4 11 15 40

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3.
PPP format BOT toll

Key industries/sectors for PPP

3.1 Highways
Road sector (405 projects valued at INR1,767 billion) accounts for 53% of the total number and 46% of the total value of PPP projects in India45. The road network in India comprises national highways (65,569 km), state highways (1,30,000 km) and district/rural/urban road (31,40,000 km)46. The contracts have primarily been awarded by competitive bidding and are largely in the BOT format (toll or annuity basis). Common forms of PPP in national highways Projects 48 8 24 Value (in INR billion) 93.3 23.5 46.8

BOT annuity Special Purpose Vehicle Projects


Source: Ministry of Road Transport & Highways

National highways: Significant progress has been made in the financing of ambitious National Highway Development Program (NHDP) covering a total length of 45,974 km and investment of INR2,200 billion up to 2012.

Status of State Highways Project status Completed projects Projects under implementation Projects in the bid process Projects where feasibility study has commenced Projects in pipeline for 2011-12 Total
Source: Compendium of PPP projects in state highways, Infrastructure website

No. of projects 73 62 41 44 38 258

State highways: With significant progress being made by the NHDP (in case of national highways) in which approximately 85% of projects are proposed to be under the PPP mode, growth model for state highways also holds potential. The state governments of Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Rajasthan and Madhya Pradesh are taking initiatives to promote PPP-based state highways.

Several government initiatives to enhance private sector participation (including PPP) in roads sector:
Viability Gap Funding in the form of capital grants subsidy of up to 40% of project cost 100% tax exemption in any consecutive 10 years out of 20 years Duty-free import of certain identified high quality construction plants and equipment Allowing FDI up to 100% in the sector and relaxed ECB norms Long concession period of up to 30 years Right to collect and retain toll Model concession agreements for state highways Standardizing of model bidding documents

45 PPP India database as of 31 July 2011 46 Ministry of Road Transport & Highways
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Investment requirements: The national highways constitute just 2% of the entire road network but carry approximately 40% of total road traffic indicating existence of significant potential to be unleashed. The investments worth INR4,902 billion have been planned as a part of the Twelfth FYP (compared to INR2,786 billion for the Eleventh FYP). The contribution of private sector is likely to range from INR1,667 billion to INR2,451 billion during the Twelfth FYP (based on an estimated 34% of private spending in the Eleventh FYP and envisaged 50% private spending in the Twelfth FYP).

3.2 Railways
The railways sector just experienced 4 PPP contracts valued at INR15.7 billion47. The projects have been contracted either by domestic competitive bidding or through negotiated MOUs. Due to the large size of the projects, the PPP projects in railways have to be supplementary or an extension to an existing large railway network. The recent PPP data48 indicates around nine projects being contracted so far in Gujarat (4), Orissa (2), Haryana (1), Andhra Pradesh (1) and Karnataka (1). The nine projects have BOT (or its variants) format (including one on DBFOT) PPP as the preferred BOT model. The INR9 billion metro links from Delhi Metro from Sikanderpur to NH 8, Gurgaon has the highest value of PPP railway contract so far. The PPP experience in the railways sector has proven to be a mixed bag so far. In projects with clear cut demarcation of responsibilities, the model has proven successful such as in the case of last mile port-connectivity (For instance, last mile connectivity to Mundra port with Palanpur-Gandhidham railway line; and rail link from Bhadrak to new port at Dhamra in Orissa). On the other hand, the railways has been facing problems in using the PPP route for manufacturing rolling stock and locomotives (two mega railway projects manufacture of Electric locomotives at Madhepura and Diesel Locomotives at Marhorwa have been on hold).

Some of the PPP project initiatives undertaken by the railways sector include:
Container Corporation of India Limited (CONCOR) for developing multi modal transport logistics infrastructure to support domestic container traffic Pipavav Railway Corporation Ltd. (PRCL) to provide broad gauge rail link to Port of Pipavav in Gujarat Rail Vikas Nigam Limited (RVNL) for Port connectivity works and improvement of the Golden Quadrilateral to meet future transportation needs

Investment requirements: As reported, the Indian railways (IR) require INR5.2 trillion of public investment during the Twelfth FYP (201217) of which the Indian Railway Corporation will raise INR1 trillion and the balance needs to be generated internally or through the form of PPPs. The IR announced its plans of restructuring to attract funding of INR500 billion49 to meet its expansion targets proposed for the Twelfth FYP. In order to carry out this, the railway is currently working out strategies to design and award PPP projects. The railways ministry has reportedly, plans of awarding projects on locomotive and coach factory and construction of a corridor for high-speed rail in Twelfth Plan period to generate the estimated investment.

