Dr Manoj Anand PPP IN INDIAN INFRASTRUCTURE: IIM Lucknow CHALLENGES & OPPORTUNITIES

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.

Dr Manmohan Singh, Honorable Prime Minister of India

Source: PM inaugural address at the Conference on Public Private Partnership in National Highways

Funding Infrastructure through PPP

Infrastructure Spending 10th Five Year Plan (2002 11th Five Year Plan (2007-

12) - Revised
Public Investment
INR 13,113 billion

07) - Actuals
Public Investment
INR 6,809 billion

Private Investment
INR 7,429 billion

Private Investment
INR 2,252 billion

12th Five Year Plan (2012-

17) - Projected
Public Investment
INR 20,496 billion

Private Investment
INR 20,496 billiom

Need for private capital in Infrastructure

Key Drivers of change
Pressure on the fiscal position of governments coupled with need for massive investments in infrastructure Globalization and breakdown of trade barriers which is compelling local industry and services to become more competitive

Emergence of successful models for engaging the private sector and increased access to capital across borders in providing infrastructure services Changing economic models leading to breakdown of erstwhile infrastructure natural monopolies, that have made possible the creation of competitive market structures

Role of public sector/state shifting from that of a financier, owner and manager of facilities to that of a facilitator and enabler of efficient infrastructure creation and provision by multiple players with an independent regulator

Evolution of PPPs in India

Phase I: 19th Century &

earlier 20th Century

Railway Co (1853)

Phase II: 1991 to 2006 Only 86 PPP projects worth

The Great Indian Peninsular

INR340 billion were awarded till 2004 (World bank study of 13 states in 2005)
Most of the projects were in

The Bombay Tramway

Company's tramway services in Mumbai (1874)

PPP models were there in

bridges and roads sector

Large-scale private financing

power generation & distribution in Mumbai and Kolkata in the early 20th century

has been limited to Vishakapatnam and Tirupur

Evolution of PPPs in India

Phase III: After 2006 Increasing acceptance of PPP PPP Projects in India by Sector Roads: 53.4% Urban Development: 20.1% Ports: 8% Energy: 7.4% Tourism: 6.6%

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

Education: 2.2%
Airports: 0.7%

Common Forms of PPP Models in India

BOT Models User-fee based BOT model: Performance-based

Management / Maintenance contracts

PPP

Commonly used in mediumto large-scale PPPs for the energy and transport subsectors (road, ports & 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

models that lead to improved efficiency are encouraged in an environment that is constrained by the availability of economic resources. Sectors meant for such form of PPP models include water supply, sanitation, solid waste management, road maintenance

WHAT IS PPP?

PPP covers a wide variety of arrangements for the participation of private organisations in public projects.

Transportation facilities, water and waste-water services, telecommunications systems, energy generation and distribution and waste management facilities. Can be financed mainly by user charges. Private participation can cover design, construction, financing and operation.

PPP projects

While there are a wide range of forms of Public Private Partnerships (PPPs) in infrastructure
Range of infrastructure delivery options: Each type differs in terms of government participation levels, risk allocation, investment responsibilities, operational requirements and incentives for operators

Ownership and Risk Asset Ownership

Management / O & M contract State

Concessions* (BOT) State

Privatization** (BOO) Private

Divestiture By License /Sale Private

Investment Responsibility Primary Commercial Risk

State

Private

Private

Private

State

Private

Private

Private

It may would be better to start at the management contract end of the spectrum and moving forward to deferred payment structures.

Sectors have a varying degree of maturity in policy and regulatory frameworks for PPPs in India

Increasing Commercial Attractiveness

Telecom

Ports & Airports Toll Roads Water and Urban Infrastructur e

Power Generation

Telecom and Electricity Generation may not be strict PPPs as defined in India but account for a major share of PPIs Commercial Attractiveness defined as a function of market structure, cost recovery and demand potential

Increasing Policy and Regulatory Clarity

PPP Market Maturity Curve

PPP: State Level Experiences

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.

Andhra Pradesh (17.5%)

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

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

PPP: State Level Experiences

Hyderabads metro rail project

Gujarat and PPP

Bridge across River Godavari at Rajahmundry

Machilipatnam Port at Machilipatnam

Gujarats 40 minor private sector ports handle approximately 80% of cargo handled by all private ports in India.
Gujarat possesses first ever private port project in the country. The only chemical port and tow LNG Terminals have been developed in the PPP format. Two air strips have been developed by private developers.

