Social Sector: Education

Dr Manoj AnandIIM Lucknow

PPP in Indian Infrastructure: Challenges & OpportunitiesPPP projects take much less time to complete and theGovernment does not have to bear cost overruns. This will not only enable us to leverage our limited public resources but also improve efficiency of service delivery.

Dr Manmohan Singh,Honorable Prime Minister of India

Source: PM inaugural address at the Conference on Public Private Partnership in National Highways

Funding Infrastructure through PPPInfrastructure Spending

10th Five Year Plan (2002-07) - ActualsPublic InvestmentINR 6,809 billionPrivate InvestmentINR 2,252 billion11th Five Year Plan (2007-12) - RevisedPublic InvestmentINR 13,113 billionPrivate InvestmentINR 7,429 billion

12th Five Year Plan (2012-17) - ProjectedPublic InvestmentINR 20,496 billionPrivate InvestmentINR 20,496 billiom

Need for private capital in InfrastructurePressure on the fiscal position of governments coupled with need for massive investments in infrastructureKey Drivers of changeGlobalization and breakdown of trade barriers which is compelling local industry and services to become more competitiveEmergence of successful models for engaging the private sector and increased access to capital across borders in providing infrastructure servicesChanging economic models leading to breakdown of erstwhile infrastructure natural monopolies, that have made possible the creation of competitive market structuresRole of public sector/state shifting from that of a financier, owner and manager of facilities to that of a facilitator and enabler of efficient infrastructure creation and provision by multiple players with an independent regulator7Evolution of PPPs in IndiaPhase I: 19th Century & earlier 20th Century

The Great Indian Peninsular Railway Co (1853)

The Bombay Tramway Company's tramway services in Mumbai (1874)

PPP models were there in power generation & distribution in Mumbai and Kolkata in the early 20th centuryPhase II: 1991 to 2006Only 86 PPP projects worth INR340 billion were awarded till 2004 (World bank study of 13 states in 2005)

Most of the projects were in bridges and roads sector

Large-scale private financing has been limited to Vishakapatnam and TirupurEvolution of PPPs in IndiaPhase III: After 2006

Increasing acceptance of PPP model due to favorable policy reforms and innovative PPP structures

Growth in PPP from 450 projects costing INR 2,242 billion in November, 2009 to 758 PPP projects costing INR3,833 billion in July 2011PPP Projects in India by Sector

Roads: 53.4%

Urban Development: 20.1%

Ports: 8%

Energy: 7.4%

Tourism: 6.6%

Education: 2.2%

Airports: 0.7%

Common Forms of PPP Models in IndiaBOT Models

User-fee based BOT model: Commonly used in medium- to large-scale PPPs for the energy and transport sub-sectors (road, ports & airports)

Annuity-based BOT model: Commonly used in sectors/projects not meant for cost recovery through user charges such as rural, urban, health and education sectors

Performance-based Management / Maintenance contracts

PPP models that lead to improved efficiency are encouraged in an environment that is constrained by the availability of economic resources. Sectors meant for such form of PPP models include water supply, sanitation, solid waste management, road maintenanceWHAT IS PPP?PPP covers a wide variety of arrangements for the participation of private organisations in public projects.

Transportation facilities, water and waste-water services, telecommunications systems, energy generation and distribution and waste management facilities.

Can be financed mainly by user charges.

Private participation can cover design, construction, financing and operation.

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PPP projectsWhile there are a wide range of forms of Public Private Partnerships (PPPs) in infrastructureRange of infrastructure delivery options: Each type differs in terms of government participation levels, risk allocation, investment responsibilities, operational requirements and incentives for operators

It may would be better to start at the management contract end of the spectrum and moving forward to deferred payment structures.15Sectors have a varying degree of maturity in policy and regulatory frameworks for PPPs in IndiaIncreasing Policy and Regulatory ClarityIncreasing Commercial AttractivenessTelecomCommercial Attractiveness defined as a function of market structure, cost recovery and demand potentialTelecom and Electricity Generation may not be strict PPPs as defined in India but account for a major share of PPIsPower GenerationToll RoadsPorts & AirportsWater and Urban Infrastructure