47 PPP India Database as on 31 July 2011 48 PPP data, PPP in India Database, accessed 9 December 2011 49 In track change, Rly eyes R50k cr pvt investment, The Financial Express website, http://www.financialexpress.com/news/ In-track-change--Rly-eyes-R50k-cr-pvt-investment/840860/ accessed 19 December 2011
Accelerating public private partnerships in India ] 36

The projects proposed for PPP format include: High speed rail corridor Dedicated freight corridor Locomotive and coach factories Multi-modal Logistics hubs

This time around, we will indeed make a difference when it comes to PPP projects. Railways doesnt have enough resources on its own and the government cant keep funding our plans for ever. So, PPP is the only way forward,
Dinesh Trivedi Honble Railway Minister of India
Source: Financial Express (http://www.financialexpress.com/news/in-trackchange-rly-eyes-r50k-cr-pvt-investment/840860/0)

3.3 Power
The GoI has taken several initiatives over the last few years to promote participation from private players in the power sector. With a total of 56 projects valued at INR672 billion, the energy sector accounts for 18% of the overall value of PPP contracts awarded in various sectors.50 Power generation51: Power generation in India takes place primarily at the state level (46%) and Central level (31%), with private sector accounting for the rest. Participation of private players in the power sector is centered on thermal power generation, largely implemented through the BOO and BOOT models. Introduced in 2005, nine Ultra Mega Power Projects (UMPPs) are expected to rope in an investment of around US$3540 billion from the private sector. To increase investor confidence, UMPPs are awarded through competitive tariff-based bidding, and are being developed on a BOO basis. Power transmission: Since January 2011, transmission projects have also been awarded through competitive bidding under the BOO model. For instance, Sterlite has already been awarded three projects (amounting to US$40 million) for building power transmission systems on a Build-Own-Operate-Maintain (BOOM) basis.

Policy initiatives and incentives to encourage private participation:


Increasing foreign participation up to 100% under the automatic route New policy framework that includes: Electricity Act, 2003, National Electricity Policy 2006, Tariff Policy 2006, Rural Electrification Policy 2006, New Hydro policy 2008 and mega power projects 2008 Introduction of open access to transmission lines and distribution systems by licensees or consumers or generators Introduction of competition/UMPPs

Opportunities in the power sector52


The demand-supply gap has been widening at an alarming pace, primarily led by rapid growth in population and manufacturing activities. The country is expected a power deficit of around 10% during 201112 and by 2030, the total demand for electricity in India is expected to cross 950GW. The Planning Commission projected an investment of US$171 billion in the power sector during the period 201217, out of which the private sector is expected to contribute around US$60 billion. Currently, 100% FDI is permitted for generation, transmission and distribution through the automatic route.

50 PPP Project Status Report, Public Private Partnerships India database, 31 July 2011 51 Position paper on the power sector in India, Department of Economic Affairs, MoF (India), December 2009 52 India plans 16 Ultra Mega Power Projects to enhance power generation, Industrial fuels and power website, http://www. ifandp.com/article/0010818.html
37 [ Accelerating public private partnerships in India

Renewable energy holds significant opportunities in generation as well as manufacturing activities, largely due to underutilized resources and lack of political will. The GoI has an ambitious Power for All plan, which aims for complete electrification by the end of 2012. To implement this initiative, significant participation from the private sector is required. The option of PPP in nuclear power generation is also being explored, though FDI in the sector is not permitted yet.

The scope for investment in the power sector over the next few years is well over $300 billion and given our large expansion programme in this sector, we would definitely need and welcome a large amount of foreign direct investment.
Sushil Kumar Shinde Honble Union Power Minister
Source: IFANDP (dated April, 2011) (http://www.ifandp.com/article/0010818.html)

3.4 Urban infrastructure


The urban infrastructure sector witnessed a relatively significant number of PPP contracts (152) valued at INR294 billion53 although it accounts for only 8% of total value of contracts indicating a large number of PPP projects with small contract value. The GoI recognizes the importance of urban infrastructure in the changing dynamics of Indian population as it is expected that urban population will reach 600 million by 203154. The GoI launched the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) to establish a framework and provide incentives to promote PPP to states and urban local governments. However, the sector still witnesses obstacles to attract private investment as there is lack of adequate legal framework at the state and city level and institutions and key stakeholders do not have the capacity and knowledge to carry out project on PPP basis.

