Download P Ravi IDECK PPP

Conceptual Framework for PPPs
Presentation to the Planning Board
May 2007
PV Ravi
Infrastructure Development Corporation (Karnataka) Limited
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Definition
 A Public Private Partnership is an
arrangement between a public
(government) entity & a private (nongovernment) 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
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Characteristics
 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
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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
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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
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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
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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
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PPP Options
Works & Management
&
Services
Contracts Maintenance
Contracts
Operation &
Maintenance
Concessions
Build
Operate
Transfer
Concessions
Full
Privatization
High
Low
Extent of private sector participation
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Concessions
 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
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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
 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. In the UK prisons, education, health services, defence related services
 Other Types - Joint ventures, Not-for-Profit vehicles
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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
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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
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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
 Efficiency gain
 Savings in cost of project versus overrun
 Savings in operating costs
 Revenue maximization - leakages
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Basic Issues
Striking a balance between differing
concerns & objectives of parties
Legislative Back up
Rights and obligations of parties
Identification and allocation of risks
Penalties and rewards which would
ensure performance
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Broad Roles & Responsibilities
 Government Agency
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Providing Project Site/ Assets
Environmental Clearances
Supporting Infrastructure and Utilities
Specific Obligations (e.g. dredging)
Regulatory Functions
 Concessionaire
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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
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Other Key Elements
 Bankability Issues
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Concessionaire’s 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
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Dispute Resolution Mechanism
Re-negotiation in good faith
Termination as a last resort
Preferential treatment in re-bidding
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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
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Partnership in Practice
 Partners not adversaries – background of mistrust
 Project should be the focus – “win-win” for both the
parties
 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
funds
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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
 All stakeholders would, therefore, like to see it succeed
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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
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Typical Funding Sources
 Equity Capital
 Core capital provided by the promoters (developers / contractors)
 Minority stakes may be taken by financial investors / funds
 Preference Capital
 Can be used if suitable changes made to the CA
 Senior Secured Debt
 Normally in the form of rupee term loans/ debentures from Indian banks/
institutions
 Capital market instruments – may be possible after CoD; not too popular
yet
 A variant could be debt with 2nd charge
 Subordinated Debt
 Typically with far lesser rights
 May even be unsecured
 Challenge is to evaluate how additional resources can be channelised
into the sector - insurance funds, pension funds
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Key Project Contracts
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Concession Agreement
Project Site Licence Agreement
Shareholder/ JV Agreement
Substitution Agreement / Direct
Agreement
State Support Agreement
EPC Contract
O&M Contract
Trust and Retention Agreement
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Main Provisions
 Concession Agreement
 Terms and conditions of undertaking the project
 Obligations of the parties
 Tenor 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
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Other Key Contracts
 EPC Contract
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Price Overrun
Time Overrun
LDs and Bonus provisions
Performance security
Standards and Specifications
 O&M Contract
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Operating Standards
Costs
Quality of Service
Penal provisions
 TRA Agreement
 Trapping of all the project cashflows
 Prioritization of Cash flows
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Financial Analysis

Elaborate Financial Model capturing these risks – base case analysis
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Establishes breakeven levels of traffic/ tariffs
Assessment under various scenarios – sensitivity analysis
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Demand / Traffic
Tariff / Tolls
Inflation
Maintenance Costs
Financial Ratios

