8/8/2019 PPP-India

1/4

1

Opportunities and Challenges for Public-Private Partnershipsin Indias Urban Infrastructure Development1

Growing Demand for Urban Infrastructure

It is estimated that Indias urban population will reach over 40% of total population by 2030 from the

current 28% (Figure 1). Moreover, urban areas in India have been the key drivers of the manufacturing-and services-led economic growth. However, poor infrastructure, including urban infrastructure, is costing3% to 4% of Indias GDP. Infrastructure investment requirements until 2010-2011, which includesinvestments in the transport, telecommunications, energy, and urban sectors, will be $425 billion. Of thistotal, there is a $123 billion anticipated financing gap which could be addressed by the private sector byincreasing the current private sector investments from 1% to 3% of Indias GDP.

The urban infrastructure investments have to be ramped-up to address the gaps in urban infrastructure, inaddition to meeting the urban basic service requirements of the burgeoning urban population. Indiasurban infrastructure needs are enormous, which are estimated at around $28 billion up to 2011-12. Inaddition to the shortfalls in the urban infrastructure development, severe inefficiencies hamper thedelivery of basic urban services, especially in water supply and sanitation. Recognizing the need foraccelerating urban infrastructure development, the Government of India has launched in 2005 theJawaharlal Nehru National Urban Renewal Mission (JNNURM), a reform-based, part-grant drivenprogram of Rs 50,000 crores ($11 billion) outlay over a seven-year period.

Figure 1: Growing Trend of Urban Population in India

0

200

400

600

800

1,000

1,200

1,400

1,600

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

Year

TotalPopulationinmillion

0

5

10

15

20

25

30

35

40

45

Percentageofurbanpopulation

Total Population in Million Percentage urban

Source: U.N. population statistics

Government of Indias Initiatives to Support Public-Private Partnerships

In the recent past, the Government of India has initiated a number of steps to promote public-privatepartnerships (PPPs) for infrastructure development, as follows: (i) establishment of a PPP cell in theDepartment of Economic Affairs in the Ministry of Finance to administer various proposals and coordinate

activities to promote PPPs; (ii) setting-up of the India Infrastructure Finance Company Limited to providelong-term finance to infrastructure projects; (iii) creation of a viability gap fund as a special facility tosupport the financial viability of economically justifiable infrastructure projects which are not deemedcommercially viable in the immediate future ; (iv) formed an inter-ministerial group to determine pre-qualification of bidders under PPP; and (v) preparation of PPP toolkits and model concessionagreements.

1This concept note was prepared by Sekhar Bonu, Sr. Urban Development Specialist, based on a Consultationmission conducted last April 2007 in India for a proposed ADB technical assistance to promote public-privatepartnerships for urban infrastructure development.

8/8/2019 PPP-India

2/4

2

Status of Private Sector Investment in Water Supply and Sewerage in India

There are few successful PPP in urban infrastructure that involves significant private capital infusion inIndia, especially in water supply and sewerage. Of the more than $51 billion private sector investments ininfrastructure since 1990, only $2 million has been invested in water supply and sewerage (Table 1).

Table 1. Total Private Sector Investments in Indias Infrastructure (US$ million)

Year ofInvestment

Energy Telecom Transport Water andsewage

Total

1990 0 0 2 0 2

1991 614 0 0 0 614

1992 13 0 0 0 13

1993 1,051 0 0 0 1,051

1994 311 97 125 0 533

1995 1,008 683 0 0 1,691

1996 1,553 1,229 108 0 2,890

1997 970 3,827 405 0 5,201

1998 1,066 673 296 0 2,035

1999 2,500 1,045 467 0 4,012

2000 2,357 682 100 0 3,1392001 345 3,445 211 2 4,004

2002 380 4,615 558 0 5,553

2003 825 1,968 505 0 3,298

2004 4,144 3,731 1,117 0 8,992

2005 755 6,201 1,449 0 8,405Total 17,891 28,195 5,343 2 51,432

Source: World Bank, PPIAF database

Of the 172 infrastructure projects executed with private sector participation, only two have been in thewater supply and sewerage sub-sector. Globally, the private sector has invested $50 billion in watersupply and sewerage ($23 billion investment in East Asia and Pacific, $21.5 billion in Latin America, $146million in sub-Saharan Africa) and yet only $2 million has been invested in South Asia. However, PPP

mode of urban basic service delivery is more prevalent and successful in urban solid waste management,while PPPs in urban mass transport is, by and large, uncharted territory.

