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World Bank Support of Railway
Conc essioning & Bidding
ROUNDTABLE ON RAILWAY PPPs
George Tharakan and Nupur Gupta, World Bank (SASEI)New Delhi, June 16, 2006
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World Railways and PPP
Americas, Australasia, UK
Substantial increase in PPP activity
Virtually all rail freight in private hands Central Asia & Eastern Europe
Restructuring involving transition from centrally planned toautonomous management, some privatization
European Union except UK
Largely publicly owned and operated
Adoption of various degrees of separation of infrastructure from
operations China and India
Largely vertically integrated & publicly owned
Mega network development plans
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Railway PPP Experience
Developing World
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Railway PPP Financ ing 1990-2001Developing Countries
Latin
America,
62%
East Asia
acific, 35%
Other, 3%
US$ 29 billion
Much of the PPP investment has taken place in Latin America and EastAsia. While in LA the experience is largely with freight railways, in EA it is
mainly with urban passenger rail.
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World Bank Group Experienc e
with Railway PPPs Freight concessions (30 +): Argentina, Chile,
Brazil, Bolivia, Uruguay, Guatemala, Mexico,Peru, Cote dIvoire/Burkina Faso, Cameroon,Malawi, Mozambique, Senegal/Mali, Ghana,Jordan, etc.
Partial Privatizations: Poland, Romania
Suburban passenger concessions: Buenos
Aires 7 lines, Rio de Janeiro, Mexico City Metro Concessions: Buenos Aires, Rio de
Janeiro, Bangkok, Sao Paulo Line 4
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LAC Rail PPP Profile
LAC accounts for close to two-thirds the
investments in developing world - $16 bn 3 countries Brazil, Argentina & Mexico
account for 95% of the investment
Largely concessioning of existing railways
Largely freight corridors
Vertically integrated concessioning
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Performanc e of PPP in RailwaysFreight TrafficVolume
Year of MainConcession
2003 TKM increaseover Concession
Year
Argentina 1993 145.7%
Bolivia 1996 -6.4%
Brazil 1996 40.3%
Chile 1995 58.3%
Colombia 1999 68.3%
Mexico 1997 29.1%
Peru 1999 117.8%
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Latin America Railway Concession
Results Erosion of railway traffic base halted
Service quality improved
Significant total factor productivity improvements
Tariff levels declined
Government relieved of financial burden
Investment projection typically not met largely aresult of lower traffic volumes than projected
Limited impact on allocative efficiency, railway
market shareConcessions resulted in improved traffic flows, productive efficiency andreduced tariffs. On the other hand, they did not generally result in largecapacity additions or improved inter modal competition
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Indian Railways & Need for Capac ity
Enhancement
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Indian Railways
IR, the fourth most heavily used system in theworld
Responsible for 15% of passenger traffic and25% of freight traffic in the country
IR has been steadily losing freight market shareto highways due to capacity constraints andskewed tariff policy
Looking from a port connectivity perspectivealone there are serious capacity constraints
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Port Traffic & Trade Projec tions Port traffic is expected to double from present levels of over
500 million tons by 2015.
