Restoring the momentum and reviving PPPs in India
Knowledge Partner
INDIA PPP SUMMIT 2015
Restoring the momentum and reviving PPPs in India
Knowledge Partner
INDIA PPP SUMMIT 2015
Restoring the momentum and reviving PPPs in India
Knowledge Partner
INDIA PPP SUMMIT 2015
Foreword : FICCI
I
am happy to share with you the FICCI-E&Y Report on 'Restoring the Momentum and Reviving PPPs in India' to be released at the India PPP Summit 2015 organized by FICCI.India has witnessed considerable growth in PPPs in the last decade and emerged as one of the leading PPP markets in the world. However, currently number of public-private partnership projects are stalled for various reasons. Government has taken several initiatives to revitalise the PPP model to attract private investments in infrastructure. The Union Budget 2015-16 has also emphasised on the need to revive the PPP mode of infrastructure investment.
Government is currently reviewing the PPP policy framework and has undertaken several measures like allowing 100 per cent exit for developers after two years of completion of highway project, one-time financial assistance to complete stalled road projects where 50 percent of the construction has been completed, etc. Going forward, the government plans to implement number of infrastructure projects like ‘Sagarmala’ and re-development of railways stations, port connectivity projects on PPP basis etc.
To deliberate on the existing policy framework and regulations relating to PPP in the country, FICCI is organising India PPP Summit 2015 in New Delhi. The Summit will highlight existing policy framework and regulations relating to PPPs, issues related to implementation of projects, financing and other relevant areas. It will highlight the measures required for creating a credible & transparent environment to revive investors' confidence on PPP projects.
As 'Knowledge Partner' for the event, Ernst & Young has prepared a comprehensive Background Paper covering a large number of important issues. The report has been prepared through detailed analysis of several critical factors influencing PPP projects in India. I take this opportunity to thank them for their efforts.
I hope you will find this report useful and as always, your suggestions and feedback are welcome.
Karunakaran Ramchand Chairman FICCI National Committee on Infrastructure
Foreword : Ernst & Young
I
ndian PPP Markets and regulatory practices are going through evolution and thinking to go to the next level of maturity. This phenomenon is evinced by noteworthy events such as development of New PPP Modalities in the Highway Sector, Liberal exit policies for Highway assets, One time fund infusion for Languishing projects, Modernization of Stations among others. However there are some key over-arching issues on account of lack of buy-in from Core ministries resulting in cascading inconsistencies which need to be addressed for successful PPPs going forward.The Government's initiative of Ease of Doing Business should be ramped up to cover all sectors. The need of the hour is increased responsiveness and Government participation for creating a pipeline of investable projects and selection of quality technical consultants on Quality cum Cost Basis.
Government handholding from procurement till operations phase will be instrumental in improving the quality of deliverables of consultants and concessionaires alike.
In the given day the Viability Gap Funding (VGF) Limits could be relooked at from the present 40% level.
There is a dire need to incentivize innovation for financial support to PPP Projects as long as the spirit of PPP is safeguarded. For instance there is a current no-go in case State Governments are willing to extend capital support beyond the threshold 40% in form of innovative structures such as Deemed Shadow Toll, EPC for funded Works, in light of improving the project economics, these initiatives could be revisited.
Also the basis of calculation of viability gap funding should be as per market rates and not as per Schedule of Rates.
Public private partnership (PPP) has become the preferred mode of financing infrastructure projects in India in the past decade. However, PPP is currently on a crossroad in the country as interest from the private sector has declined significantly in the last couple of years due to economic slowdown and a legacy of unresolved challenges. Issues impacting projects from planning to operation stage have made several projects unviable. In order to address the issues plaguing the infrastructure sector, the Union Budget 2015-16 has laid out certain initiatives such as investments to the tune of INR 70,000 Crore in infrastructure sector, including INR 14,031 Crores for roads and INR 10,050 Crores for railways. Further the government is also considering plug and play projects in infrastructure sector notably roads, ports, rail lines, airports.
In order to actualize India's infrastructure needs, a dedicated PPP policy and access to long-term funds are long overdue. The government should provide for integrated infrastructure planning, robust dispute resolution mechanism besides looking beyond the L1 bidding mechanism to dis-incentivize private sector bid aggressively. Moreover, there is a need to introduce robust contract renegotiation and rebalancing framework to manage project risk over long-term concession, without deteriorating lenders' confidence in the sector.
In this document we take stock of the current state of PPP in Transport Sector in India, the achievement so far and sector related experience and opportunities. It also discusses the challenges for PPP in Transport in Indian Context and global experiences for the same and recommendations to revive private sector's interest in PPP.
Abhaya Krishna Agarwal Partner - Infrastructure & PPP
Foreword : FICCI
I
am happy to share with you the FICCI-E&Y Report on 'Restoring the Momentum and Reviving PPPs in India' to be released at the India PPP Summit 2015 organized by FICCI.India has witnessed considerable growth in PPPs in the last decade and emerged as one of the leading PPP markets in the world. However, currently number of public-private partnership projects are stalled for various reasons. Government has taken several initiatives to revitalise the PPP model to attract private investments in infrastructure. The Union Budget 2015-16 has also emphasised on the need to revive the PPP mode of infrastructure investment.
Government is currently reviewing the PPP policy framework and has undertaken several measures like allowing 100 per cent exit for developers after two years of completion of highway project, one-time financial assistance to complete stalled road projects where 50 percent of the construction has been completed, etc. Going forward, the government plans to implement number of infrastructure projects like ‘Sagarmala’ and re-development of railways stations, port connectivity projects on PPP basis etc.
To deliberate on the existing policy framework and regulations relating to PPP in the country, FICCI is organising India PPP Summit 2015 in New Delhi. The Summit will highlight existing policy framework and regulations relating to PPPs, issues related to implementation of projects, financing and other relevant areas. It will highlight the measures required for creating a credible & transparent environment to revive investors' confidence on PPP projects.
As 'Knowledge Partner' for the event, Ernst & Young has prepared a comprehensive Background Paper covering a large number of important issues. The report has been prepared through detailed analysis of several critical factors influencing PPP projects in India. I take this opportunity to thank them for their efforts.
I hope you will find this report useful and as always, your suggestions and feedback are welcome.
