1. Water PPPs : Training & Workshop
Developing a PPP - Project Appraisal and Feasibility Studies
Infrastructure Development Corporation (Karnataka) Limited February 2009

2. 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”)

3. 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

4. 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

5. 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

6. Development Process A. Project Conceptualisation
Identification
Technical
Feasibility
Financial
Viability
Project
Structuring
Options
Resolution of
Implementation
Issues
B. Bid Process Management
Contractual &
Bid
documentation
Bid Process
Feedback &
Monitoring

7. 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…

8. 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

9. Business Consultant’s
The Need Defined
Project Leader’s
understanding
Designer’s
Program writer
Business Consultant’s
Plan
Client’s Explanation
Project
Documentation
Specifications
Contractor
Support
What Public wanted

10. 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 ?

11. 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

12. 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

13. 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

14. Why Risk Assessment? 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

15. Risky List! Construction/ Completion Operation Risk Environmental
Regulatory
Forex
Interest
Demand
Credit
Political/ Social

16. 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)

18. 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.

19. Financial Accuracy

20. Risk Mitigation PRAYER !!!! Proper Allocation Of Risks Insurances
Hedging/ Options/ Swaps
Third Party Guarantees

21. 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

22. 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

23. Thank You