PPP- Issues

Prof. b.p.mishra
Ximb
XUB.
1

Project cost & Funding

The project cost budget takes in to

account costs incurred since the
beginning of the project development
until the project is complete and
ready to operate.

Components

lopment costs:-The cost incurred by sponsors or project com

prior to the financial close.
lopment fees:- The fee paid to another company by sponso
to develop the project & to do the legwork.
ct Company Costs:- includes costs after financial close.
contract cost:
truction Phase insurance:
up costs
l Spares
s: Taxes payable on the various project costs-VAT or sa
ncing Cost
ng Reserve Accounts
ngency
3

Project Company cost

Personnel costs
Office Equipment
Costs for permit & Licenses
Owners Engineer cost
( Construction supervision)
Training & Mobilization cost

Start- up cost

hese are costs for any fuel or raw materials used by

he EPC contractor during testing & start up
f the project before final completion.

itial Spares are costs for initial stock of spare

these are not included in the EPC contract.)

Working capital

e cost that the project company has to incur

it receives its first revenue. These cost may include

itial inventories of fuel & other raw materials

ffice & Personnel cost
he first operating insurance premium
ny timing difference between payment for input supp
and product outputs.

Financing costs
o Loan arrangement & Underwriting fees
o Loan or security registration cost
o Cost of Lenders advisors
( Both before & after Financial close)
o Interest During Construction Period (IDC)
o Loan agency Fees
o Commitment fees

Funding Of Reserve
Accounts

reserve accounts provide security against short-term

h-flow problems and are also established if funds needs to be
aside for major expenditure in future.

Debt Service Reserve Account-DSRA

ebt Payment Reserve account
aintenance Reserve account- to meet escalated maintenanc
ax & other soothing Reserve account
surance Proceeds Account

DSRA

ciency of Funds for meeting debt service obligation

h interest & Principal Repayment)for at least fora hal
DSRA can be established at the beginning
e operation Period-Three types-

lude the DSRA as part of the construction cost budg

for the project
nd it from the operating cash-flow
aw it from project contingency Fund
9

Project Funding

Required Funding is divided in to cost & Equity.

f funding is available for a particular purpose
An ECA insured loan that can be used for payment f
an export contract With the ECAs country),
he calculation s need to take this in to account.

A revolving credit facility for working capital will help

n reduce the required level of Sponsors equity.

eparate short term funding may be required for

VAT or other taxes payable during construction
that are recovered from off-setting against taxes
n Revenues once operation begins.
10

ECAs

ort credit agencies:

U.S.Exim
ed States EPIC(Overseas private Investment Corpora
da- EDC (Export Development Corporation)
n- Japan bank for International Co-operation- JBIC
ce COFACE
many Hermes/ KFW
ed Kingdom ECGD
Export credit Guarantee Department)

11

Loan Drawings & Debt

Service

The required ratio between Equity & debt

The priority of Drawing between equity & debt.
Any limitation on the use of Debt
A drawdown schedule
Funding of Interest during construction period (IDC
Priorities for allocation of net operating cash flows
Allocation of cash for debt repayment
Calculation of Interest payment
Allowing for hedging contracts
12

The cash-flow Cascade

e project company needs to pay to continue operati

es and expenses due to the agent bank, security tru
erest on the debt any swap or other hedging payme
ebt repayments- To the target schedule already draw
yment to DSRA and other reserve accounts
stribution to investors
sh Sweep, if any

13

Cash sweep

me projects a cash sweep may apply:

an agreed-upon level of Distribution to the investors,
balance of the cash flow is used to prepay the debt or
between prepayment or further distribution to investors.

approach is normally used if there are likely to be substantial

uation in the cash flows
ause of price movement in input or output)
ers wish that some of the surplus cash generated in good tim
to reduce debt Provides a buffer against downturn.
o provides for Tail risk of the Lenders.

14

Cash Claw back

ere is uncertainty about future costs( A major maintenance)

evenue ,lenders may allow investors to take cash distribution
of the project company, provided a CLAW BACK undertakin
iven.

er such undertaking, the sponsors agree that if the possible

re cash flow problem develops, they will repay or lend the
ject company up to the amount they have received in divide
ther distribution over the set period of time.

15

Accounting & Taxation

t from the need to check the effect on a

sors reported earnings, there are a number of reaso
accounting results are needed:
x payments are based on financial results of Accoun
he accounting results affect companys ability
to pay dividends.
his, in turn ,could affect its ability to keep trading
dding a balance sheet is a good way for checking err
in projection,
alance sheet does not balance , there are some erro
16

The Dividend Trap

ay be preferable for the sponsor of the project to pr

of the equity in the form of sub-ordinated debt.

e reason is that the interest on shareholders

-ordinated debt may be tax deductible,
dividend is taxable.

