Innovative PPP Financing:
Performance Based Annuity
Water PPPs Workshop
GoMP and ADB
Bhopal
February 27, 2009
IDFC Ltd
India PPP Capacity Building Trust (ICAP)
Significance of the Sector
 ADB’s report “Asia Water Watch 2015” estimates that a minimum
investment of $8 billion will yield a $54 billion annual return.
 Re 1 invested in “access to water” yield Rs. 6 in health, livelihood
and education benefits.
 10th Five year plan took note of Millennium Development Goals



MDG was set in September 2005 at General Assembly in UN
the MDGs are a set of numerical and time-bound targets to
measure achievements in human and social development
To achieve these ends, access to water is most important
means
 India need Rs. 74,000 Crores for basic urban services by 2020
Financing water
 Traditionally it was public financed
 Since 1991, alternatives are being explored
 Municipal Bond
 Pooled financing
 Commercial Borrowing
 PPP
 E.g. Revolving Water Community Funds:
 providing interest free loans to Community Based
Organizations (CBOs)
 Repayments used for additional connections or other
schemes (hence revolving)
Need for alternative financing
 Cash crunch at ULBs
 the lack of reliable sources of equity funds in
purely public schemes and the
 lack of depth in local debt markets which
precludes sourcing long-term financing to
render tariffs afford afford-able
 Private investment in public projects getting
difficult
Water Project Development
 In house: Traditionally done by departments of
government
 Outsourced
 Contract for construction and separately for the
maintenance
 Public Private Partnership on BOOT, DBFO formats
 Annuity based
 User Fee based
 Community based PPP involving public at actual usage
level during O&M phase.
 Involves payments to the private sector
Input, Processes, Output and Outcomes
 Inputs are the resources consumed in producing and
delivering a service—such as labor, technology, or physical
materials.
 Process, which are in place to carry out the service
delivery
 Outputs are the immediate results of the service provider’s
activities—such as the number and quality of the health,
education, or infrastructure services provided.
 Outcomes are the ultimate effects of services on the
community—such as improvements in health or in
educational attainment. Outcomes may be influenced by
factors other than the activities of the service provider,
which distinguishes them from outputs.
The trade off
 Payment after output
 Developer’s need for finance has already passed
 Less attractive to private partner
 Payment before outcome
 No incentive to early and/or quality output
 Completion risk with Authority
 Initial payment is required for the developer to tie
up raw material supply
 Care must be taken that developer is not barraging
hard with supplier
Project Development: Conventional
Conventional
Approach
Concept
So, what are the problems ?
Design
1. Authority has no control on the
construction time – Hence, time
– overrun
Responsibility of
Contractor 1
Installation
Responsibility of
Contractor 2
Operation
2. Authority has no control on the
cost –
Hence Cost-overrun
3. Authority has to pay entire cost
by the end of the construction –
constraint on cash flow
4. Operational involvement
1. Multiple contractors
Responsibility of
Contractor 3
Maintenance
2. Admin overhead
Contractor’s Cash Flow
Investment (Outflow)
$
$
$
Conventional
Approach
$
Construction Period
Operations Period
$
$
$
$
Reimbursement (Inflow)
Authority’s cash outflow
The cash out flow for
O&M remains the
challenge for the
Authority
Conventional approach: What is overlooked ?
 The attention is only to the capital cost and not
Life-Cycle-Cost (Contractor tend to ensure such
quality of construction that it would demand sever
maintenance!)
 Focus on only part of the story
 Subsequent to the commissioning of the system,
ULBs were not ready to take on added tasks




