Post on 04-Apr-2018
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Workshop on Public Private Partnerships in Vietnam
PPP An Indian Experience
Infrastructure Leasing and Financial Services Ltd
Hanoi
June 25, 2008
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Contents
Section I : Infrastructure Leasing & Financial Services Limited
Section II : Private Sector Participation in Infrastructure
Section III : The Road Sector
Section IV : Key Lessons
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Section I: Infrastructure Leasing & Financial Services
Limited
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Infrastructure Leasing & Financial Services
IL&FS is a leading Indian Investment
Banking Institution established by
Government of India agencies in 1987 to
develop and implement infrastructure
projects on a commercial basis and provide
a wide array of value added financial
services IL&FS pioneered the concept of commercial development of infrastructure using the Public
Private Partnership (PPP) Framework
IL&FS has partnered with over 15 State Governments to develop projects on PPP
IL&FS has successfully developed and implemented projects across a range of sectors that
include telecom, power, road, water, port, airport, area development, special economic zones,
environment, social, education etc.
With each project, IL&FS has focused on establishing replicable prototypes
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Domestic Road Sector Projects
0
500
1000
1500
2000
2500
3000
3500
CumulativeLen
gth(km)
0
2000
4000
6000
8000
10000
12000
Cumulative Length (km) (LHS ) Cumulative Project Cost (Rs. C r) (RHS)
Rau
Vadodara
Noida Toll
East Coast
Ahmedabad
North
Thiruvananthapuram
West
Rajasthan Mega
Chennai IT
Andhra Pradesh
Chennai Ennore
Major Grade
Outer Ring Road
Chhattisgarh
Jharkhand
Commissioned
Under
Under
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International Experience In the past few years, IL&FS have been sourcing mandates from outside of India
Beginning with Advisory mandates, IL&FS is now undertaking projects in:
Mexico
Phillipines Indonesia
Spain
Portugal
Several Latin/South American countries
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IL&FS - Infrastructure Projects
Particulars Cost (USD Billion)
Roads/Rail 4.5
Ports 3.0
Water Supply 0.5
Area Development 0.5
Power 16.0
Others 0.5
Total 25
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Section II: Private Sector Participation in Infrastructure
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Benefits of Private Sector Participation
Risk Transfer
Transfer of Design/Solution Risk
Transfer of Financing Risk
Transfer of Construction Risk
Transfer of Market Risk
Transfer of Operations Risk
Making Subsidies more efficient (subjecting them to competition and capital market
scrutiny)
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1
Section III: The Road Sector
The Delhi-NOIDA Toll Bridge- The First large Greenfield BOT Project in Ind
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1
Milestones in Toll Road Development
10
5020
10030
15040
20050
25060
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Rao Pitampur
MoU executed for theGoI announces initial
NHAI Operationalised
Fuel Cess100% FDI
Foundation Stone for
NHAI BOT
Annuity Projects
NHDP
NHDP Phase IV
Phase I - 1990-1995 Phase II 1995-2000 Phase III 2000 - 2005
30000
0
Km
201
25000
20000
15000
10000
5000
Projected Toll Road Growth
Phase IV
Amended Philippines
Dabhol Crisis
Liberalisation Policy
Pipavav the first
Tirupur the first Private Sector
Electricity Act 2003
Securitisation Act 2002
Cochin the first Private
New ExplorationNational Telcom Policy
National Telcom Policy
Entry of IPPs
Power Sector Reforms
State BOT Projects
SEZ Act
Implementation of the first Toll Road in India
The Rao-Pitampur Toll Road
Road Projects undertaken through the
Memorandum of Understanding (MoU) Route
Implementation through Special Purpose
Vehicle (SPVs)
Multilateral Participation
Successes of initial private sectorparticipation in the road sector encouraged
the State Government privatization
initiatives
Initiatives by the Ministry of Road
Transport & Highways (MoRTH)
Establishment of the Central RoadFund
National Highway Development
Programme (NHDP)
Programmes addressing Rural &
District Connectivity
RIDCOR
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1
Early Challenges
Regulatory and Institutional
Government Policy
The lack of an integrated institutional policy and framework for project identification, development and
implementation
The lack of coordination between various Government agencies involved with road sector projects
The prioritization process for project identification based on political reasons rather than economic considerations
