Public Private Partnership

PPP IN INFRASTRUCTURE – A FINANCIAL PERSPECTIVE

Prof. Sarbesh MishraFinance Area, NICMARHyderabad – 500 084.

About Myself

Name : SARBESH MISHRA

Qualifications 1. B.Com (Hons) 2. Post-graduate In Commerce

3. M.Phil In Commerce 4. Ph.D. (Commerce)

Experience : Joined University of Delhi, as a Lecturer in Commerce in 2002 and

continued till 2005 and then joined

Army Institute as Senior Faculty, prior to current appointment

at NICMAR.

Mantras for success The most successful man in the life is the

man who has the best information.Benjamin Disraeli, 19th. Century PM of

England

Quality is the most important factor in the business.

Andrew Carnegie, Richest Man (1901 – 1935), USA

He who controls the past controls future.George Orwell, Certified Public Accountant

Contd…. Even if you’re on right track, you’ll get

run over if you just sit there.Will Rogers, Certified Cost Analyst

If you don’t know where you’re going, it doesn’t matter how you get there.

Prof. Sarbesh Mishra, NICMAR, Hyderabad

Background of Development

Notable PPPs of early 19th. Century Great Indian Peninsular Company operating between

Bombay (Bombay – Thane) (1853) Bombay Tramway company (1874) Power Generation and distribution companies in Bombay

and Calcutta (Early 20th. Century)

Understanding PPP

Public Private Partnership (PPP) Project means a project based on a contract or concession agreement, between a Government or statutory entity on the one side and a private sector company on the other side, for delivering any construction service on payment of user charges.

Govt. of India Definition

The PPP Model Ideal for the Roads & the Railways sectors (Capital Intensive) Successful after the initial hiccups in Ports, Water Supply and

Power. In case of roads the successful BOT models are annuity model

and upfront/ Lumpsum payment model Design, Build, Finance, Operate (DBFO) is another variant of BOT model.

Examples of Private Participation in road projects on the basis of Negative Grants are also prevalent

Scope for PPP is enormous in Railways ranging from commercial exploitation of rail space and Rolling stock

PPP accounts for only 25% of the total projects planned.

Categorization Schemes for Private Participation1. Build Own and Operate ('BOO')2. Build Operate and Transfer ('BOT')3. Build and Transfer ('BT’)4. Build Lease and Transfer ('BLT')5. Build Transfer and Operate ('BTO')6. Contract Add and Operate ('CAO')7. Develop Operate and Transfer ('DOT')8. Rehabilitate Operate and Transfer ('ROT')9. Rehabilitate Own and Operate ('ROO') 10. Lease Renovate Operate and Transfer

('LROT')

PPP strengths and Effectiveness Robust and dynamic structure; Government in an enabler role; Government ownership is high; Governance structure ensures consumer and public

interests are safeguarded; Commercial interest protected; Domicile risks to parties that are well equipped to deal

with them;

Requirements for Successful Public Private Partnerships

Stable Macro-economic Framework Efficient and well developed Financial Sector Sound Regulatory Framework Sustainable Project Revenues (cost recovery) Clearly laid out arbitration procedures/dispute

resolution mechanisms Well developed Bankruptcy laws Co-investment by Government-loans/equity/

subsidies (Public Service Obligations )

Infrastructure - Roads Annual allocation for roads is Rs.7,000 crores for

development and Rs.3,500 crores for maintenance. The funds are meagre compared to the requirements 3

to 4 times. Rs.1000 crores invested in roads would yield

employment for six million persons. A paved surface in reasonably good condition can

contribute to 15 to 40% saving in vehicle operation cost. The development of rural roads is a priority.

Present status of Roads

National Highways - 66,590 kmState Highways - 1,40,000 kmMajor District Roads - 4,70,000 kmRural - 26,00,000 km

32,76,590 km Say 3.3 million km.NHs just 20% of Network carries a total of total traffic

7,300 km (11 %) - 4 lane 35,300 km (54%) - 2 lane

(35%) - Single or intermediateTraffic on Indian Roads growing at 7% annum

Growth of Vehicles 12%

Critical Elements For Financial Viability

Traffic Volumes User fee Pre-determined

Concession Period Capital Costs - Variable.

