Workshop on Public Private Partnerships in Vietnam. PPP An Indian Experience

Transcription

1 June 25, 2008 Workshop on Public Private Partnerships in Vietnam PPP An Indian Experience Infrastructure Leasing and Financial Services Ltd Hanoi

2 Contents Section I : Infrastructure Leasing & Financial Services Limited Section II : Private Sector Participation in Infrastructure Section III : The Road Sector Section IV : Key Lessons 2

3 Section I: Infrastructure Leasing & Financial Services Limited 3

4 Infrastructure Leasing & Financial Services IL&FS is a leading Indian Investment Banking Institution established by Government of India agencies in 1987 to develop and implement infrastructure projects on a commercial basis and provide a wide array of value added financial services IL&FS pioneered the concept of commercial development of infrastructure using the Public Private Partnership (PPP) Framework IL&FS has partnered with over 15 State Governments to develop projects on PPP IL&FS has successfully developed and implemented projects across a range of sectors that include telecom, power, road, water, port, airport, area development, special economic zones, environment, social, education etc. With each project, IL&FS has focused on establishing replicable prototypes 4

5 Domestic Road Sector Projects 3500 Jharkhand Major Grade Chhattisgarh Cumulative Length (km) Commissioned Under Chennai IT Chennai Ennore Rajasthan Mega Andhra Pradesh Thiruvananthapuram North West Noida Toll Ahmedabad Outer Ring Road Under Cumulative Project Cost (Rs. Crore) 500 Vadodara East Coast 2000 Rau 0 Cumulative Length (km) (LHS) Cumulative Project Cost (Rs. Cr) (RHS) 0 5

6 International Experience In the past few years, IL&FS have been sourcing mandates from outside of India Beginning with Advisory mandates, IL&FS is now undertaking projects in: Mexico Phillipines Indonesia Spain Portugal Several Latin/South American countries 6

7 IL&FS - Infrastructure Projects Particulars Cost (USD Billion) Roads/Rail 4.5 Ports 3.0 Water Supply 0.5 Area Development 0.5 Power 16.0 Others 0.5 Total 25 7

8 Section II: Private Sector Participation in Infrastructure 8

9 Benefits of Private Sector Participation Risk Transfer Transfer of Design/Solution Risk Transfer of Financing Risk Transfer of Construction Risk Transfer of Market Risk Transfer of Operations Risk Making Subsidies more efficient (subjecting them to competition and capital market scrutiny) 9

10 Risk Expectancy of Infrastructure Projects Value of Stock Risk/Value Development Implementation Start Up Operations Risk Developer Strategic Investor Time Bond Investor 10

11 Section III: The Road Sector The Delhi-NOIDA Toll Bridge- The First large Greenfield BOT Project in India 11

12 Milestones in Toll Road Development Km Liberalisation Policy Phase I Phase II Phase III Phase IV Projected Toll Road Growth Pipavav the first Entry of IPPs Amended Philippines National Telcom Policy Power Sector Reforms Dabhol Crisis Electricity Act 2003 RIDCOR Securitisation Act 2002 Cochin the first Private NHDP Phase IV Tirupur the first Private Sector New Exploration SEZ Act National Telcom Policy Foundation Stone for Annuity Projects NHDP GoI announces initial MoU executed for the 100% FDI Fuel Cess NHAI BOT 0 10 Rao Pitampur NHAI Operationalised State BOT Projects Implementation of the first Toll Road in India The Rao-Pitampur Toll Road Road Projects undertaken through the Memorandum of Understanding (MoU) Route Implementation through Special Purpose Vehicle (SPVs) Multilateral Participation Successes of initial private sector participation in the road sector encouraged the State Government privatization initiatives Initiatives by the Ministry of Road Transport & Highways (MoRTH) Establishment of the Central Road Fund National Highway Development Programme (NHDP) Programmes addressing Rural & District Connectivity

13 Early Challenges Regulatory and Institutional Government Policy The lack of an integrated institutional policy and framework for project identification, development and implementation The lack of coordination between various Government agencies involved with road sector projects The prioritization process for project identification based on political reasons rather than economic considerations Regulation The absence of effective and autonomous regulatory authority (at arms length with Government) to ensure a level playing field for all participants and fair dispute resolution Delays in decisions regarding Government support-both in kind (land for example) and/or investment Multiplicity of Concession Structures Different States followed varied Concession s resulting in concurrent prevalence of various models These different structures impeded wider acceptance by the financial institutions, banks and the capital markets 13

14 2 Project Development Implementation Structures Absence of structures that effectively allocated duties & responsibilities and rewards & penalties amongst all project participants Risk of Revenue Collection and Appropriation Demand Studies Low Willingness to Pay Low Willingness to Charge Potential Risks arising from the social and environmental impacts of the projects Financial Limited Experience of Project Financing, Financial Engineering and Risk Assessment Limited Confidence amongst Contractors and Investors to take on risks associated BOT business risks Limited Understanding of the sector and therefore, assignment of highest risk to the projects by the Lenders Non availability of Long Term Debt Negligible Appetite for Project Bonds 14

