Module 1 : Project finance

fundamentals

SESSION- 4- PUBLIC PRIVATE PARTNERSHIP

Tuesday, January 10, 2023 SHYAM JI MEHROTRA 1

You will learn in this session
 Recap of previous session
 Government, Private , and PPP projects
 Public Private Partnership- definition
 Features of public private partnership
 PPP models
 Government policy initiatives for PPP
 PPP success and failure cases
 Recap

Tuesday, January 10, 2023 SHYAM JI MEHROTRA 2

 Re-cap : Type of risk
A thermal power generation company is having off take
contract with state discom. As per arrangement discom has to
pay the dues at the end of the month for the power supplied
during the month. But state discom is not paying dues for six
months due to poor financial health. This is a
a. Sovereign risk
B. Economic Risk
C. Marketing risk
D. Technical risk

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 Re-cap: Type of risk
Government order reduction of toll on a toll
road due to opposition by local residents. This
is
A. Industry Risk
B. Political Risk
C. Economic risk
D. Technical Risk

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 Re-cap: Type of risk
Construction of a new thermal power plant by a
company is being opposed by the activists on the
ground of air and water pollution. This is
A. Environmental risk
B. Currency risk
C. Political risk
D Financial risk

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 Type of risk
Smart city project being constructed under smart city
program was stopped by the state government on the
ground of corruption in tendering process by the
previous government. This is a
A.Environmental risk
B.Financial risk
C.Industry risk
D.Political risk

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 Re-cap : Type of risk
Adani power set up a power plant under Mega Power Project of
Government of India based on coal to be imported from Indonesia and
executed a power purchase agreement with Government to supply power
@ 2.45 per unit for ten years. After commissioning of power plant,
Indonesian government decided to link coal exports at international prices
causing increase in input cost to Adani Power. This has resulted into losses
as Adani Power could not raise the power tariff with the state discom due
to PPA. This is a
A.Political risk
B.Sovereign risk
C.Economic risk
D.Force majeure risk

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 Recap!

Project risk analysis

Adventure : Why project risk analysis is

important?

3
7
Infrastructure projects
Economic services from utilities like Electricity, Gas, Water and
telecommunications
Transports- road, bridges, dam, port, airports, sea port, rapid
transport system
Social services- Schools, Hospitals, Transit Hostels, Bus terminal,
Sewage system, Waste and garbage collection services,
Infrastructure projects are traditionally government responsibility
Of late given to pure private or under public sector undertaking

Tuesday, January 10, 2023 SHYAM JI MEHROTRA 9

Infrastructure projects
Mini perm financing is a project finance structure where
legal maturity is set typically around 7 years, forcing the
borrower to refinance before maturity or face default. ( Perm
is short of Permanent)
Take out financing- when a lender move out of project and is
replaced by another lender.
Usually done when project starts commercial production and
reach break even
It is time when project move to capital market to raise fund
through bonds to substitute bank financing as constructions
risk is now over

Tuesday, January 10, 2023 SHYAM JI MEHROTRA 10

 Study Government policy initiatives
Reading is compulsory
Policy for setting of mega power projects
Policy on hydro power projects
National Solar power mission
Performance link incentive (PLI) Scheme
National highway authority of India - Toll road projects
National green tribunal- NGT
Mass Rapid Transit system- Metro rail policy 2017

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 Government policy initiatives
Compulsory Reading

Prepare a summary covering salient features of the policy

Page limit- desirable one page
 Questions will be asked in Quiz- 1 regarding government policy

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What is public private
partnership ?

