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Water PPPs : Training & Workshop. Infrastructure Development Corporation (Karnataka) Limited February 2009. Developing a PPP - Project Appraisal and Feasibility Studies. Reasons for Limited PPPs. Lack of adequate project development Projects not bankable
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Water PPPs : Training & Workshop Infrastructure Development Corporation (Karnataka) LimitedFebruary 2009 Developing a PPP - Project Appraisal and Feasibility Studies
Reasons for Limited PPPs • Lack of adequate project development • Projects not bankable • Operator led projects, than Government led projects • Procurement Issues – MoU vs Competitive bidding • Lack of credible information • Lack of political will • Resistance to “Privatisation” –experience in most cities • Who bears revenue risk? (“tariff setting”)
Need for Project Development • Infrastructure projects typically have a number associated issues which need to be resolved to ensure successful implementation and operationalisation • Project viability • Technical • Financial • Legal issues (eg. Statutory guidelines) • Environmental and Social implications (eg. clearance from the MoEF, estimation of land acqusition required) • Government interface (eg. whether the project has been approved by the government taking into account the above issues) … Need for proper project definition to resolve all issues pertaining to the project
Need for Project Development • Historical practice of selection of developer through MoU route is no longer the preferred alternative • Selected developer funds requisite studies which would form the basis for future negotiations and signing of agreement • Also the bone of contention leading to failure in taking off of projects • Current practice of selection of developer through a transparent bidding process • However, investment in project definition/resolution of all issues pertaining to the project by all interested bidders both infeasible and sub-optimal - leads to lack of participation … Need for Government to invest in requisite technical, market, financial viability studies to reduce project risks and attract bidders to the project
The Need • Finalise desirable technical configuration • Identify and resolve Environment and Social issues • Estimate inputs for project viability assessment • Assess project viability and finalise project structure • Compile data pre-requisites necessary for bidding • Preparation of bidding documents
Development Process A. Project Conceptualisation Resolution of Implementation Issues Project Identification Technical Feasibility Financial Viability Project Structuring Options B. Bid Process Management Contractual & Bid documentation Bid Process Feedback & Monitoring
The Objective of Project Development • To reduce “unknowns” and “assumptions” • Identify and allocate risk, responsibility • Create a complete documentation archive • Set in place a set of contract documents • Detail payments/ rewards/ penalties • Project development does NOT mean creating a Feasibility Report and bidding for a developer • Any issue that can derail a project should be addressed, including land, R&R…
Development Cycle • Step 1 - Sector Study • Demand/Supply - Current & Projected - returns from the asset, maintenance • Tariffs/ Pricing - Current and Projected • Regulation - Entry criteria, Competition, Price/ Tariff Control • Implementation Structure - Government, Private Sector, joint venture.. • Policy framework • Enabling Legal and Contractual Framework • Should result in a well-defined strategy • Step 2 - Project Identification • Better utilise Existing Assets or Create New Assets or a Combination • Where to start - bulk or retail or both - the dilemma in water, sewage • Technology: Broad Indication
The Need Defined Project Leader’s understanding Business Consultant’s Plan Designer’s Program writer Client’s Explanation Support Contractor Project Documentation What Public wanted Specifications
The Need • What is desirable technical configuration • A good technical configuration, during the bidding phase, should provide sufficient room for innovativeness for bidders while sufficiently covering the essentials • Water : Minimum investment amount, specific facilities, design and construction approval • Applicable guidelines and major equipment specifications • Output based Specifications are the key to PPP projects – Can the government become purchaser of services rather than service provider ?
The Need • Identify and resolve Environment and Social issues • Extent of land acquisition and cost thereof • Private land/government land • Agricultural land/barren land • Forest land • Built-up structures • Extent of utility relocation and cost thereof • Environment Impact Assessment and Mitigation Measures • Develop R&R plan • However, at times private sector has been able to manage the issues more effectively with facilitator role played by the government
The Need • Estimation of inputs for project viability assessment • Demand Estimation - volume, composition and growth • Construction Cost and Project Cost • Operations and maintenance cost • Input into financial viability – impacts structuring decision • Reflected in the Concession Agreement – impacts Termination Payments • Often operations and maintenance costs are ignored, which in many projects of the government could be more than the capital investment • Solid waste management • Small airports • Operations and maintenance costs are under-estimated by departments • Roads
The Need • Assess project viability and finalise project structure • Aim is to minimize Grant/Annuity Payments –variables being • Concession Period • Packaging of additional O&M stretch • However, critical to get key input parameters right • Compile data pre-requisites necessary for bidding • Obviate need for multiple investigations by bidders • Preparation of bidding documents • Finalise pre-qualification criteria and hurdle numbers • Incorporate project specific issues, if any. For example - • Bypass road : banning entry into town • Construction phasing
Huge upfront capital costs and low margins Returns typically back ended - long term in nature No tangible security No. of participants Long term finance Long gestation periods Non completion operations affect many Limited or no recourse Low Appetite for long term finances in domestic market Why Risk Assessment?
Risky List! • Construction/ Completion • Operation Risk • Environmental • Regulatory • Forex • Interest • Demand • Credit • Political/ Social
Principles of Risk Allocation • Allocate project-specific risks to parties best able to bear them • Control performance risks through incentive contracts • Use market-hedging instruments (derivatives) for covering market-wide risks (interest and exchange rate fluctuations)
Project Issues - Financial • What is the price level for making the project viable? Would the users be willing to pay this user charge? • Are there any additional sources of income for the project? (e.g.. land development etc.) • In case the project is not financially viable at an acceptable user charge, how much of government grant is required? • Should the government grant be one-time or spread across years? • What should be the time frame for which the project is handed over to the private developer? • Typically, with pricing / cost comparatively quantifiable entities, often the softer issues get sidelined, in most PPP projects.
Risk Mitigation • PRAYER !!!! • Proper Allocation Of Risks • Insurances • Hedging/ Options/ Swaps • Third Party Guarantees • PRAYER !!!!
Risk Factors • Supply • Hydrology/ rainfall patterns/ quality/ water access contracts • Distribution monopoly vs trucked; user fees; desire to avoid retail revenues • Operating • New technologies in wastewater/ energy/ metering • Infrastructure • Old/ theft (leakage) • Environmental • Benign
Risk Factors • Political • Privatization trends/ pricing controls/ rationing • Force majuere • Maintenance/ buffers • Foreign Exchange • Local currency revenues and costs • Funding • Long term • Engineering • Standard • Completion • Ongoing large capex throughout • Legal • Concession life/ defaults