Bidders seek subsidy/ grant to reduce capital cost for arriving at an acceptable rate of returns.

Options for Increasing Return on Road Projects

1. Direct Toll - Concessionaire collects the toll charges directly from the user.

2. Shadow Toll - The toll charges are paid directly by the government / project sponsor to the BOT concessionaire according to a predetermined toll structure.

3. Annuity Payment - Annuity payment is a variation of shadow toll wherein the payment to the BOT concessionaire is determined in absolute terms with no direct reference to the number of vehicles using the highway.

Financial Incentives

Grants - According to NHAI guidelines, NHAI could provide cash support to the concessionaire. This amount should be utilized for meeting the total project cost and balance, if any, should be used for meeting the O&M cost.

Low interest rate loans - The government could provide the concessionaire access to low interest debt, either directly or facilitate the same through funding agencies.

Guarantees and assurances

The government may guarantee the loans taken by the concessionaire, thereby improving the credit rating of the concessionaire. This would directly reduce the finance cost. The financial guarantee can be provided by a state/central agency that specifically provides credit enhancement services for development of state/national highways

Ancillary revenues along project highway

The concessionaire may be given permission for property development along the project highway. The various alternatives for ancillary revenues could be as follows:

Transport terminals consisting of garages, service stations, warehouses, rest houses and other relevant infrastructure

Restaurants, shops and motels Publicity and advertising space

Tax incentives Tax holiday on Income Tax for the concessionaire

company Exemption/rebate on customs duty for imported

equipment used in construction or operation of project highway

Exemption of stamp duty applicable to various contracts in the project

Exemption/rebate/deferment of other taxes such as service tax, works contract tax, etc.

Construction Cost

Projected Infrastructure investment in XI Five year Plan (2007 – 12)

Sector US$ in Billion

INR in Crore Construction Component

Amount

a Power 120 5,40,000 43% 2,42,200

b Railways 67 3,00,000 42% 2,16,000

c Roads 49 2,20,000 100% 2,20,000

d Irrigation & Water Supply 18 80,000 45% 36,000

e Seaports 11 50,000 60% 30,000

f Airports 9 40,000 42% 16,800

9 Special Economic Zone, Township Development, Urban Infrastructure Pipelines, etc.

76 3,45,000 40% 1,55,250

Total 350 15,75,000 - 9,16,250

Risk Management Infrastructure projects are longer in size and complex. There are social, political and legal issues. These issues

are best handled by state. On the other hand, financial and operational

management are not really the forte of the state. There is a need for creation of Infrastructure stock but

adequate funds are not available and only through properly conceived projects can funds be availed.

At the same time public hand cannot be entirely ruled out which means some form of PPP should come into place

Risk sharing Construction Risk (Delays) Technology Risk (if not proven one) Sponsor Risk (ability of the sponsor to deliver the project) Environmental Risk Commercial Risk (Demand is less for services Produced) Operating Risk (Inefficiency in operation leading to higher operating

cost) Legal, Regulatory & Political Risk (Change in provisions of Law) Force Majeure (Unpredictable natural and man-made events)

Partial Risk Guarantees mitigate concerns related to government performance A Partial Risk Guarantee (PRG) can cover lenders in case

the Government does not meet its commitments

Commercial Lenders

Project Company

Government

Guarantee

Indemnity Agreement

Government Undertakings

Loans

World Bank

Major Challenges for Both Government & Private Sectors It involves shift to good governance Requires an upgrades of regulatory, restructuring and

monitoring roles. Problems relating to land acquisition by government and

landing over the site to the builder. Without is significantly improved governance, the shift to

increased PPP could just mean monopoly power being shifted to the well connected in the private sector and eventually become unsustainable.

It may be realised that it is not the policies that are failing so much as the machinery for implementing them.

THANK YOU