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Public Private Partnership in Urban Services

- special reference to tamilnadu on Solid Waste Management Projects


V.Murugesan Asst Executive Engineer O/o the CMA,Chennai,Chennai-5 vmurges@yahoo.co.in

Evolution of New Economic Policy, 1991 -Economic Reforms

The Economy of India is the ninth largest in the world

by nominal GDP and the third largest by purchasing power parity The independence-era Indian economy (before and a little after 1947) was inspired by the economy of the Soviet Union with socialist practices, large public sectors, high import duties and lesser private participation characterizing it, leading to massive inefficiencies and widespread corruption. However, later on India adopted free market principles and liberalized its economy to international trade under the guidance of Dr.Manmohan Singh, who then was the Finance Minister of India under the leadership of P.V.Narasimha Roa, the then Prime Minister.

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

to procure a $1.8 billion IMF loan. The IMF bailout wounded the pride of a country that had strove above all for self-sufficiency through its post independence socialist policies. The bailout announced to Indian policymakers and the world the countrys policy failures. In response to the crisis, the government immediately introduced stabilization measures to reduce the fiscal deficit. The government initiated a reversal of the historic policies of regulation and government intervention Reforms like market determined exchange rates, liberalization of interest rates, reductions in tariffs, and a dismantling of the License Raj. Efforts to privatize and introduce competition were

Economic Reforms
Financial Sector
leads competition - private banks and FI which - Tax on e commerce, VAT, - opening borders to trades- Industrial Policy-Centrally driven - Govt Industries privatised

Fiscal Reforms
Reduction of subsidy

Investment Sector
EXIM Policy

Industrial sector
planned to market economy, SEZ,

Infrastructure Reforms - power,ports,roads,telecom,

Labour Reforms Agricultural reforms

Privatisation Reforms



Public-Private Partnership (PPP) describes a government service or private business venture which is funded and operated through a partnership of government and one or more Private Sector companies. Public Private Partnership is commonly used to refer to a wide range of collaborations between national and subnational governments, and the private sector, in order to supply infrastructure or deliver certain services, providing public infrastructure, community facilities and related services that have traditionally been provided exclusively by the government Public Private Partnership is an arrangement between a public (government) entity & a private (non-government) entity by which services that have traditionally been delivered by the public entity are provided by the private entity under a set of terms and conditions that are defined at the outset

Characteristics of PPP

The public entity should have the enabling authority to transfer its responsibility enabling legislative & policy framework, administrative order the instrument of transfer is through a contract There is usually a significant transfer of responsibility to the private entity and usually includes financial investment obligations For a payment to the private entity directly by users or by the public entity such that - a significant portion of project revenues and/ or the payments, are conditional on achieving pre-specified levels of performance The nature of the relationship is usually long-term Concession

Optimal Risk Allocation

Demand Risk is partly mitigated through provisions for

change in duration of concession both upside and downside variety of non-compete clauses of user charges to inflation investor

Competition from other suppliers limited through a

Escalation in input costs mitigated through indexation

Construction and performance risk to be borne by the Political risk and force majeure risks borne by the


Risk Sharing

A risk is defined as any factor, event or influence that could threaten the successful completion of a project in terms of time, cost or quality In a conventional BOQ based implementation : risks planning, design, construction, environmental & social, physical damage and financing are evaluated Commercial risks revenue or maintenance costs, quality, safety of users and general regulatory risks not critically evaluated this is critical though to a private investor PPP involves sharing of risks risk allocated to the party best suited to manage them

Risk Sharing
Risk Type 1 Technology Performance 2 Revenues Description Existing technology unproven in terms of revenue service Customer willingness to pay for service unknown Traffic/requisite parameters and revenue below projections Allocation Private Mitigation Warranties

Public and Private

- Competing/alternative Projects - Excessive capital Maintenance - Insufficient revenues to fund ongoing O&M - Investment grade - Revenue studies accepted by rating agencies -Adequate debt coverage ratios - Adequate reserves - Credit enhancement, Insurance - Toll adjustment flexibility - Careful budgeting processes and O&M controls Non-compete protections

Risk Sharing
Risk Type 3 Completion Description Cost and Schedule Overruns Allocation Private (Constructi on Contractor) and Public Mitigation - Use of fixed price / guaranteed maximum contract - Adequate contingency funds - Force majeure insurance - Design and Construction Management/ Oversight by Public Partners (Which may be outsourced) - Financially viable private partners - Persuasive and supported arguments for the Project. - Early regulatory agency involvement. - Public relations and Citizen/policymaker education campaign - Community engagement and buy in strategy.