Karunakaran Ramchand Chairman FICCI National Committee on Infrastructure
Foreword : Ernst & Young
I
ndian PPP Markets and regulatory practices are going through evolution and thinking to go to the next level of maturity. This phenomenon is evinced by noteworthy events such as development of New PPP Modalities in the Highway Sector, Liberal exit policies for Highway assets, One time fund infusion for Languishing projects, Modernization of Stations among others. However there are some key over-arching issues on account of lack of buy-in from Core ministries resulting in cascading inconsistencies which need to be addressed for successful PPPs going forward.The Government's initiative of Ease of Doing Business should be ramped up to cover all sectors. The need of the hour is increased responsiveness and Government participation for creating a pipeline of investable projects and selection of quality technical consultants on Quality cum Cost Basis.
Government handholding from procurement till operations phase will be instrumental in improving the quality of deliverables of consultants and concessionaires alike.
In the given day the Viability Gap Funding (VGF) Limits could be relooked at from the present 40% level.
There is a dire need to incentivize innovation for financial support to PPP Projects as long as the spirit of PPP is safeguarded. For instance there is a current no-go in case State Governments are willing to extend capital support beyond the threshold 40% in form of innovative structures such as Deemed Shadow Toll, EPC for funded Works, in light of improving the project economics, these initiatives could be revisited.
Also the basis of calculation of viability gap funding should be as per market rates and not as per Schedule of Rates.
Public private partnership (PPP) has become the preferred mode of financing infrastructure projects in India in the past decade. However, PPP is currently on a crossroad in the country as interest from the private sector has declined significantly in the last couple of years due to economic slowdown and a legacy of unresolved challenges. Issues impacting projects from planning to operation stage have made several projects unviable. In order to address the issues plaguing the infrastructure sector, the Union Budget 2015-16 has laid out certain initiatives such as investments to the tune of INR 70,000 Crore in infrastructure sector, including INR 14,031 Crores for roads and INR 10,050 Crores for railways. Further the government is also considering plug and play projects in infrastructure sector notably roads, ports, rail lines, airports.
In order to actualize India's infrastructure needs, a dedicated PPP policy and access to long-term funds are long overdue. The government should provide for integrated infrastructure planning, robust dispute resolution mechanism besides looking beyond the L1 bidding mechanism to dis-incentivize private sector bid aggressively. Moreover, there is a need to introduce robust contract renegotiation and rebalancing framework to manage project risk over long-term concession, without deteriorating lenders' confidence in the sector.
In this document we take stock of the current state of PPP in Transport Sector in India, the achievement so far and sector related experience and opportunities. It also discusses the challenges for PPP in Transport in Indian Context and global experiences for the same and recommendations to revive private sector's interest in PPP.
Abhaya Krishna Agarwal Partner - Infrastructure & PPP
Contents
1. Overview of the PPP machinery in India's transport sector ...02
1.1 Building a robust transport infrastructure: key to...02
economic growth 1.2 Key PPP models being implemented in India ...04
2. Taking stock: PPP in key transport sub-sectors ...06
2.1 Roads...07
2.2 Railways...11
2.3 Ports ...15
2.4 Airports ...22
3. Impediments in PPP implementation: how will the ...25
Government tackle the issues? 3.1 Key challenges in PPP implementation ...25
3.2 Current Government policy framework and key initiatives ...28
3.2.1 Implementing uniform policies and procedures ...29
3.2.2 Establishing a robust institutional structure ...30
3.2.3 Designing an enabling financial support framework...32
4. Creating a scalable PPP ecosystem: learning from ...33
success stories 5. Recommendations ...39
6. Conclusion ...43
Contents
1. Overview of the PPP machinery in India's transport sector ...02
1.1 Building a robust transport infrastructure: key to...02
economic growth 1.2 Key PPP models being implemented in India ...04
2. Taking stock: PPP in key transport sub-sectors ...06
2.1 Roads...07
2.2 Railways...11
2.3 Ports ...15
2.4 Airports ...22
3. Impediments in PPP implementation: how will the ...25
Government tackle the issues? 3.1 Key challenges in PPP implementation ...25
3.2 Current Government policy framework and key initiatives ...28
3.2.1 Implementing uniform policies and procedures ...29
3.2.2 Establishing a robust institutional structure ...30
3.2.3 Designing an enabling financial support framework...32
4. Creating a scalable PPP ecosystem: learning from ...33
success stories 5. Recommendations ...39
6. Conclusion ...43
1. Overview of the PPPs in Infrastructure Sector
1.1 Building a robust transport infrastructure: key to economic growth
Infrastructure is the backbone of a growing economy, underpinning its competitiveness and self- sufficiency. However, consistent apathy and deep funding gaps have crippled India's infrastructure over time, especially in crucial sectors such
as airports, ports, roads and railways.
Furthermore, the rising urbanization and expanding trade have put immense pressure on the existing infrastructure. This has had a negative multiplier effect on the economy, hampering trade, efficient logistics,
connectivity and business operations. It has been estimated that transport constraints result in a loss of 2%-3.5% in India's GDP.1
Reviving India's Transport Sector:
PPP as a key enabler
1
Thus, reviving and building a world-class transport infrastructure is among the top priorities onthe Hon'ble Prime Minister Narendra Modi's development agenda. The Union Budget has pledged an additional expenditure of INR700 billion over 2015-16, primarily on roads, railways and ports, among other key projects. Furthermore, the Eleventh and Twelfth Five Year Plans (FYP) have laid 2,3
emphasis on the massive expansion and modernization of infrastructure, with special focus on transport sub-sectors, including roads and bridges, railways, ports, MRTS* and airports.
In the 2014 World Economic Forum, the Global Competitiveness Report ranked India as 71 out of 144 economies, citing poor infrastructure as one of the key reasons.
Source: "The long road to recovery," India Today website, http://indiatoday.intoday.in/story/infrastructure-projects-public-fundin g-economy-challenges-in-2015/1/410900.html, accessed 18 August 2015
1 "The Wide Angle India 2020: The Road to East Asia," Deutsche Bank Research, 1 September 2014, p. 24.
Twelfth Five Year Plan: Emphasis on transport infrastructure
Infrastructure investments during 2012-17 would be more than double (INR55.7 trillion), as compared with INR24.2 trillion in the Eleventh FYP (2007-12).
