India s PPP Program Progress, Key Takeaways & Emerging Challenges

India s PPP Program Progress, Key Takeaways & Emerging Challenges South Asia Sustainable Development Department The World Bank LAC Study Tour April 2009 1

A quick regional snapshot In SAR, efforts to attract private participation in infrastructure picked up momentum since mid- 90s 80 60 40 PPI Projects in SAR (Nos.) India leading the pack in terms of numbers as well as the total project cost Witnessed a substantive spurt since 2005 20 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 India Pakistan Sri Lanka Bangladesh Rest of the Region Outside of India Investment levels are lower and mostly in telecoms Efforts are patching and halty Bangladesh:Power generation; Water treatment plant pilots Nepal: Hydro power (large & small); Road pilots Pakistan: Earlier, power generation; Now Major focus on PPP framework 30000 25000 20000 15000 10000 5000 PPI Projects in SAR (Total Project Cost in $ million) 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 India Pakistan Sri Lanka Bangladesh Rest of the Region Source: World Bank PPIAF Private Participation in Infrastructure Database 2

Presentation Outline India s PPP Program In the earlier phases Major Initiatives/Approach NHDP: A Programmatic Approach to developing PPPs Yielded impressive results In the past 4-5 years Key Challenges: How to sustain and scale up Approach/Focus Cross-sectoral measures to give fillip to PPPs In the context of Global Financial Crisis Challenges and Responses 3

Major Initiatives/Approach Until 4-5 years ago Sector-specific focus on creating appropriate frameworks & enabling environment for private participation Telecom National Telecom Policy 1994, New Telecom Policy 1999, Unified Access Licensing 2003 Separation of policy, regulatory and service provision functions of the government Electricity In the early 90s, focus on generation, IPPs including fast-track projects In the mid to late 90s, focus on structural reform and establishment of regulatory agencies Unbundling in a few states and distribution privatization in Orissa and Delhi Electricity Act 2003, National Electricity Policy, Electricity Tariff Policy Roads National Highways Development Program State level initiatives, e.g., Madhya Pradesh and Maharashtra Ports Major Ports Guidelines for private sector participation in major ports Tariff Authority for Major Ports (1997) Non-major Ports: State level initiatives, e.g., Gujarat and Andhra Pradesh Across the sectors Liberalization/relaxation of FDI limits Tax incentives Govt. Objectives Market Structure Regulatory Framework Cost Recovery (User Charges) 4

India s PPI Track Record Efforts to attract private participation in infrastructure began in early 90s Significant success achieved in Telecommunication and select Transport sub-sectors Sector-wise PPI during 1990-2007: Telecom - 45%; Energy 35%; Transport 20% India s PPP program, with investment commitments of over $10.5 billion during 2006 and 2007, is already one of the largest in middle and low-income countries. In 2006, PPI investments in transport and energy amounted to 1.1% of GDP Investment commitments to infrastructure projects with private participation in India are nearly twice of those in Brazil and China 25,000 $mn 20,000 15,000 10,000 2004 2005 2006 2007 5,000 0 Brazil China India PPI flows were slow in sectors outside telecom and energy But now steep increasing trend in transport PPPs 5

PPP Track Record During 1995-2006 230+ PPP projects with an estimate total cost of US$15.8 billion achieved financial closure in sectors outside telecom and energy generation In terms of value, about 92% of these in transport sub-sectors Water Supply, Waster Water & SWM 3% Sectoral Distribution of PPP Projects by Value (Total Value = US$ 15.8 billion) Airports 17% Sectoral Distribution of PPP Projects, 1995-2006 (Total Number = 232) Water Supply, Waster Water & SWM 4% Airports 2% Ports Power 9% Distribution Power 2% Transmission Railways 0% 2% Roads & Bridges 54% Ports 20% Power Distribution 2% Power Transmission Railways 2% 2% Roads & Bridges 81% Source: Draft Report of a PriceWaterhouseCoopers Study, 2007 6

