Section II - Subject Lecture Material ( Full presentation)

1. UNDP Training Module Subject ModuleVolume 1 - Training ManualFinancing, Fare Fixation, & Cost Benefit Analyses Section II - Subject Lecture Material (Full presentation)

2. Objectives of the Module • Understand investment needed in the urban transport sector • Become familiarized with various sources of funding • Understand the key issues involved in urban transport investment • Highlight the various public financing schemes • Become familiarized with the various sources of private sector financing • Understand the concept of Public Private Partnership • Become familiarized with the concept of financing through multilaterals • Understand innovative financing mechanisms • Understand the concepts involved in setting up fare • Comprehend the need and process for fare revision • Understand the concepts of Cost / Benefit analysis , Economic analysis, and Financial analysis • Become familiarized with the project preparation process

3. What does this module not do • Provide a panacea for all financing issues facing urban transport in Indian cities • Dive into in-depth financial analysis and theories, based on the principles of finance / economics • Advocate a particular type of project structuring • Identify precise skill sets / ways forward for financing urban transport projects • Develop financing plans for any project

4. Who are the intended users of this module • Policymakers • Senior-level staff in national, state, and city governments, heading or managing departments that work in transport and related areas such as: motor vehicle licensing and regulation, land use and transport planning, public transport provision (both government and private operators), traffic management, pollution control, road safety, housing, and urban poverty alleviation • NGOs • Media

5. HANDOUT 1: URBAN TRANSPORT INVESTMENT & FINANCING – NEEDS & ISSUES

6. Rapid Urbanization: 100 Million to 200 Million in the last 20 years

7. Rapid Motorization . IIHS 2011. “Urban India 2011: Evidence” Pai, M. 2010. “India Urban Transport Indicators”

8. Road Fatalities Leading causes of premature death in the world: 90% of traffic fatalities occur in low- and middle-income countries and involve 70% of vulnerable users of the road

9. Road Traffic Scenario - Further evidence from Bangalore Pedestrian (51%) 9

10. India 2030 Mobility Scenarios: Total Energy Consumed by Mode Schipper, Banerjee, and Ng (2009) Carbon Dioxide Emissions from Land Transport in India: Scenarios of the Uncertain, TRR

11. Automobility • Expanding road capacity is not a solution to congestion • Induced travel: • 10% increase in lane kilometers in California 9% increase in Vehicle Kilometers Travel (VKT) within 4 yrs Cervero, 1998 • 50-100% of the new capacity created is absorbed by induced traffic after 3 years Noland and Len, 2000

12. Importance of Urban Transport • Urban Transport is one of the most important and crucial sectors of urban infrastructure and services. • The importance of an efficient and effective transport system to support and promote rational development of urban areas need hardly be stressed. • The National Commission on Urbanization (NCU) has noted that urban transport is the single most important component instrumental in shaping urban development and urban living. • While urban areas may be viewed as engines of growth, urban transport is, figuratively and literally, the wheels of that engine. Transportation is also critical for the economic growth of cities. • Industry, trade, commerce, and other economic activities thrive in areas where accessibility is high.

13. Key Transport Statistics

14. Investment Needs - Mckinsey Global Institute (2007) • MGI has estimated a capital outlay of USD 1.182 trillion (about Rs 53 lakh crores) for the next 20 years to build up services in cities in India to enable them to play their role in the desired economic growth of the country. • Mass rapid transit services and roads together require a major share of the projected investment; more than half of the estimated capital expenditure, i.e. USD 392 and 199 billion (Rs 17 & 9 lakh crores) respectively.

15. Investment Needs - High Powered Expert Committee • The Committee commissioned by the Ministry of Urban Development Government of India estimates a total expenditure of Rs 39,18,670 crores on Indian urban infrastructure and services by 2031. • Major expenditure on urban roads is: Rs 17,28,941 crores • Urban transport is estimated to require Rs 4, 49,426 crores. • In addition, traffic support infrastructure is estimated to require Rs 97,985 crores, and street lighting Rs 18,580 crores.

16. Investment Comparison – MGI vs. HPEC • HPEC’s total expenditure on roads and urban transport together out of the total expenditure is about same order (as a percentage) as the Mckinsey estimate. • However, there is a major difference in the estimate for roads vis-a-vis urban transport.

