ASSIGNMENT

NICMAR / SODE OFFICE

1. Course No. - PGPM 14

2. Course Title - Infrastructure Developments

3. Assignment No. - Four

4. Date of Dispatch -

5. Last date of receipt -

Of Assignment at SODE office

Assignment Submitted By:

MODHA KISHAN SURESHCHANDRA

Reg. No. 217 – 07 – 31 – 50973 – 2191

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 LIST OF CONTENT

1 Introduction………………………………………………………. 03
2 Public Private Partnership…..……………………………………. 04
3 Option of PPP……...…………………………………………….. 05
4 What is BOT………….………………………………………….. 08
4.1 Advantages & Challenges of BOT Project……………………… 10
5 Case study: Mumbai Metro….…………………………………... 12
5.1 Project Description………………………………………………. 12
5.2 PPP Structure of the project……………………………………… 13
5.3 Key Lessons……………………………………………………… 15

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1. INTRODUCTION

 Public Private Partnerships refers to arrangements, typically medium to

long term, between the public and private sectors whereby some of the

services that fall under the responsibilities of the public sector are

provided by the private sector, with clear agreement on shared objectives

for delivery of public infrastructure and/ or public services.

 A PPP is generally a contract or agreement to outline the responsibilities

of each Party and clearly allocate risk. In a BOT arrangement, the private

sector designs and builds the infrastructure, finances its construction and

owns, operates and maintains it over a period, often as long as 20 or 30

years. This period is referred to as the "Concession" period. Such projects

provide for the infrastructure to be transferred to the Government at the

end of the concession period.

 There are a number of major parties to any BOT project, all of whom

have particular reasons to be involved in the project. The Contractual

arrangements between those parties, and the allocation of risks, can be

Complex. Explain in detail structuring of BOT projects.

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2. PUBLIC PRIVATE PARTNERSHIP

 A business relationship between a private-sector company and a

government agency for the purpose of completing a project that will serve

the public. Public-private partnerships can be used to finance, build and

operate projects such as public transportation networks, parks and

convention centres. Financing a project through a public-private

partnership can allow a project to be completed sooner or make it a

possibility in the first place.

 The private sector is playing an increasingly crucial role in the financing

and provision of services that were traditionally the domain of the public

sector. One of the key reasons is that governments are unable to cope

with the ever-increasing demands on their budgets. Most infrastructure

expenditures in developing countries have been funded directly from

fiscal budgets but several factors such as macroeconomic instability and

growing investment requirements have shown that public financing is

volatile and, in many countries, rarely meet crucial infrastructure

expenditure requirements in a timely and adequate manner.

 Furthermore, there are efficiency gains arising from innovation,

management and marketing skills offered by the private sector and

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 greater incentives for the control of construction, operating and

maintenance costs. More so, the provision of additional finance for

infrastructure projects enables projects to be brought forward in time,

thus generating earlier economic benefits.

 The diagram below illustrates the continuum of options for involving the

private sector in the provision of infrastructure delivery.

 Diagram 1: Range of Private Sector Options

 At the left are supply and service contracts, which tend to be of short

duration and require less private commitment than the options higher in

the continuum. The private contractor is not directly responsible for

providing the service, but instead for performing specified tasks, such as

supplying inputs, constructing works, maintaining facilities, or billing

customers. At the left are the longer term arrangements which require

significant private sector commitment.

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3. OPTION OF PPP

 There is a range of options for involving private sector participation that

vary with regards to ownership, operations and maintenance, financing,

risk allocation and duration. A summary of these options can be viewed

in Table 1.

 Table 1: Allocation of key responsibilities under the main private sector

participation options

Option Asset Operations & Capital Commercial Duration

Ownership Maintenance Investment Risk
Service Public Public and Public Public 1-2 Years
Contract Private

Management Public Private Public Public 3-5 Years

Contract

Lease Public Private Public Shared 8-15 Years

Concession Public Private Private Private 25-30 Years

Build Private and Private Private Private 20-30 Years

Operate Public
Transfer

Divestiture Private or Private Private Private Indefinite (may be

Private and limited by licence)
public

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 Service Contract:

 Under this option, the private sector performs a specific operational

service for a fee, for example meter reading, billing and collection.

 Management Contract:

 In this option, the private sector is paid a fee for operating and

maintaining a government-owned business and making management

decisions.

