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Acceleratingpublic private

partnerships in India



FICCI

I am happy to share with you the FICCI-E&Y Report on Accelerating PPP in India to be

released at the India PPP Summit 2012 organized by FICCI.

Indian infrastructure sector is going through a signicant transformation. Investment

in infrastructure is envisaged to be doubled to US $ 1 trillion during the Twelfth Five

Year Plan and about half of this is targeted to be achieved through private sector

investment.

Indian Government has taken a number of steps to encourage private investment in

infrastructure through public-private-partnerships. However, it has been observed

that while PPP projects in some sectors have displayed good progress, several others

achieved only limited success. Issues relating to project implementation, monitoring

and dispute resolution are among the key concerns of the infrastructure developers.

To discuss some of the critical issues, FICCI is organising the India PPP Summit 2012 in New Delhi. The summit will

also focus on procedural bottlenecks adversely impacting the ability to implement infrastructure projects and time-

bound execution of PPP projects.

As ‘Knowledge Partner’ for the event, Ernst & Young has prepared a comprehensive Background Paper covering a

large number of important areas. The report has been prepared through detailed analysis of several critical factors

inuencing PPP projects in India. I take this opportunity to thank them for their efforts.

At the summit, the speakers, experts and delegates would discuss a wide range of topics pertaining to this important

area. I hope you will nd this report useful and as always, your suggestions and feedback are welcome.

Hemant Kanoria

ChairmanFICCI National Committee on Infrastructure

Foreword



India has witnessed a high economic growth in last few years. However, lately

it has been facing strong headwinds with growth rate declining from 9 plus to

around 7%. Many reasons have been attributed to the slowdown in the economyand lack of adequate and quality infrastructure is undoubtedly one of them. Both

federal and provincial governments have been taking number of measures with

varied success. Public Private Partnership format, with its mixed success across

the globe, has been acknowledged as an essential tool for focused private sector

investments in economic and social infrastructure projects.

The Indian PPP story has been a mixed bag so far. National Highway Development

Program, despite its many challenges in meeting its target, has been successful in

attracting huge private sector investments. However, there exists huge untapped

potential for PPPs in sectors like Railways, Power- Transmission and Distribution,

Education, Health and Urban infrastructure. The degree of use of PPP formats and consequently amount of

private sector investments in infrastructure project shows huge variations across various states. The nancing

of PPPs is also emerging as a challenge as commercial banks are reaching their sector exposure norms. Indianprivate sector also have capacity constraints to fund gigantic equity requirements hence necessitating higher FDI

and more foreign players.

Government in order to propel PPPs, which are expected to bring in about 50% of the infrastructure spend of USD

1000 billion in Twelfth Five Year Plan (2012-17) is taking steps to further streamline PPP processes by drafting

national PPP policy and development of corporate Bond markets. Many state governments, like Karnataka and

Andhra Pradesh have put in place an institutional framework for encouraging PPPs whereas other states are in

process of doing so.

India PPP Summit 2012, being organized by FICCI, is a platform to bring together policy-makers, regulatory

authorities, industry experts and business leaders from the infrastructure sector to join hands in dealing with

issues pertaining to implementation, monitoring and nancing of PPP projects in the country.

This paper focuses on progression of PPPs over the years, existing frameworks and challenges for PPPs in India,state level experience and sector related opportunities, practices followed in other countries, funding options for

nancing PPPs and recommendations for spearheading the usage of PPPs in India.

I am privileged to present the FICCI–Ernst & Young Report, Accelerating PPP in India, which especially focuses on

various aspects of promoting PPPs in India.

Abhaya Krishna Agarwal

Executive Director and National Leader — Public Private Partnerships

Government & Transaction Advisory Services

Ernst & Young



Accelerating public private partnerships in India ] 4

1.Public private partnership in India 07

1.1 Evolution of PPPs 07

1.2 Current status of PPPs in India 07

1.3 Common forms of PPP models in India 08

1.4 PPP policy framework 09

1.5 Challenges in PPP in India 11

1.6 State-level experience 12

1.6.1 Andhra Pradesh 12

1.6.2 Karnataka 14

1.6.3 Gujarat 15

1.6.4 Jharkhand 16

1.6.5 Chhattisgarh 16

1.7 International experience 17

1.7.1 United Kingdom 17

1.7.2 Australia 18

1.7.3 Brazil 19

1.7.4 Philippines 20

2. Funding infrastructure through public private partnerships 23

2.1 Overview 23

2.2 Meeting the Twelfth Five Year Plan targets 23

Contents



[ Accelerating public private partnerships in India5

2.3 Means of infrastructure funding 24

2.3.1 Commercial lending 25

2.3.2 Bonds 28

2.3.3 External commercial borrowings 28

2.3.4 Foreign investment funding 29

2.3.5 Foreign Institutional Investment (FII) 29

2.3.6 Multilateral agencies lending 29

2.3.7 Insurance/pension funds 23

2.4 Grants 31

2.5 Private sector capabilities 31

3. Key Industries/sectors for PPP 35

3.1 Highways 35

3.2 Railways 36

3.3 Power 37

3.4 Urban infrastructure 38

4. Recommendations 41

4.1 Policy recommendations 41

4.2 Project development recommendations 41

4.3 Financing recommendations 42




“PPP projects take much less

time to complete and the

Government does not have to

bear cost overruns. This will

not only enable us to leverage

our limited public resourcesbut also improve efciency of

service delivery.”

Shri Manmohan Singh,

Honorable Prime Minister of India

Source: PM inaugural address at the Conference on

Public Private Partnership in National Highways




A public private partnership (PPP) is an agreement between the government and private sector for the purpose

of provisioning of public services or infrastructure. With a common vision in place, the public and private sector

bring to the table their own experiences and strengths resulting in accomplishment of mutual objectives.

The Government of India (GoI) has been focusing on the development of enabling tools and activities to encourage

private sector investments in the country through the PPP format. Private investments amounting to US$150

billion is expected to bridge the infrastructure gap of US$500 billion over the period 2007-20121. As a part of

meeting this nancing gap, the PPP model is increasingly been seen as a means of harnessing private sector

investment and seeking operational efciencies in the provision of public assets and services.

The extent to which the GoI envisages a signicant role played by PPP in improving the level and quality of

economic and social infrastructure services is increasingly evident from the growing reliance on the PPP model in

the recent past.

1.1 Evolution of PPPs2

1.2 Current status of PPPs in India

The PPP India database (Department of Economic Affairs, Ministry of Finance) indicates that 758 PPP projects

costing INR3,833 billion3 is awarded/underway status (i.e., in operational, constructional or in stages wherein at

least construction/implementation is imminent). There exists signicant untapped potential for the use of the PPP

model in e-governance, health and education sectors.

1 “Investment in Infrastructure in India,” Article base website, http://www.articlesbase.com/investing-articles/investment-in-infrastructure-in-india-4585328.html, accessed 23 December 20112 “Facilitating PPP for Accelerated Infrastructure Development in India,” Ministry of Finance & Asian Development Bank,

December 20063 PPP India Database as of 31 July 2011

1.Public private partnership in India

Source: PPP in India website

Few notable PPPs could be found as early as

19th century:

• The Great Indian Peninsular Railway

Company (1853)

• The Bombay Tramway Company's tramway

services in Mumbai (1874)

• PPP models were there in power generation

and distribution in Mumbai and Kolkata in

the early 20th century

• Only 86 PPP projects worth

INR340 billion were awarded

till 2004 (World bank study of

13 states in 2005)

• Most of the projects were in

bridges and roads sector

• Large-scale private financing

has been limited to

Vishakapatnam and Tirupur

• Increasing acceptance of PPP

model due to favorable policy

reforms and innovative PPPstructures

• Growth in PPP from 450

projects costing INR 2,242

billion in November, 2009 to

758 PPP projects costing

INR3,833 billion in July 2011

Phase I:

19th century and

early 20th century

Phase II:

1991 - 2006

Phase III:

After 2006




Karnataka, Andhra Pradesh and Madhya Pradesh are the leading states in terms of number and value of PPP

projects. At the central level, the National Highway Authority of India (NHAI) is the leading user of the PPP model.

In order to select a provider/award a contract a competitive bidding process (either national or international) are

followed. International competitive bidding projects accounted for 35% of total investment followed by domestic

competitive bidding (26%).

1.3 Common forms of PPP models in IndiaWhile the preferred forms of PPP model is the one in which the ownership of underlying asset remains with the

public entity during the contract period and project gets transferred back to public entity on contract termination,

the nal decision on the form of PPP is determined using the Value for Money Analysis.