Not fully equipped,
No full trained manpower
Hence low collection
And strained finances
Project Development: PPP
So, what about that?
Concept
PPP
Approach
1. Authority
only conceives the
Conventional
project
Approach
2. Developer would design to
required specs
Design
3. Developer to invest money
Responsibility of
Installation
and recover
during O&M
Contractor 1
period
1. EitherResponsibility
as User Fee or
of
Contractor 2
2. As Annuity
Operation
4. DeveloperResponsibility
assumes risk
of of
Cost & TimeContractor
overrun and
3
Maintenance
operations
Developer’s
Responsibility
Developer’s Cash Flow: Annuity/User Fee
In performance based
Investment (Outflow)
Annuity, each payment is
linked to achievement of
$ performance
$
$ milestones
$
(pre-specified maintenance
standards)
Construction
Period
PPP
Approach
Operations Period
$
$
$
$
$
$
$
$
Authority’s cash outflow (In case of Annuity)
$
Recovery (Annuity/User Fee)
In a Nutshell
Conventional
PPP
Design Risk
Authority’s
Developer’s
Cash Flow Risk
Authority’s
Developer’s
Cost and Time
Over run
Authority has no control
over it
Developer has inherent
incentive to control time & cost
Operations
Period
Authority invests
substantial time and
manpower
Independent Engg-monitoring
Developer bears the risk of
operations
Performance
Standard
The contractor is already
paid for, hence no control
Future payments to developer
are linked to the performance
Rests with Authority
PPP (Annuity)- with Authority
PPP (User Fee) – with the
developer
Revenue
(Demand) Risk
Developer’s Cash Flow-PBDPS
Apart from during operations
Investment
(Outflow)
period,
the payment is made
during construction period also.
However
$
$
$linked$ to pre-specified
maintenance standards
Operations Period
$
$
$
$
$
$
$
$
$
Recovery (Annuity/User Fee)
Recovery (Annuity/User Fee)
Authority’s cash outflow (In case of Annuity)
Authority’s cash outflow (In case of Annuity)
$
Construction Period
PPP
Approach
$
$
Operational Framework: PBDPS
 Detailed (output) specifications for construction;
 Detailed maintenance standards (processes) and
 In terms of service delivery parameters (user
perceived value)
 Private developer’s performance to be assessed on
specified performance indicators
 Hence, involves regular monitoring
Monitoring Mechanism: Option 1
Source: Check List for OBA, Warrick Smith, World Bank
Monitoring Mechanism: Option 2
Source: Check List for OBA, Warrick Smith, World Bank
Using Performance Based Contracts
 Clearly set objectives
 Reached through mutual consent
 Transparency and honesty
 Due Diligence
 Scope
 Minute details to be covered beforehand
 Service Area: Include a map in the agreement
 Duration of the Agreement
 Realistic assessment
 Scope for fair returns
 Lease (10-15 yrs) and Concession (20-30 yrs)
 Early Termination
 Triggers
 Avoid general one-sided clauses favouring authority
Source: Guidelines on Performance-based Contracts, OECD
Due Diligence
 the utility's current and proposed service area;
 current characteristics of service (quantities
supplied, metered and paid for);
 basic inventory of the assets of the utility as well
as of their condition;
 if any, current performance standards and the
record of achievement thereof;
 human resources;
 tariffs (level and structure, subsidy arrangements
and disconnection arrangements); and
 general financial performance.
Source: Guidelines on Performance-based Contracts, OECD
Selection of performance indicators
 Which indicator best describes developer’s performance



Input based- Quality of material, workmanship
Output based- user experience, quality of service delivery etc
Whether really under control of Developer
 Not too many of those; only the most crucial ones
 Detailed procedure to measure the indicators
 Whether, developer is allowed to invest in equipments needed to
measure indicator (waste water reduction)
 How much time is required to achieve the targets


Too short: difficult/impossible to achieve
Too long: wherewithal of the utility to monitor, very limited visible
improvement, political risk
 Flexibility to accommodate unforeseen-mutually agreed terms
 Not only penalties but also incentives
 Cross-subsidy: inherent self imposed obstacle to improvement
Source: Guidelines on Performance-based Contracts, OECD
Performance Indicators: examples
 Financial Performance
 collection efficiency
 profitability, current ratio (current assets/current
liabilities);
 operating ratio (operational expenses including or not
depreciation/operational revenues);
 accounts receivable;
 salary or energy costs as a % of total operating costs;
 annual income;
 debt service coverage ratio (relevant in cases where
the utility's activities are financed by the proceeds of a
loan)
Source: Guidelines on Performance-based Contracts, OECD
Performance Indicators: examples
 Operational:
 number of staff (measured against an indicator such as
number of person served, area, pieces of equipment,
etc.);
 unaccounted for water;
 pipe breaks (measured against an indicator such as
time period and/or length of the pipe system);
 reduction of consumer's complaints (billing error, meter
malfunctioning, quality of service, etc.);
 type of consumers’ complaints;
 response time to consumer's complaints; and
 metering coverage and metering effectiveness.
Source: Guidelines on Performance-based Contracts, OECD
Performance Indicators: examples
 Operating Performance:
average hours of service;
population served;
average water production;
average water consumption;
average pressure in the distribution system
and water quality; and
 water quality indicators.





