South Asia Regional Conference On€¦ · In the 74th Constitutional Amendment Act (74th CAA), 18 functions were identified and incorporated in the 12th Schedule, as functions that

URBAN INFRASTRUCTURE: New Approachesto Public-Private Partnership & MunicipalFinance Innovations

South Asia Regional Conference On

(National Institution for Transforming India)ASIAN DEVELOPMENT BANK

November 15-16, 2018 | Pravasi Bhartiya Kendra, New Delhi, India

3U R B A N I N F R A S T R U C T U R E

ACKNOWLEDGEMENT

This Background Paper is produced with an objective to support and facilitate the deliberations at the

‘South Asia Regional Conference on Urban Infrastructure: New Approaches to Public-Private

Partnership and Municipal Finance Innovations’, to be held on November 15-16, 2018 at Pravasi

Bhartiya Kendra, New Delhi.

The development of this background paper benefited significantly from the inputs and support provid-

ed by conference partners, UNESCAP and the Asian Development Bank.

The preparation of this background paper was undertaken by the team members of Programme

Appraisal and Management Division and the Public Private Partnersip (PPP) cell of NITI Aayog.

Knowledge Partners were instrumental in developing the background notes for their respective ses-

sions. While the background paper has benefited greatly from the individual contributions, the views

it contains do not necessarily reflect the views of the institutions involved in the preparation of the back-

ground papers.

4 N I T I A AY O G

Globally, the deficit in infrastructure implementation, vis-à-vis the demand, is not only huge but steadi-ly growing, especially so in the Asian region. In India alone, until 2040, estimated investments of around$4.5 trillion are required in the infrastructure space. With respect to urban needs, the population inSouth Asia is expected to grow by around 250 million till 2030, while that in India is expected to reacharound 590 million during the same period. There are an estimated 98 million people who reside in theslums of Indian cities and are disproportionately deprived of access to basic services and infrastructure.These gaps must be addressed, so that the cities grow equitably and in an environmentally responsibleway.

Countries need to explore innovative models to implement infrastructure projects. Public-private part-nerships (PPPs) have been one such option that enables governments to optimally share the risks associ-ated with a project’s life cycle. However, for making government procurement more dynamic, it is criti-cal to focus on wider options of “Partnership - Private & Public”. Furthermore, for PPP to work in India,a deeper deliberation is required on the means of democratising the governance at the city level with aview towards providing greater operational and fiscal autonomy to ULBs. Also, to enable effective pri-vate sector intervention, it is imperative to create a robust framework for alternative sources of infrastruc-ture finance, with cities focusing on innovative sources of municipal financing such as cooperation onhousing and community-based financing, land value capture and environmental externality financing.

These challenges and the emerging opportunities necessitate focusing on the institutional environmentto improve the delivery of sustainable urban infrastructure and services and evaluating alternatives forlong term, predictable financing. Hence, the National Institution for Transforming India (NITI) Aayog,the apex policy think tank of the Government of India, has partnered with the United Nations Economicand Social Commission for Asia and the Pacific (UNESCAP) and the Asian Development Bank (ADB)to host a conference at the Pravasi Bhartiya Kendra in New Delhi on November 15-16 , 2018 to deliber-ate on key regional issues, perspectives and the way forward on “Urban Infrastructure: NewApproaches to Public-Private Partnerships and Municipal Finance Innovations”.

The overall objectives of the conference are to:

• Review overall issues and assess the sustainability of PPPs and urban finance in South Asia, specifi-cally India.

• Broaden the knowledge base regarding PPPs and municipal finance innovations in South Asiathrough elaboration of international best practices and knowledge partnerships.

• Take the knowledge and recommendations forward, for better policy interventions by the govern-ment and execution by the private sector while disseminating and raising awareness within their net-works.

PREFACE


TABLE OF CONTENTS

ACKNOWLEDGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

AGENDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

DAY 1

SESSION 1: IMPLEMENTING URBAN INFRASTRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

SESSION 2: PARTNERSHIP – PRIVATE AND PUBLIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

SESSION 3A: FUNDING THE FUTURE: ALTERNATIVE SOURCES FOR INFRASTRUCTURE . . . . 19FINANCING

SESSION 3B: URBAN SOCIAL INFRASTRUCTURE – HEALTH AND EDUCATION . . . . . . . . . . . . . 27

SESSION 3C: SMART CITIES – EASE OF LIVING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

6 N I T I A AY O G

AGENDA

Day 1 - November 15, 2018

TIME SESSION

09:00-10:00 REGISTRATION AND MORNING TEA

10:00-11:30 INAUGURAL SESSION

11:30-12:30 SESSION 1: IMPLEMENTING URBAN INFRASTRUCTURE

Governance at the City Level – Clarity of Responsibility and Coherence in Output Newer and Innovative Means of Financing and Implementation

12:30-13:30 SESSION 2: PARTNERSHIP- PRIVATE & PUBLIC

Deliberations on newer frameworks for procurement, involvement of international contractors, global bestpractices, modalities for scaling up successful models and engaging the private sector.

Analysing the Growth, Issues and the Way Forward for the PPP Framework in India Newer Approaches for Procurement of Infrastructure ServicesStandardisation of DocumentsGlobal Best Practices and Key Learnings

13:30-14:15 NETWORKING LUNCH

14:15-16:30 SESSION 3A: ALTERNATIVE SOURCES FOR INFRASTRUCTURE FINANCING

Exploring alternative means such as domestic/global insurance/pension funds, sovereign funds, privateequity, etc. via newer instruments viz. municipal bonds, credit enhanced debt, etc. along with suitableincentives and supportive regulatory framework.

Newer Products and Investors Challenges and the Way Forward

14:15-16:30 SESSION 3B: BREAKOUT PARALLEL SESSION – PPP FRAMEWORK SECTOR FOCUS

Urban Social Infrastructure (Health & Education)Effective governance of health and education needs a degree of centralised policy and finance, with decen-tralised management and local funding. Therefore, it is critical to attract private funding to ensure addition-al resources, improved service coverage, and enhanced service quality. Thus exploring complementaryadvantages of the public and private sectors is imperative.

14:15-16:30 SESSION 3C: BREAKOUT PARALLEL SESSION – PPP FRAMEWORK SECTOR FOCUS

Smart Cities – Ease of LivingSmart cities with focus on sustainable and inclusive development, offering enhanced quality of life are thefuture. Key challenges, however, are financing, implementation and operation of the smart solutions.Further brainstorming is required on horizontal and vertical coordination between the three-tier gover-nance, cohesion in policies, master development plan, effective administration, municipal bonds and sus-tainability of ULBs, etc., to explore the way forward.

16:30-16:45 TEA/COFFEE

16:45-17:45 RECOMMENDATIONS FROM EACH GROUP, FOLLOWED BY PLENARY DISCUSSION


AGENDA

Day 2 - November 16, 2018

TIME SESSION

9:00-9:30 MORNING TEA

9:30-10:30 OPENING SESSION ON MUNICIPAL FINANCING

10:30-11:30 SESSION 1: URBAN UTILITIES

Focus Sectors: Water Supply, Water Treatment, Solid Waste Management

11:30-13:00 SESSION 2: HOUSING & COMMUNITY – BASED FINANCING

Benefits of adopting PPP models in affordable housing for municipal governments.Overcoming the challenges such as increasing land prices, poor legal infrastructure, limited long-term funding, inefficient regulatory regimes and inappropriate land planning. Community-based housing finance for urban poor to leverage funds

13:00-13:45 NETWORKING LUNCH

13:45-15:15 SESSION 3: LAND-LINKED FINANCING

Strengthening capacities for effective land-linked financing and land value capture .Strategies for governments to extract greater value including land value taxation, land pooling, negotiated extractions, tax increment financing, special assessments, joint development, betterment levies, transportation utility fees, impact fees and air rights.

15:15-16:45 SESSION 4: ENVIRONMENTAL EXTERNALITY FINANCING

The application of environmental taxes that can facilitate sustainable urban development whilst simultaneously contributing to local tax revenues. The challenges or potential risks of externality financing.

16:45-17:00 TEA/COFFEE

17:00-17:30 SESSION 5: THE WAY FORWARD & CLOSING REMARKS

NITI Aayog, UN-ESCAP and ADB


NOVEMBER 15, 2018

Day 1

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0 10 10020 30 50 60 70 80 9040

10 N I T I A AY O G

DAY 1

Urbanisation and its contribution to economic developmenthas recently been the focus of policy making in the SouthAsian region. This is primarily in view of the South Asianregion being one of the least urbanised areas in the world,with urbanisation levels of merely ~34.8% as against globallevels of ~54% (2015)1. Such low levels of urbanisations are acause of concern especially considering the established cor-relation between the urbanisation levels and economicgrowth of a country, as shown in figure 1.

Successful economic and social advancement, however,demands sustainable and well-managed urbanisation, withadequate focus on rural-urban migration, expanding citylimits, climate change etc. For South Asian economies, awell managed urbanisation is a serious challenge, not justin view of its existing deficit in the infrastructure, but alsoconsidering the daunting increase in urban population overthe next 20 years.

Urban population in India has grown at an annual growthrate of ~2.4% over the last 26 years, which is higher than glob-al average of ~2.0%.An estimated ~439 million (2016)2 peopledwell in urban areas of India, who contribute to almost ~60%of its Gross Domestic Product (GDP)3. The current urbanisa-

tion level of ~33%, however, is still quite low compared to theaverage urbanisation levels of ~40% for developingeconomies4. Rural-urban migration, expansion of city bound-aries and reclassification of rural into urban currently con-tribute to almost ~55% of the growth in urban population(2001-2011)5. Around ~24% of the urban population lives inthe slums of India with only ~65% having access to basic san-itation services (as in 2014)6. Owing efforts of the Governmentand other support groups/institutions in India, the percent-age of urban population with no access to power has reducedto less than 2-3%. However continuous efforts are required toensure the growth in population does not render the improve-ments futile.

Recognising the need for sustainable urbanisation, theGovernment of India has undertaken policy level reforms andhas been institutionalising schemes/programmes for improv-ing the performance, governance of urban local bodies inIndia. On the governance front, major reforms were undertak-en through the 74th Constitutional Amendment Act in 1992,which accorded constitutional status to the municipal bodies,by initiating a process of democratic decentralisation. TheAmendment stipulates devolution of greater functionalresponsibilities and financial powers to the municipalities,

- Session 1 -Implementing Urban Infrastructure

Examining major roadblocks and evolving innovative models for holistic development

Figure 1: Correlation between the urbanisation levels and economic growth

(Source: United Nations & World Bank Study 2014 cited in World Cities Report 2016)


DAY 1

regular and fair conduct of municipal elections and constitu-tion of State Finance Commissions among other stipulations.

