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Innovative Infrastructure Financing a presentation by V Suresh Director General, Good Governance India and Former Ch

Innovative Infrastructure Financing a presentation by V Suresh Director General, Good Governance India and Former Chairman and Managing Director, HUDCO New Delhi 05-03-2004. The Urbanising World.

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Innovative Infrastructure Financing a presentation by V Suresh Director General, Good Governance India and Former Ch

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  1. Innovative Infrastructure Financing a presentation by V Suresh Director General, Good Governance India and Former Chairman and Managing Director, HUDCO New Delhi 05-03-2004

  2. The Urbanising World • The 20th Century began with a population of 2 billion which increased to 6 billion population by the end of the century. • The Century also witnessed the biggest exodus of human population from Rural to Urban areas • The global urbanisation level increased from 10% to 50% during the century; The world has turned urban with more than half the population living in urban areas

  3. Extra-ordinary Urban Growth in Less Developed Countries • 600 Million people added to the world’s urban population between 1990-2000 • Close to 3 million people are added in Asia alone every month, i.e. equivalent to one new City a month • Of the 21 mega cities (popln. 10 million+) in the world today, 17 are estimated to be in developing countries

  4. World Population Trends Population in and developing (lesser developed) countries to be 88% of total population by 2050 (in millions) 8200(88%) WORLD POPULATION DEVELOPING COUNTRIES Source: UN Population Division; WORLD POPULATION PROSPECTS Population Reference Bureau: WORLD POPULATION DATA SHEET

  5. Urbanisation Scenario in India Decadal Growth Rate of Population (1991-2001)Urban: 31.13%Rural17.97% 1 March, 2001, 1027 M 11 May, 2000,1000 M

  6. India: Urbanisation Scenario Metropolitan Cities/Agglomerations No.of Class-I Cities(> 1 Lakh) - 300 (1991) % of Urban Population - 65%

  7. India : Million plus Cities and Urban Agglomerations - 2001 35 million plus cities/ urban agglomerations

  8. Urban Infrastructure Scenario in India – National Perspective Urban Population Coverage (%) AvailabilityDeficiency Protected Water Supply Sewerage & Sanitation Latrine Refuse Collection/ Disposal Electrification 1991 Census

  9. Urban Infrastructure Scenario in India • According to estimates of the Rakesh Mohan Committee total requirement for urban infrastructure development covering backlog, new investments and O&M costs for the next ten years isRs. 2,50,000 Crores (US$ 57 Billion) • The ninth Plan proposal identifies only around Rs. 12000 Crores. With anticipated growth in Tenth plan providing additional funds of Rs.13,000 Crores, the total expected plan outlay comes to Rs. 25,000 Crores (US$ 5.7 Billion). • Funds for UI development fall short by more than 10 times the requirement

  10. The Vicious Circle Low Level of Infrastructure Low Service Level Low Investments Low Equilibrium Cycle Low Maintenance Low Collection/ Recovery Low Capacity to Pay VS/ KS

  11. Challenges facing Infrastructure • Characteristics of infrastructure projects: • natural monopolies - non-exclusive nature • in-elastic demand - huge investment required for capital & maintenance • Traditionally Infrastructure provision seen as role of government • Schemes conceived as unitary service - no experience in unbundling • Although Financing options are rapidly changing due to financial, technological and organisational innovations at project and policy levels- no clear guidelines for Private sector Participation Cities and Citizens get the infrastructure they desire and deserve.

  12. Major Concerns in Urban Infrastructure Sector • Inadequate coverage and service level • Poor quality of service to consumers • Institutional deliquencies and high administrative overheads • Insufficient financial and managerial resources with Urban Local Bodies / parastatals • High non-revenue component due to wastage, pilferage, unaccounted-for losses and free riders • Inefficient operation and maintenance • Poor monitoring and cost recovery • Unsustainable resource management practices • High investment needs and project costs • Lower priority accorded to certain urban services

  13. Financing of Infrastructure Schemes • Budgets of • Central Government • State Governments • Local Governments • Raising loans from LIC/HUDCO and other Financial Institutions • Loans from International Funding Agencies like OECF(JBIC), World Bank, ADB, KfW, USAID, etc. • Grant funds from Donor Agencies like DANIDA, DFID, CIDA, National Trust/ Missions “Every One Crore rupees spent in infrastructural provision now, saves Ten Crore on cost escalation and public health care due to deficient services later!”

