Presentation

Emerging Options in Urban Infrastructure Financing a presentation by Chairman and Managing Director Housing and Urban Development Corporation Ltd Pankaj Jain Global Convention on Agenda for Urban Infrastructure Reforms Organised by at CITYSCAPES 2002 FICCI Delhi 21st October, 2002 Urban Infrastructure Scenario in India Urban Population Coverage (%) Availability Deficiency Protected Water Supply Sewerage & Sanitation Latrine Refuse Collection/ Disposal 84 46 69 72 75 54 31 16 28 25 Electrification 1991 Census Urban Infrastructure Scenario in India • According to estimates of the Rakesh Mohan Committee total requirement for urban infrastructure development covering backlog, new investments and O&M costs for the next ten years is Rs. 2,50,000 Crores (US$ 57 Billion) • The ninth Plan identified only around Rs. 12000 Crores. With anticipated growth in Tenth plan providing additional funds of Rs.13,000 Crores, the total expected plan outlay comes to Rs. 25,000 Crores (US$ 5.7 Billion). • Funds for UI development fall short by more than 10 times the requirement The Vicious Circle Low Level of Infrastructure Low Investments Low Service Level Low Equilibrium Cycle Low Maintenance Low Collection/ Recovery Low Capacity to Pay Major Concerns in Urban Infrastructure Sector • Insufficient financial and managerial resources with Urban Local Bodies / parastatals / utilities • Institutional delinquencies and high administrative overheads • Inadequate coverage and service level • Low quality of service and lack of consumer orientation • High non-revenue component – wastage – pilferage – unaccounted-for losses – free riders • Inefficient operation and maintenance • Poor monitoring and cost recovery • Unsustainable resource management practices • High capital and maintenance costs ISSUES: • Asset liability mismatch - short term borrowing vs. longterm funding. • Large volume of resources for capital intensive projects • Lock-up of funds in specific large projects. • High risk involved in greenfield ventures • Non-uniformity in appraisal, guidelines and documentation requirements • Lack of tangible security and partial or nil recourse basis of funding projects. • Norms restricting exposure to individual agencies. RISKS: • Political risks & Implementation risks. • Risks of default by borrowing agency • Risks of prepayment in falling interest rate scenario • Foreign Exchange Risks and currency fluctuations Alternatives in service delivery and innovations in resource mobilisation explored by Financial Institutions Issues Involved in Infrastructure Financing: Financial Institution‟s Perspective Risks in Infrastructure Projects • Market Uncertainties – Varying Demand – Fluctuating Prices / Land value • Procedural Hurdles – Land acquisition – Land transactions – Development permissions / Operational permits • Construction Risks – Price escalation & cost over-runs – Time over-runs – Labour unrests Operational Risks - Tariff and cost recovery Political Risks - Policy Changes - Conflicting political interests Judicial interventions - Court orders / directives - Regulatory Authority Need for Alternative Models • Government / local administration/ public agencies / parastatals are unable to meet the increasing demand of infrastructure and services • In view of physical and financial resource constraints and concerns of equitable distribution, supply has not been keeping pace with demand. • Need for alternative models involving: – Commercialisation to ensure cost recovery & sustainability – Privatisation to bring in finance, technology & management capacity – Community participation to ensure responsiveness and sense of ownership / involvement – Alternative Guarantee mechanisms and Securities – Regulatory authorities to ensure integration and coordination Need for Alternative Securities for Urban Infrastructure Financing • Mortgages not viable as securities in UI projects • Non-availability of government guarantees due to limits prescribed by RBI • “Letters of comfort” not legally acceptable security option • Bank guarantees/ Corporate Guarantees/ Personal Guarantees are limited and the projects are capital intensive. • Negative lien could be considered only as a transient security instrument • Escrow accounts enhance transparency of the cashflows and ensures sufficient balance for immediate repayments. However involves administrative costs and monitoring is difficult. • Need for alternative security mechanisms and partial or non-recourse financing. Budget 2002-03 – Incentives for Infrastructure Sector • Urban Reform Incentive Fund of Rs. 500 crores contribution to help urban local bodies in implementing reform agenda. • Proposed City Challenge Fund to enhance the credit worthiness of urban local bodies • Pooled Finance Mechanism and enhancement of municipal tax-free bonds from Rs 200 crores to Rs 500 crores to facilitate resource mobilisation • Infrastructure Equity Fund of Rs. 1000 crores for encouragement