ADBs

Private Sector Financing Options

Mainstreaming PPPs in India

Mumbai, 28-30 January 2010

Sujata Gupta Principal Investment Specialist Private Sector Operations Asian Development Bank

Outline

ADBs private sector operations Private sector products Areas of operation Public private partnership

ADBs Private Sector Operations

Promotes private sector development & catalyzes private financing for infrastructure & capital/financial market transactions

Provides financial support through equity investments, loans & credit enhancement products including guarantees

Originates, negotiates, structures, executes & administers private sector transactions

Shares project risks with private sector investors & financiers no government guarantees

Private Sector Operations

Poverty reduction is ADBs overarching objective

The Private Sector Development Strategy states: The Asian experience shows that growth is the most powerful weapon in the fight against poverty.

Private Sector Operations alleviate poverty by:

generating employment increasing the tax base freeing government resources for social spending

Impact of PSODs interventions on poverty reduction are often indirect but significant.

Private Sector Financing Products

Develop flexible & innovative products for the unique financing & risk mitigation needs of our clients projects in emerging markets

Equity Investments Directly or indirectly (through funds), includes preferred stock, convertible loans, & other forms of mezzanine financing Lending Long-term, dominated in international or local currency Includes corporate & project Bonds Complementary Financing Scheme B Loan Guarantees Partial Credit & Political Risk Guarantee

PSOD Financing 2001-2008 ($ million)

Infrastructure Finance

2,500

2,000

1,500

1,000

500

0 2002 2003 2004 2005 2006 2007 2008

2001

PSOD Approvals 2008

Transport 11%

Housing Finance 1% Health 2%

Conventional Energy 34%

Banking Systems 14%

Telecommunications 10% Transmission & Distribution 18%

Renewable Energy 6% Energy Sector Development 4%

PSODs Indicative Pipeline

Trade 30% Conventional Energy 29%

Housing Finance

1%

Finance Sector

Development

1%

Banking Systems Renewable Energy 21%

1%

Capital Markets & Funds Hydropower Generation Water 12% 1%

3% Communications

1%

Private Sector Infrastructure Finance

Portfolio by Country
VIE THA SRI BAN CAM AFG

DMC

No. of Projects

AFG

BAN

CAM

IND

12

INO
PRC

LAO

MLD

1
IND

NEP

PAK
PHI

PHI

PRC

7
PAK NEP MLD INO LAO

SRI

THA

VIE

Total

46

Regional Departments Government / Sector Dialogue

ADB RDs

Private Sector Development

ADB PSOD

Private Sector Investors On the Ground Experience

Our core niche Public Private Partnerships

(infrastructure, financial sectors)

Public Sector
Crowding Out

Private Sector

What projects do we favour?

Model (replicable) projects Pioneering projects (a first) Frontier markets Projects that influence policy, from the bottom up Projects with wider sector / economic impacts Projects with strong poverty reduction elements Projects that promote good governance ADB involvement is catalytic crowds in others Innovative structures Deepening financial & capital markets Bring private sector rigour & management skills into public sector services CPS & LTSF alignment Projects that are financially strong!

How PSOD works with ADB colleagues

OCO

RDs/ RMs

PSD, leads, PPPs

cofinancing, guarantees, syndication

ORM

PSOD

risk ratings, evaluatio n

legal support, outside counsel

OGC

funding, disbursement

safeguards, CDM

TD / CTL

RSDD

PSODs PPP Initiatives

The Investment Gap

too risky too unpredictable too small tariffs too low too opaque too expensive too difficult to leverage too hard to exit too many better opportunities my credit people!!!

Project preparation

insufficient master planning insufficient project preparation bidding process is crucial land issues have to be resolved law & arbitration have to be acceptable government leadership, consistency & staying power are crucial need to chose the best model projects dont be too ambitious right risk balance & government support freedom to earn a decent return

Water PPP issues

cost recovery (supplied by God) political sensitivity offtaker (status, credit, size, experience) usage conflicts deal size demand projections sector preparation regulation / oversight sponsor appetite? associated facilities interface risk land issues forex issue? environmental / social issues

Challenges

ULB deliver services - but most fiscal authority at state level (= unfunded mandate) ULB typically in charge of O&M but state agencies in charge of capital investment Unable to cover O&M costs (capital investment for expansion?)

