Viability Gap Funding and Project Development

experience for Kolhapur STP Project

Rahul Bedmutha

Associate Director – CRISIL Risk & Infrastructure Solutions

April 2012

1

Presentation Structure

2

11 Project Overview

33 Factors for Successful implementation of the project

22 Mechanism for release of Capital Grant & Annuity

Project Overview

3

Kolhapur is one of the largest cities in Maharashtra

4

Kolhapur lies in the south

western Maharashtra. It is an

important agriculture and

agri-commodities trading

centre.

Project Background

Partial/untreated sewage is being presently disposed into the Panchaganga River.

– Pollution levels in the river have crossed allowable limits – reports of dead fish, epidemic

breakout, etc.

Pollution Control Board has filed a criminal case against Kolhapur Municipal

Corporation (KMC) for not controlling the quality of sewage discharge

KMC decided to setup a 76 MLD Sewage Treatment Plant (STP) using the Sequential

Batch Reactor (SBR) technology to improve its environment compliance.

– Detailed project report (DPR) prepared by KMC.

KMC had applied and obtained a grant from National River Conservation Directorate

(NRCD), MoEF for the STP and ancillary infrastructure

– NRCD has sanctioned Rs 52 crores (70% of the project cost estimated in the DPR for the STP).

5

Why was VGF required?

6

KMC Financial Snapshot (Rs. Crores) KMC’s revenue surplus

averaged Rs. 15 crores

Project Cost was estimated

to be Rs. 75 crores

KMC had a number of

critical projects on ground

e.g. Slum Housing, water

supply, etc.

VGF enabled KMC to implement the project without causing stress to its

financials.

96

109

130

117

122

81

93 93

98

111

2004-05 2005-06 2006-07 2007-08 2008-09

Revenue Income Revenue Expenses

Source: KMC and Cris Analysis

100%

70%

30%

Project Cost NRCD Grant ???

Project Funding – KMC was able to minimize its upfront

outflow

7

KMC decided to use Public Private Partnerships to fund the balance 30% of KMC decided to use Public Private Partnerships to fund the balance 30% of

the Project Cost.

Key features of the PPP Project

KMC

– Provide land to the successful bidder for developing STP and ancillary infrastructure

– Provide sewage through the concession period

– Pay capital grant provided by NRCD

– Pay annuity for operating and maintaining the STP [as there was no demand for treated

sewage]

Developer

– Design, Finance (up to 30% of Capital Cost), Construct, Operate and Maintain STP

– Treat and discharge the sewage in the Panchganga river

– Meet performance standard over the Concession Period.

8

Mechanism for release of capital grant &

annuity

9

10

AnnuityCapital

Grant

Performance

standards

for operating

STP

The above three clauses were designed to align Developer and KMC The above three clauses were designed to align Developer and KMC

interests.

11

AnnuityCapital

Grant

Performance

standards

for operating

STP

Capital Grant released on completion of pre-defined

milestones

Concession Agreement specified the milestones and grant amount to be

released on fulfilling them.

Grants to be released within 60 days of the PMC certifying completion of

milestone.

In case of delay in payment, Concessionaire can raise Bridge

Finance, Interest Cost of such funds will be paid by KMC.

12

Resulted in transparency and standardization in the manner the grant will be Resulted in transparency and standardization in the manner the grant will be

released

Level playing field created among bidders

Prevented the Concessionaire from front loading expenses to obtain release of

the Grant.

13

AnnuityCapital

Grant

Performance

standards

for operating

STP

Annuity charge has two components

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Annuity

Availability

Charge

Variable

Charge

Escalable

Charge

Escalable

Availability

Charge

Non-escalable

Charge

Non-escalable

Availability

Charge

Details of the Availability and Variable Charges

Two part tariff structure was developed to protect KMC and the Concessionaire from

fluctuations in the quantum of sewage generated in Kolhapur.

– KMC only has to make payments for the sewage treated by the developer

– Concessionaire is protected from fluctuations in sewage volume; availability charge payments ensure

recovery of capital costs irrespective of the volume of sewage treated.

Availability Charge

– The Non-escalable component is compensation for capital cost incurred by Concessionaire for

constructing the STP.

– Escalable Availability Charge is compensation for the fixed operating costs. It will escalate at 6%

(Long term WPI) per annum during the term of the project.

Variable Charge

– Variable Charge compensates the cost incurred on Power and Chemical Consumable, which

fluctuate with the volume of sewage treated.

– Variable Charge is indexed to rate of increase in power and chemicals.

Two part tariff structure has since been used in the Taloja MSW Project and the 200

MLD Nagpur STP Augmentation Project.

15

16

AnnuityCapital

Grant

Performance

standards

for operating

STP

Performance criteria to be maintained by Concessionaire

17

Description of Performance

StandardRemarks

Treated Sewage Quality

Treated sewage to meet quality norms in

weekly tests conducted by Independent

Laboratory appointed by KMC.

Emergency Stoppages of STPEmergency stoppages should not to exceed a

pre-defined limit every quarter

Breakages in sewage transmission

pipeline

Transmission pipeline breakages should not

exceed a pre-defined limit /quarter

Concessionaire to maximize sewage treatment

Non-conformance with any of the above would lead to reduction in the

annuity thus incentivizing the Concessionaire to maximize sewage treatment

while maintaining treated sewage quality.

Factors which enabled successful project

implementation

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Stakeholder engagement crucial for success

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Successful

project

award

Need for Project

Developer

ConfidencePolitical Buy-in

GoI/ADB Support

Policy thrust

Periodic interactions

Approval for grant for the project

Maintain transparency in

procurement

Impress upon them the benefits

to the community

Appraise them of need for

project

KMC had no sewage

treatment facilities

Criminal case against KMC

Availability of grant from

NRCD for STP

Inputs to project & concession

structure

Incorporate suggestions in

concession agreement

Timely replies to queries

Prepare balanced

concession agreement

Provide base line data

Developer identified within a year of initiating the project

20

16 Bidders applied 16 Bidders applied

for

Pre-qualification

11 Bidders were

pre-qualified

6 Bidders

submitted RFPs

KMC signed Concession Agreement with the Preferred KMC signed Concession Agreement with the Preferred

Bidder

RFQ launched in

September 2009

CA signed in

November 2010

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