The private sector will play a key role in building the country's transport infrastructure. The private sector participation in infrastructure projects increased from around 22% (INR2 trillion) in the Tenth Five Year Plan to 37% (INR8.9 trillion) in the Eleventh Five Year Plan. It is expected to rise further to around 48% (INR26.8 trillion) in the Twelfth Five Year Plan.
Public-Private Partnerships (PPP) have acted as a key enabler in major infrastructure projects of varying scales in India, ranging from leading construction projects to managing operational activities. Some of the prominent benefits of PPP include:
2 Actual investment: US$11 billion. Exchange rate used: USD1=INR63.6
3 "India's Budget Focuses on Infrastructure," The Wall Street Journal website, http://www.wsj.com/articles/india-budget focuses-on-infrastructure-1425111915, accessed 10 August, 2015.
* MRTS - Metro Rail Transit System Airports
MRTS* Ports Railways Roads and bridges Storage Oil and gas pipelines Water supply and sanitation Renewable energy Irrigation Telecom Electricity
1% 3%
4% 6%
9%
17%
27%
Share of transport 33% (INR 18.4 tn)
Sectoral Infrastructure Investment in the Twelfth FYP
Source: "Twelfth Five Year Plan (2012-2017) Faster, More Inclusive and Sustainable Growth," Planning Commission, May 2013, p.89.
(figures have been rounded off)
Brides the funding gap
Increases competitiveness
Mitigates Government risk
Increases technical expertise
Improves transparency
Reduces project life cycle costs Key benefits
of PPP projects 2%
2% 4%
9%
16%
1. Overview of the PPPs in Infrastructure Sector
1.1 Building a robust transport infrastructure: key to economic growth
Infrastructure is the backbone of a growing economy, underpinning its competitiveness and self- sufficiency. However, consistent apathy and deep funding gaps have crippled India's infrastructure over time, especially in crucial sectors such
as airports, ports, roads and railways.
Furthermore, the rising urbanization and expanding trade have put immense pressure on the existing infrastructure. This has had a negative multiplier effect on the economy, hampering trade, efficient logistics,
connectivity and business operations. It has been estimated that transport constraints result in a loss of 2%-3.5% in India's GDP.1
Reviving India's Transport Sector:
PPP as a key enabler
1
Thus, reviving and building a world-class transport infrastructure is among the top priorities onthe Hon'ble Prime Minister Narendra Modi's development agenda. The Union Budget has pledged an additional expenditure of INR700 billion over 2015-16, primarily on roads, railways and ports, among other key projects. Furthermore, the Eleventh and Twelfth Five Year Plans (FYP) have laid 2,3
emphasis on the massive expansion and modernization of infrastructure, with special focus on transport sub-sectors, including roads and bridges, railways, ports, MRTS* and airports.
In the 2014 World Economic Forum, the Global Competitiveness Report ranked India as 71 out of 144 economies, citing poor infrastructure as one of the key reasons.
Source: "The long road to recovery," India Today website, http://indiatoday.intoday.in/story/infrastructure-projects-public-fundin g-economy-challenges-in-2015/1/410900.html, accessed 18 August 2015
1 "The Wide Angle India 2020: The Road to East Asia," Deutsche Bank Research, 1 September 2014, p. 24.
Twelfth Five Year Plan: Emphasis on transport infrastructure
Infrastructure investments during 2012-17 would be more than double (INR55.7 trillion), as compared with INR24.2 trillion in the Eleventh FYP (2007-12).
The private sector will play a key role in building the country's transport infrastructure. The private sector participation in infrastructure projects increased from around 22% (INR2 trillion) in the Tenth Five Year Plan to 37% (INR8.9 trillion) in the Eleventh Five Year Plan. It is expected to rise further to around 48% (INR26.8 trillion) in the Twelfth Five Year Plan.
Public-Private Partnerships (PPP) have acted as a key enabler in major infrastructure projects of varying scales in India, ranging from leading construction projects to managing operational activities. Some of the prominent benefits of PPP include:
2 Actual investment: US$11 billion. Exchange rate used: USD1=INR63.6
3 "India's Budget Focuses on Infrastructure," The Wall Street Journal website, http://www.wsj.com/articles/india-budget focuses-on-infrastructure-1425111915, accessed 10 August, 2015.
* MRTS - Metro Rail Transit System Airports
MRTS*
Ports Railways Roads and bridges Storage Oil and gas pipelines Water supply and sanitation Renewable energy Irrigation Telecom Electricity
1%
3%
4%
6%
9%
17%
27%
Share of transport 33%
(INR 18.4 tn)
Sectoral Infrastructure Investment in the Twelfth FYP
Source: "Twelfth Five Year Plan (2012-2017) Faster, More Inclusive and Sustainable Growth," Planning Commission, May 2013, p.89.
(figures have been rounded off)
Brides the funding gap
Increases competitiveness
Mitigates Government risk
Increases technical expertise
Improves transparency
Reduces project life cycle costs Key benefits
of PPP projects 2%
2%
4%
9%
16%
Owing to the multiple benefits of PPP, the Government has increased awarding PPP concessions (with a rising share of the transport sector), largely over the last decade and a half. According to the World Bank, India was the highest recipient of PPI (private participation in infrastructure) projects during 2008-2012. Furthermore, India 4
has remained the largest market for PPI over this period across emerging markets.
As on March 2013, roads, railways, airports and ports accounted for 40% (1,034 projects, including complete, under implementation, and pipeline projects) of all PPP projects in India, clearly highlighting the importance given by the Government to the country's transport
infrastructure. Out of these 1,034 projects, the 5
roads sector led with 78% of the projects,
followed by ports (16%), airports (4%) and railways (2%). To implement these projects efficiently, multiple PPP models have been designed to cater to project-specific requirements, and take care of public as well as private interests.
