Viability and Funding of Urban Infrastructure Projects Presentation by:

1. CITYSCAPES 2004 Viability and Funding of Urban Infrastructure Projects Presentation by: K VENKATESH – VICE-PRESIDENT LARSEN & TOUBRO LIMITED CHENNAI

2. Presentation Structure • Introduction • Financial viability • Present Gap & Pre-requisites • Cost recovery & innovative solutions • Funding of Urban Infrastructure Projects • Issues involved • Financing options • Conclusions

3. INTRODUCTION

4. Introduction • Extra-ordinary Urban Growth in Less Developed Countries like India • 700 Million people added to the world’s urban population in last decade • Close to 3 million people are added in Asia alone every month, i.e. equivalent to one new City a month • Of the 21 mega cities (popln. 10 million+) in the world , 17 are estimated to be in developing countries, 3 in India

5. Urbanisation of India Decadal Growth Rate of Population (1991-2001) Urban: 31.13% Rural 17.97%

6. India : Million plus Cities and Urban Agglomerations - 2001 35 million plus cities/ urban agglomerations

7. Urban Infrastructure Scenario in India – National Perspective Urban Population Coverage (%) AvailabilityDeficiency Protected Water Supply Sewerage & Sanitation Refuse Collection/ Disposal Electrification

8. FINANCIAL VIABILITY

9. Pre-requsites for financial viability • Principle of “user-pay” to be used for pricing. • Willingness to Pay AND Willingness to Charge • For improving the sustainability need to ensure • Principle of full cost recovery • Transparent, Targeted & Measurable subsidy, if needed • Cost savings through energy efficiency, reduction of leakages, manpower rationalisation etc. • Full autonomy to local bodies to determine tariffs – to last thru’ changes in administrative set-up • Tariff fixation taking care of annual incremental cost, O&M cost, debt dues, depreciation charges etc. • Compulsory 100% metering - ‘even if it is free, let it be measured’ • Operation of escrow accounts for transparency / confidence in collection

10. Project viability issues • Development stage • Assessment of revenue • Verification of leakages • Assessment of pre-operating costs, capital req, P&M • Repayment of debt & subsidies • Tendering process / selection of partner stage • Technology tie-ups • Capital Costs • O&M Costs • Financing structure • Delivery commitments

11. Concept of Cost Recovery • Category I – Where beneficiaries are identifiable and benefits accrued to each beneficiary can be quantified – eg. telescopic rates for electricity, water supply and cross-subsidy for public transport • Category II – Where beneficiaries are identifiable but benefits accrued to each beneficiary are not quantifiable directly – eg. waste water connection - charge a flat rate • Category III – Where it is difficult to identify individual beneficiaries as well as to quantify the benefits accrued to the group of beneficiaries – eg. Bulk supply – provide for indirect payments through local bodies / co-operatives “If citizens / government don’t pay realistic price for the services they will pay a far greater price later on due to shortages”

12. Agreements • Drafting • Negotiation / Approval from Project Authority • Adoption of procedures to last thru’ changes in administartive set-up • Notification / Revision of tariff structure by the project authority • Related agreements eg. Site lease, Loan, Shareholder’s, EPC, O&M etc. “A robust concession agreement is the basis for a successful PPP project”

13. Some Innovative ‘User pay’ Instruments Infrastructure TypeInnovative user pay Instruments • Water Supply - Advance registration charges, Connection charges, Enhancement of water tariff, Water benefit tax/water tax, Betterment charges, Development charges, Utilization from other sources such as octroi, property tax, sale of plots etc. and Charges from water Kiosks • Sewerage - Connection Charges, Sewerage Cess Tax, Conservancy Tax, Sale of Renewable waste, Sale of Sludge and Sale of Nutrient rich wastewater. • Roads/Fly-overs/ - Toll Tax, Land as a Resource and advertising Bridges • Airports/Rly. Stations/ - Surcharge on tickets,using land as a resource, Bus Terminals Toll Tax, User, Charges for transportation terminals and advertising rights.

14. FUNDING OF URBAN INFRASTRUCTURE PROJECTS

15. Huge Funding Gap • Unless the private sector investments happen, Urban Infrastructure Sector will not see the ‘sea change’ / ‘quantum leap’ necessary in Less Developed Countries like India • According to recent estimate of the India Infoline Report on Urban Infrastructure total requirement of funds covering backlog, new investments and O&M costs for the next ten years is over Rs. 2,80,000 Crores • Funds for Urban Infrastructure development fall short by more than 10 times the requirement

16. Present Financing of UI • Budgets of • Central Government • State Governments • Local Administrative bodies / municipal corporations • Raising loans from Financial Institutions - limited • Loans from International Funding Agencies like OECF(JBIC), World Bank, ADB, KfW, USAID, etc. • Grant funds from Donor Agencies like DANIDA, DFID, CIDA, National Trust/ Missions “Every One Crore rupees spent in infrastructural provision now, saves Ten Crore on cost escalation and public health care due to deficient services later!”

