Transcript Investment Needs

BUILDING
INFRASTRUCTURE:
INDIAN
EXPERIENCE
YES Summit,
Nairobi
2006
Arvind Mayaram
India
Infrastructure Deficit In
India-Problem or Opportunity?
Problem• The infrastructure deficit – GDP ↓ 1.5-2%
• Expenditure on infrastructure inadequate
• Result: Infrastructure deficit ↑ which impacts GDPvicious cycle
Opportunity• Growing demand for Infrastructure to support
growth
• Need for investment
• High returns due to supply deficit
• Job creation
Spurt in demand for infrastructure
 12% peaking and 8% non-peaking shortage of power
 Major Ports- traffic growth (by weight) 12.4 %, container
traffic by more than 20%
 Minor Ports- comparative figure 11.3%
 Air Transport (for AAI)- aircraft movement (12%), passenger
movement (22%), cargo (20%)
 Railways: 8% in freight, 6% in passenger traffic
Gross Capital Formation in Infrastructure
• GCFI in India hovers around 4.5%
• GoI striving for a minimum of 8%
• To fill the gap, private investment is essential
Estimates of investment necessary
based on projected growth rate and projected GCFI
(in US $ billion)
US $ 363 billion would be required in the next 5 years alone.
Assumptions:8% growth rate of GDP per annum; GCFI at 8% of GDP.
Year
2006-07
2007-08
2008-09
2009-10
2010-2011
GDP
775
837
904
976
1055
Investment
necessary
62
67
72
78
84
Investment Needs
-Key sectors
 The Committee on
Infrastructure has estimated
the need for funds in some key
sectors as given in the table
alongside.
 Tenth Five Year Plan was
projected at Rs. 11,08,800
crore (US $ 246 billion) at
2001-02 prices
Sector
Investment
Crores
(US $bill in
brackets)
To be made
by
2,20,000
(49)
2012
Airports
40,000
(9)
2010
Ports
50,000
(11)
2012
5,40,000
(120)
2012
National
Highways
Energy
Emerging Sectoral Opportunities
(2006-2007 to 2011-2012)
•
ROADS: 45974 Km National Highways with investment up to Rs.
2,20,000 crore (US $ 49 billion)
•
AIRPORTS: 35 non-metro airports, 5 green field airports and
technology upgradation of Rs.40,000 crore (US $ 9 billion)
PORTS: 387 Port and Shipping projects under NMDP of Rs. 1,00,339 cr
with substantial private investment (US $ 22.29 billion)
•
•
POWER: 60000 MW capacity addition in power generation, with 7 mega
power projects of 28000 MW capacity exclusively for the private
sector, translating to Rs. 2,40,000 cr (US $ 53 billion)
•
RAILWAYS: Dedicated freight corridors to be developed possibly with
PPP: estimated investment Rs.37000 cr (US $ 8.22 billion)
PPPs in India
• Over 10 years experience in India in the
development and use of PPPs for delivering
infrastructure services
• Progress has been uneven
• Main sectors of focus are:
– Basic public services excluding power: transportation
(ports, airports, roads, and rail)
– Water and sanitation
– Other urban infrastructure (solid waste management,
light rail, bus terminals)
– Any other sector can be added
Measures taken by Government
 permitting the private sector to exert competitive pressure in all
sectors

