PPPs in Infrastructure
An Overview
Rekha Jain
rekha@[Link]
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Objectives
• Sector infrastructure plans overview
• Framework for examining and analyzing
Infrastructure sector/projects
• Some key issues and trends
• Overview of the course
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•
Strategy Challenges
• Based on an intensive process within the
Commission, the following "Twelve Strategy
Challenges" have been identified to initiate the
consultations. The "strategy challenges" refer to
some core areas that require new approaches to
produce the desired results.
• Enhancing the Capacity for Growth Today, India
can sustain a GDP growth of 8 percent a year.
Increasing this to 9 or 10 percent will need more
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mobilization of investment resources; better
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Drivers for Private Sector Participation
• Eleventh Plan (2007-12) aims at a sustainable growth
rate of 9% (after review revised to 8%)
– Need to remove infrastructural constraints to growth.
– Combating poverty through Infrastructure led growth
• GCFI in infrastructure as percentage of GDP 4.6 % during
the 10th tenth plan, expected to go up to 8%. If growth in
GDP to be sustained GCFI in infrastructure must keep pace.
Total estimated investment of US $ 400-450 billion in
infrastructure up to 2012
• Infrastructure requires private capital (shortage of funding
in the government) and also overcome the deficiencies in the
public sector (operations, maintenance, citizen orientation, pro-
poor (?), environmental concerns)
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Drivers for Private Sector Participation:
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
[Source: Arvind Mayaram, Department of Economic Affairs, Ministry of Finance]
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Sector Plans Overview
•10th Plan estimates $218 billion, 11th: $514
billion, 12th Plan $1 trillion.
•Share of Private Sector:16, 30, 50%
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Sector-wise Projections of Investments (corrected)
S 11th Plan (2007-12) 11th Plan Mid Term
Sectors
No (Projected) Review (Est)
Rs US $ Share Rs Share
Billion Billion (%) Billion (%)
1 Power 6665 141 32.4 6586 32.4
2 Roads 3141 83 15.3 2786 13.6
3 Railways 1196 64 12.7 2008 9.8
4 Telecommunication 2584 46 12.6 3451 16.8
85 Irrigation 2533 43 12.32 2462 11.9
6 Water Supply & Sanitation 1437 27 7.0 1117 5.4
Ports 890 19 4.2 406 1.9
8 Airports 309 9 1.5 68 0.8
9 Gas 168 5 0.8 97 1.1
10 Storage 224 4 1.1 48 0.5
Total 20,561 440 100.0 20542 100.0
Share of Private Investment [Source: IIFCL, 2007] 33% 7 33
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Status of 11th Plan (wrt PPPs)
• Electricity: Private investments show an increase of
55 per cent as compared to the original projections.
The contribution of public sector investment is likely
to decline mainly due to lower than anticipated
investment in the central plan
• Roads: Inability of NHAI to allocate projects to
private sector. State investments expected to increase
due to higher investments under the Pradhan Mantri
Gram Sadak Yojana (PMGSY).
• [Link]
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Status of 11th Plan (wrt PPPs)
• Telecom: Much higher private investments by the
private sector in telecom. Lower investment by the
Centre than the original projections.
• Railways: is 23.3 per cent lower than the earlier
projection of Rs 2,61,808 crore. Both central sector
and private investments are below the original
projections. Containerization privatization has
happened but not much else
• Focus required on both urban and rural areas
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Approach to Twelfth Plan
• The total investment in infrastructure which
includes roads, railways, ports, airports, electricity,
telecommunications, oil gas pipelines and irrigation
is estimated to have increased from 5.7 percent of
GDP in the base year of the Eleventh Plan to
around 8.0 percent in the last year.