Further, programme level efforts were undertaken throughthe Jawaharlal Nehru National Urban Renewal Mission,launched in 2005 (continued till 2014). Currently theGovernment of India is undertaking a massive urbanisationprogramme under dedicated schemes for various focus areassuch as Pradhan Mantri Awas Yojana (PMAY Housing for All(Urban Mission)), Atal Mission for Rejuvenation and UrbanTransformation (AMRUT), Smart Cities Mission (SCM),Swacch Bharat Mission (SBM), National Urban LivelihoodsMission (NULM), National Heritage City Development &Augmentation Yojana (HRIDAY) Mission etc.

Challenges to Well-Managed Urbanisation

Achievement of desired objectives, under various ongoingschemes, demands resolution of existing challenges in thesystem. The challenges to urbanisation in India can broadlybe understood in terms of structural, financial and technical.Structural issues pertain to broad matters of governance, reg-ulatory matters and policy frameworks. Financial matters, onthe other hand, are challenges relating to internal fund gen-eration and the 3Cs of external fund raising i.e. Capability,Creditworthiness and Channels. Technical matters are theimplementation challenges relating to spatial planning,shape, project development models, project implementationexperience and environmental degradation.

A. Governance ChallengesIn the 74th Constitutional Amendment Act (74th CAA), 18functions were identified and incorporated in the 12thSchedule, as functions that the State Government can trans-fer to the municipal bodies in an attempt to ensure betterplanning and implementation at the local level. This includ-ed functions such as urban planning, regulation of land useand provision of basic utilities like water, sanitation, solidwaste management, public health and regulating the con-struction of buildings, roads and bridges. In the run-up to theimplementation of the 74th CAA, the number of municipalbodies in India has crossed 40417, however their delivery hasnot kept consonance with their increasing number. Althoughthe 74th CAA embodied globally followed urban governancepractices involving decentralisation of responsibilities andresources to the local authorities, while encouraging the par-ticipation of civil societies, it has not been able to achieve itsdesired impact because of the following reasons:

54.0%

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70.0%

80.0%

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Urban Population (%age of total) %age of Urban population in slums Urban population with accessto basic sanitation

World South Asia India

Figure 2: Urbanisation Trends

Efforts towards Sustainable Urbanisation

Figure 3: Challenges to Urbanisation

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12 N I T I A AY O G

DAY 1

By nature, the 74th CAA is persuasive owing to federalfabric of the Constitution. As per CAG Audit report onlocal bodies of various states for 2015/2016, several majorstates including Uttar Pradesh, Rajasthan, Karnataka,Bihar, Odisha are yet to devolve all of the18 functions tourban local bodies. States have expressed administrativeor legislative constraints in devolving all functions8.

The municipal bodies in any State derive their powersand responsibilities from the municipal, as well as subjectmatter laws, framed by the respective States. The incon-sistencies in the framework across states and weak legaland institutional framework hamper the effectiveness andefficiency for urban governance in India.

For matters like urban planning and local revenues suchas property tax, State Government is the final approvingauthority. There is a need to strengthen the “local” elem-ents of urban governance. In the current situation, localgovernment is functioning as an extension of State Gove-rnments. The absence of capacity is the reason being citedfor concentration of powers at the State Governmentlevel. There is an urgent need for local governments to betruly representative of the local aspirations and to reallyfunction as a third-tier of government. After all, the localgovernment is called the “government at the door-step”of citizens.

B. Devolution of FinancesThe total revenue of all Urban Local Bodies (ULBs) in Indiaamounts to approximately 1% of India’s GDP compared tolocal government revenues of 7.4% of GDP in Brazil and 6%

of GDP in South Africa9. ULBs in India are, thus, largelydependent on Central and State grants with only one-third orless of their total revenues comprising own revenues. Thelimited revenue base and substantial dependence on Centraland State grants severely constrain the ability of ULBs toinvest adequately in capital expenditure which will createinfrastructure and thereby, improve quality of life in the city.

The constitution of the State Finance Commission (SFC) wasaimed to look at independently the revenue share betweenthe State Government and the urban local governments.However, either SFCs have not been constituted or their rec-ommendations have not been fully implemented. The fiscaldevolution to the urban local bodies is not based on the objec-tive criteria and hence does not form a predictable source ofrevenue. The uncertainty on the quantum of resources avail-able with the urban local bodies does not allow them toundertake planning for implementing long-term infrastruc-ture projects.

C. Implementation ChallengesWhile availability of financial resources is a cause of concernfor ULBs, the absorption of programme funds, as madeavailable by the Central and State Government, is an equallyenormous challenge. As per the 22nd Report of StandingCommittee on Urban Development (2017-2018) the utiliza-tion and allocation for various urban development schemesis as demonstrated in figure 4 below.

Average utilization for all schemes put together is thereforeless than 20%. This is mostly in the view of capacity andcapability challenges in addition to other implementation

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SCM PMAY AMRUT SBM NULM HRIDAY

Fund allocation (Rs Crs)

Fund released (Rs Crs)

Funds utilized (Rs Crs)

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12,000

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SCM PMAY AMRUT SBM NULM HRIDAY

Fund allocation (Rs Crs)

Fund released (Rs Crs)

Funds utilized (Rs Crs)

Figure 4 : Funds allocation and utilisation for Urban Schemes in India


hurdles faced by the ULBs. Attempts have been made toaugment these implementation/technical capabilitiesthrough engagement of the private sector. However, theprivate sector in its attempt to augment the ULB capabilitieshas faced its own set of challenges such as low returns,delay in approvals, regulatory uncertainty etc., leading toreduced appetite for further investments in the sector. It hasalso been observed that there is a greater emphasis of pub-lic investments on infrastructure creation rather thanimproving service levels. The sector thus goes through sev-eral investment cycles, but public service providers are sel-dom made accountable for past investments and servicelevels delivered. Considering these challenges, thePlanning Commission in its 2012 report on UrbanGovernance, had recommended various goals for UrbanGovernance for the 12th Plan including:

State Policy focus on delivery of Urban Services at desiredlevels rather than creation of assets.

Planned urbanisation with optimal and sustainable utili-sation of land and other urban resources through consul-tation with neighbourhoods.

Private Sector participation for designing, building,financing and operating the urban infrastructure and fordelivery of urban services.

Most of the aforementioned goals, even after the completionof 12th plan period, are still in inceptionary phases and needto be targeted with vigorous efforts for any visible impact inurban infrastructure services.

D. Devolution of FunctionariesThe manpower available in most of the ULBs is not equippedwith the necessary technical and planning skills to meet thegrowing urban challenges. It can be said that while cities

have grown, the local governments have not grown in skillsets both in quantity and quality. Even senior officials at localgovernment including the commissioners have very shorttenures that does not allow the city government to take long-term initiatives. Further, to engage the private sector, the citygovernments will require the capacity to supervise and enterinto contracts with the private sector.

It is hence imperative that a policy level discussion is under-taken on the aforementioned challenges faced by the urbanlocal bodies on sustainable innovative solutions for same.

End notes

1 World Cities Report 2016 by UN-Habitathttp://wcr.unhabitat.org/main report/#section_eleven

2 World Development Indicators on Urbanisation by World Bankhttp://wdi.worldbank.org/table/3.12



5 Agenda Action Plan (2017-18 to 2019-20) by NITI Aayoghttp://niti.gov.in/writereaddata/files/coop/India_ActionAgenda.pdf


7 Agenda Action Plan (2017-18 to 2019-20) by NITI Aayoghttp://niti.gov.in/writereaddata/files/coop/India_ActionAgenda.pdf

8 Planning commission Report on Urban Governance Report -2012


DAY 1

Discussion PointsOwing various challenges highlighted above, it is necessary to bring the following issues for deliberation:

1. To address the dichotomy that urban local bodies have considerable responsibilities but little authority. The 3Fs of devolu-tion - functions, finance and functionaries - need to be implemented for making them an effective third tier of government.

2. Addressing the inconsistencies of legal framework for urban local bodies across various states.

3. Planning for optimal and sustainable utilisation of all available resources along with a predictable and significant shareof fiscal devolution from the higher forms of government.

4. Enhancing technical and manpower capability of ULBs.

5. Encouraging private sector participation for project implementation and resource mobilization.

14 N I T I A AY O G

DAY 1

The India PPP story so far

Public Private Partnerships (PPPs) have increasingly comeforth as a mechanism for delivering infrastructure projectsin India, with India today being recognized as one of thelargest markets for PPP projects in the world. With manyyears’ of experience, the PPP framework in many sectors inIndia is now undergoing significant policy and regulatoryreforms so as to reach the next level of maturity. NITIAayog, which has been mandated to provide directionaland policy inputs to the Government, has deployed a feder-al co-operation structure to plan and to facilitate some largePPP projects across Central Line Ministries, States andUnion Territories.

India has progressed well in creating an institutional mech-anism to analyse potential PPP projects and to standardisedocumentation and processes. Government of India andfew State Governments have devised a robust PPP policyformulation and appraisal mechanism. The CabinetCommittee of Economic Affairs (CCEA) approved an elab-orate and a robust procedure for approval of PPPs andthereafter, the Public Private Partnership AppraisalCommittee (PPPAC) was set-up. Furthermore, the CabinetSecretariat has provided relaxation from obtaining Cabinetapproval in cases, involving transfer on lease or rent orlicense of land (Possession & control of Government/Government controlled entities) to a concessionaire, thathave been appraised through the PPPAC route and requi-site approval (as the case may be, depending on the valueof the projects).

However, despite these efforts, there are some over-arch-ing issues that need to be resolved if the Government hasto achieve its targeted investment in Infrastructure.Following are two important issues that are still plaguingthe sector:

Institutional capacity issues in developingInfrastructure projects: As highlighted by the report ofthe Committee on Revisiting and Revitalizing the PPPmodel of Infrastructure “governments at all levels,including the ULBs, line departments, state agencies, areby and large unable to create a steady pipeline of projects

due to institutional capacity constraints”. This lack ofcapacity does not only impact the pipeline of PPP proj-ects but also leads to launching of poorly prepared proj-ects for bidding. Also, to ensure that PPPs are properlyprioritized (subject to budgetary constraints) and replica-ble where useful, appropriate institutional investmentsare warranted. Arguably, where the expertise to createand evaluate project proposals is absent, viable projectscannot make headway.

Limited spread of PPPs in specific sectors: As highlight-ed by the database of infrastructure projects in Indiamaintained by the Department of Economic Affairs, PPPprojects both by number and value, have largely hap-pened in the transport sector, leaving other sectors large-ly neglected.

During the whole of last decade and a half, the Governmenthas made significant investments to create infrastructureassets using public funds and by awarding PPP concessionsas well. As per the latest data published by the Departmentof Economic Affairs, Government of India, 1539 PPP projectshave been awarded so far in India. Sector-wise break-upshows that the transport sector accounts for 58% of the theseprojects, followed by the energy sector with 24%, whilesocial and commercial infrastructure sector accounts for 9%and water & sanitation for the balance 8%.

