Conceptual Framework for PPPs
Presentation to the Planning Board
May 2007
PV Ravi
Infrastructure Development Corporation (Karnataka) Limited
1
Definition
A Public Private Partnership is an
arrangement between a public
(government) entity & a private (non-
government) entity by which services
that have traditionally been delivered by
the public entity are provided by the
private entity under a set of terms and
conditions that are defined at the outset
2
Characteristics
The public entity should have the enabling authority to
transfer its responsibility – enabling legislative & policy
framework, administrative order – the instrument of
transfer is through a contract
There is usually a significant transfer of responsibility to
the private entity – and usually includes financial
investment obligations
For a payment to the private entity – directly by users or
by the public entity such that - a significant portion of
project revenues and/ or the payments, are conditional
on achieving pre-specified levels of performance
The nature of the relationship is usually long-term
3
Risk Sharing
A risk is defined as any factor, event or influence
that could threaten the successful completion of a
project in terms of time, cost or quality
In a conventional BOQ based implementation : risks
– planning, design, construction, environmental &
social, physical damage and financing are evaluated
Commercial risks – revenue or maintenance costs,
quality, safety of users and general regulatory risks
– not critically evaluated – this is critical though to
a private investor
PPP involves sharing of risks – risk allocated to the
party best suited to manage them
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Why PPPs?
Fiscal reasons - Inadequacy of resources – leveraging
on lower government funding
Optimal transfer of risks – to the entity best suited to
manage the risks
Design, Financing, Construction, Operations and
Maintenance – all are commercially understood and
manageable
Change of scope, defective designs, time overrun, cost
overruns, leakage of revenues, high maintenance costs
Transfer of responsibilities – efficiency gain
Appropriate technology, innovative design solutions,
project management, better collection practices, life
cycle costing
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Other Reasons
Enhanced bankability – more rigorous project
preparation
Incentive to deliver whole life solution – not just
asset creation
Focus shifts to service delivery – integrated with
construction, measurement of quality & payment
linked to service delivery
Acceleration of programme – time-bound
implementation
Better overall management of public services –
transparency in prioritisation, selection and
ongoing implementation
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PPP Options
Build
Works & Management Operation &
& Operate Full
Services Maintenance
Transfer Privatization
Contracts Maintenance Concessions
Contracts Concessions
Low High
Extent of private sector participation
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Concessions
BOT - Build Operate Transfer
BOOT - Build Own Operate Transfer
BOO - Build Own Operate
BOOST - Build Own Operate Share Transfer
BOLT - Build Own Lease Transfer
DBFO - Design Build Finance Operate
OMT - Operate Maintain Transfer
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Types of PPPs
Financially free standing projects
Role of public sector - planning, licensing & statutory
procedures; no financial support/ payment by government
Revenues through levy of user charges by private sector
Toll Roads and Bridges, Telecom services, Port projects
Projects where Government procures services
Private Sector paid a fee (tipping fee), tariff (shadow toll) or
periodical charge (annuity) by Government for providing services;
payment against performance – no/partial demand risk transfer
Risks associated with asset creation (including design) and O&M
transferred to private sector
Accountability to users for service - retained by Government
Roads - annuity/ shadow tolls, power - under PPAs. In the UK
-prisons, education, health services, defence related services
Other Types - Joint ventures, Not-for-Profit vehicles
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Features of PPPs - 1
Genuine risk transfer
All risks pertaining to design, building, financing and
operation transferred to the private entity
Transfer of demand risk depends on the extent to which
the private sector can influence usage
Output based Specifications
Contracts specify the service outputs required rather than
asset configuration/mode of service delivery
Emphasis on type of service & performance standards
Private entity incentivised to deliver outputs using
innovation in design, construction, operation and financing
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Features of PPPs - 2
Whole life asset performance
Private entity takes responsibility & assumes
risk for the performance of the asset and
delivery of service over a long term
Payment for Performance
Revenue/ Payment to private entity is subject
to performance in relation to specific &
quantified criteria enshrined in the contract
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Value for Money
Transfer of risks/ responsibilities under a PPP
structure should result in better value for money
for the user
Telecom sector – mobile phone tariffs from Rs.
16/- per minute to Re.1/- or 50 paise per minute
Tolls paid – offset by savings in direct & indirect
costs and value of time
Annuity payments – public sector comparator –
value for money
Efficiency gain
Savings in cost of project versus overrun
Savings in operating costs
Revenue maximization - leakages
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Basic Issues
Striking a balance between differing
concerns & objectives of parties
Legislative Back up
Rights and obligations of parties
Identification and allocation of risks
Penalties and rewards which would
ensure performance
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Broad Roles & Responsibilities
Government Agency
Providing Project Site/ Assets
Environmental Clearances
Supporting Infrastructure and Utilities
Specific Obligations (e.g. dredging)
Regulatory Functions
Concessionaire
Designing, Engineering, Financing
Construction/ augmentation / upgradation
Operation and Maintenance
Payment and other obligations
Transfer of assets at expiry of concession period
In exchange the concessionaire has the right to receive
revenue – tolls or annuity or any other mechanism
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Other Key Elements
Bankability Issues
Concessionaire’s ability to assign rights
Lenders’ step-in rights
Charge on project assets and enforceability
Critical Events and consequences
Force Majeure
Events of Default
Remedial process incase of default/ events leading to termination
Protection of debt in the event of termination
Supporting Provisions
Dispute Resolution Mechanism
Re-negotiation in good faith
Termination as a last resort
Preferential treatment in re-bidding
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What a PPP is not & what it is
PPP is not privatisation or disinvestment
PPP is not about borrowing money from the private
sector.