1.2 Key PPP models being implemented in India
Increasing infrastructure requirements call for a wide variety of tailored solutions, to cater to the specific demands of a project. This has led to the development of various PPP models to ensure efficient project completion and sufficient commercial value creation. Some of the factors which govern the choice for a specific PPP model include:
l Capital asset ownership
l Investment responsibility
l Risk liability
l Contract duration
The most commonly adopted PPP models are: 6
40 106 70
86 125 191
2000-05 2005-10 2010-15
Number of PPP projects awarded
Non-transport sector Transport sector 68%
54%
73%
% of transport projects
Source: “Database of infrastructure projects in India,”
Infrastructure India website,
h ps://infrastructureindia.gov.in/, accessed 6 August 2015
Model/key parameters
PPP duration* Private partner's roles
Private partner revenue risk and compensation terms
Private partner's roles
Management contracts
This is a contractual arrangement for the management of a part or whole of a public facility or service by the private sector. Capital investment is not the primary focus in such arrangements.
Management contract
S-M Public Pre-determined fee,
possibly with
performance incentives
Management of operation and maintenance
Public ownership Private ownership
Low risk Medium risk High risk
*S -M: Short -Medium (3 -5 years) M: Medium (10 -15 years) L: Long (20-30 years)
Management contract (with rehabilitation/ expansion)
M-L Private Tariff/revenue share Minimum Capex,
management, maintenance
Lease contracts In this model, the asset is leased, either by the public entity to the private partner, or vice versa. Capital investment in the BLT, BOLT and BTL models is Greenfield.
Lease M Public Revenue from
operations
Management and maintenance Build-lease-
transfer (BLT) or Build-own-lease- transfer (BOLT)
M Private Pre-set lease from the
Government
Capex
Build-transfer- lease (BTL)
M Private Revenue from user
charges
Capex and operations Concessions In this model, the private partner is responsible for construction (typically
Brownfield/expansions) and operations, while the ownership is retained by the public sector.
Area concessions L Private Tariff revenue Design, finance,
construct, manage, maintain
Build-operate- transfer (BOT) contracts
The responsibility for the construction (typically Greenfield) and operations rests with the private partner, while ownership is retained by the public sector.
Design-build- operate (DBO)
S-M Public Tariff revenue Design, construct,
manage, maintain BOT and Design-
build-finance- operate-transfer (DBFOT)
L Private Tariff revenue Design, finance,
construct, manage, maintain
BOT annuity L Private Annuity revenue Design, finance,
construct, manage, maintain
Build-own- operate transfer (BOOT)
contracts
The private partner has the responsibility for construction and operations.
The ownership is with the private partner, for the duration of the concession.
Build-own- operate-transfer (BOOT) or DBOOT
L Private Tariff revenue Design, construct,
own, manage, maintain, transfer
Build-own- operate (BOO)
Perpetual Private Tariff revenue Design, finance,
construct, own, manage, maintain
4 "Compendium of PPP Projects in Infrastructure," Planning Commission, March 2014, p.15.
5 "Compendium of PPP Projects in Infrastructure," Planning Commission, March 2014, p.15.
6 “PPP Toolkit for improving PPP decision-making processes," PPP in India website, http://toolkit.pppinindia.com/ports/module1- oopmv-tmpmf.php?links=oopmv1b, accessed 18 August 2015.
Owing to the multiple benefits of PPP, the Government has increased awarding PPP concessions (with a rising share of the transport sector), largely over the last decade and a half. According to the World Bank, India was the highest recipient of PPI (private participation in infrastructure) projects during 2008-2012. Furthermore, India 4
has remained the largest market for PPI over this period across emerging markets.
As on March 2013, roads, railways, airports and ports accounted for 40% (1,034 projects, including complete, under implementation, and pipeline projects) of all PPP projects in India, clearly highlighting the importance given by the Government to the country's transport
infrastructure. Out of these 1,034 projects, the 5
roads sector led with 78% of the projects,
followed by ports (16%), airports (4%) and railways (2%). To implement these projects efficiently, multiple PPP models have been designed to cater to project-specific requirements, and take care of public as well as private interests.
1.2 Key PPP models being implemented in India
Increasing infrastructure requirements call for a wide variety of tailored solutions, to cater to the specific demands of a project. This has led to the development of various PPP models to ensure efficient project completion and sufficient commercial value creation. Some of the factors which govern the choice for a specific PPP model include:
l Capital asset ownership
l Investment responsibility
l Risk liability
l Contract duration
The most commonly adopted PPP models are: 6
40 106 70
86 125 191
2000-05 2005-10 2010-15
Number of PPP projects awarded
Non-transport sector Transport sector 68%
54%
73%
% of transport projects
Source: “Database of infrastructure projects in India,”
Infrastructure India website,
h ps://infrastructureindia.gov.in/, accessed 6 August 2015
Model/key parameters
PPP duration* Private partner's roles
Private partner revenue risk and compensation terms
Private partner's roles
Management contracts
This is a contractual arrangement for the management of a part or whole of a public facility or service by the private sector. Capital investment is not the primary focus in such arrangements.
Management contract
S-M Public Pre-determined fee,
possibly with
performance incentives
Management of operation and maintenance
Public ownership Private ownership
Low risk Medium risk High risk
*S -M: Short -Medium (3 -5 years) M: Medium (10 -15 years) L: Long (20-30 years)
Management contract (with rehabilitation/
expansion)
M-L Private Tariff/revenue share Minimum Capex,
management, maintenance
Lease contracts In this model, the asset is leased, either by the public entity to the private partner, or vice versa. Capital investment in the BLT, BOLT and BTL models is Greenfield.
Lease M Public Revenue from
operations
Management and maintenance Build-lease-
transfer (BLT) or Build-own-lease- transfer (BOLT)
M Private Pre-set lease from the
Government
Capex
Build-transfer- lease (BTL)
M Private Revenue from user
charges
Capex and operations Concessions In this model, the private partner is responsible for construction (typically
Brownfield/expansions) and operations, while the ownership is retained by the public sector.
Area concessions L Private Tariff revenue Design, finance,
construct, manage, maintain
Build-operate- transfer (BOT) contracts
The responsibility for the construction (typically Greenfield) and operations rests with the private partner, while ownership is retained by the public sector.
Design-build- operate (DBO)
S-M Public Tariff revenue Design, construct,
manage, maintain BOT and Design-
build-finance- operate-transfer (DBFOT)
L Private Tariff revenue Design, finance,
construct, manage, maintain
BOT annuity L Private Annuity revenue Design, finance,
construct, manage, maintain
Build-own- operate transfer (BOOT)
contracts
The private partner has the responsibility for construction and operations.
