Infrastructure Challenges in South Asia The Role for PublicPrivate Partnerships

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Infrastructure Challenges in South Asia The
Role for Public-Private Partnerships

• ADB Presentation to
• South Asia Finance Ministers
• 4 May 2008
• Madrid

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Presentation Outline

• This presentation draws from ADBs experience in
  promoting public-private partnerships (PPPs) and
  complementary sector reforms.
• I. Infrastructure Challenges
• II. The Role for PPPs
• III. Mainstreaming PPPs
• IV. ADB Support
• V. Conclusions
• Appendix - South Asia Examples (Handout)

Approximate presentation time 15 minutes
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South Asia is under investing in infrastructure
I. Infrastructure Challenges in South Asia

• Infrastructure investment need is estimated at
  94 billion p.a.
• Infrastructure investments are nearly half of the
  estimated need.
• Infrastructure investments are predominantly by
  the governments.

• Limited availability
• Poor quality
• Unreliable supply
• High unit cost of output

Large gap in infrastructure investments is a
major challenge for the governments in the region.
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South Asia needs huge investments in
infrastructure
I. Infrastructure Challenges in South Asia

• To rebuild ageing facilities, construct new
  capacities, and keep up maintenance.
• To cope with urbanization.
• To promote inclusive development by addressing
  uneven access to infrastructure.

Rural infrastructure is critical for poverty
reduction. Availability of quality infrastructure
accelerates growth and enhances competitiveness.
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South Asia also needs to invest in cross-border
infrastructure
I. Infrastructure Challenges in South Asia

• To enhance sharing of resources and efficiency.
• To build connectivity and enlarge markets.
• To reduce transportation costs.
• To link with regional and global supply chains.

Significant economic benefits could be derived
from regional cooperation.
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The advantage PPP is not just about investment
II. The Role for PPPs

• PPPs encompass partnerships between the
  government and the private sector for

• Construction
• Renovation
• Technology
• Maintenance
• Service delivery
• Management
• Financing

• Efficiency gains from private sector innovation
  can offset the higher cost of private financing.
• Incentive-driven management can result in better
  service.

Greater Willingness To Pay
More Private Investments
Lower Fiscal Stress
Better Service
Affordable Tariff
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II. The Role for PPPs
Learning by doing experiment and innovate
Increasing contract duration, private sector
financing, and assumption of risks by the private
sector is possible with improvements in enabling
conditions.
Source Deloitte. Closing the Infrastructure Gap
The Role of Public-Private Partnerships
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II. The Role for PPPs
PPP project sequence is amenable to customization
Source Public-Private Partnership Handbook, ADB
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Common objections to PPPs can be addressed
II. The Role for PPPs

• PPPs are costlier for the governments
• Cost of capital from private sector is higher
• Failure to realize value for money
• PPPs are prone to failure
• Governments bear most risks
• Windfall for the private sector
• Customers are at a disadvantage

• While benefits from PPPs outweigh difficulties in
  most cases, the benefits must be evaluated during
  the PPP project structuring process.

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Initial progress shows promise of mainstreaming
PPPs
III. Mainstreaming PPPs
Improvements in enabling conditions could
increase the number of PPP projects, the range of
PPP models, and coverage of sectors.
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Mainstreaming establishing enabling conditions
III. Mainstreaming PPPs

• Policy Transparent, predictable, and
  streamlined
• Regulation Conducive but robust regulation
• Capacity Talent pool for managing PPPs
• Advocacy Convergence of expectations
• Financing Access to long-term finance
• Risk Optimal allocation and mitigation
• Projects Shelf of bankable PPP projects

The challenge is in pursuing reforms that assure
private sector of level playing field and
risk-reward balance, and consumers of quality of
services and affordability.
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Governments have to drive the mainstreaming of
PPPs
III. Mainstreaming PPPs
The phases are not mutually exclusive and could
be drawn in accordance with the status of the
preparedness for implementing the countrys
strategy for PPP development.
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Enduring problem tenor of financing and project
life cycle mismatch
III. Mainstreaming PPPs

• Easing Financing
• Constraints
• Developing long-term bond markets
• Encouraging pension and mutual funds, insurance
  companies, and financial institutions to invest
  in infrastructure
• Dedicated long-term financing institutions
• Rating of projects

Increasing pool of funds
Capital Markets
Infrastructure Funds
Commercial Banks
Project Revenue
Int. Long-term Fund Providers
Government Budget
Bankable projects
Governments have created dedicated institutions
for extending the tenor of funds available in the
domestic markets.
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Allocation of risks determines private sector
participation in PPPs
III. Mainstreaming PPPs
Risks that private sector can assume include

• Risk Mitigation Instruments
• Off-take contracts
• Guarantees
• Insurance
• Viability gap funding
• Government equity/loan
• Ring fencing
• Arbitration

• Design risks
• Service standards
• Delivery delays
• Cost overruns

It is important to avoid optimism bias while
assessing risks.
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ADB is responding to country needs over the
entire spectrum of the PPP development process
IV. ADB Support
PROJECT DEVELOPMENT
CAPACITY BUILDING
FINANCING