Regulation
The absence of effective and autonomous regulatory authority (at arms length with Government) to ensure a level
playing field for all participants and fair dispute resolution
Delays in decisions regarding Government support-both in kind (land for example) and/or investment
Multiplicity of Concession Structures
Different States followed varied Concession Agreements resulting in concurrent prevalence of various models
These different structures impeded wider acceptance by the financial institutions, banks and the capital markets
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1
2
Project Development
Implementation Structures
Absence of structures that effectively allocated duties & responsibilities and rewards & penalties amongst all
project participants
Risk of Revenue Collection and Appropriation
Demand Studies
Low Willingness to Pay
Low Willingness to Charge
Potential Risks arising from the social and environmental impacts of the projects
Financial
Limited Experience of Project Financing, Financial Engineering and Risk Assessment
Limited Confidence amongst Contractors and Investors to take on risks associated BOT business risks
Limited Understanding of the sector and therefore, assignment of highest risk to the projects by the
Lenders
Non availability of Long Term Debt
Negligible Appetite for Project Bonds
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Innovations in Project Development
Project Development
Methodologies for Project identification
Studies to ascertain Demand and Need
Willingness to Pay Surveys
Methodologies for Project Conceptualization
Environment and Social Aspects
Establishment of Feasibility
Securing Revenues
Project Development Fund
The pre-feasibility reports prepared by the government authorities are often inadequate for the
bidders/sponsors to raise funding the Project
The Private Sector may not have the risk appetite to undertake studies for Projects where bankability is
yet to be established
IL&FS recognised the need for a corpus of funds that could help catalyse the Project Development
process by bearing the initial expenses and formed the India Project Development Fund by pooling
resources from institutional investors
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2
Environmental and Social Impact Mitigation
To ensure long term sustainability of Projects, it is imperative that the Developer cultivates a relationship with the local
community by:
Undertaking adequate Environment and Social Impact Assessment (ESIA) and Mitigation measures
Ensuring all provisions of the Environment Management Plan and Rehabilitation & Resettlement (R&R) Plan are
met
Example: VHTRL
Structures affected by Project Alignment Resettlement Colony
Religious Structures: Pre-Project Rehabilitation of Religious Structures
Rehabilitation
Resettlement
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3
Securing Revenues
It has been observed that the economic benefits
of infrastructure facilities often outweigh the
financial returns to an investor
In order to make an infrastructure project more
attractive to the private sector, economic benefits
can be captured by way of indirect collections
for:
Ensuring benchmark returns
Providing potential upside to investors
Example: NTBCL
Land Development Rights have been included in
the Concession Agreement for NTBCL
Owing to the construction on the Bridge,
value of this land has increased, making it
amenable to commercial development
Time
Returns
ERR
FIRR
0
+ve
-ve
I i C i R d C S i
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Incresing Capacity - Road Cross Section
7.0 M1.50M1.5M 1.50M 1.5M
3.5% 2.5%2.5%
Hard
Shoulder
Paved
Shoulder
Carriageway Paved
Shoulder
Hard
Shoulder
2.5% 3.5%2.5%
TYPICAL CROSS SECTION
Carriageway7.0m
Paved Width10m
Formation Width13m
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1
Innovation in Implementation
Design/Solution to be driven by the required
service standards rather than theoretical capacity
The Engineering Solution vs. the Elegant Solution
PCUs 1,50,00030,000 80,000 1,20,00018,000
The Traditional View
The Possible Approach
PCUs 1,50,00030,000 80,000 1,20,00018,000PCUs 1,50,00030,000 80,000 1,20,00018,000 1,50,00030,000 80,000 1,20,00018,000
The Traditional View
The Possible Approach
The East Coat Road
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National Highways Under Development
As on January 31, 2008
GQ Port
Connectivity
Others NSEW Phase III A Phase V Total
Total Length (km) 5,846 380 962 7,274 4,815 6,500 25,777
Completed till date (km) 5,647 191 412 1,744 396 3 8,393
Under Implementation (km) 198 183 595 4,577 1,832 135 7,520
Balance length for award
(km)
0 6 20 822 2,552 6,365 9,765
Cost incurred so far (Rs.
