Home » PPP is almost the only way for better management of water sector

PPP is almost the only way for better management of water sector

PPP is almost the only way for better management of water sector

A new initiative by ADB and the Government of India seeks to promote and “mainstream” PPP for inclusive growth of the country. The Bank's support to inclusive growth—especially in urban projects such as water management—spans finance to advice and process support. But as finance and implementation capacity stymie our infrastructure industries' growth, innovation is the key and will find ADB's favour, says Hun Kim, Country Head—India, Asian Development Bank, in an interaction with Shashidhar Nanjundaiah.

In its advisory role, what has been Asian Development Bank's (ADB) contribution to process standardisation among infrastructure projects under PPP?
ADB has been assisting the Government of India in developing processes, policy inputs and guidelines for PPP projects across sectors. Both at a central ministry level as well as at a state level, ADB-supported PPP Cells have been working on developing these over the last three years. Capacity-building at local government levels for structuring and implementing PPP projects along these standardised processes has been a focus of ADB.

To what extent has this advisory role worked? How have states benefited from this exercise?
ADB, through its technical assistance, has provided PPP experts in selected state PPP cells. These experts play a multiple set of roles within state governments: in capacity development, formulation of policies and processes, cross linking with national and international best practices, and practically assisting with all aspects of PPP projects. More than 50 PPP workshops were held across states, benefiting over 3,000 government officials. PPP manuals and policies were developed across 12 states, and most importantly ADB finance experts assisted in developing PPP project pipelines, especially in challenging sectors such as water supply, rural development, urban, education and health. Over 30 projects are being developed across the states, many of which are in advanced bid stages or awarded already, while the general PPP pipeline is much larger, over 200 projects.

What has ADB's (India) experience been in project structuring and documentation?
Innovations in project structuring are critical, especially in developing 'bankable models'. An example is using innovative means for developing alternative revenue streams through direct user fees. This is an area where ADB has assisted projects directly especially in areas such as Metro rail, bus rapid transit, and urban water and sanitation projects. More such innovative structures are being developed, as sponsors gain awareness of best practices and are able to assess assistance from professional transaction advisors for good project structuring.

Which states have taken most advantage of, and been the most responsive to ADB's expertise?
All states being supported under the ADB PPP initiative have been developing their PPP programmes and are at various stages of implementation of their PPP projects. We are seeing a lot of movement in PPP projects now, and states such
as Uttarakhand, Madhya Pradesh, Maharashtra, Karnataka, and Rajasthan, amongst others, are trying out some innovative PPP projects.

Which sectors are proving to be the most active in PPP?
Sector-wise, we are focusing the PPP activity in urban infrastructure followed by roads. Of around 180 of our PPP projects closed in the last two years, about 50 per cent were in the urban sector. PPP projects are also being developed in ports, power and tourism.

Water has not been on top of states' agenda under PPP. How do you propose PPP in water in a country where the users are in general reluctant to pay for basic services? Can ADB help with public training programmes?
Interestingly, sectors such as water supply and sanitation (as well as health) have seen a rapid growth recently and we estimate that currently around 30 such projects are at various stages of structuring.

Over the last three years, with ADB assistance to state PPP cells, the number of PPP projects in water and sanitation has increased. Initial reluctance has given way to a realisation in many government quarters that PPP is now almost the only way for the water sector to be better managed. The change is now in the understanding that PPP is not just about investment but can also be about performance management. Hence, the pipeline of PPP projects under the ADB-supported PPP initiative alone has around 15 water projects, of which two have already been awarded and four are nearing the final award stage. More states are requesting assistance for development of PPP in water projects.

This has been a result of developing innovative structures which not only focus on performance improvements as the PPP goal, but also better leverage already existing government funding schemes. Tariffs will remain an issue, but this is a decision for local governments. In the meantime, the spectre of 'shadow tariffs' has been established in several of our projects providing for bankable and viable PPP projects. Private sector interest too has been strong as seen by 12-16 RfQ stage bids for some projects.

What is the extent of disbursement towards infrastructure projects last year (2009-10)? Will your plans for the current fiscal be different?
In 2010, ADB approved sovereign loans amounting to $2.2 billion while its annual disbursement reached a record level of $1.7 billion. We will continue to work closely with the Government of India in implementing projects which promote inclusive growth and help in reducing poverty in the country.

A major thrust of ADB's India Country Operations Business Plan (COBP) for 2011-2013 will be to support infrastructure development, particularly through PPP programmes. Supporting the Government's efforts to redress inter-state economic disparities is also a key cornerstone of the India COBP which is aligned to India's 11th Five Year Plan for 2007-2012 and ADB's long term Strategy 2020 for reducing poverty in the Asia and Pacific region. Continued assistance for development of the vital energy sector by means of projects involving clean and renewable energy sources including solar power is another key focus area.