to projects would help support taking up infrastructure projects Urban Reform Incentive Fund • Urban Reform Incentive Fund of Rs. 500 crores contribution to help States and urban local bodies in implementing reform agenda – Revision of Rent Control Laws – Repeal of Urban Land Ceiling & Regulation Act – Rationalisation of Stamp Duty – Revision of Building Bye-Laws – Revision of Municipal Laws in line with Model Legislation – Simplification of procedure for permitting conversion of land for non-agriculture purposes – Levying realistic user charges – Initiation of Public-Private-Partnerships in civic services Action being taken to enter into Memorandum of Agreement with the State Governments for implementing the reform agenda in a phased manner. City Challenge Fund • City Challenge Fund –a city-level economic reform program to enhance the credit worthiness of urban local bodies on a competitive basis. • Incentive based grant facility for meeting transition costs of implementing institutional systems of municipal management and service delivery. • Funds to be provided on a competitive and demand-driven basis, subject to strict criteria for eligibility and award, detailed on-site assessment, clear disbursement milestones and strict monitoring. • Independent professional groups for the assessment and monitoring of the plans. • MoUD&PA to operationalise CCF by end of 2002 Infrastructure Equity Fund • Infrastructure Equity Fund of Rs. 1000 crores to be set up under IDFC for facilitating investments into projects. • Institutional mechanism for co-ordinating debt financing by FI‟s and Banks of infrastructure projects above Rs. 250 Crores • IDFC to co-ordinate in association with IDBI and ICICI involved in debt financing. Tax-free Municipal Bonds • Budget has enhanced the limit of municipal taxfree bonds from Rs 200 crores to Rs 500 crores Problems faced by ULBs in raising Municipal Bonds: • Since bonds are raised within a short period whereas their utilisation may involve 2-3 years, the States/agencies tend to fall into debt trap • On account of the dire financial position, Credit Rating of ULBs need to be enhanced to enable raising funds at lower costs. • Smaller Towns and cities unable to access the capital market on account of inadequate capacity and high transaction costs. Pooled Finance Mechanism • Pooled Finance Mechanism to facilitate resource mobilisation by Urban local bodies OBJECTIVES: • Credit enhancement, creating Structure for Pooled Financing, provide technical and capacity support, and leverage urban reforms. • Facilitate smaller towns and cities to access capital markets • Effective reduction in transaction cost owing to economies of scale. • Incorporating Special Purpose Vehicle for pooling projects of various ULBs under a single umbrella. • Liabilities and obligations for the loans to remain with the repective towns. • During 2001-02, Ahmedabad Municipal Corporation raised Rs. 100 crore and Hyderabad Municipal Corporation raised Rs. 82.50 crore. Innovative Resource Avenues in UI Financing Consortium financing / Group lending • For capital intensive projects and greenfield ventures beyond lending capacity of single financial institution • Pooling of resources for funding the project. • Ensures sharing of the risks involved. • Needs rationalisation and standardisation of appraisal procedures, lending guidelines and legal documentation of the constituent financial institutions • Need for pari passu charge on the escrow account as security to the partner institutions. • Desirable to provide a single window facility based on tripartite or joint agreements with the borrowing agency. Takeout Financing Transfer of Loan Accounts Fees / Commitment Charges Primary Lender Partner Institution Outstanding Loan Amt. (Principal + Interest) 5 years 10 years TENURE OF LOAN (15 years) • Liabilities of primary lender on project absolved at the end of a specified period • Partner institution transfers pertinent loan accounts to its own books, in lieu of an agreed fee or commitment charge. • Both parties bear the project risks after the take-out based on a non-recourse structure. • pari passu charge on the escrow account as security option. Securitisation of receivables • Conversion of future cash receivables into financial or debt instruments tradable in capital market • Role of SPV as intermediary: – assumes the entire credit risk on the securitised receivables of selected outstanding loan portfolio – Insulates the lender from bankruptcy & insolvency risks – repackages the receivables into pass-through certificates of manageable lots for onward trading in the secondary market. – Principal and interest components of the repayments are passed on to the security owner. • Merits to Investor: – Continuous cash flow on Securitised instruments over the life of the loan and principal “depletes” over time. • Advantages to Lending Institution: – – – – reduces the locking up of funds in a few