15 Innovations in Project Development Project Development Methodologies for Project identification Studies to ascertain Demand and Need Willingness to Pay Surveys Methodologies for Project Conceptualization Environment and Social Aspects Establishment of Feasibility Securing Revenues Project Development Fund The pre-feasibility reports prepared by the government authorities are often inadequate for the bidders/sponsors to raise funding the Project The Private Sector may not have the risk appetite to undertake studies for Projects where bankability is yet to be established IL&FS recognised the need for a corpus of funds that could help catalyse the Project Development process by bearing the initial expenses and formed the India Project Development Fund by pooling resources from institutional investors 15

16 2 Environmental and Social Impact Mitigation To ensure long term sustainability of Projects, it is imperative that the Developer cultivates a relationship with the local community by: Undertaking adequate Environment and Social Impact Assessment (ESIA) and Mitigation measures Ensuring all provisions of the Environment Management Plan and Rehabilitation & Resettlement (R&R) Plan are met Example: VHTRL Resettlement Structures affected by Project Alignment Rehabilitation Resettlement Colony Religious Structures: Pre-Project Rehabilitation of Religious Structures 16

17 3 Securing Revenues It has been observed that the economic benefits of infrastructure facilities often outweigh the financial returns to an investor In order to make an infrastructure project more attractive to the private sector, economic benefits can be captured by way of indirect collections for: Ensuring benchmark returns Providing potential upside to investors Example: NTBCL Returns +ve 0 ERR FIRR Land Development Rights have been included in the Concession for NTBCL Owing to the construction on the Bridge, value of this land has increased, making it amenable to commercial development -ve Time 17

18 Incresing Capacity - Road Cross Section Hard Shoulder Paved Shoulder Carriageway 1.5M 1.50M 7.0m M 1.50M 1.5M 3.5% 2.5% 2.5% Formation Width 13m Paved Width 10m Carriageway 2.5% Paved Shoulder Hard Shoulder 2.5% 3.5% TYPICAL CROSS SECTION

19 Innovation in Implementation Design/Solution to be driven by the required The East Coat Road service standards rather than theoretical capacity The Engineering Solution vs. the Elegant Solution PCUs 18,000 30,000 80,000 1,20,000 1,50,000 The Traditional View The Possible Approach 19

20 National Highways Under Development As on January 31, 2008 GQ Port Connectivity Others NSEW Phase III A Phase V Total Total Length (km) 5, ,274 4,815 6,500 25,777 Completed till date (km) 5, , ,393 Under Implementation (km) ,577 1, ,520 Balance length for award (km) Cost incurred so far (Rs. Billion) ,552 6,365 9,

21 Outlook National Highways NHDP V, VI, VII announced Phase Length & Nature of Development Mode of Implementation Total Cost (USD Bn) Over km of National Highway to be bid out at an estimated project cost of USD 45.2 billion over the next 10 years Government is in the process of forming a separate dispute resolution authority. This will also provide an impetus to the sector The new NHAI model concession agreement is expected to transfer onus for land acquisition and utility shifting to private sector. This may increase cost of future projects States NHDP I&II 1306 km to be awarded Mix of BOT/EPC NHDP III 11,113 km, 4 laning BOT (Toll) NHDP IV 20,000 km, 2 Laning with paved shoulders BOT (Toll)/ BOT (Annuity) 6.18 NHDP V 6,500 km, 6 Laning BOT (Toll) 9.16 NHDP VI 1,000 km Expressway BOT (Toll) 3.71 NHDP VII SARDP NE Ring Roads, Bypasses, Underpasses Special Accelerated Road Dev. Program for NE Mix of BOT/EPC 3.71 Mix of BOT/EPC 2.69 Approximately km of state highways are expected to be improved at an expected cost of USD 20 billion over the next five years To cater to the increasing vehicular traffic, several cities have announced programs to develop/upgrade over 1000 km of city roads at an approximate cost of USD 445 million Capex in the next 5 years- USD 35 billion 21

22 Section IV: Key Lessons 22

23 The PARADOX Of Private Sector Participation.those who are best able to manage themselves will attract private sector participation and the rest will be left out in the process what is necessary is public sector reforms at state and local level 23

24 Policy Framework Infrastructure projects involve complex relationships between the Government, concessionaires and investors While Infrastructure is a large opportunity, conditions for investment need to be safe, favourable and stable in the long run The private sector requires clear and stable rules of engagement as provided through a legal framework: Laws governing concessions and/or privatizations A clear process for dispute resolution and the ability to enforce contracts Lender remedies under bankruptcy and insolvency 24

25 Concession Concession in the Absence of Regulation! High Approach to Concession Opportunities for innovation toll Flexible and Innovative Approach (Negotiation with Credible Agencies) Hybrid Approach Hybrid Approach (An Unsolicited Bid/ Swiss Challenge/ Solution Flexibility) Transparent and Competitive Approach (Template Approach) Low Value of Transparency & Competitiveness High 25