PPP projects in India by sector

(Total number of projects: 758)*

Source: PPP India database, *As of July 31, 2011

Airports,

0.7%

Education,2.2% Energy,

7.4%

Healthcare,

1.1%

Ports, 8.0%

Railways,0.5%

Roads,53.4%

Tourism,

6.6%

UrbanDevelopment,

20.1%

PPP projects by value of contracts

(Total value of contracts: INR3,833 billion)*

Based on INR 100 crore,

2.5%

Between INR 100 to

INR 250 crore,

5.2%

Between INR 251 to

INR 500 crore,

14.4%

More than INR 500 crore,

77.9%

BOT (build-operate-transfer) models

The BOT form of model and its variants is the

most common form of PPP model used in India

accounting for almost two-thirds of PPP projects

in the country. The two major forms of BOT

models are:

• User-fee based BOT model: Commonly

used in medium- to large-scale PPPs for the

energy and transport sub-sectors (road,ports and airports).

• Annuity-based BOT model: Commonly used

in sectors/projects not meant for cost

recovery through user charges such as

rural, urban, health and education sectors

PPP models

supported

by the

Government

Modified design-build (turnkey)

contracts

• The design-build contracts yield

benefits in the form of time and cost

savings, efficient risk-sharing and

improved quality. The turnkey

approach with milestone-linked

payments and penalties or

incentives can be linked to such kindof contracts.

Performance based

management/maintenance contracts

• The PPP models that lead to improved

efficiency are encouraged in an

environment that is constrained by the

availability of economic resources. The

sectors meant for such form of PPP

models include water supply, sanitation,

solid waste management, road mainte-

nance etc.




While there do exist build-own-operate (BOO) models, they are not supported by the GoI due to its nite resources

and the complexities in imposing penalties in case of non-performance and estimation of value of underlying assets

in case of early termination. Also, the GoI does not recognize the engineering-procurement-construction (EPC)

contracts and asset divestitures as PPPs.

1.4 PPP policy framework4

Signicant growth in the number of PPPs in the past 15 years has made India one of the leading PPP markets in the

world. As a result, a proper PPP eco-system comprising institution, developers, nanciers, equity providers, policies

and procedures has emerged.

In the light of growing PPP trends and policy/institutional intervention, the GoI feels it is imperative to have in

place a broad policy framework. Following the Finance Ministers’ budget 2011–12 speech to come up with a

comprehensive policy, the Ministry of Finance drafted a National PPP policy for soliciting suggestions. The draft

National PPP Policy proposes to focus on assisting Central and state Government agencies and private investors by:

• Undertaking PPP projects through streamlined processes and principles

• Ensuring adoption of value for money approach through optimization of risk-return allocation in project

structuring

• Attaining apt public oversight and monitoring of PPP projects

• Developing governance structures to facilitate competitiveness, fairness and transparency

Prominent features of the proposed National PPP policy:

• The GoI plan to formalize PPPs as preferred implementation models based on the existence of strong track

record for those models. It has laid down strong procedures to procure a PPP project. In order to instill

transparency in PPP, it will publish separate mandatory disclosures and fair practices, set up dedicated dispute

resolution mechanism, develop new market-based products (e.g., pre-bid rating), and explore possibilities of

setting up web-based PPP market place.

4 “National Public Private Partnership Policy – Draft for consultation,” Ministry of Finance, September 2011

Major policy and institutional initiatives taken:

• Setting up of PPP Appraisal Committee to streamline

appraisal and approval of projects

• Preparation of PPP Toolkit to improve PPP decision making

process

• Establishment of transparent and competitive bidding

processes through model bidding documents

• Extending financing support through development funds,

VGF, user charge reforms, etc.

Institutions Developers

Financiers Equity providers

Need for policies

and procedures in

PPP ecosystem




• The PPP process should comprise four phases:

• The GoI is likely to establish MIS for continuous monitoring of the performance of PPP projects.

• The development of a sustainable PPP program requires a strong and well dened institutional structure:

• Supporting the creation of nodal agencies such as PPP Cells at the state or sector level.

• Laying down of appraisal mechanism for PPP projects by the PPP Appraisal Committee (PPPAC)

PPP

identification stage

Consists of strategic

planning, project

prefeasibility analysis,

Value for Money

analysis, PPP suitability

checks, and internal

clearances to proceed

with PPP development

Procurement stage

Consists of

procurement and

project award

PPP contract

management and

monitoring stage

Consists of project

implementation and

monitoring over the

life of PPP project

Development stage

Consists of project

preparation (including

technical feasibility and

financial viability analysis),

project structuring,

preparation of contractual

documents and obtaining of

project clearances and

approval

Creating enabling environment for PPPs:

• GoI has a progressive nancial support system for PPP projects. Some of the key initiatives include India

Infrastructure Project Development Fund (IIPDF), Viability Gap Funding (VGF), resources for annuities/

availability-based payments, long tenor lending, re-nancing facility, infrastructure debt funds, etc. The GoIwill provide legislative and policy support to develop equity, debt, hybrid structures and appropriate credit

enhancement structures.

• The GoI will undertake capacity building interventions to develop organizational and individual capacities for

identication, procurement and managing PPPs.

• The PPP Cell in Department of Economic Affairs will have professionals who provide competencies and

technical support to the ministries and other authorities developing PPPs.




1.5 Challenges in PPP in India5

While most of the above challenges are being worked upon by the GoI, the limited availability of sources of funding is

the biggest bottleneck for the success of the PPP model.

5 Infrastructure Challenges in South Asia: The Role of Public-Private Partnerships, ADB, September 2007 Transparency in PPP programme, The Financial Express, October 27 2011 Indian Infrastructure – Challenges, IDFC, September 2010

There is no independent PPP regulator as of now. In order to attract more

domestic and international private funding of the infrastructure, a more robust

regulatory environment, with an independent regulator is essential.

Regulatory

environment

The PPP program lacks a comprehensive database regarding the projects/studiesto be awarded under PPP. An online data base, consisting of all the project

documents including feasibility reports, concession agreements and status of

various clearances and land acquisitions will be helpful to all bidders.

Lack of information

The project development activities such as, detailed feasibility study, land

acquisition, environmental/forest clearances etc., are not given adequate

importance by the concessioning authorities. The absence of adequate project

development by authorities leads to reduced interest by the private sector,

mispricing and many times delays at the time of execution.

Project development

The limited institutional capacity to undertake large and complex projects at

various Central ministries and especially at state and local bodies level, hinder the

translation of targets into projects.

Lack of

institutional capacity

The private sector is dependent upon commercial banks to raise debt for the PPP

projects. With commercial banks reaching the sectoral exposure limits, and large

Indian Infrastructure companies being highly leveraged, funding the PPP projects

is getting difcult.

Financing availability




1.6 State-level experience6

The scenario in each state is different in the context of infrastructure development as each state has the right to

promulgate legislations in the areas covered in the state list of the Constitution of India. However, certain states

have taken substantial steps to encourage PPP activity. They have created legal frameworks for participation of

private sector in the state.

1.6.1 Andhra Pradesh7

Andhra Pradesh is the leading state in terms of PPP projects by number of contracts (96) and value (INR669 billion).

It accounts for around 17.5% of the total value8 of PPP contracts in India.

The state has been drawing interest for PPP project investment in sectors such as urban development (29%), energy

(24%), roads (22%), etc.

6 PPP India Database as on 31 July 20117 “PPP Cell of Andhra Pradesh,” PPP Cell AP website, http://ppp.cgg.gov.in/Login.aspx,

accessed 16 December 20118 PPP India Database as of July 31, 2011

Gujarat

Uttar Pradesh

Andhra Pradesh

Maharashtra

Karnataka

States of India and PPP6

• The top ve states account for 58.3% of total

value of PPP in India.

• The major sectors being targeted for PPP format

by leading states are roads, ports and airports.

• Maharashtra, Karnataka and Gujarat average

around 11% of the total value of PPP of the

country.

• The bottom 10 states represent only 3.5% of

the total value of PPP — indicating differences in

attractiveness of investment by private sector.

Prominent projects undertaken

• HITEC City, Hyderabad

• Rajiv Gandhi International Airport

• Gangavaram Port

• Krishnapatnam Port

• Hyderabad International Convention Center & an

Integrated Township

• 108 Mobile Emergency Response Service and

104 Mobile Health Service

PPP projects in pipeline

• Hyderabad’s metro rail project

• Bridge across River Godavari at Rajahmundry

• Machilipatnam Port at Machilipatnam

• Development of four greeneld airports

• Bus Rapid Transit System in Hyderabad and

Vijayawada

• Diagnostic centers in hospitals at

Vishakapatnam, Kurnool, Kakinada and Warangal




The state has set up various institutions to promote infrastructure:

• Andhra Pradesh Industrial Infrastructure Corporation (APIIC) — provides estate infrastructure for the

development of industrial areas (IT parks, food processing zones, SEZs, etc.)

