Opportunities and Challenges for Public-Private Partnerships

in India’s Urban Infrastructure Development1

Growing Demand for Urban Infrastructure

It is estimated that India’s urban population will reach over 40% of total population by 2030 from the
current 28% (Figure 1). Moreover, urban areas in India have been the key drivers of the manufacturing-
and services-led economic growth. However, poor infrastructure, including urban infrastructure, is costing
3% to 4% of India’s GDP. Infrastructure investment requirements until 2010-2011, which includes
investments in the transport, telecommunications, energy, and urban sectors, will be $425 billion. Of this
total, there is a $123 billion anticipated financing gap which could be addressed by the private sector by
increasing the current private sector investments from 1% to 3% of India’s GDP.
The urban infrastructure investments have to be ramped-up to address the gaps in urban infrastructure, in
addition to meeting the urban basic service requirements of the burgeoning urban population. India’s
urban infrastructure needs are enormous, which are estimated at around $28 billion up to 2011-12. In
addition to the shortfalls in the urban infrastructure development, severe inefficiencies hamper the
delivery of basic urban services, especially in water supply and sanitation. Recognizing the need for
accelerating urban infrastructure development, the Government of India has launched in 2005 the
Jawaharlal Nehru National Urban Renewal Mission (JNNURM), a reform-based, part-grant driven
program of Rs 50,000 crores ($11 billion) outlay over a seven-year period.

Figure 1: Growing Trend of Urban Population in India

Total Population in Million Percentage urban
1,600 45

1,400 40

Percentage of urban population

35
Total Population in million

1,200
30
1,000
25
800
20
600
15
400
10

200 5

0 0
1950
1955

1960
1965
1970

1975
1980

1985
1990
1995

2000
2005

2010
2015
2020

2025
2030

Year

Source: U.N. population statistics

Government of India’s Initiatives to Support Public-Private Partnerships

In the recent past, the Government of India has initiated a number of steps to promote public-private
partnerships (PPPs) for infrastructure development, as follows: (i) establishment of a PPP cell in the
Department of Economic Affairs in the Ministry of Finance to administer various proposals and coordinate
activities to promote PPPs; (ii) setting-up of the India Infrastructure Finance Company Limited to provide
long-term finance to infrastructure projects; (iii) creation of a viability gap fund as a special facility to
support the financial viability of economically justifiable infrastructure projects which are not deemed
commercially viable in the immediate future ; (iv) formed an inter-ministerial group to determine pre-
qualification of bidders under PPP; and (v) preparation of PPP toolkits and model concession
agreements.

1
This concept note was prepared by Sekhar Bonu, Sr. Urban Development Specialist, based on a Consultation
mission conducted last April 2007 in India for a proposed ADB technical assistance to promote public-private
partnerships for urban infrastructure development.

1
Status of Private Sector Investment in Water Supply and Sewerage in India
There are few successful PPP in urban infrastructure that involves significant private capital infusion in
India, especially in water supply and sewerage. Of the more than $51 billion private sector investments in
infrastructure since 1990, only $2 million has been invested in water supply and sewerage (Table 1).

Table 1. Total Private Sector Investments in India’s Infrastructure (US$ million)

Year of Water and
Energy Telecom Transport Total
Investment sewage
1990 0 0 2 0 2
1991 614 0 0 0 614
1992 13 0 0 0 13
1993 1,051 0 0 0 1,051
1994 311 97 125 0 533
1995 1,008 683 0 0 1,691
1996 1,553 1,229 108 0 2,890
1997 970 3,827 405 0 5,201
1998 1,066 673 296 0 2,035
1999 2,500 1,045 467 0 4,012
2000 2,357 682 100 0 3,139
2001 345 3,445 211 2 4,004
2002 380 4,615 558 0 5,553
2003 825 1,968 505 0 3,298
2004 4,144 3,731 1,117 0 8,992
2005 755 6,201 1,449 0 8,405
Total 17,891 28,195 5,343 2 51,432
Source: World Bank, PPIAF database

