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India’s PPP Program Progress, Key Takeaways & Emerging Challenges

South Asia Sustainable Development DepartmentThe World Bank

LAC Study TourApril 2009

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A quick regional snapshotPPI Projects in SAR (Nos.)

0

20

40

60

80

1990 1992 1994 1996 1998 2000 2002 2004 2006

India Pakistan Sri Lanka Bangladesh Rest of the Region

PPI Projects in SAR (Total Project Cost in $ million)

0

5000

10000

15000

20000

25000

30000

1990 1992 1994 1996 1998 2000 2002 2004 2006India Pakistan Sri Lanka Bangladesh Rest of the Region

Source: World Bank PPIAF Private Participation in Infrastructure Database

In SAR, efforts to attract private participation in infrastructure picked up momentum since mid- 90s

India leading the pack in terms of numbers as well as the total project cost− Witnessed a substantive spurt since 2005

Outside of India− Investment levels are lower and mostly in

telecoms− Efforts are patching and halty− Bangladesh:Power generation;

Water treatment plant pilots− Nepal: Hydro power (large & small);

Road pilots− Pakistan: Earlier, power generation;

Now Major focus on PPP framework

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Presentation Outline

India’s PPP Program In the earlier phases

− Major Initiatives/Approach NHDP: A Programmatic Approach to developing PPPs

− Yielded impressive results

In the past 4-5 years− Key Challenges: How to sustain and scale up− Approach/Focus… Cross-sectoral measures to give fillip to PPPs

In the context of Global Financial Crisis − Challenges and Responses

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Major Initiatives/ApproachUntil 4-5 years ago… Sector-specific focus on creating appropriate frameworks

& enabling environment for private participation Telecom

− National Telecom Policy 1994, New Telecom Policy 1999, Unified Access Licensing 2003− Separation of policy, regulatory and service provision functions of the government

Electricity− In the early 90s, focus on generation, IPPs including fast-track projects− In the mid to late 90s, focus on structural reform and establishment of regulatory agencies

Unbundling in a few states and distribution privatization in Orissa and Delhi− Electricity Act 2003, National Electricity Policy, Electricity Tariff Policy

Roads− National Highways Development Program− State level initiatives, e.g., Madhya Pradesh and Maharashtra

Ports− Major Ports

Guidelines for private sector participation in major ports Tariff Authority for Major Ports (1997)

− Non-major Ports: State level initiatives, e.g., Gujarat and Andhra Pradesh

Across the sectors…− Liberalization/relaxation of FDI limits − Tax incentives

Market Structure

RegulatoryFramework

Cost Recovery (User Charges)

Govt. Objectives

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India’s PPI Track Record Efforts to attract private participation in infrastructure began in early 90s

− Significant success achieved in Telecommunication and select Transport sub-sectors

− Sector-wise PPI during 1990-2007: Telecom - 45%; Energy – 35%; Transport – 20%− India’s PPP program, with investment commitments of over $10.5 billion during 2006 and 2007,

is already one of the largest in middle and low-income countries. − In 2006, PPI investments in transport and energy amounted to 1.1% of GDP

Investment commitments to infrastructure projects with private participation in India are nearly twice of those in Brazil and China

PPI flows were slow in sectors outside telecom and energy− But now steep increasing trend in transport PPPs

0

5,000

10,000

15,000

20,000

25,000

Brazil China India

$mn

2004

2005

2006

2007

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“PPP” Track Record… During 1995-2006

− 230+ PPP projects with an estimate total cost of US$15.8 billion achieved financial closure in sectors outside telecom and energy generation

− In terms of value, about 92% of these in transport sub-sectors

Source: Draft Report of a PriceWaterhouseCoopers Study, 2007

Sectoral Distribution of PPP Projects, 1995-2006(Total Number = 232)

Airports2%

Ports9%

Power Distribution

2%

Roads & Bridges81%

Water Supply, Waster Water &

SWM4%

Power Transmission

0%Railways2%

Sectoral Distribution of PPP Projects by Value(Total Value = US$ 15.8 billion)

Airports17%

Ports20%

Roads & Bridges

54%

Power Transmission

2%

Power Distribution

2%

Water Supply, Waster Water &

SWM3%

Railways2%

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NHDP: An example of programmatic approach

