Development of Infrastructure through PPP Gajendra Haldea Colombo

Development of Infrastructure through PPP Gajendra Haldea Colombo August 2, 2016

Structure of the Presentation Part I : The Indian Experience Part II : Challenges in attracting Private Investment Part III : Sri Lanka PPP Programme: The Way Forward 2

PART I THE INDIAN EXPERIENCE 3

Response to Infrastructure Deficit • India faced a huge infrastructure deficit: Spent only about 5% of GDP in X Plan compared to 9 -10% in East Asian economies • Public investment alone could not meet the deficit because resources are limited • Hence, Govt. adopted the PPP policy to leverage limited public resources for attracting private capital • Committee on Infrastructure (COI) set up u/c of PM in 2004 for steering creation of world-class infrastructure • Secretariat for COI set up in Planning Commission 4

Strategy for investment • Public resources are limited; competing demands • Public funds should, therefore, be leveraged through PPP • Reliance on private investment is inevitable • PPP is more complex than anticipated • A concerted effort with support from top leadership is a pre-requisite • Need transformational, not incremental approach 5

Key elements of PPP strategy • Appraisal & approval processes were streamlined for speedy clearance of PPP projects • Bidding documents (RFQ and RFP) were standardized for transparency and savings in time & costs • Model Concession Agreements (MCAs) were formulated for adoption of best practices & speedy roll-out • Financial support: Capital subsidy (VGF) and Debt (IIFCL) • Reliance on extensive consultations, including IMGs 6

Outcomes of PPP Strategy • Investment increased from Rs. 9 lakh cr ($ 200 bn) in X Plan to Rs. 19 lakh cr ($ 422 bn) in XI Plan (2006 -07 prices) • Private Investment rose 3. 5 times from Rs. 2 lakh cr ($ 44 bn) (22%) in X Plan to Rs. 7 lakh cr ($ 156 bn) (37%) in XI Plan 7

Streamlining of approval process • Guidelines formulation, appraisal & approval of PPP projects approved by Co. I in 2005 • PPPAC constituted under the chairmanship of Secretary, DEA • Dedicated PPP Appraisal Unit in Planning Commission • Appraisal & approval within 5 weeks of submission • PPPAC approved 303 projects during 2007 -16 with an investment of Rs. 3, 46, 761 cr ($ 60 bn) 8

Standardisation of Bidding Process • Sound pre-qualification of bidders is critical to success of PPP • Sub-optimal pre-qualifications in the past have led to difficulties; eg. Delhi/Mumbai airports (see case study) • Model RFQ/RFP documents finalised after consultations; provide a simplified, transparent and inexpensive process • These documents have played a critical role in accelerating the roll-out of projects; No complaints or court cases reported • Documents used in over 600 projects: Centre & States 9

Model Bidding Documents • Request for Qualification (RFQ) - Technical eligibility based on score for track record - Highest six are pre-qualified & shortlisted - Must possess the specified minimum networth • Request for Proposals (RFP) - Only short-listed bidders invited to bid - All project terms specified in concession agreement - Only financial bid invited • RFQ and RFP take about two months each 10

Model Concession Agreements • MCAs reflect international best practices • They are based on consultations with stakeholders, which increases their acceptability, ensures speedy roll-out, reduces costs, and minimizes malfeasance • MCAs strike a balance between risks & rewards; assure the users of specified service quality at least cost • MCAs also imply enunciation of public policy; makes it less likely that individual projects will be criticised; act as a shield • Enable the government to procure value for public money • MCAs used in over 600 projects: Centre & States 11

Consensus Building for MCAs • Several rounds of consultations held with experts & stakeholders including the Ministries, State Govts. , Industry Associations, Banks, Consultants etc. • Revised versions circulated to all participants • Central sector MCAs went through several rounds of discussion in Inter Ministerial Groups chaired by the concerned secretary • Documents vetted by reputed law firms • Documents published for wide dissemination and use 12

List of Model Agreements • Model Agreements published for the following: • National Highways (Six Laning) • State Highways • Operation & Maintenance of Highways • State Ports • Ports Terminals • Urban Rail Transit Systems (Metro rail) • Container Train Operation • Re-development of Railway Stations • Procurement-cum-Maintenance Agreement for Locomotives • Non-metro Airports • Greenfield Airports 13

