infrastructure consulting and finance- session 1

8/10/2019 Infrastructure Consulting and Finance- Session 1

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Infrastructure Management

Session 1

Introduction to infrastructureNMIMS



Objective of this course

Facilitate appreciation for infrastructureindustry as descipline and as a careeroption

Instill necessary skills for continuingfurther research and studies in this space

Create an atmosphere of awareness andknowledge for this industry in this institute



Methodology of the course

Discussions and debate on concepts

Sharing of facts and appreciation ofnumbers

Case studies – group activities



Agenda

Introduction to infrastructure

Introduction to the course Key roles and responsibilities

How is infrastructure different from otherverticals

Importance of infrastructure

Key concepts – infrastructure Infrastructure stakeholders – roles and

responsibilities



Introduction to infrastructure



How is a common person related to

infra?

• Electricity

• Water & Sewerage

• Solid waste

• Cold Storage

• Warehouses

• Urban transport

• Oil & Gas

• Social

• Road

• Rail• Airport

• Port

C o m p o n e n

t s o

f d a

i l y l

i f e

In addition to telecom..



Infrastructure is not a end objective

– it’s a enabler Infrastructure is key to:

Production of goods

& services

Trade & investment

Regional integration



Introduction to course



Gamut of infrastructure

Hard

Soft

Social

Healthcare facilities

Education Institutions

Housing

Public utilities (Bus stations,Parking etc.)

Corrections and Justice (Prisonsetc.)

Road

Port

Airport

Railways

Water & Sewerage

Solid WasteManagement

Power

Oil & gas

Mining

Telecom

Institutional setups for delivery of

specialized services to people



So what will this course cover?

Transport

Energy

Urban

• Introduction to sector

• Role of sector in the overall economy

• Status of infrastructure in India

o Demand and supply

o Global benchmarks Sector specific case

discussion

• Future of sector

• Key steps of developing infrastructure (Case study

based approach)

• Future challenges and constraints

• Role of future manager in the sector

• Class presentation by group

Session 2 to 5 – Ports and aviation , Road and rail, Energy, Urban Infra

Session 6: Infrastructure finance

Session 7: Designing the future

Session 8: Learning from examples



Group activity

12 groups of 4 participants: Energy group

Urban Infra group

Surface transport group General transport group

Each group will be given one project todebate and brainstorm

Template and topics to be presented willbe shared in this week



How is infrastructure different



Basic features of infrastructure

development

What are the main characteristics ofinfrastructure development?

Capital intensive investment

Extend over many years

Economy of scale

Network effects Linkage effects

Various stakeholders with different interests

Advanced technical expertise



Basic features of large-scale infrastructure

development

What are the issues related with large-scale infrastructure development?

Investment selection and resource allocation

Implementation

Operation and maintenance

Recurrent financing Social and environmental considerations

External finance and technical assistance



Basic features of large-scale infrastructure

development

What is the government’s role in large-scale infrastructure development?

Planning and budget allocation

Coordination

Resource mobilization

Monitoring and evaluation Institution and capacity building

Aid/donor management



Importance of infra – case study 1

China vs India in port sector – some factsand figures

Importance of integrated planning

Role of transport infrastructure Cost to trade




Rail share in India versus the US for cargo

Cost of rail transport in India versus theUS

Linkage impact of lack of infrastructure Resultant impact on business




Industrial park infrastructure in Indiaversus the Middle East

Emergence of ME as global consolidation

hub Impact on business and economy in

general




Quality of road infrastructure in Gujaratversus Punjab

Impact on investments in new businesses

Overall impact on economy andopportunities



Key steps of infrastructure projects



Key steps in a infrastructure project

• Conceptualization

• Planning

• Financial feasibility and structuring

• Bidding and award

• Project implementation

• Project execution and monitoring

• Project Termination



Key concepts



Key Development Concepts

D e s i g n .

B u i l d

D e s i g n .

B u i l d ,

M a i n t a i n

D e s i g n .