PPP is more about creating a structure
in which greater value for money is achieved for services
through private sector innovation and management skills
delivering significant improvement in service efficiency levels
This means that the public sector
no longer builds roads, it purchases miles of maintained highway
no longer builds prisons, it buys custodial services
no longer operates ports but provides port services through world
class operators
No longer builds power plants but purchases power
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Partnership in Practice
Partners not adversaries – background of mistrust
Project should be the focus – “win-win” for both the
parties
Independent agencies – Independent Engineer - useful
during both implementation and operations
Government retains ultimate responsibility – uses the
private sector to deliver infrastructure services of
specified standard
Private Financing – can significantly leverage public
funds
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Basic Features
Conventional financing is asset based – debt provided is
usually a percentage of project cost linked to the value
of asset cover
Project Financing is cash flow based - on the estimated
cash flows that are generated by the project
“A financing structure that relies on future cash flows of a
project as the primary source of its servicing & repayment, with
only the project assets, rights and interests being the security”
There is little or no recourse to the sponsors
Usually large projects - investments are huge & costs of
non-completion/ unsuccessful operations - affect many
Little tangible security
All stakeholders would, therefore, like to see it succeed
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Project Appraisal
An elaborate project appraisal process – analysis of
risks and specification of return expectations (pricing)
from investing in the project
Cash flow projections based on technical, market and
financial analysis
Risk mitigated through project contracts and financing
agreements or consciously taken after evaluation
Structured financing – to meet the characteristics of
the project
Security and documentation - elaborate
Project monitoring and compliance
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Typical Funding Sources
Equity Capital
Core capital provided by the promoters (developers / contractors)
Minority stakes may be taken by financial investors / funds
Preference Capital
Can be used if suitable changes made to the CA
Senior Secured Debt
Normally in the form of rupee term loans/ debentures from Indian banks/
institutions
Capital market instruments – may be possible after CoD; not too popular yet
A variant could be debt with 2nd charge
Subordinated Debt
Typically with far lesser rights
May even be unsecured
Challenge is to evaluate how additional resources can be channelised
into the sector - insurance funds, pension funds
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Key Project Contracts
Concession Agreement
Project Site Licence Agreement
Shareholder/ JV Agreement
Substitution Agreement / Direct
Agreement
State Support Agreement
EPC Contract
O&M Contract
Trust and Retention Agreement
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Main Provisions
Concession Agreement
Terms and conditions of undertaking the project
Obligations of the parties
Tenor of the contract
Default provisions and remedies
Provision for substitution
Force Majeure provisions and remedies
Termination and compensation payments
State Support Agreement
Support during implementation
Protection from a competing facility
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Other Key Contracts
EPC Contract
Price Overrun
Time Overrun
LDs and Bonus provisions
Performance security
Standards and Specifications
O&M Contract
Operating Standards
Costs
Quality of Service
Penal provisions
TRA Agreement
Trapping of all the project cashflows
Prioritization of Cash flows 23
Financial Analysis
Elaborate Financial Model capturing these risks – base case
analysis
Establishes breakeven levels of traffic/ tariffs
Assessment under various scenarios – sensitivity analysis
Demand / Traffic
Tariff / Tolls
Inflation
Maintenance Costs
Financial Ratios
Debt Equity Ratio – cash flow impact & level of promoters’ funds
Internal Rate of Return (project/ equity)
Debt Service Coverage Ratio
Loan Life Ratio
Project Life Ratio
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Financing Documents
Facility Agreement
Financial Terms
Project Risk Mitigating
Conditionalities
General Conditions
Inter-Creditor Agreements
Security Documentation
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Basic Structure
NHAI
Concession Annuity
JV
Agreement
Partner
Financing
Agreements
Lenders Shhldr’s
Project SPV Equity
Agmnt
Debt
EPC
O&M Main
Agmnt
Agmnt Sponsor
Indep Eng
LE Contractor
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Transaction Structure
Sponsors Advisers
Government
Invt. Bankers,
Advisers Technical & Legal
Advisers
Invt. Bankers, Equity
Technical & Legal
Advisers
Concession / Licence
Agreement
Financial Insurance
Investors Companies
Equity /
Sub-Debt
Insurance Policies
Users
Off-take O&M
Contracts Project SPV O&M
Contract
Operator
TRA/Escrow
TRA Agreement
Agent EPC Contract
Debt Substitution
Agreement
EPC
Lenders Contractor
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Implementation Structures
Existing Assets
Full Divestiture – UK – Telecom, Steel, Electricity, Ports, Water,
Airlines, Airports; so far in India – Modern Foods, BALCO, Hotels
Asset Sales/ Leases – airports in Australia
BOT/ ROMT Concessions – roads, tourism facilities, berths in
ports
Management contracts – water assets, ports in Philippines
New Assets
Implementation by government – followed by OMT concessions –
Mumbai-Pune expressway, Ports in Rotterdam, hospitals
Implementation through SPVs – Moradabad bypass or port
connectivity projects or dedicated freight corridor for railways
BOT Concessions – commonest form – roads, ports,
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Isn’t Private Infrastructure
Expensive?
