Presentation on “Public Private Partnerships” in Fiduciary Forum, 2010 at The World Bank, Washington, D.C. (1st – 5th March, 2010) By Mr. B.K. Chaturvedi Member, Planning Commission Government of India New Delhi Background CONTENTS Economy & Related Issues (Slides No. 3 – 10) Public Private Partnership (PPP) Infrastructure & PPP (Slide No.11) Basic Parameters & Related (Slides No. 12 – 29) Development Case Studies NOIDA Toll Bridge (Slide No. 31) Bengaluru Airport (Slide No. 32) Indian Experience Lessons Learnt ( (Slides No. 33 – 34) 2 Indian Economy One billion people. 1/6th of world’s population. GDP of $ 1.2 trillion. World’s 4th largest, in PPP terms. GDP growth during 2004-08 between 8% - 9%. In spite of global slowdown Indian economy grew at 6.7% during 2008-09 & 7% - 7.5% in 2009-10, even as global GDP fell by 0.8% in 2009. Large share of young persons with higher skill levels Foreign Exchange reserves of $ 279 billion & growing. 3 Economic Fundamentals Central Govt.’s Fiscal Deficit < 3.2% in 2007-08. Increased in 2008-09 & 2009-10 as stimulus provided to maintain growth. Plans to revert back gradually to a fiscal deficit of around 3% during the next 3 - 4 years. Savings rate increased to 36% (2007-08). Declined in 2008-09 to 32% due to increase in Govt. deficit. Economic growth driven by industrial & services sectors growing at 8% - 10% p.a., with agriculture at 4% p.a. during 2006-09. In current year, agriculture has not grown due to highly adverse weather conditions. A strong and well regulated banking system, well capitalized banks with small NPAs. Steady flow of Foreign Direct Investments & growing. 4 Impact of Global Financial Crisis on India 12% Total GDP Non-Farm GDP Industrial GDP GDP fell by 200 bps, industrial GDP by much more. Growth recovery has been equally sharp 10% 8% 6% 4% 2% 0% Q-1 Q-2 Q-3 2007-08 Q-4 Q-1 Q-2 Q-3 2008-09 Q-4 Q-1 Q-2 Q-3 Q-4 2009-10 5 Break out in the Investment Rate Investment Rate 40% Has shown a dip in 2008/09 due to fall in inventory Expected to be 37-38% of GDP in next two years 35% 30% 25% 20% 15% 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 10% 6 Infrastructure Development Deficit Low per capita use of Electric Power. 1/4th of world average. 14% peaking deficit & 10% energy shortage. 800 GW additionally required by 2030. Present capacity 150 GW. Large but saturated Rail network. Average speed: Freight 25 kmph & Mail/Express Passenger 50 kmph. Need to improve Freight to Tare Ratio of wagons from present 2.5 to carry larger freight traffic & improve energy efficiency. Need to expand Road network, improve ride quality & develop fast express ways. 65,590 km of National Highways carrying 40% of traffic with 12% 4-lane, 50% 2-lane and 38% single-lane. Port traffic growing at 10%-11% p.a. Need to double Port capacities with new berths, substantially modernize & improve mechanization & undertake dredging to enable handling of large ships. Need to develop modern Airports & meet growing air capacity requirement of domestic & international traffic. Telecom density 48% (Dec.2009) & growing rapidly. Broadband penetration is only about 10%. Expansion both in rural & urban areas. 7 Estimated Infrastructure Investment Requirement for XI Plan US $ in Billions Sector Electricity (incl. NCE) Share % 166.6 32.4 Roads & Bridges 78.5 15.3 Railways (Incl. MRTS) 65.5 12.7 Ports 22.0 4.3 7.7 1.5 64.6 12.6 Others 109.1 21.2 Total 514.0 100.0 Airports Telecommunications Estimated share of investment to GDP: Private: 2.9% Public : 6.5% Total : 9.3% 8 Gross Capital Formation in Infrastructure & Private Investment thereof 100 92.7 90 87.1 80 US $ in Billions 70 60 50 40.9 40 30 33.4 21.6 20 10 44.8 13.7 5.3 0 2000-01 2004-05 2007-08 Total Of which Private 2008-09 9 Gross Capital Formation in Infrastructure 2004-05 2008-09 US $ in Billions Electricity 16.8 5.8 Railways 10.7 22.0 Airports 5.9 Roads & Bridges 7.8 2.9 6.0 0.2 Communications 28.7 2.7 16.3 Others (incl. Ports) % of GDP Sector 2004-05 2008-09 Public 2.8% 4.1% Private 2.0% 3.9% Total 4.8% 8.0% 10 Infrastructure & PPP Projects The XI Plan strategy is to develop Infrastructure sector rapidly to step up growth rates. 30% of total investment in infrastructure from private capital. Government of India policy mandates employment of public private partnerships (PPPs) extensively in all infrastructure sub-sectors. PPPs offer following advantages in the Indian context: Allows private sector entry where underlying asset (land, tourist sights) is owned by govt. Reduce pressure on govt. budget & release resources for social sectors, where the need is acute and pressing. Focus on service delivery & performance through performance benchmarks, penalty & incentives in contracts. PPP combines the advantages of both sectors: Social responsibility & public accountability of public sector; Finance, technology, managerial efficiency & entrepreneurship of private sector. 