B u i l d ,

O p e r a t e

D e s i g n .

B u i l d ,

O p e r a t e ,

M a i n t a i n

B u i l d ,

O w n ,

O p e r a t e ,

T r a n s f e r

B u i l d ,

O w n ,

O p e r a t e

S e r v i c e C o n t r a c t

M g m t . C o n t r a c t

L e a

s e

C o n c e s s i o n

D i v e s t i t u r e

Public Private

This leads to PPP…

New Projects

Existing projects



So what emerges is PPP

O w n e r s h i p

100% private

100% Public

Duration in years

Lease

Service contract

Mgmt. Contract

Build-Own-Operate-Transfer

Build-Own-

Operate

Divesture

R o l e o f G o v e r n m

e n t

P r o v

i d e r

E n a

b l e r

0 n



What is a PPP

Collaboration or partnership between

Government and Private Players which is built on

the expertise of each partner and it meets clearly

defined public needs through the appropriate

allocation of:

Resources

Risks

Responsibilities, and

Rewards



Looking deeper – PPP maturity varies

across sectors

P l a n n e d D e v e l o p m e n t

PPP MaturityLow High

Low

High Port

Airport

Railways

Road

Water,

Sewerage,

SWM

Urban

Transport



Why PPP?

Limitations of government resources and widening

infra gap

Expedite projects

Time-bound implementation

Appropriate risk sharing

Cost saving through efficiency and technology

Strong service orientation Enabling public sector to focus on outcome and core

business

Ch i i f i l PPP



Characteristics of typical PPP

modelsCriteria PPP (BOT/ BOOT etc.) PPP (Annuity) JV/ SPV Management Contract Type PPP PPP PPP PPP

Revenue Source

Revenue rights

awarded to private

concessionaire over the

concession period

Regular periodic

payments received from

Government

Authority/Awarding

agency over operation

period

Revenue rights

awarded to SPV over

the concession period

Fixed and performance

linked periodic

payments received from

Government

Authority/Awarding

agency over operation

period

Bid Parameter

Concession period,

Revenue Share or

Grant (Capital Subsidy)

Periodic Payment by

Government

Concession period,

Revenue Share or

Grant (Capital Subsidy)

Periodic Payment by

Government

Typical Duration18 – 30 years

(Concession Period)

15 – 18 years

(Concession Period)

18 – 30 years

(Concession Period)

5 – 10 years (Contract

Period)

Traffic Risk

Entirely borne byConcessionaire,

In case of revenue

share, risk partly shared

by Government

No Traffic Risk

Entirely borne by SPV,

In case of revenue

share, risk partly shared

by Government

No Traffic Risk

Risk Return High Risk – High ReturnLow Risk – Fixed

returns with no upside

High Risk (Though

relatively lower than

PPP (BOT/ BOOT) –

High Return

Low revenue risk – Only

performance risk

H i i diff f di i l



How is it different from traditional

models?

Different in terms of project development,implementation, and management.

The administrative and approval processes in the caseof PPP projects are also different.

A PPP project is viable essentially when a robust businessmodel can be developed.

The focus of a PPP project is not on delivering aparticular class/type of assets but on deliveringspecified services at defined quantity and levels.

The risk allocation between the partners is at the heart ofany PPP contract design and is more complex than that of aconventional construction project.

A PPP contract generally has a much longer tenure than aconstruction contract.



Relevance of PPP for India

Deficit in infrastructure services

Deficient infrastructure being a binding constraint

Need or economic growth and competitiveness

Poor infra impedes inclusive growth and povertyreduction

Largely manufacturing and agriculture sector

Growing emphasis on infra spending

Constraint on government resources

Emphasis on private sector participation in infra



Principles of PPP in Indian Context

Implementation for provision of public assets and/or relatedservices

Ensure that the projects are planned, prioritized and managed tobenefit the users and maximize financial and economicreturns

Protect the interests of end users, project affected persons,private and public sector entities and other stakeholders

Encourage efficient delivery of public services by engagingproficient and innovative practices with the utilization of bestavailable skills, knowledge & resources in the private sector.