• PPP Policy has been announced
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XII Plan
Target
Sectoral Growth Rates IX X XI 9.0 9.5
1Agriculture, Forestry & Fishing 2.5 2.3 3.2 4.0 4.2
2Mining & Quarrying 4.0 6.0 4.7 8.0 8.5
3Elect. Gas & Water Supply 4.8 6.8 6.4 8.5 9.0
Trade, Hotels etc. + Transport,
4 Communication, Storage 8.0 11.2 9.9 11.0 11.2
Total GDP 5.5 7.8 8.2 9.0 9.5
Industry 4.3 9.4 7.4 9.6 10.9
Services 7.9 9.3 10.2 10.0 1110.0
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Approach Paper 12th Five Year Plan
• “(i) availability of energy, (ii) growing evidence of
problem with water availability, (iii) slower than
required improvement in farm output and in the
logistics of farm produce, (iv) difficulties relating to
land acquisition for industry and infrastructure
development, and (v) the lack of a credible and fair
system for exploitation of mineral resources”.
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Scope
• Social Overhead Capital
• What does it include?
– Physical infrastructure
– Social Infrastructure
• Government’s role seen as critical as infrastructure
supports
– economic growth
– poverty alleviation (pricing mechanism, universal
service obligations)
– sustainable environment
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Economic Infrastructure
• Energy
• Telecom/IT
• Transport
• Housing
• Water Supply/Sanitation
• Rural, Urban, Industrial Parks
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Infrastructure: Characteristics
• Economies of scale and scope (natural monopoly,
government’s role, regulation)
• Service as an integral part of provision
• Usage of a key national resource
• Benefits from users to non users
• Strong public interest
• Non exportability, Non excludability
Changing paradigm: Increased role for
commercialization of projects, involvement of
private sector 15
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Infrastructure Financing Characteristics
• Complex contractual arrangements (linkages, types
:concessions, performances contracts and loan
contracts)
• Project financing as a dominant technique
• Risk management strategies and techniques
• Financial re engineering: Incentive system of
contracting parties may change once the investment is
sunk, complete contingent contracts)
• Government support and guarantees
• Foreign investments and legal jurisdictions
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Experience of Publicly Managed
Infrastructure (World Bank)
• Inefficiency of operations (Lines per employee)
• Inadequate maintenance
• Financial inefficiency
• Unresponsive to user demands
• Neglect of the poor
• Neglect of the environment
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Role of Government in Facilitating Private Sector
• Ensuring project viability
• Providing the appropriate regulatory frameworks for
competition and choice
• Facilitating financial closure (capital market reform,
institutional infrastructure)
• How to introduce efficiency and effectiveness in IS provision?
– Corporatization (transition process, phases, developing the
capabilities, accountability, risk taking)
– Competition (number of players, social policy goals, pricing,
legislation changes, new laws, creation of institutional
framework: regulatory, appellate and consumer)
– Unbundling and project structuring
– Facilitating project implementation
• Legal framework (Corporatization without a legal framework)
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Role of Government in Infrastructure
• Building capacity within institutions to handle large PPP
program, including project preparation
• Preparation of project manuals, handbooks on procedures,
toolkits, standard bidding and contract documents etc.
• Expert support to central ministries/state governments for
project preparation
• India Infrastructure Project Development fund
• Independent initiatives by IDFC, IL&FS
[Source: Arvind Mayaram, Department of Economic Affairs, Ministry of Finance]
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Role of Government: Infrastructure
Financing
• Tax incentives
• Underwriting major sources of risks
• Creation of markets for infrastructure products
• Viability Gap Funding (VGF)
• Setting up new institutions: India Infrastructure Finance
Company Limited (IIFCL), IDFC
• India Infrastructure Initiative ($ 5 bn. Fund)
• Encouraging development of new instruments such as
grading of PPP projects/SPV rating by the major credit
rating companies
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IIFCL: Framework for PPP
• Addresses the need for providing long-term debt for
financing infrastructure projects that typically involve long
gestation periods.
• Debt finance for such projects should be of a sufficient
tenure that enables cost recovery across the project life.
• Indian markets, however, are deficient in long-term debt
instruments. Most of the available debt is of seven to twelve
years’ maturity.
• Assistance through long term debt; either by way of
refinance to banks and financial institutions or by direct
lending to project companies.
