INFRASTRUCTURE

Group - 5

SOURCE- PRINCIPLES & PRACTICE OF MANAGEMENT BY P. K. AGARWAL (A PRAGATI EDITION)

INDIA GROWTH STORY

Indias economic growth is attracting wide attention
India & China are enjoying high economic growth In 2006-07 Indias growth was 9.4% Economic prosperity is placing huge demands on

infrastructure India is the third largest economy behind USA and China

Infrastructure Requirements
World Economic Forum has noted that Indias annual

investments in infrastructure between 1998 and 2005 averaged 4% of GDP compared to 8.2% for China Government of India is addressing the infrastructure requirements 11th Five Year Plan (2007-2012) calls for more than doubling the financial outlay for infrastructure

Investment requirements
Total financing requirements
$492 billion in the next five years Of this, $147 billion to come from private investment

Share of private investment in total to rise from 17% to

30% by 2012.
Investment to touch $1.48 trillion by 2017

Interest of international investors

Strong interest evinced by international investors in

Indias infrastructure
This includes Private Equity 3i, Blackstone etc International banks Citigroup, Macquarie Bank (Australia), Mizuho (Japan), Deutche Bank Multilateral institutions including ADB, World Bank, IFC,

JBIC, KfW

Challenges before India

India growth story likely to continue
Strong economic growth will fuel further demand on

infrastructure India should absorb the large investments in infrastructure sector to sustain growth momentum Indian rupee has appreciated against the dollar by 5% over the past year and 20% in the past five years

Development of PPP market in India

PPPs in India are at a nascent stage Slew of measures by government 100% foreign investment allowed in infra sectors Model Concession Agreements evolved Viability Gap Funding (VGF) Setting up of IIFCL Regulatory institutions (Telecom Regulatory Authority, Port Tariff Authority) PPPs in India are accelerating 118 projects valued at $13.4 billion are progressing in roads, ports, airport sectors

Transport Sector the potential in India

Aviation infrastructure 100% foreign direct investment allowed $ 9 billion programme to upgrade 25 airports Delhi and Mumbai International airports two PPP projects with estimated investment of $3.8 billion 19 greenfield airport locations identified Airport Economic Regulatory Authority being set up

Air transportation - growth

Passenger traffic is projected to cross 100 million

passengers p.a. by 2010 Cargo traffic to grow at over 20% p.a. over the next five years - To cross 3.3 million tonnes by 2010 Maintenance, Repair and Overhaul (MRO) growing in a big way
MRO market expected to grow by 10%

Roads and Highways

India has the second longest road network in the

world of 3.3 million KMs Expressways and highways constitute only 2% of the above US $54 billion earmarked for the sector Cargo traffic expected to grow by 15-18% over the next 5 years

Roads - Potential
100% foreign direct investment allowed Incentives:

- 100% income tax exemption for a period of 10 years - Grants/viability gap funding for marginal projects available - Model Concession Agreement formulated Opportunities in construction equipment (earth moving, material handling equipment etc), tolling equipment services and advisory (architecture, structural design, soil investigation etc)

Railways
India has one of the largest railway networks in the

world (63,000 route KMs network) Accounts for 30% of total freight traffic Traffic volumes set to double by 2012 Potential for rolling stock, locomotives, passenger coaches, track equipment, signalling equipment

Ports
India has coastline of 7500 KMs
12 major ports; 187 minor ports Traffic has grown by a compounded average of

8.5%
Traffic expected to reach 880 million tonnes by 2011-12

95% of Indias exports & imports moved by sea India expects to double its exports to $150 billion

in the next five years

Ports
100% FDI under the automatic route is permitted

for port development projects 100% income tax exemption is available for a period of 10 years Tariff Authority for Major Ports (TAMP) regulates the ceiling for tariffs charged by Major ports
Investment needed in the next 5 years $18 billion

Ports - Opportunity
Opportunities exist in
Development of greenfield ports Development of container and bulk terminals Logistics infrastructure Dredging services