List of Model Agreements (contd…) • • • • Brownfield Airports Transmission of electricity Coal Mining Exploration and Mining of Coal Storage Annuity Projects School Education (Central) School Education (States) Power Purchase Agreement Power Supply Agreement for Procurement of Power Agreement for Supply of Power Engineering, Procurement & Construction Contract (Highways) Engineering, Procurement & Construction Contract (Railways) 14

Selection of Consultants • Model RFPs for selection of Technical, Legal & Financial Consultants were published in 2009 • Enable cost-cum-quality based selection • Ensure sound advice formulating PPP projects • Eliminate conflicts of interest • Help in avoiding costly mistakes with potential claims • Documents used in over 600 projects 15

Financial Support to PPPs • VGF scheme approved by Co. I in 2005; provides capital subsidy of upto 20% of project costs; another 20% may be provided by concerned Ministry/ State Govt. • 532 projects approved for VGF with an investment of Rs. 4, 33, 176 cr ($ 96 bn) (incl. 289 NH projects where NHAI gave VGF) • Creation of IIFCL approved by COI in 2005; provides longterm debt of upto 20% of Project costs • IIFCL sanctioned a total debt of Rs. 54, 147 cr ($ 12 bn) for 332 projects • Infrastructure Debt Funds (IDFs) conceptualised for refinancing of long-term debt; 3 IDFs set up so far 16

Regulatory Framework for PPP Projects • Standardisation is a form of regulation that ensures uniformity and eliminates unguided discretion • Regulation by contract eliminates regulatory uncertainty; obligations of both parties are governed by the MCA • Institutional mechanism for monitoring of PPP projects mandated by Cabinet in 2012; NHAI /Depts yet to comply • Annuity projects to be limited to an annual ceiling as laid down by the Cabinet in 2013 • Joint Ventures (JVs) are not PPPs; Guidelines on JVs issued in 2012 to regulate formation of JVs 17

Examples of flawed projects • NOIDA Bridge: 30 year concession period to exceed 70 years (see case study) • NSICT Port Terminal at JNPT: 100% ROE for several years; undue gain exceeding Rs. 5, 800 cr (see case study) • Aborted misuse of Delhi/Mumbai airport land for commercial purposes (see case study) • Negotiated award of Hyderabad & Bangalore airports; only 3% share in revenues • ‘Cost Plus’ tariffs for Delhi & Mumbai airports (see case study) 18

Examples of flawed projects (contd. ) • Delhi Airport Metro Line: Huge loss to Delhi Govt • Gold plating of NH Projects leading to failed projects (see Sub Prime Highways) • Flawed PPAs; numerous standard projects; bleeding banks: (see Sub Prime Infrastructure) • Unlawful trading of electricity (see article) • Privatisation of power distribution in Delhi: creation of unlawful and exploitative private monopolies (High Court and PAC) • Sub Prime Infrastructure: Crony capitalism in Public Sector Banks (see Sub Prime Infrastructure) 19

PPP in India: A success story • World Bank Report: − India top recipient of PPP investment during 2008 -13 • ADB: Infrascope Report of EIU (of Economist, UK) states: − India in same league as Korea & Japan; only UK & Australia ahead − Risk allocation has been improving due to MCAs − VGF and IIFCL enabled greater private participation • There have been some problems; not insurmountable 20

PART II CHALLENGES IN ATTRACTING PRIVATE INVESTMENT 21

Challenges: Adverse Perceptions • PPP takes too long to deliver; political leaders become indifferent due to elusive results during their tenure • Users and general public suspect high user charges from PPP; lack of trust in private companies • Entrenched beneficiaries of ongoing practices oppose PPP • Incumbent officials apprehend loss of turf • Bureaucracies are risk averse and view change with suspicion; lack of knowledge accentuates resistance to PPP • Investors lack trust in ability of Govt. to honour contracts 22

Challenges: Institutional Arrangements • PPP being a relatively new concept, the required laws, rules, policies and regulatory framework are deficient • No dedicated department or institution for PPP, hence no ownership, champion or destination • No receptacle for receiving and holding knowledge • PPP not mainstreamed in Govt. functioning; ad hoc treatment • Policies and frameworks not preceded by adequate interdepartmental & inter-disciplinary consultations • Governments are unable to readily access expert advice and policy support, as PPP is still in transition 23

Challenges: Inadequate Capacity • Inadequacy of knowledge, exposure and staff resources within the Govt. poses a major challenge • Only skeletal staff is provided for PPP; usually lacking in qualifications and experience • Policy makers usually don’t have the time to learn, absorb and take decisions relating to PPP • Over-arching resistance and lack of capacity to handle change; unwillingness to take ownership of PPP • As a result, thinking and policy formulation get outsourced, leading to unintended consequences 24