Of the 172 infrastructure projects executed with private sector participation, only two have been in the
water supply and sewerage sub-sector. Globally, the private sector has invested $50 billion in water
supply and sewerage ($23 billion investment in East Asia and Pacific, $21.5 billion in Latin America, $146
million in sub-Saharan Africa) and yet only $2 million has been invested in South Asia. However, PPP
mode of urban basic service delivery is more prevalent and successful in urban solid waste management,
while PPPs in urban mass transport is, by and large, uncharted territory.
Challenges to PPPs in Urban Infrastructure Development
The urban sector2 requires huge investments in urban infrastructure and new management models that
promote efficient, effective and good quality basic urban services on a sustainable basis should be
introduced. The twin objectives of accelerating urban infrastructure investments and quickly scaling-up
new performance-based management models can be achieved through well conceived, structured and
transparently-executed public-private partnerships (PPP).
Based on the past trends of private urban infrastructure investments, it is safe to assume that there are
serious barriers for private sector investments in urban infrastructure in India, more so in the critical water
supply and sewerage sub-sectors. A quick review of the relevant literature indicates a number of reasons
for reluctance on the part of the private sector to assume commercial risks in majority of the urban sub-
sectors. Most of the urban sector investments involve third tier of governments, which increase the
perceived political risks for private sector investments. Historically, water supply and sanitation services
have been seen as “public goods” that need to be provided at affordable prices (meaning nominal low
costs). The low water and sewerage tariffs make water supply and sewerage projects non-bankable
which require general revenue support even for operations and maintenance (O&M). An exception,
however, is the industry which has a long history of paying rational tariffs. Except for a minority of

2
For purposes of this paper, the following urban sub-sectors are considered: urban water and sanitation, solid
waste, urban transport and urban housing.

2
municipalities, the general financial status of most municipalities is precarious. All put together, the urban
infrastructure sector is seen as a very high-risk sector, leading to anemic inflows of private capital.
Urban sector project development and execution are largely done at the state or urban local body (ULB)
level. In the past, the financing of urban infrastructure projects at these levels has been largely through
government budgets, which also supported O&M expenditure of assets that were developed. Direct user
charges or tariffs are largely unable to meet 100% of O&M costs. Hence, the financing of the urban sector
projects also have to address both the “real” cost of operations of urban infrastructure services, as well as
in the development of financial models that can provide some bankability assurance to prospective
financiers of such projects. This makes proper structuring of a project important where the commercial
and political risks are appropriately allocated to parties which can bear the identified risks most efficiently.
Private investors should be assured of adequate returns on their invested capital that is commensurate to
the perceived risks that the private sector would be undertaking.
PPPs are very different from the traditional procurement and project execution process followed in the
urban sector by state and ULBs in the past.3 Factors that affect the desirability of PPP include (i) nature of
project, (ii) risks inherent in the project, (iii) status of the project, (iv) speed of implementation, (v)
availability of revenues/ application of user charges, and (vi) affordability. Globally, a variety of urban
projects have been amenable to PPP mode of execution, which include water supply and sanitation, solid
waste, urban transport, toll roads within urban limits, and urban housing.
PPP is a complex process that requires different skills and experience mix, including complex legal
contracts.4 Globally, governments engage project officers who meet rigorous standards for competency to
supervise the PPP process, including feasibility study and other consultant inputs. The project officer’s
responsibility spans the entire PPP project life cycle, and his/her job is to ensure that the process runs
smoothly, on time and within the budget. One of the important tasks of the project officer is to hire
transaction advisors: individuals or firms with expertise in the field of PPP who act as third party advisors
to government throughout the process of PPP project design, procurement, negotiations, and contract
award. Depending upon the nature of the project, the firm assembles a multidisciplinary team of
individuals with expertise in the fields like economics, law, engineering, human resources,
communications, accounting, and financial management.
Opportunities for Expanding PPPs in Urban Infrastructure Development
With the launch of the reform-driven and part-grant financed JNNURM, both the macro-environment as
well as project-level microenvironment is becoming more and more congenial for public-private
partnerships (PPPs) in the urban sector. Many of the JNNURM-supported reforms are expected to create
favorable governance and institutional framework for private sector to feel more confident to venture into
the urban sector. A combination of part-grant financing by the JNNURM, which is likely to increase the
bankability of a number of large urban infrastructure projects, and the financing gap/needs arising from
the state- and city-level contribution for the JNNURM projects is likely to create demand for private capital
as well as greater interest from private sector in the urban sector. However, to encourage PPPs, it is
important to develop ‘bankable’ or financially-sustainable models at a project level.
Based on the nature of the project, PPPs have evolved in different forms with increasing private sector
risk, responsibility and financing starting at the low risk to high risk as follows: service contracts (low risk);
management contracts; leasing; joint ventures and partnerships; build-operate-transfer, concessions; and
finally, build-own-operate and divestures (high risk). Many of the above forms of PPP are feasible where
tariffs or user fees meet the full recovery of the cost of service including O&M and depreciation. In the

3
In the case of PPP: public sector purchases services and not assets; public sector specifies service outputs; private
sector provides the design, build, operate, and possibly finance; risks are identified and placed with party best able
to manage them; private sector is paid based on performance; and the core objective is to achieve “value for
money”.
4
The contractual provisions in all PPP contracts are complex and include, among others, the following: (i)
requirement for performance bonds, (ii) insurance requirements, (iii) delay provisions, (iv) force majeure, (v)
governmental action, (vi) government warranties, (vii) private sector warranties, (viii) change in the law, (ix)
variations, (x) termination, (xi) indemnification, (xii) intellectual property, (xiii) claims, (xiv) financial security, (xv)
dispute resolution, (xvi) partnership management, (xvii) compliance with all laws, (xviii) personnel, and (xix)
conditions precedent.