Limited government financial resources, lack of technical expertise & inadequate tariff recovery = under funded & unsustainable sector Tariffs not based on economic cost recovery very low with no relationship to actual costs For customers water & sanitation = entitlement not payable service Unsustainably low prices +poor collection gives poor economic signals (= water wasted) Vicious cycle of lack of funds in ULB poor service delivery Recognised need for alternative finance, management & technical approaches = PPP

Example: Surat New N. Zone water supply

Population (2007) 400,000 Projections - 654,000 in 2026 & ~ 923,000 in 2031 Detailed town planning schemes in developed area Detailed Project Report (DPR) approved under JNNURM

Grants available for 70% of approved project cost of INR 1.6 bn ($ 33 m). Total cost $50 million.

Project components:

Intake well, pump house, approach bridge & pipeline work; WTP & E Point; UGSR with booster house, E-Point, WDS Headwork & ESRs; Mechanical & Electrical works at intake wells & booster houses; Raw Water Trunk Main & lines; Distribution Network; Metering

Proposed structure
SMC JNNURM GoI + GoG Grant 50%

Private Operator

Equity SMC grant 25%

Reporting by operator Connections and Service levels Payments to Private operator based on price per KL and volume of water at End-customer level

Debt

Project SPV

SMC

Build network

Maintain Network / service levels

Provide Connections

Metering and billing

Consumer Tariff Fixation

Retain user charges

* Collection on behalf of SMC

Regulation by Contract through Independent Engineer / Independent Auditor & Bid Tariff regulation committee

Lessons Learnt

Careful planning of PPP required (thorough professional FS) Strong Government commitment champion within government Revenue & cost estimates realistic & comprehensively assessed Solid legal/regulatory PPP framework desirable (though not always possible) Contracts need to be clear & complied with Procurement open, transparent & competitive Public buy-in essential public communication & consultation Ability to pay is often not an issue convert ability to willingness Needs of vulnerable groups Initial PPP transaction costs higher Project needs to be sustainable once established Combine grants, project revenues (tariff, secondary), soft loans Safeguards incorporated in design not as afterthought

Lessons Learnt

Need to develop capacity of ULB for PPP projects

Develop technical & managerial capacity by training & hiring qualified personnel possibly from private sector Complete success in short run difficult but focus on LT sustainability

Need to develop the financial strength of the ULB

Devolution of revenue raising ability

Tariffs on cost recovery basis

Clear economic signal for proper allocation of a scarce resource Sudden tariff increase not politically acceptable phased approach Communicate to public that water a service which costs money

Innovative financial structures may be required Financing cannot make bad project good

Donor/MDB funding available through ODA, soft / commercial loans OBA to incentivise good performance Credit enhancements, TA from MDBs Targeted subsidies for sub-components Municipal bond financing

PRC: Chengdu Waterworks Project

First BOT scheme under competitive bidding in the PRC which established a new water treatment plant with a capacity of 400,000 in Chengdu, Sichuan Total cost: USD 107.6 mil Shareholders: Veolia Env 60% Marubeni Corp 40% ADB: Loan - USD 26.5 mil B loan - USD 21.5 mil

Key challenges/issues: Credibility of the offtaker & the offtake guarantee by the Chengdu government Foreign exchange risk (mismatch of debt service & local currency revenues) Completion risk of transmission connections to be constructed by Chengdu government

Chengdu Water : Contractual Structure

CAMPENON BERNARD
Construction Contract (fixed price, date certain) Offtake Agreement (take or pay)

Concession Agreement

MUNICIPAL GOVERNMENT

Primary Obligor (under Offtake Agreement)

PROJECT COMPANY

MUNICIPAL WATERWORKS COMPANY

Technical Agreement (O&M)

VIVENDI

ADB support for Chengdu Water

TA for sponsor selection TA for project document preparation TA for water tariffs Financial advisor:

Structured & arranged financing Due diligence

IMPACTS Addresses water shortage Private sector efficiencies Major investment in inland province First BOT water project model for future IWPs First BOT project without central government support Ensured cost recovery Catalysed commercial funding (B loan) Local currency participation

Thank you

For more information sgupta@adb.org Private Sector Operations ADBs India Resident Mission New Delhi