Billion)
276 52 - 150 37 2 516
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Outlook
States
Approximately 25000 km of state highways are expected to be improved at an expected cost of USD 20 billion over the next
five years
To cater to the increasing vehicular traffic, several cities have announced programs to develop/upgrade over 1000 km of city
roads at an approximate cost of USD 445 million
Capex in the next 5 years- USD 35 billion
National Highways
NHDP V, VI, VII announced
Over 39000 km of National Highway to be bid out at an
estimated project cost of USD 45.2 billion over the next
10 years
Government is in the process of forming a separate
dispute resolution authority. This will also provide an
impetus to the sector
The new NHAI model concession agreement is
expected to transfer onus for land acquisition and utility
shifting to private sector. This may increase cost of
future projects
Phase Length & Nature of
Development
Mode of
Implementation
Total Cost
(USD Bn)
NHDP
I&II
1306 km to be awarded Mix of BOT/EPC 11.64
NHDP III 11,113 km, 4 laning BOT (Toll) 14.48
NHDP IV 20,000 km, 2 Laning
with paved shoulders
BOT (Toll)/ BOT
(Annuity)6.18
NHDP V 6,500 km , 6 Laning BOT (Toll) 9.16
NHDP VI 1,000 km Expressway BOT (Toll) 3.71
NHDP VII Ring Roads, Bypasses,
Underpasses
Mix of BOT/EPC 3.71
SARDP
NE
Special Accelerated
Road Dev. Program for
NE
Mix of BOT/EPC 2.69
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2
Section IV: Key Lessons
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2
The PARADOX
Of
Private Sector Participation
.those who are best able to manage themselves will attract private
sector participation and the rest will be left out in the process
what is necessary is public sector reforms at state and local level
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2
Policy Framework
Infrastructure projects involve complex relationships between the Government,
concessionaires and investors
While Infrastructure is a large opportunity, conditions for investment need to be safe,
favourable and stable in the long run
The private sector requires clear and stable rules of engagement as provided
through a legal framework:
Laws governing concessions and/or privatizations
A clear process for dispute resolution and the ability to enforce contracts
Lender remedies under bankruptcy and insolvency
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2
Concession
Approach to ConcessionHigh
Low High
Value of Transparency & Competitiveness
Opportun
itiesforinnovati
ontoll
Hybrid Approach
(An Unsolicited Bid/
Swiss Challenge/Solution Flexibility)
Hybrid ApproachTransparent and Competitive Approach
(Template Approach)
Flexible and Innovative
Approach
(Negotiation with Credible Agencies)
Concession in the Absence of Regulation!
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Regulation
Creation of Monopoly
Private Sector Participation in Infrastructure results in monopoly power in the hands of the
private sector
The need to regulate the quality of service and pricing levels
Structural changes are required to make regulation effective
Protection of the Consumer
One objective of regulation is to ensure that the monopoly provides acceptable service at
specified tariff
Investor Protection
The second important reason for regulation is to protect the investor from policy & political
risk
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Project Development
Adequate Project Development is critical given the high costs and risks of infrastructure projects
Private investment tend to crowd in when they sense the opportunity perception is real
Private investors are interested in earning commercial returns for their shareholders within a certain fixed
time horizon
Timely decision making and confidence building are crucial in decision making
Optimal Design
Desired performance levels
Acceptability of the Project by the User
Lower life time costs
Communication
Acceptability of the infrastructure facility by the local community is essential for its success
Information dissemination facilitates interaction with the local community, enabling the service provider to mitigate risks of
local opposition
Demonstrating transparency and accountability helps achieving public trust, support and acceptance
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SPVSPV
Concession Grantor
(State/Authority)
Concession Grantor
(State/Authority)Construction
Contractor
Construction
Contractor
O&M
Contractor
O&M
Contractor
ShareholdersShareholders LendersLenders
UsersUsersState GovernmentState Government
ConstructionContract
ConcessionAgreements
ShareholdersAgreements
State SupportAgreement
Contracts forIE/LE/IA
FinancingAgreements
O & MContract
ConsultantsConsultants
Imp lementa t ion St ruc t u re
Service
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SPVSPV
Concession AgreementConcession AgreementConstruction