Out of these 1539 projects, about 745 projects (i.e. 48%) arecompleted or are in the operational stage, while others areeither stuck at pre-construction stages or are under construc-tion. A closer view of the projects at different stages revealsthat the average time taken for achieving financial closure is~2 years, while average time taken for achieving commercialoperations is ~5 years, as demonstrated in Figure 5 andFigure 6. These key metrics indicate that project implement-ing agencies both public as well as private, face significantissues in financing and implementing PPP projects. Whilethere have been success stories in the Infrastructure sector, anumber of projects have suffered, mostly on account of mar-ket failures leading to disrepute for the prevailing contract-ing models. Also, after the initial success, PPP projects acrosssectors are facing multiple challenges in order to maintaintheir momentum.

- Session 2 -

‘Partnership - Public & Private’the New Approach


Newer Approaches to PPPs

As is evident from the exhibits above, the PPP projects acrossall states in India have experienced a number of challenges ingetting the projects to reach completion and operations stage.Aggressive bidding, poor appraisal capacity of commercialbanks, inadequate project preparation activities, capacityconstraints for concession monitoring, multiplicity of institu-tions, and overlapping functions are some of the challengesthat have resulted in delays faced in achieving financial clo-sures and commercial operations.

The data available with Department of Economics Affairs,Ministry of Finance reveals that average number of projectsrecommended per year by PPPAC from Financial Year 2007to Financial Year 2018 has been pointing towards a decline(Figure 7). Hence there is a strong need for rebooting PPPModels, so that a sustainable project cycle can be created.There also exists a dire need to consider newer approaches toengage with the private sector for procurement of infrastruc-ture and related services. Further, there is need to incentiviseinnovation for financial support to infrastructure projects innewer sectors as long as the spirit of PPP is safeguarded inboth the cases.

Key issues affecting delivery of infrastructureprojects

In the paragraphs below, we highlight some of the challengesof implementing infrastructure projects:

Project Planning and Preparation: In India PPPs havemostly been perceived as a tool to leverage privatefinance and to develop infrastructure asset, rather thanas tool for quality service delivery and output. Today,the Government possesses a significant infrastructureasset base, which requires massive investments for effi-cient operation and maintenance. Performance basedcontracts that encourage better maintenance and service

DAY 1

Figure 5:PPP projects at different stages of Life cycle

(Source: www.pppindia.gov.in as accessed on October 10, 2018)

PPP Projects1539

Completed or Operational Projects745

Time taken for financial ~2 Years

Time taken from FC till COD~ 5 Years

ChhattisgarhBihar

Arunachal PradeshTelanganaDelhi (UT)Jharkhand

AssamGoa

KeralaWest Bengal

OdishaUttarakhand

SikkimHaryana

RajasthanGujarat

Andhra PradeshTamil Nadu

Uttar PradeshPunjab

MaharashtraMP

KarnatakaHimachal Pradesh

Preconstruction Construction O&M Completed

0 20 40 60 80 100 120 140 160 180

Figure 6 : State wise status of PPP projects


16 N I T I A AY O G

level of assets at similar or lesser costs, could be ananswer to this requirement.

However, a significant percentage of projects that havefailed to take-off, could have been better planned at theconceptualisation and the bidding stage. Emphasisshould be given to ensure the overall bankability of a proj-ect, project life-cycle cost and output. Strong impetusshould be given on quality of techno-economic feasibilityreport. In case of urban projects in particular, importanceof project planning activities like capacity design, demandforecast, mapping of project readiness, affordability andupfront approvals have been well established and itsimpact on success of the projects is quite evident.

Procurement Processes: A transparent and credible processthat attracts adequate investor interests and generates com-petitive pressures right through to the end of process is cru-cial in coming up with sound project viabilities.

Financing issues: PPP projects are facing financingissues, including aggressive bidding, under-pricing ofprojects and funding constraints (debt and equity).Project sponsors in PPP projects depend hugely on com-mercial banks for financing the debt portion of the proj-ect. These banks have reached their correspondingexposure limits for the sector and run with high level ofnon-performing assets (NPAs) in the sector.Commercial banks have been the largest contributor ofPPP financing in India since the beginning. In India’sinfrastructure financing landscape where there are afinite number of key financial institutions financing

bulk of infrastructure projects, it is quite possible to cre-ate a lenders’ pool and stapled debt at the project devel-opment stage. This will improve the prospects projecttaking off with reasonable success.

Furthermore, considering the federal structure of Indiathere is currently no incentive for the State Government toapproach the Central Government in case of a viable PPPproject. There is also a current no-go in case StateGovernments are willing to extend capital supportbeyond the threshold limit, covered under extantViability Gap Funding (VGF) Scheme, in the form of inno-vative structures, such as deemed shadow toll, additionalland and EPC for funded works etc.

Post Award Asset and Contract Management: After proj-ect award, the existing institutional network has a limitedcapacity to manage infrastructure assets and the contracts,which are embedded therein. There is a need for a para-digm shift from project monitoring, which is the existingstyle, to project partnering. At present, the authorities,who conceptualize and structure the project, do notengage in employing techniques to model and to assessprobabilities of risks associated with the project. Further,in the absence of clear renegotiation window in the con-tracts, when these risks do occur, a substantial projectstress is created, which is evident from the magnitude ofarbitrations and dispute cases pertaining to the same.

Besides, the Kelkar Committee’s recommendations onrevitalization of the PPP model of infrastructure arefocused on a host of issues, including rebalancing of risk

DAY 1

15 13

4853

33

52

25 25

18 17

94

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Figure 7: Number of PPP projects approved by PPPAC till date



sharing, renegotiation of contracts, need for an independ-ent regulator, creation of a dispute resolution mechanismand strengthening of lending institutions. Efforts arebeing made by the Government to implement some ofthese recommendations which are demonstrated in thefigure 8.

Key Enabling Interventions

Some initiatives taken during the last few years to revitalisethe PPP sector include adoption of new PPP models, specialdispensations for languishing projects, liberalisation of exitpolicies and monetisation of assets through station redevel-

opment programs and roll out of the long-term Toll-Operate-Transfer (TOT) model.

To reduce dependency on commercial banks and forimprovement of the PPP financing market in the country,the government has undertaken several initiatives. TheGovernment has established institutions such as IndiaInfrastructure Finance Corporation Limited (IIFCL) andNational Investment and Infrastructure Fund (NIIF) tofacilitate requisite long-term funding, while newer andinnovative products like Infrastructure Debt Funds (IDFs)and Infrastructure Investment Trusts (InvITs) have beencreated to suitably monetise asset portfolios. The govern-ment, through institutions like IIFCL, introduced financing

DAY 1

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bilit

y co

nstr

aint

s Aggressive bidding and underpricing of projects

Huge dependency on commercialbanks for PPP financing

Over leveraged balancesheet of developers

Lack of equity in themarket

Inflation of the Total ProjectCost (TPC) by bidders

Cap

acity

and

pro

cedu

ral c

halle

nges

Lack of efficient projectpreparation acitivities

Delay in landacquisition

Delay in obtainining approvalsand clearances

Inadequate projectmonitoring activities Po

licy,

regu

lato

ry a

nd in

stitu

tiona

l gap

s Strengthening of the regulatory regimethrough independent regulators

Under developed disputeresolution mechanism

Adsence of dedicated PPP policy orregulation at national level

Multiplicity of institutions andoverlap in roles

Figure 8: Kelkar Committee’s recommendations

Figure 9: Financing Mechanisms

NBFCs-IFCs

IIFCL -Takeout

Finance orReliance

VGFScheme FDIs

Tax-freeInfrastructure

Bonds InVITs

NIIF ECBs IDFs

18 N I T I A AY O G

instruments such as take-out finance, refinance, masalabonds etc. with the aim to boost private investments in theinfrastructure sector. Figure 9 demonstrates these financinginstruments.

A renewed focus of the Government is evident and theaction is geared towards creating projects success stories atthe level of States. Thus, there is a need to develop collabora-tive networks. Given the market failures, there is a strongneed to create innovative and socially inclusive project andservice delivery models in the sector. While delivering proj-ects, success stories need to be created, so that replicablemodels that can be rolled out with reasonable success.Knowledge sharing among the key stakeholders and bestpractices need to be disseminated effectively so that theinfrastructure projects develop a market for themselves. It isnow imperative to direct efforts towards capacity building atthe level of State government as well as departments, so they

are able to carry out thorough project preparation, planningand eventually deliver successful projects on ground.

Given this context, the NITI Aayog’s mandate as the thinktank of the Government along with its various focusedefforts namely, fostering an environment of co-operative fed-eralism, collaborating actively with States is designed tobring-in the much needed revival in the sector. NITI Aayogis taking active participation in providing stimulus to thePPP sector by facilitating regulatory reforms, assisting StateGovernments in structuring complex, high impact andreplicable infrastructure projects in PPP mode. NITI Aayogis also steer-heading a program ‘Development support serv-ices for States and Union Territories’ for hand-holding forimplementing infrastructure projects in PPP mode in variousStates and Union Territories. All these efforts are aimed atstreamlining PPP regulatory framework, ensuring capacitybuilding and creating replicable and scalable success stories.

DAY 1

Discussion PointsWe will try to discuss and seek answers to some of the key questions we need to address in order to reinventing the PPPsuccess story in India:

1 What are the issues affecting the sustainability of PPPs in Indian context?

2 Is there a need to shift focus from asset and private finance focused to service delivery over long term?

3 Financing approaches: Short term finance vs. long term institutional capital?

4 What could be the newer approaches for procurement of Infrastructure services?


DAY 1

Being one of the fastest growing economies of the World1 andthe seventh largest economy in terms of GDP at currentprices2, India’s Infrastructure needs are not only huge but evergrowing. As indicated in the Economic Survey 2017-2018,around US$ 4.5 trillion worth of investments are required forInfrastructure in India, till 2040, for improved economicgrowth and community wellbeing. The current trend showsthat India can meet around US$ 3.9 trillion (~86%) ofInfrastructure investment out of total required investment ofUS$ 4.5 trillion. The cumulative figure for India’s Infrastru-cture investment gap would hence be around US$ 526 Billionby 20403. This envisaged deficit, along with the urgent needfor diversification of funding sources, spells out the financingchallenge of Infrastructure in India.

Past Perspectives

Historically, the financing of Infrastructure projects wasdone through budgetary allocations and public investmentsby erstwhile Development Financial institutions like ICICI,IDBI, IFCI, etc. Public sources constituted more than 75% ofthe total financing to Infrastructure during the Tenth Plan.However, the Eleventh and Twelfth plan saw active involve-ment of Commercial Banks, especially Public Sector Banks(PSBs) as the main facilitators and financiers ofInfrastructure projects. Year wise estimates for InfrastructureInvestments from FY 2007-08 to FY 2016-17, along with pub-lic and private investment envisaged for same are demon-strated below in Figure 10.