The ownership is with the private partner, for the duration of the concession.
Build-own- operate-transfer (BOOT) or DBOOT
L Private Tariff revenue Design, construct,
own, manage, maintain, transfer
Build-own- operate (BOO)
Perpetual Private Tariff revenue Design, finance,
construct, own, manage, maintain
4 "Compendium of PPP Projects in Infrastructure," Planning Commission, March 2014, p.15.
5 "Compendium of PPP Projects in Infrastructure," Planning Commission, March 2014, p.15.
6 “PPP Toolkit for improving PPP decision-making processes," PPP in India website, http://toolkit.pppinindia.com/ports/module1- oopmv-tmpmf.php?links=oopmv1b, accessed 18 August 2015.
PPP in India's Transport Sector - Where do we stand today?
2
2. Taking Stock: PPP in Key Transport Sub-sectors
PPP is expected to play a pivotal role in the transport sector and in sustaining India's GDP growth rate of 7%-8% over the next decade, if implemented with guided efforts. Notably, reviving steam in transport sub-sectors will also go a long way in streamlining the country's logistics operations and boosting the overall economic growth. Estimates
suggest that a 0.5% reduction in logistical costs will lead to a 2% increase in trade, and a substantial 40%
increase in the range of products exported out of the country.7
Clearly, there is an urgent call for action from the Government to address the growing requirements and constantly monitor the status of ongoing PPP activities in key transport sub-sectors, including
7 "Transport Corporation of India," Company Report, 25 February 2011, p. 7.
roads, railway, ports and airports. This will also help ensure that the Government's operating environment is adapting fast enough to the evolving needs of the private sector.
Cost of logistics operations to the economy, as % of GDP
Source: “Transport Corporation Of India Limited,”
Systematix group equity research, September 2012, p.4.
9%
11%
US Japan
India 13% -15%
Roads
Key sub-sectors for reviving India’s transport infrastructure
Railways Ports Airports
2.1 Roads
India's road network is the second-largest in the world, spanning 4.7 million km across national and state highways, district, urban and rural roads. Furthermore, road transport contributes ~5% 8
to the country's economy, via direct/indirect revenues from channels such as road transport tax and vehicle taxes. 9
The roads sector, however, is under severe pressure, carrying nearly 60% of freight and 85% of the total commuter traffic. 10
The number of registered vehicles in the country grew at a CAGR of around 11% during 2003-13, with the road network increasing by just 4% during the period. Furthermore, the national 11
highways, which are the arterial roads of the country and handle 40% of the traffic, account for just ~1.5% of the total network, lagging behind other countries.12
Hence, the Government is looking to address the challenges of capacity constraints, slow traffic movement, and limited technological development. Thus, leveraging private sector's financial and technical wherewithal becomes critical to support and accelerate the development of India's roads infrastructure.13
PPP's role is pivotal for sector growth; though private sector interest is dampening
Over the past few years, the PPP model has been widely used in the roads sector, with over 90%
of the total PPP projects in India being awarded in this sector. As of March 2015, projects worth 14
around INR2 trillion have been awarded through PPP. 15
However, since FY12, the sector witnessed a decline in private activity (especially in BOT projects), due to land acquisition issues, delay in getting environmental clearances and over-leveraged balance sheets of the developers. This is evident from a shortfall in the planned targets of PPP 16
projects to be awarded under the Twelfth FYP.
8 http://www.asappconferences.com/IndiaRoadsConference/2015/
9 https://en.wikipedia.org/wiki/Indian_road_network
10 "Indian Road Network," National Highways Authority of India website, http://www.nhai.org/roadnetwork.htm, accessed 10 August, 2015.
11 "Basic Road Statistics of India 2012-13," Ministry of Road Transport and Highways, July 2015, p. iv.
12 "Basic Road Statistics of India 2012-13," Ministry of Road Transport and Highways, July 2015, p. i.
13 "Twelfth Five Year Plan (2012-2017)," Planning Commission, 2013, p. 224.
14 "Investment in Infrastructure: Strengthening PPP Policy framework," NITI Aayog, accessed on 10 August 2015, p. 8.
15 "Highways," Public Private Partnership in India website, http://pppinindia.com/sector-highways.php, accessed 10 August, 2015.
16 "Investment in Infrastructure: Strengthening PPP Policy framework," NITI Aayog, accessed on 10 August 2015, p. 3.
PPP in India's Transport Sector - Where do we stand today?
2
2. Taking Stock: PPP in Key Transport Sub-sectors
PPP is expected to play a pivotal role in the transport sector and in sustaining India's GDP growth rate of 7%-8% over the next decade, if implemented with guided efforts. Notably, reviving steam in transport sub-sectors will also go a long way in streamlining the country's logistics operations and boosting the overall economic growth. Estimates
suggest that a 0.5% reduction in logistical costs will lead to a 2% increase in trade, and a substantial 40%
increase in the range of products exported out of the country.7
Clearly, there is an urgent call for action from the Government to address the growing requirements and constantly monitor the status of ongoing PPP activities in key transport sub-sectors, including
7 "Transport Corporation of India," Company Report, 25 February 2011, p. 7.
roads, railway, ports and airports. This will also help ensure that the Government's operating environment is adapting fast enough to the evolving needs of the private sector.
Cost of logistics operations to the economy, as % of GDP
Source: “Transport Corporation Of India Limited,”
Systematix group equity research, September 2012, p.4.
9%
11%
US Japan
India 13% -15%
Roads
Key sub-sectors for reviving India’s transport infrastructure
Railways Ports Airports
2.1 Roads
India's road network is the second-largest in the world, spanning 4.7 million km across national and state highways, district, urban and rural roads. Furthermore, road transport contributes ~5% 8
to the country's economy, via direct/indirect revenues from channels such as road transport tax and vehicle taxes. 9
The roads sector, however, is under severe pressure, carrying nearly 60% of freight and 85% of the total commuter traffic. 10
The number of registered vehicles in the country grew at a CAGR of around 11% during 2003-13, with the road network increasing by just 4% during the period. Furthermore, the national 11
highways, which are the arterial roads of the country and handle 40% of the traffic, account for just ~1.5% of the total network, lagging behind other countries.12
Hence, the Government is looking to address the challenges of capacity constraints, slow traffic movement, and limited technological development. Thus, leveraging private sector's financial and technical wherewithal becomes critical to support and accelerate the development of India's roads infrastructure.13
PPP's role is pivotal for sector growth; though private sector interest is dampening
Over the past few years, the PPP model has been widely used in the roads sector, with over 90%
of the total PPP projects in India being awarded in this sector. As of March 2015, projects worth 14
around INR2 trillion have been awarded through PPP. 15
However, since FY12, the sector witnessed a decline in private activity (especially in BOT projects), due to land acquisition issues, delay in getting environmental clearances and over-leveraged balance sheets of the developers. This is evident from a shortfall in the planned targets of PPP 16
projects to be awarded under the Twelfth FYP.