11 Basic Parameters of PPP Projects PPP Projects are an arrangement between Govt./Govt. Entities (GE) & private players. The process envisages Govt./GE invites private players to build infrastructure or other capital assets as per prescribed performance parameters. The concessionaire is selected based on notified bidding parameters. The contract between Govt./GE & concessionaire defines delivery of infrastructure services against specified payment of user charges or annuities. User charges are predetermined in accordance with Rules, Regulations or Act. In most sectors, the asset is generally returned to Govt./GE by the Concessionaire at the end the concession period. Govt./Private concessionaire share the risk during the concession period as per the agreement. 12 Approval of PPP Projects of Central Government The PPP Projects identified and prioritized through consultation with Planning Commission and Ministry concerned (the planning process). The PPP Project Report of the concerned Central Govt. Ministry/CPSUs/ Govt. Entity is prepared with assistance of legal, technical & financial experts. Appraisal & clearance by PPP Appraisal Committee (PPPAC). The Committee is chaired by Finance Secretary & includes Secretaries of Departments of Expenditure, Planning Commission, Legal Affairs & administrative Ministry. The Projects are based on Model Concession Agreements (MCA) to encourage stability and transparency in risk sharing frameworks. Performance parameters in accordance with the prescribed Manual for Standards and Specifications (MSS). Projects not prepared in accordance with standard MCA require more detailed scrutiny & ‘in principle’ approval of PPPAC. For projects with low capital investment, the appraisal procedure is further simplified. Approval of the Project by the Minister concerned, Finance Minister or Cabinet/ Cabinet Committee (cost of the Project determines level of approval). 13 Regulatory Mechanism Current Regulatory Mechanism in India provides for Competition Act to ensure free & fair competition & has strong safeguards. Set up only recently under the Competition Act & has been operationalized recently (2009). Sectoral regulators established: Airport : Airport Economic Regulatory Authority set up under the Airport Economic Regulatory Authority of India Act, 2008 & provides for Regulatory Tariff & standards of services. Port : Tariff Authority for Major Ports (TAMP) fixes tariffs of major Ports. Tariffs of minor ports are determined by State Govt.s. Power : Central Electricity Regulatory Commission (CERC) is the Central regulator with wide ranging functions, from tariff fixation to defining terms of service delivery & dispute adjudication. State ERCs exist in most States and Union Territories (UTs) of the country. Telecom: Telecom Regulatory Authority of India (TRAI) oversees the functioning of the telecom and media sectors and also has a wide mandate. Regulation by contract: Road, Railway & Urban Transport : There are currently no regulators in these sectors. The Concession Agreement provides regulation by contract. MCA for the Road sector is a standard template on the basis of which other agencies prepare their respective MCAs. Standard methodology prescribed for ‘duly approved’ MCA under appraisal by PPPAC. MCAs for other sectors, e.g., urban transport, greenfield airports, railway stations and urban water & sanitation are in the process of finalization. 14 Streamlined Bid Process for PPP Projects Extensive consultative process with all stakeholders was launched to develop standard documents for bidding of PPP Projects. Model Concession Agreement (MCA)/Request for Qualification (RFQ)/Request for Proposal (RFP) developed based on above. These are being used by PPP projects being bid out. State Govt.s encouraged to promote PPP Projects. If modifications required by them in standard MCA/RFQ/RFP Documents, they do so as deemed appropriate. Model Bidding Documents– RFQ & RFP notified by Ministry of Finance. Project Development expenditure supported Infrastructure Project Development Fund (IIPDF). through India The IIPDF supports up to 75% of the project development expenditure, with the objective to reduce the burden of procurement on the budgets of Central Ministries, States & Municipalities, and to encourage transparency in the bid process. 