29
Isn’t Private Infrastructure Expensive?
Additions to Cost Benefits
Risk Premium Lower Cost From Efficiency
Example
Public Entity Private Entity
ROI 8% WACC 13.7%
(Debt @ 11% 70: 30 Equity @ 20%)
Cost 105.3 Cost 100
Required Required
Return 113.7 Return 113.7
A 5.3% cost overrun (increase in actual project cost) in the public
sector is enough to overcome the private sector disadvantage of
higher financing cost!
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Isn’t Private Infrastructure Expensive?
Additions to Cost Benefits
Risk Premium Lower Cost From Efficiency
Example
Public Entity Private Entity
ROI 8% WACC 13.7%
(Debt @ 11% 70: 30 Equity @ 20%)
Cost 100 Cost 95
Required Required
Return 108 Return 108
A 5% reduction in project cost (efficiency) by the private
sector is enough to overcome the higher financing cost!
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Key question
What should be the framework to induce the
private entity make the investments needed to
provide efficient service to the end user?
Investments decided by the investor or driven by
the market, i.e. the consumer
Private entity has a stronger case for state support
if it makes investments determined by the State
Demand risk – how much passed on?
Extricate the public entity from making
commercial decisions on individual projects,
wherever possible
Public entity’s role from being a planner,
financier & manager to facilitator & regulator
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The Right Balance
The Investor wants The Investor needs
Monopoly rights Initial risk mitigation
support - can be pre-
defined
Stable environment -
Full pricing freedom regulatory and policy
framework
State support for social
State support for social obligations/ viability
obligations/ viability considerations – can be
considerations transparently determined
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Some Indian Examples - 1
Roads
BOT Concessions for toll roads and bridges (NHAI, state
governments) (OMT Concessions in future)
Annuity payment based concessions – highways, urban roads
(NHAI/ state governments)
Solid Waste Management
Engineered landfills – tipping fee linked payments (Bangalore,
Trivandrum)
SW Collection and Transportation (MCD/ NDMC)
Port Concessions
Major Ports – container berths (JNPT, Chennai, Kochi,
Tuticorin, Vizag, Kandla); bulk cargo berths (Marmagao, Haldia,
Ennore, New Mangalore)
Minor Ports –Pipavav, Mundra, Kakinada
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Some Indian Examples - 2
Water Supply and Sanitation – Bulk water
supply systems in Tirupur and Vizag
Tourism Facilities – hotels, tourist
facilities, PWD rest houses – Karnataka &
Kerala
Bus Terminals/ Parking Facilities
Bus terminals – Dehra Dun, Amritsar, Jullundur
Parking + commercial complexes – NDMC/ DDA/
MCD/ Bangalore
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International Experience - 1
Toll Roads (Chile, Mexico, Hungary, Poland); Ports
(Argentina, Philippines, Sri Lanka)
Airports (Australia, Greece, Germany)
Roads in UK under DBFO program
Private Finance Initiative of UK – diverse areas
Dorset Police Service - $ 40 million contract for refurbishment of
police stations, construction of a divisional headquarters
building, maintenance, janitorial & waste management services
Nottinghamshire, Police Fleet Management Contract - ($ 180
million over 25 years) – driver slots - usage of a vehicle for a 24
hour period
Durham & Dunstead Hospital Project, Durham – 30 year, $ 155
million hospital services contract – to construct and operate
health care facilities + ancillary services
Stoke-On-Trent Grouped Schools Project – a $ 250 million
project involving 122 schools – refurbishment and maintenance
contract
36
International Experience - 2
Louis Trichardt Maximum Security Prison
Project, South Africa – a $ 270 million project –
largest prison facility (also UK and Australia)
Full fledged water concessions in Argentina
(Buenos Aires) and Philippines (Manila);
Management contract for water supply &
sanitation in Johannesburg, South Africa
Rural Pay Phones, Peru – against payment of a
subsidy – based on a system of monitoring of
service standards
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On the Table in Karnataka
Airport Rail Link
Core Ring Road
Airport Expressway
BMRDA Townships
Minor airports
Tourism Properties
IMTC (Kempegowda)
Mega Convention Center, Bangalore
Bypass roads
Truck terminals
…
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