8 http://www.asappconferences.com/IndiaRoadsConference/2015/
9 https://en.wikipedia.org/wiki/Indian_road_network
10 "Indian Road Network," National Highways Authority of India website, http://www.nhai.org/roadnetwork.htm, accessed 10 August, 2015.
11 "Basic Road Statistics of India 2012-13," Ministry of Road Transport and Highways, July 2015, p. iv.
12 "Basic Road Statistics of India 2012-13," Ministry of Road Transport and Highways, July 2015, p. i.
13 "Twelfth Five Year Plan (2012-2017)," Planning Commission, 2013, p. 224.
14 "Investment in Infrastructure: Strengthening PPP Policy framework," NITI Aayog, accessed on 10 August 2015, p. 8.
15 "Highways," Public Private Partnership in India website, http://pppinindia.com/sector-highways.php, accessed 10 August, 2015.
16 "Investment in Infrastructure: Strengthening PPP Policy framework," NITI Aayog, accessed on 10 August 2015, p. 3.
Shift in contracting trends to revive private participation in the sector
Post the decline in the private sector participation since FY12, the NHAI adopted the EPC
17,18
(engineering, procurement and construction) as the preferred model to award contracts. The NHAI aims to award 5,400 km of road construction over FY16, out of which 2,500 km (46%) would be awarded under the EPC model. In order to efficiently cater to the specific project
requirements, the authorities are also deploying other PPP models in the road sector which should be extended to other sectors such as ports (Vizhinjam Port), railways, and airports etc where the private sector interest is waning:19
l Modified annuity: Concessionaire to partly finance, construct, toll and manage the project. This model facilitates reduced debt requirement and cost of borrowings for the private sector (up to 50-75 bps), when compared to BOT annuity .20
l Toll-operate-transfer (TOT): Under this model, Brownfield assets are to be refinanced by private parties, with a medium- to long-term investment horizon (30 years of concession period). 21
l BOT toll (with funded EPC for structures)22: As per EY Research this model can be deployed for complex projects such as tunnels and bridges, in a BOT toll stretch a complex structure could be developed on EPC basis by the same developer or separate developer/contractor. The critical infrastructure components of the project could be funded separately, wherein the EPC payment and milestones for key structures are predetermined. This model facilitates better availability of capital to finance the project, better managed cost of financing and balanced construction risk.
l Swiss Challenge method: The model is being explored, especially for expressway development projects. This is essentially a bidding process, wherein private investors may conceptualize and 23
enlist potential projects in core sectors. Innovative ideas emerging from this method are expected to expedite the development of expressways in India.
National highway development also plans to give a major push to private participation The Government's National Highway Development Project (NHDP) is one of the world's largest road development programs responsible for the widening, upgrade and
rehabilitation of 54,000 km of national highways. The entire project is likely to involve an investment of over INR3 trillion, and is expected to run through multiple phases. 25
The Government plans to nearly double the private investment allocation in the NHDP from INR868 billion in the Eleventh FYP to INR1.7
27,28
trillion during the Twelfth FYP.
The construction of 1,000 km of expressways has already been approved under NHDP's Phase VI, at a cost of around INR167 billion, on DBFOT basis. In August 2015, the Government announced the conversion of eight National Highways into state-of-the-art expressways, with an aim to reduce travel time and fuel costs, and boosting economic growth. Construction activity
on all these projects is expected to start once the feasibility study is finalized (which is currently underway), and the land acquisition is complete. 29
State roads gradually adopting the PPP mode to develop their network
Various State Governments are also looking to increase private participation in the roads sector.
For instance, the Rajasthan Government is planning to award 20,000 km of state highways, involving an investment of INR700 billion through PPP, over 2014-19.31
The Twelfth FYP allocates nearly INR1.2 trillion in private investments for the state highways development. 32
Government has taken several measures to incentivize private sector participation and address some of the key road blocks
l The hybrid annuity model has been introduced, which is a mix of the EPC and BOT annuity models, with the Government and the private enterprise sharing the total project cost in a 40:60 ratio. It aims to reduce the financial burden on the private players in the implementation phase. 33
l MoRTH is considering the monetization of constructed assets which include Item Rate Contract, EPC and Annuity projects under a new modality called Toll Operate Transfer (TOT). The Target Projects for this modality are Brownfield assets which are intended to be monetized by sale to private parties with medium to long term investment horizon in conjunction with developers possessing the necessary wherewithal for such project implementation. The intended time of Monetization of these projects is 2 years from COD in-order to have a traffic history. The
17 "Indian Road Sector," ICRA Research Services, August 2014, p. 3.
18 "Indian Road Sector," ICRA Research Services, August 2014, p. 3.
19 EY Research
20 EY Research
21 EY Research
22 EY Research
23 "Govt may open Swiss challenge for private players to develop highways," Indian Express website,
http://indianexpress.com/article/business/business-others/govt-may-open-swiss-challenge-for-private-players-to-develop- highways/, accessed 10 August, 2015.
24 "National Highway Development Project (NHDP)," National Highway Authority of India website, http://www.nhai.org/WHATITIS.asp, accessed 10 August, 2015.
25 http://www.nhai.org/Doc/23aug11/Guidelines%20for%20Investment%20in%20Road%20Sector%20%28as%20on%2015%20Aug%
202011%29.pdf accessed on 10 August 2015
26 http://pib.nic.in/newsite/PrintRelease.aspx?relid=83846 accessed on 10 August 2015
27 "Report of the Working Group on Central Roads Sector," Planning Commission, April 2014, p. 29.