- Session 3A -

Alternative Sources forInfrastructure Financing

Total Invest as %age of GDPPublic Invest Lac Cr

Private Invest Lac CrPublic Invest. %agePrivate Invest. %age

69% 66% 67%

56%

61%

65%

68% 65% 65%65%

44%50%

60%

70%

80%

8

10

12

6% 7% 7% 8% 6% 6% 6% 6% 6% 6%3.59 3.43 3.56 4.25 4.6

2.862.21

2.002.4931% 34%

33%

44%39% 35% 32%

35% 35%35%

0%

10%

20%

30%

40%

0

2

4

6

2007-08(A)

2008-09(A)

2009-10(A)

2010-11(A)

2011-12(A)

2012-13(A)

2013-14(A)

2014-15(RE)

2015-16(BE)

2016-17(P)

0.96

2.16 2.74

1.41

2.97

1.451.94

3.03

5.68

3.34

6.34

Figure10: Infrastructure Investments Estimates from FY 2007-08 to FY 2016-17

*GDP at market prices, A=Actual, RE= Revised Estimates, BE=Budget Estimates, P=Projections(Source: FY06-07 to FY11-12 from Twelfth Five Year Plan Volume 1;Planning Commission; FY12-13 to FY 16-17; Appraisal Document Five Year Plan2012-17, by Niti Aayog)

20 N I T I A AY O G

The Twelfth Plan had projected an investment of Rs.55,74,663 Crore (at current prices) for the Plan period (2012-17), with a share of 48% from the private sector4. However,based on lower investment received in the first two years ofthe Plan period and anticipated investment levels, in theremaining three years of the Plan, being low, the Twelfth Planprojections were revised to about 69%5 of the original planprojections. The shortfall in realising the projected privatesector investment largely accounts for the downward projec-tions of the Infrastructure investment in the Twelfth Plan6.The principal reasons for shortfall in private sector invest-ment across the Infrastructure sub-sectors can be attributed toshrinkage of equity & debt flows in PPP projects due tostranded and stressed projects and increase in Non-Performing Assets (NPAs) of Banks, thereby causing lack oflong-term financing options for Infrastructure projects.

Bank Credit to Infrastructure and EnsuingProblems

Between 2005 and 2012, Banks were the mainstay of debtfinancing to infrastructure. With their geographical reachand inexpensive deposits, Banks lent heavily to infrastruc-ture projects, especially to sub-sectors such as Power andRoads. Their exposure to Infrastructure sector peaked ataround 14% of their total credit7. They promptly filled in thegap in Infrastructure financing due to tight Governmentbudgets and declining DFIs who found it difficult to com-pete against attractive loan pricing by Banks (Figure 11).

The unrestricted flow of finances from Banks toInfrastructure has created its own set of problems for the sec-tor and the economy at large. Banks are now grappling withthe problem of rising Non Performing Assets (NPAs), muchof which is concentrated in Power and Roads sector. A num-ber of structural, institutional and regulatory factors areattributed to have led to these NPAs, but the net impact isthat Banks are now saddled with bad debts which arerestricting them to take further exposure to Infrastructuresector. Banks’ outstanding credit to Infrastructure sector hasdecreased by 8% in last 2 years from Rs.9.6 lakh crore as atMarch 2016 to Rs.8.9 lakh crore as at March 20188. NPA’salone is not the only factor that has led to the currentdrought in Bank financing. Factors affecting flow of Bankfinancing to Infrastructure include:

Deterioration in asset quality: The credit costs and losseson account of falling asset quality; reducing the capitalavailable with Banks, their ability to raise funds and alsotheir ability to take fresh exposures.

Capital constraints: Capital is essential in order to raisefunds and take fresh exposure. The increased capitalrequirement under the Basel III norms is expected toreduce Banks’ lending ability. Indian Banks requireRs.4,60,120 crore of for an additional capital (Rs.2,39,720crore Common Equity Tier-I, Rs. 1,55,900 crore AdditionalTier-I and Rs.64,500 crore Tier-II)9 in order to meet BaselIII capital requirements.

DAY 1

Infra lending As %age of total Bank Credit

Power Telecom Roads Others

10% 9%

18% 18% 16% 14% 15% 13% 12% 12% 12% 13% 13%8.7%

9.7% 11.7% 13.2% 13.7% 13.9% 14.0% 14.1% 13.3%11.6%

10.3%10.0%

12.0%

14.0%

16.0%

80%

100%

120%

46% 46% 49% 51% 53% 57% 58% 60% 60% 58% 58%

19% 19% 16% 18% 15% 12% 11%

0.0%

2.0%

4.0%

6.0%

8.0%

0%

20%

40%

60%

FY2008 FY2009 FY2010 FY2011 FY212 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018

10% 9% 9% 9%17% 17% 19% 17% 18% 18% 19% 18% 18% 20% 19%

Figure 11 : Percentage Share of Infrastructure in Bank Credit and Sectoral Composition

(Source: Annual Series for Scheduled Commercial Banks- Select Aggregates and Industry Wise Deployment of Bank Credit from the Handbook of Statisticson the Indian Economy, Database on Indian Economy, Reserve Bank of India)


Exposure constraints: As of March 2018, credit toInfrastructure accounted for 10.3% of Banks Total Credit(Food and Non-Food) and 33% of Banks’ Credit toIndustries, thereby reducing Banks’ ability to take addi-tional exposure in the Infrastructure sector.

Asset liability mismatch: About 85% of Banks’ depositshave maturity of up to five years10 as against 20 to 25 yearsof most Infrastructure projects, thereby restricting Banks’ability to provide long term financing to Infrastructureprojects.

Owing aforementioned challenges, Bank as the primary fund-ing institutions for Infrastructure, with funding at pre 2015levels, may not be sustainable going forward. However, itneeds to be ensured that the huge savings base tapped byBanks continues to provide support to the Infrastructure fund-ing requirement in the country through prudent lending andstructuring of projects, disciplined compliance of asset liabili-ty norms and a healthy mix of greenfield/brownfield projectsor fresh lending/refinance etc. At the same time, Banks neednewer sources of finance in order to meet the ever growingfinancing gap in Infrastructure.

Alternative Financing of Infrastructure

While deliberating on the newer sources of Infrastructurefinancing it needs to be highlighted that, in addition to theaforementioned challenges of Bank financing, private sectoradditionally faces the following challenges in arrangingfunds for Infrastructure projects:

Already leveraged balance sheets of major developers,making further debt raising difficult;

Constraints of insurance and pension funds to invest inlower rated bonds for Infrastructure sector;

Nascent stage of Indian corporate bond market;

Insufficient equity with domestic sponsors; and

Preference for investment in brownfield projects by over-seas investors, pension/insurance funds etc.

It is hence pertinent that the challenges faced by privatedevelopers in terms of factors limiting investment by insur-ance and pension funds in Infrastructure projects and pre-requisites for development of a vibrant corporate bond mar-ket are suitably addressed. Also innovative products andmechanisms need to be explored for tapping the funds avail-able with long term institutional investors such as pension,insurance and sovereign funds etc. as well as for mobilisationof private capital.

The financial market has recently seen the development ofsuch innovative mechanisms through creation of institutionssuch as National Investment and Infrastructure Fund (NIIF)and in form of introduction of products/entities such asCredit Enhancement, Infrastructure Debt Funds (IDF),Infrastructure Investment Trusts (InvITs), Alternative Invest-ment Funds (AIF), asset monetisation techniques etc. Thealternate sources can broadly be categorized into Institutionsand Products and Mechanisms as described below:

DAY 1

PRO

DU

CTS

AN

D M

ECH

AN

ISM

S 01

02

03

04

05

Capital Market

Innovative Financing Vehicles

Credit Enhancement

Securitization

Asset Monetization, VCF, etc.

Pension & Sovereign Funds

NIIF & State/Sector AIFs

Private Equity

Infrastructure Debt Funds

Development Financial Institutions

06

07

08

09

10

INSTITU

TION

S

Figure 12 : Alternative Sources of Financing

22 N I T I A AY O G

DAY 1

� Investment vehicles incorporated as NBFC (for operational projects) or MutualFunds (for all projects)� Investment by domestic/offshore investors esp. insurance & pension funds in units/bonds with� Limited Asset Base: IDF-NBFCs (ICICI Bank-backed India Infradebt, L&T-owned L&T IDF, IDFC IDF etc.)

> `9,000 cr, IDF-MF (IIFCL, ILFS, Srei etc.): `3,000 cr

� Vehicles allowing developers to monetise operational infra assets, through pooling of assets & listing of units� Allows pooling of capital from retail investors� InVITs issued (privately placed and public) in India: India Grid Trust, IRB InvIT Fund, Indiinfravit Trust� Only 3 issuances made so far; Challenges of capital market concerns, misplaced return expectations etc.

� Privately pooled investment vehicles helping developers unlock tied-up capital by allowing monetization of investments through new class of long term investors (Pension Funds, Private Equity firms etc)

� AIF route used by NIIF and states like Tamil Nadu and Andhra Pradesh for infrastructure investments� Suitable for pooling from institutional investors

� GoI anchored fund, with funding from domestic, international sources for investment in greenfield and brownfield, including stalled projects.

� As on date, three funds established under NIIF platform as Category II AIF.� NIIF 1: ‘Master Fund’ for completed Brownfield Projects/SPV’s with operational projects.� NIIF 2: ‘Fund of Funds’ investing in AIF’s created to boost infrastructure investments.� NIIF 3: ‘Strategic Fund’ focused towards investing in Greenfield Assets.

Infrastructure Debt Funds

(IDFs)

Infrastructure Investment Trust

(InvITs)

Alternative Investment Funds

(AIFs)

National Investment and Infrastructure

Fund (NIIF)

‘Institutional’ Alternate Sources of Finance

� About 75% of the Indian market is Government-issued debt; Size of corporate bond market: 14-15% of GDP� Lack of liquidity and depth required to support infrastructure financing� Low credit rating (~BBB level) for under construction assets - additional concern as market has appetite for

higher rated bonds (AA and above)

� Liquidity, guarantee etc. support for enhancing credit rating of debt instruments of infrastructure projects for refinancing/ raising funds from capital markets

� Reduced cost of debt post rating enhancement � IIFCL’s credit enhancement scheme and partial credit enhancement by Banks already in place� Deterants: Limited commercial benefit for low rated projects, instances of invocation in case of previously

credit enhanced structures and capital allocation/provisioning implications for Banks under RBI guidelines

� SEBI guidelines on issue of general purpose and project specific municipal bonds� 3 issuances since then including Pune Muni. Corp., Indore Muni. Corp & Greater Hyderabad Muni. Corp� Challenges: Lack of audited accounts, low revenue base and limited investor interest

� Long-term investors (insurance companies and pension funds) and overseas investors (sovereign wealth funds, and FIIs): Preference for investment in operational projects

� Equity investments in operational projects divested to other investors with suitable return� Released capital utilised for fresh projects � NHAI’s Toll-Operate-Transfer Model for operational Highways projects: Valuations received over

Bonds

CreditEnhancement

MunicipalBonds

Monetisationof Assets

‘Products’ as Alternate Sources of Finance


While Development Finance Institutions, pension/insur-ance/sovereign funds and private equity may directly fundgreenfield/ brownfield projects depending upon the assetquality and creditworthiness with a desired risk-return, insti-tutions such as NIIF, AIFs(State/Sector) shall help pool in cap-ital from multiple investors for funding of similar projects.Infrastructure Debt Funds specifically, as well as any of theaforementioned institutions, shall meanwhile help in recyclingof capital through refinancing for operational projects therebycreating low cost funding sources for better rated assets.