 Lease:

 Under the lease option, the private sector leases facilities and is

responsible for operation and maintenance.

 Concession:

 Under concessions, the private sector finances the project and also has

full responsibility for operations and maintenance. The government owns

the asset and all full use rights must revert to the government after the

specified period of time.

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4. WHAT IS BOT?

 BOT is the terminology for a model or structure that uses private

investment to undertake the infrastructure development that has

historically been undertaken by the public sector.

 In a BOT project, a private company is given a concession to build and

operate a facility that would normally be built and operated by the

government. The private company is also responsible for financing and

designing the project.

 At the end of the concession period, the private company returns

ownership of the project to the government (although this need not be the

case).

 The concession period is determined primarily by the length of time

needed for the facility’s revenue stream to pay off the company’s debt

and provide a reasonable rate of return for its effort and risk.

 The table provided below reviews the BOT option and its variants,

describes some characteristics of these different procurement

arrangements and depicts the relationship between these different

procurement methods and the financing of the project.

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 BOT PROJECT PROCUREMENT STRUCTURES

BOT Project Type Characteristics

Build Own Operate Transfer (BOOT) • The service provider is responsible for design and

construction, finance, operations, maintenance and

Commercial risks associated with the project.

• The service provider owns the project throughout the

concession period

• The asset is transferred back to the government at the

End of the term, often at no cost.

Build Own Operate (BOO) • Similar to BOOT projects, but the service provider

Retains ownership of the asset in perpetuity.

• The government only agrees to purchase the services

produced for a fixed length of time

Design Build Operate (DBO) • A design and construction contract linked to an

Operation and maintenance contract.

• The service provider is usually responsible for

Financing the project during construction.

• The government purchases the asset from the

developer for a pre-agreed price prior to (or

immediately after) commissioning and takes all

Ownership risks from that time.

Lease Own Operate (LOO) • Similar to a BOO project but an existing asset is

Leased from the government for a specified time.

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 BOT projects, when properly designed, offer significant potential for

technology transfer and local capacity building as well as helping develop

national capital markets.

4.1 Advantages & Challenges of BOT Project

 The BOT approach has many potential advantages, some of which have

been alluded to above, and is a visible alternative in most countries to the

more traditional approach using sovereign borrowings or budgetary

resources. These are captured in the box provided below.

 Some challenges that should be taken into consideration include the

length of time required to develop and negotiate BOT schemes, the need

for a suitable political and economic climate, and a defined regulatory

environment. In short, the BOT approach requires an environment that is

conducive to private sector investment.

 The economic costs associated with BOT projects include the

following:

 Costs due to imbalance in experience. Governments with little experience

in BOT contracts are advised to initiate BOT projects on a manageable

scale and seek professional advice to compensate the often greater

experience of the private sector.

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 User costs imposed for the first time or increased to match market rates.

The economic costs of public services, once covered by the Government,

and then become financial costs for the user.

 Overpriced supplies. Potential conflicts of interest on pricing among the

project sponsors must be monitored. Care must be taken to ensure that

sponsors who supply goods or services to the project do so on a fully

competitive basis.

 High financing costs. Financing costs for BOT projects tend to be high, as

the legal fees associated with their contractual arrangements are much

higher than those of standard commercial contracts. The complexity of

the credit means that lenders need more time than usual to assess a

project’s merits and will tend to charge higher fees.

 Given the importance of infrastructure investment to national

development it is essential that the wider socio-economic costs and

benefits associated with a BOT scheme are taken into account when

designing the legal framework to promote private sector investment in

such projects.

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5. CASE STUDY: MUMBAI METRO

5.1 Project Description

 Mumbai Metro is a rapid transit system which is under construction in

Mumbai. The system is designed to address both present and future needs

of public transportation. The project was implemented under Built, Own,

Operate and Transfer (BOOT) method and has been India’s first PPP

metro project in which all three phases (construction, operation and

maintenance) were given to private players. The project involved an

elevated 11 KM Light Rail Transit (LRT) system linking Andheri and

Ghatkopar, via Asalpha, Marol, Chakala and Saki Naka.

 The construction of Mumbai Metro involved building up of a total of 146

KM of track, of which 32 KM is underground. The project was approved

by the Government of Maharashtra in August 2004 and global bids were

invited through an Expression of Interest (EoI). Almost 150 bidders

responded to the EoI and a pre-bid meeting was held in November 2004

and final tender was given to Reliance Energy and Connex France. Veolia

Transport and Hong Kong MRT were the other members of the

consortium providing technical know-how.