Debt Equity Ratio – cash flow impact & level of promoters’ funds
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Internal Rate of Return (project/ equity)
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Debt Service Coverage Ratio
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Loan Life Ratio
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Project Life Ratio
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Financing Documents
 Facility Agreement
 Financial Terms
 Project Risk Mitigating
Conditionalities
 General Conditions
 Inter-Creditor Agreements
 Security Documentation
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Basic Structure
NHAI
Annuity
Concession
Agreement
JV Partner
Financing
Agreements
Lenders
Project SPV
Shhldr’s
Agmnt
Equity
Debt
EPC
Agmnt
LE
Contractor
Main
Sponsor
Indep Eng
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Transaction Structure
Sponsors
Government
Advisers
Invt. Bankers,
Technical & Legal
Advisers
Advisers
Invt. Bankers,
Technical & Legal
Advisers
Equity
Concession / Licence
Agreement
Financial
Investors
Equity /
Sub-Debt
Users
TRA
Agent
Off-take
Contracts
Insurance
Companies
Insurance Policies
Project SPV
O&M
Contract
TRA/Escrow
Agreement
O&M
Operator
EPC Contract
Debt
Lenders
Substitution
Agreement
EPC
Contractor
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Implementation Structures
 Existing Assets
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Full Divestiture – UK – Telecom, Steel, Electricity, Ports, Water,
Airlines, Airports; so far in India – Modern Foods, BALCO,
Hotels
Asset Sales/ Leases – airports in Australia
BOT/ ROMT Concessions – roads, tourism facilities, berths in
ports
Management contracts – water assets, ports in Philippines
 New Assets
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Implementation by government – followed by OMT concessions
– Mumbai-Pune expressway, Ports in Rotterdam, hospitals
Implementation through SPVs – Moradabad bypass or port
connectivity projects or dedicated freight corridor for
railways
BOT Concessions – commonest form – roads, ports,
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Isn’t Private Infrastructure
Expensive?
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Isn’t Private Infrastructure Expensive?
Additions to Cost
Benefits
Risk Premium
Lower Cost From Efficiency
Example
Public Entity
ROI
Private Entity
8%
WACC
13.7%
(Debt @ 11% 70: 30 Equity @ 20%)
Cost
Required
Return
105.3
Cost
100
113.7
Required
Return
113.7
 A 5.3% cost overrun (increase in actual project cost) in the public
sector is enough to overcome the private sector disadvantage of
higher financing cost!
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Isn’t Private Infrastructure Expensive?
Additions to Cost
Benefits
Risk Premium
Lower Cost From Efficiency
Example
Public Entity
ROI
Private Entity
8%
WACC
13.7%
(Debt @ 11% 70: 30 Equity @ 20%)
Cost
Required
Return
100
Cost
95
108
Required
Return
108
 A 5% reduction in project cost (efficiency) by the private
sector is enough to overcome the higher financing cost!
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Key question
 What should be the framework to induce the
private entity make the investments needed to
provide efficient service to the end user?
 Investments decided by the investor or driven by
the market, i.e. the consumer
 Private entity has a stronger case for state support
if it makes investments determined by the State
 Demand risk – how much passed on?
 Extricate the public entity from making
commercial decisions on individual projects,
wherever possible
 Public entity’s role from being a planner,
financier & manager to facilitator & regulator
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The Right Balance
The Investor wants
The Investor needs
 Monopoly rights
 Initial risk mitigation
support - can be predefined
 Full pricing freedom
 Stable environment regulatory and policy
framework
 State support for social
obligations/ viability
considerations
 State support for social
obligations/ viability
considerations – can be
transparently determined
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Some Indian 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 (Bangalore,
Trivandrum)
 SW Collection and Transportation (MCD/ NDMC)
 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
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Some Indian 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
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International Experience - 1
 Toll Roads (Chile, Mexico, Hungary, Poland); Ports
(Argentina, Philippines, Sri Lanka)
 Airports (Australia, Greece, Germany)
 Roads in UK under DBFO program
 Private Finance Initiative of UK – diverse areas
 Dorset Police Service - $ 40 million contract for refurbishment of
police stations, construction of a divisional headquarters
building, maintenance, janitorial & waste management services
 Nottinghamshire, Police Fleet Management Contract - ($ 180
million over 25 years) – driver slots - usage of a vehicle for a 24
hour period
 Durham & Dunstead Hospital Project, Durham – 30 year, $ 155
million hospital services contract – to construct and operate
health care facilities + ancillary services
 Stoke-On-Trent Grouped Schools Project – a $ 250 million project
involving 122 schools – refurbishment and maintenance contract
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International Experience - 2
 Louis Trichardt Maximum Security Prison Project,
South Africa – a $ 270 million project – largest
prison facility (also UK and Australia)
 Full fledged water concessions in Argentina
(Buenos Aires) and Philippines (Manila);
Management contract for water supply &
sanitation in Johannesburg, South Africa
 Rural Pay Phones, Peru – against payment of a
subsidy – based on a system of monitoring of
service standards
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On the Table in Karnataka
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Airport Rail Link
Core Ring Road
Airport Expressway
BMRDA Townships
Minor airports
Tourism Properties
IMTC (Kempegowda)
Mega Convention Center, Bangalore
Bypass roads
Truck terminals
…
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