1 Developing a PPP - Project Appraisal and Feasibility Studies Water PPPs : Training & Workshop...

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Developing a PPP - Project Appraisal and Developing a PPP - Project Appraisal and Feasibility StudiesFeasibility Studies

Water PPPs : Training & Workshop Water PPPs : Training & Workshop Water PPPs : Training & Workshop Water PPPs : Training & Workshop

Infrastructure Development Corporation (Karnataka) LimitedInfrastructure Development Corporation (Karnataka) Limited

February 2009February 2009

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Reasons for Limited PPPs

Lack of adequate project development Projects not bankable Operator led projects, than Government led projects Procurement Issues – MoU vs Competitive bidding Lack of credible information Lack of political will

Resistance to “Privatisation” –experience in most cities

Who bears revenue risk? (“tariff setting”)

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Infrastructure projects typically have a number associated issues which need to be resolved to ensure successful implementation and operationalisation Project viability

Technical Financial

Legal issues (eg. Statutory guidelines)

Environmental and Social implications (eg. clearance from the MoEF, estimation of land acqusition required)

Government interface (eg. whether the project has been approved by the government taking into account the above issues)

… Need for proper project definition to resolve all issues pertaining to the project

Need for Project Development

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Historical practice of selection of developer through MoU route is no longer the preferred alternative Selected developer funds requisite studies which would form

the basis for future negotiations and signing of agreement Also the bone of contention leading to failure in taking off of

projects

Current practice of selection of developer through a transparent bidding process

However, investment in project definition/resolution of all issues pertaining to the project by all interested bidders both infeasible and sub-optimal - leads to lack of participation

… Need for Government to invest in requisite technical, market, financial viability studies to reduce project risks and attract bidders

to the project

Need for Project Development

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The Need

Finalise desirable technical configuration

Identify and resolve Environment and Social issues

Estimate inputs for project viability assessment

Assess project viability and finalise project structure

Compile data pre-requisites necessary for bidding

Preparation of bidding documents

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Development ProcessDevelopment Process

Project Identification

Technical Feasibility

FinancialViability

ProjectStructuring

Options

Resolution ofImplementation

Issues

Contractual &Bid

documentationBid Process

Feedback &Monitoring

A. Project Conceptualisation

B. Bid Process Management

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The Objective of Project Development To reduce “unknowns” and “assumptions” Identify and allocate risk, responsibility Create a complete documentation archive Set in place a set of contract documents Detail payments/ rewards/ penalties

Project development does NOT mean creating a Feasibility Report and bidding for a developer Any issue that can derail a project should be addressed,

including land, R&R…

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Development Cycle Step 1 - Sector Study

Demand/Supply - Current & Projected - returns from the asset, maintenance

Tariffs/ Pricing - Current and Projected Regulation - Entry criteria, Competition, Price/ Tariff Control Implementation Structure - Government, Private Sector, joint

venture.. Policy framework Enabling Legal and Contractual Framework Should result in a well-defined strategy

Step 2 - Project Identification Better utilise Existing Assets or Create New Assets or a

Combination Where to start - bulk or retail or both - the dilemma in water,

sewage Technology: Broad Indication

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The Need Defined

Client’s ExplanationClient’s Explanation

SpecificationsSpecifications SupportSupport What Public wantedWhat Public wantedContractorContractorProject Project DocumentationDocumentation

Program writerProgram writerDesigner’s Designer’s Project Leader’s Project Leader’s understandingunderstanding

Business Consultant’s Business Consultant’s PlanPlan

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The Need

What is desirable technical configuration

A good technical configuration, during the bidding phase, should provide sufficient room for innovativeness for bidders while sufficiently covering the essentials

Water : Minimum investment amount, specific facilities, design and construction approval Applicable guidelines and major equipment specifications

Output based Specifications are the key to PPP projects – Can the government become purchaser of services rather than service provider ?

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The Need

Identify and resolve Environment and Social issues Extent of land acquisition and cost thereof

Private land/government land Agricultural land/barren land Forest land Built-up structures

Extent of utility relocation and cost thereof Environment Impact Assessment and Mitigation Measures Develop R&R plan

However, at times private sector has been able to manage the issues more effectively with facilitator role played by the government

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The Need

Estimation of inputs for project viability assessment

Demand Estimation - volume, composition and growth

Construction Cost and Project Cost

Operations and maintenance cost Input into financial viability – impacts structuring decision

Reflected in the Concession Agreement – impacts Termination Payments

Often operations and maintenance costs are ignored, which in many projects of the government could be more than the capital investment

Solid waste management

Small airports

Operations and maintenance costs are under-estimated by departments

Roads

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The Need

Assess project viability and finalise project structure Aim is to minimize Grant/Annuity Payments –variables being

Concession Period Packaging of additional O&M stretch

However, critical to get key input parameters right

Compile data pre-requisites necessary for bidding

Obviate need for multiple investigations by bidders

Preparation of bidding documents Finalise pre-qualification criteria and hurdle numbers

Incorporate project specific issues, if any. For example -

Bypass road : banning entry into town

Construction phasing

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Why Risk Assessment?

Huge upfront capital costs and low margins

Returns typically back ended - long term in nature

No tangible security

No. of participants

Long term finance

Long gestation periods

Non completion operations affect many

Limited or no recourse

Low Appetite for long term finances in domestic market

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Risky List!

Construction/ Completion Operation Risk Environmental Regulatory Forex Interest Demand Credit Political/ Social

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Principles of Risk Allocation

Allocate project-specific risks to parties best able to bear them

Control performance risks through incentive contracts

Use market-hedging instruments (derivatives) for covering market-wide risks (interest and exchange rate fluctuations)

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Project Issues - Financial

What is the price level for making the project viable? Would the users be willing to pay this user charge?

Are there any additional sources of income for the project? (e.g.. land development etc.)

In case the project is not financially viable at an acceptable user charge, how much of government grant is required?

Should the government grant be one-time or spread across years?

What should be the time frame for which the project is handed over to the private developer?

Typically, with pricing / cost comparatively quantifiable entities, often the softer issues get sidelined, in most PPP projects.

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Financial Accuracy

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Risk Mitigation

PRAYER !!!!

Proper Allocation Of Risks

Insurances

Hedging/ Options/ Swaps

Third Party Guarantees

PRAYER !!!!

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Supply

Hydrology/ rainfall patterns/ quality/ water access

contracts

Distribution monopoly vs trucked; user fees; desire to

avoid retail revenues

Operating

New technologies in wastewater/ energy/ metering

Infrastructure

Old/ theft (leakage)

Environmental

Benign

Risk Factors

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Political Privatization trends/ pricing controls/ rationing

Force majuere Maintenance/ buffers

Foreign Exchange Local currency revenues and costs

Funding Long term

Engineering Standard

Completion Ongoing large capex throughout

Legal Concession life/ defaults

Risk Factors

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Thank You