On the product side, credit enhancement in form of existingscheme for Infrastructure projects by IIFCL, partial creditenhancement from Banks or the recently deliberated BondGuarantee Fund shall help in enhancing creditworthiness ofdebt instruments for higher acceptability in the bond marketand among long term investors. InvITs, asset monetisationtechniques as Toll Operate Transfer (TOT), securitization aremechanisms for recycling of capital from operational projectsto under construction projects.

Challenges for Alternative Sources

We are yet to experience the full set of benefits that wereenvisaged while formulating these innovative financingmechanisms/ products. The various challenges faced byvarious products/institutions such as lack of liquidity, assetquality etc. needs to be addressed. It further needs to be

ensured that the newer sources of finance are appropriatelydistributed along the spectrum of project cycle dependingupon their risk appetite, liability maturity profile and returnexpectations. Lingering concerns like inadequate invest-ment-related dispute resolution mechanisms, policy bottle-necks and unsustainable asset-liability structures of Banks/financial institutions must be addressed to further deepenand diversify the Infrastructure financing landscape.

End notes

1 Source: IMF World Economic Outlook April 2018

2 Source: http://www.imf.org/external/datamapper/NGDPD@ WEO/OEMDC/ADVEC/WEO/JPN/FRA

3 Source: Economic Survey 2017-2018, Volume II, Chapter 8,Page 130

4,5,6 Appraisal Document of Twelfth Five Year Plan 2012-17,NITI Aayog

7,8 Source: RBI Data on Sectoral Deployment of Bank Credit,Handbook of Statistics on Indian Economy.

9 Source: Capital requirement of Public Sector Banks, PressInformation Bureau

10 RBI data on Maturity Pattern of Term Deposits ofScheduled Commercial Banks from Handbook of Statisticson Indian Economy.

DAY 1

24 N I T I A AY O G

DAY 1

As per the study on ‘Municipal Finances & Service Deliveryin India’, the cost for provision of core services viz. watersupply, safe sanitation & elimination of open defecation,sewerage and storm water has been estimated at Rs.15,59,069 Crs (capital expenditure and operating expendi-ture) for the 20 year period, beginning 2015-16 (at 2009-10prices)1. While this pertains only to a few, critical sub-sectorswithin the urban infrastructure space, it translates into annu-al capital expenditure of Rs. 77,953 Crs, which is ~83% of thetotal capital expenditure of all urban local bodies (ULBs)during 2012-132. Compare this with the receipt pattern of thelocal bodies and the challenge is massive. The expendi-ture/deficit and the receipt patterns of the ULBs for the 2012-13 period (basis for Fourteenth Finance Commission recom-mendations) as in figure 13.

There is hence a significant deficit in the annual receipts ofurban local bodies as against the annual expenditureundertaken. Further, the actual expenditure undertaken ismuch below the requisite investment for benchmark deliv-ery levels. The Government of India has created large out-lays for urban rejuvenation through schemes and missionslike Smart Cities Mission, AMRUT, Swachh Bharat Mission,etc., to fill the existing infrastructure gap in cities, therebyrequiring an even larger pool of capital. This funding chal-lenge is further aggravated in view of the receipt patterns

of the ULBs, with ~50% of receipts being contributedthrough devolutions, scheme funds and grants & loansfrom Central and State Government. As per the 14th FCreport, only ten States reported borrowings by urban localbodies. Of the Rs. 920 crore borrowed by them in 2012-13,~60% was borrowed by municipal corporations in MadhyaPradesh and Maharashtra3.

There is hence a dire need for creating alternative financingavenues for urban infrastructure such as market or institution-al borrowings, while ensuring sufficient policy support forULBs to enhance existing revenue base. Alternative/innova-tive sources currently being contemplated/experimentedfor urban infrastructure include land value capture, munic-ipal bonds, pooled finance mechanism, tax incrementfinancing etc.

Municipal Bonds

Municipal bonds primarily are debt obligations, which areissued by state government institutions/urban local bodiesto finance urban infrastructure projects. Municipal bondsoften have been cited as a panacea for meeting the urbanfinancing deficit. But very few cities have been able to makebond issuance.

Financing Urban Infrastructure

0

10000

20000

30000

40000

50000

60000

70000

Revenue (Crs)

15,110

PropertyTax

OtherTax

NonTax

DevolutionGrant

Others

15,801

19,002

18,537

14,809

4,234

Expenditure (Crs)

Capital

34,188

Revenue

60,098

Deficit (Crs)

6,793

Figure 13 : Revenue and Expenditure Breakup and Deficit for ULBs (2012-13)

(Source: Study on ‘Municipal Finances & Service Delivery in India’, commissioned by Fourteenth Finance Commission (14th FC)through AdministrativeStaff College of India )


DAY 1

The quantum of municipal bond issuances (taxed, tax freeand pooled issuances) made ever since 1997 is as depicted infigure 14.

The various challenges to municipal bonds issuance in Indiahave been:

Credit worthiness of the ULBs with the annual receipts(specifically own sources) insufficient for servicing obliga-tions, non-maintenance of double entry accounting sys-tem, non-compliance with audit requirements etc.

Insufficient investor interest due to lack of auditedaccounts, limited information sharing, regulatory uncer-tainty etc.

Legal/regulatory constraints with respect to borrowingpowers, possibility of security creation etc.

Costs involved in raising municipal bonds and lack ofawareness

Of late, there is a gradual improvement in the health ofmunicipal bodies. Reasons have been increased fiscal devo-lution which is making considerable impact on the revenueincome, maintenance of annual audited accounts based ondouble entry accounting system as stipulated at least by thelarger ULBs etc.

Further, the Central Government has been stimulating andsupporting the ULBs for accessing the market or institution-al borrowings for funding their expenditure. The 14th FC rec-ommended that local bodies and States explore the issuanceof municipal bonds as a source of finance with suitable sup-port from the Union Government. In July 2015, the Securitiesand Exchange Board of India (SEBI) notified a new frame-work of regulations for the issue and listing of municipal

0

00

17451080

1958212

2003200420052007

Year

s

12501000

1100100

800

19971998199920002001 4000 Crs

5000 Crs

6000 Crs

7000 Crs

0 Crs

1000 Crs

2000 Crs

3000 Crs

6495

Free Pooled

2586

Issuance

Taxable Tax Free Pooled Issuance

2002 0

200

Taxable Tax

44501500

0 500 1000 1500 2000

Figure 14 : Municipal Issuances in India (in Crs)

(Source: SEBI Concept Paper on proposed regulatory framework for issuance of debt securities by Municipalities & Brookings report on municipal bondfunding)

Amount Rs 200 Crore Rs 140 Crore Rs 395 Crore (Rs 200 Crore Issue 1 &

Rs 195 Crores Issue 2)

Rating AA+(SO) AA(SO) AA

Tenor Ten Years Ten Years Ten Years

Annual Coupon 7.59% 9.25% 8.90% for Issue 1 & 9.38% for Issue 2

Purpose Water Supply Projects Implementation of AMRUT projects Road development plan

Servicing Escrow of Property Tax, Debt Service Reserve Account & Sinking Fund Account General Escrow

Description Pune Municipal Corporation Indore Municipal Corporation Grater Hyderabad Municipal Corporation

List 1: Recent Municipal Bond Listing under SEBI Guidelines

(Source: Information Memorandum at BSE & NSE Website)

26 N I T I A AY O G

DAY 1

bond as per which a municipal corporation may issue bondssubject to compliance of eligibility requirements includingsubmission of audited annual accounts etc. To furtherencourage investors, credit rating of 412 ULBs have beendone of which 34 have ratings above A- and above4. Of these34 ULBs, 3 ULBs have already issued and listed their munic-ipal bonds as tabulated above.

While inroads have been made, there is still a long way to go.There still are multiple challenges pertaining to prepared-ness and awareness in ULBs for issuing municipal bonds,timely issuance and utilization of funds to avoid wastefulexpenditure, lack of investor sentiment and liquidity. Thereis still limited interest in the general investor communitywith most issues being subscribed by central/state insur-ance/pension funds, public sector banks etc.

Aforementioned challenges need to be addressed throughpolicy intervention and capability enhancement to create avibrant municipal bond market in India. Issuance of bondsthrough leveraging of fiscal devolution to the ULBs may beconsidered. Fiscal devolution when devolved along pre-dictable patterns based on objective criteria can be consid-ered as AAA cash flows. This can then be leveraged for mak-ing better rated issuances by larger municipal corporations.In the case of smaller local bodies, state government throughspecialized urban infrastructure financing institutions candevelop pooled financing mechanism which can create amultiplier effect in augmenting the finance available withcities for infrastructure creation.

Land Value Capture

Land has been used a financing instrument for creating urbaninfrastructure successfully globally. It has been observed that

investments in infrastructure around an area make a signifi-cant positive impact on land values. Land pooling or townplanning schemes can hence be utilized for physical planningfor redevelopment of existing brownfield areas and facilitateplanned urban expansion in green-field sites. Land-poolingby efficient use of land parcel and creation of public amenitiesin a planned manner can create a land bank for the urbandevelopment agency for recovering the investments made.The town-planning schemes of Gujarat provide direction forother cities in India to adopt. The cluster redevelopmentmodel for urban renewal of the city core which is also plannedon similar lines and can be used to rejuvenate Indian cities.Cities can also aim for creation of infrastructure fund such asan Urban Transport Fund which can pool revenues from sev-eral sources and which can be leveraged to develop a sustain-able urban financing framework.

End notes

1 Study on ‘Municipal Finances & Service Delivery in India’, com-missioned by Fourteenth Finance Commission (14th FC)throughAdministrative Staff College of India (ASCI), https://fincomin-dia.nic.in/writereaddata/html_en_files/oldcommission_html/fincom14/others/37.pdf

2 Study on ‘Municipal Finances & Service Delivery in India’, com-missioned by Fourteenth Finance Commission (14th FC)through Administrative Staff College of India (ASCI),https://fincomindia.nic.in/writereaddata/html_en_files/old-commission_html/fincom14/others/37.pdf

3 Fourteenth Finance Commission Reporthttp://www.prsindia.org/uploads/media/Report%20Summaries/14th%20Finance%20Commission%20Report.pdf

4 PIB Website:http://pib.nic.in/newsite/PrintRelease.aspx?relid=159951

Discussion Points1 Exploring policy, regulatory, legal interventions to

o Enhance the attractiveness of Infrastructure sector to domestic/ global institutional investors like sovereign wealth funds, pension funds, insurance companies, PE, etc.

o Enhance the depth of Indian Corporate Bond Market

2 Requirement of specialized institutions to fund and manage the risk of projects during construction phase.

3 Dissecting the challenges obstructing the adoption of new products and mechanisms like IDF(MFs/NBFCs), InvIT, REIT,AIF, masala bonds, NIIF, credit enhancement structures etc.