Contract
Construction
Contract
O&M
Contract
O&M
Contract
Shareholders AgreementShareholders Agreement
Project Site Lease
Deed / Subst itution
Agreement /
Escrow Agreement
Project Site Lease
Deed / Substitution
Agreement /
Escrow Agreement
Service /Supply
Agreements
Service /Supply
AgreementsState Support AgreementState Support Agreement
Contract for IE/LE/IAContract for IE/LE/IA
Pro jec t Agreements
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SPV
With Lenders
SPV
With Lenders
Common Loan Agreement
Or
Individual Loan Agreements
Common Loan Agreement
Or
Individual Loan AgreementsConsent AgreementConsent Agreement
Inter-creditor
Agreement
Inter-creditor
Agreement
Debenture Trust
cum Mortgage Deed
Debenture Trust
cum Mortgage Deed
Security Agency
Agreement
Securi ty Agency
Agreement
Escrow Agreement/Trust and Retention Agreemen
Escrow Agreement/Trust and Retention Agreement
Undertakings forNon disposal of shareholding \
Cost Over run
Undertakings for
Non disposal of shareholding \
Cost Over run
Indenture of Mortgage /Jt. Deed of Hypothecation /
Pledge Agreement
Indenture of Mortgage /Jt. Deed of Hypothecation /
Pledge Agreement
Financ ing Agreement s
M t f A L U L i C
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Management of A Long User Learning Curve
The Users are not used to paying an economic price for infrastructure service,
therefore there is an initial low willingness to pay
The users need to be made aware of the tangible benefits of the facility through:
Public Relations exercise
Workshops
Handouts and Advertisements
Inaugural/frequent user discounts may have to be offered to incentivise the Users
to try outthe facility
The Users need to experience benefits for word-of-mouth publicity
Ri k d R t
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Risk and Return
Assessment of all project risks and appropriate mitigation mechanisms (including
domiciling of risk) is crucial to deliver an economically efficient project
Commercial attractiveness of an investment is evaluated at two levels
They should commensurate with risks
They should be comparable with other investment opportunities
Providing opportunities for the private sector to enjoy benefits of commercial returnshould be structured within the above constraints or goals
Government Support
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Government Support
Infrastructure projects require substantial support from government entities:
Financial Commitments
Time-bound Clearances
The viability and sustainability of PPP projects critically hinge on adhering to cost, time and
quality, therefore government decisions should be expeditious
Augmentation of Government Capacity is required for fast and consistent decision making
Public Private Partnerships (PPPs) for infrastructure creation can extend for long periods of time and
involve complex financial, risk and performance arrangements
Specialized skills are required to conceptualize and evaluate infrastructure projects
The government needs to be attuned to private sector requirements and international best practices for
development of policies and frameworks that facilitate PPP
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Conclusions
Conclusions
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Conclusions
With the growth of the Economy there is a demand for increasing capacities and enhanced levels of service
in the core infrastructure sectors of power, transport, and telecommunications
The infrastructure challenge before the Government today may seem overwhelming. However, the
Government has realized that inaction is simply not an option
Given the fiscal constrains, increasingly more projects will be undertaken using the BOT format
In order to sustain the growth momentum, active participation will be required from Government and the
Private Sector
PPPs alone are not a panacea. Rather, they are one tool that the Government has at its disposal for
facilitating infrastructure deliverya tool that requires careful application
By making the best use of the full range of delivery models that are available and continuing to innovate
learning from failure instead of retreating from it the Government can maximize the likelihood of meeting its
infrastructure objectives
The interest of the investment community can only be maintained if there is a perception of long-term value
in the Projects
Therefore, it is critical for the government to effectively engage the private sector by creating and maintaining
an enabling environment for the creation of infrastructure
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Thank You
CONTACT
K Ramchand, President and CEO, IL&FS Transportation Networks Limited, Mumbai-INDIA
E-mail id - Ramchand.karunakaran@ilfsindia.com Tel : +91-22-26593020 Fax : +91-22-26527056
Websites - www.ilfsindia.com or www.itnlindia.com