Developing integrated, smart & sustainable cities

1. www.pwc.com Developing integrated, smart & sustainable cities Project Viability & Financing Challenges January 2013 Draft

2. – Agenda A B C D Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 3

3. – • Large scale industrial developments • Special investment regions (SIR) • Bigger and more diverse than an SEZ • Is not export-oriented and offers variety of services • Size around 90,000 ha which is bigger than the size of Mumbai at 603 sq km Reference: Dholera SIR • Industrial corridor • Comprises several zones • Around 1,500 kms in length (DMIC) • Industrial cities planned along corridor • New Manufacturing Investment Zones • Spread over 5,000 ha with standard infrastructure and clean technologies and skill development institutes SEZs Ceiling - 5,000 ha Sector specific SEZ requires developer’s Net Worth >= Rs 1000Cr, For multi product, it is = 250 Cr Area- 10-20 Ha Industrial Estates Governed by State Acts Product clusters Multi product, Sector-Specific or Free Trade Warehousing Zone SMEs operate out of product cluster No defined cluster boundaries SEZ Act 2005 Micro, Small, Medium Enterprises Development Act 2006 Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 4

4. – Agenda A B C D Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 5

5. – SEZs are economically feasible but pose financial viability challenges- Key issues • Land acquisition • High land values impediment to negotiated purchase of land • Financing Issues: • Huge-upfront capital required for infrastructure creation • Long gestation periods, that don’t match Tenure restrictions • Demand dynamics • Revenues from sale / lease of land and from utilities user-charges may not be sufficient to pay for the zone infrastructure initially • Large upfront recoveries by Government / Govt. agencies can be deterrents • Others- clearances and approvals, public protest etc Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 6

6. – Mechanisms to counter key challenges • Innovative land-pooling mechanisms: TIF districts, TDR, TP Scheme, SIR • Efficient project phasing:Enables investment to be aligned with demand build-up • Unbundling of project components: • Distributes financing requirements • Homogenizes risk • Maximises private sector participation and capabilities • Project structuring: Public SPV, JV/ PPP, Private SPV • Innovative financing mechanisms: Bonds, Dedicated Project Fund, Cess, Betterment charge • De-risking demand: Govt. guarantees (annuity payments), Multi-lateral agencies, etc providing minimum revenue guarantee (anchor tenants) Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 7 1 Karnataka Information Technology Investment Region Act

7. – Innovative Land pooling mechanisms Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 8

8. – Tax Increment Financing- widely used in USA • Tax Increment Financing (TIF) districts – e.g Stapleton Redevelopment • TIF districts delineated for a specific life-period (16-20-25 yrs) • TIF bonds issued to finance land acquisition, clearance and upfront developmental costs • Post the life of the TIF district, tax increments revert to local government taxing jurisdictions Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 9

9. – Other successfully adopted mechanisms by Govt. in India • Use of TDR for land acquisition: Land acquired for public purpose, by allowing transfer of development potential of the land that is reserved for some purpose, to another designated area. Land owner can trade/ sell the FSI (floating FSI) at market price. • Town Planning Scheme: Micro plans prepared for new growth areas measuring100-200 Ha, involving 100-250 landowners. Roads, public amenity plots etc developed by regularising plots, by taking a portion from each landholding. Incremental land value captured through sale of public amenity plots , and Betterment charges fund up-front developmental costs. No compensation involved. • Creation of Special Planning Zone Authorities: SIR Act, Gujarat; KITIR Act, Karnataka: Government is empowered to declare Investment Region or Industrial Area and designate them as Special Investment Region. Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 10

10. – Efficient project phasing Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 11

11. – Peak Financing can be optimised through efficient project phasing Capex requirement Cumulative Project Cash flows Illustrative Illustrative Long gestation period (~15 years) Total project cost (say 50bn) Illustrative Peak funding requirement : USD 5 Bn * Cash flows reflect the investment into land and low viability projects, and revenues from land only – excludes revenues from municipal charges/ revenues/ cesses etc. Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 12