second is the concept of Dividend trap implying

company has the cash flow but can not pay dividen
investors because of a negative balance in P&L acc
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The Example

umptions:
roject cost 1500, funded 1200 by Debt and 300 by E
ncome & Expenditure including interest are constant
475 and 175 p.a respectively
he tax DEP is 25% on WDV basis
( declining balance method)
ccounting Dep is same as Tax Dep.
he tax rate is 30%
the project makes tax loss, a tax credit of 30% of th
arried Forward, and applied against future taxes pay
oan principal repayment are 200 per annum
he figure runs for 6 years, although the project life i
18

TOTA
L

Revenues

475

475

475

475

475

475

2375

Expenditure

-175

-175

-175

-175

-175

-175

-875

Tax DEP

-375

-281

-211

-158

-119

-89

-1144

Taxable
income/loss
(A+B+C)

- 75

19

89

142

181

211

567

Tax credit/due[-D
*30%}

23

-6

-27

-43

-54

-63

Tax credit used

17

23

17

Tax credit CF
G

Tax payable (E+F)

-10

-43

-54

-63

-170

Net Income[D-G]

- 75

19

79

99

127

148

397

Loan repayments

-200

-200

-200

-200

-200

-200

-1200

Dividend paid

-23

-99

-127

-148

-397

Cash flow[HC+I+J]

100

100

67

-42

-81

-111

33

Cash balance

100

200

267

225

144

33

190

Negative Equity

arge amount of Equity is brought in as Sub-ordinate

se may arise, when the repayment of sub-ordinate d
s not have sufficient cash flow and results in negativ
ty.

negative equity (possibly with negative balance

&L account) has to cease trading and go into liquidat

20

PPP

have taken several form ranging from pure privatizati

ll structured partnerships with various levels of comm
een the Public & Private sector.

21

Based on the Project Status:Cancelled Projects

Distressed Projects
Merged projects

22

Cancelled Projects

here the private sector has exited from the partnershi

her
by selling or transferring the economic interest
ck to the government before fulfilling the contract terms.

Removing all management and personnel from the concern.

By ceasing operation, service provision or construction for

% or more of the license or concession period,
lowing the revocation of the license or repudiation of the con

23

Distressed projects
Where the Government or the operator has
either requested termination or are in
arbitration.
Power Purchase Agreements:
980 MW Adani power project has a PPAs with Gujarat & Haryana
Government
4000-mw Tata Power- promoted Coastal Gujarat Power Ltd has PPAs
with Maharashtra,Punjab, Gujarat, Haryana, Rajasthan.

Concession agreements on Road:

About 39 projects eligible for rescheduling premium amount of Rs
25,000 crores spread over next 20 years

Metro Trains:
Rel Infra promoted Mumbai Metro in litigation with MMRDA over fares
Airport Expressway in Delhi, now run by DMRC, under dispute over
loan Repayment.
24

Merged projects

hat has been acquired and merged with other project

25

The focus

re is still a lot of improvement to achieve concerning the

ementation of PPPs and this improvement is expected throu
er understanding of PPP framework.

26

The Dynamics of PPPs

Ps are characterised by two significant but Unique properties

The dual or multiple roles of the stake holdersblic authority. Concessionaire, the lenders, the contractors et

The strong dependence on the Economic and Social environm

which they are developed.

27

Analysis of Risk

Understanding and analysis of Context of Risk.

The identification of the requirements for managing these Ri

28

Relationships with key stakeholders

in PPPs
Key Stake
holder

Concession Contrac Lend Public

aire
tor
er
Authori
ty
Concessionai Funder
Client Client
re
Contractor

Client

Lender

Client/
Funder

Client

Public
Authority

Client/
Guarantor

Client 29

Conflict of Interest

ecessity of compromising conflicting interests because of

akeholders multiplicity of roles and clarifying relationships
at after seems paradoxical.

30

1)The lenders in bidding phase often provide

consulting services For the development of financial
tenders to several competitive bidders
Simultaneously acting as adviser for Public
authority for development of Proper financial
structure and strategy for the PPP.
2) Concessionaire develops the project with invitation
from PA and have to meet the standard of delivery
set by the PA. Again PA guarantees minimum
revenue. Considering Profit making Mind set of the
private sector, it is a question mark how the PAs
interest is protected?
3)The contractor is either chosen by SPV, or part of
SPV.
Whether the concessionaire acts as a client and

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Impact of Economic & Social

Environment on PPP

are inherently prone to more financial & economic Ris

use of its financial structure and long concession per
ncial structure involves Loans granted from Credit Institutions
Equity raised by Public/private sector
Income generated from the project
Grants provided by the Government

c Economy Deficiencies ( Debt, Deficit)

te Economy Deficiencies ( Insolvency, Liquidity, Short

32

Problematic Economic environment

Private Participation in Infrastructure Projects Database- 2011.