projects. facilitates reduction in borrowings ensures better asset-liability management. provides efficient exit option for the financial institutions to transfer the risks of default and prepayment Securitisation of Receivables Loan Lending Institution Borrower Repayments Outstanding Loan Portfolio SPV Fees Pass Through Certificates Investors Periodic Cash Flows Sub-ordinate (Mezzanine) Debt Financing • Quasi Equity Instrument with Flexible maturity and payment terms • Interest rates could be higher than normal loan with longer tenor • Could repay the loan after meeting all secured debt obligations • Loan could be considered as deemed equity for a specific period granting the borrower better financial leverage • Option for Debt to be converted to equity at a later date Cashflow Financing • Institutional funding to be tailormade to suit the cash-flow/ financial requirements at various stages of the project • Lenders could estimate cash-flow over life-time of the project to assess the Individual Debt Packages and the rates of interest Project Initialisation Fund/ Project Initiative Fund / Project Development Fund • PIF/PDF for creation of well structured projects – Technically viable – Financially feasible and bankable – Environmentally sustainable • HUDCO would fund 100% of the formulation cost upto a maximum of Rs. 5 Crores per project and Rs. 50 crores per year. • HUDCO has already assited – Feasibility study for alternate alignment of National Highway connecting Jammu and Srinagar with support of Rs. 2.3 Crores – Preparation of detailed design and Bid documents etc. for the Sports Stadia at Hyderabad for the 7th National Games 2002. Financial assistance of Rs. 2.5 Crores provided to the Sports Authority of AP Emerging State Level Initiatives for Financing Urban Infrastructure • State Level Urban Development Funds like TNUDF & MUDF in Tamilnadu Maharashtra, for facilitating private sector participation bringing in commercial orientation, improving financial management , assisting ULBs accessing capital markets. • State level urban development Finance Corporations formed – APUFIDCO - TUFIDCO – KUDFC - KUIDFC – Gujarat Municipal Finance Board • Tax intercept concept introduced in Madhya Pradesh by setting apart a fund for debt servicing of urban local bodies. FDI in Infrastructure • Foreign Direct Investment(FDI) possible through: – Financial Collaborations – Joint Ventures / Technical Collaborations – Capital Markets via Global Depository Receipts (GDRs / Euro issues) – Private Placements or Preferential Allotments • In India, FDI upto 100% permitted in airports (beyond 74% with approval) and Mass Rapid Transit Systems. • FDI upto 100 % permitted in – Integrated township development including housing, commercial premises, hotels, resorts – City and regional urban infrastructure facilities – Manufacture of building materials – Development of Land with allied infrastructure as part of integrated township development Special Economic Zones • Proposal to set up Special Economic Zones (SEZ) in various parts of country as duty-free zones for industrial, service and trade operations to attract foreign investment and facilitate expeditious development. • The policy envisages the treatment of SEZs as priority areas in provision of infrastructure, convergence in statutory clearances, exemption from duties and levies as well as liberal regulations. • SEZs industrial townships would open new opportunities for integrated provision of infrastructure facilities. Increased emphasis on Commercialisation and Private Sector Participation in Urban Infrastructure Commercialisation to Privatisation • It is essential to ensure cost recovery and sustainability of projects through appropriate user pay instruments • Need for unbundling of projects to facilitate private participation Illustrative List of Potential Unbundling Packages • WATER SUPPLY – – – – Water resource management & Development of source Treatment of water and bulk supply -Water Purchase Agreement Distribution / Operation and Maintenance (O&M) Billing / Collection • SANITATION – Sewerage network (collection system) – Pumping Stations(Installation and O&M) – Disposal system - Through taxes (on the basis of water consumed) Commercialisation to Privatisation: Illustrative List of Potential Unbundling Packages SOLID WASTE MANAGEMENT • Collection • Separation and treatment • Distribution of by-products (scrap material, manure, fuel pellets & bio-gas) URBAN TRANSPORT • Development of urban mass transit systems • Operation and maintenance of urban mass transit systems • Development and maintenance of terminals • Operation of bus and intermediate public transport (IPT) systems • Construction and maintenance of toll bridges • Construction and maintenance of parking facilities Some Innovative „User pay‟ Instruments to ensure cost recovery Infrastructure Type • Water Supply Innovative user pay Instruments Advance registration charges, Connection charges, Enhancement