• AP Invest — promotes Andhra Pradesh as the favored destination

• AP Tourism Developement Corporation — provides tourism infrastructure to attract tourist inow

• Infrastructure Corporation of Andhra Pradesh (INCAP) — deals with projects that are of critical importance

to the state’s progress

• AP Road Development — procures road projects in the state• AP Urban Finance & Infrastructure Development Corporation — provides nancial assistance, technial

assistane and other guidance

• State PPP cell — acts as a nodal agency for all PPP projects for supporting the state’s PPP initiatives

Institutional support

• Andhra Pradesh was the rst state to enact the AP Infrastructure Development Enabling Act, 2001

applicable to all infrastructure projects implemented by the state. The act lays down guidelines for

developer selection, illustrates various PPP types, and range of state support to infrastructure projects

Policy reforms

The Government of Andhra Pradesh extends support in the following forms:

• Direct nancial support in the form of state’s share of viability gap funding (VGF) to promote economically

viable projects

• Exemptions in terms of sales tax, stamp duty and seigniorage fees

• Asset-based support to provide Government-owned land at concessional lease charges, providing linkage

infrastructure to projects

• Administrative support to get clearances, undertake rehabilitation and resettlement, supply power and

water at project site, land requirements

Funding initiatives

Case study: Major bridge across Godavari

• Major bridge across river Godavari costing INR8.1 billion, is the rst four lane bridge in Asia under the PPP

mode. The scope of the project is to design, build, construct, nance, operate and maintain major bridge

across the river Godavari with a total project length of 15 kms. While the construction for the bridge is

on, the project got its nancial closure in May 2009 and the land acquisition to an extent of 90% is also

complete. The project is likely to begin its commercial operations in May 2012 and is expected to yield

signicant benets in the form of reduced distance between Eluru and Rajahmundry, reduced time of travel,

lower travel costs than earlier and decongestion of trafc.

• PPP model - The project is on BOT toll basis with the developer being selected through competitive biddingprocess for a concession period of 25 years. The project will have grant of INR2.1 billion and the remaining

shall be raised in the form of equity provided by the developer and debt from the FIs.




1.6.2 Karnataka9

According to Economic Survey 2010, Karnataka is among the top states in PPP in infrastructure projects. The

state has 104 PPP projects of value INR447 billion10. As the knowledge hub of India, it has immense potential for

investment in the areas of information technology, biotechnology, textiles, steel and cement.

In 2008, the transportation sector bagged the maximum investment on a PPP basis in the state. However, the

Government of Karnataka is now targeting new areas for PPP. It has tabled a Bill in Legislative Assembly to develop

all ports in the state on a PPP basis and is formulating an integrated energy policy that aims to promote PPP

projects in the energy sector.

9 Geert Dewulf, Ashwin Mahalingam, and Stephan Jooste, “The Transition Towards a Sustainable PPP Regime,” August 2011 “Karnataka Special Ppp On Fast Track,” 24 October 2011, Project Monitor, via Factiva, © 2011 Economic Research India

Pvt. Ltd., distributed by Contify.com Infrastructure Development department website, http://idd.kar.nic.in/ppp-go.html, accessed 12 December 201110 PPP India Database as of July 31, 2011

• The State Government has established the Infrastructure Development Department in 1996. It aims to

attract private sector participation in the development of infrastructure projects.

• The State Government has set up a PPP cell in the Infrastructure Development Department to boost PPP

in the state. PPP cell aims at identication, conceptualization and creation of a shelf of projects that can

be considered for implementation through the PPP route.


• The state’s New Infrastructure Policy, 2007 aims to provide a fair and transparent policy framework for

promotion of PPP in the infrastructure sector in the state. The policy has the provision for consideration of

implementing the project rst through PPP for all new investments in infrastructure.

• The State Government decided to establish a single window to facilitate the speedy approval of the projects.

Policy reforms

• The State Government has set up a fund called Karnataka Infrastructure Project Development Fund to

provide nancial assistance to state agencies taking on infrastructure projects under PPP mode. The fund

targets investment in railways, airports, ports, roads, urban infrastructure, energy, tourism and industrial

infrastructure.

Funding initiatives

Case study: Bangalore International Airport

• The ”Greeneld” Bangalore International Airport, the rst PPP airport in the country, is developed on aPPP model with total investment of INR19.3 billion. It is the joint venture between the Airports Authority of

India (AAI), Karnataka State Industrial Investment and Development Corporation Ltd. (KSIIDC) and private

promoters. The airport is built on international lines with world class facilities along with the capacity to

handle 40 million passengers on further development.

• PPP model - The Bangalore International Airport is being built on BOOT format with Government of

Karnataka and Airports Authority of India (AAI) each having 13% equity shares and developer being selected

through competitive bidding process for a concession period of 30 years (provision of 30 years extension).

The INR19.3 billion nancing being done as equity — INR31.5 million, state support — INR3.5 billion and debt

— INR12.65 billion.




1.6.3 Gujarat11

With around 63 projects valued at INR396 billion12,

Gujarat is among the leading states witnessing high

level of PPP activity especially in the sectors of

ports and power. Gujarat’s vision 2010 envisioned

development of robust infrastructure in the state

primarily through the PPP mode. Similar planning exercise has been undertaken for future projects in the form

of ”Blueprint for Infrastructure, Gujarat-2020.” It envisages investment of INR120 trillion by 2020 across

infrastructure sectors.

11 “The Transition Towards a Sustainable PPP Regime,” Geert Dewulf, Ashwin Mahalingam, and Stephan Jooste, August 2011 Major Initiatives, Gujarat Ofcial State Portal, http://www.gujaratindia.com/index.htm, accessed 11 December 2011 Public Private Partnership, Gujarat infrastructure Development Board website, http://www.gidb.org/, accessed 12 December

2011

12 PPP India Database as of July 31, 2011

• Gujarat is the rst state to build a regulatory framework for PPP through the passing of Gujarat

Infrastructure Development Act in 1999. It denes guidelines for the private sector participation in

nancing, construction, maintenance and operation of infrastructure projects undertaken on a PPP basis

in Gujarat.

• Gujarat Infrastructure Development Board (GIDB) was set up in 1995 to undertake PPP initiatives in

the state. Gujarat Infrastructure Development (GID) Act 1999 provides a mechanism for selection of

developers to encourage private sector participation.


• GIDB has developed model concession agreements for certain sectors such as ports, urban transport, road

and water.

• In addition, sector-specic policies of the state provide for utilization of PPP.

Policy reforms

• The State Government has formulated viability gap funding scheme to provide funds for essential PPP

projects. Under this scheme, the State Government provides nancial support up to 20% of the cost of

PPP project. The funding is provided in the form of a capital grant at the stage of project construction.

Funding initiatives

Case study: Dahej LNG Terminal• Gujarat’s Dahej LNG Terminal is the rst LNG terminal in India, spread over 48 hectares and is currently

”under operation” stage. Owned by Petronet LNG Ltd. and located at Dahej in Bharuch district of Gujarat,

the PPP project is estimated to cost INR23 billion.

• PPP model - Dahej LNG Terminal PPP is in a BOOT format with contract awarded by the Negotiated MoU

method for 30 years. The equity was contributed by Indian oil companies, a France-based company and

Asian Development Bank. The project had a debt-equity ratio of 71:29.

(Source: PPP in India and http://www.gidb.org/cms.aspx?content_id=106)

Gujarat and PPP

• Gujarat’s 40 minor private sector ports handle

approximately 80% of cargo handled by all

private ports in India.

• Gujarat possesses rst ever private port

project in the country.

• The only chemical port and tow LNGTerminals have been developed in the PPP

format.

• Two air strips have been developed by

private developers.




16

1.7 International experience

1.7.1 United Kingdom

PPP activities in the UK started gaining momentum in the 1980s, in a bid by the UK Government to reduce the

economy’s dependence on public sector nancing.17 With the support of various initiatives over the years, the PPP

model has evolved from a channel to offset the constraints on public sector expenditure, to the preferred model todeliver superior quality services.

According to the UK treasury data, 698 private nance initiative (PFI) projects have been signed to be delivered

through the PPP route, in various sectors such as education, health, defense, public-housing, IT and transport. 18

The PPPs in the UK have been highly successful, with several countries around the world trying to emulate the UK

model. According to British National Audit Ofce (NAO) an assessment of the UK PPP policy in 2009 shows that 65%

of the contracts were delivered on time and within the agreed budget.19

16 “Chhattisgarh,“ Ministry of Foreign Affairs, Kingdom of Thailand website, http://www.mfa.go.th/internet/document/6691.pdf, accessed 19 December 2011

“World class education in Chhattisgarh,” Dailybhaskar.com website, http://daily.bhaskar.com/article/MP-RAI-soon-world-

class-education-in-chhattisgarh-iiit-likely-to-open-in-state-2142187.html, accessed 19 December 201117 “Public-Private Partnerships, Government Guarantees, and Fiscal Risk,” International Monetary Fund, April 2006, p. 72-7618 “Project Database,” PPPForum website, http://www.pppforum.com/projects, accessed 14 December 201119 “Theorizing Public-Private Partnership Success: A Market-Based Alternative to Government,” Paper for the Public

Management Research Conference at Syracuse University, June 2011, p. 16

Upcoming PPPs16

Setting up of Gems & Jewellery SEZ on PPP

Chhattisgarh State Industrial Development

Corporation Limited plans to set up a Gems and

Jewellery SEZ covering 70 acres. The project

will be developed on a PPP basis with M/s Ramky

Infrastructure Ltd. The project is expected to be

completed by 2014 at a cost of INR17.42 billion.