NHDP: An example of programmatic approach National Highways (65,000km) account for 2% of the road network but carry 40% of the total traffic NHDP, aimed at 4/6 laning of 14,000km of NH corridors, launched in 1998 To address the twin-challenge of poor quality of corridors and paucity of resources Many roads developed through traditional cash contracts But, the Program also ushered in PPPs through two predominant modes BOT-Tolling method -- the traffic & toll collection risks are borne by the private operator 46 projects (4,231 kms) awarded and 9 projects (454 kms) completed BOT-Annuity -- the operator paid a competitively bid out, fixed semi-annual payments, beginning after completion of construction and through the remaining concession period 24 projects (1,376 kms); Completed: 8 projects (476 kms) 60 projects (5000+ kms) with estimated value of US$15.6 bn in process of being awarded 7

NHDP: Salient Features at Program Level NHDP, in effect, provided a platform for introducing a consistent framework for encouraging PPPs through a variety of policy and institutional interventions Strong political commitment as reflected in the announcements of the Prime Minister and the Task Force constituted by him A programmatic approach that galvanized the enthusiasm of both the public and private sector players around a substantive investment opportunity A clear focus on cost recovery based on collection of direct and proxy user charges, respectively through tolling and dedicating a portion of revenue streams from the levy of cess on fuel, ring-fenced in to a non-lapsable road fund, through the enactment of the Central Road Fund Act 2000 A dedicated institution National Highways Authority of India with a clear mandate for implementing the program backed by substantial delegation of financial investment and administration powers A framework for encouraging private participation through a combination of measures including viability gap support, indexing toll rates to the wholesale price index, developing model concession agreements in consultation with key stakeholders, tax concessions, liberal limits for External Commercial Borrowing and foreign equity participation, and allowing Foreign Direct Investment up to 100% 8

NHDP: Salient Features at Project Level BoT Toll Projects Provision of grant to bridge viability gap, if any, required up to 40% of project cost Up to 20% during the construction and the remaining during the O&M phase Concessionaire selection through open competitive bids based on a single parameter Amount of grant sought [or] the extent of project revenues sought to be shared with the govt. Clearly defined framework for allocation of key risks Commercial & technical risks relating to construction and O&M allocated to Concessionaire Traffic growth rate risk i.e., deviation from expected growth rate Mitigated with provision for extending the concession period Conversely, in case of higher than expected growth rate, the concession period will be reduced Defined time limit (180 days) for achieving financial closure In the event of termination, buy-out by the Authority and full protection to project debt Even if termination as a result of default by the Concessionaire, 90% of the project debt protected All direct and indirect political risks assigned to the Concessioning Authority Protection to the Concessionaire from construction of competing roads Authority to provide encumbrance free site for construction User fees (tolls) as per the rates notified by the government Provision for a fixed annual increase plus 40% of Wholesale Price Index (WPI) Local traffic exempted until free service lanes are provided Monitoring and supervision through an Independent Engineer (firm) selected by the Authority through a transparent process 9

NHDP: An Overview Spurred by the success achieved in the first two phases, NHDP has since been expanded to include 2/4/6 laning of about 40,000km of National Highways, through five additional phases Phase I: 7,498 km US$6.7 billion Phase II: 6,644 km US$7.6 billion Phase IIIA: 4,035 km US$4.9 billion Phase IIIB: 8,074 km US$12.1 billion NHDP IV: 2-laning of 20,000 km NHDP V: 6-laning of 6,500 km US$9.2 billion NHDP VI: Expressways NHDP VII: Ring Roads, By-passes, etc. Also, in 2004, the government decided to adopt BOT-Tolling as a preferred option for implementing all the remaining portions of the NHDP 10