Challenges: Role of Incumbents • Shift from a Department-driven discretion-based mindset to a contract-bound PPP regime is a major challenge • Ceding of turf is not easily accepted by incumbents • Loss of control over assets and spending power is not welcome • While structuring PPPs, incumbents tend to push for discretionary powers and control; leads to imbalanced contracts • Since PPP projects are financed by private entities, incumbents tend to engage in over-engineering • In sum, incumbents often emerge as barriers to PPP 25

Challenges: Ad hoc Documents & Practices • Case by case approach is costly & time consuming; prolonged processes tend to exhaust political capital • Ad hoc approach enhances regulatory uncertainty and risks; also creates potential for regulatory capture • Case by case approach is amenable to manipulation by entrenched interests; also prone to costly mistakes • Exposes ministers and bureaucrats to direct personal accountability for failures and mistakes • Standardisation & simplification is resisted by consultants (for loss of business) and incumbents (for loss of discretion) 26

Challenges: Role of Consultants • For want of capacity, Govt. tends to rely heavily on consultants for policy formulation and project structuring • Consultants are not adequately sensitised to public policy concerns, accountability to people, and reduction in costs • Motive force of consulting firms is profit maximisation as distinct from optimising public welfare • Tend to expand scope of work by engaging in avoidable complexities; ‘creeping scope’ represents a conflict of interest • Tend to resist simplification, standardisation and speed • Tend to tilt excessively in favour of private sector in order to close deals at the earliest; inadequate concern for public interest 27

Challenges: Debt Financing • PPP projects need large debt resources for financing about 70% of project costs; equity usually finances about 30% • Bulk of the debt has to come from domestic banks who lack long-term funds for projects with extended payback periods • Domestic banks lack capacity and experience for appraising and financing PPP projects on ‘non-recourse’ basis • Funding of PPP projects by MDBs is scarce and also takes long to access • Govt. support in the form of guarantees or buy back arrangements is critical for attracting debt financing 28

Challenges: Role of Private Sector • Private entities in developing countries often lack the requisite capacity and experience to undertake PPP projects • Potential investors prefer ‘cost plus’ arrangements that transfer much of the risks to the exchequer and users • Tendency to bid aggressively and then seek post bid concessions through renegotiations; vitiates credibility of PPP • Given the large stakes, PPP projects are prone to crony capitalism; lead to high costs and backlash of public opinion • Critical for Govt. to ensure fair, transparent & competitive environment for delivery of PPP on sustainable basis 29

The Road Ahead • PPP is a new mode of governance for delivery of public infrastructure and services • It is a world of contracts; different from usual public projects • Private investors need adequate risk mitigation and reasonable returns in order to invest large sums for long periods • Compels Govt. to strike a balance between the profit motive of private entities and least cost to the exchequer and user • Scaling the PPP peak is very challenging, though not impossible; there seems no other option 30

PART III SRI LANKA PPP PROGRAMME: THE WAY FORWARD 31

Way Forward: Visible Demonstration of Commitment • Due to adverse perceptions and resistance from diverse quarters, private participation may remain at the margins • Without significant private investment, inclusive growth and poverty alleviation may take much longer • Change in institutional structure and mindset is unlikely to happen unless driven by top leadership • Visible demonstration of support by top leadership is a prerequisite for private investment at the scale required 32

Way Forward: Legislative Framework • PPP is currently governed by extant laws relating to contracts • Enormity of investments, peculiarities and complexities in PPP require a dedicated and comprehensive law • PPP Law is necessary for enabling & regulating private investment • It will facilitate detailed regulations having the force of law • Without legal safeguards, investors unlikely to come forward 33

Way Forward: Institutional Framework • Credibility of institutional arrangements & policy framework is the acid test that would determine the investment flows • If it is found wanting, investors would either shy away or seek a high risk premium, leading to costlier services • Effective institutional framework is essential for sustainable private participation • Currently, the institutional arrangements are fragmented and lack empowerment • Need to establish an institution that would serve as the focal point and champion for the PPP programme 34

Way Forward: Institutional Framework (contd. ) • Establish the Sri Lanka Partnerships Authority as an empowered inter-ministerial body under chairmanship of Finance Minister • Authority would formulate, support & approve PPP projects, processes & documentation for ensuring efficient outcomes • Would help build capacity & expertise; act as a receptacle for knowledge & institutional memory • Would be accountable to Parliament; make regular reports on performance & outcomes 35