15 Financial Grants to PPP Projects PPP Project sponsor in Central/State Govt. has option to apply to Ministry of Finance for Viability Gap Funding. Projects eligible : If concessionaire selected through open competitive bidding. Projects in specified Infrastructure sector: Transport, Urban Sector, Power, Tourism infrastructure and SEZs. Appraisal by Department of Economic Affairs, Planning Commission and Expenditure. Financial grant or VGF available up to 20% of project cost as capital grant; with additional 20% grants, if Govt./GE so decides & provides funds for it. Empowered Institution/Committee set up for quick processing of Cases. For amounts exceeding Rs. 200 crores approval of Finance Minister required. The VGF is disbursed after private partner has subscribed and expended the equity contribution required for the Project. 16 Infrastructure Finance Commercial banks main source of debt, have asset liability mismatch problem. India Infrastructure Finance Company Limited (IIFCL) was established in 2006 to provide long term debt for financing infrastructure projects. IIFCL lends to public sector, PPP, or private sector. Lending up to 20% of project cost. Borrowings of IIFCL guaranteed by Govt., hence, has access to low cost funds. A scheme for IIFCL to refinance existing infrastructure loans approved by Govt. IIFCL is expected to commence ‘takeout’ financing shortly. Proposal for encouraging credit enhancement through IIFCL being examined. IIFC (UK) Ltd established at London. Operated with the objective of using foreign exchange reserves for meeting capital expenditure outside India. Dedicated infrastructure fund set up by State Bank of India (SBI), Infrastructure Development and Finance Corporation (IDFC) & Unit Trust of India Asset Management Company (UTI AMC) to increase flow of equity investments. Guidelines of insurance and pension regulatory authorities are being liberalized to facilitate flow of long term funds for infrastructure. 17 Capacity Building for PPP Projects PPP Cells set up in Central Ministries & State Govt.s to develop new Projects, with the following objectives: Building capacity at State ,Central Ministry Level; Supporting pilot projects; Building enabling frameworks: Advocacy, Policy development, templates for urban sector, infrastructure need gap studies; developing Development of websites, MIS frameworks and project databases; Capacity building initiatives – policy makers, departments and municipalities; Sectoral studies and status papers. National Programme on Capacity Building for PPPs to be launched in collaboration with World Bank and KfW in 2010. 20 institutes at national and state levels to be covered. Developing Online sector specific toolkits, Standard templates, risk frameworks, contingent liability frameworks. Capacity Building programmes taken up at various reputed institutes of management to develop expertise in setting up these projects & exchange learning experience. 18 Communication & Information Communication Strategy being developed for advocacy & awareness among stake holders www.pppinindia.com – exclusively devoted to PPP policies/ programmes/ initiatives in the States & Central Ministries. An online PPP projects database, www.pppindiadatabase.com provides information on over 450 PPP Projects in the country. 19 Progress of PPP Projects Sector Projects Completed & under Implementation Projects in Pipeline Projects Overall No. Cost (US $ Billion) No. Cost (US $ Billion) No. Cost (US $ Billion) Power 270 93 7 5 15 26.7 19.0 6.0 1.0 8.1 167 46 7 53 33 25.2 7.5 0.9 19.6 14.2 437 139 14 58 48 51.9 26.5 6.9 20.7 22.4 Urban Infrastructure 244 11.3 133 13.2 377 24.5 125 759 11.6 83.8 154 593 8.9 89.5 279 1,352 20.5 173.3 Roads Ports Airports Railways Others Total Source : Planning Commission, Government of India. 20 Private Sector Participation (1990 - 2008) (Comparative Position of India & Other Developing Countries) (US $ in Billions) Sector Investment Commitment India China Brazil Argentina Energy 45.9 37.3 76.0 29.5 Telecom 52.9 14.5 107.6 29.3 Transport 24.8 47.4 32.1 14.1 Water & Sewerage 0.3 8.4 4.6 8.2 123.9 107.7 220.3 81.1 Total Source: ppi.worldbank.org Bidding Parameters in PPP Projects & Consumer Tariff Roads & Urban Transport/Metro - Viability Gap Funding (i) Upfront grant to concessionaire to ensure commercial viability. (ii) Revenue share to be paid over project life, if project is profitable. Airport, Port & Railway Container Trains - Revenue Share : The bidders are required to indicate the revenue share which they will offer during the concession period to the Government. Power - Tariff : (i) Selection of prospective bidders for setting up power plants is based on best offer of per unit of generation tariff. (ii) For Transmission Lines, the bidding parameter is levelized tariff over the concession period of the project. Need to monitor Project cost to ensure reasonable cost of service to consumers. 