PPP IN INFRASTRUCTURE – A

FINANCIAL PERSPECTIVE

Prof. Sarbesh Mishra

Finance Area, NICMAR
Hyderabad – 500 084.
 About Myself
Name : SARBES H MI SHRA

Qualifications 1. B.Com (Hons)

2. Post-graduate In Commerce
3. M.Phil In Commerce
4. Ph.D. (Commerce)

Experience : Joined University of Delhi, as a

Lecturer in Commerce in 2002 and
continued till 2005 and then joined
Army Institute as Senior Faculty,
prior to current appointment at NICMAR.
 Mantras for success
 The most successful man in the life is the
man who has the best information.
Benjamin Disraeli, 19th. Century PM of England
 Quality is the most important factor in the
business.
Andrew Carnegie, Richest Man (1901 – 1935), USA
 He who controls the past controls future.
George Orwell, Certified Public Accountant
Contd….
 Even if you’re on right track, you’ll get
run over if you just sit there.
Will Rogers, Certified Cost Analyst

 If you don’t know where you’re going, it

doesn’t matter how you get there.
Prof. Sarbesh Mishra, NICMAR, Hyderabad
Background of Development

Notable PPPs of early 19th. Century

 Great Indian Peninsular Company
operating between Bombay (Bombay –
Thane) (1853)
 Bombay Tramway company (1874)
 Power Generation and distribution
companies in Bombay and Calcutta (Early
20th. Century)
Understanding PPP

Public Private Partnership (PPP) Project

means a project based on a contract or
concession agreement, between a
Government or statutory entity on the
one side and a private sector company
on the other side, for delivering any
construction service on payment of
user charges.
Govt. of India
 The PPP Model
 Ideal for the Roads & the Railways sectors
(Capital Intensive)
 Successful after the initial hiccups in Ports,
Water Supply and Power.
 In case of roads the successful BOT models are
annuity model and upfront/ Lumpsum payment
model Design, Build, Finance, Operate (DBFO)
is another variant of BOT model.
 Examples of Private Participation in road
projects on the basis of Negative Grants are
also prevalent
 Scope for PPP is enormous in Railways ranging
from commercial exploitation of rail space and
Categorization Schemes for Private
Participation
1. Build Own and Operate ('BOO')
2. Build Operate and Transfer ('BOT')
3. Build and Transfer ('BT’)
4. Build Lease and Transfer ('BLT')
5. Build Transfer and Operate ('BTO')
6. Contract Add and Operate ('CAO')
7. Develop Operate and Transfer ('DOT')
8. Rehabilitate Operate and Transfer ('ROT')
9. Rehabilitate Own and Operate ('ROO')
10. Lease Renovate Operate and Transfer
('LROT')
PPP strengths and Effectiveness
 Robust and dynamic structure;
 Government in an enabler role;
 Government ownership is high;
 Governance structure ensures
consumer and public interests are
safeguarded;
 Commercial interest protected;
 Domicile risks to parties that are well
equipped to deal with them;
Requirements for Successful Public
Private Partnerships
 Stable Macro-economic Framework
 Efficient and well developed
Financial Sector
 Sound Regulatory Framework
 Sustainable Project Revenues (cost
recovery)
 Clearly laid out arbitration
procedures/dispute resolution
mechanisms
 Well developed Bankruptcy laws
 Co-investment by Government-
Infrastructure - Roads
 Annual allocation for roads is Rs.7,000
crores for development and Rs.3,500
crores for maintenance.
 The funds are meagre compared to the
requirements 3 to 4 times.
 Rs.1000 crores invested in roads would
yield employment for six million persons.
 A paved surface in reasonably good
condition can contribute to 15 to 40%
saving in vehicle operation cost.
 The development of rural roads is a
Present status of Roads
National Highways - 66,590 km
State Highways - 1,40,000 km
Major District Roads - 4,70,000 km
Rural - 26,00,000 km
32,76,590 km Say 3.3
million km.
NHs just 20% of Network carries a total of total
traffic
7,300 km (11 %) - 4 lane
35,300 km (54%) - 2 lane
(35%) - Single or
intermediate
Critical Elements For Financial
Viability
• Traffic Volumes
• User fee Pre-determined

• Concession Period
• Capital Costs - Variable.