26 Regulation Creation of Monopoly Private Sector Participation in Infrastructure results in monopoly power in the hands of the private sector The need to regulate the quality of service and pricing levels Structural changes are required to make regulation effective Protection of the Consumer One objective of regulation is to ensure that the monopoly provides acceptable service at specified tariff Investor Protection The second important reason for regulation is to protect the investor from policy & political risk 26

27 Project Development Adequate Project Development is critical given the high costs and risks of infrastructure projects Private investment tend to crowd in when they sense the opportunity perception is real Private investors are interested in earning commercial returns for their shareholders within a certain fixed time horizon Timely decision making and confidence building are crucial in decision making Optimal Design Desired performance levels Acceptability of the Project by the User Lower life time costs Communication Acceptability of the infrastructure facility by the local community is essential for its success Information dissemination facilitates interaction with the local community, enabling the service provider to mitigate risks of local opposition Demonstrating transparency and accountability helps achieving public trust, support and acceptance 27

28 Concession s The Concession can be entered into by the Grantor with Concessionaire having due regard to the specific requirements of each Project. The arrangements include: Build-and-Transfer (BT) Build-Own-Lease-Transfer (BOLT) Build-Lease-and-Transfer (BLT) Build-Operate-and-Transfer (BOT) Build-Own-and-Operate (BOO) Build-Own-Operate-Transfer (BOOT) 28

29 Implementation Structure Construction Construction Contractor Contractor Concession Concession Grantor Grantor (State/Authority) (State/Authority) O&M O&M Contractor Contractor Construction Contract Concession s O & M Contract Shareholders Shareholders Shareholders s SPV SPV Financing s Lenders Lenders State Support Contracts for IE/LE/IA Service State State Government Government Consultants Consultants Users Users 29

30 Project s Construction Construction Contract Contract Concession Concession O&M O&M Contract Contract Shareholders Shareholders SPV SPV Project Project Site Site Lease Lease Deed Deed / / Substitution Substitution / / Escrow Escrow State State Support Support Contract Contract for for IE/LE/IA IE/LE/IA Service Service /Supply /Supply s s 30

31 Financing s Consent Consent Common Common Loan Loan Or Or Individual Individual Loan Loan s s Inter-creditor Inter-creditor Debenture Debenture Trust Trust cum cum Mortgage Mortgage Deed Deed SPV SPV With With Lenders Lenders Security Security Agency Agency Undertakings Undertakings for for Non Non disposal disposal of of shareholding shareholding \ \ Cost Cost Over Over run run Indenture Indenture of of Mortgage Mortgage / / Jt. Jt. Deed Deed of of Hypothecation Hypothecation / / Pledge Pledge Escrow Escrow / / Trust Trust and and Retention Retention 31

32 Management of A Long User Learning Curve The Users are not used to paying an economic price for infrastructure service, therefore there is an initial low willingness to pay The users need to be made aware of the tangible benefits of the facility through: Public Relations exercise Workshops Handouts and Advertisements Inaugural/frequent user discounts may have to be offered to incentivise the Users to try out the facility The Users need to experience benefits for word-of-mouth publicity 32

33 Risk and Return Assessment of all project risks and appropriate mitigation mechanisms (including domiciling of risk) is crucial to deliver an economically efficient project Commercial attractiveness of an investment is evaluated at two levels They should commensurate with risks They should be comparable with other investment opportunities Providing opportunities for the private sector to enjoy benefits of commercial return should be structured within the above constraints or goals 33

34 Government Support Infrastructure projects require substantial support from government entities: Financial Commitments Time-bound Clearances The viability and sustainability of PPP projects critically hinge on adhering to cost, time and quality, therefore government decisions should be expeditious Augmentation of Government Capacity is required for fast and consistent decision making Public Private Partnerships (PPPs) for infrastructure creation can extend for long periods of time and involve complex financial, risk and performance arrangements Specialized skills are required to conceptualize and evaluate infrastructure projects The government needs to be attuned to private sector requirements and international best practices for development of policies and frameworks that facilitate PPP 34

35 Conclusions 35

36 Conclusions With the growth of the Economy there is a demand for increasing capacities and enhanced levels of service in the core infrastructure sectors of power, transport, and telecommunications The infrastructure challenge before the Government today may seem overwhelming. However, the Government has realized that inaction is simply not an option Given the fiscal constrains, increasingly more projects will be undertaken using the BOT format In order to sustain the growth momentum, active participation will be required from Government and the Private Sector PPPs alone are not a panacea. Rather, they are one tool that the Government has at its disposal for facilitating infrastructure delivery a tool that requires careful application By making the best use of the full range of delivery models that are available and continuing to innovate learning from failure instead of retreating from it the Government can maximize the likelihood of meeting its infrastructure objectives The interest of the investment community can only be maintained if there is a perception of long-term value in the Projects Therefore, it is critical for the government to effectively engage the private sector by creating and maintaining an enabling environment for the creation of infrastructure 36

37 Thank You CONTACT K Ramchand, President and CEO, IL&FS Transportation Networks Limited, Mumbai-INDIA id - Ramchand.karunakaran@ilfsindia.com Tel : Fax : Websites - or 37