Way Forward: Institutional Framework (contd. ) • Examples of dedicated institutions in other countries − Partnership UK (now Infrastructure UK) − Infrastructure Australia − Partnerships Victoria (Australia) − Committee on Infrastructure, India (Chair: PM) − Dedicated institutions in Indian states, such as Gujarat, Karnataka & Rajasthan − Bangladesh has an autonomous PPP office in PMO; also the Infrastructure Investment Facilitation Company − Kenya has a statutory PPP Committee and PPP Unit 36

Way Forward: Role of Finance Ministry • The Ministry of Finance would be − best suited to be nodal Ministry for PPP as it is responsible for economic policy and allocation of budgetary resources − best placed to determine which projects should seek private participation instead of public funding − well positioned to coordinate with all Ministries • Finance Ministry would also carry the requisite authority to manage the process of change • Partnerships Authority would report to Finance Minister, who would be answerable to President & Parliament 37

Way Forward: Role of Ministries • PPP Projects belong to the relevant Ministries; their ownership must not be diluted • To manage incumbent resistance, dialogue and consensus building need to be encouraged • Need for training and capacity building must be addressed • Set up a dedicated PPP Unit in each Ministry with sufficient capacity & empowerment; full-time Project Managers • Ministries must remain responsible for their projects at all times; should make annual reports on performance & outcomes 38

Way Forward: Focus on Outcomes • Normal approach is process oriented; outcomes get prolonged while PPP loses support • It takes five to seven years from conception to commencement of construction; will delay growth & poverty alleviation • Infrastructure deficit cannot be bridged at this pace • Need for an outcome-based approach that would ensure service delivery within an acceptable time-frame • Need for simplification & streamlining of appraisal and approval processes 39

Way Forward: Standardisation of Documents • PPP is a world of contracts; they determine the success of PPP • Bidding documents viz. RFQ and RFP tend to be cumbersome, time-consuming and lacking in transparency • Case by case documents prepared by Transaction Advisers are time-consuming & expensive; prone to high costs & disputes • Case by case documents make ministers and bureaucrats more vulnerable • Need for standardising RFQ, RFP & Concession Agreements; will save on time, reduce costs, and improve services 40

Way Forward: Better Services at Lower Costs • PPP has potential for gold plating, rent seeking and crony capitalism; implies high costs for the economy and end-user • Economy & end-users encumbered by high costs over the longterm cause back-lash of public opinion • Poorly structured project create potential for low quality services • The justification for PPP lies in improved services at lower costs; important to structure projects & institutional arrangements to meet this objective 41

Way Forward: Five Year and Annual Plans • Every Ministry should identify potential PPP projects over a fiveyear horizon • Finance Ministry and Partnerships Authority may coordinate & consolidate this exercise • Annual Plan of Action with timelines should be evolved and adopted • PPP Plan should be mainstreamed for ensuring timely delivery 42

Way Forward: Competition & Transparency • Key to a successful PPP programme lies in transparency and competition • Essential for attracting credible investors, especially foreign investors • It minimises public criticism, suspicion and antipathy • Ensures discovery of true market costs and helps provide services at least costs 43

Way Forward: Viability Gap Scheme • Infrastructure projects are typically capital-intensive • Economic user charges may not be affordable for end-users; thus requiring Govt. support • Govt. support may be justified on account of externalities not captured in the financial structure of a PPP project • Efficient way of reducing user charges is to provide capital grants • A tested method is to fix user charges at the maximum affordable level and seek bids for lowest grant to bridge viability 44

Way Forward: Project Development Facility • Outcomes of PPP projects depend on the quality of structuring and documentation • World-class expertise is necessary; costly, but pays for itself • Standardisation can help cut costs significantly • Success fee is a flawed concept; not in public interest • Create a Project Development Facility to finance project development • Budgetary funding may be supplemented by donor assistance 45

Way Forward: Immediate Steps • Reinforce commitment of the top leadership in public statements; set up an Infrastructure Committee u/c the President/ PM • Enact PPP Law; establish institutional framework • Establish, operationalise & empower the Partnerships Authority, pending enactment of PPP Law • Set up PPP Units in relevant Ministries • Fast-track 3 PPP projects for demonstration • Standardise documents & processes, esp. for 3 PPP Projects • Mainstream PPPs 46

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