PPP Market Maturity Curve

PPP: State Level ExperiencesThe top five states account for 58.3% of total value of PPP in India.The major sectors being targeted for PPP format by leading states are roads, ports and airports.Maharashtra, Karnataka and Gujarat average around 11% of the total value of PPP of the country.The bottom 10 states represent only 3.5% of the total value of PPP indicating differences in attractiveness of investment by private sectorAndhra Pradesh (17.5%) HITEC City, HyderabadRajiv Gandhi International AirportGangavaram PortKrishnapatnam PortHyderabad International Convention Center & an Integrated Township108 Mobile Emergency Response Service and104 Mobile Health ServicePPP: State Level ExperiencesHyderabads metro rail projectBridge across River Godavari at RajahmundryMachilipatnam Port at MachilipatnamDevelopment of four greenfield airportsBus Rapid Transit System in Hyderabad & VijayawadaDiagnostic centers in hospitals at Vishakapatnam, Kurnool, Kakinada and WarangalGujarat and PPPGujarats 40 minor private sector ports handle approximately 80% of cargo handled by all private ports in India.Gujarat possesses first ever private port project in the country.The only chemical port and tow LNG Terminals have been developed in the PPP format.Two air strips have been developed by private developers.

20Project FinancingEconomically separable capital investment project which operates under a concession from the host governmentProject cash flows as source of funds to service the loansto provide the return of & return on the equity invested in the project2/25/2014Manoj Anand21Project FinancingNon-recourse or Limited- recourse to the promoter.Project is very big compared to firms present size.The Project has unacceptable risk to be brought to the balance sheet. (So, quarantine the risk by forming a separate company called Special Purpose Vehicle)risk does not attach, but return does! 212/25/2014Manoj Anand22Project FinancingComprehensive contractual arrangements with suppliers & customers

High ratio of debt to equity with limited-recourse / non-recourse

Cash waterfall / escrow mechanism2/25/2014Manoj Anand23Project FinancingAn agreement by financially responsible partiesto complete the projectto purchase the project outputto supply the project inputsto make available necessary funds in the event of disruption in operation occurs

Contractual Structure for Project FinanceSpecial Purpose Vehicle/Project CompanyArrangers/Lead fundersEPCContractorEPC ContractSales contractO&MContractorSuppliersSupply ContractSponsorsExport CreditAgenciesOff-takerGuaranteeDebtEquityEscrow agent/TrusteeSecurityLessorsLease financingO&M contractIndependent experts/lawyersStudies/adviseGovernmentConcession/Land leaseInsurers/Surety companiesDelays/InsuranceSuppliers creditCompletion RiskPolitical RiskFinancial RiskPermitting RiskOperating Risk Funding Risk Demand Risk / Market RiskKey project risksForce MajeureRiskA Project is essentially a Web of Contractsthat mitigates (but does not eliminate) these risks Environmental RiskForeign Exchange RiskParticipant Risk Engineering/Design Risk Regulatory RiskIf you invested $1 in 19002/25/201426Annualized Rate of ReturnsTreasury BillsGovernment BondsStock Market4.03%4.92%9.73%2/25/201427If the Stock markets yields are highest, would you invest all your money there?Stock market returns are more variable than returns on Bonds/ Treasury Bills.Measured by Variance or Std Dev from the mean or the Expected Return2/25/201428Risk PremiumInvestors like to be compensated for the risk i.e., Return commensurate with Risk2/25/201429Treasury BillsGovt. BondsStock marketAnnualized Returns 4.03%4.92%9.73%Risk Premium00.89%5.70%Variance(2)7.968402.6292/25/201430No Risk No GainMeasure of Risk: CAPM2/25/201431RfRisk()01Expected ReturnRmRe = Rf + ( Rm- Rf )Typical Asset BetasSectorBetaEnergy0.41Gas0.57Power0.64Water0.46Telecom0.70Transport0.482/25/201432 measures the riskiness of the project vis--vis the Stock Market In practice, the companies also add Country risk premium+ Regulatory risk PremiumProjectLength Final EPCCostNHAI Estimate of CostYr of Cont*Cost/Km In 2006(km)TotalCost / KmTotalCost / KmTuni-Anakapalli59.02343.973425.8020024.73Tambaram-Tindivanam73.53154.294416.0020025.11Panagarh-Palsit64.44086.344076.3220027.56Durgapur Expressway64.03235.055248.1920026.02Rajahmundry-Dharmavaram53.02194.132514.7420024.93Dharmavaram-Tuni47.02124.512815.9820025.38Belgaum-Maharashtra Border77.03905.062002Bangalore Maddur62.62153.4320043.74Vadape Gonde996506.5720066.57Ahmedabad - Mahesana52.02244.3120005.61Vadodara-Halol32.01193.7219995.06Tumkur-Neelmangala32.51324.061945.9720015.06BOT Projects - EPC Cost Data* Considering 5% inflation to bring it to 2006 pricesBackFinancing Options