Water

Water PPPs
PPPs :: Training
Training &
& Workshop
Workshop

Developing a PPP - Project Appraisal and

Feasibility Studies

Infrastructure Development Corporation (Karnataka) Limited

February 2009
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Reasons for Limited PPPs
 Lack of adequate project development
 Projects not bankable
 Operator led projects, than Government led projects
 Procurement Issues – MoU vs Competitive bidding
 Lack of credible information
 Lack of political will

 Resistance to “Privatisation” –experience in most cities

 Who bears revenue risk? (“tariff setting”)

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Need for Project Development

 Infrastructure projects typically have a number associated issues

which need to be resolved to ensure successful implementation and
operationalisation
 Project viability
 Technical
 Financial
 Legal issues (eg. Statutory guidelines)
 Environmental and Social implications (eg. clearance from the MoEF, estimation
of land acqusition required)
 Government interface (eg. whether the project has been approved by the
government taking into account the above issues)

… Need for proper project definition to resolve all issues

pertaining3 to the project
Need for Project Development
 Historical practice of selection of developer through MoU route is no
longer the preferred alternative
 Selected developer funds requisite studies which would form the basis
for future negotiations and signing of agreement
 Also the bone of contention leading to failure in taking off of projects

 Current practice of selection of developer through a transparent

bidding process
 However, investment in project definition/resolution of all issues
pertaining to the project by all interested bidders both infeasible
and sub-optimal - leads to lack of participation

… Need for Government to invest in requisite technical, market,

financial viability studies to reduce project risks and attract bidders
to the
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project
The Need

 Finalise desirable technical configuration

 Identify and resolve Environment and Social issues

 Estimate inputs for project viability assessment

 Assess project viability and finalise project structure

 Compile data pre-requisites necessary for bidding

 Preparation of bidding documents

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 Development Process

A. Project Conceptualisation

Project Resolution of
Project Technical Financial
Structuring Implementation
Identification Feasibility Viability
Options Issues

B. Bid Process Management

Contractual &
Feedback &
Bid Bid Process
Monitoring
documentation

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The Objective of Project Development
 To reduce “unknowns” and “assumptions”
 Identify and allocate risk, responsibility
 Create a complete documentation archive
 Set in place a set of contract documents
 Detail payments/ rewards/ penalties

 Project development does NOT mean creating a Feasibility Report

and bidding for a developer
 Any issue that can derail a project should be addressed, including land,
R&R…

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Development Cycle
 Step 1 - Sector Study
 Demand/Supply - Current & Projected - returns from the asset,
maintenance
 Tariffs/ Pricing - Current and Projected
 Regulation - Entry criteria, Competition, Price/ Tariff Control
 Implementation Structure - Government, Private Sector, joint venture..
 Policy framework
 Enabling Legal and Contractual Framework
 Should result in a well-defined strategy

 Step 2 - Project Identification

 Better utilise Existing Assets or Create New Assets or a Combination
 Where to start - bulk or retail or both - the dilemma in water, sewage
 Technology: Broad Indication

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The Need Defined

Client’s Explanation Project Leader’s Designer’s Program writer Business Consultant’s

understanding Plan

9 Support
Project Specifications Contractor What Public wanted
Documentation
The Need
 What is desirable technical configuration

 A good technical configuration, during the bidding phase, should

provide sufficient room for innovativeness for bidders while
sufficiently covering the essentials

 Water : Minimum investment amount, specific facilities, design and

construction approval
  Applicable guidelines and major equipment specifications

 Output based Specifications are the key to PPP projects – Can the
government become purchaser of services rather than service
provider ?

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The Need

 Identify and resolve Environment and Social issues

 Extent of land acquisition and cost thereof
 Private land/government land
 Agricultural land/barren land
 Forest land
 Built-up structures
 Extent of utility relocation and cost thereof
 Environment Impact Assessment and Mitigation Measures
 Develop R&R plan
 However, at times private sector has been able to manage the issues
more effectively with facilitator role played by the government

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The Need
 Estimation of inputs for project viability assessment

 Demand Estimation - volume, composition and growth

 Construction Cost and Project Cost

 Operations and maintenance cost

 Input into financial viability – impacts structuring decision
 Reflected in the Concession Agreement – impacts Termination Payments
 Often operations and maintenance costs are ignored, which in many projects
of the government could be more than the capital investment
 Solid waste management
 Small airports
 Operations and maintenance costs are under-estimated by departments
 Roads

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The Need

 Assess project viability and finalise project structure

 Aim is to minimize Grant/Annuity Payments –variables being
 Concession Period
 Packaging of additional O&M stretch
 However, critical to get key input parameters right

 Compile data pre-requisites necessary for bidding

 Obviate need for multiple investigations by bidders

 Preparation of bidding documents

 Finalise pre-qualification criteria and hurdle numbers
 Incorporate project specific issues, if any. For example -
 Bypass road : banning entry into town
 Construction phasing
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Why Risk Assessment?

 Huge upfront capital costs and low margins

 Returns typically back ended - long term in nature

 No tangible security

 No. of participants

 Long term finance

 Long gestation periods

 Non completion operations affect many

 Limited or no recourse

 Low Appetite for long term finances in domestic market

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Risky List!

 Construction/ Completion
 Operation Risk
 Environmental
 Regulatory
 Forex
 Interest
 Demand
 Credit
 Political/ Social

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Principles of Risk Allocation
 Allocate project-specific risks to parties best able
to bear them
 Control performance risks through incentive
contracts
 Use market-hedging instruments (derivatives) for
covering market-wide risks (interest and exchange
rate fluctuations)

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Project Issues - Financial
 What is the price level for making the project viable? Would the
users be willing to pay this user charge?
 Are there any additional sources of income for the project? (e.g..
land development etc.)
 In case the project is not financially viable at an acceptable user
charge, how much of government grant is required?
 Should the government grant be one-time or spread across years?
 What should be the time frame for which the project is handed
over to the private developer?
 Typically, with pricing / cost comparatively quantifiable entities,
often the softer issues get sidelined, in most PPP projects.

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Financial Accuracy

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Risk Mitigation

 PRAYER !!!!

 Proper Allocation Of Risks

 Insurances

 Hedging/ Options/ Swaps

 Third Party Guarantees

 PRAYER !!!!

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Risk Factors

 Supply
 Hydrology/ rainfall patterns/ quality/ water access contracts
 Distribution monopoly vs trucked; user fees; desire to avoid
retail revenues
 Operating
 New technologies in wastewater/ energy/ metering
 Infrastructure
 Old/ theft (leakage)
 Environmental
 Benign
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Risk Factors
 Political
 Privatization trends/ pricing controls/ rationing
 Force majuere
 Maintenance/ buffers
 Foreign Exchange
 Local currency revenues and costs
 Funding
 Long term
 Engineering
 Standard
 Completion
 Ongoing large capex throughout
 Legal
 Concession life/ defaults
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Thank You

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