Bidders seek subsidy/ grant to

reduce capital cost for arriving at
an acceptable rate of returns.
Options for Increasing Return on
Road Projects
 Direct Toll - Concessionaire collects the
toll charges directly from the user.
 Shadow Toll - The toll charges are paid
directly by the government / project
sponsor to the BOT concessionaire
according to a predetermined toll
structure.
 Annuity Payment - Annuity payment is a
variation of shadow toll wherein the
payment to the BOT concessionaire is
determined in absolute terms with no
direct reference to the number of vehicles
Financial Incentives

 Grants - According to NHAI guidelines,

NHAI could provide cash support to the
concessionaire. This amount should be
utilized for meeting the total project cost
and balance, if any, should be used for
meeting the O&M cost.
 Low interest rate loans - The
government could provide the
concessionaire access to low interest
debt, either directly or facilitate the same
Guarantees and assurances

The government may guarantee the

loans taken by the concessionaire,
thereby improving the credit rating of
the concessionaire. This would
directly reduce the finance cost. The
financial guarantee can be provided
by a state/central agency that
specifically provides credit
enhancement services for
development of state/national
Ancillary revenues along project
highway
The concessionaire may be given
permission for property development
along the project highway. The various
alternatives for ancillary revenues could
be as follows:
 Transport terminals consisting of
garages, service stations, warehouses,
rest houses and other relevant
infrastructure
 Restaurants, shops and motels

 Publicity and advertising space

Tax incentives
 Tax holiday on Income Tax for the
concessionaire company
 Exemption/rebate on customs duty for
imported equipment used in
construction or operation of project
highway
 Exemption of stamp duty applicable to
various contracts in the project
 Exemption/rebate/deferment of other
taxes such as service tax, works contract
tax, etc.
Construction Cost
 Projected Infrastructure investment in XI Five
year Plan (2007 – 12)
Sector US$ INR in Crore Construc Amount
in tion
Billion Compone
nt
a Power 120 5,40,000 43% 2,42,20
0
b Railways 67 3,00,000 42% 2,16,00
0
c Roads 49 2,20,000 100% 2,20,00
0
d Irrigation & Water 18 80,000 45% 36,000
Supply
e Seaports 11 50,000 60% 30,000
f Airports 9 40,000 42% 16,800
9 Special Economic Zone, 76 3,45,000 40% 1,55,25
Township 0
Development, Urban
Infrastructure
Pipelines,
Total etc. 350 15,75,000 - 9,16,250
Risk Management
 Infrastructure projects are longer in size
and complex.
 There are social, political and legal
issues. These issues are best handled by
state.
 On the other hand, financial and
operational management are not really
the forte of the state.
 There is a need for creation of
Infrastructure stock but adequate funds
are not available and only through
properly conceived projects can funds be
 Risk sharing
 Construction Risk (Delays)
 Technology Risk (if not proven one)
 Sponsor Risk (ability of the sponsor to deliver the
project)
 Environmental Risk
 Commercial Risk (Demand is less for services
Produced)
 Operating Risk (Inefficiency in operation leading
to higher operating cost)
 Legal, Regulatory & Political Risk (Change in
provisions of Law)
 Force Majeure (Unpredictable natural and man-made
 Partial Risk Guarantees mitigate
concerns related to government
performance
A Partial Risk Guarantee (PRG) can cover
lenders in case the Government does not
meet its commitments
Loans
Project Commercial
Company Lenders

Government
Guarantee
Undertakings

Indemnity
Agreement
Government World Bank
Major Challenges for Both
Government & Private Sectors
 It involves shift to good governance
 Requires an upgrades of regulatory,
restructuring and monitoring roles.
 Problems relating to land acquisition by
government and landing over the site to
the builder.
 Without is significantly improved
governance, the shift to increased PPP
could just mean monopoly power being
shifted to the well connected in the private
sector and eventually become
unsustainable.
 It may be realised that it is not the policies
that are failing so much as the machinery
for implementing them.
THANK
YOU