4. Political

Uncertainties on public policy and change in law. Regulatory uncertainties. Funding Support

Public and Private

Risk Sharing
Risk Type 5. O&M Costs Description Excessive costs of Operation Excessive capital maintenance expenditures Unpredictability of Costs Allocation Private (O&M Contractor) Mitigation -Non-recourse financing - Minimum guarantees - Toll adjustment flexibility - Credit enhancement insurance. - Careful Budgeting processes Capital asset replacement assurances. Warranties, incentives, and penalties - Financially viable Private Partners. - Use of fixed price/ guaranteed maximum pricing, with escalations and adjustments overtime.

Infrastructure Deficit in India

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

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

Inadequate berths, rail / road connectivity and draft are

Inadequate capacity: Runways, aircraft handling capacity,

parking space & terminal buildings

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

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

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

losses; absence of competition; and inadequate private

Demand Potential
Ports: 877 million tonnes of traffic by 2011-2012 15.5% growth expected in containerized traffic Airports: Passenger and cargo traffic slated to grow at over 20% annually Railways: Freight traffic is growing at close to 10% and passenger traffic at close to 8% annually Power: 13% peaking and 8% average shortage of power annually Telecom: Rural penetration less than 4%

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

Average Revenue per User- there is comfort in numbers Power: High revenue recovery recorded in recent times with 100% recovery in many cases High economic growth rate has translated into a larger disposable income and larger spending capacity Willingness to pay exists provided delivery is of good quality

Why PPPs?

Fiscal reasons - Inadequacy of resources leveraging on lower government funding Optimal transfer of risks to the entity best suited to manage the risks Design, Financing, Construction, Operations and Maintenance all are commercially understood and manageable Change of scope, defective designs, time overrun, cost overruns, leakage of revenues, high maintenance costs Transfer of responsibilities efficiency gain Appropriate technology, innovative design solutions, project management, better collection practices, life cycle costing

Why PPPs?
Maximizing investment Budgetary constraints Development of assets of world class

standards Improved maintenance and management of assets Provision of efficient services Affordable prices through greater competition Risk Sharing

Other Reasons

Enhanced bankability more rigorous project preparation Incentive to deliver whole life solution not just asset creation Focus shifts to service delivery integrated with construction, measurement of quality & payment linked to service delivery Acceleration of programme time-bound implementation Better overall management of public services transparency in prioritisation, selection and ongoing implementation

PPP Options

Works & Management & Services Contracts Maintenance Contracts

Operation & Maintenance Concessions

Build Operate Transfer Concessions

Full Privatization

Extent of private sector participation


BOT - Build Operate Transfer

BOOT - Build Own Operate Transfer

BOO - Build Own Operate BOOST - Build Own Operate Share Transfer BOLT - Build Own Lease Transfer DBFO - Design Build Finance Operate OMT - Operate Maintain Transfer

Types of PPPs
Financially free standing projects Role of public sector - planning, licensing & statutory

procedures; no financial support/ payment by government Revenues through levy of user charges by private sector Toll Roads and Bridges, Telecom services, Port projects, Service Sectors which requires technical expertiseProcessing fee/tipping fee model STPS, MSWM Projects (Processing and Disposal)

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

or periodical charge (annuity) by Government for providing services; payment against performance no/partial demand risk transfer Risks associated with asset creation (including design) and O&M transferred to private sector Accountability to users for service - retained by Government Roads - annuity/ shadow tolls, power under PPAs.