Source: Guidelines on Performance-based Contracts, OECD
Output Based Aid: Andhra Pradesh
 The scheme involves a public-private partnership
between the Naandi Foundation, a local Indian
NGO, Water Health International, a water
purification technology provider, and the village
councils
 A project supported by the Global Partnership on
Output-Based Aid (GPOBA) is piloting a project
providing safe drinking water to 12,500 poor
households in 25 villages in three coastal districts
of Andhra Pradesh: Guntur, Krishna, and West
Godavari.
Output Based Aid: Andhra Pradesh
1
2
3
Indicator
Description
25 UV water
Purification
Plans/CSWSs
installed
Construction &
Installation of
complete CSWS
Completion Report for
each plant available from
the Independent
Verification Agent
20%
Paid
Subscription
Fees
Minimum 500 BPL
households registered for
paid usage of water;
subscription fee received
from such households
60%
cum of water
sold
continued usage of paid
water by a min 500 BPL
Households
Billing Records
20%
Registration of
households
3 months of
billed user fee
Cross Check
Target Parameters
Parameter
Current
Status
Short Term
(0-3 years)
Medium Term
(3-7 years)
Long term
(7 + years)
Technical
Frequency of
water supply
2 – 3 days
a week for
few hours
5 days a week for
few days
Daily water
supply for few
hours
24 X 7 water
supply
Coverage
(Population)
<50%
70%
80%
90%
Nil
70% metering
100% metering
100%
metering
30 to 70%
< 30%
< 20%
< 15%
< 50%
75%
90%
100%
Nil
Develop consumer
redressal system
Response time:
< 3 day
Response
time: < 1 day
Metering
UFW Control
Sanitation
Coverage
Consumer
Redressal System
Target Parameters
Parameter
Current Status
Short Term
(0-3 years)
Medium Term
(3-7 years)
Long term
(7 + years)
Financial
Recovery of
O&M Costs
<40%
75%
100%
100%
Recovery of
Full Cost
-
25%
40%
75% in 10th
year
Accounting
Systems
Development
No separate
accounting system
Development of
accounting
system
Implementation
Periodic
maintenance
and review
Institutional Framework
Sector
Database
Not available
Development &
implementation
Periodic
updation
Periodic
updation
Training
Adhoc basis
30% of staff
trained
100% of staff
trained
Monitoring &
training contd
Thank You
Spectrum
Dams, River-lift etc
Generation
Conventional
Finance
New
Approach
Public
PPP
Public
PPP
Public
PPP/Commu
nity based
Canals, Bulk Supply Lines
Transmission
Last Mile Connectivity
Distribution
ULBs challenges: The vicious circle
Poor Revenue
Collection
Strain on Finance
for newer
connections
Low Control on
leakages and
theft
Poor O&M
standards
Low Willingness
to pay
Poor Perceived
value of service
Water Supply Sector: Issues
 Political Aspects
 Water usage charges – a politically sensitive issue
 While charging user-fees, gross under-pricing of water
 Operational Aspect (ULB level)
 Commercial inefficiencies of ULBs;
 Sub-optimal service-provision and asset-utilisation and
 Reactive maintenance;
 Private participation a tricky issue
 financial viability issues,
 revenue (demand) risk fully passed to the private
 lack of adequate and reliable database
 Community Aspects
 Still considered as a ‘free good’ by the citizens and;
 Low willingness-to-pay citing poor service levels- ‘chicken
and egg’ problem.
Monitoring
 Self sampling reports by developer
 Surprise, spot check- audit by authority
Annuity Types
 Equal Periodic Amounts
 Spread equally over the useful life of the
assets/concession period.
 Front Loaded
 Higher amounts in initial periods and equal
periodic amounts in later part.
Karnataka
 ADB-funded North Karnataka Urban Sector Investment Program
(NKUSIP) at 25 towns of northern Karnataka
 Primarily water supply, UGD, storm water drains (SWD), & roads
 PPP- Performance Based Deferred Payment System: PBDPS
 The developer is responsible for
 good quality construction and
 preventive maintenance over the period of contract
 Critical aspect of regular, pro-active O&M is addressed,
 Entire market risk not be passed on to developer
 ULBs could partly retain the same while the project would
provide funds for maintenance from the ADB-assistance and
earmarked devolution from the GoK.
 Project structured with larger upfront payments, so that repay
most of the loan in the initial period, reducing his financing costs
and also the overall costs of the project.