17. Key Issues affecting Investment in Urban Transportation • High Capital and Operation Cost • Long Gestation Period • Project Viability • User Charge • Fare Revision • Cost Recovery • Demand Risk • Social Linkages • Macro Economic Policies

18. Existing State Laws and Legal Frameworks Regarding Financing • As per the present practice, the government makes budgetary allocations both in the revenue and the capital account. • This is linked to the overall government budgeting and not necessarily to the needs of urban transport in a city and hence is seldom adequate. • A policy on budgetary allocations, user charges, and tapping other sources of funds based on taxation of non-user beneficiaries, land development and vehicle taxation on the polluter-pays principle should be provided to the city. • All cities should have formula-based funding from the central and state governments, and should leverage debt as well. • Involvement of the private sector is a potential source for financing and managing urban transport services in the city. • This source should be used for services that yield direct revenue to the private entrepreneur to recover his investment with commercial profit.

19. HANDOUT 2: Financing Sources (Public, Private, and Public-Private Partnership)

20. Service Provision Options Urban Transport Services Public Agency: Govt. creates assets & provides services Privatisation: Government transfers entire sector responsibility to the private sector – which then creates assets and provides services PPPs: Contracting of Services - Government creates assets and contracts service provision to private sector PPPs: Government awards concession/ licence to private sector for a fixed term under which it creates assets and provides services

21. Public Financing – 5 year Plans For Urban Transport, 10 goals have been identified in the 12th Five Year Plan (FYP) 1. To create an effective institutional and implementation framework that will manage the huge investments envisaged; 2. To build capacity of state and city officials and other stakeholders—today hardly any state or city has an urban transport professional on its roles; 3. To create facilities for walking and cycling in all 2 lac+ cities and state capitals—these are non-polluting modes that do not use fossil fuels and provide social equity; 4. To develop an upgraded cycle rickshaw as an integral part of the last mile connectivity for city- wide public transport networks 5. To augment public transport with part funding from the Government of India so as to: a. Introduce organized city bus service as per Urban Bus Specifications issued by MoUD in all 2 lac+ cities and state capitals; b. Add BRTS at 20 km/1 million population in 51 cities with population> 1 Million; c. Add rail transit at 10 km/ million population, d. Expand rail transit in existing mega cities i.e. 4 million +, at 10 km per/yr. i.e. 50 km in 12th FYP,

22. Public Financing – 5 year Plans e. Provide suburban rail services in urban agglomerations with population > 4 million; f. Improve and upgrade Intermediate Public Transport vehicles and services. 6. To improve accessibility and mobility in cities through: a. Developing hierarchical road networks in newly developing areas b. Completing 25 percent of major road networks in all 2 lac + cities with missing links including opening up of dead end roads for better utilization c. Improving and maintaining road surface to the highest standards with good drainage 7. To provide grade-separated entries and by-passes for through traffic; 8. To improve road safety and security against vandalism, crime, and terrorism introduce a system of safety audit; 9. To use technology for multimodal integration, enforcement, and traffic management; 10. To promote innovation, research, and development in guided transport; and to support pilot projects with 100 percent funding from the Government of India.

23. Public Financing - investments under 12th FYP • Rs. 3,88,308 crore is estimated to be required from all sources on urban transport. • Development of the street network as well including pedestrian and bicycle facilities is Rs. 1,67,218 crores • The projected investment in public transport is estimated at Rs. 2,02,628 Crore.

24. State Budgets • In the 11th FYP, of the total estimated investment, the states accounted for a 32.6 % share • Within state investment, the state budgetary support accounted for a 66.3% share, followed by a 23.6 % share from borrowings, while internal generation contributed to only 10.1 % of the total investment • 12th Central Finance Commission (CFC) made recommendations on the measures needed to augment the Consolidated Fund of a state to supplement the resources of the panchayats and municipalities • Rs. 20,000 crore for the panchayats and Rs. 5,000 crore for the municipalities may be provided as grants-in-aid to augment the Consolidated Fund of the states for the period 2005-10 to be distributed with inter sate shares

25. Municipal Budgets • The annual outlay in mega cities such as Delhi for the year 2012-13 indicates an outlay of Rs 3372 crores for the transport sector, which is 22 %of the total plan outlay. • The temporal trends of outlays in the 9th , 10th, and 11th FYP period of Delhi reveal that the total outlay increased from 15541.28 cr. in the 9th FYP to 23,000 cr in the 10th FYP and 45,000 cr. in the 11th FYP. • The corresponding share on Transport was 20.3 percent, 23.7 percent, and 33.9 percent respectively, exhibiting the increasing importance of transport in the city’s overall development budget.