Sports City in Naya Raipur

Naya Raipur Development Authority is setting up a

sports city with facilities for aquatic, tennis and indoor

stadium on PPP in Naya Raipur over 137 Acres. The

private player will build the sports facilities and hand it

back to the authority. A 93 acre residential land parcel

will cross-subsidize the sports facilities.

Infrastructure

UK (IUK)

2007

Partnerships

UK (PUK)

2000

Treasury

taskforce

1997

PFI

1992




1.7.2 Australia20

The Australian PPP market is one of the most well developed markets for PPP. The initial phase of PPP pertained

to infrastructure projects that were modeled on the BOT and BOOT types. However, the focus of PPP shifted to

social infrastructure in 2000s. The projects are diverse and relate to hospitals and schools. The market for social

infrastructure is expected to continue to develop as there is need for water and energy infrastructure to meet

Australia’s future sustainability requirements.

Australia is witnessing signicant growth in infrastructure. The infrastructure market is estimated to procure

investments worth US$101 billion by 2016. In addition, the devastation caused by the oods in northern Australia

exacerbates the massive task of rebuilding damaged infrastructure. Thus, there is requirement of private

investment in the country.

20 “Case Studies of Transportation Public-Private Partnerships around the World,” Ofce of Policy and Governmental Affairs,July 2011

Public Private Partnerships, Infrastructure Australia website, http://www.infrastructureaustralia.gov.au/public_private/,accessed 11 December 2011

High level of political commitment: Timely reforms

have been introduced by the Government to ensure

development of the PPP markets. This includes

steps such as PFI, and empowering the National

Audit Office (NAO) to independently oversee PPPs.

Strong policy framework: A proper legal and

institutional framework at national, regional and

municipal levels is in place, which acts as a safeguard

for potential partners. It is ensured that the

Government spending is regularly scrutinized and

published for the general public.Key

success

factors

1

2

3

4

Specialized bodies: The creation of specialized

bodies such as Partnerships UK (PUK) and the

Treasury Taskforce has institutionalized and

gave structure to the PPP activities, which has

been critical for the success of a PPP programin such a large scale.

Utilization of taxpayer's money: A proper evaluation

tool, along with a program management process, has

been put in place. This screening optimizes the

project risk, and ensures that they are delivered on

time without compromising on the quality.

Case study: Advantage PPP - A55 Llandegai to Holyhead Trunk Road

• The £101 million A55 Llandegai to Holyhead trunk road has been designed, nanced and built by UK

Highways A55, a consortium of Carillion Laing and Hyder and is the rst trunk road built in Wales under the

Private Finance Initiative. It is a key international highway linking Dublin and Ireland more generally with

Wales and England and the major markets of Europe. The project proved to be a major achievement for the

concessionaire as it delivered the project 6 months ahead of time despite the wettest winters and fuel crisis.

Infrastructure Australia

Independent statutory advisory council with 12 members

from government and private sector

Australian PPP unit

Established by Department of Finance and Administration to

provide guidance to government agencies on use of PPP

National PPP Forum

Facilitates cooperation across Australian regional

jurisdictions for infrastructure projects through PPP

Key national

entities for PPP




1.7.3 Brazil21

Private investment to build infrastructure has existed in Brazil for a long time. In fact, it was the main form in which

majority of the country’s original infrastructure were developed. The rst railroads of the country were built byprivate players under the state licenses. Brazil has one of the longest highway network under private concessions22

in the world indicating co-existence of public and private entities.

PPP activities are regulated under the Concessions Law (1995) and the Public Private Partnerships Law (2004). The

main drawback of the concession law has been that the users (especially drivers on toll roads) are unwilling to pay

for the use of a previously free road. Under the law the contract duration can vary between 5 to 35 years and the

contract value should be at least US$11 million.

The adoption of the two model structure in the PPP law has proven to be effective because:

• The PPP law allows the payments to be partly or totally funded by the Government. This has helped in attracting

private investments in projects that cannot be sustained by the fees charged from the users.

• The Government has to establish a fund to provide warranty of its obligations under the agreement.

• The law also provides for the use of alternative mechanisms for disputes resolution, including arbitration.

21 “Brazilian PPP Program, Lessons and Challenges,” Brazil Ministry of Planning website, http://estatico.buenosaires.gov.ar/

areas/hacienda/pdf/8_mesapanel_vanialucia_lins_souto.pdf, accessed 12 December 2011. “An Overview of Concessions and Public-Private Partnerships in Brazil,” American Bar Association website, March 2011.Public Private Partnership Unit website, www.ppp.mg.gov.br, accessed 12 December 2011

“Privatization and Public-Private Partnership,” Barbosa, Müssnich & Aragão Advogados website, 2008, p. 422 A concession is the right to operate public services or facilities for a xed period of time, at the concessionaire’s risk.

Case study: Advantage PPP - Sydney Harbor tunnel

• The level of trafc between North Sydney and the Sydney Central Business District led to the development

of the tunnel on PPP model (BOOT). The New South Wales Government selected the Sydney Harbor Tunnel

Company Pty. Ltd. as the preferred consortium in 1987. The PPP model with ownership of private sector

led to signicant alleviation of congestion in the area and proved to be successful.

• Investment is recovered from the revenues collected from the users in the

terms of concession (Revenue source = user tariffs)

• Ideal for long-term sustainable projects

The Concession

Law

• Sponsored concession — state is allowed to complement concessionaire’s

revenues (Revenue source = user tariffs + public)

• Administrative concession — Government is responsible for the private

partner’s remuneration (Revenue source = public payments)

The Public Private

Partnership Law




Scope for improvement: Despite certain advantages, few PPP projects have been contracted in the country. Many

Government ofcials are not comfortable with the idea of paying taxpayers’ money to private investors and are

hesitant in implementing such contracts. There are major issues are in the areas of policy formulation, regulation

and supervision of contracts. According to the law, the Government cannot make any payment until the private

partner provides the service to the users. This creates nancing difculties as the private investor may have to

make huge investments in building facilities without receiving any cash ow. Brazil launched Phase two of its Growth

Acceleration Program, which estimates to incur public and private investments worth US$526 billion to upgrade the

country’s infrastructure in the period 2011 to 2014.

1.7.4 Philippines23

Government of Philippines has been promoting participation of private sector not only in traditional infrastructure

projects such as power, transportation and water sectors, but also in non-traditional infrastructure and development

sectors such as information and communications technology, health and property development since 1987. PPP

enabled resolving of the power crisis in the early 1990s and helped improve road network quality, transport linkages

and social services in the country. PPP initiatives have bagged approximately US$19.5billion in the country.

The country’s PPP program is a vital component of its development plan. The PPP center is at the helm of affairs of

the PPP program. It provides various services and assistance to implementing agencies (IAs), government-owned

and controlled corporations (GOCCs), state universities (SUCs), local government units (LGUs) and the private

sector in the development and implementation of critical infrastructure projects. In addition, the country’s BOT law

recognizes the role of private sector in the development of the country by providing various incentives such as tax

exemptions. PPP center serves as an efcient nodal agency for PPP projects of the country. Project Development

and Monitoring Facility (PDMF) of the center provides funds for PPP activity.

Government is proactive in takings steps to build up support for PPP projects. It has allocated US$6.8 million in the

2011 budget to enable structuring and preparation of PPP projects. In addition, it is developing an interim scheme

to provide access to long-term nancing for PPP projects until a dedicated infrastructure nance facility can be

established.

23 “Public Private Partnership Projects,” Republic of Philippines, March 2011“The Philippine PPP Program,” PPP unit, December 2008

Case study: PPP in Brazil - MG-050 highway

• The recovery, expansion and maintenance of the MG-050 highway was the rst highway project in Brazil tobe executed through PPP. The 372-km long highway entails investment worth US$650 million till 2032. The

project is being executed as sponsored concession and the private player has been granted a guarantee by

the state-owned Minas Gerais Economic Development Company.

Case study: Advantage PPP - North Luzon Expressway (NLEX)

• In 1990s, the Government of Philippines invited the private sector to undertake the rehabilitation,

expansion, and modernization of NLEX. The total cost of the project amounted to US$252.2 million. The

private sector undertook the responsibilities of nancing the project without the Government’s guarantee,

building tollway and assuming constructing risk. It resulted in development of the regional agriculture and

industry besides providing access to northern and central Luzon.




2.1 Overview

The development of a good physical and social infrastructure is characterized by signicant investment

requirements, low operating costs with repayments from revenues generated from the project. The GoI has

traditionally been taking the onus of nancing, implementation, operations and maintenance of these projects.

However, to avoid cost and time overrun and benet from innovative project structuring and implementation

strategies, private sector participation in development of infrastructure is extremely critical.

The GoI, cognizant of the fact, is setting the targets for its Twelfth ve year plan such that that 50% of the infra

spending is met by the private sector.