Challenges to PPPs in Urban Infrastructure Development

The urban sector2 requires huge investments in urban infrastructure and new management models thatpromote efficient, effective and good quality basic urban services on a sustainable basis should beintroduced. The twin objectives of accelerating urban infrastructure investments and quickly scaling-upnew performance-based management models can be achieved through well conceived, structured andtransparently-executed public-private partnerships (PPP).

Based on the past trends of private urban infrastructure investments, it is safe to assume that there areserious barriers for private sector investments in urban infrastructure in India, more so in the critical watersupply and sewerage sub-sectors. A quick review of the relevant literature indicates a number of reasonsfor reluctance on the part of the private sector to assume commercial risks in majority of the urban sub-sectors. Most of the urban sector investments involve third tier of governments, which increase theperceived political risks for private sector investments. Historically, water supply and sanitation serviceshave been seen as public goods that need to be provided at affordable prices (meaning nominal lowcosts). The low water and sewerage tariffs make water supply and sewerage projects non-bankablewhich require general revenue support even for operations and maintenance (O&M). An exception,however, is the industry which has a long history of paying rational tariffs. Except for a minority of

2For purposes of this paper, the following urban sub-sectors are considered: urban water and sanitation, solidwaste, urban transport and urban housing.

8/8/2019 PPP-India

3/4

3

municipalities, the general financial status of most municipalities is precarious. All put together, the urbaninfrastructure sector is seen as a very high-risk sector, leading to anemic inflows of private capital.

Urban sector project development and execution are largely done at the state or urban local body (ULB)level. In the past, the financing of urban infrastructure projects at these levels has been largely throughgovernment budgets, which also supported O&M expenditure of assets that were developed. Direct usercharges or tariffs are largely unable to meet 100% of O&M costs. Hence, the financing of the urban sector

projects also have to address both the real cost of operations of urban infrastructure services, as well asin the development of financial models that can provide some bankability assurance to prospectivefinanciers of such projects. This makes proper structuring of a project important where the commercialand political risks are appropriately allocated to parties which can bear the identified risks most efficiently.Private investors should be assured of adequate returns on their invested capital that is commensurate tothe perceived risks that the private sector would be undertaking.

PPPs are very different from the traditional procurement and project execution process followed in theurban sector by state and ULBs in the past.3 Factors that affect the desirability of PPP include (i) nature ofproject, (ii) risks inherent in the project, (iii) status of the project, (iv) speed of implementation, (v)availability of revenues/ application of user charges, and (vi) affordability. Globally, a variety of urbanprojects have been amenable to PPP mode of execution, which include water supply and sanitation, solidwaste, urban transport, toll roads within urban limits, and urban housing.

PPP is a complex process that requires different skills and experience mix, including complex legalcontracts.4

Globally, governments engage project officers who meet rigorous standards for competency tosupervise the PPP process, including feasibility study and other consultant inputs. The project officersresponsibility spans the entire PPP project life cycle, and his/her job is to ensure that the process runssmoothly, on time and within the budget. One of the important tasks of the project officer is to hiretransaction advisors: individuals or firms with expertise in the field of PPP who act as third party advisorsto government throughout the process of PPP project design, procurement, negotiations, and contractaward. Depending upon the nature of the project, the firm assembles a multidisciplinary team ofindividuals with expertise in the fields like economics, law, engineering, human resources,communications, accounting, and financial management.

Opportunities for Expanding PPPs in Urban Infrastructure Development

With the launch of the reform-driven and part-grant financed JNNURM, both the macro-environment aswell as project-level microenvironment is becoming more and more congenial for public-privatepartnerships (PPPs) in the urban sector. Many of the JNNURM-supported reforms are expected to createfavorable governance and institutional framework for private sector to feel more confident to venture intothe urban sector. A combination of part-grant financing by the JNNURM, which is likely to increase thebankability of a number of large urban infrastructure projects, and the financing gap/needs arising fromthe state- and city-level contribution for the JNNURM projects is likely to create demand for private capitalas well as greater interest from private sector in the urban sector. However, to encourage PPPs, it isimportant to develop bankable or financially-sustainable models at a project level.

Based on the nature of the project, PPPs have evolved in different forms with increasing private sectorrisk, responsibility and financing starting at the low risk to high risk as follows: service contracts (low risk);management contracts; leasing; joint ventures and partnerships; build-operate-transfer, concessions; andfinally, build-own-operate and divestures (high risk). Many of the above forms of PPP are feasible wheretariffs or user fees meet the full recovery of the cost of service including O&M and depreciation. In the

3In the case of PPP: public sector purchases services and not assets; public sector specifies service outputs; privatesector provides the design, build, operate, and possibly finance; risks are identified and placed with party best ableto manage them; private sector is paid based on performance; and the core objective is to achieve value formoney.

