BUILDING INFRASTRUCTURE: INDIAN EXPERIENCE Arvind Mayaram India YES Summit, Nairobi 2006

Infrastructure Deficit In India- Problem or Opportunity? Problem- The infrastructure deficit – GDP ↓ 1.5-2% Expenditure on infrastructure inadequate Result: Infrastructure deficit ↑ which impacts GDP- vicious 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 GDP Investment necessary

Investment Needs -Key sectors Sector Investment Crores (US $bill in brackets) To be made by National Highways 2,20,000 (49) 2012 Airports 40,000 (9) 2010 Ports 50,000 (11) 2012 Energy 5,40,000 (120) 2012  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 prices

Emerging Sectoral Opportunities ( to ) ROADS: 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 $ billion) POWER: MW capacity addition in power generation, with 7 mega power projects of 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 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 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)

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 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 –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 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 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