26. Central Schemes • Jawaharlal Nehru National Urban Renewal Mission (JnNURM) • Urban infrastructure Development Scheme for Small & Medium Towns (UIDSSMT) • Viability Gap Funding (VGF) • Central Assistance for doing Technical Studies

27. Private Sector Financing • There is an ongoing public policy debate in India on how to find the necessary new investment as well as operations and maintenance on the growing transport infrastructure needs. • The GOI and many state governments are interested in broadening the role of the private sector in transport infrastructure development with a view to strengthening and expanding private financing. • There are several key determinants of the viability of privately financed programmes, including the country regulatory and legal environment and the resulting nature of the public private risk regime. • The main sources of private sector financing in transport projects include: • Debts • Equity

28. Private Sector Financing – Debt • Debt financing takes the form of loans that must be repaid over time, usually with interest. • Businesses can borrow money over the short term (less than one year) or long term (more than one year). • Debt financing offers businesses a tax advantage, because the interest paid on loans is generally deductible. • Debt funding to infrastructure projects is dominated by domestic commercial banks • Debt funding has been restricted by factors such as regulatory uncertainties, rising domestic interest rates, etc.

29. Private Sector Financing – Equity • Equity financing continues to be a vital source of investment for the infrastructure sector. • Given the under-developed state of the Indian debt market, infrastructure developers have to rely quite a lot on equity subscription to fulfil their capital requirements. • While both the primary and secondary equity markets have taken a hammering in the past year, private equity (PE) has remained a surprisingly buoyant source of funding. • Equity investment with respect to infrastructure projects can be divided into two types: (a) active (or ‘direct’) equity investors that seek to participate in the management or operations of the project; and (b) passive (or ‘portfolio’) equity investors that provide for only their funds.

30. Public Private Partnerships – PPP • The Department of Economic Affairs, Government of India defines PPP as: an arrangement between a government or statutory entity or government-owned entity on one side and a private sector entity on the other, for the provision of public assets and/or related services for public benefit, through investments being made by and/or management undertaken by the private sector entity for a specified period of time, where there is a substantial risk sharing with the private sector, and the private sector receives performance-linked payments that conform (or are benchmarked) to specified, pre-determined, and measurable performance standards. • The ultimate accountability to users for the provision of these services vests is with the public entity – even if delivery is by the private partner

31. Why do we need PPPs? • Fiscal reasons - inadequacy of resources with government (most common reason) • By leveraging on committed government funding, it is possible to finance projects of much larger magnitudes. • Efficiency gains due to appropriate risk transfer, speedy decision making, and flexibility of operations (better reason) • Examples of private sector involvement in core sectors: airlines, telecom services, oil refining -private sector is able to take on large projects, complex operations, and can handle reasonable commercial risks attached to projects such as Design, Financing, Construction, Operations, and Maintenance. • Risks that often affect projects implemented by the public sector - time overrun, cost overrun, change of scope, inadequate designs, lower construction quality, leakage of revenues, high maintenance costs – can be assumed by the private player • There is also incentive for the private party to use appropriate technology, develop innovative design solutions, improve project management practices, install more efficient revenue collection practices, and use a life cycle cost approach. • Expected outcomes - value for money, expeditious implementation, and higher quality of assets and services

32. Key Benefits • Rigorous project preparation – since the focus shifts to developing bankable projects • Delivery of a whole life solution – going beyond asset creation • Focus shifts to service delivery – construction responsibility is integrated with O&M obligations and, together with appropriate quality monitoring and service delivery-linked payments, this could enhance the levels of service delivery • It is possible to roll it into a program and have a time-bound implementation plan • Can lead to better overall management of public services – transparency in prioritization, selection, and ongoing implementation

33. Pre-requisites • The public entity should have the enabling authority to transfer its responsibility – enabling a legislative & policy framework as well as administrative order; the instrument of transfer is through a contract • There is a significant transfer of responsibility to the private entity – usually including large financial investment obligations • Payment to the private entity for services – directly by users or paid by the public entity • These are conditional on achieving pre-specified levels of performance • The nature of the relationship is usually long-term to derive maximum benefits

34. Features of PPPs - 1 • Genuine risk transfer • All risks pertaining to design, building, financing, and operation transferred to the private entity as applicable • Transfer of demand risk depends on the extent to which the private sector can influence usage or on the monopoly characteristic of the asset • Output-Based Specifications • Contracts specify the service outputs required rather than asset configuration/mode of service delivery • Emphasis on type of service & performance standards • Incentive to deliver outputs using innovation in design, construction, operation, and financing

35. Features of PPPs - 2 • Whole life asset performance • Private entity takes responsibility & assumes risk for the performance of the asset and delivery of service over the long term • Payment for Performance • Revenue/ Payment to private entity is subject to performance in relation to specific & quantified criteria set out in the contract