of water tariff, Water benefit tax/water tax, Betterment charges, Development charges, Utilization from other sources such as octroi, property tax, sale of plots etc. and Charges from water Kiosks Connection Charges, Sewerage Cess Tax, Conservancy Tax, Sale of Renewable waste, Sale of Sludge and Sale of Nutrient rich wastewater. Collection Charges, Cess, Sale of Renewable waste, and Fines for dumping waste. Toll Tax, Land as a Resource and Advertising • Sewerage - • Solid waste - • Roads/Fly-overs/ Bridges • Airports/Rly. Stations/ - Surcharge on tickets,using land as resource, Bus Terminals Toll Tax, User, Charges for transportation terminals and advertising rights. Private Sector Participation in Urban Infrastructure The need for Private Sector Participation to bring in: • ADDITIONAL RESOURCES • STATE-OF-THE-ART TECHNOLOGIES • EXPERTISE IN PROJECT MANAGEMENT / O&M Privatisation experience in India in Solid Waste Management • ENBEE Infrastructure Ltd. on BOO basis in Nagpur • M/s Excel Industries – Bio-degradation of solid waste in – Vijayawada, Calcutta, Mumbai, Bhopal, Bangalore, Gwalior, Cochin & Calicut • M/s CELCO in Hyderabad • Common hospital waste treatment plant by GJ Multiclave in Hyderabad • Compost plant by IVR Enviro at Tiruppur Privatisation experience in Transportation • Pali Bye-pass, Rajasthan - TCI Infrastructure Ltd • Coimbatore Bye-pass (L & T) • Karur Bridge on BOT basis by East Coast Constns & Infrastructure Pvt. Ltd. • Kemptee-Kalamana Toll Road in Nagpur • Karur Bridge on BOT basis • Faridabad Byepass • NOIDA Toll Bridge Company • Cochin International Airport in Joint Sector by CIAL • Bangalore Airport • Ports – Pipavav, Positra, Adani, Kakinada, Ennore, Cochin, Mumbai State Govt. Initiatives to Facilitate Private Participation GUJARAT: • Gujarat Infrastructure Development Board set up. • Model BOT Law : Gujarat Infrastructure Development Act – 1999 – Gujarat the first State to formulate a separate act – Draws from the model of overarching BOT regulation in Philippines • Authorises the Govt./agencies to enter into concession agreements • Provides a list of various forms of assistance to be provided to the developer including exemption of taxes etc. • Competitive bidding mandatory for ensuring transparency • The concession agreement to prescribe the user fee to be charged by the developer State Govt. Initiatives to Facilitate Private Participation ANDHRA PRADESH • Infrastructure Development Enabling Act (IDEA) adopted. • Infrastructure Authority has been set up in Andhra Pradesh Envisaged Roles of Infrastructure Authority: – Conceptualisation/ identification/ Processing/ Prioritisation of projects – Mobilising public opinion – Monitoring and approval of the bidding process – Implementation of public private partnerships – Preparation of project schedule/ Approval of TOR for consultancy – Budgeting and financial allocation – Tariff fixing, user/abuser charges and cost recovery – Expediting clearances and permits – Supervision over implementation and project management • Proposes a “Swiss Challenge Approach” for evaluating the single bid projects. Vicious Circle to Virtuous Cycle High Level of Infrastructure Higher Investments High Service Level High Equilibrium Cycle Higher level Maintenance High Collection/ Recovery Higher Willingness to Pay VS/ KS HUDCO Established In 1970 as a Techno-financial Institution (As a fully Owned Govt. of India Enterprise) Urban Infrastructure Financing Window Opened in 1989-90 HUDCO: PROGRAMMES • URBAN INFRASTRUCTURE – Land Acquisition – Integrated Land Acquisition & Development – City Level Urban Infrastructure for Water Supply, Sanitation, Sewerage, Drainage, Solid Waste Management,Transportation etc. – Social Infrastructure Schemes – Commercial Schemes – UI Project Initialisation Funding HUDCO: URBAN INFRASTRUCTURE FINANCING CROSSES Rs 20524 Cr. (US$ 4.2 B) Type of Scheme No. Project Cost Loan Amt. (US) (M$)  UTILITY INFRASTRUCTURE – Water Supply – Sewerage, Drainage & Sanitation – Low Cost Sanitation – Solid Waste Management – Transport Nagar/Terminals – Roads/Bridges – Airports/Ports – Area Development & IDSMT  SOCIAL INFRASTRUCTURE  ECONOMIC INFRASTRUCTURE TOTAL 344 71 1039 18 27 101 8 133 128 77 1947 (Rs. in Crore) 18689 7032 1465 2816 1777 370 1559 560 117 637 330 69 2350 797 166 7147 4077 849 850 725 151 13409 2068 431 3902 2593 540 1660 770 160 53057 20524 4276 (US$ 4.2 B) Thank You for your kind attention Partnering Co-operation for Sustainable Human Settlements Swiss Challenge Approach • In case of unsolicited projects proposed suo motu by private entrepreneurs / companies or singular bids, the AP-IDEA stresses on the need for evaluation of the merits of the proposal to ensure fairness, impartiality and cost effectiveness. • Provision for Swiss Challenge approach, where the claims, veracity and global competitiveness of the proposal could be put to open test by inviting competitive proposals from other market players