4 Deliberation on other possible alternatives viz. value capture financing, bond guarantee fund, securitization etc.

• Financing of urban infrastructure by mainstreaming of products like Municipal Bonds and mechanisms like asset moneti-sation, value capture finance, etc. to enhance the resource mobilisation capacity of Urban Local Bodies.


DAY 1

Significant Progress made in the Social Sector

It is a well-established fact that there is a strong correlationbetween the human development and economic growth,with both having a circular impact on each other. No coun-try grew quickly without the benefit of a highly qualifiedlabour force. In Asia, all those that grew quickly possessed aworkforce that was exceptionally well qualified.

The Sustainable Development Goals (SDGs), adopted in2015, are the blueprint to achieve a better and more sustain-able future for all by 2030. ‘People’ and ‘Prosperity’ are twoout of the five key dimensions which are at the heart of the2030 agenda. The 2030 Agenda for SustainableDevelopment acknowledges that ensuring healthy lives andpromoting the well-being for all at all ages is essential tosustainable development (SDG 3) and that obtaining a qual-ity education is the foundation to improving people’s livesand sustainable development (SDG 4). ‘Partnership’, anoth-er critical dimension of the 2030 agenda emphasises thatconcerted efforts are required from all stakeholders, includ-ing the public and private sector to achieve a sustainablefuture and human development.

Taking cognisance of the importance of human developmentin economic prosperity, India has taken many proactivesteps in the field of health and education. As a result, there isnoticeable progress on the key health and education indica-tors. As per the Human Development Index (HDI)1 releasedby UNDP, India ranks 130 out of 189 countries. Between 1990and 2017, India’s HDI value increased from 0.427 to 0.640, an

increase of nearly 50%, and an indicator of the country’sremarkable achievement in uplifting the lives of millions ofpeople in the country.

India has also adopted the SDG agenda for 2030. It is committ-ed to achieving these goals and targets, and has taken severalsteps in these areas. Of all these goals, good health and wellbe-ing and quality education have been given major importance.As per the SDG Index and Dashboards Report 20182, Indiastands at 112 out of 156 countries with an aggregate score of59.1. India’s score on SDG 3 (Good Health & Wellbeing) andSDG 4 (Quality Education) are 58.9 and 64.8 respectively.

Table 1 below shows that India has achieved significantimprovement in the key health indicators. However, a lotneeds to be done to reach the SDG target for 2030. The tablealso demonstrates a clear regional disparity between ruraland urban India, which presently is a big concern.

Education holds the key to India’s growth and socio-econom-ic development. This has assumed greater importance withIndia positioning itself as a knowledge economy in a fast glob-alizing world. India is a young country with 40.91% of thepopulation between 4-23 years of age as per the 2011 Census.To reap the benefits of demographic dividends, India needs tofast track access to quality education. However, as per theHDI Report 2018, the expected years of schooling in India isonly 12.3 years and mean years of schooling is 6.4 years.

The Gross Enrolment Ratio (GER) in 2015-16 at the primarylevel was 99.2%; at the secondary level was 80%; and at the

- Session 3B -

Urban Social Infrastructure:Health and Education

IMR (2017) 34.0 38.0 23.0 58.0 12

MMR (2014-16) 130.0 Na Na 254.0 70

Immunization coverage (%) (2015-16) 62.0 61.3 63.9 43.5 Universal coverage

Institutional delivery (%) (2015-16) 78.9 75.1 88.7 38.7 Universal coverage

Health Indicators Current status 2005-06 SDG Target 2030

Overall Rural Urban

Table 1: India’s Key Health Indicators

28 N I T I A AY O G

higher secondary level 56.2%; and at higher educationreached 24.5%3. The government targets a GER of 30% forhigher education by 2020. As per U-DISE, the percentage ofschools with a Student Classroom Ratio (SCR) greater than30 students declined from 43% in 2009-10 to 25.7% in 2015-16 and the Pupil Teacher Ratio at the primary educationlevel has come down to 23:1 with approximately 70% of theschools having a Pupil Teacher Ratio of <30. The issue,however, has been the quality of learning outcomes whichis largely attributed to lack of technology and adequateteacher training. As per Annual Status of Education Report(ASER) 20174, 27% of all children in standard VIII wereunable to read a standard II level text. Almost 57% wereunable to solve a 3-digit by 1-digit division sum. Both thehealth and education sectors, have a huge gap in terms ofinfrastructure and human resources, as shown in Table 2.

Role of Private Partner to Improve Access andQuality of Social Sector

India has progressed well in health and education sectorover the years, but there is still a lot that needs to be achievedin the coming years. The private sector is growing fast andis the preferred choice in terms of quality. Huge investment

is required to bridge the existing gap.

The hospital industry in India stood at 4 trillion INR ( 61.79billion USD) in Financial Year (FY) 17 and is expected toreach 8.6 trillion INR (132.84 billion USD) by FY225. Schooleducation in India has been primarily provided by the gov-ernment, but private schools have been catching up very fast.As per District Information system for Education (DISE), theproportion of private schools in India has increased from18.9% in 2007 to 23.8% in 2017 (Table 3).

In the contrast, the government of India has limited availableresources and in order to achieve the desired outcomes analternative source of funding will be required. Over theyears, the private sector has gained significance in health andeducation in India and needs to be made a key stakeholder tofinance the huge infrastructure requirement, ideally throughPPP. Table 4 depicts this gap below.

PPP Experiences thus far

Thus far the PPPs in healthcare has been across the health-care value chain starting from primary care through opera-tion and management contracts for running Primary Health

DAY 1

India has 0.9 beds per 1000 population and to reach WHO norms of 3.5

beds per 1000 population, an additional 2.75 million beds are required

India has 0.76 doctors and 2.09 nurses and midwives per 1,000 people.

To reach WHO average it requires an additional 1.5 mn doctors and

2.4 mn nurses

Issues of teacher shortage and poor coverage of in-service training

weaken the delivery capacity of human resources

Shortage of 1.4 mn teachers in India

+ 20% of teachers do not measure up to the standards of National

Council for Teachers’ Education (NCTE).Only 22 % of all primary teachers

undergo any in-service training

6.2% elementary schools are single teacher with enrolment >= 15 school

Healthcare Education

Table 2: Gaps in terms of Infrastructure and Human Resource

(Source: WHO Data, 2016, Association of Healthcare Providers India; http://www.assocham.org/newsdetail.php?id=5931, Elementary Education in India,NUEPA Report, 2018.)

Private sector own only 40% beds, over 72% of rural and 79% of urban

population rely on private hospitals for treatment

63% of total hospitalization is in private sector

On an average medical expenditure in private sector is 4 times higher

than in public sector

Primary reasons included poor service, lack of nearby facilities and longer

waiting times.

23.8% of the total schools are owned by private sector accounting for

44.4% student enrolment in 2015-16.

From 2011-12 to 2015-16 total enrolment in government schools fell by

9% without overall fall in student enrolment.

The drop in government school enrolment was accompanied by a 36%

increase in private school enrolment.

Healthcare Education

Table 3: Dominant Role of Private Sector in Health and Education

(Source: NSSO 2014 Survey Report; U-DISE; Education Statistics at a glance, 2018, MHRD Report; Elementary Education in India, NUEPA Report, 2018;http://idronline.org/budget-private-schools-education-india/)


DAY 1

Government’s. spending on health has grown to 1.4% of

GDP in FY18 from 1.2% of GDP in FY14

Private sector accounts for 74% of the total healthcare

expenditure

OOPE in India is around 67.78%

National Health Policy target Government spend on

health is 2.5% of GDP

Over USD 200 billion is required to be spent on health

infrastructure by 2024

Indian healthcare sector is expected to reach US$ 372

billion by 2020.

Current Scenario Road Ahead

Table 4: Existing Gaps in Health and Education Sector

(Source: Economic Survey 2017-18; Healthcare in India, 2018, IBEF Report; WHO Health Financing Profile 2017, India; Education sector in India, 2018IBEF Report.)

There has been significant progress in student’s

enrolment with nearly universal enrolment at primary

level, but it drops sharply at higher levels.

Govt. spend on education reduced from 3.1% in FY 13

to 2.7% in FY 18

Investment of USD 200 b needed by Govt. to achieve

its target of 30 per cent GER for the higher education by

2020

Indian education sector is estimated at US$ 91.7 bn in

FY18 and is expected to reach US$ 101.1 bn in FY19

HEALTH

EDUCATION

Operation and Management of Various states have experimented with outsourcing of operation & management of PHCs. Under this model various PHC

Primary Health Center (PHC) (mostly non-performing) have been handed over to the private sector for operation and management on cost reimburse-

ment model. This model has seen participation primarily from not for profit sector.

Diagnostics and Dialysis Services Various states have implemented PPPs in providing diagnostic and dialysis services in district hospitals and medical

colleges on Design Build Finance Build Operate Transfer (DBFOT) model. The project is part financed by funding from

state government in the form of capital or operation subsidy, and in some cases both. User charges are either free or

heavily subsidized. In some cases cross subsidization model has also been adopted.

Digital primary care Recently technology has been used for improving access and quality of health services at the primary care level. Existing

PHCs are handed over to private player and services are provided through telemedicine, point of care diagnostic devices

and EMR. Payment is made by the government as monthly operating cost. E.g. Digital PHCs in Punjab, Telangana,

Rajasthan, etc.

Ambulatory Care As per the NHM Annual Report 2015-16, 31 states/union territories are operating 108/102 dial in for ambulatory

services. Most of these facilities are operating under PPP. The initiative is completely financed by government with

services being completely free for the patients.

Super-specialty care Super-specialty care have been introduced in existing public health facilities under PPP mode in specialties like cardiac

and cancer. In some cases government has also provided capital subsidy. Services are mostly free for poor patients

cross-subsidized from market rate charged to private patients or financed through extant government scheme.

Non-clinical services States have outsources non-clinical services like bio-medical waste management, dietary, housekeeping services, etc. to

private partners for improvement of overall service delivery in government health facilities. Payment mechanism has

been user fee & payment by government or a combination of both.

Areas PPP models

Table 5: PPPs in Health Sector in India

Centers (PHC) to delivering secondary and tertiary care,advanced radiology services, dialysis and telemedicine.Some of the key PPP experiences so far have been tabulatedin Table 5.

In addition to the aforesaid initiatives, certain initiatives have

been taken at the policy level like the guidelines and modelagreement issued by NITI Aayog for PPP for NonCommunicable Diseases (NCDs) in district hospitals and theguidelines issued by the Ministry of Health & FamilyWelfare for the Free Diagnostic Service Initiative under theNational Health Mission.