3
urban sector, full cost recovery is not immediately possible in water supply and sewerage due to a variety
of factors, including the essential nature of the services and poverty. Globally, governments in similar
situations have been increasingly experimenting with forms of PPPs that bring in private investments but
also allow services to be subsidized through output-based-aid, which use explicit performance-based
subsidies to deliver basic services where policy concerns would justify public funding to compliment user
fees.
Key Areas to Strengthen Urban Infrastructure PPPs5
Given the issues noted above, technical assistance in three key areas may lead to the eventual
structuring of bankable urban projects to be able to attract private sector capital and/or strategic interests.
ULB Capacity Building. ULB level capacity building will focus on improving the awareness of selected
city officials and political executives in commercial and operational issues impacting PPP development.
Commercial and operational issues are likely to include understanding the ‘true’ cost of operations, user
charge structures, alternative revenue generation possibilities (such as carbon emission credits,
recycling, etc), credit ratings, debt leveraging, development of key performance criteria such as loss level
reductions, and others. The TA intends to develop PPP specialists in selected cities and states who will
also be trained in different PPP modalities and in evaluating, implementing and monitoring PPP contracts.
An assessment will also be carried out to match sub-sectors (e.g. raw water treatment, water distribution,
wastewater treatment, solid waste collection, landfills, sewerage network, collections of garbage,
metering, collections of tariffs, bus rapid transport systems, mass rapid transport systems, traffic
management systems, and others) to the most achievable PPP modalities for that particular city or ULB
given a host of considered criterion. Interactions including visits with selected municipalities or PPP
projects will be planned under this component.
PPP Impediment Audit and Mitigation Road Maps. Legal, regulatory and policy issues that might
prohibit private sector (including foreign) investments (funds and/or strategic and operational interests)
flowing into the urban sectors or sub-sectors will be identified, and where possible, mitigating strategies
will be laid out. Stakeholder concerns will be identified under this activity as well as suggestions made for
mitigating concerns, where possible. The stakeholders will include the civil servants of state and ULBs,
civil society, nongovernment organizations, political executives, private sector, financial intermediaries,
and the urban poor. On the funding side, analysis to identify key obstacles to the provision of long tenure
competitive finance to urban projects as well as potential collaborators for funding bankable projects and
probable lending criterion will be explored. Based on an agreed PPP impediment audit and mitigation
framework, the sub-sectors and urban projects that are amenable to PPP structuring would be identified
for immediate support. Workshops and training programs will be supported for awareness building of PPP
impediments, and for evolving time-bound executable mitigation road map with support of all
stakeholders, especially the private sector.
Demonstration PPP Projects. In an attempt to create some good models, demonstration projects will be
identified and implemented subject to all regulatory approvals. Demonstration projects are expected to be
no more than 4-6, most probably from identified list of states, and will be structured in parallel to the other
TA activities. The ULBs will be provided support for identification and implementation of demonstration
PPP project for which the TA will provide a dedicated PPP project officer and PPP transaction advisory
support. It is expected that cities will work with the TA consultants in developing bankable project models
that will be sustainable on their own without recourse to guarantees from the state or central governments
and will be able to attract private sector investments. Issues such as tariff reforms, alternative revenue
lines, shadow tariffs, escrow structures, leveraging JNNURM grant funds for good debt / equity structures,
creation of special purpose vehicles or incorporated entities, amongst others, will be structured in the
development of the project. PPP modalities will be considered in the structuring with the intention of
bidding out the projects to private sector. Given the importance of long term finance in establishing more
bankable models, and the necessity for catalyzing private sector investments through taking risk capital
positions, ADB’s sub-sovereign loan products as well as ADB’s private sector funding window, among
others, can also be considered as part of the project structuring. Collaborations with domestic funding
institutions, such as the IIFCL, will be actively sought to ‘crowd-in’ domestic funding institutions.

5
ADB proposed a technical assistance to strengthen urban infrastructure PPPs in India as described.