World Bank Support of Railway Concessioning & Bidding

ROUNDTABLE ON RAILWAY PPPs

George Tharakan and Nupur Gupta, World Bank (SASEI) New Delhi, June 16, 2006

World Railways and PPP

Americas, Australasia, UK Substantial increase in PPP activity Virtually all rail freight in private hands Central Asia & Eastern Europe Restructuring involving transition from centrally planned to autonomous management, some privatization European Union except UK Largely publicly owned and operated Adoption of various degrees of separation of infrastructure from operations China and India Largely vertically integrated & publicly owned Mega network development plans
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Railway PPP Experience Developing World

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Railway PPP Financing 1990-2001 Developing Countries

Other, 3%

US$ 29 billion

East Asia Pacific, 35%

Latin America, 62%

Much of the PPP investment has taken place in Latin America and East Asia. While in LA the experience is largely with freight railways, in EA it is mainly with urban passenger rail.
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World Bank Group Experience with Railway PPPs

Freight concessions (30 +): Argentina, Chile, Brazil, Bolivia, Uruguay, Guatemala, Mexico, Peru, Cote dIvoire/Burkina Faso, Cameroon, Malawi, Mozambique, Senegal/Mali, Ghana, Jordan, etc. Partial Privatizations: Poland, Romania Suburban passenger concessions: Buenos Aires 7 lines, Rio de Janeiro, Mexico City Metro Concessions: Buenos Aires, Rio de Janeiro, Bangkok, Sao Paulo Line 4
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LAC Rail PPP Profile

LAC accounts for close to two-thirds the investments in developing world - $16 bn 3 countries Brazil, Argentina & Mexico account for 95% of the investment Largely concessioning of existing railways Largely freight corridors Vertically integrated concessioning

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Performance of PPP in Railways

Freight Traffic Volume Argentina Bolivia Brazil Chile Colombia Mexico Peru
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Year of Main Concession 1993 1996 1996 1995 1999 1997 1999
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2003 TKM increase over Concession Year 145.7% -6.4% 40.3% 58.3% 68.3% 29.1% 117.8%
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Latin America Railway Concession Results

Erosion of railway traffic base halted Service quality improved Significant total factor productivity improvements Tariff levels declined Government relieved of financial burden Investment projection typically not met largely a result of lower traffic volumes than projected Limited impact on allocative efficiency, railway market share
Concessions resulted in improved traffic flows, productive efficiency and reduced tariffs. On the other hand, they did not generally result in large capacity additions or improved inter modal competition
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Indian Railways & Need for Capacity Enhancement

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Indian Railways
IR, the fourth most heavily used system in the world Responsible for 15% of passenger traffic and 25% of freight traffic in the country IR has been steadily losing freight market share to highways due to capacity constraints and skewed tariff policy Looking from a port connectivity perspective alone there are serious capacity constraints

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Port Traffic & Trade Projections

Port traffic is expected to double from present levels of over 500 million tons by 2015. Container traffic from 4.5 to 20 million teu, dry bulk traffic from 197 to 390 million tons over the next ten years
1130 1200 1000 800 522 600 400 200 0 1990-91 2000-01 2004-05 2009-10 2014-15 164 368 782

Urgent need for rail capacity enhancement and technology upgradation to cater to this growth alone
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Competitiveness of Indian Trade

Higher logistics costs incurred by exporters on account of suboptimal routing or mode use directly affect competitiveness While these additional costs may be sustainable during boom periods, may lead to a loss of trade opportunity during troughs, and therefore an overall loss to the economy

Rail capacity and efficiency needs to be significantly ramped up for meeting the growing trade opportunities
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Paradip Port Case Study - Hinterland

Jharkhand
Gua Noamundi (IO)

West Bengal

Koira (IO)

Joda-Barbil (IO)Haldia

Sambalpur (TC)

Raipur Talcher (TC) Daitari (IO)

Paradip is the natural choice for exports of Iron Ore and Thermal Coal but significant quantities volumes must move through Haldia and Vizag Key issue for thermal coal is the connectivity constraint Key issues for iron ore are Connectivity constraint Port handling facilities Paradip Iron Ore 15.74 9 (57%) 10.5 (81%) Vizag 1.32 (8%) 2.5 (19%) Haldia 5.4 (34%) -

Ch at tis ga r

Dalli Rajhara 8.0 0.0 8.0

Paradip

Orissa

Bailadila 17.2 5.6 11.6

Vishakhapatnam (Vizag)

Thermal Coal 13

Port unable to encash hinterland value

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Quantity in Million Tonnes

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Paradip Case Study Iron Ore Exports

Port handled only 60% of iron ore exported from its hinterland
Paradip handled 9 million tonnes

61% of the ore at Paradip was transported by road.

Rail line capacity, port rake handling capacity are constraints

Logistics Cost
Rail transport cost to various ports ranges between Rs 450 Rs 1,350 (per MT) Road transport cost varies between Rs 1,000 Rs 1,250 (per MT)

Impact of new rail connectivity projects

The Banspani Daitari rail link will reduce costs by Rs 350 per MT, this will benefit significant volumes earlier routed to Haldia Lower FoB price of ore will expand market demand, so benefits even larger. Savings on the order of Rs 100 crore a year or higher.