28 "Highways," Public Private Partnership in India website, http://pppinindia.com/sector-highways.php, accessed 10 August, 2015.
29 "Government to upgrade eight National Highways to world-class express highways," The Economic Times website,
http://economictimes.indiatimes.com/news/economy/infrastructure/government-to-upgrade-eight-national-highways-to-world- class-express-highways/articleshow/48377152.cms, accessed 10 August, 2015.
30 "PPP Projects in Infrastructure," Planning Commission, March 2014, p.15.
31 "Indian Road Sector," ICRA Research Services, August 2014, p. 4.
32 "Rajasthan govt plumps for private participation in roads," Business Standard website, http://www.business-
standard.com/article/economy-policy/rajasthan-govt-to-award-20-000km-state-highways-through-ppp-114080101426_1.html, accessed 10 August, 2015.
33 "Indian Road Sector," ICRA Research Services, August 2014, p. 3.
Shift in contracting trends to revive private participation in the sector
Post the decline in the private sector participation since FY12, the NHAI adopted the EPC
17,18
(engineering, procurement and construction) as the preferred model to award contracts. The NHAI aims to award 5,400 km of road construction over FY16, out of which 2,500 km (46%) would be awarded under the EPC model. In order to efficiently cater to the specific project
requirements, the authorities are also deploying other PPP models in the road sector which should be extended to other sectors such as ports (Vizhinjam Port), railways, and airports etc where the private sector interest is waning:19
l Modified annuity: Concessionaire to partly finance, construct, toll and manage the project. This model facilitates reduced debt requirement and cost of borrowings for the private sector (up to 50-75 bps), when compared to BOT annuity .20
l Toll-operate-transfer (TOT): Under this model, Brownfield assets are to be refinanced by private parties, with a medium- to long-term investment horizon (30 years of concession period). 21
l BOT toll (with funded EPC for structures)22: As per EY Research this model can be deployed for complex projects such as tunnels and bridges, in a BOT toll stretch a complex structure could be developed on EPC basis by the same developer or separate developer/contractor. The critical infrastructure components of the project could be funded separately, wherein the EPC payment and milestones for key structures are predetermined. This model facilitates better availability of capital to finance the project, better managed cost of financing and balanced construction risk.
l Swiss Challenge method: The model is being explored, especially for expressway development projects. This is essentially a bidding process, wherein private investors may conceptualize and 23
enlist potential projects in core sectors. Innovative ideas emerging from this method are expected to expedite the development of expressways in India.
National highway development also plans to give a major push to private participation The Government's National Highway Development Project (NHDP) is one of the world's largest road development programs responsible for the widening, upgrade and
rehabilitation of 54,000 km of national highways. The entire project is likely to involve an investment of over INR3 trillion, and is expected to run through multiple phases. 25
The Government plans to nearly double the private investment allocation in the NHDP from INR868 billion in the Eleventh FYP to INR1.7
27,28
trillion during the Twelfth FYP.
The construction of 1,000 km of expressways has already been approved under NHDP's Phase VI, at a cost of around INR167 billion, on DBFOT basis. In August 2015, the Government announced the conversion of eight National Highways into state-of-the-art expressways, with an aim to reduce travel time and fuel costs, and boosting economic growth. Construction activity
on all these projects is expected to start once the feasibility study is finalized (which is currently underway), and the land acquisition is complete. 29
State roads gradually adopting the PPP mode to develop their network
Various State Governments are also looking to increase private participation in the roads sector.
For instance, the Rajasthan Government is planning to award 20,000 km of state highways, involving an investment of INR700 billion through PPP, over 2014-19.31
The Twelfth FYP allocates nearly INR1.2 trillion in private investments for the state highways development. 32
Government has taken several measures to incentivize private sector participation and address some of the key road blocks
l The hybrid annuity model has been introduced, which is a mix of the EPC and BOT annuity models, with the Government and the private enterprise sharing the total project cost in a 40:60 ratio. It aims to reduce the financial burden on the private players in the implementation phase. 33
l MoRTH is considering the monetization of constructed assets which include Item Rate Contract, EPC and Annuity projects under a new modality called Toll Operate Transfer (TOT). The Target Projects for this modality are Brownfield assets which are intended to be monetized by sale to private parties with medium to long term investment horizon in conjunction with developers possessing the necessary wherewithal for such project implementation. The intended time of Monetization of these projects is 2 years from COD in-order to have a traffic history. The
17 "Indian Road Sector," ICRA Research Services, August 2014, p. 3.
18 "Indian Road Sector," ICRA Research Services, August 2014, p. 3.
19 EY Research
20 EY Research
21 EY Research
22 EY Research
23 "Govt may open Swiss challenge for private players to develop highways," Indian Express website,
http://indianexpress.com/article/business/business-others/govt-may-open-swiss-challenge-for-private-players-to-develop- highways/, accessed 10 August, 2015.
24 "National Highway Development Project (NHDP)," National Highway Authority of India website, http://www.nhai.org/WHATITIS.asp, accessed 10 August, 2015.
25 http://www.nhai.org/Doc/23aug11/Guidelines%20for%20Investment%20in%20Road%20Sector%20%28as%20on%2015%20Aug%
202011%29.pdf accessed on 10 August 2015
26 http://pib.nic.in/newsite/PrintRelease.aspx?relid=83846 accessed on 10 August 2015
27 "Report of the Working Group on Central Roads Sector," Planning Commission, April 2014, p. 29.
28 "Highways," Public Private Partnership in India website, http://pppinindia.com/sector-highways.php, accessed 10 August, 2015.
29 "Government to upgrade eight National Highways to world-class express highways," The Economic Times website,
http://economictimes.indiatimes.com/news/economy/infrastructure/government-to-upgrade-eight-national-highways-to-world- class-express-highways/articleshow/48377152.cms, accessed 10 August, 2015.
30 "PPP Projects in Infrastructure," Planning Commission, March 2014, p.15.
31 "Indian Road Sector," ICRA Research Services, August 2014, p. 4.
32 "Rajasthan govt plumps for private participation in roads," Business Standard website, http://www.business-
standard.com/article/economy-policy/rajasthan-govt-to-award-20-000km-state-highways-through-ppp-114080101426_1.html, accessed 10 August, 2015.
