PPP IN INFRASTRUCTURE – A FINANCIAL PERSPECTIVE

Prof. Sarbesh Mishra
Finance Area, NICMAR Hyderabad – 500 084.

About Myself
Name Qualifications : 1. 3. 4. Experience

SARBES H MI SHRA
B.Com (Hons) 2. Post-graduate In Commerce M.Phil In Commerce Ph.D. (Commerce)

: 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

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

Categorization Schemes for Private Participation
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Build Own and Operate ('BOO') Build Operate and Transfer ('BOT') Build and Transfer ('BT’) Build Lease and Transfer ('BLT') Build Transfer and Operate ('BTO') Contract Add and Operate ('CAO') Develop Operate and Transfer ('DOT') Rehabilitate Operate and Transfer ('ROT') Rehabilitate Own and Operate ('ROO') 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-

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

Present status of Roads
National Highways 66,590 km State Highways - 1,40,000 km Major District Roads - 4,70,000 km Rural - 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 intermediate

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

Direct Toll - Concessionaire collects the toll charges directly from the user. Shadow Toll - The toll charges are paid directly by the government / project sponsor to the BOT concessionaire according to a predetermined toll structure. 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

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

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

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$ INR in Crore Construc in tion Billion Compone nt Amount

a b c d e f 9

Power Railways Roads Irrigation & Water Supply Seaports Airports Special Economic Zone, Township Development, Urban Infrastructure Pipelines, etc. Total

120 67 49 18 11 9 76

5,40,000 3,00,000 2,20,000 80,000 50,000 40,000 3,45,000

43% 42% 100% 45% 60% 42% 40%

2,42,20 0 2,16,00 0 2,20,00 0 36,000 30,000 16,800 1,55,25 0
9,16,250

350

15,75,000

-

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

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

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
Project Company Loans Commercial Lenders

Government Undertakings Indemnity Agreement Government

Guarantee

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