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Issues on Urban Finance & Governance - PPPs March 2013 Infrastructure Development Corporation (Karnataka) Issues on Urban Finance & Governance - PPPs March 2013 Infrastructure Development Corporation (Karnataka) Limited 1

Urban Growth • 5 times – the number by which GDP will have multiplied Urban Growth • 5 times – the number by which GDP will have multiplied by 2030 • 590 million people in cities - ~ twice the population of USA • $ 2. 2 trillion capital investment needed – $ 1. 2 trillion in capital investment – 26% of capital investment from debt and PPP • 700 - 900 million sqft of commercial residential space needs to be built ~ a Chicago every year • 20 times than the past decade of the capacity of roads, metros and subways need to be created Source : India’s Urban Awakening, Mc. Kinsey Global Institute • Estimated investment for urban infrastructure over the next 20 years – Rs 39. 2 Lakh Crore at 2009 -10 prices (HPEC Report) Five Elements – Funding, Governance, Planning, Sector Policies and Shape • Funding – where will resources come from? 2

PPP trends in water Signs of success Momentum subsided A few projects grounded Onset PPP trends in water Signs of success Momentum subsided A few projects grounded Onset of pessimism Way Ahead? Now Mid to Late 90 s Mid decade Around 2000 First initiatives High international interest Poor results Pune, Hyd, Goa, Bangalore Bulk water – 100 -300 Cr Failed Sonia Vihar, Delhi, Sangli – Bulk water Bangalore – Rehab, O&M 500 Cr Failed Efforts to prepare PPP projects High NGO opposition High profile projects in Delhi, Mumbai, Failed Successful projects also emerge Many ongoing initiatives Waiting for commercial results PPP interest in pilots – scale up not demonstrated 3

Water • Tiruppur Water Supply – the first attempt? – About 20% urban, and Water • Tiruppur Water Supply – the first attempt? – About 20% urban, and 80% industrial • by the time the project was made, circumstances were unmade… • Visakhapatnam Water Supply – the pretender – Similar structure 20% urban and 80% industrial 30 25 20 – Management contracts – near risk free • Tiger tasting the blood; is upscaling on similar model practical? • Full city models 17 15 12 10 5 • But somewhere when the BOT was being awarded, a question of conscience came up. 0 Are contracts not better for all concerned? • Pilots – KUWASIP, Nagpur etc. 26 2 PPP projects attempted Contracts awarded Under Implementation Operational • Too many models, limited bidders • Lesser financial bids ; more questions (pre bid queries) • Growing interest in participation – Tariffs and adherence to agreements 4

MSWM PPPs in Jn. NURM SWM Activities covered in PPP Types of PPP JNNURM MSWM PPPs in Jn. NURM SWM Activities covered in PPP Types of PPP JNNURM Cities implementing MSW components on a PPP framework Average Tenure of the Project Integrated Municipal Solid Waste Management BOOT , DBOOT, 20 - 30 years (Some of the BOT project tenures linked to the asset life) Collection, Transportation & BOOT 3 years Disposal Transportation, Processing BOOT 20 years and Disposal Treatment & Disposal DBOOT, BOT 20 / 25 years Treatment BOO 20 -35 years Disposal DBOOT, BOOT 3 - 20 years 18 11 12 9 6 6 3 4 0 Integrated Solid Waste Management Collection & Compost Plant Transportation Waste Treatment Sanitary Landfill 10 9 10 4 3 Status of implementation 12 14 15 7 8 8 6 3 4 2 0 1 3 Bid Stage Pipeline Awarded 1 Operational >1 Operational <= Pre- project year 1 year development Stage / Concept Pipeline - Bid Process to commence Pipeline Commercial Operations Pipeline Construction 5

Solid Waste • Lucknow Biomethanation – Was the technology inappropriate, or did the ULB Solid Waste • Lucknow Biomethanation – Was the technology inappropriate, or did the ULB literally expect ‘gritto-gas’? • Thiruvananthapuram Composting – How much waste does the city generate • “Misfortunes one can endure--they come from outside, they are accidents. But to suffer for one's own faults--ah!--there is the sting of life. ” Oscar Wilde • Bangalore – the first sanitary land-fill in the country – Land? • “In any collection of data, the figure most obviously correct, beyond all need of checking, is the mistake. ” Finagle's Third Law • A number of tipping fee based contracts have been awarded • Some developers continue to rest hopes on WTE – “In all things it is better to hope than to despair”: Goethe 6