Features of PPPs - 1
Genuine risk transfer All risks pertaining to design, building, financing and

operation transferred to the private entity Transfer of demand risk depends on the extent to which the private sector can influence usage
Output based Specifications Contracts specify the service outputs required rather

than asset configuration/mode of service delivery Emphasis on type of service & performance standards Private entity incentivised to deliver outputs using innovation in design, construction, operation and financing

Features of PPPs - 2

Whole life asset performance Private entity takes responsibility & assumes risk for the performance of the asset and delivery of service over a long term Payment for Performance Revenue/ Payment to private entity is subject to performance in relation to specific & quantified criteria enshrined in the contract

Value for Money

Transfer of risks/ responsibilities under a PPP structure should result in better value for money for the user Telecom sector mobile phone tariffs from Rs. 16/per minute to Re.1/- or 50 paise per minute Tolls paid offset by savings in direct & indirect costs and value of time Annuity payments public sector comparator value for money Reduction in environmental risk Efficiency gain Savings in cost of project versus overrun Savings in operating costs Revenue maximization leakages Carbon Credit

Broad Roles & Responsibilities

Government Agency Providing Project Site/ Assets Environmental Clearances Supporting Infrastructure and Utilities Specific Obligations (e.g. dredging) Regulatory Functions

Concessionaire Designing, Engineering, Financing Construction/ augmentation / upgradation Operation and Maintenance Payment and other obligations Transfer of assets at expiry of concession period
In exchange the concessionaire has the right to receive

revenue tolls or annuity or any other mechanism

Other Key Elements

Bankability Issues Concessionaires ability to assign rights Lenders step-in rights Charge on project assets and enforceability Critical Events and consequences Force Majeure Events of Default Remedial process incase of default/ events leading to

termination Protection of debt in the event of termination Supporting Provisions Dispute Resolution Mechanism Re-negotiation in good faith Termination as a last resort Preferential treatment in re-bidding

What a PPP is not & what it is

PPP is not privatisation or disinvestment PPP is not about borrowing money from the private sector. PPP is more about creating a structure in which greater value for money is achieved for

services through private sector innovation and management skills delivering significant improvement in service efficiency levels This means that the public sector no longer builds roads, it purchases miles of maintained highway no longer builds prisons, it buys custodial services no longer operates ports but provides port services through world class operators No longer builds power plants but purchases power

Partnership in Practice
Partners not adversaries background of mistrust Project should be the focus win-win for both the

Independent agencies Independent Engineer - useful

during both implementation and operations

Government retains ultimate responsibility uses the

private sector to deliver infrastructure services of

specified standard
Private Financing can significantly leverage public


Basic Features

Conventional financing is asset based debt provided is usually a percentage of project cost linked to the value of asset cover Project Financing is cash flow based - on the estimated cash flows that are generated by the project A financing structure that relies on future cash flows of a project as the primary source of its servicing & repayment, with only the project assets, rights and interests being the security There is little or no recourse to the sponsors Usually large projects - investments are huge & costs of non-completion/ unsuccessful operations - affect many Little tangible security

Project Appraisal

An elaborate project appraisal process analysis of risks and specification of return expectations (pricing) from investing in the project Cash flow projections based on technical, market and financial analysis Risk mitigated through project contracts and financing agreements or consciously taken after evaluation Structured financing to meet the characteristics of the project Security and documentation - elaborate Project monitoring and compliance

Key Project Contracts

Concession Agreement Project Site Licence Agreement Shareholder/ JV Agreement Substitution Agreement / Direct Agreement State Support Agreement Engineering Procurement Construction (EPC )Contract O&M Contract Trust and Retention Agreement

Main Provisions
Concession Agreement Terms and conditions of undertaking the project

Obligations of the parties

Tenure of the contract Default provisions and remedies

Provision for substitution

Force Majeure provisions and remedies Termination and compensation payments State Support Agreement Support during implementation Protection from a competing facility

Other Key Contracts

EPC Contract Price Overrun Time Overrun LDs and Bonus provisions Performance security Standards and Specifications O&M Contract Operating Standards Costs Quality of Service Penal provisions

Financial Analysis

Elaborate Financial Model capturing these risks base case analysis Establishes breakeven levels of traffic/ tariffs Assessment under various scenarios sensitivity analysis Demand / Traffic Tariff / Tolls Inflation Maintenance Costs Financial Ratios Debt Equity Ratio cash flow impact & level of promoters funds Internal Rate of Return (project/ equity) Debt Service Coverage Ratio Loan Life Ratio Project Life Ratio