Adopting a transparent and pre-defined process for bid andaward of projects

Support and monitor the project through establishment of asuitable institutional setup



And the results..

Investment largely limited to PPP in physical infrastructure

sector (roads, ports, power, airports, metro, urban sector)

Few PPPs in social sector (education, health, water supply).

Mixed success stories

Increased thrust on policy and regulatory reforms,

addressing operational issues, monitoring capacity etc.

Uncertain climate



All PPPs don’t succeed

Poor setup

Policy and regulatory environment

Restrictions and conditions and expectations of risk transfer

Unrealistic expectations of PPPs — thinking it provides ―free money‖ or that

its the solution to all problems Evolving project objectives

Sponsors sometimes lack consensus about the purpose of and expected

outcomes for the project

Attempt to compensate for this failure by overspecifying parameters

• PPP is for revenue generation

Lack of internal capacity

Lack of skills to manage complex PPPs



All PPPs don’t succeed

Failure to realize value for money

The borrowing and tendering costs associated

vis-à-vis efficiency gains

Lack of understanding of how to test value for

money

• Poorly structured project

• Over-aggression of bidders



Characteristics of good PPP project

Thorough and realistic cost/ benefits assessment

Well assessed Technical, Financial and Economic Feasibility

Strong private developer

Appropriate risk allocation and sharing

Policy and regulatory certainty

Robust financial market

Well organised public agency

Transparent and competitive procurement process



The Typical Process

I d e n t i f i c a t i o n

I n i t i a l S c r e e n i n g

A p p r o v a l o f I S R

T E F R

D

e v e l o p m e n t o f P P P

s t r u c t u r e

C o n c e s s i o n

A g r e e m e n t

Public Private

P r o j e c t M o n i t o r i n g

F i n a n c i a l S u p p o r t

L o n g t e r m d e b t

• In-house

• External consultants

• Approvals as per nature of

project

• Transaction Advisors

• Independent Engineers

• External consultants

Project led by concerned authority with approval from various agencies

V i a b i l i t y G a

p

F u n

d i n

g

I I F C

L



Enabling Institutional Setup

Designation agencies for development of projects in each sector

Standardised approval processes

Creation of funding institutions

Closer monitoring by the relevant Ministry

Stakeholder consultation for policy and regulatory intervention

Model Documents

RfQ

RfP

Concession Agreement




The Government has supported the creation of nodal agenciessuch as the PPP Cells at a State or sector level to undertake

Identify, conceptualize and create a shelf of projects and recommendapproval of suitable projects for implementation on PPP basis

Assist in project development through consultants

Ensure rigorous adherence to managing effective and transparenttendering processes

Create coordinated, efficient, machinery for PPPs whereby viabletransactions are tendered to the market

Develop internal evaluation guidelines in consultation with therespective departments to evaluate and assess the projects

Act as the nodal agency for capacity building for PPP, through trainingand technical assistance, to increase the deal flow of eligible projects

Ensure dissemination to consumers, investors and other governmententities on the benefits and procedures for PPP in a given sector.

Inspect, visit, review and monitor PPP projects under implementation.




Cabinet Committee on Economic Affairs of the Government hascreated the PPP Appraisal Committee (PPPAC),

Every PPP project at the central government level, even where nocapital subsidy is required, is expected to obtain clearance fromthe PPPAC.

The intent of the clearance process is to ensure that the projectsthat are bid out are commercially robust, the provisions in thecontract document safe guard user and public interests and thecontingent liabilities of the Government are capped.

The PPPAC encourages the utilisation of standardized contractualdocuments, which lay down the standard terms relating toallocation of risks, contingent liabilities and guarantees as well asservice quality and performance standards, and standardisedbidding documents such as Model Request for Qualifications andModel Request for Proposals that have been notified.



Thank you and next steps