• It will lend up to 20% of the capital costs of a project. 21
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IIFCL (continued)
• IIFCL will raise funds from both domestic as well as
external markets on the strength of government guarantees,
which will be extended as necessary.
• India Infrastructure Financing Company Limited (IIFCL)
has been authorized to raise Rs.10,000 crore through
Government guaranteed tax free bonds in the previous
financial year 2008-09. Further, IIFCL have been authorised
to raise additional Rs.30,000 crore on the same basis as per
requirement during 2009-10. The capital so raised will be
used by IIFCL to refinance bank lending of longer maturity
to eligible infrastructure projects.
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IDFC: Facilitating PPP
• IDFC was set up on the recommendations of the ‘Expert
Group on Commercialization of Infrastructure Projects’ as a
specified financial intermediary for infrastructure.
• IDFC’s policy advisory mandate is to provide leadership in
rationalizing policy and regulatory frameworks, and
removing impediments to the movement of capital to
infrastructure sectors.
• Has helped to rationalize policy and regulatory frameworks
across infrastructure sectors
• Encouraged an increased flow of private capital, including
foreign capital, into infrastructure investment.
• Domain knowledge, particularly with regard to project
structuring, appraisal and risk evaluation. 23
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State Level Initiatives
• Legal Framework to facilitate PPP: Gujarat
Infrastructure Development Act (BOT Law)
• Contractual framework
• Creation of Gujarat Infrastructure Development
Board under the Chair, Chief Minister
• Inputs from functional departments
• Private initiative in formulating projects: Swiss
Challenge
• Direct Development
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Role of Private Sector
• Understand the specific characteristics of
infrastructure projects (corporate projects)
– Risk profile assessment, mitigation instruments
– Market assessment
• Demand
• Tariff
• Collection efficiency
– Contract structures (tighten)
– Policy and regulatory advocacy
– Financing instruments
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Optimal Risk Allocation
• Termination payments and terms protect against
arbitrary termination by Government
• Land acquisition risk borne by government
• Risk relating to permits and approvals especially
environment permission borne by government
• Provision of other related infrastructure an
obligation of the authority
[Source: Arvind Mayaram, Department of Economic Affairs, Ministry of Finance]
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Lessons on Risks Management
• Demand Risk is partly mitigated through provisions for
change in duration of concession –both upside and
downside
• Competition from other suppliers limited through a
variety of non-compete clauses
• Escalation in input costs mitigated through indexation of
user charges to inflation
• Construction and performance risk to be borne by the
investor
• Political risk and force majeure risks borne by the
Government
[Source: Arvind Mayaram, Department of Economic Affairs, Ministry of Finance]
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Conclusions
• Need to manage infrastructure like a business not a
bureaucracy
• Introduce competition directly or indirectly
• Give users and other stake holders a strong voice
and responsibility
• Public private partnerships in infrastructure have
promise
• Role of government has changed: facilitator not
operator.
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The Program
• Lessons from PPPs in Infrastructure Projects.
• What perspective change is required to enable
infrastructure growth? What types of legal and
regulatory frameworks are required? What should be
the structure and role of regulatory institutions? What
are effective regulatory instruments? What is the key to
structuring projects?
• Demand assessment, project appraisal, risks and their
mitigation, sources of funds, implementation
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Program Design: Broad Level
• General overview of issues, cutting across sectors
• Sector specific case studies focusing on some
conceptual issue or framework
• Participant Presentations
• Reflections
• Sectors: Power, Transport (road, rail, ports, airports)
Telecom, Water, Urban
• Case studies
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What We Expect
• Faculty as enablers in the learning process
• (WYG)*2 or What you get is what you give: participate
• Team work and spirit is important
• Prior preparation is critical
• Pedagogy: Case method
– Class presentations
– Reflections 2 groups per day (15 min each)
– Participants experience
– Guest faculty
• Groups: As diversified as possible (Syndicate Rooms)
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Thank You
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