Year

No. of PPP projects initiated per

Year

1990

58

1992

82

1994

270

1996

304

1998

345

2000

202

2004

212

2006

330

2007

329

2008

250

2011

117 ( 64% less initiated in

comparison to 2007)

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Social Factors

Considering that concession periods are long (25-40 years),

The experience of the participating entities,
Level of commitment to concession contract clauses,
The security of such an agreement against future conditions remain low

The factors that primarily contribute to the initiation and success of PPP
Are hardly foreseeable for a such long period Demand for PPP project services
Customers purchasing power
The stability of the prices
Political consideration-corruption, legal compliance
Ethics ,culture and tradition.

34

The issue of renegotiation

35

Renegotiation

overview of more than 1000 ppp concessions studied

y the World Bank Institute in Latin America and Caribbean
om 1985 to 2000 throw up these characteristics:

41.5% have undergone re-negotiation.

Out of the total in transport sector, 55% underwent renegotia

85% of renegotiation occurred 4 years of awarding concessio

And 60% occurred within 3 years.

Renegotiation occurred mostly in concessions awarded throu

Competitive bidding.
36

Problems of financial
renegotiation/hold-up in PPP

nancial Renegotiation and the associated hold-up problems

ay happen, When
Project Cost,
Market demand
Other market conditions are significantly unfavourable,
e promoter renegotiate for subsidies / Rescue by the GOVT.
e GOVT is often tempted to accept renegotiation
even not legitimate) to avoid cost of failure.

uch inconsistency creates serious opportunistic problems

nd associated transaction cost.
37

Inefficiency due to financial

renegotiation/hold-up in PPP

xpectation of GOVT for renegotiation under project distress

ay cause opportunistic bidding.

ntentional suppression of Cost/ overstate profitability/

nderstate the possible risk, so as to outperform other bidder
ovt usually in bidding process tend to favour proposal with
ptimistic financial forecasts
ubsequent adjustments add to transaction cost.

38

Ex-post inefficiency during the

Concession period

If Renegotiation is expected, the Agent may choose

Inefficient actions that will reduce overall Social efficiency,
But increases the Agents Payoff.
As Promoters are the major contractors for construction,
They will not be bothered about cost overrun,
Nor in efficiency in operation.
Political & Economic Cost of Bailing Out.

39

Is the short term contract- an

answer?
To avoid Renegotiation,
is the provision of rebidding is an option?

40

Merits of Rebidding
Transparency-

appropriate disclosure rebidding of contracts , rather than

te negotiation, provides better administrative and
c control.

Performance-

ter period audits results in upgraded quality standards and

crease of the service level provided to the public.

Financing-

bidding process in short terms would force unbundling of serv

e partnership, with less financing cost.

41

s connection several important issues can be raised:

capability and willingness of the public sector to run

actual processes in close time periods.

scope for discontinued services due to change of private pa

advantage held by the incumbent party in the rebidding pr

potential change in the nature of PPPs from a partnership to

urcing infrastructure management scheme.

42

In fact many failures of PPPs have been reported,

both in developing and developed countries,
due to well identified ,but poorly Treated causes Lack of basic education in PPPs
Insufficient raising of public awareness in PPP projects
Lack of transparency in processes and contract details

43

Renegotiation- why?
It is clear in hindsight that the magnitude of risks and the ability
of different stakeholders to manage them had not been
adequately assessed. The private sector has Over aggressive traffic estimation.
High debt leveraging
Exuberant Bidding
Lack of management maturity
Defective risk assessment & Forecasting Skills.

44

Renegotiation- why?
NHAI has conclusively demonstrated:

Its inability to eliminate outlying bids

Procure Sovereign clearances
Perform land acquisitions
Clear due processes in clearly defined
and accountable time frames

45

The Road Blocks

The Project 3P INDIA would go in to issues regulation,
Structuring And management of contracts under PPP.
Lack of balancing of Risk factorsAll risk passed on to private parties
One size fits all policy
Inflexible contracts
Till date Public utilities services paid through
budgetary support less by user charges
Public patronage/ populist pressure
Enough flexibility to align prices with market realities
Resolution of commercial impasse/ arbitration
- international best practices

46

Recent changes -contract

Making Exits Viable: NHAI

HAI Contracts- pre 2009 no exit

ost 2009contracts- 51% in construction Period,
33% in first 3 years operation period
26% subsequently
n,2013- Notification
oject with Distress, they can replace operator.
ne, 2013- Notification
complete exit by concessionaire after two years of
oject being commissioned, as long as majority stake
as maintained during construction period.
he move is now for complete EXIT after the commissioning is
47

Kelkar Committee Report

The success of deploying PPP as an
additional policy instrument for creating
infrastructure in India will depend on the
change in attitudes and mind sets of
all the authorities, including public
agencies partnering the private
sector, government departments
supervising the PPPs, and auditing
and legislative institutions providing
oversight of the PPPs,
48

It has also called for a rational

allocation of risks among various
stakeholders in a project, and moving
away from the one-size-fits-all
approach to PPP model concession
agreements (MCAs).

49

It is the committees view that MCAs for

each sector be reviewed to capture the
interests of all participating stakeholders
users, project proponents,
concessionaires, lenders and markets,

50

Thanks

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