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What is PPP (P3)
https://www.youtube.com/watch?v=KWfqaZrLqhI

Tuesday, January 10, 2023 SHYAM JI MEHROTRA 14

What is PPP?
Private business venture which is funded and operated through a
partnership with the government
Private party assumes substantial technical, financial and operational
risk
Run on the basis of concession contract ( Government role is of
concessionaire)
Goods or service in question is sold to end users for a fee ( say toll
roads) or public administration it self ( hospital or prison)
Global experience is shifting of projects from pure public to public
private partnership due to budget constraints of the government and
local bodies

Tuesday, January 10, 2023 SHYAM JI MEHROTRA 15

What is PPP?
PPP envisages public and private sector coming
together
For provision of publics assets for public benefits
Through investment or management or both by
private sector
For a specified time period known as concession
period
With substantial risk sharing by private sector
What is PPP?
Government assists PPP by way of Concession agreements to provide
infrastructure by
Transfer of existing assets
Capital subsidy by way of one time grant through viability gap funding or
revenue subsidy ( known as annuity)
Tax Breaks

State government provide land, water, power and other clearances on

priority basis
Also responsible for law and order

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Essential Features of PPP
model
Public services ( services that the state is obligated to provide to
its Citizens ) are provide through private sector
Public Assets is that asset the use of which is linked to delivery of
Public service
Investment / or management ( focus on efficiency to deliver
quality services) through private management
Operation/Management for a specified period ( arrangement
not in perpetuity)
Substantial Risk Sharing with the Private sector ( differentiates
from mere outsourcing services)
Performance linked Payments/ conformance to Performance
Standards
PPP Models
◦ Transaction Advisory services
◦ Management contracts
◦ Lease contracts
◦ Service contracts
◦ Build operate transfer (BOT) contracts
◦ Build own operate transfer (BOOT) contracts
◦ Securitization of assets - TOT contracts
◦ HAM- Hybrid annuity model
◦ Divestiture (disinvestment)
◦ Many more………
Various types of PPP

https://www.youtube.com/watch?v=_nKx1ZyNh1A

Tuesday, January 10, 2023 SHYAM JI MEHROTRA 20

PPP models
DBO ( Design build operate) Private sector design build and operate and sells
Hospital and Prison services back to government.

BDO ( Buy-develop-operate) Private party leases or buy a facility from public

Road projects sector and operate it and recover its investment.

BOT( Built-operate-transfer) Private party build a facility, operate for a fixed time
Road projects recover its investment and transfer back to
government .
BOOT ( Built-own-operate- Public sector enter into a concession agreement and
transfer) give ownership of the facility to private sector. At
Road and Metro projects the end of concession period, utility is handed over
to the government.

BOO ( Built-own-operate) Public sector transfer ownership to private sector

Airport/Sea port ( on long lease basis) and facility is operated and
owned by private sector.
Tuesday, January 10, 2023 SHYAM JI MEHROTRA 21
PPP model- for road projects
BOT model: All investments are made by private party and recover this
by levying toll
Hybrid annuity model: 40% is given by government as advance and rest is
contributed by the private party. Government money is returned by
levying toll.
EPC contractor: 100% money is given by government to contractors and
recovered through tolling
TOT model: Toll operate and transfer model - Running road projects are
securitized to raise liquid resources by NHAI and operator gets his money
back through tolling

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 PPP: Evolution of PPP frame work
•Private sector contributed 36.6% in the overall Infrastructure
Investment(2007-12),
•A mature PPP framework is the most useful tools with the
Govt. to facilitate private investment into Infrastructure.
•Mid 1990s to 2004- marked the inception of PPPs, focus on
transport and Power, limited success, due to absence of a
mature framework.
•During 2004-12- Govt. laid foundation for a mature
framework, formulated guidelines and standardization of
documents for PPP projects.
•~1539 projects awarded so far, of which`50% are in
operational stage (transport 58%, energy 24%, social and
commercial sector~9%, water and sanitation~8%)
 PPP-steps taken by Govt.
Ease of doing business
Established cabinet Committee on Infrastructure (COI),PPP appraisal Committee
(PPPAC) and several task Force to streamline Decision Making and operationalize
PPP
Liberalized the Exit Policy for Concessionaires to free-up equity for investment in
to new Projects
Approved the policy for Railway Station development through PPP
Setting up of National Infrastructure Investment fund (NIIF) to channelize
Foreign Institutional Funds in to Infrastructure.
Setting up of IIFCL ( India Infrastructure Finance Co. Ltd) to provide long-term
finance to PPP projects.
Amendment in the Arbitration and Conciliation Act,1996 to make dispute
resolution more Cost effective and time –bound.
.
 PPP-steps taken by Govt.
Viability gap funding scheme of Central Government
◦ Project being implemented by a SPV setup by private sector company or state
undertaking through a process of competitive bidding
◦ Funding under scheme for Financial Support to Public Private Partnership(PPP) up to
200 crores by an empowered committee or over 200 crores with approval of finance
minister
◦ 20% of total project cost for economic infrastructure
◦ 30% of total project cost for social infrastructure in waste water treatment, water
supply, solid waste management, health and education sector
◦ 40% of total project cost for pilot or demonstration project in health and education
sector