National Highways (65,000km) account for 2% of the road network but carry 40% of the total traffic

NHDP, aimed at 4/6 laning of 14,000km of NH corridors, launched in 1998− To address the twin-challenge of poor quality of corridors and paucity of resources

− Many roads developed through traditional “cash contracts”

− But, the Program also ushered in PPPs through two predominant modes BOT-Tolling method -- the traffic & toll collection risks are borne by the private operator

– 46 projects (4,231 kms) awarded and 9 projects (454 kms) completed BOT-Annuity -- the operator paid a competitively bid out, fixed semi-annual payments,

beginning after completion of construction and through the remaining concession period

– 24 projects (1,376 kms); Completed: 8 projects (476 kms) 60 projects (5000+ kms) with estimated value of US$15.6 bn in process of being awarded

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NHDP: Salient Features at Program Level

NHDP, in effect, provided a platform for introducing a consistent framework for encouraging PPPs through a variety of policy and institutional interventions− Strong political commitment as reflected in the announcements of the Prime

Minister and the Task Force constituted by him− A programmatic approach that galvanized the enthusiasm of both the public and

private sector players around a substantive investment opportunity− A clear focus on cost recovery based on collection of direct and proxy user

charges, respectively through tolling and dedicating a portion of revenue streams from the levy of cess on fuel, ring-fenced in to a non-lapsable road fund, through the enactment of the Central Road Fund Act 2000

− A dedicated institution – National Highways Authority of India – with a clear mandate for implementing the program backed by substantial delegation of financial investment and administration powers

− A framework for encouraging private participation through a combination of measures including viability gap support, indexing toll rates to the wholesale price index, developing model concession agreements in consultation with key stakeholders, tax concessions, liberal limits for External Commercial Borrowing and foreign equity participation, and allowing Foreign Direct Investment up to 100%

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NHDP: Salient Features at Project Level

BoT – Toll Projects Provision of grant to bridge viability gap, if any, required up to 40% of ‘project cost’

− Up to 20% during the construction and the remaining during the O&M phase

Concessionaire selection through open competitive bids based on a single parameter− Amount of grant sought [or] the extent of project revenues sought to be shared with the govt.

Clearly defined framework for allocation of key risks− Commercial & technical risks relating to construction and O&M allocated to Concessionaire− Traffic growth rate risk – i.e., deviation from expected growth rate

Mitigated with provision for extending the concession period Conversely, in case of higher than expected growth rate, the concession period will be reduced

− Defined time limit (180 days) for achieving financial closure− In the event of termination, buy-out by the Authority and full protection to ‘project debt’

Even if termination as a result of default by the Concessionaire, 90% of the ‘project debt’ protected

− All direct and indirect political risks assigned to the Concessioning Authority− Protection to the Concessionaire from construction of competing roads− Authority to provide encumbrance free site for construction

User fees (tolls) as per the rates notified by the government − Provision for a fixed annual increase plus 40% of Wholesale Price Index (WPI)− Local traffic exempted until free service lanes are provided

Monitoring and supervision through an Independent Engineer (firm) selected by the Authority through a transparent process

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NHDP: An Overview

Spurred by the success achieved in the first two phases, NHDP has since been expanded to include 2/4/6 laning of about 40,000km of National Highways, through five additional phases − Phase I: 7,498 km US$6.7 billion− Phase II: 6,644 km US$7.6 billion− Phase IIIA: 4,035 km US$4.9 billion− Phase IIIB: 8,074 km US$12.1 billion− NHDP IV: 2-laning of 20,000 km− NHDP V: 6-laning of 6,500 km US$9.2 billion− NHDP VI: Expressways− NHDP VII: Ring Roads, By-passes, etc.

