Workshop on Public Private Partnerships in Vietnam PPP An Indian Experience

Infrastructure Leasing and Financial Services Ltd Hanoi June 25, 2008

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

Section I: Infrastructure Leasing & Financial Services Limited

Infrastructure Leasing & Financial Services

IL&FS is a leading Indian Investment Banking develop Institution and established by Government of India agencies in 1987 to 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

Domestic Road Sector Projects

3500
Jharkhand

12000

3000
Major Grade Chhattisgarh

10000

Outer Ring Road

8000

Commissioned
2000

Chennai IT

Chennai Ennore

Rajasthan Mega

Andhra Pradesh

6000 1500
Thiruvananthapuram

North

West

4000

1000
Noida Toll Ahmedabad

Under
2000

500
Rau

Vadodara

East Coast

0 C um ulative Length (k m ) (LH S ) C um ulative P roject C ost (R s. C r) (R H S )

Cumulative Project Cost (Rs. Crore)

2500

Under

Cumulative Length (km)

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

IL&FS - Infrastructure Projects

Particulars

Cost (USD Billion)

Roads/Rail Ports Water Supply Area Development Power Others Total

4.5 3.0 0.5 0.5 16.0 0.5 25

Section II: Private Sector Participation in Infrastructure

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)

Risk Expectancy of Infrastructure Projects

Value of Stock

Risk/Value

Development

Implementation

Start Up

Risk Operations

Developer Strategic Investor Bond Investor

Time

10

Section III: The Road Sector

The Delhi-NOIDA Toll Bridge- The First large Greenfield BOT Project in India

11

Milestones in Toll Road Development

Km 30000
Pipavav the first Power Sector Reforms Dabhol Crisis Electricity Act 2003 Securitisation Act 2002 RIDCOR

Phase I - 1990-1995

Phase II 1995-2000

Phase III 2000 - 2005

Phase IV

Projected Toll Road Growth

Entry of IPPs Amended Philippines Cochin the first Private National Telcom Policy Tirupur the first Private Sector New Exploration National Telcom Policy Annuity Projects SEZ Act NHDP Phase IV

25060 25000 20050 20000

15000 15040

Liberalisation Policy

10030 10000
Fuel Cess GoI announces initial 100% FDI

NHDP Foundation Stone for NHAI BOT

5020 5000
Rao Pitampur

MoU executed for the

10 1992

NHAI Operationalised

State BOT Projects

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005 2012

Implementation of the first Toll Road in India The Rao-Pitampur Toll Road Road Projects undertaken through the Memorandum of Understanding (MoU) Route Implementation Vehicle (SPVs) through Special Purpose

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 Programme (NHDP) Development

Programmes addressing District Connectivity

Rural

&

Multilateral Participation

12

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 Agreements resulting in concurrent prevalence of various models These different structures impeded wider acceptance by the financial institutions, banks and the capital markets

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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

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

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

Resettlement Colony Structures affected by Project Alignment

Rehabilitation

Religious Structures: Pre-Project

Rehabilitation of Religious Structures

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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

+ve

ERR FIRR

Returns

Example: NTBCL
Land Development Rights have been included in the Concession Agreement for NTBCL Owing to the construction on the Bridge, value of this land has increased, making it amenable to commercial development

Time -ve
17

Incresing Capacity - Road Cross Section

Paved Shoulder

Hard Shoulder

1.5M
3.5%

1.50M
2.5% 2.5%

Carriageway Carriageway 7.0m M 7.0

2.5%

1.50M
2.5%

Paved Shoulder

1.5M
3.5%

TYPICAL CROSS SECTION

Hard Shoulder

Formation Width 13m Paved Width 10m

Innovation in Implementation
Design/Solution to be driven by the required service standards rather than theoretical capacity The East Coat Road

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

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National Highways Under Development

As on January 31, 2008

GQ

Port Connectivity

Others

NSEW

Phase III A

Phase V

Total

Total Length (km)

