ROLE OF PPP IN REAL ESTATE CONSTRUCTION

Prof. Sarbesh Mishra, PhD 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)

Finance at NICMAR.

: Joined University of Delhi, as a Lecturer in Commerce in 2001 and continued till 2005 and then joined Army Institute as Senior Faculty, prior to current appointment

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’s Definition

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

for

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;

Contd….

Transparent and well-conceived contracts; Documentation recognizes rights and responsibilities of all project-related parties; Concerns of all stakeholders addressed; Involves participation of a large number of institutions: government, politicians, banks, financial institutions, investors, contractors,

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.

Risk sharing and Management
  

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
events)

provisions of Law) Force Majeure (Unpredictable natural and man-made

Real Estate – At glance

The real estate industry, broadly defined, consists of a collection of industrial and services sectors of the economy, such as construction (housing, commercial offices, retail and industrial buildings). It also includes brokerage services, real estate finance services (mortgage banking, real estate investment), real estate operations, property management, architecture and design. Real estate cluster is critical for the health of the nation as its impact becomes volatile throughout the economy.

RBI Directives for Real Estate
In terms of the master circular of Reserve bank of India dated 2nd July, 2007: the scope of infrastructure lending (for the purpose of financing by banks) has broadened to include all commitments in real estate. With assured easy finance, private borrower companies can avail credit facilities engaged in:  Developing;  Operating and Maintaining;  Developing, operating and maintaining any facility that is a project in any one of the following sectors:

Contd….
 

 

A road, including a toll road, a bridge or a rail system A highway Project A port, airport, inland waterways A water supply project, Irrigation project, sanitation and sewerage system An industrial park or SEZ Construction relating to projects involving AgroProcessing, construction for preservation and storage of agro-products, perishable commodities such as fruits, vegetables etc. Construction of Educational Institutions and hospitals Any other infrastructure facility of similar nature.

Real Estate for IT and BPO companies

Real estate developers are forecasting rise from IT and BPOs making a beeline for space in SEZs as STPI (Software Technology park of India) scheme benefits are set to end March 2009. According to real estate advisor DTZ, by 2010 as much as 60-70 million sq.ft. of IT and ITES- specific commercial office space is expected to come up in India through SEZs alone.

A CASE STUDY – RAIN TREE PARK, PHASE - 1
Rain Tree Park is developed by Swarnandhara – IJMII Township Development Company Pvt. Ltd. (SITCO Pvt. LTD.). A joint venture between Andhra Pradesh Housing Board (APHB) and IJM (India) Infrastructures Ltd. (IJMII), a subsidiary of IJM Corporation Berhad, Malaysia. The planned township is coming up in Kukatpally Area. It hosts the largest colony in Asia under the name of Kukatpally Housing Board (KPHB).

Project Details
Rain Tree Park was conceptualized as an integrated township incorporating residential units and facilities. The integrated township is spread over 29acres of clear titled land and will be developed in two phases over a period of 03 years.

Project Arrangement
The land is provided by APHB while the investment is done by IJM. The integrated township is first of its kind Integrated Township Project involving 100% FDI. The client of the project (Between APHB and IJM) SITCO Pvt. Ltd. is a SPV for this EPC project. IJM construction division is the main contractor of this EPC project and contract value of 2169 million rupees.

Win – Win Situation for Both
IJM approached APHB through Swiss challenge approach i.e. the private sector participant submitting a SUO – MOTO proposal (Latin term meaning on its own cognizance or on its own initiative). IJM developed the plan and made sufficient research and surveys. IJM approached APHB for this project and was appreciated by AP Govt.

Revenue Generation
Total Revenue generated = 537 Cr. Share of IJM (51%) = 274 Cr. Share of APHB (49%) = 263 Cr. + 555 LIG houses

Conclusion
Phase I is complete and the profit made by IJM is nearly 25 – 30% which is negligible as compared to 2-3years of investment done in the project. But with the phase II, the company expects to earn 100% profit on the total investment. The Rain Tree Park, Hyderabad is a good example of success of PPP in Real Estate Construction.

Recommendations
The company has had previous experience of working in Indian soil. Owing to the success of this project, IJM has ventured into many more projects on similar lines in real estates and infrastructure developments. This case will act as an inspiration for different state Govt. and foreign equity investors to further explore the PPP model.

THANK YOU