2.2 Meeting the Twelfth Five Year Plan targetsThe Eleventh Five Year Plan (FYP) period of 2007–2012 is about to end soon and the GoI is currently drafting the

Twelfth FYP. Thus, while the nal Twelfth ve year plan is yet to see the light of day, the Approach Paper for the

Twelfth FYP targets an infrastructure spending requirement of INR40,992 billion (up from infrastructure spending

levels of INR9,061 billion and INR20,542 billion during the Tenth and Eleventh FYPs respectively) in order to attain

a share of 10% of the country’s GDP. Around 50% of such investment is estimated to come from the private sector,

against the average 35.8% contribution that was estimated in the Eleventh FYP.

The Approach Paper24 to the Twelfth FYP further states that while public investment in infrastructure is needed for

the overall societal development and wider reach, the PPP-based development needs to be encouraged in all feasible

areas. For this, the institutional mechanisms to support this kind of investment deserve strong support.

As a result, the GoI has already taken various measures to enhance availability of funds and meet increased level of

private sector participation. The next section describes in detail each of the funding sources and the measures taken

by the GoI to encourage the use of such source for infrastructure nancing.

24 “Faster, sustainable and More inclusive Growth – An approach to the Twelfth FYP,” Planning Commission, GoI

2.Funding infrastructure throughpublic private partnerships

Infrastructure spending estimates across

the various FYPs (in INR billion)

Source: Planning Commission projections of Investment in infrastructure during the Twelfth Five Year Plan

Planned year-wise infrastructure spending

during the Twelfth FYP (in INR billion)

6,80913,113

20,4962,2527,429

20,496

-5,000

10,00015,00020,00025,00030,00035,00040,00045,000

Tenth Plan

(Actual)

Eleventh Plan

(Revised)

Twelfth Plan

(Projected)

Public investment Private investment

FY2013,6,194

FY2014,7,127

FY2015,8,095

FY2016,9,181

FY2017,10,395




2.3 Means of infrastructure funding

The following table broadly indicates the various means of funding for an infrastructure project.

Sources of funds for PPP25

Forms Domestic sources External sources

Debt • Domestic commercial banks

• Domestic term lending institutions

• Domestic bond markets

• Specialized infrastructure nancing

institutions

• International commercial banks

• Export credit agencies

• International bond markets

• Multilateral agencies

Equity • Domestic developers

• Public utilities

• Other institutional investors

• International developers

• Equipment suppliers funds

• Other international equity investors

• Multilateral agencies

• Bank credit: Commercial banks are facing difculties as they have already reached their lending exposure limitsfor the infrastructure sector and face the problems of concentration risks and ALM mismatches.

• Bonds: The bond market in India is highly underdeveloped. The rate at which the bond market in India is

growing is considerably slow in comparison to the rate of growth needed by the GoI to build its infrastructure.

• External Commercial Borrowings (ECBs): ECB lending is highly dependent on the interest rate scenario.

Prominent infrastructure companies such as L&T have been increasingly evincing interest in ECBs as an option

for infrastructure funding.

• Multilateral agencies: The World Bank and the Asian Development Bank have launched programs supporting

PPP projects in India. The institutions provide technical and nancial assistance to facilitate infrastructure

development.

The infrastructure sector has been witnessing rising debt equity ratios in the recent years. The senior debt is

contributed by both commercial banks and public sector banks. The use of subordinated debt is limited and is used

particularly in the road sector.

Apart from lending in form of debt nancing, the government grants are devised to support economically unviable

but feasible projects. The domestic bank credit has been the prime source of debt nancing in case of infrastructure

projects.

25 Proposed Multitranche Financing Facility India: India Infrastructure Project Financing Facility, Asian Development Bank,November 2007

L e n d e r s ’

p e r s p e c t i v e




2.3.1 Commercial lending

Commercial lenders are the prominent nancers for the infrastructure sector of the country. The following table

indicates that infrastructure lending of commercial banks grew from INR1,128 billion in 2006 to INR5,266 billion in

2011 registering a growth of approximately 36%. In addition, the share of bank nance extended to infrastructure

sector as a percentage of gross bank credit has increased from 2.2% in 2001 to around 13.4% in 2011.26

Bank credit to the infrastructure sector

in INR billion 2006 2007 2008 2009 2010 2011

Infrastructure sector 1,128 1,433 2,051 2,699 3,798 5,266

Primarily comprising

Power 601 731 950 1,244 1,878 2,691

Telecommunication 184 194 380 503 593 1,004

Roads and Ports 196 249 345 470 735 925

Source: Handbook of Statistics on Indian Economy 2010-11

However, many Indian banks are now on the verge of reaching their maximum limits for lending toward the

infrastructure sector. With signicant number of high investments proposals in the pipeline for the infrastructure

sector, the banks are nding it difcult to nance infrastructure projects. One of the key problems faced by banks is

the asset-liability mismatch problem, typically of infrastructure projects.27

Challenge of asset-liability mismatch and reaching infrastructure exposure limitsThe asset-liability mismatch problem arises due

to the fact that longer duration loans required by

the infrastructure projects need to be nanced by

shorter duration borrowings. The lending banks are

nding it increasingly difcult to provide nancing

to high-value projects with repayments schedules of

up to 15 years in comparison with deposits ranging

in maturity period of one to three years. With ALM

and concentration risks, the loans are not complete

reection of the project risk and loan pricing controls

(for liquidity shortfall and renancing risk). The low

deposit rates have further aggravated the situationas the depositors are unwilling to commit themselves

to long-term maturities28.

26 RBI Annual Report 2010-11, pg5127 “Loan-deposit mismatch may hit bank lending to infra sector,” Live Mint website, http://www.livemint.com/2011/02/08224328/Loandeposit-mismatch-may-hit.html, accessed on 4 January 2012

28 “Bank face asset-liability mismatch on infra lending,” Business Standard website, http://www.business-standard.com/india/news/banks-face-asset-liability-mismatchinfra-lending/393085/, accessed 29 December 2011

“Infrastructure loans are of 10-15

years duration, while most bank

deposits have tenure of one-two

years. In the last nancial year,

not much disbursement took place,

and now every bank is sitting

on huge sanctions waiting to bedisbursed. This is going to create

a major problem, as we won’t have

deposits of equal maturity,”

Chairman and Managing Director of a

public sector bank

(Source: Business Standard)

L e n d e r s ’ p e r s p e c t i v e




The difference between liabilities and assets varies according to their maturity prole buckets. The table indicates

that as the maturity time period increases, the liabilities (deposits and borrowings) surpass the assets (loan and

advances and investments). It results in asset liability mismatch for banks.

The problem accentuates with infrastructure lending as infrastructure loans are long-term in nature.

Table: Maturity prole of selected items of liabilities and assets of four public sector banks (in INR million) as

on 31 March 2011

SBI Bank of India Punjab

National Bank

Canara Bank Total

Deposits

Over 5 years 1,571,656 538,719 714,426 523,464 377,587

Borrowings

Over 5 years 409,693 98,139 101,781 43,550 77,986

Loan and Advances

Over 5 years 1,360,204 363,307 264,986 355,125 287,161

Investments (at book value)

Over 5 years 1,600,123 543,334 579,436 597,985 374,098

Difference

Over 5 years 97,898 26,978 2,822 38,610 20,569

In the absence of a developed corporate bond market, use of renancing facility has been suggested to mitigate

ALM mismatches. Under this facility, the long-term funds will be borrowed and used to renance infrastructure

loans of banks and specialized NBFCs.

“Many banks are close to

exhausting their internal limits

set for infrastructure rms….

We may not see the samepace of expansion, in terms

of credit disbursement to the

infrastructure sector, in the next

two years that we have seen in

the past two years”

R. Ramachandran, Chairman and

Managing Director of Andhra Bank

“Maximum loan proposals are

coming from this (infrastructure)

sector. All are big-ticket

proposals…Banks will have tosee their loan book and see what

their headroom available for

lending”

P.K. Anand, Executive director of

Punjab and Sind Bank (Source: Livemint)

L e n d e r s ’ p e r s p e c t i v e




Take-out nancing as a solution: The take-out nancing scheme has been developed to deal with issues of hitting

sectoral limits, concentration risk and asset-liability mismatch. The takeout nancing scheme involves three parties

— project company, lending company and taking over institution (bank/consortium of banks/FI). Under the scheme,

the taking over institution enters an agreement by which the lender transfers a part/whole of the outstanding to the

taking over institution on a pre-determined basis. The concept of takeout nancing has been accepted as a global

practice to release long-term funds for nancing infrastructure projects.

IIFCL, an SPV formed for the purpose of lending funds to infrastructure projects and supplement other loans from

banks and nancial institutions, has been recognized as a special agency to extend takeout nance scheme in 2010.

A tripartite agreement was signed in September 2011 between IIFCL, LIC and IDFC which allows takeout nancing

to an extent of 50%29 of the project cost.