22 PPP in Roads National Highway Development Programme for 45,974 km with 39,694 km (86%) through PPP. Estimated investment $ 48.6 billion up to 2012. 117 Projects with an investment of $ 14.1 billion awarded & another 81 projects with $ 16.9 billion investment to be awarded shortly. Total of more than 10,000 km completed. Projects connecting major metropolis of Delhi, Mumbai, Chennai & Kolkata implemented. Also, North, South, East & West corridors connecting projects taken up. Projects with aggregate length of 6,500 km of 6-Lane, 1,000 km of Express ways & Bypass Roads to be implemented. Several major State Govts. have taken initiatives to implement construction of roads through PPP mode. 23 Addressing Concerns of Stakeholders - Road Sector Very large programme in Road sector. To be awarded in 3 - 4 years. Needs large number of developers. To ensure flexibility & meet concerns of concessionaires, financial institutions & developers, several changes made in MCA/RFQ/ RFP Documents. Delegation of Powers to Implement Projects : Powers to amend MCA/RFP/RFQ delegated to Ministry. In case of MCA, approval of Cabinet to be obtained. Restriction on number of Bidders : Restriction on number of Bidders on Road sector removed. Conflict of Interest : Provision liberalized to permit up to 25% of shareholding of a bidder in another competing bidder without attracting conflict of interest disqualification. Termination of Agreement : Provision made to permit a Concessionaire to opt for making additional investments in expansion of road & getting additional concession period, if actual traffic is more than the road capacity. 24 Addressing Concerns of Stakeholders - Road Sector - II Comfort to Lenders : To further strengthen the level of comfort to lenders, a provision has been made that the Escrow account in which the Project revenues are being deposited will be securitized & a charge created in favour of lender. Exit Provision : To ensure faster turnover of capital of developers concessionaire permitted to exit from SPV set up to construct roads after two years of completion. Viability Gap Funding for Roads : A total of 40% VGF during construction period now permitted instead of 20% being earmarked for O&M period of the road. Dispute Resolution Mechanism Mechanism provided under MCA. BOT & Annuity projects which are PPP have very few disputes. EPC projects have large disputes. Govt. working on mechanism to resolve outstanding disputes quickly 25 & set up policies for quick settlement of new disputes. PPP in Ports Growth in Ocean Port traffic at 10%-11% till 2007-08. After slowdown in 2008-09, it has resumed 9% growth path this year. Investment of nearly $ 20.8 billion estimated, of which, PPP is planned at $ 15.2 billion. Port capacity to be stepped up to handle 1,500 million MT traffic annually from present around 730 million MT. Major capacity expansion taking place at Kochi, Vizag, Chennai, Paradip & Kandla. 21 Port development Projects to be awarded in 2010-11. All Port capacities to be developed primarily on PPP basis. Private Ports developing at Mundra, Gangavaram, Kirtania & Dhamra with support from State Governments. 26 PPP in Airports Growth in passenger traffic 18% annually. Carried 117 million passengers (2007-08). After slowdown, traffic picking up again in current year. 3.4 million MT cargo expected (2010). An investment of $ 6.8 billion expected in 2007-12 primarily in PPP mode. Delhi International Airport being developed through PPP with passenger handling capacity of 37 million p.a. & will be operational by May, 2010. Hyderabad Airport already operating, has capacity of 12 million passengers. Expansion of capacity to 40 million passengers in Phase-II. Phase-I completed & functional. Mumbai Airport Phase-I completed & work on Phase-II under progress to be completed by 2012. Plans for 40 million passenger capacity. Bengaluru International Airport developed on this model (2009). Designed for 11.4 million passengers. Passenger traffic already reached 9.5 million. 