Also, in 2004, the government decided to adopt BOT-Tolling as a preferred option for implementing all the remaining portions of the NHDP

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In the past 4-5 years…

Additional investments in infrastructure to sustain a GDP growth rate of 9 percent per annum, estimated at $500 billion during 2007-12− Of these, about 30% ($150 billion) expected to be through private participation

− In major sectors, expected total investments (US$ bn) and private sector share

Source: Planning Commission

Number of states are using or exploring PPP approach for service delivery

Electricity 150 26% Roads & Bridges 76 36%

Telecom 65 66% Railways 62 17%

Water Supply & Sanitation 49 3% Ports 18 74%

Irrigation 53 0% Civil Aviation 9 65%

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Key Challenges How to scale up the program, particularly at other levels of government?

− Mobilizing finances for new PPPs Debt: increasing quantum as well as options, especially of longer-tenor, fixed term Equity: increase avenues for participation by multiple variety of players, e.g., financial Government

– Viability gap funding support– Project preparation expenses, including land acquisition, R&R, etc.

− Building capacities and institutions to expand the PPP program from the Central level to State and Local levels of government beyond transport to other sectors, including health, education, and agribusiness

In the ongoing projects…− How to regulate contracts effectively during the entire project life cycle− Measuring and management of fiscal risks associated with PPPs− Evaluation and drawing lessons for structuring future PPP programs and also

expanding into new sectors like health and education− How to ensure adequate financing for meeting re-financing needs? Knowledge of

Best Practices

CapacityBuilding

Financing

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India’s PPP Program: Key Building Blocks

• Legislation• Rules

- Procurement- Budgeting- Accounting

• Fin. Support- Viability Gap (VGF)- Project Devpt.

(IIPDF)

Developing a robust PPP program requires action on several key areas− At Project as well as Program/Sector levels− By all relevant governments

• Tool kits & Manuals

• Standard documents (MCAs)

• Handholding indeveloping projects

• Training• Knowledge

dissemination

• Consensus building

• Strategiccommunication

• Platforms forexchanging information and experience

• Monitoring • Review• Research• Feedback

EstablishingEnabling

Frameworks

Building Capacities at Various Levels

of Government

FosteringEnabling

Environment

Quality Assurance &

Learning

World Bank is supporting initiatives in each of these areas

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Major Initiatives/ApproachIn the last 4-5 years… Focus on cross-sectoral interventions

GoI established Committee on Infrastructure chaired by the Prime Minister A Viability Gap Fund to support PPPs A Project Development Fund to finance PPP project preparation expenses India Infrastructure Finance Company Limited (IIFCL) for increasing the

availability of long-tenor debt financing for PPP projects

Other Efforts The Planning Commission and DEA are developing

− PPP frameworks− Guidance material − Capacities

Many states have established PPP Cells and some have enacted enabling legislation and set up dedicated agencies to facilitate PPPs

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Some useful pointers from the experience of India and other countries

Successful off-take of PPP is usually contingent on the following factors

Political will and commitment at the highest level of government

Enabling legal framework

Encouraging policy/administrative arrangements

Lining up of tangible financial support to

− Provide assistance in developing and structuring bankable PPP projects

− Bridge gap in commercial viability of projects that are otherwise economically and social desirable e.g., Viability Gap Fund (India)

A dedicated unit/facility to assist the Line Ministries/Agencies in various ways

− Developing a shelf of bankable PPP projects

− Providing transactional advice in implementing PPP projects/programme

− Creating an enabling policy, legal and regulatory framework

− Standardization of documents and procedures

In sectors where PPP opportunities are many and replicable, develop and implement a programmatic approach e.g., National Highway Development Project in India

Universal service funds/institutions for rural electricity and telecom connectivityin many countries.

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Key Challenges in the context of GFCTraditionally… PPPs relied substantively on debt financing mostly provided by local commercial banks

− Mainly with floating rates or with reset periods of up to 2 to 3 years − As investors’ gained confidence, the pattern of financing moved towards higher debt:equity

ratios, shorter reset periods and finer spreads

In the aftermath of the global financial crisis Investors have become more cautious

− Commercial banks no longer seem to hold a “business as usual” view of the future and, hence, seem reluctant in making long-term commitments

− Reportedly, even in case of NHDP projects, bidders’ response has shown a marked decline and the financial closure has become an increasingly challenging task Developers and lenders seeking more support through Viability Gap Fund mechanism

