Water PPPs : Training & Workshop
Developing a PPP - Project Appraisal and
Feasibility Studies
Infrastructure Development Corporation (Karnataka) Limited
February 2009
1
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”)
2
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
pertaining3 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
4
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
5
Development Process
A.
Project Conceptualisation
Project
Identification
B.
Technical
Feasibility
Financial
Viability
Project
Structuring
Options
Bid Process Management
Contractual &
Bid
documentation
Bid Process
6
Feedback &
Monitoring
Resolution of
Implementation
Issues
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…
7
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
8
The Need Defined
Client’s Explanation
Project
Documentation
Project Leader’s
understanding
Specifications
Designer’s
9
Contractor
Program writer
Support
Business Consultant’s
Plan
What Public wanted
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 ?
10
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
11
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
12
The Need

Assess project viability and finalise project structure



Compile data pre-requisites necessary for bidding


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
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
13
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 term14finances in domestic market
Risky List!









Construction/ Completion
Operation Risk
Environmental
Regulatory
Forex
Interest
Demand
Credit
Political/ Social
15
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)
16
17
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.
18
Financial Accuracy
19
Risk Mitigation

PRAYER !!!!

Proper Allocation Of Risks

Insurances

Hedging/ Options/ Swaps

Third Party Guarantees

PRAYER !!!!
20
Risk Factors

Supply

Hydrology/ rainfall patterns/ quality/ water access contracts

Distribution monopoly vs trucked; user fees; desire to avoid
retail revenues

Operating


Infrastructure


New technologies in wastewater/ energy/ metering
Old/ theft (leakage)
Environmental

Benign
21
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
22
Thank You
23