4The contractual provisions in all PPP contracts are complex and include, among others, the following: (i)requirement for performance bonds, (ii) insurance requirements, (iii) delay provisions, (iv) force majeure, (v)governmental action, (vi) government warranties, (vii) private sector warranties, (viii) change in the law, (ix)variations, (x) termination, (xi) indemnification, (xii) intellectual property, (xiii) claims, (xiv) financial security, (xv)dispute resolution, (xvi) partnership management, (xvii) compliance with all laws, (xviii) personnel, and (xix)conditions precedent.

8/8/2019 PPP-India

4/4

4

urban sector, full cost recovery is not immediately possible in water supply and sewerage due to a varietyof factors, including the essential nature of the services and poverty. Globally, governments in similarsituations have been increasingly experimenting with forms of PPPs that bring in private investments butalso allow services to be subsidized through output-based-aid, which use explicit performance-basedsubsidies to deliver basic services where policy concerns would justify public funding to compliment userfees.

Key Areas to Strengthen Urban Infrastructure PPPs5

Given the issues noted above, technical assistance in three key areas may lead to the eventualstructuring of bankable urban projects to be able to attract private sector capital and/or strategic interests.

ULB Capacity Building. ULB level capacity building will focus on improving the awareness of selectedcity officials and political executives in commercial and operational issues impacting PPP development.Commercial and operational issues are likely to include understanding the true cost of operations, usercharge structures, alternative revenue generation possibilities (such as carbon emission credits,recycling, etc), credit ratings, debt leveraging, development of key performance criteria such as loss levelreductions, and others. The TA intends to develop PPP specialists in selected cities and states who willalso be trained in different PPP modalities and in evaluating, implementing and monitoring PPP contracts.An assessment will also be carried out to match sub-sectors (e.g. raw water treatment, water distribution,wastewater treatment, solid waste collection, landfills, sewerage network, collections of garbage,

metering, collections of tariffs, bus rapid transport systems, mass rapid transport systems, trafficmanagement systems, and others) to the most achievable PPP modalities for that particular city or ULBgiven a host of considered criterion. Interactions including visits with selected municipalities or PPPprojects will be planned under this component.

PPP Impediment Audit and Mitigation Road Maps. Legal, regulatory and policy issues that mightprohibit private sector (including foreign) investments (funds and/or strategic and operational interests)flowing into the urban sectors or sub-sectors will be identified, and where possible, mitigating strategieswill be laid out. Stakeholder concerns will be identified under this activity as well as suggestions made formitigating concerns, where possible. The stakeholders will include the civil servants of state and ULBs,civil society, nongovernment organizations, political executives, private sector, financial intermediaries,and the urban poor. On the funding side, analysis to identify key obstacles to the provision of long tenurecompetitive finance to urban projects as well as potential collaborators for funding bankable projects andprobable lending criterion will be explored. Based on an agreed PPP impediment audit and mitigation

framework, the sub-sectors and urban projects that are amenable to PPP structuring would be identifiedfor immediate support. Workshops and training programs will be supported for awareness building of PPPimpediments, and for evolving time-bound executable mitigation road map with support of allstakeholders, especially the private sector.

Demonstration PPP Projects. In an attempt to create some good models, demonstration projects will beidentified and implemented subject to all regulatory approvals. Demonstration projects are expected to beno more than 4-6, most probably from identified list of states, and will be structured in parallel to the otherTA activities. The ULBs will be provided support for identification and implementation of demonstrationPPP project for which the TA will provide a dedicated PPP project officer and PPP transaction advisorysupport. It is expected that cities will work with the TA consultants in developing bankable project modelsthat will be sustainable on their own without recourse to guarantees from the state or central governmentsand will be able to attract private sector investments. Issues such as tariff reforms, alternative revenuelines, shadow tariffs, escrow structures, leveraging JNNURM grant funds for good debt / equity structures,

creation of special purpose vehicles or incorporated entities, amongst others, will be structured in thedevelopment of the project. PPP modalities will be considered in the structuring with the intention ofbidding out the projects to private sector. Given the importance of long term finance in establishing morebankable models, and the necessity for catalyzing private sector investments through taking risk capitalpositions, ADBs sub-sovereign loan products as well as ADBs private sector funding window, amongothers, can also be considered as part of the project structuring. Collaborations with domestic fundinginstitutions, such as the IIFCL, will be actively sought to crowd-in domestic funding institutions.

5ADB proposed a technical assistance to strengthen urban infrastructure PPPs in India as described.