progressive levy of appropriate user charges

setting up autonomous regulatory authorities, tariff authorities and
quasi-judicial bodies
 providing fiscal incentives in terms of “tax holiday” to infrastructure
projects, tax incentive to investors providing long-term finance or
investing in equity capital
 permitting FDI up to 100% on the automatic route in several
infrastructure sectors
 Encouraging PPP
 Providing stable policy environment
Illustrative List of Infrastructure
Sectors with FDI Up to 100%
 Electricity Generation
(except atomic energy)
 Electricity Transmission
 Electricity Distribution
 Mass Rapid Transport
System
 Roads and Highways
 Toll Roads
 Vehicular Bridges
 Ports and Harbours
 Hotel and Tourism
 Townships, Housing and
Construction Development
Projects
 Greenfield Airports
 Power Trading
Encouraging PPP in India
• Scheme for VGF
• Establishment of IIFCL
Viability Gap Funding
-a novel scheme
 Seeks to cover PPPs where
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Private sector provides services
for a fee under a concession
agreement
Concession granted on the basis
of a transparent bidding process
Bidding parameter is the capital
grant sought
Bidder is assured of a stable
environment through a
concession agreement
 Eligible sectors:
transportation,tourism, urban
infrastructure, energy, any
other sector could be
considered with prior approval
Viability Gap Funding
-a novel scheme
• Funding of 20% of Project
Cost. Additional 20% can be
given by the sponsoring
authority
• Empowered Committees set
up for quick processing of
cases
• Project to be implemented
for the project term by
Private Sector firm selected
by sponsoring public
authority through process of
open competitive bidding
• Project should provide a
service against payment of a
pre-determined tariff or
user charge
India Infrastructure Finance Company
Limited
 To meet long term debt requirement of
infrastructure projects
 IIFCL will
 Borrow long term funds on GoI guarantees, from multilateral
organizations etc and lend to identified infrastructure projects
in 6 sectors
 Lending up to 20% of project cost
 Covers public sector, PPP, or private sector
 IIFCL lending will
 Ease asset-liability mismatch of FIs through refinance;
 Lower Long term debt cost due to sovereign guarantees
 Set benchmarks for market borrowings by other organizations
Stable Policy Environment
Through Model Concession Agreements
• Direct and indirect political events defined clearly
• Protection provided against such events through
provision for extension of concession period or
payment of damages
• Conditions precedent with specific timelines and
‘damages’ for non-adherence, which include issues
pertaining to land and permits
International experience in PPPs
Investment in Infrastructure Projects with Private
Participation: Developing Countries ($US bn)
120.0
100.0
80.0
60.0
40.0
20.0
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International experience in
PPPs
(contd.)
• 2004 and 2005: around 206 PPP deals worth approximately
US$52 billion were closed, of which Europe accounts for 152
projects of US $ 26 billion (source: Report of Pricewaterhouse
Coopers)
• PPP approach increasingly being adopted in all countries, initially
in the transport sector and later extended to health, education,
energy, water, waste management
• Globally, PPPs have track record in contributing to new
infrastructure investment and improved service delivery
(source: World Bank)
• In developing countries despite declines since peak - averages
20% of infrastructure investment through PPP (source: World
Bank)
• Evidence suggests broad improvements in efficiency, coverage impacts on prices and the poor mixed (source: World Bank)
Conditions necessary to attract
investment in infrastructure projects
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Fewer Entry Barriers
Commercial Viability
Optimal Risk Allocation
Competitive Processes
Transparency in Transactions
Independent Regulation
Benefits of PPP model
• Formal risk sharing in PPP-risk doesn’t sit only on
Government books. In public tender risk
management with Government
• Job creation in the private sector-better skill
formation and outcome orientation
• Projects conceived well & realized well
– Approach to project specifications by service and not only by
material characteristics or public entity investment capacity
– Better service to the end user thanks to
• Project life maintenance
• Cost control
• ‘wrong economies’ avoidance during construction & maintenance
– Greater transparency & public information performance
indicators
– Management change enabler within public authorities
Role of Governments – what not to
do
• Acting like an owner, not a partner
• Inappropriate requirements (e.g. insurance of
returns)
• Failure to manage information requirements
• Cumbersome approvals processes
• Under-resourced implementation organization
Three Fundamental Requirements
• Value for Money must be demonstrated for any
expenditure by the public sector
• Private sector must genuinely assume risk
• The deal must offer enduring value to both sides
Reduce Process Uncertainty
• Anticipate questions of partnership and have
ready answers
• Rigorous project proposal preparation
• Demonstrate how PPP would:
– Add value
– Give value for money
• Provide a stable partnership face
• Changes in parameters of the project to be kept
to the minimum
• Acknowledge that a P3 model will evolve over time
Reduce Bidder Uncertainty
• Develop clear, unambiguous requirements
• Resolve strategy debates before going public
• Use a transparent, understandable selection
process:
– Provide the same information to all proponents
– Provide bidders with access to relevant staff
– Disclose evaluation/ selection criteria
• Allow proponents freedom for innovation
• Anticipate bidders’ need, not just public
requirements
Protecting the Public Interest
in the RFP
• Regulatory regime:
– Initial rate structure
– Future increases
• Develop standards
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Timing requirements
Service level standards
Operational standards
Safety standards
• Have policy debates in private
Risk Transfer Strategy
• Risk should be allocated to the party best able to
manage the risk
• Aim to achieve optimum risk transfer; Do not
transfer risk for its own sake
• Risk transfers cost money
• Transfer risks that the private sector can control
and is prepared to assume
Types of Projects
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Roads and bridges
Airports and seaports
Commuter rail, urban transit and parking
Water and wastewater, electricity and gas
Courts, prisons, hospitals, schools, sports centers
Public sector real estate
Social housing
Agribusiness infrastructure
Tourism infrastructure
Project Implementation
Strategies
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Design-build
Design-build-operate
Design-build-finance-operate
Design-build-finance-leaseback
Sale-leaseback
Operations and maintenance
Sell-outsource
Commercialization
Devolution or privatization
Job Creation
• Job creation in development and long term
maintenance of infrastructure as well as growth
of industry and services on account of good
infrastructure
• Skill formation: HRD key to job creation-right
kind of skills
• Development and maintenance of infrastructure
requires higher level skills-technology driven
• Whereas private sector to invest in projects,
governments must invest in creation of right skill
sets in youth
Thank You