30 N I T I A AY O G

DAY 1

School management School management PPP model envisages private partner to run the existing government infrastructure and enjoys

operational autonomy in terms of pedagogy, teachers, management and delivery of educational services. Government

provides 100% funding and no fee is charged to students. E.g. Rajasthan DBFOT Model, Punjab Adarsh School Model,

etc.

School Adoption School adoption PPP model envisages partnership with private operator in the areas of capacity building of teachers,

performance management and governance support. Government pays for the services offered by private partner. This

model is being implemented by various state governments in partnership with corporate foundations

Capacity building of teachers Cluster based teachers training comprising of 5-6 medium sized schools (with 6-10 teachers in each school) within the

radius of 3-4 km. Private partner appoints mentors for each cluster, manage and provide teacher’s training free of cost.

Teachers are provided training on pedagogy, continuous learning through teacher’s resource centre. Govt. monitors and

pays for teachers’ training.

ICT in School Private partner equip, operate and maintain ICT in various areas of school administration, management, e-learns, digital

library etc. Government monitors and pays for the services. E.g. Smart School Online is working with govt. of

Chhatisgarh, Chandigarh in implementing ICT in schools

Areas PPP models

Table 6: PPPs in Education Sector in India

Thus far in India’s education sector, PPPs have had signifi-cant opportunities in the areas of school management andschool adoption, capacity building of teachers and ICT inschools. These models have been described in the Table 6.

At the policy level, the Ministry of Human ResourceDevelopment launched the Model School Scheme to estab-lish 2500 schools under the PPP mode. This scheme is nowdelinked from the support of Government of India (GoI) andhas been transferred to states/Union Territories for furtherappropriate action.

In spite of PPP initiatives thus far, there exists huge scopefor improvements in the areas of quality of educational andnon-educational services in Government schools, capacitybuilding of teachers, augmenting and maintaining existinginfrastructure and creating new infrastructure for bridgingthe demand-supply gap. Usage of technology for improv-ing quality of education in Government schools is the needof the hour.

Challenges in Implementing Social Sector PPPs

Social sector PPPs (hospital, training and educational insti-tutes) tend to improve quality of human life as against eco-nomic PPPs (roads, ports, airports, etc.) which aide econom-ic development. As such, the design of social sector PPPsneeds to be driven by socio-political impact. Hence, SocialSector PPPs need to be looked through a different lens. Someof the differentiating features of social sector PPPs are pro-vided in the figure 15.

Additionally, social sector PPPs in India have been impededmainly by lack of support and political will to use PPPs as analternative tool for service delivery, lack of a clear regulatoryframework and institutional mechanism, socio-political obli-gation attached to the social infrastructure and a trust deficitbetween the public and private sector. The key issues impact-ing social sector PPPs have been further detailed in figure 16.

Way Forward

Develop a sound PPP policy framework for the socialsector: Develop a national level policy for implementinga social sector PPP project which will act as a guidancedocument for social sector PPPs across India. A strong policy and regulatory framework will foster pri-vate participation.

Develop a robust institutional mechanism: Social infra-structure PPPs, unlike core infrastructure PPPs, are serv-ice oriented and people centric. They need to be looked atthrough a different prism. The diversity of models basedon type of challenge being addressed warrants a cus-tomized monitoring and evaluation mechanism for ensur-ing not only quality service delivery but also impact.

Hence it is the need of the hour to develop a clear frame-work with the nature of possible partnerships and a corre-sponding responsibility framework, monitoring and eval-uation mechanism, and developing guidelines in terms ofengagement and institutional set up for social infrastruc-ture PPPs. The institutional mechanism should also focuson setting up nodal agencies, at the central and state level,


DAY 1

Trust deficit - Lack of common objective

� Government often tend to overlook financial viability and private sector looks at partnership as interference in their operations.

� Private sector is also perceived to be highly expensive

Inadequate institutional framework

� Inadequate legal & regulatory framework and institutional mechanism for managing PPPs in social sector.

� Social infrastructure are mostly planned by local authorities which struggle due to absence of any guidelines or regulatory framework

Lack of socio-political stance

� PPPs in social infrastructure is often perceived or presented by distractors as privatization of basic public services.

� The policy to introduce private participation often fail due to lack of strong political will and “Champion”.

Lack of Government fiscal support

� Government often provides one time contribution in the form of VGF or existing infrastructure.

� Lack of recurring fiscal support thereafter, often impacts operational viability

Figure 16: Challenges of Implementing Social Sector PPPs

Direct interfasewith generalpopulation

Partner is acompetitor

User chargesare minimal

Services is thecore component

Nonstandardized

Social sector PPPs directly serve the general populationwhile Economic PPPs mostly serve commercial organizations

Social sector PPPs require much more user friendly interfase

Financial viability is dependent on alternate funding source

Performance is measured by quality of serviceFunding at operation stage is critical for continued service

Each case is different and unique and has to be dealt with keeping in specific context and challenge

A win-win situation to be created in the structure to attract the right partner with clear unambiguous division of responsibility

In most cases in social infrastructure private partner is a direct competitor otherwise (private hospitals and schools training institute, etc.)

Payment from the beneficiaries is minimum due to socio political obligation of the government

Services form the major component of the scope as compared to economic PPPs where infrastructure is the core

Social sector PPPs are designed to address specific local challenges. The need is localized and difficult to standardize

Figure 15: Differentiating Features of Social Sector PPPs

32 N I T I A AY O G

DAY 1

Discussion Points1. What are the Policy frameworks that needed for promoting PPPs in social infrastructure?

2. What are the institutional mechanism for streamlining PPPs in social infrastructure?

3. What are areas where PPPs can be used for improving availability and quality of services ?

4. What are the innovative approaches to engage the private sector in social sector ?

5. What are the alternate funds that can be used for financing social infrastructure PPP ?

6. What are the Incentive mechanisms for adoption of technological innovation in social infrastructure PPPs?

for faster decision making to address the challenges beingfaced by both public and private partner at the groundlevel during implementation.

Identify alternate financing mechanism: Social infra-structure PPP projects, being service oriented and focusedon providing benefits to the underserved, poor and mar-ginal section of society, requires financial support forcommercial viability and sustainability. Thus far, socialsector infrastructure projects have been financed throughthe government budget, both state as well as central. TheScheme for Support to Public Private Partnerships (PPPs)in Infrastructure (VGF Scheme) notified by theGovernment of India to support the creation of infrastruc-ture (including health and education) provides for VGF inthe form of capital grant upto a maximum of 20% of thetotal project cost. Under the scheme sponsoring govern-ment agencies can provide further assistance, restricted to20% of the total project cost. Various state governmentshave used their respective budgets to finance social sectorPPPs. However, with the growing pressure on the govern-ment budget there is a need to explore alternative sourcesof financing social sector PPPs. Some of the alternativesources of financing have been discussed below:

Regional development funds: There are special fundsallocated for the development of various categories ofbackward and underserved regions like, mining areas,tribal areas, coastal regions and Northeast India. Thesefunds are sector agnostic but their main objective is touplift the economy and human development in those sp-ecific regions. Health and education being at the centreof human development, these funds can be utilized tofinance social sector PPPs in those underserved regions.

Corporate Social Responsibility (CSR) Funds: As perthe requirement of the Companies Act 2013 certain cat-egories of companies have to spend at least 2% of theiraverage net profit in the last three preceding years onCSR activities every year. The Ministry of CorporateAffairs allows for the setting up of a nodal agency at thestate level which can pool funds from small corporatesand spend on eligible projects. The Gujarat CSRAuthority is one such agency established under theseprovision. These pooled funds at the state level can beused for financing social sector PPPs.

Development impact bonds (DIBs): DIBs are a form ofresult based financing wherein the private sector pro-vides upfront investment to finance development pro-grammes. Payment is contingent on the success of theprogramme being funded measured through pre-agreed outcomes. DIBs put emphasis on outcomesinstead of inputs, and create space for more innovation,local problem-solving, and adaptation. DIBs areincreasingly used for financing social projects and willbe helpful for innovating outcome based PPPs.

End notes

1 http://hdr.undp.org/en/2018-update

2 http://www.sdgindex.org/reports/2018/

3 ‘Education statistics at a glance’, 2018, MHRD report

4 http://img.asercentre.org/docs/Publications/ASER%20Reports/ASER%202017/aser2017nationalppt.pdf

5 Healthcare, IBEF report, September 2018


DAY 1

Global Urbanization Trend: Megatrends shap-ing the world

Megatrends are macroeconomic and geostrategic forces thatare shaping the world. These are the big changes that are dis-rupting the economy, business and society as a whole.Following are the mega trends (Refer Figure 17):

Demographic Shift

Shift in Global Economic Power

Rapid Urbanization

Climate Change & Resources Scarcity

Technological Breakthrough

The focus of global growth has shifted western economicdominance is a relatively recent historical phenomenon thatis waning, and the developments we see are essentially arebalancing of the global economies. These megatrends aretranslating into following:

- Session 3C -

Smart Cities – Ease of Living

Figure 17: Global Urbanization Trends

We’ll add another billion people to the world’s population by 2025, making the estimated total 8 billion. At the same time, we’re living longer and having fewer children.

By 2030, we estimate that the E7’s purchasing power will overtake that of the G7. As incomes rise in these markets, they will contribute an increasing share of the global middle class.

In 1800, only 2% of the world’s population lived in cities – now it is 50%. 1.5 million people are added to this total every week. Strong population growth will put big pressures on infrastructure, the environment and the social fabric of the cities.

As the world becomes more populous, urbanised and prosperous, demand for energy, food and water will rise. At current rates, we will breach the carbon budget needed to keep temperature rises to two degrees by 2034.

Digital change is constant, ubiquitous and fast. Emerging technologies and global megatrends are colliding to disrupt both business and society.

Demographic Shift Shift in Global Economic Power

Rapid Urbanization Climate Change & Resource Scarcity

Technological Breakthroughs

1.5 Millionpeople are added to the global urban

population every week.

85%Of global GDP was generated

in Cities.

By 2025there could be nearly 40 cities with a

population of over 10 million.

By 2020There will be seven times more connected

devices than people on the planet.

40 times higherData production by 2020 as

compared to 2009.

CitiesConsume 75% of the world’s natural

resources & account for 80% of global greenhouse emissions.

Urban SlumPopulation has increased by

33% since 1990.

^50%The global population is predicted todemand 50% more energy by 2030.

34 N I T I A AY O G

Urbanization: Rise of Smart Cities in India

Cities will witness an inflow of 2.5 billion new urbandwellers by 2050 leading to a need for smart & sustainabledevelopment.