GoI, however, is keen to keep up PPP momentum and initiated several measures in collaboration with RBI, to increase availability of funds for infra PPPs − RBI slashed repo rates and CRR and relaxed norms for external commercial borrowings (ECBs)− Through the fiscal stimulus package, IIFCL was allowed to raise about $6 billion through tax-

free bonds for providing re-financing to intermediaries lending to infrastructure projects− Government also requested the World Bank to increase the proposed line of credit to IIFCL, by

an additional $600 mn to $1.2 bn

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WB Support to India’s PPP Program(Backup for further discussion)

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AAA Support: Past and Ongoing

Cross-sectoral: Developing Frameworks and Capacity Building DEA (Infrastructure), MoF

− Recipient-executed DFID TF Grant of $450,000 (Closing date: June 2008) Online PPP database, Training programs, Stakeholder consultations, etc.

− PPIAF Review of PPP Institutions and Processes, by PartnershipsUK Study on Infrastructure PPP Financing, by PWC

− Others Managing the Fiscal Implications of PPPs Advice on the design of the Viability Gap Fund (2003/04) Reports on Infrastructure Financing/PPPs (2005/06)

The Planning Commission (Secretariat to the PM’s Committee on Infrastructure)− PPIAF assistance in drafting and/or desk review of various model documents

e.g., MCAs for Ports, Non-Metro Airports, Metro Rail and Railway Station Modernisation

Bihar: Technical Assistance complementing State DPL (PPIAF and DFID TF) Review of legal and institutional frameworks for development of infra PPPs

Capacity building of the Infrastructure Development Authority

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AAA Support: Past and Ongoing

Sector-specific interventions State Roads: Transaction Advisory support for road PPPs in Tamil Nadu, Orissa and AP

− 15 road stretches with a total length of 1550 km and an estimate cost of $1.9 bn Of these, 6 road stretches are likely to be developed as PPPs

Energy− Assisting the Maharashtra distribution company to better manage its private

distribution franchisees; − Helping borrowers to explore PPPs in distributed power generation and in

electricity distribution in Haryana (as part of a proposed lending operation)

Education: Supporting the reform of current PPP models, through − Detailed policy advice to MHRD on establishment of new PPP models as part of

their design of centrally sponsored schemes− State-level policy dialogue, particularly for secondary and vocational education

In Secondary Education, indicated strong interest in supporting implementation of new PPP models with investment lending

− Provided significant inputs to Planning Commission's strategy relative to PPPs in education as part of the Five Year Plan, 2009-2012

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AAA Support: WBNew NLTA for DEA (Infrastructure), MoF

Develop PPP Toolkits for 4-5 selected sectors− To help central and state governments improve their management of key PPP

processes viz., identification (making a choice between PPP and traditional public sector route),

procurement, contract management and monitoring of associated fiscal risks

− Review experience to-date with PPPs, through 15-20 case studies To inform design of future PPP program/projects

To provide inputs for all the components of the NLTA

Inputs to the National Level PPP Training Strategy− Training needs assessment

− Developing curriculum and content for Basic and Advanced PPP courses

− Training a cadre of Trainers

Assistance in increasing stakeholder awareness about the concept of PPP− Communications needs analysis

− Review of how other countries address this challenge

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Lending & Investment Support: WBOngoing & Planned

Line of credit to the India Infrastructure Finance Company Limited (IIFCL)− A joint project of the Bank and IFC − IIFCL is an SPV set up by the Government of India to provide long term debt for

infrastructure projects, with preference to PPP projects− Bank negotiations for support of US $600 mn through IDA & IBRD funds completed

Sectors covered will include power, roads, ports, airports, urban water supply & sanitation

− IFC, through its sub-national finance window, is to sign an MoU with IIFCL

Karnataka State Highway Improvement Project (under preparation)− Part-financing of modified long-term annuity contracts: 600 km− Part-VGF support for BOT-Toll projects: 340 km− A financing strategy for upgrading & managing 14,500 km of state highway network

Corporate loan (planned) of USD 100 million to MSETCL, the Government of Maharashtra’s transmission utility, which plans to undertake PPP initiatives− E.g., the strategic alliance model for building transmission infrastructure through

IFC’s sub-national finance window and involves a joint World Bank-IFC team