Transcript City Development Plan for Bangalore

Water PPPs : Training & Workshop
Developing a PPP - Project Appraisal and
Feasibility Studies
Infrastructure Development Corporation (Karnataka) Limited
February 2009
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Reasons for Limited PPPs
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Lack of adequate project development
Projects not bankable
Operator led projects, than Government led projects
Procurement Issues – MoU vs Competitive bidding
Lack of credible information
Lack of political will
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Resistance to “Privatisation” –experience in most cities
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Who bears revenue risk? (“tariff setting”)
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Need for Project Development
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Infrastructure projects typically have a number associated issues
which need to be resolved to ensure successful implementation and
operationalisation
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Project viability
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Technical
Financial
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Legal issues (eg. Statutory guidelines)
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Environmental and Social implications (eg. clearance from the MoEF, estimation
of land acqusition required)
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Government interface (eg. whether the project has been approved by the
government taking into account the above issues)
… Need for proper project definition to resolve all issues
pertaining3 to the project
Need for Project Development
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Historical practice of selection of developer through MoU route is no
longer the preferred alternative
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Selected developer funds requisite studies which would form the basis
for future negotiations and signing of agreement
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Also the bone of contention leading to failure in taking off of projects
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Current practice of selection of developer through a transparent
bidding process
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However, investment in project definition/resolution of all issues
pertaining to the project by all interested bidders both infeasible
and sub-optimal - leads to lack of participation
… Need for Government to invest in requisite technical, market,
financial viability studies to reduce project risks and attract bidders
to the project
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The Need
 Finalise desirable technical configuration
 Identify and resolve Environment and Social issues
 Estimate inputs for project viability assessment
 Assess project viability and finalise project structure
 Compile data pre-requisites necessary for bidding
 Preparation of bidding documents
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Development Process
A.
Project Conceptualisation
Project
Identification
B.
Technical
Feasibility
Financial
Viability
Project
Structuring
Options
Bid Process Management
Contractual &
Bid
documentation
Bid Process
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Feedback &
Monitoring
Resolution of
Implementation
Issues
The Objective of Project Development
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To reduce “unknowns” and “assumptions”
Identify and allocate risk, responsibility
Create a complete documentation archive
Set in place a set of contract documents
Detail payments/ rewards/ penalties
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Project development does NOT mean creating a Feasibility Report and
bidding for a developer
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Any issue that can derail a project should be addressed, including land,
R&R…
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Development Cycle
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Step 1 - Sector Study
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Demand/Supply - Current & Projected - returns from the asset,
maintenance
Tariffs/ Pricing - Current and Projected
Regulation - Entry criteria, Competition, Price/ Tariff Control
Implementation Structure - Government, Private Sector, joint venture..
Policy framework
Enabling Legal and Contractual Framework
Should result in a well-defined strategy
Step 2 - Project Identification
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Better utilise Existing Assets or Create New Assets or a Combination
Where to start - bulk or retail or both - the dilemma in water, sewage
Technology: Broad Indication
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The Need Defined
Client’s Explanation
Project
Documentation
Project Leader’s
understanding
Specifications
Designer’s
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Contractor
Program writer
Support
Business Consultant’s
Plan
What Public wanted
The Need
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What is desirable technical configuration
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A good technical configuration, during the bidding phase, should
provide sufficient room for innovativeness for bidders while
sufficiently covering the essentials
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Water : Minimum investment amount, specific facilities, design and
construction approval
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 Applicable guidelines and major equipment specifications
Output based Specifications are the key to PPP projects – Can the
government become purchaser of services rather than service
provider ?
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The Need
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Identify and resolve Environment and Social issues
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Extent of land acquisition and cost thereof
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Private land/government land
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Agricultural land/barren land
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Forest land
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Built-up structures
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Extent of utility relocation and cost thereof
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Environment Impact Assessment and Mitigation Measures
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Develop R&R plan
However, at times private sector has been able to manage the issues
more effectively with facilitator role played by the government
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The Need
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Estimation of inputs for project viability assessment
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Demand Estimation - volume, composition and growth
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Construction Cost and Project Cost
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Operations and maintenance cost
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Input into financial viability – impacts structuring decision
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Reflected in the Concession Agreement – impacts Termination Payments
Often operations and maintenance costs are ignored, which in many projects
of the government could be more than the capital investment
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Solid waste management
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Small airports
Operations and maintenance costs are under-estimated by departments
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Roads
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The Need
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Assess project viability and finalise project structure
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Compile data pre-requisites necessary for bidding
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Aim is to minimize Grant/Annuity Payments –variables being
 Concession Period
 Packaging of additional O&M stretch
However, critical to get key input parameters right
Obviate need for multiple investigations by bidders
Preparation of bidding documents
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Finalise pre-qualification criteria and hurdle numbers
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Incorporate project specific issues, if any. For example -
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Bypass road : banning entry into town
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Construction phasing
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Why Risk Assessment?
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Huge upfront capital costs and low margins
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Returns typically back ended - long term in nature
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No tangible security
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No. of participants
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Long term finance
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Long gestation periods
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Non completion operations affect many
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Limited or no recourse
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Low Appetite for long term14finances in domestic market
Risky List!
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Construction/ Completion
Operation Risk
Environmental
Regulatory
Forex
Interest
Demand
Credit
Political/ Social
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Principles of Risk Allocation
 Allocate project-specific risks to parties best able
to bear them
 Control performance risks through incentive
contracts
 Use market-hedging instruments (derivatives) for
covering market-wide risks (interest and
exchange rate fluctuations)
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Project Issues - Financial
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What is the price level for making the project viable? Would the
users be willing to pay this user charge?
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Are there any additional sources of income for the project? (e.g..
land development etc.)
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In case the project is not financially viable at an acceptable user
charge, how much of government grant is required?
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Should the government grant be one-time or spread across years?
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What should be the time frame for which the project is handed
over to the private developer?
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Typically, with pricing / cost comparatively quantifiable entities,
often the softer issues get sidelined, in most PPP projects.
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Financial Accuracy
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Risk Mitigation
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PRAYER !!!!
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Proper Allocation Of Risks
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Insurances
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Hedging/ Options/ Swaps
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Third Party Guarantees
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PRAYER !!!!
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Risk Factors
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Supply
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Hydrology/ rainfall patterns/ quality/ water access contracts
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Distribution monopoly vs trucked; user fees; desire to avoid
retail revenues
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Operating
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Infrastructure
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New technologies in wastewater/ energy/ metering
Old/ theft (leakage)
Environmental
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Benign
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Risk Factors
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Political
 Privatization trends/ pricing controls/ rationing
Force majuere
 Maintenance/ buffers
Foreign Exchange
 Local currency revenues and costs
Funding
 Long term
Engineering
 Standard
Completion
 Ongoing large capex throughout
Legal
 Concession life/ defaults
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Thank You
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