Has the performance of the infrastructure projects you have financed been in accordance with the initial projections? What factors do you attribute to any skews? How can the performance improve?
ADB has been working closely with the Government to improve portfolio performance. Quarterly tripartite portfolio review meetings (TPRMs) are being organised since September 2005, and attended by the Department of Economic Affairs (DEA), Ministry of Finance; ADB; and executing agencies of ADB projects across all sectors and states, help immensely in the timely resolution of implementation problems and sharing of development experience and knowledge across different sectors and states. The effectiveness of the TPRMs can be gauged from the fact that between 2004 and 2010, contract awards increased from $550.5 million to $1.79 billion, while loan disbursements rose from $381.0 million to $1.69 billion.

In addition to tracking inputs, ie, contract awards and disbursement, TPRMs are also increasingly focusing on tracking and monitoring outputs and results. Detailed case studies of two to three projects are presented in each TPRM to discuss best practices and facilitate learning across executing agencies.

ADB has also devoted resources to train and build capacity of executing agencies of ADB projects in order to strengthen project design, implementation, procurement, and safeguards.

What are the main challenges of lending to infrastructure projects in India? Do you believe that finance for infrastructure projects can be further facilitated?
Even though India has a large and diversified financial sector, inadequate availability of long term funding for infrastructure projects remains a major weakness. In order to address this weakness, ADB has provided $1.2 billion to the India Infrastructure Finance Company (IIFCL) for providing long-term (more than 20 year) funds for financing PPP projects selected through a transparent and competitive process, and cutting across sectors (roads, power, airports, ports, urban infrastructure). It has also helped IIFCL in strengthening its credit risk assessment procedures and pricing policies, and in designing a detailed environmental and social safeguards framework. It is estimated that ADB support is enabling IIFCL to leverage around five to seven times its own resources by increasing the confidence of other lenders and attracting private sector participation in PPP projects.

Other than financing, a major challenge is weak capacity in implementation. Since 2008, capacity building programmes that we organised have trained nearly 1,927 staff members from various agencies on procedures pertaining to procurement (524), consultant selection (265), disbursement (465), and safeguards (493), and on topics such as project management (40) and contract administration (140).

Attracting and retaining good contractors and consultants, especially in relatively small and remote places, remains a major challenge. ADB has been collaborating with organisations such as the Builders' Association of India, Construction Federation of India, and the Consultancy Development Centre to organise Business Opportunity Seminars to disseminate information about ADB projects and facilitate networking with staff of ADB's executing agencies.

In your proposed guarantee scheme with IIFCL, you would back infrastructure companies' bond offerings. How far do you think this will take your corporate bond markets in infrastructure?
ADB is proposing to partner with IIFCL in developing and implementing a partial credit guarantee (PCG) product. The objective of the PCG is to credit enhance project bonds, to a minimum AA rating, issued by infrastructure project Special Purpose Vehicles (SPVs) to make the bonds eligible for investment by institutional investors such as insurance and pension funds. ADB proposes to partner with IIFCL to share underlying project risk arising from taking an exposure to the cash flows of the SPV by guaranteeing a portion of principal and coupon payments due to the investor of the bond issued by the project SPV.

In addition to encouraging a fresh source of funding to the infrastructure sector and mitigating risk arising from excessive bank exposure to infrastructure, the PCG is also expected to support development of the corporate debt market by encouraging new investors (institutional investors) and investable instruments (bonds issued by infrastructure project companies). This is consistent with several expert studies such as the Patil Committee Report (2005) which suggest that expanding the investor base and investable instruments holds the key to promoting the Indian corporate debt market. Finally, we see a significant opportunity for institutional investment in infrastructure given that the market share of private life insurers has increased from 29.08 per cent in FY 2009 to 33 per cent in FY 2010. Further, the private sector premium is growing at a rate of 31.81 per cent as compared to public sector premium which has shown a growth of 11.89 per cent in FY 2010.

What degree of growth do you foresee over the next two to three years in this segment?
The proposed PCG product will be available to all infrastructure sub-sectors as mentioned in the IIFCL scheme. With regard to growth prospects, we see a significant opportunity for credit-enhancement products, driven by banks hitting group exposure limits to infrastructure developers and eager to take the opportunity to re-finance bank debt from bond proceeds. As mentioned, the investable corpus of insurance and pension funds is growing rapidly providing an opportunity for investing this resource in infrastructure given the long term investment horizon of these funds.

ADB's goals in India

ADB's India Country Partnership Strategy (CPS) 2009-2012, designed to address some of the binding constraints identified in the 11th Five Year Plan, aims to strengthen ADB's support for infrastructure development in the relatively poor states of India, promote PPP in infrastructure, support climate change adaptation and mitigation, and encourage innovative financing modalities (non-sovereign loans and co-financing) to increase the leverage of ADB operations.

ADB's Strategy 2020 emphasises three agendas: support for inclusive growth, environmentally sustainable growth, and regional integration to reduce poverty.

Leave a Reply