Financing Documents

Facility Agreement Financial Terms Project Risk Mitigating Conditionalities General Conditions Inter-Creditor Agreements Security Documentation

Basic Structure

Concession Agreement Financing Agreements

Annuity/ Tipping fee

JV Partner


Project SPV


Shhldrs Agmnt

EPC Agmnt

Main Sponsor


Indep Eng

Transaction Structure
Sponsors Advisers Invt. Bankers, Technical & Legal Advisers Financial Investors Equity / Sub-Debt Users Off-take Contracts TRA/Escrow Agreement EPC Contract Debt Substitution Agreement EPC Contractor Equity Concession / Licence Agreement Government Advisers Invt. Bankers, Technical & Legal Advisers

Insurance Companies Insurance Policies

Project SPV

O&M Contract

O&M Operator

TRA Agent


Governance Structure for PPPs

Constitution of a Committee on Infrastructure (CoI)

- Prime Minister is the Chairperson - Ministers of Infrastructure Ministries; Finance Minister and Deputy Chairman, Planning Commission are members

Empowered Sub-Committee of CoI chaired by Dy. Chairman, Planning Commission and represented by Ministries Secretariat for CoI in the Planning Commission Ministries retain their role but work closely with CoI to develop & implement the vision for world-class infrastructure Greater reliance on inter-ministerial & inter-disciplinary dialogue to enrich outcomes & eliminate conflicts of


Instruments of Governance

PPPs integrated in the planning process chairmanship of Cabinet Secretary/ concerned Secretary

Constitution of Inter-Ministerial Committees (IMCs) under

Specified tasks are assigned to IMCs with an agreed time frame Involvement of experts in formulation of programmes & processes investors

Consultations with stakeholders, including users &

Simplification & standardisation of documents & processes

Instruments of Governance

PPP Appraisal Committee:

- Appraises & recommends all PPP projects of the Central Government - Chaired by the Finance Secretary - Appraisal Unit in the Planning Commission

Empowered Committee/ Institution

- Approves proposals for Viability Gap Funding (upto 20% of capital costs) - Chaired by Secretary/ Addl. Secretary, Department of Economic Affairs - Appraisal Unit in the Planning Commission

India Infrastructure Finance Company (IIFC)

- Raises funds against sovereign guarantees

Important Reports under Implementation

Model Concession Agreements in highways, rail & ports, sewage Treatment Plants, MSWM Projects Guidelines for Pre-Qualification of Bidders (RFQ) Guidelines for Invitation of Financial Bids (RFP) Projects

Guidelines for formulation, appraisal & approval of PPP


Guidelines for financial support to PPP projects Scheme for financing infrastructure projects through the IIFC Financing Plan for National Highway Development

Important Reports under Implementation

Manual of Specifications and Standards for two lane highways

Report on Restructuring of NHAI

Financing Plan for Airports Corridors.

Report on the Delhi-Mumbai & Delhi-Howrah Freight


Report on Road Rail Connectivity of Major Ports. Report on streamlining of Customs procedures at Ports. Report on streamlining of Customs procedures at airports

Public Private Partnership

Infrastructure projects might not be financially viable on

their own;
Public Private Partnership to bring in private sector

resources and techno-managerial capabilities;

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

Funding in the form of capital grant, Operation &

Management support, interest subsidy, etc.

Support linked with predefined milestones.

Steps taken by Government

Viability Gap Funding (VGF) arranged through various schemes India Infrastructure Finance Company Limited (IIFCL) India Infrastructure Initiative ($ 5 bn. Fund) India Infrastructure Project Development Fund Jawaharlal Nehru National urban renewal Mission (JNNURM) PPP cells- PPP appraisal committees Transaction Advisors Training and Information Kits Standard Bidding procedures Model Concession Agreement Permission to foreign financial institutions and multilaterals to raise financial resources Encouraging development of new instruments such as grading of PPP projects/SPV rating by the major credit rating companies GOI have provided assistance to the tune of Rs.2500 crores under 12th Finance Commission for SWM IncomeTax relief has also been provided to waste mgt agencies and Tax free municipal bonds have been permitted by GOI Technical Advisory Group on SWM has been constituted and Technical Manual on SWM has been prepared.