Container traffic from 4.5 to 20 million teu, dry bulk trafficfrom 197 to 390 million tons over the next ten years
Urgent need for rail capacity enhancement and technology
upgradation to cater to this growth alone
164
368
522
782
1130
0
200
400
600
800
1000
1200
1990-91 2000-01 2004-05 2009-10 2014-15
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Competitiveness of Ind ian Trade
Higher logistics costs incurred by exporters onaccount of suboptimal routing or mode use
directly affect competitiveness While these additional costs may be sustainable
during boom periods, may lead to a loss of tradeopportunity during troughs, and therefore an
overall loss to the economy
Rail capacity and efficiency needs to be significantlyramped up for meeting the growing trade opportunities
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Paradip Port Case Study - Hinterland
Cha
ttis
garh
Orissa
JharkhandWest
Bengal
Paradip
Haldia
Vishakhapatnam(Vizag)
Koira (IO)
Gua Noamundi (IO)
Joda-Barbil (IO)
Bailadila17.2 5.6 11.6
Daitari (IO)Dalli Rajhara8.0 0.0 8.0
Sambalpur (TC)
RaipurTalcher (TC)
Paradip is the naturalchoice for exports of IronOre and Thermal Coal butsignificant quantitiesvolumes must movethrough Haldia and Vizag
Key issue for thermal coalis the connectivityconstraint
Key issues for iron ore are
Connectivity constraint
Port handling facilities
Paradip Vizag Haldia
Iron Ore
15.74
9
(57%)
1.32
(8%)
5.4
(34%)
Thermal Coal
13
10.5
(81%)
2.5
(19%)
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Quantity in Million TonnesPort unable to encash hinterland value
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Paradip Case Study Iron Ore Exports Port handled only 60% of iron ore exported from itshinterland
Paradip handled 9 million tonnes
61% of the ore at Paradip was transported by road. Rail line capacity, port rake handling capacity are constraints
Logistics Cost
Rail transport cost to various ports ranges between Rs 450 Rs
1,350 (per MT) Road transport cost varies between Rs 1,000 Rs 1,250 (per MT)
Impact of new rail connectivity projects
The Banspani Daitari rail link will reduce costs by Rs 350 per MT,this will benefit significant volumes earlier routed to Haldia
Lower FoB price of ore will expand market demand, so benefitseven larger. Savings on the order of Rs 100 crore a year or higher.
High inland transport costs is one of the key issues
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Paradip Port Case Study Thermal Coal
Origin Port Distance
Km
Paradip 200 194Talcher
Vizag 560 472
Inland Haulage
Rs per MT
Sambalpur
Talcher
Paradip
Vizag
Paradip is the natural choice for coastalshipping of Thermal Coal
Significant quantities of thermal coal aredirected to Vizag ( 20- 25%)as per allotmentplan of the Standing Linkage Committee forthermal coal
Standing Linkage Committee, allotment plan forJan March (06-07)
Reduction in volumes to Paradip 18%
Increase in volumes to Vizag 51%
This is primarily due to rail line capacity issues
Talcher Paradip
Sambalpur Paradip
Cuttack Paradip
Rail capacity is the key reason
for reduction in volumes
IRCapac ity Enhancement Potentia l
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IR Capac ity Enhancement Potentia lIndia-China Comparison
(2002 Data)
India China
Route-km 63,000 72,000
Ton-km per year(billion)
336 1551
Average Freight Tariff
(US cents/ton-km)
1.6 0.96
Traffic Density
(million TU/route-km)
13.1 27.4
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China Railway Network Plan
2003-20
Railway route length to increase from 75,000to 100,000 km
Separation of freight and passenger
transport operation on trunk lines 50% double tracking
50% electrification
Total cost of the mid and long term network plan is expected to be$240 billion spread over 2003-20
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Indian Railways Development Plan
2007-12 Rs. 5,00,000 crores ($ 100 bn) outlay proposed
for railway upgradation Capacity upgradation
Rolling stock
Equipment upgradation etc.
Given the quantum of funding involved, PPPexpected to be a major contributor (about 60%)
to the planned investments This is a scale of Railway PPPs unprecedented
among railways around the world.
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Embarking on PPPs
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The Partnership
There are certain misconceptions about the wordpartnership. It is not a warm and fuzzy relationship
between public and private parties working towards acommon objective.
Public and Private partners have distinct objectives.
Challenge for the public sector is to design sufficientincentives so that private profit seeking attains broaderpublic interest objectives.
Rewards are performance related, with mechanismsfor continuous monitoring by the public agency overthe life of the contract not fire and forget proposition.
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Public Private Partnerships
PPPs are long-term contracts between a public sectorContracting Authority (CA) and a private service provider.
Challenges for CA are: Carefully structured contracts that are affordable and bankable.
Transfer of specified project risks and good risk management.
Adequate public control to assure output and quality.