10 Green field Airports in different stages of implementation. Parliament passed a statute to set up Airports Economic Regulatory Authority to approve tariffs of aeronautical services & monitoring performance standards. Expansion of 35 other Airports & smaller Airstrips being undertaken by Airports Authority of India. City-side development of non-metropolis Projects planned to 27 upgrade passenger amenities. PPP in Urban Infrastructure Urban sector contributing 62%-63% of GDP. Urban areas expanding with several million-plus cities which have severe infrastructure strain. Jawaharlal Nehru National Urban Renewal Mission (JNNURM) being implemented with a provision of $ 11 billion approximately over a seven year period. It is leveraging private sector efficiency in developing, financing & managing Projects. Major projects include water supply & sewerage, solid waste management, urban transport & Metro Rail. Large number of Projects spread through out the country in PPP mode. Metro Rail Projects in Delhi, Hyderabad, Mumbai & Bengaluru at an estimated cost of around $13 billion taken up. Of these, the PPP Projects are Delhi Airport Express Line under implementation. To be completed before Oct. 2010. Hyderabad, Bengaluru & Mumbai Metro Projects under various phases of implementation. 28 PPP in Power Large investment required in Power sector during XI Plan & estimated at $ 250 billion during 2007-12. Total investments a mix of PPP, CPSU/State Govt.’s investments & private sector plants. PPP Project for three Transmission Lines under award. Several Projects Transmission Line projects planned by State Govt.s. Earlier, Tala Transmission System, implemented with private participation. 36 GW planned under 9 Ultra Mega Power Projects (UMPP) each of 4 GW capacity. Expected to attract $ 3.5 - 4.5 billion private investments. Four Projects already awarded. Electricity Act, 2003, National Electricity Policy, 2006, Tariff Policy, 2006 & Ultra Mega Power Projects, 2008 stimulating investments. 800 GW gap estimated by 2020 under Integrated Energy Policy. 78 GW planned in 2007-12. Several Projects planned with private participation or as merchant power plants or as PPP Project. 29 PPP in Railways Indian Railways with 64,000 km length is one of the world’s biggest Rail network. Large investments required to modernize & expand Railway network. Some major PPP Programmes planned or under implementation are: Movement of containers by private players having a Concession Agreement with Railways. 14 Concessions granted concessions for running Container Trains. Two Dedicated Freight Corridors, Ludhiana–Sonnagar Eastern (1,279 km) & Tuglakabad Jawaharlal Nehru Port (Western) for 1,483 km planned. Estimated cost $ 12 billion. Part-funding arranged from JBIC/World Bank. PPP planned in different activities of the Project. Electric/Diesel Locomotive Factories under PPP route being considered. Development of 26 Stations in metropolis cities and major tourist places through PPP mode. Development of Multi-level Logistic Parks for effective transportation through PPP mode. 30 Concession for Delhi–NOIDA Toll Bridge - A Case Study General : 552.5 m long, 8-lanes. Cost $100 million. Equity $30 million. Project concessionaire NOIDA Toll Bridge Company Ltd (NTBCL). Incorporated 8th Apr.96. Completed ahead of schedule. Set up by Delhi Administration, NOIDA (a statutory authority) & ILFS. Opened Feb.2001. First successfully implemented BOOT Project. Terms : NTBCL can levy toll to recover the total project cost plus 20% p.a. return on it. Total cost of Project include (i) Project Cost (ii) Major Maintenance Expenses (iii) Shortfall of Recovery of Return in a specific financial year. Concession period is 30 years to be extended every two years beyond it until such returns recovered by company. Issues : Concession period estimated to be in excess of 70 years, due to shortfall in the returns of the company on the total project cost (31st March, 2006). Concession not awarded competitively. Hence, the level of 20% return not justified. Guarantee of extension of concession period means that concessionaire bears low commercial risk. Equity holders earning nearly 32% return given that Project cost includes debt & company’s interest rate was 14.7% p.a. Debt restructuring made concessions still more profitable. 31 Bengaluru International Airport Limited (BIAL) Planning for Rapid Passenger Growth Expression of Interest: June, 1999. Selection Project venture: 2001. Concession Agreement based on BOOT signed: July, 2004. Construction commenced: June, 2005. 