Prominent PPP project initiatives in urban infrastructure:


24 X 7 water supply project for Nagpur city to provide uninterrupted water supply to consumers; model slated to be emulated in many other cities Water supply and sewerage project in Kolkata to develop water supply-cum-sewerage for the township of Sector-V of Salt Lake Integrated solid waste management project in Chennai to meet the requirements of solid waste management City bus service of Surat to cater to the need for public transport system for the congested city of Surat

53 As per PPP in India database (as on 31 July, 2011) 54 Report on Indian Urban Infrastructure and Services, The High Powered Expert Committee (HPEC) for Estimating the Investment Requirements for Urban Infrastructure Services, March 2011, page XXI
Accelerating public private partnerships in India ] 38

One of the most critical issue in urbanization is efficient transport system and a recent study shows that metro rail answers the transit needs of urban areas most effectively and has the potential to bring all round benefits to business, to environment and multiple benefits to people in all walks of life55. A new metro project is being taken up in Hyderabad for 71.16 km., at an estimated cost of INR123.32 billion, besides the ongoing metro projects of Bangalore, Chennai, Kolkata (East-West Metro corridor) and Mumbai. Also, metro rail projects have received in principle approval forJaipur,Patna, Pune, Kochi and Lucknow. Urban infrastructure investment requirement: INR39,186 billion (2012-31)
1% 3% 3% 5% 6% 8% 8% 44% Urban roads Urban transport Renewal and redevelopment including slums Water supply Sewerage Storm water drains Capacity building Trafc support infrastructure Solid waste management 10% 11% Other sectors

The Central and state governments will require funds to fulfill the demand for urban infrastructure. The deficit can only be met through involving private players in the sector. Ministry of Urban Developments strategic plan states that PPP can play a prominent role in the fields of solid waste management functions such as door-to-door collection, street sweeping, transportation and treatment; e-goverenance and strenghtening of urban local bodies (ULBs). The ministry also envisions setting up of a PPP urban infrastructure fund to encourage PPP to supplement government efforts.
Source: Report on Indian Urban Infrastructure and Services, The High Powered Expert Committee (HPEC) for Estimating the Investment Requirements for Urban Infrastructure Services, March 2011, page XXV

Government will encourage PPP model for developing infrastructure like water supply and municipal solid waste management in the cities across the country
Kamal Nath Honble Urban Development Minister of India
Source: The Hindu (http://articles.economictimes.indiatimes.com/201112-20/news/30538042_1_ppp-model-solid-wastemanagement-urban-local-bodies)

55 Study on Urbanizing India & Mega Metro Network Vision for the Emerging Cities of India-2030 http://www.assocham.org/ arb/general/Metro Study_Update.pdf
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4.

Recommendations

Policy recommendations Setting up independent institutional structure for handling PPP program Development of sector-specific regulatory mechanism Dissemination of Information on PPPs

Project development recommendations Capacity building measures for the Government Role of consultants Project development activities Optimal allocation of risks, authority and accountability Selection of private sector partner

Financing recommendations Developing corporate bond market Encouraging participation by pension funds and insurance companies Stimulating PE investments in infrastructure sector Hedging mechanism for external borrowings and investments

4.1 Policy recommendations


An independent institutional structure for handling of PPP program: With the express objective of meeting the PPP targets, an independent institution should be set up to act as nodal agency with the responsibility of creation of PPP data base, best practices, model documents for all sectors and coordination with all departments. Development of sector-specific regulatory mechanism: In order to protect the interest of users, private developers, the social community and lenders and sector-specific regulators should be established. The independent regulators can make the dispute resolution mechanism effective especially in cases where public authority is also an operator, for example in railway, where the Indian Railway is the concessioning authority and at the same time compete with private train operator (through Concor). Dissemination of information on PPPs: There exists a need for the creation of specific information policy for PPPs wherein all bid documents, feasibility reports and current status of the projects are published on a dedicated contract portal. The international policy models such as Partnerships Victoria (Australia) can be referred to in this case.