Fair contracts that positively enable private investment. Achieving good PPP outcomes is non-trivial. Bad outcomes
can be disastrous e.g. Turkey power sector PPPs resulted inan estimated loss to the country of US$7 billion per year as a
result of badly structured contracts. Fortunately, a lot has been learned and the mistakes need not
be repeated.
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PPP-Necessary Cond itions Suc cess
Adequate legal and regulatory framework that isperceived to be, and is in fact, fair and equitable.
Development of standardized clauses which havereceived adequate legal due diligence.
Mechanisms for periodic review of specificcontractual terms during the life of contract.
Effective, efficient and fair dispute resolution.
Fiscal tools for correct accounting of liabilities, esp.contingent liabilities related to PPP contracts.
Early and regular communication with stakeholders,including end-use customers.
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Regulation of PPPs
by Law and Regulatory Agency Unilateral administrative act specifying the rights
and obligations of private parties.
Rules written by the legislature with secondaryregulations by Regulatory Agency.
Regulator responsible for applying licensingframework including regulation of tariffs, servicestandards and protecting customer rights.
Discretion vested in the Regulator better informed
but risk of excessive intervention.
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Regulation of PPPs
by Contrac t and the Courts Rules written by CA and private party as a contract
governed by contract law.
Discretion vested in the courts may be difficultwhen there are complex technical issues.
Ability to write robust but flexible contractsdesigned to last 30 years could be an issue.
CAs ability to monitor service provider may bedeficient and seen as not even handed.
Insertion of a Regulator with excessive discretionmay deter private sector private sector preferssharp rules - predictable though a little imperfect.
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Ch k d B l
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Checks and Balances
Projec t Preparation Guidelines for, e.g.
Appointment/mgnt of Transaction Advisors
Preparation of the business Case
Construction of Public Sector Comparator
Stakeholder consultations Rules for, e.g.
Site hand-over by public agency
Minimum risk transfer e.g. construction risk Tariff adjustment method
Guarantees that assume financing risk
Ch k d B l
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Checks and Balances
Bidding and Contrac t Management Guidelines for, e.g.
Standardized contract clauses
Legal due diligence to seal risks in contract
Contract and performance management
Contingency plans for emergencies Independent auditing
Rules for, e.g.
Dealing with unsolicited proposals Payment deductions for under-performance
Interim reviews and periodic contract adjustments
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PPP Polic y Support
Expert Advisory Services for generic PPP issues, e.g.:
Contract Adjustment during life of the contract.
Mechanisms for independent expert panels should beestablished:
Method of appointing independent expert panels.
Limits of discretion given to such panels. How to handle refinancings or other windfall profits
Management of Contingent liabilities
Proper accounting of contingent liabilities.
Control risks of off-balance sheet accounting.
Etc.
I iti ti L S l PPP P
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Initiating a Large Scale PPP Program
for Railways Where do you start?Well developed Railway PPP Policy paper. This will also createconfidence in the program. The paper should cover, i.a.
PPP initiative in the context of a long term strategic transportnetwork development plan that is stable and predictable.
Bolstering capacity for planning, preparation & implementationof PPP transactions reduce risks.
Development of necessary legal and regulatory framework Simple & transparent bidding procedures Standardised Concession Agreements equitable risk sharing Dispute resolution defined procedures & speedy resolution
Preconstruction land acquisition, utility shifting Clear understanding of and safeguarding against contingentliabilities.
Finally, last but not least, mechanisms to safeguard against
moral hazards created by long-term nature of the contracts!
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World Bank Involvement
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World Bank PPP Assistance in Ind ia
Capacity Building for PPPs at national & state levels Capacity building for Viability Gap Funding
Guidelines, etc. PPP Appraisal Unit in Planning Commission Model
Concession Agreement reviews, guidelines
Indian Infrastructure Finance Corporation (IIFCL) Examining possibility of assistance to IIFCL
Resources India : Addressing Supply Constraints to
Infrastructure Financing
India : Building Capacities for PPPs
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World Bank Assistanc e
Funding for Investment
Guarantees Technical Assistance
Knowledge Bank
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Thank You
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