IIFCL has further increased take-out nancing disbursement target by INR50 billion as a result of which the banksand infrastructure developers are expected to get attractive takeout nancing deals. Under the new concession

in PPP projects, the take-out nancing rate is likely to vary from 9.90% to 10.85%. The banks will now be able to

seek out takeout nancing immediately after the commercial operation date. Also, the BOT projects of NHAI will be

eligible for the scheme. These changes will enable banks reduce exposure to existing borrowers and free up their

capital and operate within the exposure limits.30

Measures taken by the RBI31

Additionally, the Reserve Bank of India (RBI) has taken a number of regulatory concessions for

infrastructure nance:

• Permitting banks to enter take-out nancing arrangement• Freedom to issue long term bonds by banks

• Relaxation of single and group borrower limit for additional credit exposure in the infrastructure sector

• Flexibility to invest in unrated bonds of companies engaged in infrastructure activities within the overall ceiling

of 10%

• Excluding the promoters’ shares in the SPV of an infrastructure project to be pledged to the lending bank from

the banks’ capital market exposure

• Permitting banks to extend nance to fund promoter’s equity where the proposal involves acquisition of share

in an existing company engaged in implementing or operating an infrastructure project in India.

Further, the central bank recently eased the norms by allowing banks to lend 20% of its capital funds to

Infrastructure Finance Companies (IFCs).

29 “IIFCL, LIC, IDFC enter into MoU for takeout nancing,” Economic Times website, http://articles.economictimes.indiatimes.com/2011-09-19/news/30175667_1_takeout-nancing-iifcl-india-infrastructure-nance, accessed 2 January 201230 “IIFCL raises takeout n bar by Rs5,000 crore,” DNA website, http://www.dnaindia.com/money/report_iifcl-raises-takeout-

n-bar-by-rs5000-crore_1627878, accessed 20 December 201131 “K C Chakrabarty: Infrastructure nance – experiences and the road ahead,” BIS Review, February 2010




2.3.2 Bonds

The bond market in India comprises issuances by

both Central and state governments, public sector

undertakings, other government bodies, nancial

institutions, banks and corporates. However,

the corporate bond market currently is highly

underdeveloped and lacks liquidity and depth.32

The corporate debt markets have been constrained by detailed primary issue guidelines, lengthy processes, and

absence of long-term investors.

The bond market primarily functions as a private

placement market as the public issues of bonds have

been found to be difcult, slow, expensive as well as

risky. A debt private placement amount of INR5.4 billion

was raised in the infrastructure sector during FY09 up

from INR4.3 billion in FY08.33

Indian companies are allowed to issue bonds in Indian

currency for trading on the corporate bond market in the

country according to the existing regulations. Foreign

institutional investors are permitted to invest in these

bonds up to INR935 billion collectively, with a “carve

out” of INR234 billion for infrastructure projects.34

2.3.3 External commercial borrowings

External commercial borrowings (ECBs) can also serve as an important means of funding debt requirements of the

infrastructure project. The number of ECBs extended depends on interest rates in the country. Over the years, they

have become cheaper and developers are increasingly viewing them as an alternate source.

Some of the regulatory changes implemented to make ECBs an important means of funding include:

• In May 2011, the RBI permitted IFCs to raise funds through ECBs of up to 50% of net-owned funds without

approval.35

• In September 2011, the limits to avail ECB under the automatic route has been liberalized as given below:36

• Corporates in real sector/industrial sector/infrastructure sector — INR35 billion or equivalent as compared to

the current limit of INR23.3 billion or equivalent

32 “India to set up vibrant bond market: Mukherjee,” Economic Times website, http://economictimes.indiatimes.com/markets/bonds/india-to-set-up-vibrant-bond-market-mukherjee/articleshow/7320944.cms, accessed 20 December 2011

33 “Product Innovations for Financing Infrastructure: A Study of India’s Debt Markets”, Asian Development Bank, October 201134 “India to set up vibrant bond market: Mukherjee,” Indo-Asian News Service, 19 January 2011, via Factiva © 2011 HT MediaLimited.

35 ECB norms liberalized for infrastructure nance rms, Live mint, May 201136 “External Commercial Borrowings (ECB) – Rationalisation and Liberalisation,” RBI, September 2011

India plans to develop a vibrant

bond market to facilitate

infrastructure nancing, as

the source of nearly one-third

of the targeted $1 trillion

investment in the sector duringthe Twelfth plan period is not

known yet…..”We want to

develop and set up a vibrant

bond market in the country

to facilitate infrastructure

nancing.”

Pranab Mukherjee

Hon’ble Finance Minister of India (Source: Economic Times)

“ The success of government’s

very ambitious infrastructure

programme hinges on

developing an adequate bond

market “

D.H.Pai Panandiker, President, RPG Foundation (Source: Business Week)

L e n d e r s ’

p e r s p e c t i v e




• Corporates in specied service sectors such as hotel, hospital and software — INR9.3 billion or equivalent as

against the current limit of INR4.6 billion or equivalent

• The corporate entities in the infrastructure sector can now avail of ECBs for interest during construction (IDC)

as a permissible end-use, under the automatic/approval route, as the case may be, subject to IDC being a part of

project cost and is capitalized.

The GoI approved fund raising worth INR609.5 billion by companies through external commercial borrowing (ECB)

or foreign currency convertible bonds (FCCB) for infrastructure projects in the last two nancial years.37

Companies such as L&T Finance are mulling the ECB route for its expansion. L&T Infrastructure Finance raised

INR4.2 billion through the ECB window this scal and is aiming to raise more funds through this route.38

2.3.4 Foreign investment fundingForeign direct investment (FDI) — FDI of up to 100% is permitted in greeneld infrastructure projects under the

automatic route. In the case of existing projects, FDI under the automatic route is permitted up to 74% and FIPB

approval is required beyond 74%. FDI gained a prominent role in infrastructure nancing in the recent years. Total

FDI increased from US$5.03 billion in 2002–03 to US$27.02 billion.39 Over the next two years, India could attract

FDI worth US$80 billion. The infrastructure sector as a percentage of total FDI increased signicantly from around

4% in 2002–03 to around 16.7% in 2010–11.40 Going by these trends, FDI could signicantly contribute to nancing

infrastructure in India.

2.3.5 Foreign Institutional Investment (FII)

The GoI is reportedly in talks with the regulatory authorities to allow infrastructure nance companies to issue bonds

to foreign investors for the purpose of raising infrastructure nance in the country. The GoI had earlier raised thelimit on FII investment in corporate bonds of duration of more than ve years issued by companies in this sector.41

2.3.6 Multilateral agencies lending

Institutions such as the World Bank and the Asian Development Bank also provide funds to nance PPP

infrastructure projects.

Asian Development Bank42

The GoI started a PPP initiative called “Mainstreaming PPPs in India” in collaboration with ADB. It commenced in

2007 to enable PPPs by focusing on all activities relating to various parameters such as process standardization,

sector tools, development funds and projects development.43

ADB also provides support to India in structuring of potential PPP through its support in the form of TechnicalAssistance (TA).The support provided by the institution is in the following forms:

• Public sector loans to states or municipalities for nancing grants/equity support

• Public sector loans to IIFCL that further grant funds for project companies

• Private sector loans to project companies

• Provision of guarantee to commercial lenders.

37 http://www.projectsinfo.in/News.aspx?nId=tqS7Qlvq+Qa2afymafoMpg==38 “L&T Infra launches tax-free bonds; mulls ECB route for funds,” Business Line website, http://www.thehindubusinessline.

com/industry-and-economy/banking/article2656496.ece, accessed 22 December 2011

39 Department of Industrial Policy and Promotion, India FDI Fact Sheet – April 2011 Pg440 RBI Annual Report 2010-11 pg7041 “http://www.moneycontrol.com/news/business/govt-aims-to-ease-i-entryinfra-nance-bonds-sources_579707.html42 Country Operations Business Plan, ADB, December 201043 “Theoretical Framework,” ADB website, http://www.adb.org/India/PPP/about.asp, accessed 2 January 2012




ADB’s TA support for the Indian PPP program identied more than 30 pilot projects across challenging sectors such

as urban, health, education, power distribution and the rural sector. It is supporting approximately 452 PPP projects

across the country through the PPP cells.

World Bank

World Bank support intends to increase the availability of long-term nancing for infrastructure PPP projects

in India. It will help IIFCL to stimulate the development of a long-term local currency debt nancing market for

infrastructure in India.

The International Bank for Reconstruction and Development (IBRD) has provided a Line of Credit (LoC) of INR58

billion to IIFCL for infrastructure projects.

In addition, World Bank project (2009–2015) regarding IIFCL support is expected to bring around 150 new PPPsto nancial closure, resulting in a four-fold increase in the amount of private capital available. Such a nancing will

support a number of PPP projects, mainly in the roads, power and ports sectors.