Some Examples - 1
Roads BOT Concessions for toll roads and bridges (NHAI,

state governments) (OMT Concessions in future) Annuity payment based concessions highways, urban roads (NHAI/ state governments) Solid Waste Management Engineered landfills tipping fee linked payments (Coimbatore, Madurai, Namakkal, Salem, Bangalore, Trivandrum) SW Collection and Transportation (MCD/ NDMC, most of the ULBs in TN) Port Concessions Major Ports container berths (JNPT, Chennai, Kochi, Tuticorin, Vizag, Kandla); bulk cargo berths (Marmagao, Haldia, Ennore, New Mangalore) Minor Ports Pipavav, Mundra, Kakinada

Some Examples - 2
Water Supply and Sanitation Bulk water supply

systems in Tirupur and Vizag Tourism Facilities hotels, tourist facilities, PWD rest houses Karnataka & Kerala Bus Terminals/ Parking Facilities Bus terminals Dehra Dun, Amritsar, Jullundur Parking + commercial complexes NDMC/ DDA/ MCD/ Bangalore

Failures in PPP- Reasons

Most PPP failures can be attributed to inadequate or non-existent feasibility studies, including unrealistic forecasts and undefined public contribution of funds. Poor legal framework and enforcement Weak institutional capacity and PPP strategy Unrealistic revenue and cost estimations Lack of thorough financial and economic analysis Inappropriate sharing of risks Lack of competitive procurement Public resistance (willingness to pay not assessed)

PPP in TamilNadu
Tamil Nadu Water Investment Company Limited (TWIC), a joint venture between the state government and Infrastructure Leasing and Financial Services (IL&FS), has been set up with the express mandate to develop infrastructure projects with private participation, emphasizing water and sanitation. The path-breaking sanitation project at Tirupur Tamil Nadu Urban Development Project (TNUIFSL) is a state government project with assistance from the World Bank. Part of its strategy is to enhance institutional development by building and strengthening financial and managerial capacities in ULBs. Under this project, the TamilNadu Urban Development Fund, the first private institutional arrangement in the country, has been established to assist municipalities in raising funds from markets to finance specific infrastructure projects Tamil Nadu Road Development Company Ltd (TNRDC) is the third institutional arrangement established as a joint venture between Tamil Nadu Industrial Development Corporation (a government of Tamil Nadu undertaking) and IL&FS for developing road-sector initiatives under the public private partnership format. Its first project was the 113 kilometer- long tolled East Coast Road (ECR), which has set benchmarks in both quality of construction and maintenance.

PPP in TamilNadu
There are two types of public-private partnerships that have emerged with respect to urban infrastructure: 1. Involvement of NGOs in provision of public services like solid waste collection, processing and disposal. - Pammal,Kulithalai (Exnora International) 2. Private firm or agency enters into an agreement / contract to provide the services -The New Tiruppur Area Development Corporation was formed as a Special Purpose Vehicle Company under the Indian Companies Act to undertake water supply and sewerage projects in Tiruppur -The Government of India, Government of Tamil Nadu, Tiruppur Municipality, and ILFS as promoters have assumed complete responsibility for implementing the project over 30 years -Alandur UGSS project became a model and it is studied by Academicians, Policy makers, ULB officials of different states and countries, elected representative of Urban Local bodies of various state and countries

Projects under implementation in TamilNadu

Sl.No ULBs Est. Cost (Rs in Cr.) 96.51

1 Coimbatore Corporation

2 Madurai Corporation
3 Salem Corporation 3 Namakkal Municipality Alandur,Pallavapuram&Tambaram 4 Municipalities
Sl.No ULBs 1 Tiruchy Corporation 2 Erode Corporation 3 Udumalpet Municipality 4 Pollachi Municipality 5 Coonoor Municipality 6 Mettupalayam Municipality

30.00 3.58



Coimbatore Solid Waste Management Facility Madurai Solid Waste Management facility Salem Waste Management facility Namakkal Waste Management facility IWMUST projects Tiruchirappalli Corporation Erode Corporation Coonoor Municipality Pollachi Municipality Mohanur Model Thudiyaloor Model Pammal Model