In the past 4-5 years Additional investments in infrastructure to sustain a GDP growth rate of 9 percent per annum, estimated at $500 billion during 2007-12 Of these, about 30% ($150 billion) expected to be through private participation In major sectors, expected total investments (US$ bn) and private sector share Electricity 150 26% Roads & Bridges 76 36% Telecom 65 66% Railways 62 17% Water Supply & Sanitation 49 3% Ports 18 74% Irrigation 53 0% Civil Aviation 9 65% Source: Planning Commission Number of states are using or exploring PPP approach for service delivery 11

Key Challenges How to scale up the program, particularly at other levels of government? Mobilizing finances for new PPPs Debt: increasing quantum as well as options, especially of longer-tenor, fixed term Equity: increase avenues for participation by multiple variety of players, e.g., financial Government Viability gap funding support Project preparation expenses, including land acquisition, R&R, etc. Building capacities and institutions to expand the PPP program from the Central level to State and Local levels of government beyond transport to other sectors, including health, education, and agribusiness In the ongoing projects How to regulate contracts effectively during the entire project life cycle Measuring and management of fiscal risks associated with PPPs Evaluation and drawing lessons for structuring future PPP programs and also expanding into new sectors like health and education How to ensure adequate financing for meeting re-financing needs? Financing Capacity Building Knowledge of Best Practices 12

India s PPP Program: Key Building Blocks Establishing Enabling Frameworks Building Capacities at Various Levels of Government Fostering Enabling Environment Quality Assurance & Learning Legislation Rules - Procurement - Budgeting - Accounting Fin. Support - Viability Gap (VGF) - Project Devpt. (IIPDF) Tool kits & Manuals Standard documents (MCAs) Handholding in developing projects Training Knowledge dissemination Consensus building Strategic communication Platforms for exchanging information and experience Monitoring Review Research Feedback World Bank is supporting initiatives in each of these areas Developing a robust PPP program requires action on several key areas At Project as well as Program/Sector levels By all relevant governments 13

Major Initiatives/Approach In the last 4-5 years Focus on cross-sectoral interventions GoI established Committee on Infrastructure chaired by the Prime Minister A Viability Gap Fund to support PPPs A Project Development Fund to finance PPP project preparation expenses India Infrastructure Finance Company Limited (IIFCL) for increasing the availability of long-tenor debt financing for PPP projects Other Efforts The Planning Commission and DEA are developing PPP frameworks Guidance material Capacities Many states have established PPP Cells and some have enacted enabling legislation and set up dedicated agencies to facilitate PPPs 14

Some useful pointers from the experience of India and other countries Successful off-take of PPP is usually contingent on the following factors Political will and commitment at the highest level of government Enabling legal framework Encouraging policy/administrative arrangements Lining up of tangible financial support to Provide assistance in developing and structuring bankable PPP projects Bridge gap in commercial viability of projects that are otherwise economically and social desirable e.g., Viability Gap Fund (India) A dedicated unit/facility to assist the Line Ministries/Agencies in various ways Developing a shelf of bankable PPP projects Providing transactional advice in implementing PPP projects/programme Creating an enabling policy, legal and regulatory framework Standardization of documents and procedures In sectors where PPP opportunities are many and replicable, develop and implement a programmatic approach e.g., National Highway Development Project in India Universal service funds/institutions for rural electricity and telecom connectivity in many countries. 15

Key Challenges in the context of GFC Traditionally PPPs relied substantively on debt financing mostly provided by local commercial banks Mainly with floating rates or with reset periods of up to 2 to 3 years As investors gained confidence, the pattern of financing moved towards higher debt:equity ratios, shorter reset periods and finer spreads In the aftermath of the global financial crisis Investors have become more cautious Commercial banks no longer seem to hold a business as usual view of the future and, hence, seem reluctant in making long-term commitments Reportedly, even in case of NHDP projects, bidders response has shown a marked decline and the financial closure has become an increasingly challenging task Developers and lenders seeking more support through Viability Gap Fund mechanism GoI, however, is keen to keep up PPP momentum and initiated several measures in collaboration with RBI, to increase availability of funds for infra PPPs RBI slashed repo rates and CRR and relaxed norms for external commercial borrowings (ECBs) Through the fiscal stimulus package, IIFCL was allowed to raise about $6 billion through taxfree bonds for providing re-financing to intermediaries lending to infrastructure projects Government also requested the World Bank to increase the proposed line of credit to IIFCL, by an additional $600 mn to $1.2 bn 16