  14. Role of Financing Agencies as Facilitators of Change • Principles of“user-pay”, “abuser pay” or “polluter pay”to be used while determining the service charges to assess the practical aspect of pricing. • Willingness to PayOR Willingness to Charge • For improving the sustainability of UI projects HUDCO emphasises • Principle of full cost recovery • Transparent, Targeted and Measurable subsidy, if needed • Cost savings through energy efficiency, reduction of leakages, manpower rationalisation etc. • Full autonomy to local bodies to determine tariffs • Tariff fixation taking care of annual incremental cost, O&M cost, debt dues, depreciation charges etc. • Compulsory 100% metering • Operation of escrow account

  15. Issues Involved in Infrastructure Financing: Financial Institution’s Perspective ISSUES: • Asset liability mismatch due to short term borrowing vs. longterm funding. • Large volume of resources for capital intensive projects • Locking up of funds in specific large projects. • High risk involved in greenfield ventures • Non-uniformity in appraisal, guidelines and documentation requirements • Lack of tangible security and partial or nil recourse basis of funding projects. • Norms restricting exposure to individual agencies. RISKS: • Political risks & Implementation risks. • Risks of default by borrowing agency • Risks of prepayment in falling interest rate scenario • Foreign Exchange Risks and currency fluctuations In this context, alternatives in service delivery and innovations in resource mobilisation being explored by Financial Institutions HUDCO, IDFC, ICICI, IL&FS and LIC

  16. Some Innovative ‘User pay’ Instruments Infrastructure TypeInnovative user pay Instruments • Water Supply - Advance registration charges, Connection charges, Enhancement of water tariff, Water benefit tax/water tax, Betterment charges, Development charges, Utilization from other sources such as octroi, property tax, sale of plots etc. and Charges from water Kiosks • Sewerage - Connection Charges, Sewerage Cess Tax, Conservancy Tax, Sale of Renewable waste, Sale of Sludge and Sale of Nutrient rich wastewater. • Solid waste - Collection Charges, Cess, Sale of Renewable waste, and Fines for dumping waste. • Roads/Fly-overs/ - Toll Tax, Land as a Resource and Advertising Bridges • Airports/Rly. Stations/ - Surcharge on tickets,using land as a resource, Bus Terminals Toll Tax, User, Charges for transportation terminals and advertising rights.

  17. Commercialisation to Privatisation:Illustrative List of Potential Unbundling Packages • WATER SUPPLY • Water resource management & Development of source • Treatment of water and bulk supply - Water Purchase Agreement • Distribution / Operation and Maintenance (O&M) • Billing / Collection • SANITATION • Sewerage network (collection system) • Pumping Stations(Installation and O&M) • Disposal system - Through taxes (on the basis of water consumed)

  18. Commercialisation to Privatisation:Illustrative List of Potential Unbundling Packages SOLID WASTE MANAGEMENT • Collection • Separation and treatment • Distribution of by-products (scrap material, manure, fuel pellets & bio-gas) URBAN TRANSPORT • Development of urban mass transit systems • Operation and maintenance of urban mass transit systems • Development and maintenance of terminals • Operation of bus and intermediate public transport (IPT) systems • Construction and maintenance of toll bridges • Construction and maintenance of parking facilities

  19. Increased emphasis on Private Sector Participation in Urban Infrastructure The imperative need for Private Sector Participation for: • EXTENDED RESOURCES • STATE-OF-THE-ART TECHNOLOGIES • EFFICIENT PROJECT MANAGEMENT / MAINTENANCE

  20. Route to Private Sector Participation • The concept of Public-Private -Partnership is generally seen as one of these models: • Build-Operate-Transfer (BOT) • Build-Operate-Own-Transfer (BOOT) • Build-Operate-Lease-Transfer (BOLT) • Rehabilitate-Operate-Transfer (ROT) • Design-Build-Finance-Operate-Transfer (DBFOT) • In INDIA full blown Private Sector Participation models have not been put into place, so far

  21. Options for Private Sector Participation (PSP) • However, the various options available, in order of increasing Private Participation in Water Supply & Sanitation Projects being taken up are: • Service Contracts • Management Contracts • Lease • Concession With experience and later on, through • BOT/BOOT etc. • Divestiture