33 "Indian Road Sector," ICRA Research Services, August 2014, p. 3.
Concession period for these projects is 25-30 years. The Bidding Parameter is the Maximum upfront one time Concession Fee.34
l Private developers are now allowed to exit all operational BOT projects, two years after tolling begins, freeing up nearly INR48 billion as investment for other projects. 35
l One time fund infusion in Languishing projects-The Cabinet Committee on Economic Affairs is considering a one-time fund infusion in stalled projects where 50% of work has been
completed. Government has identified 15 projects (3 on BOT Annuity and 12 on BOT Toll) to
36,37
undertake the infusion in an attempt to revitalize the sector.
l There are plans to set up a finance corporation with a corpus of INR1 trillion, in collaboration with Japanese investors (26% stake), to fund projects in the road sector. 38
l The Government has set up Special Land Acquisition Units to expedite the process of land acquisition, simplify the environment clearance process and recommend a new dispute resolution mechanism. 39
l As part of procedural simplification, the Finance Ministry has relaxed the norms for PPP and EPC projects, wherein appraisal of projects below INR5 billion may be done by the Standing Finance Committee, headed by the Secretary, Road Transport & Highways (RTH) and approved by the Hon'ble Minister (RTH). 40
l As per EY sources, NHAI is undertaking various initiatives such as Vendor Ranking and
Corporatization. Under the Vendor ranking initiative all service as well as work vendors are to be rated annually based on a list of KPIs and frameworks that have been finalized. These rankings will be made public and can be used for future procurement. Debarment can be linked with below par rating and this will be an annual process to be included in all future contracts, however these won't have a retrospective effect on previous contracts.
The Corporatization initiative is guided towards improved transparency and development of a world class highway agency. Consultants have identified various arears where interventions are required throughout the Value Chain of activities (including Planning, Procurement, Contract management, Legal, Commercial & Technical Due Diligence, Dispute Resolution, Vendor Management, Accounts and Internal Audits, Vigilance, Board & Executive decision making) performed by NHAI.
l As per EY sources, NHAI is revisiting E-tolling options in order to curb toll leakages.
l As per EY research various State highway development programs in Rajasthan, West Bengal,
Andhra Pradesh, Karnataka, Chhattisgarh are on the anvil and will foster great investment opportunities for the private sector.
Upcoming opportunities for private players in the sector
l The Government aims to award 576 km of national highway projects under the newly introduced hybrid annuity model over FY15-FY16. 41
l As per EY research, nearly 30% of the projects under the NHDP are yet to be awarded, 42 indicating a significant pipeline for private players.
l The Government has announced its ambitious Bharat Mala" project to be rolled out by 2017.
The project aims to build 7,000 km of national highways under Bharatmala Pariyojana at an estimated cost of INR 80 billion. The roads would stretch from Gujarat in the west to Mizoram in the east, covering 10 other states as well. The NHAI has already invited bids for preparing the detailed project reports (DPRs) and it is expected that a substantial share of this mega project will be tendered to the private sector.43
2.2 Railways
The Indian Railways (IR) is the world's third-largest rail network operated under a single
management, with a route length and track length of 65,000 km and 115,000 km, respectively. 44
It is also the fourth-largest rail freight carrier in the world, with freight traffic accounting for 64%
of the total earnings. 45
However, infrastructure growth has been very slow in the sector in the past few decades. For instance, while the total passenger and freight traffic nearly doubled during FY01-FY14, the running track length increased by only 10% during this period. This has resulted in severe traffic 46
congestions, with 804 out of the 1,219 railway sections operating on an 80%+ capacity. Apart 47
from the significant under-investment, IR also faces issues of poor service quality and low operational inefficiency. 48
Considering the enormous impact of the railways network on the overall economy, the Government has recognized that high private sector participation is imperative to mitigate pressure on the existing network and streamline operations at a pan-India level.
34 http://indianexpress.com/article/india/india-others/toll-operate-transfer-private-tolls-to-fund-new-roads/
35 "Centre plans 10,000km push for road sector," The Times of India website, http://timesofindia.indiatimes.com/india/Centre-plans- 10000km-push-for-road-sector/articleshow/47219049.cms, accessed 10 August, 2015.
36 http://www.moneycontrol.com/news/economy/15-stalled-road-projects-eligible-for-one-time-funds-nhai_3603461.html
37 http://nhai.org/Doc/17sep15/circular%20one%20time%20fund%20infusion.pdf
38 "Govt mulls Rs 1-lakh-cr road financing corp," Business Standard website, http://www.business-standard.com/article/economy- policy/govt-mulls-rs-1-lakh-cr-road-financing-corp-114062500089_1.html, accessed 10 August, 2015.
39 "Outcome Budget 2015-16," Ministry of Road Transport and Highways, accessed on 10 August 2015, p. 20.
40 "Modification in Delegation of powers for approval and appraisal of National Highway Projects," RoadsIndia website, accessed 10 August 2015.
41 "Govt's hybrid annuity model paves way for road projects," Business Standard website, http://www.business-
standard.com/article/economy-policy/govt-s-hybrid-annuity-model-paves-way-for-road-projects-115070900020_1.html, accessed 10 August, 2015.
42 http://articles.economictimes.indiatimes.com/2015-07-27/news/64918884_1_award-road-projects-worth-road-transport-nhdp
43 http://pib.nic.in/newsite/AdvSearch.aspx
44 http://www.ibef.org/industry/railways-presentation, Aug 2015 and "18 interesting facts about India Railways," Business Standard website, http://www.business-standard.com/article/beyond-business/18-interesting-facts-about-india-railways-business-standard- news-115021600404_1.html, accessed 10 August, 2015.
45 "This one table shows why Indian Railways is in dire need for private capital," Firstpost website,
http://www.firstpost.com/budget/budget-2015-budget/one-table-shows-indian-railways-dire-need-private-capital-2122763.html, accessed 10 August, 2015.
46 "Statistical Summary-Indian Railways," Indian Railways, accessed on 10 August 2015, p. 1.
47 "Infrastructure: Powering Growth through Connectivity," NITI Aayog, May 2015, p. 2.
48 "Indian Railways Lifeline of the nation," Indian Railways, February 2015, p. 25.