• Guidelines and manuals
• Regulation and policy
• Data base Development
• Compliance and safeguards
• Bidding documents/ procedure standardization
• Knowledge dissemination
• Project development setup

• Identification
• Appraisal
• Structuring
• Financial closure

• Sovereign
• Non-sovereign
• Equity and Debt
• Political risk guarantees
• Partial credit guarantees
• Syndication
• Co-financing
• Local currency
• Multi-tranche financing
• Technical assistance

ADB also supports complementary reforms in
infrastructure sectors and in the financial
sector.
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IV. ADB Support
In addition, infrastructure PPPs could make use
of these ADB initiatives

• The Energy Efficiency Initiative
• Clean Energy Financing Partnership Facility

• The Water Financing Program
• Water Financing Partnership Facility

• Urban Services Initiative
• New partnership approaches for sustainable urban
  development
• Knowledge products

• The Carbon Market Initiative
• Asia Pacific Carbon Fund
• Technical Support Facility
• Credit Marketing Facility

• Sustainable Transport Initiative
• Knowledge products for building efficient
  transport systems

PPPs could facilitate use of technology for
addressing climate change concerns.
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V. Conclusions
Conclusions Growth of a trend

• Systematic mainstreaming is needed for
  accelerating and increasing infrastructure
  investments through PPPs.
• Government commitment is critical for
  establishing enabling conditions for PPPs and for
  investments in mainstreaming PPPs.
• Lessons learned from regions and sectors that
  have moved up the maturity curve will help expand
  the frontiers of PPPs.
• ADB support is available for developing a shelf
  of bankable PPP projects, catalyzing investor
  interest in PPPs, and ensuring sectoral spread of
  PPPs.

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For more information

• Ashok Sharma
• Tel No. 632 632-6755
• Fax No. 632 636-2337
• Email asharma_at_adb.org

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South Asia Examples
Appendix - South Asia Examples

• The examples, some of which are work in progress,
  are only a general overview and do not constitute
  any judgment on the part of ADB. Changes may have
  occurred to the status and structure of these PPP
  examples.
• The examples are only meant to demonstrate
  mainstreaming efforts and application of PPP
  models along with financing and risk mitigation
  instruments applied in different contexts.

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Bangladesh Urban Primary Health Care
(Management Contract)
Appendix
Appendix - South Asia Examples

• Risk Mitigation
• Performance-based modified management contract
• Contractor assumes performance, certain demand
  risk, and user fees revenue generation risks as
  per contract agreement
• Financing
• ADB ADF loan and grant
• Cofinancing from DFID and
• SIDA (Swedish)
• Status
• First project implemented
• between 2000-2005
• Second project implemented
• from July 2005

• Project Description
• One of the largest PPPs in health sector in South
  Asia
• Implemented by Local Government Division of the
  Government of Bangladesh
• Contracting-out of urban primary health care
  services to nongovernment organizations and
  private sector
• Cost
• USD90 million to cover 6 city corporations and
  five municipalities for 6.5 years of project
  implementation
• Implementation
• Project Management Unit at national level and
  project implementing units at city
  corporation/municipality level

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Bhutan Dagachhu Hydropower Export (Concession)
Appendix
Appendix - South Asia Examples

• Project Description
• Concession for 30 years under consideration
• Power export from Bhutan to India
• Run-of-the-river type (114 MW)
• Project Cost USD150 million (base)
• Status pre-construction stage
• Joint venture company Public and
• private companies (the public sector
• takes a majority of capital)
• Cross-border CDM in regulatory process for
  validation and registration to
• UNFCCC

• Risk Mitigation
• Long-term off-take contract with a private power
  trader.
• Escrow/swap arrangement
• Carbon financing (optional)
• Financing
• Equity from Government
• Equity from private power trader as a minority
  shareholder
• ADB seed finance on both equity and debt sides
• Commercial lenders/export credit agency

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India Long-term funding for PPPs
Appendix
Appendix - South Asia Examples

• PPP PROJECTS UNDER IIFCL
• Ultra Mega Power Project
• Project 4000 MW Power Project to be set up in
  Mundra, Gujarat
• Cost USD4 billion
• Financing Equity USD1 billion (25) balance
  debt IIFCL providing USD450 million debt
• PPP Modality Concession awarded to SPV owned by
  Tata Power Group in 2008 through a bid process
  (lowest price per unit basis)
• Status Financing closed in April 2008
  operational by 2012
• Oriental Pathways (Agra)
• Project 4 laning of Agra Bharatpur section
• Cost USD56 million
• Financing Equity (private player) 25
• (USD14 m) 75 debt financing including
• IIFCL (ADB loan of USD7.5 million)
• PPP Modality BOT Concession
• awarded to Oriental Pathways (Agra)
• Ltd including fee splits with NHAI
• from toll revenues

• India Infrastructure Finance Company Limited
  (IIFCL)
• Set up in 2006 as a 100 GOI entity
• Key aim is to catalyze infrastructure financing
  by providing long-term debt
• Only funding for PPP and bankable projects
• ADB IIFCL
• Supporting IIFCL with a USD500 million 25-year
  credit facility
• Funds for bankable projects mostly PPPs
• Assisting IIFCL in capacity building including
  project appraisal