Urban Transport • One of the earliest LRT system awarded was in Bangalore, but Urban Transport • One of the earliest LRT system awarded was in Bangalore, but later cancelled • A few large projects bid/ awarded – With capex • Mumbai, Hyderabad (!), Haryana – Without capex • Delhi Airport Link – Bangalore airport rail link, Hyderabad (encore) • Buses: – Indore, a successful model • Interestingly, why is this model not widely replicated? – Ahmedabad BRT – A number of BRT systems (Delhi, Bangalore, Mysore) studied and structured on PPP, but being executed by the Authority 7

Land Related • A large number of projects being attempted on this formula – Land Related • A large number of projects being attempted on this formula – Project = land available with Authority + Some public use + commercial development • Bus terminals. Convention centers. Malls (oops – parking complexes). IMAX (uh – tourism projects). • What is the Government’s “acceptable” price for land, especially when they still “own” it? 8

Are we on right track? • Feasibility studies provide only a partial picture – Are we on right track? • Feasibility studies provide only a partial picture – projects not financially free standing!! – Water: Tariffs set to recover only O&M costs, and after factoring efficiencies, there is a deficit in finances. – SWM: Hardly any user charges or markets for sale of products/ recyclables – Dependence on government finances in some form (capital grants/ annuities/ tipping fees etc. ) – Land other support infrastructure requirements could be quantified – Other project parameters are matters of detail • Assuming we get the above elements right, will the project (s) go ahead? • Given the financial situation (and lack of political will in improving it), how can a credible investment environment be built, where many projects require financial support? • Lots of “concerns” remain unanswered!! 9

Big Push Theory • Nation wide impact/ externalities – central scheme – Jn. NURM Big Push Theory • Nation wide impact/ externalities – central scheme – Jn. NURM - large corpus, based on reform agenda • For the first time, cities were forced to think of an aggregate vision and investment plan – But these were very large numbers (Bangalore is at Rs. 60, 000 Crores) and the fund flow is the proverbial drop in the ocean. • However, the structure seems to have a disincentive for improvising efficiencies , though the objective was to encourage it. – Most projects focused on asset creation. E. g. , in Bangalore, a series of projects that was being structured through PPP became EPC contracts after Jn. NURM. • To see how the newer version will fare? – “Iteration, like friction, is likely to generate heat instead of progress. ” George Eliot 10

Access to domestic institutions • Tax Buoyancy • Project specific/ general purpose loans from Access to domestic institutions • Tax Buoyancy • Project specific/ general purpose loans from banks/ FIs/ MLAs, securing municipal revenues – Loan conditionality; State Government guarantees • Bond issues of Ahmedabad, Hyderabad, BMP, Nashik, KUIDFC etc. , have not led to large-scale replication – Issues of market appetite, end-use – Limited number of ULBs which can access financing on a standalone basis – Small ‘pilots’ Rs. 40 -100 Crores. Enormous amount of effort and arm twisting to close. – Pooled Finance ‘seems’ a more appropriate structure for small ULBs • No perceptible efforts to leverage 11

Approach for Urban PPPs in urban sector need to be hybrid models less focus Approach for Urban PPPs in urban sector need to be hybrid models less focus on ‘typology’……more focus on tailored solutions + results Government Developers Civic Society Concerns need to be addressed 12 • Continuity of services • Profit motives of private sector • Hand back of assets • Availability of funds for payments to private operator on a continuous basis • Fear of ‘privatization’ • Increase in tariffs • Service Delivery • Lack of baseline data • Tariff risks • Payment guarantees • Impractical performance standards • Political Will 12

Looking ahead, hopefully… • Cities have coped reasonably well in the past – Though Looking ahead, hopefully… • Cities have coped reasonably well in the past – Though under immense stress now – No reason why the problem cannot be addressed in the future • Political/ Social realization of imperative need for improvement of urban services • Policies slowly being set in place • Local capacities improving • PPP experience building up – emerging models validating proof of concept – Various precedents are being tried and tested, and experience is maturing • But yet a long way to go 13

Thank You 14 Thank You 14