WB Support to India s PPP Program (Backup for further discussion) 17

AAA Support: Past and Ongoing Cross-sectoral: Developing Frameworks and Capacity Building DEA (Infrastructure), MoF Recipient-executed DFID TF Grant of $450,000 (Closing date: June 2008) Online PPP database, Training programs, Stakeholder consultations, etc. PPIAF Review of PPP Institutions and Processes, by PartnershipsUK Study on Infrastructure PPP Financing, by PWC Others Managing the Fiscal Implications of PPPs Advice on the design of the Viability Gap Fund (2003/04) Reports on Infrastructure Financing/PPPs (2005/06) The Planning Commission (Secretariat to the PM s Committee on Infrastructure) PPIAF assistance in drafting and/or desk review of various model documents e.g., MCAs for Ports, Non-Metro Airports, Metro Rail and Railway Station Modernisation Bihar: Technical Assistance complementing State DPL (PPIAF and DFID TF) Review of legal and institutional frameworks for development of infra PPPs Capacity building of the Infrastructure Development Authority 18

AAA Support: Past and Ongoing Sector-specific interventions State Roads: Transaction Advisory support for road PPPs in Tamil Nadu, Orissa and AP 15 road stretches with a total length of 1550 km and an estimate cost of $1.9 bn Of these, 6 road stretches are likely to be developed as PPPs Energy Assisting the Maharashtra distribution company to better manage its private distribution franchisees; Helping borrowers to explore PPPs in distributed power generation and in electricity distribution in Haryana (as part of a proposed lending operation) Education: Supporting the reform of current PPP models, through Detailed policy advice to MHRD on establishment of new PPP models as part of their design of centrally sponsored schemes State-level policy dialogue, particularly for secondary and vocational education In Secondary Education, indicated strong interest in supporting implementation of new PPP models with investment lending Provided significant inputs to Planning Commission's strategy relative to PPPs in education as part of the Five Year Plan, 2009-2012 19

AAA Support: WB New NLTA for DEA (Infrastructure), MoF Develop PPP Toolkits for 4-5 selected sectors To help central and state governments improve their management of key PPP processes viz., identification (making a choice between PPP and traditional public sector route), procurement, contract management and monitoring of associated fiscal risks Review experience to-date with PPPs, through 15-20 case studies To inform design of future PPP program/projects To provide inputs for all the components of the NLTA Inputs to the National Level PPP Training Strategy Training needs assessment Developing curriculum and content for Basic and Advanced PPP courses Training a cadre of Trainers Assistance in increasing stakeholder awareness about the concept of PPP Communications needs analysis Review of how other countries address this challenge 20

Lending & Investment Support: WB Ongoing & Planned Line of credit to the India Infrastructure Finance Company Limited (IIFCL) A joint project of the Bank and IFC IIFCL is an SPV set up by the Government of India to provide long term debt for infrastructure projects, with preference to PPP projects Bank negotiations for support of US $600 mn through IDA & IBRD funds completed Sectors covered will include power, roads, ports, airports, urban water supply & sanitation IFC, through its sub-national finance window, is to sign an MoU with IIFCL Karnataka State Highway Improvement Project (under preparation) Part-financing of modified long-term annuity contracts: 600 km Part-VGF support for BOT-Toll projects: 340 km A financing strategy for upgrading & managing 14,500 km of state highway network Corporate loan (planned) of USD 100 million to MSETCL, the Government of Maharashtra s transmission utility, which plans to undertake PPP initiatives E.g., the strategic alliance model for building transmission infrastructure through IFC s sub-national finance window and involves a joint World Bank-IFC team 21