12. – Project structuring - Unbundling of project components Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 13

13. – Unbundling of project components to distribute financing requirements Medium viability High viability Low Viability Buildings Real Estate Specialized Infrastructure Land Utilities Core/ Trunk Infrastructure Public amenities • Power • Telecom, etc • Effluent treatment plant • Power back-up • Parking, etc • Water supply • Sewage treatment plant, etc • Developed parcels with access and requisite infrastructure provision • Access to site • Bulk water supply provision to site • Electricity / telecom linkages to site, etc • Open spaces • Schools • Hospitals, etc • Cold shell • Industrial sheds • Warm shell • Built-to-suit • Plug and Play • Incubators, etc • Residential • Commercial • Retail • Hospitality • Government funding not required • Master Dev Co to service land and development cost by sale of plots/ building to industrial, and real estate developers • Govt. subsidy support required • Utility charges insufficient for capital servicing (subsidised charges) • Requires de-risking of project • Large proportion of cost can be recovered through user charges • Financing support- VGF, subordinate debt etc • De-risking of project Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 14

14. – Implementation structure: Single SPV/ multiple SPVs for development and O&M of components Govt. • Land acquired • Trunk Infrastructure • Master Dev Co. pays for land in multiple forms: • Upfront premium • Annuity • Deferred payments • Preferential shares • Equity Infrastructure creation SPVs • User charges • Maintenance charges • Lease rentals • Member contributions Tenants Master Dev Co. (Govt or Pvt.) Infrastructure O&M SPVs Sub-concession (Multiple SPVs) Own Specialized Infrastructure SPVs Land Sale Viable projects (power supply, etc) Low viability projects (water supply, health, education etc) Other developers/ private entities Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 15

15. – Agenda A B C D Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 16

16. – Government contributions in various forms to enhance the viability & financing challenge Govt. develops the entire zone infrastructure Govt. funds a portion of zone infrastructure Zone development through JV PPP (BOT) with enhancers from Govt. Private • Multiple turnkey contracts for land and core infrastructure • Private BOT concessions for individual components: e.g. Power, water & drainage • Multiple turnkey contracts for land and core infrastructure- external linkages etc • Single SPV/ Multiple SPVs for provision of utilities, real estate development • Single SPV/ Multiple SPVs for O&M of utilities, services • Private SEZ • Smaller SEZs- Mostly IT/ITeS SEZs, sector-specific SEZs etc requiring smaller land parcels • Nil/ negligible Govt. role • Private land acquisition through negotiated payments • Financing through PE funds etc • Public SEZs • Multiple turnkey contracts • O&M concession for parts/whole of the SEZ • Financing through: • Budgetary support • Local/ govt. Bonds (e.g China) • Multi-lateral funding • Minimum revenue support • Providing anchor tenant (G-to-G partnerships) • Deferred payment / annuity payments • Payment is linked to the developer providing pre-defined services (as per agreement) • Facilitate clearances & approvals Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 17

17. – Comparative analysis of different models of development Issues surrounding land and need for a clear risk allocation and responsibility framework, are increasingly making BOT models more popular". Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 18

18. – Comparative analysis of different models of SEZ development Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 19

19. – Agenda A B C D Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 20

20. – Key Learnings • Creation of “Dedicated Project Fund” through levy of cess, betterment charge etc, which can be leverage for long term financing • State level Investment Region Acts to facilitate speedy land acquisition, and facilitate industrial development through single window system • In sync with international best practices, various land based revenues could be monetized for infra creation- Purchasable/ Auctionable Development Rights, Land gains tax, Special Assessment Tax, TIF bonds etc • Private participation should be encouraged in provision of infrastructure and utilities • User charges policy to be evolved upfront Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 21

21. – Thank You Developing integrated, smart & sustainable cities • Project Viability & Financing Challenges 22