Development of four greenfield airports

Bus Rapid Transit System in Hyderabad & Vijayawada

Diagnostic centers in hospitals at Vishakapatnam, Kurnool, Kakinada and Warangal

Project Financing
20

Economically separable capital investment project which operates under a concession from the host government Project cash flows as source of funds
to service the loans to provide the return of & return on the equity invested in the project

Project Financing
21

Non-recourse or Limited- recourse to the promoter.

Project is very big compared to firms present size. The Project has unacceptable risk to be brought to the balance sheet. (So, quarantine the risk by forming a separate company called Special Purpose Vehicle) risk does not attach, but return does!

Manoj Anand

4/22/2014

Project Financing
22

Comprehensive contractual arrangements with suppliers & customers High ratio of debt to equity with limited-recourse / nonrecourse Cash waterfall / escrow mechanism

Manoj Anand

4/22/2014

Project Financing
23

An agreement by financially responsible parties

to complete the project to purchase the project output to supply the project inputs to make available necessary funds in the event of disruption in operation occurs

Manoj Anand

4/22/2014

Contractual Structure for Project Finance

Export Credit Agencies Off-taker Sales contract Insurers/ Surety companies Government Suppliers

Guarantee Arrangers/ Lead funders Debt

Delays/ Insurance EPC Contract

Special Purpose Vehicle/ Project Company

EPC Contractor

Escrow agent/ Trustee Sponsors Lessors O&M Contractor

Independent experts/lawyers

Key project risks

Permitting Risk Political Risk Foreign Exchange Risk Financial Risk Environmental Risk Regulatory Risk Completion Risk Participant Risk Operating Risk Funding Risk

A Project is essentially a Web of Contracts that mitigates (but does not eliminate) these risks

Demand Risk / Market Risk

Force Majeure Risk

Engineering/ Design Risk

If you invested $1 in 1900

$100,000

$18,814
$10,000

$1,000

$171
$100

$66
$10

$1

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

Treasury bills
4/22/2014

Govt Bonds

Stocks
26

Annualized Rate of Returns

Treasury Bills Government Bonds Stock Market

4.03%

4.92%

9.73%

4/22/2014

27

Stock market returns are more variable than returns on Bonds/ Treasury Bills. Measured by Variance or Std Dev from the mean or the Expected Return

4/22/2014

28

Risk Premium

Investors like to be compensated for the risk i.e., Return commensurate with Risk
Treasury Bills Govt. Bonds Stock market

Annualized Returns

4.03%

4.92%

9.73%

Risk Premium

0.89%

5.70%

Variance (2)

7.9

68

402.6

4/22/2014

29

4/22/2014

30

Measure of Risk: CAPM

Re = Rf + ( Rm- Rf ) Expected Return

Rm Rf 0 1 Risk()

4/22/2014

31

Typical Asset Betas

Sector Energy Gas Power Water Telecom Transport Beta 0.41 0.57 0.64 0.46 0.70 0.48

measures the riskiness of the project vis--vis the Stock Market In practice, the companies also add Country risk premium+ Regulatory risk Premium

4/22/2014

32

BOT Projects - EPC Cost Data

*Cost/Km In 2006

Project

Length (km) Total 234 315 408 323 219 212

Final EPC Cost Cost / Km 3.97 4.29 6.34 5.05 4.13 4.51

NHAI Estimate of Cost Total 342 441 407 524 251 281 390 Cost / Km 5.80 6.00 6.32 8.19 4.74 5.98 5.06

Yr of Cont

Tuni-Anakapalli Tambaram-Tindivanam Panagarh-Palsit Durgapur Expressway Rajahmundry-Dharmavaram Dharmavaram-Tuni Belgaum-Maharashtra Border Bangalore Maddur Vadape Gonde Ahmedabad - Mahesana Vadodara-Halol Tumkur-Neelmangala

59.0 73.5 64.4 64.0 53.0 47.0 77.0 62.6 99 52.0 32.0 32.5

2002 2002 2002 2002 2002 2002 2002 2004 2006 2000 1999

4.73 5.11 7.56 6.02 4.93 5.38

215 650 224 119 132

3.43 6.57 4.31 3.72 4.06 194 5.97

3.74 6.57 5.61 5.06 5.06

2001

* Considering 5% inflation to bring it to 2006 prices

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Financing Options