5,846

380

962

7,274

4,815

6,500

25,777

Completed till date (km)

5,647

191

412

1,744

396

8,393

Under Implementation (km)

198

183

595

4,577

1,832

135

7,520

Balance length for award (km) Cost incurred so far (Rs. Billion)

20

822

2,552

6,365

9,765

276

52

150

37

516

20

Outlook
National Highways
Phase Length & Nature of Development 1306 km to be awarded Mode of Implementation Mix of BOT/EPC Total Cost (USD Bn) 11.64

NHDP V, VI, VII announced Over 39000 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
SARDP NE NHDP V NHDP VI NHDP VII NHDP I&II NHDP III NHDP IV

11,113 km, 4 laning 20,000 km, 2 Laning with paved shoulders 6,500 km , 6 Laning 1,000 km Expressway Ring Roads, Bypasses, Underpasses Special Accelerated Road Dev. Program for NE

BOT (Toll) BOT (Toll)/ BOT (Annuity) BOT (Toll) BOT (Toll) Mix of BOT/EPC

14.48 6.18

9.16 3.71 3.71

Mix of BOT/EPC

2.69

States
five years

Approximately 25000 km of state highways are expected to be improved at an expected cost of USD 20 billion over the next

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

Section IV: Key Lessons

22

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

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
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Concession
Concession in the Absence of Regulation!
Approach to Concession
High

Opportunities for innovation toll

Flexible and Innovative Approach (Negotiation with Credible Agencies)

Hybrid Approach (An Unsolicited Bid/ Swiss Challenge/ Solution Flexibility)

Hybrid Approach

Transparent and Competitive Approach (Template Approach)

Low

High

Value of Transparency & Competitiveness

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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
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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

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Concession Agreements
The Concession Agreement 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

Implementation Structure

Construction Construction Contractor Contractor

Concession Grantor Concession Grantor (State/Authority) (State/Authority) Construction Contract Concession Agreements O&M Contract

O&M O&M Contractor Contractor

Shareholders Shareholders

Shareholders Agreements

SPV SPV

Financing Agreements Service

Lenders Lenders

State Support Agreement

Contracts for IE/LE/IA

State Government State Government

Consultants Consultants

Users Users 29

Project Agreements

Construction Construction Contract Contract

Concession Agreement Concession Agreement

O&M O&M Contract Contract

Shareholders Agreement Shareholders Agreement

SPV SPV

Project Site Lease Project Site Lease Deed / /Substitution Deed Substitution Agreement / / Agreement Escrow Agreement Escrow Agreement

State Support Agreement State Support Agreement

Contract for IE/LE/IA Contract for IE/LE/IA

Service /Supply Service /Supply Agreements Agreements 30

Financing Agreements

Consent Agreement Consent Agreement

Common Loan Agreement Common Loan Agreement Or Or Individual Loan Agreements Individual Loan Agreements

Inter-creditor Inter-creditor Agreement Agreement

Debenture Trust Debenture Trust cum Mortgage Deed cum Mortgage Deed

SPV SPV With Lenders With Lenders

Security Agency Security Agency Agreement Agreement

Undertakings for Undertakings for Non disposal of shareholding \ \ Non disposal of shareholding Cost Over run Cost Over run

Indenture of Mortgage / / Indenture of Mortgage Jt. Deed of Hypothecation / / Jt. Deed of Hypothecation Pledge Agreement Pledge Agreement

Escrow Agreement/ Escrow Agreement/ Trust and Retention Agreement Trust and Retention Agreement 31

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

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

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

Conclusions

35

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 deliverya 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

Thank You

CONTACT K Ramchand, President and CEO, IL&FS Transportation Networks Limited, Mumbai-INDIA E-mail id - Ramchand.karunakaran@ilfsindia.com Tel : +91-22-26593020 Fax : +91-22-26527056 37

Websites - www.ilfsindia.com or www.itnlindia.com