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Issues on Urban Finance Issues on Urban Finance & Governance - PPPs& Governance - PPPs

Infrastructure Development Corporation (Karnataka) Limited

March 2013

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Urban Growth• 5 times – the number by which GDP will have multiplied by 2030

• 590 million people in cities - ~ twice the population of USA

• $ 2.2 trillion capital investment needed – $ 1.2 trillion in capital investment

– 26% of capital investment from debt and PPP

• 700 - 900 million sqft of commercial residential space needs to be built ~ a Chicago every year

• 20 times than the past decade of the capacity of roads, metros and subways need to be createdSource : India’s Urban Awakening, McKinsey Global Institute

• Estimated investment for urban infrastructure over the next 20 years – Rs 39.2 Lakh Crore at 2009-10 prices (HPEC Report)

Five Elements – Funding, Governance, Planning, Sector Policies and Shape

• Funding – where will resources come from?

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PPP trends in waterSigns of success

A few projects grounded

Around 2000

Mid decade

Now

Way Ahead?

Mid to Late 90s

Momentum subsided

Onset of pessimism

Efforts to prepare PPP projectsHigh NGO oppositionHigh profile projects in Delhi, Mumbai, FailedSuccessful projects also emerge

Many ongoing initiatives

Waiting for commercial results

PPP interest in pilots – scale up not demonstrated

First initiatives

High international interest

Poor results

Pune, Hyd, Goa, Bangalore Bulk water – 100-300 Cr Failed

Sonia Vihar, Delhi, Sangli – Bulk water

Bangalore – Rehab, O&M

500 Cr

Failed

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Water• Tiruppur Water Supply – the first

attempt?– About 20% urban, and 80% industrial

• by the time the project was made, circumstances were unmade…

• Visakhapatnam Water Supply – the pretender– Similar structure 20% urban and 80%

industrial• But somewhere when the BOT was being

awarded, a question of conscience came up. Are contracts not better for all concerned?

• Pilots – KUWASIP, Nagpur etc.– Management contracts – near risk free

• Tiger tasting the blood; is upscaling on similar model practical?

• Full city models – Tariffs and adherence to

agreements

• Too many models, limited bidders• Lesser financial bids ; more questions (pre bid queries)•Growing interest in participation

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SWM Activities covered in PPP

Types of PPP

Average Tenure of the Project

Integrated Municipal Solid Waste Management

BOOT , DBOOT, BOT

20- 30 years (Some of the project tenures linked to the asset life)

Collection, Transportation & Disposal

BOOT 3 years

Transportation, Processing and Disposal

BOOT 20 years

Treatment & Disposal DBOOT, BOT 20 / 25 yearsTreatment BOO 20 -35 yearsDisposal DBOOT,

BOOT3- 20 years

MSWM PPPs in JnNURM

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Solid Waste • Lucknow Biomethanation

– Was the technology inappropriate, or did the ULB literally expect ‘grit-to-gas’?

• Thiruvananthapuram Composting– How much waste does the city generate

• “Misfortunes one can endure--they come from outside, they are accidents. But to suffer for one's own faults--ah!--there is the sting of life.” Oscar Wilde

• Bangalore – the first sanitary land-fill in the country– Land?

• “In any collection of data, the figure most obviously correct, beyond all need of checking, is the mistake.” Finagle's Third Law

• A number of tipping fee based contracts have been awarded

• Some developers continue to rest hopes on WTE – “In all things it is better to hope than to despair”:

Goethe

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Urban Transport• One of the earliest LRT system awarded was in Bangalore,

but later cancelled• A few large projects bid/ awarded

– With capex• Mumbai, Hyderabad (!), Haryana

– Without capex• Delhi Airport Link

– Bangalore airport rail link, Hyderabad (encore)

• Buses:– Indore, a successful model

• Interestingly, why is this model not widely replicated?

– Ahmedabad BRT– A number of BRT systems (Delhi, Bangalore, Mysore)

studied and structured on PPP, but being executed by the Authority

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Land Related

• A large number of projects being attempted on this formula– Project = land available with Authority +

Some public use + commercial development

• Bus terminals. Convention centers. Malls (oops – parking complexes). IMAX (uh – tourism projects).

• What is the Government’s “acceptable” price for land, especially when they still “own” it?

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Are we on right track?

• Feasibility studies provide only a partial picture – projects not financially free standing!!– Water: Tariffs set to recover only O&M costs, and after factoring

efficiencies, there is a deficit in finances. – SWM: Hardly any user charges or markets for sale of products/

recyclables– Dependence on government finances in some form (capital grants/

annuities/ tipping fees etc.)– Land and other support infrastructure requirements could be quantified– Other project parameters are matters of detail

• Assuming we get the above elements right, will the project (s) go ahead?

• Given the financial situation (and lack of political will in improving it), how can a credible investment environment be built, where many projects require financial support?

• Lots of “concerns” remain unanswered!!

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Big Push Theory

• Nation wide impact/ externalities – central scheme – JnNURM - large corpus, based on reform agenda

• For the first time, cities were forced to think of an aggregate vision and investment plan

– But these were very large numbers (Bangalore is at Rs. 60,000 Crores) and the fund flow is the proverbial drop in the ocean.

• However, the structure seems to have a disincentive for improvising efficiencies , though the objective was to encourage it.

– Most projects focused on asset creation. E.g., in Bangalore, a series of projects that was being structured through PPP became EPC contracts after JnNURM.

• To see how the newer version will fare?– “Iteration, like friction, is likely to generate heat instead of

progress.” George Eliot

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Access to domestic institutions

• Tax Buoyancy• Project specific/ general purpose loans from banks/ FIs/

MLAs, securing municipal revenues– Loan conditionality; State Government guarantees

• Bond issues of Ahmedabad, Hyderabad, BMP, Nashik, KUIDFC etc., have not led to large-scale replication– Issues of market appetite, end-use– Limited number of ULBs which can access financing on

a standalone basis– Small ‘pilots’ Rs. 40-100 Crores. Enormous amount of

effort and arm twisting to close.– Pooled Finance ‘seems’ a more appropriate structure for

small ULBs• No perceptible efforts to leverage

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Concerns need to be addressed

Civic Society

Government

Developers

PPPs in urban sector need to be hybrid models less focus on ‘typology’……more focus on tailored

solutions + results

• Continuity of services

• Profit motives of private sector

• Hand back of assets

• Availability of funds for payments to private operator on a continuous basis

• Fear of ‘privatization’

• Increase in tariffs

• Service Delivery

• Lack of baseline data

• Tariff risks• Payment

guarantees• Impractical

performance standards

• Political Will

Approach for Urban PPPs

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Looking ahead, hopefully…

• Cities have coped reasonably well in the past– Though under immense stress now– No reason why the problem cannot be addressed in

the future

• Political/ Social realization of imperative need for improvement of urban services

• Policies slowly being set in place• Local capacities improving• PPP experience building up – emerging models

validating proof of concept– Various precedents are being tried and tested, and

experience is maturing

• But yet a long way to go

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Thank You