17. Issues in Urban Infrastructure FinancingPrivate Sectors Perspective • Asset liability mismatch due to short term borrowing vs. long term funding. • Large volume of resources for capital intensive projects • Locking up of funds in specific large projects. • High risk involved in greenfield ventures • Non-uniformity in appraisal, guidelines and documentation requirements • Lack of tangible security and partial or nil recourse basis of funding projects. • Norms restricting exposure to individual agencies.

18. Risks in Urban Infrastructure FinancingPrivate Sectors Perspective • Political risks • Implementation risks • Revenue collection risks • Risks of default by borrowing agency • Risks of re-payment in changing interest rate scenario • Foreign Exchange Risks due to currency fluctuations

19. Financing Options Matrix

20. CONCLUSIONS

21. Way forward • Development of innovative financing and security mechanisms • Enabling Public-Private-Beneficiary-Partnerships • Enabling regulatory framework like CERC, TRAI etc. and similar such Regulatory Authorities with representative from the User • Frame and regulate tariff – retail and bulk • Lay down, enforce and monitor minimum standards of service; model concession • Promote efficiency and competition • Adjudicate disputes / differences between local bodies, service provider and consumers • Formulate sustainable sectoral policy framework

22. Larsen & Toubro Ltd.ECC Division, Chennaie-mail: kvh@lntecc.comInternet: http://www.lntecc.com Thank You

23. Urban Infrastructure Projects – examples from L&T’s experience • Coimbatore Bypass Road on NH47 - First Privatized Road Project in South India. • Development of HITEC City at Hyderabad. • Phase 1 - CYBER TOWERS, with a built up area of 5.8 lakh sft completed and fully occupied. • Development of Phase II CYBER GATEWAY with a built of area of 8.64 lakh sft completed. • Development of Phase III with 5 lakh sft commenced • Bangalore International Airport to be developed on Privatization by Siemens-Zurich-L&T Consortium

24. COIMBATORE -Bypass

25. HITEC CITY Cyber Towers Cyber Gateway

26. Bangalore International Airport

27. L&T EXPERIENCE IN PRIVATISED WATER PROJECTS

29. Visakhapatnam Industrial Water Supply Project First BOT Industrial Water Supply Project In India Record time of completion • The 2.6m dia. Godavari Pipeline, largest of it kind in India (Rs. 450 cr.) implemented in a record time of 12 months (including land acquisition) to bring Godavari water to Visakhapatnam. Public Private Partnership • The Project is Jointly developed by Public Institutions (APIIC, RINL, VMC and NTPC) with L&T as private contributor.

30. Visakhapatnam Industrial Water Supply Project • Unique concept of direct subsidy by Government to reduce impact of initial fixed charge burden repayable back as a commercial loan • Unique concept of Water Price Review by an Independent Committee • Project deliverables monitored by an Independent Engineer • Project financials scrutinised by an Independent Auditor .

31. Visakhapatnam Industrial Water Supply Project • Implemented by a SPV called VIWSCo with • L&T consortium 51% • AP Industrial Infrastructure Corporation (APIIC) 33% • VMC 16% • Debt funded mainly by the benficiaries The Project is Lifeline for entire corridor between Kakinada and Visakhapatnam for Industrial development

32. Project Beneficiaries Existing • Visakhapatnam Steel Plant (VSP) • National Thermal Power Corp. • Visakhapatnam Municipal Corporation Proposed • VSP expansion from 3 to10 Mil.Tonnes • Pharma City • Special Economic Zone • Gangavaram Port • Other New Industries Water Is The Pre-condition To All Future Development

33. TiruppurWater Supply & Sewerage Project • Implemented through a SPV New Tiruppur Area Development Corporation (NTADC) promoted by • Infrastructure Leasing & Financing Services(IL&FS) • Tiruppur Exporter’s Association (TEA) • TamilNadu Corporation for Industrial Infrastructure Development (TACID) • Project execution • EPC contract by L&T and others • O&M contract to consortium of Mahindra & Mahindra+United Utilities International, North West Water +Bechtel