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 PPP Models – Successful cases
Tata Power Delhi Distribution Ltd. (TPDDL)- Have taken over power
distribution of Delhi from government Discom- Converted into vibrant,
customer centric and profitable organization
Singapore PPP Desalination Project- Singapore was dependent upon Malaysia
for water- developed its own water desalination project – highly successful
model of using sea water for drinking purpose through desalination process
Hyderabad Metro Rail Project- Larsen & Toubro is operating this metro and
invested Rs. 14000 crores- Government is providing viability gap funding-
average passenger traffic is over 3 lakh per day- only metro in India which
break even before Covid 19
 PPP Models – Failure
China Pakistan Economic Corridor 2013 - china belt and road initiative- focus
was on connecting China with Gwadar Port of Pakistan through highway, rail
and pipe line infrastructure- Known as trillion dollar blunder- only 25% has
been completed – also issue of illegal occupation of Indian territories to
complete the project
Delhi airport metro project- Cost over run, defects in infrastructure build by
DMRC and wrong traffic projection , project terminated by DAME and filed
case against DMRC, settled by SC in favour of Reliance Infrastructure
Rajasthan Sun Technique CSP Plant: Solar power project in Rajasthan- Rate of
electricity was very high – Tie up with NTPC for buying power- Agitation by
farmers for use of canal water
 PPP Models – Some Cases of
Failure
New Chennai Airport: Tussle between AAI and Private
Consortium, Government now appointed new advisor to look
into techno economic viability and bidding process
Delhi_Gurgaon Expressway: Victim of mammoth red tape , lack
of coordination of more than 15 civic bodies, traffic congestion
and government decision to open the toll
Vadodara-Halol Toll project suffered due to mistaken traffic
projections, due to which proposed Government incentives
were stripped off from the project
Rapid metro Gurugram: ILF&S exited and now managed by
Haryana government, traffic projection did not come true, 80%
of the debt will have to be paid by Haryana government
PPP- experience
Contractual mechanism that generate value for money for
public sector due to contractual bundling, risk sharing and
private asset ownership
Transaction cost at start up of initiative ( for bidding,
contract design, negotiation and monitoring) and during life
of partnership (for renegotiation) are high and cost
efficiency impact service quality
Pure PPP model ( out sourcing contracts) reduced cost but
complex model ( like BOT- built operate and transfer) or
(BOOT – built own operate and transfer) result is not strong

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 Assignment date 28.08.22
Written case analysis on project sustainability
The student will submit one to two page write up (A4 size) to
evaluate their understanding on issues relating to the
environmental, ecological, and or social aspects of the case
affecting the operations of projects and prepare an EIS
(environmental impact study) and mitigation report.
Weight 20%
Assignment submission will be on Moodle subject to
plagiarism check
Read Appendix C – Environmental appraisal of Projects of Dr
Prasanna Chandra (last pages of the book)

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 Recap!

Public private partnership

Adventure : Why PPP is considered a better option of project

financing?

3
7
THANKS

January 10, 2023 32

Advisory Services

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