  22. Private Sector Participation in Water Utilities - Manila Experience • Successful involvement of Private Sector in Power Generation and Distribution; Largest effort in privatisation of Water utilities. • Metropolitan Water Works and Sewerage System (MWSS) had covered only 67% population with intermittent water supply and 8 % with sewerage system in 1994. • 56 per cent of 3000 mld supply was non-revenue water • MWSS privatised in 1997 and split into two. • Manila divided into two Zones - East and West. • Two Consortia led by - BENPRES for West and AYALA for east -selected to run water works on 25 year franchise; Both Groups offered rates lower than the prevalent rate (8.78 pesos)

  23. Private Sector Participation in Water Utilities - Buenos Aires Experience • National Public Company OSN was in charge of water & sewerage. • Unaccounted-for water was about 45% of production • Objective of PSP: To reduce Government burden and minimise the price for service delivery • Privatised in 1993 - Through Concession, thus effectively keeping the fixed assets under Public Ownership • Single private firm to operate on 30 years concession period to be revived by re-bidding later • Responsible to operate and maintain fixed assets and expand coverage and guarantee water quality • Pricing to incorporate subsidy already existing, first price review after 5 years

  24. Improvements in Water and Sanitation Services after Awarding the Concession in Buenos Aires

  25. Private Sector Participation in Water Utilities - Buenos Aires Experience Reasons for success : • Comprehensive and transparent bidding process - Two Envelope System • Independent Regulatory Agency established by Government to monitor concessionaire, enforce the terms of contracts and regulatory specifications and levy fines where necessary • Contract had provision for adjustment and re-negotiation during enforcement of concessional period (after 2 years the initial reduction of tariff partly withdrawn in view of more capital investment on system improvement, than originally estimated) • Re-negotiation : transparent and stakeholders involved • Tariff policy had a fixed portion to cover cost of infrastructure and a variable part proportional to consumption

  26. Indian Experience in Privatisation of Water Supply & Sanitation Tiruppur Water Supply and Sewerage Project • Implemented through a SPV New Tiruppur Area Development Corporation (NTADC) promoted by • Infrastructure Leasing & Financing Services(IL&FS) • Tiruppur Exporter’s Association (TEA) • TamilNadu Corporation for Industrial Infrastructure Development (TACID) • Estimated Project cost - Rs. 900 Crores at 1998 prices (Rs. 1000 crore at present). • O&M contract to consortium of Mahindra & Mahindra+United Utilities International, North West Water +Bechtel • Attained financial closure with 10% stake by LIC & GIC.

  27. Indian Experience in Privatisation of Water Supply & Sanitation Pune Water Supply and Sewerage Project - • Developed by Pune Municipal Corporation at a estimated project cost of Rs. 750 crores ($ 187.5 M) later revised toRs. 392 Crores with HUDCO assistance • Private Sector Participation envisaged in Construction, Operation and Maintenance, Tariff collection • Financial Participation in addition to HUDCO expected from IL&FS, ICICI, HDFC, IDFC and Bank of Maharashtra • Request for proposal sought • Tie-ups: Anglian Water + Trafalgar House & Shirkes Binnie Black + Veatch & Thames Water + L&T Krugger + Generale Des eaux & Shanska Int. Preussag + Tata Projects Hyundai + Sundram Chemicals Hanjin + Krupp and Zoom Development Group • Political Risk - work re-tendered at RfP level

  28. Indian Experience in Privatisation of Water Supply & Sanitation Bangalore Water Supply Project • BOOT arrangement for sourcing 500 mld water. • Establishment of two Tertiary Water Treatment Plants (of total 60 mld capacity) with HUDCO assistance • Private Sector (Industries) to undertake laying of feeder mains • envisages provision of 500 mld of water to the city on a BOT basis with estimated project cost is Rs. 800 Crores (US$ 173 M).