Port related equipment

Ship building, ship repair, maritime training

Role of IIFCL
IIFCL is a SPV to provide long term finance to

infrastructure projects
Overriding priority to PPP projects Finance projects in sectors like roads, airports, ports,

power, urban infrastructure etc

Since inception in April 2006
Financed 77 projects to the tune of $4.3 billion with a

total project cost of $31 billion

Conclusion
Investment requirements of infrastructure sector

huge India growth story to continue

50% of the population is below 25 years Huge domestic demand

Need to bridge infrastructure gaps to sustain

economic growth Opportunities for international investors significant India can leverage on its vast human capital to successfully adopt the PPP model

Indias Infrastructure Challenges

Experimenting with the Public Private Partnership Route

Scope of this interaction

Introduce the concept, need and basic terms to

increase familiarity with the subject Take the case of a road project to discuss the issues relating to PPP Consider the issue from different stand points government, private sector, financiers, project affected parties and citizens Share PPP experiences from your countries Clarify any doubts if they arise after this session or on the email later on

Traditional Model -Budgetary Support

Public good - Public Function

Highly capital intensive

Long gestation period Uncertain returns Plan expenditure Why change the mode ?

PPP Model
More funds will be available for construction

and maintenance Greater efficiency through competition Scope for Innovation International best practices and knowledge transfer Government can focus on merit goods where there are no private takers

Fundamental concepts
What is a PPP? Is it the same as subsidy? What are the types of PPP? (Management contract/Lease) (BOT/BOO/BOOT/BOLT) (DBFO)

What is the role of Government experts in PPP?

Determining which projects can be taken up through

PPP- are they bankable? Facilitation at the design stage- project preparation detailed feasibility report Facilitation in the pre-construction stage Providing avenues for long term finance Understanding contingent liabilities Ensuring quick and effective dispute resolution mechanism Ensuring transparency and fair play through adequate regulation and disclosure Building effective and sustainable partnerships

Optimum Apportioning of Risk

Project risks
Technology/Design risk Construction risk Operating risk Market risk Foreign exchange risk Macro-economic risks Political or Regulatory Risk Environmental risk Force Majeure risk

Building Capacity in Public /Private Sector Guardians of Public Money

Viability Gap Funding

PPP Cells - PPP Appraisal Committee

Transaction Advisors Training/Information kits

Standard Bidding Procedures

Model Concession Agreement

Changing Public Opinion

Change the command mindset Demonstrate excellent and trouble free delivery Educate people on getting value for money in

public expenditure Re-train Public sector employees

External Control- Regulatory Bodies

Why is independent regulation necessary?

Venture Capital for pre-operative expenses

India Infrastructure Project Development Fund Huge upfront transaction cost + high risk corpus Rs.1000 million, up to 75% project dev cost

interest free loan to be recovered from successful bidders State Govts and local bodies eligible If no interest by bidders converted to grant

Facilitating Finance
India Infrastructure Finance Company Ltd.

-raises resources under Govt. - up to 20% of project cost lends to viable projects -Long term tenor (10 + years)

guarantees and then on-

India Infrastructure Financing Initiative (IIFI)

Equity and debt funding for viable state sector

projects
Partners 5 billion corpus IIFCL

Citigroup
IDFC Blackstone Group Holdings

PPP in the Road Sector

EPC vs item-rate contract BOT (Annuity)/BOT (Toll) O&M contracts Toll Policy Major concerns Poor quality of contractors Land acquisition and R&R Capacity of NHAI and State PWDs Environment/Forest Traffic vs connectivity Apathy to paying toll

Internal Controls
Define all terms

Conditions precedent (Escrow account,

Applicable permits,performance security, Financing Agreements) Detailed account of obligations of concessionnaire Obligations of Authority Representations and Warranties Mandatory Disclosure

Internal Controls
International Competitive Bidding

Bid security/performance security

Outcome specification Completion Certificate If there is a change of scope? O&M obligations Safety requirements Independent Engineer Dispute Resolution Mechanism

Accounts and Audits

Concessionnaire to appoint a Statutory Auditor

from a list of mutually agreed panel Articles and schedules provided in the MCA

The

Interpretations Committee (IFRIC) of the International Accounting Standards Board is developing financial accounting standards for PPPs. The complexity of PPPs and the dependence of national accountants on government financial accounting data makes it highly desirable to have a common treatment of PPPs in the SNA and in the accounting standards. How should PPPs be accounted for?

THANK YOU FOR YOUR ATTENTION