2.3.7 Insurance/pension funds

Pension funds can serve as an alternate source of nance for infrastructure projects as they provide long-term

streams of income, constancy, predictable cash ows, lower default rates, diversication of project and societal

benets. The GoI plans to allow infrastructure companies to raise nances from both domestic and foreign insurance

and pension funds by launching infrastructure debt funds (IDFs). IDFs can be setup as a trust or a company. To

attract off shore funds into IDFs, the Ministry of Finance proposed that withholding tax on interest payment on

borrowing by IDFs will be reduced from 20% to 5%. Also income of IDFs will also be exempt from income tax.

“The government clears policy

impediments to enable life

insurance companies and

pension funds, which have funds

for 20-30 years at their disposal,

to invest in the infrastructure

sector.”

Suggested by KC Chakrabarty, Deputy Governor, RBI (Source: The Times of India)

Setting up of India infrastructure debt fund

The GoI has laid down the format for INR500 billion infrastructure debt fund with 50% participation from

foreign banks and multilateral agencies and the remaining being contributed by the state-owned FIs. The fund is

expected to lend to any infrastructure project, which is based on PPP.




• Urban infrastructure: There are signicant opportunities for private sector in the elds of urban renewal and

management, drinking water supply, waste water recycling, treatment of municipal sewerage wastage and

treatment or urban sewerage.

• Health care services: PPP arrangements can be utilized to nance health care services and to strengthen the

secondary and tertiary health care systems in the country.

In India, majority of equity in infrastructure projects is contributed by project developers, with the next-largest

contributor being the public sector. The private sector consortium along with public agency contributes equity

depending on the terms of contract while debt is sourced from an outside agency.

According to World Bank’s Private Participation in Infrastructure database, India stands second only to China in

terms of number of PPP projects and is second to Brazil in terms of investments.

PPP projects in India require a minimum shareholding commitment from sponsors of projects amounting to 51%

of the equity up to second year of commencement of operations. The equity capital is entirely provided by project

sponsors out of their existing balance sheets. There is also placement of minority equity stakes with Engineering

Procurement and Construction (EPC)/O&M contractors besides strategic investors who are likely to benet from the

project’s operations.

A private player in a PPP project can be a private company, a consortium of private interests or a Non Government

Organization (NGO). Private sector plays the role of designing, construction, operation and maintenance of the

project. Private players are also responsible for providing equity of the PPP project. They, in turn, can tap the

primary market to raise capital via an IPO issue.

However, private developers have limited amount of capital, tied up for long term in infrastructure projects. They

rely on private equity investors to decrease promoter’s risk. Private equity witnessed around 241 deals worth

INR266 billion in the infrastructure sector in 1H11.

Table: Capital raising of infrastructure companies and PE investments in infrastructure

IPO/FPO PE

Number of issues INR billion Number of deals INR billion

2004-05 4 62 7 4

2005-06 9 46 10 28

2006-07 12 66 40 115

2007-08 21 206 77 341

2008-09 3 10 48 184

Source: Financing Infrastructure, IDFC Series

The investment is contributed by both domestic and foreign players. However, the domestic players dominate thescenario of PPP projects in India.

Table: Prominent private players in Indian Infrastructure

Domestic players Investment

(INR billion)

Number of

projects

Major domestic players

Larsen & Turbo Transportation Infrastructure Ltd. 35 10

Small domestic players

DS Constructions 3 4

Sadbhav Engineering Limited 21 11

MSK Projects (India) Limited 2 15

Total 65 40

Source: Shodhganga




3.1 Highways

Road sector (405 projects valued at INR1,767 billion) accounts for 53% of the total number and 46% of the total

value of PPP projects in India45. The road network in India comprises national highways (65,569 km), state highways

(1,30,000 km) and district/rural/urban road (31,40,000 km)46. The contracts have primarily been awarded by

competitive bidding and are largely in the BOT format (toll or annuity basis).

Common forms of PPP in national highways

PPP format Projects Value (in INR billion)

BOT – toll 48 93.3

BOT – annuity 8 23.5Special Purpose Vehicle Projects 24 46.8

Source: Ministry of Road Transport & Highways

• National highways: Signicant progress has been made in the nancing of ambitious National Highway

Development Program (NHDP) covering a total length of 45,974 km and investment of INR2,200 billion up to

2012.

Status of State Highways

Project status No. of projects

Completed projects 73

Projects under implementation 62

Projects in the bid process 41

Projects where feasibility study has commenced 44

Projects in pipeline for 2011-12 38

Total 258

Source: Compendium of PPP projects in state highways, Infrastructure website

• State highways: With signicant progress being made by the NHDP (in case of national highways) in which

approximately 85% of projects are proposed to be under the PPP mode, growth model for state highways also

holds potential. The state governments of Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Rajasthan and

Madhya Pradesh are taking initiatives to promote PPP-based state highways.

45 PPP India database as of 31 July 2011

46 Ministry of Road Transport & Highways

3.Key industries/sectors for PPP

Several government initiatives to enhance private sector participation

(including PPP) in roads sector:

• Viability Gap Funding in the form of capital grants subsidy of up to 40% of project cost

• 100% tax exemption in any consecutive 10 years out of 20 years

• Duty-free import of certain identied high quality construction plants and equipment

• Allowing FDI up to 100% in the sector and relaxed ECB norms

• Long concession period of up to 30 years

• Right to collect and retain toll

• Model concession agreements for state highways

• Standardizing of model bidding documents




Investment requirements: The national highways constitute just 2% of the entire road network but carry

approximately 40% of total road trafc indicating existence of signicant potential to be unleashed. The investments

worth INR4,902 billion have been planned as a part of the Twelfth FYP (compared to INR2,786 billion for the

Eleventh FYP). The contribution of private sector is likely to range from INR1,667 billion to INR2,451 billion during

the Twelfth FYP (based on an estimated 34% of private spending in the Eleventh FYP and envisaged 50% private

spending in the Twelfth FYP).

3.2 Railways

The railways sector just experienced 4 PPP contracts valued at INR15.7 billion47. The projects have been contracted

either by domestic competitive bidding or through negotiated MOUs. Due to the large size of the projects, the PPPprojects in railways have to be supplementary or an extension to an existing large railway network.

The recent PPP data48 indicates around nine projects being contracted so far in Gujarat (4), Orissa (2),

Haryana (1), Andhra Pradesh (1) and Karnataka (1). The nine projects have BOT (or its variants) format

(including one on DBFOT) PPP as the preferred BOT model. The INR9 billion metro links from Delhi Metro —

from Sikanderpur to NH 8, Gurgaon has the highest value of PPP railway contract so far.

The PPP experience in the railways sector has proven to be a mixed bag so far. In projects with clear cut

demarcation of responsibilities, the model has proven successful such as in the case of last mile port-connectivity

(For instance, last mile connectivity to Mundra port with Palanpur-Gandhidham railway line; and rail link from

Bhadrak to new port at Dhamra in Orissa). On the other hand, the railways has been facing problems in using the

PPP route for manufacturing rolling stock and locomotives (two mega railway projects — manufacture of Electric

locomotives at Madhepura and Diesel Locomotives at Marhorwa have been on hold).

Investment requirements: As reported, the Indian railways (IR) require INR5.2 trillion of public investment during

the Twelfth FYP (2012–17) of which the Indian Railway Corporation will raise INR1 trillion and the balance needs to

be generated internally or through the form of PPPs. The IR announced its plans of restructuring to attract funding

of INR500 billion49 to meet its expansion targets proposed for the Twelfth FYP. In order to carry out this, the railway

is currently working out strategies to design and award PPP projects. The railways ministry has reportedly, plans of

awarding projects on locomotive and coach factory and construction of a corridor for high-speed rail in Twelfth Plan

period to generate the estimated investment.

47 PPP India Database as on 31 July 201148 “PPP data,” PPP in India Database, accessed 9 December 201149 “In track change, Rly eyes R50k cr pvt investment,” The Financial Express website, http://www.nancialexpress.com/news/

In-track-change--Rly-eyes-R50k-cr-pvt-investment/840860/ accessed 19 December 2011

Some of the PPP project initiatives undertaken by the railways sector include:

• Container Corporation of India Limited (CONCOR) — for developing multi modal transport logistics

infrastructure to support domestic container trafc

• Pipavav Railway Corporation Ltd. (PRCL) — to provide broad gauge rail link to Port of Pipavav in Gujarat

• Rail Vikas Nigam Limited (RVNL) — for Port connectivity works and improvement of the Golden

Quadrilateral to meet future transportation needs




• Renewable energy holds signicant opportunities

in generation as well as manufacturing activities,

largely due to underutilized resources and lack of

political will. The GoI has an ambitious “Power for

All” plan, which aims for complete electrication

by the end of 2012. To implement this initiative,

signicant participation from the private sector

is required. The option of PPP in nuclear power

generation is also being explored, though FDI in the

sector is not permitted yet.

3.4 Urban infrastructureThe urban infrastructure sector witnessed a relatively signicant number of PPP contracts (152) valued at INR294

billion53 although it accounts for only 8% of total value of contracts indicating a large number of PPP projects with

small contract value.

The GoI recognizes the importance of urban infrastructure in the changing dynamics of Indian population as it is

expected that urban population will reach 600 million by 203154. The GoI launched the Jawaharlal Nehru National

Urban Renewal Mission (JNNURM) to establish a framework and provide incentives to promote PPP to states and

urban local governments.