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India Long-term funding for PPPs (contd.)
Appendix
Appendix - South Asia Examples

• PPP PROJECTS FINANCED BY IIFCL
• Trichi Tollways Pvt Limited
• Project Road widening and rehabilitation
• Cost USD187 million
• Financing Equity 23 (USD42 million) balance
  debt of 77 incl. from IIFCL (ADB loan of USD7
  million)
• PPP Modality Concession granted to Trichy
  Tollways Ltd under a toll revenues based contract
• Tindivanam-Ulundurpet Road Projects
• Project 73 kms NH-45 road rehabilitation and
  widening
• Cost USD200 million
• Financing Equity USD50 million (25) USD149
  million debt (75) incl. from IIFCL (USD20
  million from the ADB facility)
• PPP Modality GMR Group awarded 20-year BOOT
  concession

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Nepal West Seti Hydroelectric Project (Build
Own Operate Transfer)
Appendix - South Asia Examples

• Project Description
• 750MW storage type hydroelectric power generation
  facility on a BOOT basis for 30 years
• West Seti Hydro Limited (WSHL) owned by the Snowy
  Mountains Engineering Corporation (SMEC), will
  develop and operate the project
• 90 power to be exported to India and 10
• for domestic use
• Bulk sale to India and Nepal Electricity
• Authority
• Status Planning stage
• Project Cost USD1,517 million (base cost)
• Outputs
• The Project is expected to generate about
• USD890 million in cumulative revenue for the
  Government over the 25-year operating period.

• Risk Mitigation
• Government of Nepal (GON) equity stake in the
  WSHL
• No direct market risk exposure
• Off-take contracts with India is in place and
  with Nepal Electricity Authority is under
  consideration.
• Financing
• SMEC USD80 million (21), the GON USD45 (12).
  Other equity holders are ILFS (India), ADB, and
  Nepalese Financial Institutions
• ADBs considering direct loan to WHSL
• Political Risk Guarantee from ADB, the China
  Export and Credit Insurance Corporation
• (Sinosure) and Multilateral
• Investment Guarantee Agency

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Pakistan PPP developments
VII. South Asia Examples
Appendix - South Asia Examples

• Policy Focus
• Private Participation in Infrastructure (PPI)
  Task Force coordinating reforms
• Infrastructure Project Development Facility,
  under Ministry of Finance, helps with technical
  work
• Efforts advancing to set up viability gap funding
  and risk management framework
• PPP Projects
• PPP in power generation activities in the early
  90s
• Developing a pipeline of projects currently

• PPP Projects In The Pipeline
• Karachi Mass Transit Project
• USD630 million cost
• ADB finalizing an MFF project
• Sindh Cities Improvement Investment Program
• Lahore Rapid Mass Transit System
• ADB is assisting with a Technical Assistance
  project
• Charsadda Solid Waste Management
• Integrated community based SWM system from
  collection to landfill development
• USD7 million cost
• Transaction advisors in place for structuring
  the project
• Kalinger Water Supply Project
• 22,000 inhabitants
• Water supply system

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Pakistan PPP developments (contd.)
VII. South Asia Examples
Appendix - South Asia Examples

• PPP In Education
• Quality Education for All (Punjab)
• 2,400 schools managed by National Rural Support
  Network, governed by management contract
• Began as pilots in 2002 of 48 schools
• Railways Schools
• Beaconhouse Schools managed 19 Railways schools
  from 2003-2005
• Contract was for 33 years but contract design
  issues caused it to end early
• City District Government of Lahore (CDGL)/CARE
• CARE, a local NGO, manages 172 public schools in
  Lahore on behalf of the CDGL (97,000 students)
• Developments in Learning
• DIL, an NGO, contracts with providers to operate
  150 public schools
• DIL provides funding and local NGOs manage
  schools on their behalf

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VII. South Asia Examples
Appendix - South Asia Examples
Sri Lanka Colombo Port Expansion Project (Build
operate transfer)

• Risk Mitigation
• Non-revenue generating component i.e., breakwater
  protection work to be undertaken by public sector
  while revenue generating component to be
  undertaken by private sector.
• Innovative dispute resolution mechanism to
  address potential disputes between the new
  container terminal operator and existing port
  authority-run terminal operator being considered
• Financing
• ADB 38.5
• Government (port authority) 23.0
• Private sector 38.5
• Status
• Contractor selected for breakwater
• 5 major port companies submitted
• bids for container terminal
• concession

• Project Description
• 30 years concession (BOT), ending with transfer
  of asset back to the government
• First transport sector PPP in Sri Lanka
• Project Output
• Phase I- Breakwater protection works for three
  new container terminals and construction of one
  new container terminal increasing container
  handling from 3.3 million containers to 5.5
  million containers.
• Three phase project with ultimate capacity being
  10.5 million capacity
• Cost
• Phase I - project cost USD781 million public
  sector component USD480 million and private
  sector component USD301 million