Indian economy is expanding rapidly, buoyed largely bythe country’s urban centres. Today, India is approximately30 % urban and the quality of life in its cities is chronicallylow. With 2/3rds of GDP being generated in India’s citiesand rural to urban migration patterns accelerating, thecountry faces a critical challenge of managing this rapidurbanisation in a way that enhances the liveability of India’surban spaces. Further, in India, 34% of the population cur-rently lives in cities. This is expected to reach 40% by 2030due to better employment opportunities, healthcare andeducational facilities, and a higher standard of living.Hence, the country is in a critical need of leveraging urban-ization to sustain and accelerate economic growth and pro-mote human development. (Refer Figure 18)

International best practices highlight that well equippedcities can be a center to raising levels of productivity,enhancing job creation and improving public finances at alllevels of the economy. Sustainable urban transformation crit-ically depends on reforming the way our cities are governedand services are delivered. In order to promote the same. TheUnion Ministry of Housing and Urban Affairs has launchedvarious schemes and programs such as AMRUT, SwachhBharat, Housing for All, HRIDAY, SCM etc. with a view tocreate economically vibrant, inclusive and sustainable urbanhabitats. As a part of the same, Smart Cities Mission (SCM)

was launched by the Government of India in June 2015 tocreate 100 ‘smart cities’ in the country by the year 2023.

The coverage of SCM includes area-based developmentschemes, that includes city improvement (retrofitting), cityrenewal (redevelopment) and city extension (Greenfielddevelopment) and as well as pan-city solutions (application ofsmart solutions to existing city-wide infrastructure) constitutethe strategic components of the mission. (Refer Figure 19):

City master plan creates the foundation for an ICT masterplan – both plans jointly lead to the model smart city. ModelSmart City consists of three components- economic opportu-nities, high quality of life and sustainable development.These components are built on four pillars- physical infra-structure, utilities provisioning, social infrastructure andgovernance. (Refer Figure 20)

DAY 1

Figure 18: Defining Smart City

Source: PwC,Strategy& Analysis

Networked

Integrated

Characteristics of Smart Cities

Location Aware

Leverage networked technology and information to manage and deliver utility and public services to residents

Coordinate utility and public service delivery across functional siloes through service integration

Leverage GIS technology and information to track and manage assets and events in real-time

DigitalPayments

DigitalIndia

SkillIndia

EODBPMJDY-JandhanBharat

Net

UniqueID

Make in IndiaSmart

Cities

GovteMarketplace

GSTDBT

Bharat

Figure 19: Smart City Mission runs in convergencewith other key Government of India Schemes andinitiatives


Cities are planned to build upon four pillars which are inte-grated through technology to enhance the livability of thecity. The SCM, tries to bring together numerous technical dis-ciples and strategies to deliver smarter solutions with essen-tial features, as following (Refer Figure 21):

Promotion of mixed land use in area-based developments.

Expanding housing opportunities for all.

Creating walkable localities- reduce congestion, air pollu-tion and resource depletion, boost local economy, pro-mote interactions and ensure security.

Preserving and developing open spaces in order to

DAY 1

Figure 20: Model Smart City- Pillars & Components

Social Infrastructure

GovernanceUtilities Provisioning

PhysicalInfrastructure

Connectivity

EconomicOpportunities

High Quality of Life

SustainableDevelopment

Power Residential Real Estate

Efficient Operations

Service LevelPromises

Inclusive Growth

HighAccountability

CommunityServicesWater

Gas

Transport

Commercial Real estate

Industrial Zones

Model Smart City

…ICT Master plan builds on the four pillars of a city

Figure 21: Smart City Elements

36 N I T I A AY O G

enhance the quality of life.

Citizen friendly and cost-effective governance.

Promoting a variety of transport options.

Giving an identity to the city based on its main economicactivity, such as local cuisine, health, education, art etc.

Applying smart solutions to infrastructure and services.

Indian Smart City- Where are we now?

Out of a total 5,116 projects, approximately 1461 total proj-ects have been implemented under this initiative till now,with a project cost of worth Rs 529 Bn. The current status ofthe implemented projects under the Smart Cities Mission isexhibited in figure 22.

Out of the many development categories, five developmentcategories, viz, Transportation, Energy and Ecology, Water

and Sanitation, Housing and Economy constitute ~80% ofthe SCM budget, as shown in figure 23.

Ease of Living

Ministry of Housing and Urban Affairs has launched “Easeof Living” Index in January 2018, which will help cities tosystematically assess themselves against global and nationalbenchmarks and encourage them to shift towards an ‘out-come-based’ approach to urban planning and management.The Ease of Living Index captures the breadth of the qualityof life in cities across 4 pillars and 15 categories using 78 indi-cators, of which 56 are core indicators and 22 are supportingindicators. (Refer Figure 24)

DAY 1

2% 4% 4% 5%7%

9%13%

15%18%

25%

Health &Education

IT Culture &Heritage

Governance Misc Economy Housing Water &Sanitation

Energy &Ecology

Transport

Figure 23: Percentage of Budget Allocation in SCM

(Source: CPR Smart Cities Database, 2018)

Figure 24: Ease of Living Index- Pillars &Components

Physical(Housing, transportation,

assured water supply, waste water

management, solid waste management, reduced

pollution, others)Ease of Living Index

Institutional(Governance)

Economic(Economic and Employment)

Social(Education, Health, Safety and Security, Identity and Culture)

Figure 22: Status of Projects under SCM

Rs 192 Bn,432 Nos.

Rs 60 Bn,332 Nos.

Rs 277 Bn,697 Nos.

Completed Under Implementation Under Tendering

Of 73 projects under public-pri-vate partnership (PPP) SmartCity Mission, 14 projects havebeen completed, 30 are underimplementation and 29 areunder the tendering stage


Sources of finances under Smart City Mission-Role of Private Sector

Indian Smart City market size is INR 2,016 Billion, which issupported different modes of finance. The major component isthrough Smart City Mission, in which INR 500 crores (per city)is funded from Central & State Government individually.(Refer Figure 25)

There have been debate about the possible innovative wayswhich may be explored for financing smart city projects. Thefollowing are the key areas envisaged to be taken up on PPPmode for implementation by private sector:

Smart Parking Solution

Public Bike Sharing

Intelligent Poles

Public Wi-Fi

Common Card Payment

Social Incentive

Waste to Energy Management

However, is can be interpreted from the same that the focus of private participation is been majorly on sectorswith low scale and size. This depicts the nascent stage ofSmart Cities in the country and explains the resistance or

unfamiliarity of the private players to take up big projectsin this sector.

These instruments can be serviced through identified futurecash flows so as to design and implement infrastructure proj-ects with transformative service delivery impact. The financ-ing in smart city projects in order to be bankable and replic-able essentially requires the following consideration. (ReferFigure 26)

There has been a remarkable progress in success of SCM.India is finally set to give shape to its futuristic smart citieswhich are world-class, self-sustainable habitats with mini-mal pollution levels, maximum recycling, optimized energysupplies and efficient public transportation. However, thereis a still a way to go. The GoI has provided utmost impor-tance to the SCM. The support provided by the governmentto bring success to the mission is as figure 27:

DAY 1

Figure 25: High Level View of Sources of Finance, PwC Analysis

Figure 26: Means of Financing under SCM

Shelf of projects to justify cost of issuance and sustained investors interest

Bankable urban infrastructure projects

Escrow mechanism to earmark specific revenue streams

Credit Rating of the project specific bonds

Ring fencing funds for projects

Appropriate size and scale of projects

38 N I T I A AY O G

Remarkable progress in success of SCM, still away to go

India is finally set to give shape to its futuristic smart citieswhich are world-class, self-sustainable habitats with mini-mal pollution levels, maximum recycling, optimized energysupplies and efficient public transportation. The initiative issubstantial because it allows urban local bodies the alterna-tive to replace the poor state of their urban infrastructurewith sustainable and well-functioning facilities with highlevel of service quality. The country has shown readiness fortaking up these projects to a next level through:

Support for preparation of well strategized Master Plansand layouts

Expedited land acquisition with R&R settlement

Fast tracking of Government Clearances

Identification of Key PPP components

Funding support & incentivization from Govt. for tappingalternative sources

Governance and administration akin to corporate struc-tures with high degree of accountability

Further, there exists some gaps in implementation of projectson PPP mode due to certain challenges being faced by theindustry related to:

Provision of adequate financing as funding disbursementis based on physical progress of the project.

Governance issues as creation of special purpose vehicle(SPVs) take ~15-18 months.

~90% of cities are brownfield which pose an additionalchallenge of rehabilitation of existing urban population

Time taken for approvals and clearances due to Stateintervention

The Way Forward

In the recent years, the Ministry of Housing & Urban Affairs(MoHUA) has introduced an umbrella approach for address-ing core issues that have been miring the overall develop-ment of the urban centers in India. A number of programmesinvolving the development of Smart Cities through theSmart Cities Mission, providing basic infrastructure in citiesthrough AMRUT, Cleanliness and Housing for All throughthe Swachh Bharat Mission & PMAY (U) missions and cre-ation of employment for the masses through DAY-NULMhave been implemented.

With such a robust framework being laid down by theGovernment, deliberations are now required on ways tostreamline the issues of “incoherent urbanization” withfocus on integrating on-going central and state Governmentschemes at the asset/ service delivery level on the Groundand on addressing issues in the overall Governance frame-work at the City/ ULB level.

Furthermore, to further give an impetus to the overallinfrastructure development, possible role of private play-ers in developing, operating and maintaining smart cities

DAY 1

Key PPP components have been identified

Expedited land acquisition with R&R

settlement

Masterplans are ready / under implementation / under planning stage

Generating investments for financing of projects

Governance and administration who works

like a city-CEO or any other similar designation

Fast tracking government clearances

Figure 27: Components of Readiness


assets and services is extremely imperative. About 20 per-cent of the total proposed investment under the SmartCity Mission is indicated to be developed through PPPs.This further establishes the importance of creating aframework to ring-fence revenue for structuring viablestandalone projects, while at the same time focus on dif-

ferent options for financing the trunk infrastructure of thecity.

Some of core enablers that can be engaged and newapproaches of Partnership-Private & Public that can be maderelevant in SCM model include (Refer Figure 28):

DAY 1

Discussion Points1. Does the current policy & regulatory framework encourage private sector participation

2. Need for tariff reforms and creation of regulators for utilities on PPP mode.

3. Need for alignment of infrastructure investments with performance based contracts.

4. Modalities for involving private sector in O&M of brownfield infrastructure and utilities projects.

5. Sectors and sub-sectors particularly relevant for PPP in smart cities.

6. Different frameworks for engaging private players.

7. Potential risks envisaged by private player and mitigation plan.

8. Reasonableness of project size for a PPP

Institutional capacity to be strengthened to manage a PPP project

Scale and size of the project

Project size has to be relevant in order to make it feasible and attractive under a PPP model

Single windowclearances

Expediting the approvals and clearances for fast-tracking the progress of the projects

Robust EscrowMechanism

Robust Escrow mechanism with ring-fencing of funds to make a bankable case for financing by private player

Delineating ofresponsibilities

Roles and responsibility of all stakeholders to be clearly charted out together with mitigation plans for risks in such projects

Strengthening of Institutional capacity

Figure 28: Way forward and Key steps to be taken

For further details, please contact:

Aman Hans, PPP Specialist, NITI Aayog, [email protected] P.R. Jaishankar, CEO, IIFCL Projects Limited, [email protected], [email protected]

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