4.2 Project development recommendations


Capacity building measures for the government: There is a need for capacity building at the Centre and more particularly at the state governments and local bodies level. The PPP nodal agencies at the Centre and state level should take the responsibility of creating awareness about the PPP program in all departments and wherever required, the services of the technical and financial consultant for training of the staff should be taken. The multilateral and bilateral agencies can also provide technical and financial assistance for the PPP projects and to provide best global practices to be followed in PPPs. Role of consultants: For development of PPP project the role of technical and transaction advisors is most critical. Hence, it is imperative the utmost care is taken in appointment of consultants. Generally the consultant fee is a small proportion of the project cost and the value addition by a good consultant could be much higher. For the success of the project, consultants quality is more critical as compared to the cost implications. Hence, the preferred model for selection of the consultant should be either quality based or quality-cum-cost based with higher weightage to quality.

41

[ Accelerating public private partnerships in India

Project development activities: The lack of project preparation by the relevant development authority such as, inaccurate scope definition, land acquisition, utilities, environment clearance, no public consultations etc. can result in poor bid response and also at the execution stage delays in commencement of construction, compromises on the design quality to reduce costs or attempt to change scope resulting in abnormal increase in project cost leading to disputes. The authorities should try to get all approvals and latest feasibility reports with technical scope of work before awarding concessions. Optimal allocation of risks, authority and accountability: There is a need for effective distribution of responsibility, costs and risks between the public and private sector. In many cases, due to lack of proper project development, public authorities are not able to fulfill their responsibilities such as land acquisition, environmental clearance, state support etc., due to which project gets delayed. However, even in cases where government is not able to fulfill its part, the private sector has to suffer the losses due to delay, as there is no appropriate framework for compensation. Selection of private sector partner: To get best technical and financial offer, the authorities should start interaction with private sector from the project development activities stage, and concerns of the private bidders should be taken care of in the best possible way. For selection of private partners there is an excessive focus on highest financial bids. The speculative bids can hamper the project in the long run, as the developer will find it difficult to get funding and service the obligations. The authorities should evolve a policy on the speculative bids and other selection methods such as competitive dialogue process for complex projects should also be used.

4.3 Financing recommendations


Developing corporate bond market: There is an immediate need to develop the corporate bond market. The proposal to set up Infrastructure Debt Funds (IDFs) is a step in the right direction. Further, in order to jumpstart the corporate bond market in infrastructure projects, the large Indian commercial banks while funding the project can compulsorily fund some part of debt by subscribing to bonds. These bonds can be listed on exchanges. The large commercial banks and NBFCs can also play the market makers in infrastructure bonds for initial years. Encouraging participation by pension funds and insurance companies: Given the fact that the commercial banks are concerned about asset liability mismatches and concentration risks, the GoI should alternately consider domestic institutional investors for investment in infrastructure. The GoI should make the investment policies and regulatory guidelines of the insurance companies and pension funds more conducive and flexible toward investing in the infrastructure sector. The regulations such as rating requirements and treatment of investments by insurance companies in infrastructure sector can be reviewed. Stimulating PE investments in infrastructure sector: Global and domestic private equity funds have the capability to provide finance for infrastructure growth in India. To attract PE funds for bidding in infrastructure projects, the eligibility criteria should be suitably amended, and apart from the financial networth, the Funds under Management for PE and Venture Capital funds should also be included. Hedging mechanism for external borrowings and investments: The Indian companies have been raising external commercial borrowings for infrastructure projects. IDFs also aim to tap international insurance and pension funds for investment in infrastructure in India. The hedging of foreign currency exposure eats up a large part of interest rate arbitrage through foreign funding. The GoI can use a part of its foreign currency reserves to give a less expensive currency hedging mechanism for foreign currency borrowings and investments in the infrastructure space.

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Notes

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44

FICCI contact
Abdul Salam Deputy Director FICCI Industrys Voice for Policy Change Federation House, Tansen Marg, New Delhi 110 001 Email: abdul@ficci.com Tel: + 91-11-2376 5082 Fax: + 91-11-2332 0736 Mobile: + 91-99 998 84 007 Web: www.ficci.com

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