 The construction of first phase of Mumbai Metro commenced on February

2008 and is expected to enter into operation in December 2013.

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5.2 PPP Structure of the project

 The Mumbai Metro project was developed by means of constituting a

special purpose vehicle (SPV) - Mumbai Metro One Private Ltd.

(MMOPL), a joint venture of Reliance Infrastructure, Veolia transport

(France) and Mumbai Metropolitan Region Development Authority

(MMRDA) holding 69 per cent, 5 per cent and 26 per cent of equity share

capital respectively.

 MMOPL entered into a concession agreement with Maharashtra

government to design, finance, build, operate, maintain and transfer the

ownership and assets at the end of the concession period of 35 years.

 The cost of the project was estimated at Rs. 2,356 crores, but due to

delays in completion of project the cost has swelled by Rs. 1,935 crores.

The total cost was financed on the basis of viability grant amounting to

Rs 650 crores from Government of India and Government of

Maharashtra.

 The remainder being financed by 70 per cent debt and 30 per cent equity.

The private operators also raised debt of Rs 1,240 crores through

consortium of banks- IDBI, Corporation Bank, Karur Vysya Bank,

Canara Bank, Indian Bank and Oriental Bank of Commerce.

 The project's master plan execution has been planned in three phases.

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 Phase I covers a total length of 62.68 KM including 11.07 KM Versova -

Andheri - Ghatkopar route, the 20 KM Colaba - Bandra section and 31.8

KM CharkopBandra - Mankhurd route.

 Phase II has been planned to cover the 7.5 KM Charkop - Dahisar route,

the 12.5 KM Ghatkopar - Mulund route and 19.5 KM BKC Kanjurmarg

via Mumbai Airport sections. Phase II will be executed in 2012-2017.

 Phase III will include the development of the 18 KM Andheri East-

Dahisar East route, the 21.8 KM Flora Page 2 of 2 © CIRC, 2013

www.circ.in circ@circ.in Fountain and Ghatkopar and an underground

section route and is expected to be executed in 2016-2021.

 One of the key features of Mumbai Metro is latest signalling technology,

including automatic train protection (ATP) and automated signalling to

control the high-volume of train movements on the 11.07 KM route.

 For this, Siemens will supply the signalling systems required for the

project, while Thales will supply the required communication systems.

Additionally, the project has been focusing on development of an

environmental friendly system to become Asia’s first Green Metro, right

from construction stage.

 Even though work in progress of Mumbai Metro, ambitious plans are in

place to establish the system into nine line network by 2021.

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5.3 Key Lessons

 The Mumbai Metro case provides several insights that need to be

highlighted so that lessons can be drawn and applied to other projects as

well.

 Assessing bid process is crucial:

 The process of bid for choosing the successful bidder took more than 2

years. This led to a lesser number of bidders to bid for the project. Similar

hurdles were experienced in the bid process for the Metro Line 2 as the

concession agreement was based on the model concession agreement.

These delays resulted in only one bidder finally submitting a bid for the

project.

 Delays in approval can derail the project:

 There was a delay in obtaining approvals for the over bridge that passed

over the railway line from the railway authorities. Project gets delayed

from scheduled deadline because a railway was exploring the feasibility

of another project invading the path of the metro line.

 It is recommended that authorities be cognizant of all other upcoming

infrastructure projects that have the potential to affect operations of the

planned project while bidding out such projects and resolve the same

prior to the appointment of a developer.

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 Specification on Assets transfer:

 On the termination of the project through the efflux of time, 5 years

before the expiry of the concession period (i.e. 35 years) a survey of the

assets would be carried out to determine whether they are in working

condition as given in the agreement.

 The survey is to be carried out by an independent engineer based on a

schedule of specifications on the condition of assets. However, the

schedule in the concession agreement does not have clear and robust

specifications. Thus there is a risk of a difference of opinion between the

concessionaire and the government and this can potentially lead to a

dispute.

 The government could manage this better by incorporating clear and

robust specifications on the condition it would want the assets to be

handed over to the government.

 Public support for the project:

 For projects like this public support is necessary to ensure proper

implementation. MMRDA ensured adequate public support for land

acquisition and road expansion activities by a dialogue with the affected

individuals.

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