High inland transport costs is one of the key issues

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Paradip Port Case Study Thermal Coal

Origin Port Distan ce Km 200 560 Inland Haulage Rs per MT

Sambalpur Talcher

Talcher

Paradip Vizag

194 472

Paradip

Vizag

Paradip is the natural choice for coastal shipping of Thermal Coal Significant quantities of thermal coal are directed to Vizag ( 20- 25%)as per allotment plan of the Standing Linkage Committee for thermal coal Standing Linkage Committee, allotment plan for Jan March (06-07)
Reduction in volumes to Paradip 18% Increase in volumes to Vizag 51%

This is primarily due to rail line capacity issues

Rail capacity is the key reason for reduction in volumes

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Talcher Paradip Sambalpur Paradip Cuttack Paradip

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IR Capacity Enhancement Potential India-China Comparison (2002 Data)

India Route-km Ton-km per year (billion) Average Freight Tariff (US cents/ton-km) Traffic Density (million TU/route-km)
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China 72,000 1551 0.96 27.4

63,000 336 1.6 13.1

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China Railway Network Plan 2003-20

Railway route length to increase from 75,000 to 100,000 km Separation of freight and passenger transport operation on trunk lines 50% double tracking 50% electrification
Total cost of the mid and long term network plan is expected to be $240 billion spread over 2003-20
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Indian Railways Development Plan 2007-12

Rs. 5,00,000 crores ($ 100 bn) outlay proposed for railway upgradation Capacity upgradation Rolling stock Equipment upgradation etc. Given the quantum of funding involved, PPP expected to be a major contributor (about 60%) to the planned investments This is a scale of Railway PPPs unprecedented among railways around the world.
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Embarking on PPPs

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The Partnership
There are certain misconceptions about the word partnership. It is not a warm and fuzzy relationship between public and private parties working towards a common objective. Public and Private partners have distinct objectives. Challenge for the public sector is to design sufficient incentives so that private profit seeking attains broader public interest objectives. Rewards are performance related, with mechanisms for continuous monitoring by the public agency over the life of the contract not fire and forget proposition.
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Public Private Partnerships

PPPs are long-term contracts between a public sector Contracting Authority (CA) and a private service provider. Challenges for CA are: Carefully structured contracts that are affordable and bankable. Transfer of specified project risks and good risk management. Adequate public control to assure output and quality. Fair contracts that positively enable private investment. Achieving good PPP outcomes is non-trivial. Bad outcomes can be disastrous e.g. Turkey power sector PPPs resulted in an estimated loss to the country of US$7 billion per year as a result of badly structured contracts. Fortunately, a lot has been learned and the mistakes need not be repeated.

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PPP-Necessary Conditions Success

Adequate legal and regulatory framework that is perceived to be, and is in fact, fair and equitable. Development of standardized clauses which have received adequate legal due diligence. Mechanisms for periodic review of specific contractual terms during the life of contract. Effective, efficient and fair dispute resolution. Fiscal tools for correct accounting of liabilities, esp. contingent liabilities related to PPP contracts. Early and regular communication with stakeholders, including end-use customers.
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Regulation of PPPs by Law and Regulatory Agency

Unilateral administrative act specifying the rights and obligations of private parties. Rules written by the legislature with secondary regulations by Regulatory Agency. Regulator responsible for applying licensing framework including regulation of tariffs, service standards and protecting customer rights. Discretion vested in the Regulator better informed but risk of excessive intervention.

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Regulation of PPPs by Contract and the Courts

Rules written by CA and private party as a contract governed by contract law. Discretion vested in the courts may be difficult when there are complex technical issues. Ability to write robust but flexible contracts designed to last 30 years could be an issue. CAs ability to monitor service provider may be deficient and seen as not even handed. Insertion of a Regulator with excessive discretion may deter private sector private sector prefers sharp rules - predictable though a little imperfect.
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Checks and Balances

Guidelines, Rules and Approvals

Checks and Balances Project Preparation

Guidelines for, e.g. Appointment/mgnt of Transaction Advisors Preparation of the business Case Construction of Public Sector Comparator Stakeholder consultations Rules for, e.g. Site hand-over by public agency Minimum risk transfer e.g. construction risk Tariff adjustment method Guarantees that assume financing risk
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Checks and Balances Bidding and Contract Management

Guidelines for, e.g. Standardized contract clauses Legal due diligence to seal risks in contract Contract and performance management Contingency plans for emergencies Independent auditing Rules for, e.g. Dealing with unsolicited proposals Payment deductions for under-performance Interim reviews and periodic contract adjustments
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PPP Policy Support

Expert Advisory Services for generic PPP issues, e.g.: Contract Adjustment during life of the contract. Mechanisms for independent expert panels should be established: Method of appointing independent expert panels. Limits of discretion given to such panels. How to handle refinancings or other windfall profits Management of Contingent liabilities Proper accounting of contingent liabilities. Control risks of off-balance sheet accounting. Etc.
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Initiating a Large Scale PPP Program for Railways Where do you start?
Well developed Railway PPP Policy paper. This will also create confidence in the program. The paper should cover, i.a. PPP initiative in the context of a long term strategic transport network development plan that is stable and predictable. Bolstering capacity for planning, preparation & implementation of PPP transactions reduce risks. Development of necessary legal and regulatory framework Simple & transparent bidding procedures Standardised Concession Agreements equitable risk sharing Dispute resolution defined procedures & speedy resolution Preconstruction land acquisition, utility shifting Clear understanding of and safeguarding against contingent liabilities. Finally, last but not least, mechanisms to safeguard against moral hazards created by long-term nature of the contracts!
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World Bank Involvement

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World Bank PPP Assistance in India

Capacity Building for PPPs at national & state levels Capacity building for Viability Gap Funding Guidelines, etc. PPP Appraisal Unit in Planning Commission Model Concession Agreement reviews, guidelines Indian Infrastructure Finance Corporation (IIFCL) Examining possibility of assistance to IIFCL Resources India : Addressing Supply Constraints to Infrastructure Financing India : Building Capacities for PPPs
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World Bank Assistance

Funding for Investment Guarantees Technical Assistance Knowledge Bank

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Thank You
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