30 years concession period, BIAL option to extend another 30 years. Initial phase designed: 4.5 million passengers. Estimated Project cost: $ 300 million. First Model Concession Agreement negotiated. Initial phase re-designed midway through implementation of the Project. Capacity increased from 4.5 million to 11.4 million passengers. Construction completed in March, 2008. Revised Project cost $ 500 million approximately. Present traffic at BIAL 9.5 million passengers (2009). This level of traffic has led to near saturation of passenger terminal, import cargo, apron & runways. Action initiated to add additional capacity of about 10 million passengers in the short and medium term. In designing PPP infrastructure Projects need to Very carefully assess consumer demand & design Project for growth. Maintain service quality by quick remedial action on passenger capacity services expansion so that the quality of service does not deteriorate. 32 Indian Experience – Lessons Learnt Development of PPP Projects has Helped larger investments in infrastructure. Private investment as percentage of GDP has increased from 1.2% (2001-02) to 3.9% (2008-09). It has enabled Indian Planners to increase share of Plan for Education & Health from 13.3% (2002-07) to 28% (2007-12). PPP investments by private sector is increasing in social sectors, too & thus, helping total investments & service quality. Helped development of good governance practices in award of contract with expansion of MCA/RFQ/ RFP. Viability Gap Funding is typical to most road projects, as Toll revenues from traffic may not be adequate. An alternative mechanism is in form of providing land for development to provide financial support. It is difficult, however, to develop a transparent mechanism for it. Development of major PPP Projects takes several years in development, finalizing the Project parameters & acquisition of land. Projects are quite often not able to assess the correct level of passenger traffic. It is important to provide for Project expansion or other mid-course correction. A good option, from point of view of continuity, is to ask the current concessionaire to make 33 such expansion. Indian Experience – Lessons Learnt - II Development of standardized documents for bidding of PPP Projects, like MCA, RFQ & RFP has been extremely helpful in developing new infrastructure Projects. The capacity for implementing PPP Projects, financing & developing documentation is limited. There is need to Expand capacity. Develop financial support for capacity building to States & other entities. Develop financial institutions to support such Projects. The regulatory mechanism needs to be made strong to ensure the effectiveness of public service delivery from the large number of PPPs envisaged. In addition, an effective grievance redressal mechanism for consumers is required. Current arrangements may invariably require review & strengthening. To ensure reasonable & affordable cost of service to consumers, it is important to ensure a cap on Project cost while finalizing contract & selecting the concessionaire based on bidding parameters. 34 35 BACKGROUND 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) Indian Economy Economic Fundamentals Impact of Global Financial Crisis on India (Graph) Break out in the Investment Rate (Graph) Infrastructure Development Deficit Estimated Infrastructure Investment Requirement for XI Plan (Table) Gross Capital Formation in Infrastructure & Private Investment thereof (Graph) Gross Capital Formation in Infrastructure (Graph) Infrastructure & PPP Projects Basic Parameters of PPP Projects 36 PPP in Infrastructure 12) 13) 14) 15) 16) 17) 18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) 29) Approval of PPP Projects of Central Government Regulatory Mechanism Streamlined Bid Process for PPP Projects Financial Grants to PPP Projects Infrastructure Finance Capacity Building for PPP Projects Communication & Information (Pictures) Progress of PPP Projects (Table) Private Sector Participation (1990-2008) – (Table) Bidding Parameters in PPP Projects & Consumer Tariff PPP in Roads Addressing Concerns of Stakeholders – Road Sector Addressing Concerns of Stakeholders – Road Sector-II PPP in Ports PPP in Airports PPP in Urban Infrastructure PPP in Power PPP in Railways 37 Case Studies & Indian Experience 30) Concession for Delhi-NOIDA Toll Bridge – Case Study 31) Bengaluru International Airport Limited Planning for Rapid Passenger Growth (BIAL) 32) Indian Experience – Lessons Learnt 33) Indian Experience – Lessons Learnt-II 34) Thank You 38