  29. Indian Experience in Privatisation of Water Supply & Sanitation Chennai Metro Water • Out of 119 Sewerage Pumping Stations, Operation & Maintenance of 70 by private sector • Sourcing of water in 7 wells through private sector • Construction of 300 mld Water Treatment Plant by - M/s Hindustan Dorr Oliver Ltd. And O&M by M/s Richardson Cruddas • New Chembarampakkam WTP of 530 mld capacity (over and above the existing 600 mld capacity) • Bid documents for BOT by TCS • HUDCO funding availed

  30. Indian Experience in Privatisation of Water Supply & Sanitation • Private Sector Participation on the anvil in water supply & Sanitation • Nagpur - Dewas • Kolhapur - Cochin • Vishakhapatnam - Dharwad • Goa - Alandur • Karnataka Urban Water Supply and Drainage Board (KUWS&DB) for Management Contract in Distribution and O&M Towns Selected for the initiative are • Mysore - Mangalore • Hubli – Dharwad - Gulbarga

  31. Privatisation experience in India in Solid Waste Management • ENBEE Infrastructure Ltd. on BOO basis in Nagpur • M/s Excel Industries – Bio-degradation of solid waste in • Vijayawada, Calcutta, Mumbai, Bhopal, Bangalore, Gwalior, Cochin & Calicut • M/s CELCO in Hyderabad • Common hospital waste treatment plant by GJ Multiclave in Hyderabad • Compost plant by IVR Enviro at Tiruppur

  32. Privatisation experience in Transportation • Pali Bye-pass, Rajasthan - TCI Infrastructure Ltd • Coimbatore Bye-pass (L & T) • Karur Bridge on BOT basis by East Coast Constns & Infrastructure Pvt. Ltd. • Kemptee-Kalamana Toll Road in Nagpur • Karur Bridge on BOT basis • Faridabad Byepass • NOIDA Toll Bridge Company • Cochin International Airport • in Joint Sector by CIAL • Bangalore Airport • Ports – Pipavav, Positra, Adani, Kakinada, Ennore, Cochin, Mumbai

  33. Important issues in a BOT arrangement • Who are the parties to the contract ? • What are the objects and scope of the BOT arrangement? • What is the duration that might lead to early termination? • What are the obligations of the BOT operator ? • What are the obligations of the guarantor ? • What are the key regulatory provisions ? • How will the key risks be managed ? • How will performance be measured and monitored ? • How will the assets be transferred to the BOT operator? • What are the consents required ? • Who will be responsible for environmental liabilities ? • How will disputes be resolved ?

  34. Countdown Steps for Structuring Private Sector Participation Process Structuring and Stages - countdown • 09 Expression of Intent by Public Agencies • 08 Firming up the Project Contours (Consultants) • 07 Short-listing of Private Parties • 06 Project Description Report • 05 Pre-qualification of existing bidders • 04 Issue of Request for Proposal (RFP) • 03 Evaluation of Bids • 02 Negotiations • 01 Award of the Contract (Financial Closure) • 00 Commencement of Work

  35. Evolving Appropriate Organisational/Institutional Mechanisms • Legal and Regulatory Framework • Simplification of Legislation • Techno -Legal Regime (Australian Utilities Commission, U.K. initiatives-OFTEL, OFWATS) • over-arching legislation in the line of Federal Law of Philippines (BOT, BOO,etc) • State/City Level Regulatory Bodies in India • CERC / SERC in Power Sector • TRAI (set to become CCI) in Telecom / ICE sector • NHAI in highways sector • Need for similar regulators in Urban Infrastructure

  36. Urban Infrastructure - Regulatory Authority Utility & Shareholders Users Political Authorities

  37. The Regulatory Mechanism • Regulate prices • Promote operating efficiency • Specify and monitor service standards • Control externalities • Maintain public good functions • Ensure asset serviceability • Ensure development of essential infrastructure • Prevent manipulation of land values • Prevent unfair trade practices • Promote efficient use • Ensure responsiveness to final customer needs

  38. Model BOT Laws • Gujarat Infrastructure Development Act– 1999 • First State to formulate a separate act • Draws from the experiences in Philippines • Authorises the Govt./agencies to enter into concession agreements • Provides a list of various forms of assistance to be provided to the developer including exemption of taxes etc. • Competitive bidding mandatory for ensuring transparency • The concession agreement to prescribethe user fee to be charged by the developer • Need for replication in other States

  39. Infrastructure Authority • Infrastructure Authority formed under Infrastructure Development Enabling Act (IDEA), Andhra Pradesh • Envisaged Roles for Infrastructure Authority: • Conceptualisation of projects - Processing of the projects • Mobilising public opinion - Advisory role to the government • Co-ordination - Monitoring / approval of bidding • Implementation of P-P-P-P - Prioritisation of projects • Preparation of schedule. - Approval of TOR for consultancy • Budgeting / financial allocation - Expedite clearances and permits • Tariff fixing, user/abuser charges and cost recovery • Model contract principles • Supervision over implementation and project management • Proposes a “Swiss Challenge Approach” for evaluating the single bid for projects brought by proprietary agencies