However, the sector still witnesses obstacles to attract private investment as there is lack of adequate legal

framework at the state and city level and institutions and key stakeholders do not have the capacity and knowledge

to carry out project on PPP basis.

53 As per PPP in India database (as on 31 July, 2011)54 “Report on Indian Urban Infrastructure and Services,” The High Powered Expert Committee (HPEC) for Estimating the

Investment Requirements for Urban Infrastructure Services, March 2011, page XXI

“The scope for investment

in the power sector over the

next few years is well over

$300 billion and given our

large expansion programme

in this sector, we would

denitely need and welcome a

large amount of foreign direct

investment.”

Sushil Kumar Shinde

Hon’ble Union Power Minister

Source: IFANDP (dated April, 2011)

(http://www.ifandp.com/article/0010818.html)

Prominent PPP project initiatives in urban infrastructure:

• 24 X 7 water supply project for Nagpur city — to provide uninterrupted water supply to consumers; model

slated to be emulated in many other cities

• Water supply and sewerage project in Kolkata — to develop water supply-cum-sewerage for the township of

Sector-V of Salt Lake

• Integrated solid waste management project in Chennai — to meet the requirements of solid waste

management

• City bus service of Surat — to cater to the need for public transport system for the congested city of Surat




One of the most critical issue in urbanization is efcient transport system and a recent study shows that metro

rail answers the transit needs of urban areas most effectively and has the potential to bring all round benets to

business, to environment and multiple benets to people in all walks of life55.

A new metro project is being taken up in Hyderabad for 71.16 km., at an estimated cost of INR123.32 billion,

besides the ongoing metro projects of Bangalore, Chennai, Kolkata (East-West Metro corridor) and Mumbai. Also,

metro rail projects have received in principle approval forJaipur,Patna, Pune, Kochi and Lucknow.

The Central and state governments will require funds to fulll the demand for urban infrastructure. The decit can

only be met through involving private players in the sector.

Ministry of Urban Development’s strategic plan states that PPP can play a prominent role in the elds of solid

waste management functions such as door-to-door collection, street sweeping, transportation and treatment;

e-goverenance and strenghtening of urban local bodies (ULBs).

The ministry also envisions setting up of a PPP urban

infrastructure fund to encourage PPP to supplement

government efforts.

Source: “Report on Indian Urban Infrastructure and Services,”The High Powered Expert Committee (HPEC) for Estimating the

Investment Requirements for Urban Infrastructure Services,March 2011, page XXV

55 Study on Urbanizing India & Mega Metro Network Vision for the Emerging Cities of India-2030 “http://www.assocham.org/arb/general/Metro Study_Update.pdf

Urban infrastructure investment requirement: INR39,186 billion (2012-31)

44%

11%

10%

8%

6%

5%

3%

3%

1%8%

Urban roads

Urban transport

Renewal and redevelopment including slums

Water supply

Sewerage

Storm water drains

Capacity building

Traffic support infrastructure

Solid waste management

Other sectors

“Government will encourage

PPP model for developing

infrastructure like water supply

and municipal solid wastemanagement in the cities across

the country”

Kamal Nath

Hon’ble Urban Development Minister of India

Source: The Hindu

(http://articles.economictimes.indiatimes.com/2011-12-20/news/30538042_1_ppp-model-solid-waste-

management-urban-local-bodies)




4.1 Policy recommendations

• An independent institutional structure for handling of PPP program: With the express objective of meeting

the PPP targets, an independent institution should be set up to act as nodal agency with the responsibility

of creation of PPP data base, best practices, model documents for all sectors and coordination with all

departments.

• Development of sector-specic regulatory mechanism: In order to protect the interest of users, private

developers, the social community and lenders and sector-specic regulators should be established. Theindependent regulators can make the dispute resolution mechanism effective especially in cases where public

authority is also an operator, for example in railway, where the Indian Railway is the concessioning authority

and at the same time compete with private train operator (through Concor).

• Dissemination of information on PPPs: There exists a need for the creation of specic information policy

for PPPs wherein all bid documents, feasibility reports and current status of the projects are published on a

dedicated contract portal. The international policy models such as Partnerships Victoria (Australia) can be

referred to in this case.

4.2 Project development recommendations

• Capacity building measures for the government: There is a need for capacity building at the Centre andmore particularly at the state governments and local bodies level. The PPP nodal agencies at the Centre and

state level should take the responsibility of creating awareness about the PPP program in all departments and

wherever required, the services of the technical and nancial consultant for training of the staff should be

taken. The multilateral and bilateral agencies can also provide technical and nancial assistance for the PPP

projects and to provide best global practices to be followed in PPPs.

• Role of consultants: For development of PPP project the role of technical and transaction advisors is most

critical. Hence, it is imperative the utmost care is taken in appointment of consultants. Generally the consultant

fee is a small proportion of the project cost and the value addition by a good consultant could be much higher.

For the success of the project, consultant’s quality is more critical as compared to the cost implications. Hence,

the preferred model for selection of the consultant should be either “quality based” or “quality-cum-cost based”

with higher weightage to quality.

4.Recommendations

Policy recommendations Project development

recommendations

Financing recommendations

• Setting up independent

institutional structure for

handling PPP program

• Development of sector-specic

regulatory mechanism

• Dissemination of Information

on PPPs

• Capacity building measures for

the Government

• Role of consultants

• Project development activities

• Optimal allocation of risks,

authority and accountability

• Selection of private sectorpartner

• Developing corporate bond

market

• Encouraging participation by

pension funds and insurance

companies

• Stimulating PE investments in

infrastructure sector

• Hedging mechanism for

external borrowings and

investments




• Project development activities: The lack of project preparation by the relevant development authority such

as, inaccurate scope denition, land acquisition, utilities, environment clearance, no public consultations etc.

can result in poor bid response and also at the execution stage delays in commencement of construction,

compromises on the design quality to reduce costs or attempt to change scope resulting in abnormal increase in

project cost leading to disputes. The authorities should try to get all approvals and latest feasibility reports with

technical scope of work before awarding concessions.

• Optimal allocation of risks, authority and accountability: There is a need for effective distribution of

responsibility, costs and risks between the public and private sector. In many cases, due to lack of proper

project development, public authorities are not able to fulll their responsibilities such as land acquisition,

environmental clearance, state support etc., due to which project gets delayed. However, even in cases where

government is not able to fulll its part, the private sector has to suffer the losses due to delay, as there is no

appropriate framework for compensation.

• Selection of private sector partner: To get best technical and nancial offer, the authorities should start

interaction with private sector from the project development activities stage, and concerns of the private

bidders should be taken care of in the best possible way. For selection of private partners there is an excessive

focus on highest nancial bids. The speculative bids can hamper the project in the long run, as the developer

will nd it difcult to get funding and service the obligations. The authorities should evolve a policy on the

speculative bids and other selection methods such as competitive dialogue process for complex projects should

also be used.

4.3 Financing recommendations

• Developing corporate bond market: There is an immediate need to develop the corporate bond market.

The proposal to set up Infrastructure Debt Funds (IDFs) is a step in the right direction. Further, in order to

jumpstart the corporate bond market in infrastructure projects, the large Indian commercial banks while funding

the project can compulsorily fund some part of debt by subscribing to bonds. These bonds can be listed on

exchanges. The large commercial banks and NBFCs can also play the market makers in infrastructure bonds for

initial years.

• Encouraging participation by pension funds and insurance companies: Given the fact that the commercial

banks are concerned about asset liability mismatches and concentration risks, the GoI should alternately

consider domestic institutional investors for investment in infrastructure. The GoI should make the investment

policies and regulatory guidelines of the insurance companies and pension funds more conducive and exible

toward investing in the infrastructure sector. The regulations such as rating requirements and treatment of

investments by insurance companies in infrastructure sector can be reviewed.

• Stimulating PE investments in infrastructure sector: Global and domestic private equity funds have the

capability to provide nance for infrastructure growth in India. To attract PE funds for bidding in infrastructure

projects, the eligibility criteria should be suitably amended, and apart from the nancial networth, the ”Funds

under Management” for PE and Venture Capital funds should also be included.

• Hedging mechanism for external borrowings and investments: The Indian companies have been raising

external commercial borrowings for infrastructure projects. IDFs also aim to tap international insurance and

pension funds for investment in infrastructure in India. The hedging of foreign currency exposure eats up a

large part of interest rate arbitrage through foreign funding. The GoI can use a part of its foreign currency

reserves to give a less expensive currency hedging mechanism for foreign currency borrowings and investments

in the infrastructure space.




Notes




Abdul Salam

Deputy Director

FICCI

Industry’s Voice for Policy Change

Federation House, Tansen Marg, New Delhi 110 001

Email: [email protected]

Tel: + 91-11-2376 5082

Fax: + 91-11-2332 0736

Mobile: + 91-99 998 84 007

Web: www.cci.com

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