  40. Legal Issues in Urban Infrastructure Financing Security Mechanism for UI Projects • Non-availability of Conventional securities (government guarantees, corporate / bank guarantees) • “Letters of comfort” not a legal security option • Collateral Securities and Equipment Leases used in certain infrastructure • Mortgages not viable securities in most UI projects • Need for partial or non-recourse financing andlegislative changes for treatment as Secured Loans in the Book of Accounts • Negative lien could be considered only as a transient security instrument • Escrow accounts of receivables • enhances transparency of the cash-flows • ensures sufficient balance for immediate repayments.

  41. Escrow Rs. 1000 / bus / day (US$ 20.8) deposited in escrow account out of the anticipated daily revenue of Rs. 5760 per bus (US$ 120) upgradation of infrastructure KSRTC KSRTC fleet augmentation computerisation Innovative Escrow Account for Transportation

  42. Innovative Resource Avenues in UI Financing

  43. Financing Options Matrix

  44. Financing Options Matrix

  45. Consortium financing / Group lending • For capital intensive projects and greenfield ventures beyond lending capacity of single financial institution • Pooling of resources for funding the project. • Ensures sharing of the risks involved. • Needs rationalisation and standardisation of appraisal procedures, lending guidelines and legal documentation of the constituent financial institutions • Need for pari passu charge on the escrow account as security to the partner institutions. • Desirable to provide a single window facility based on tripartite or joint agreements with the borrowing agency.

  46. Transfer of Loan Accounts Fees / Commitment Charges Primary Lender Outstanding Loan Amt. (Principal + Interest) 5years 10 years TENURE OF LOAN (15 years) Takeout Financing • Liabilities of primary lender on project absolved at the end of a specified period • Partner institution transfers pertinent loan accounts to its own books, in lieu of an agreed fee or commitment charge. • Both parties bear the project risks after the take-out based on a non-recourse structure. • pari passu charge on the escrow account as security option. Partner Institution

  47. Innovative Financing Mechanisms Sub-ordinate (Mezzanine) Debt Financing: • Internal restrictions on equity participation by financial institutions, • Lower equity and hence limited debt-equity ratio of new State level bodies for infrastructure projects restrict them from market borrowing on a large scale. • Funding could be considered as deemed equity for a specific period granting the bodies better financial leverage Cashflow financing: • institutional funding to be tailor-made to suit the financial requirements at various stages of the project calling for cash-flow financing.

  48. Loan Lending Institution Borrower Repayments Outstanding Loan Portfolio Pass Through Certificates Fees Periodic Cash Flows Securitisation of Receivables Investors SPV

  49. Securitisation of receivables • Conversion of future cash receivables into financial or debt instruments tradable in capital market • Role of SPV as intermediary: • assumes the entire credit risk on the securitised receivables of selected outstanding loan portfolio • Insulates the lender from bankruptcy & insolvency risks • repackages the receivables into pass-through certificates of manageable lots for onward trading in the secondary market. • Principal and interest components of the repayments are passed on to the security owner. • Merits to Investor: • Continuous cash flow on Securitised instruments over the life of the loan and principal “depletes” over time. • Advantages to Lending Institution: • reduces the locking up of funds in a few projects. • facilitates reduction in borrowings • ensures better asset-liability management. • provides efficient exit option for the financial institutions to transfer the risks of default and prepayment

  50. Municipal Bonds • In United States, account for nearly 70% of the capital financing for infrastructure. • General Obligation Bonds (GO) • Revenue Bonds • Ahmedabad Municipal CorporationGO bond issue of Rs. 100 Crores • Bangalore, Vijayawada and Ludhiana have already raised money through municipal bonds; Mumbai & Pune have obtained credit ratings; Kanpur Development Authority latest entrant Problems faced: • Since bonds can be raised over night within a short period and their utilisation may require 2-3 years, quite often, States/agencies tend to fall into the debt trap • On account of the dire financial position, Credit Rating of agencies need to be enhanced to enable raising funds at lower costs.

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