36. Types of PPPs • Financially free standing projects • Role of public sector - planning, licensing & statutory approvals • No financial support/ payment is made by government • Revenues are by levy of user charges by private sector • Examples: Toll Roads/ Bridges, Telecom services, Port projects • Projects where Government procures services • Private Sector is paid a fee (tipping fee), tariff (shadow toll) or periodical charge (annuity) by Government for providing services • The payment is made against performance • There may be demand risk transfer – either in part or whole • Example - Roads - annuity/ shadow tolls, power - under PPAs. In UK -prisons, education, health services, defence-related services • In both cases, the design, financing, construction, and O&M risks are fully that of the private partner

37. Types of PPPs - 2 • Hybrid Structures – Combine the financially free-standing nature – levy of a user charge – with payment by the public entity • Payment could be as a viability gap subsidy or an annuity payment • Example – toll road project with either viability gap payment by government or annuity payment-based road contract with tolling rights

38. High Low Extent of private sector participation PPP Options

39. PPP Options • Existing Assets, usually with refurbishment obligations • Lease of assets • Concessions (licenses) • Management contracts of whole or significant parts of the undertaking • New Assets • OMT Concessions of assets newly built by the public sector • Sale of a government-owned SPV after project implementation • Design, Build, Operate, Transfer Concessions – most common form used in India

40. Concession Terminologies • BOT - Build Operate Transfer • BOOT - Build Own Operate Transfer • BOO - Build Own Operate • BOOST - Build Own Operate Share Transfer • BOLT - Build Own Lease Transfer • DBFO - Design Build Finance Operate Transfer • OMT - Operate Maintain Transfer

41. Stakeholder Expectations • Sponsors/ Strategic Investors • Project cash flows are reasonably predictable and sufficiently long term • Stable policy/ regulatory framework • Return – commensurate with the level of risk • Lenders/ Other Financial Investors • Adequate/ Secure cash flows to cover debt/ meet return expectations • Contractual claim on cash flows for debt servicing • Comfort in the event of termination • Government/ Public Authority • Asset built & operated/ maintained to specified standard – service of desired order – public interest • Transparent award of project to a suitable partner • User • Quality of service • Affordable/ Reasonable cost

42. Contractual Framework • All intentions are set out in a contract • Concession Agreement - bundle of rights & obligations and consequences in case of non-fulfillment • Usually the only tangible security available • Contracting parties : Government Agency – Concessioning Authority and Private Party – Concessionaire • Other parties – state government, lenders, suppliers of services • A concession is a license – rights enjoyed for obligations performed

43. What a PPP is not & what it is • PPP is not privatization or disinvestment • PPP is not about borrowing money from the private sector • PPP is more about creating a structure • in which greater value for money is achieved for services • through private sector innovation and management skills • delivering significant improvement in service efficiency levels • This means that the public sector • no longer builds roads, it purchases kilometers of maintained highway • no longer builds prisons, it buys custodial services • no longer operates ports but provides port services through world class operators • No longer builds power plants but purchases power

44. Partnership in Practice • Partners, not adversaries – this is important given the background of mistrust in conventional procurement • Project should be key focus – “win-win” for both parties • Independent agencies – Independent Engineer - useful during both implementation and operations • Government retains ultimate responsibility but uses the private sector to deliver infrastructure services of specified standard • Private Financing – can significantly leverage public funds

45. Investor Comforts & Incentives • Fiscal Benefits - Tax holiday of 100% for 10 years in a block of 20 years • Viability gap funding of up to 40% of the cost of the project – as a grant • Foreign Direct Investment – 74% to 100% of the equity permitted • Duty-free import of high capacity and modern construction equipment • Long Concession periods – up to 30 years

46. Case-study of Indore City Bus Service PPP in urban transport projects

47. indore: a snap shot

48. Before City Bus: UnorganizedTransport in Indore

49. about AICTSL • Inception in 2006 with a seed capital of Rs. 5 million • Adopted the net-cost based PPP model of bus operations… widely copied in other cities across India • Started with 37 buses with 4 operators. • Installed vehicle tracking systems on the entire fleet, which remains the best in the country to date. • Initiated the BRT project in Indore, which is in the final stage of implementation. • Funding from JnNURM allowed modernizing the fleet with CNG buses that have electronic displays and voice announcement systems.

50. PPP Model of Bus Operations • Public partners role: • Planning of routes • Inviting tenders for bus operations • Providing support infrastructure • Objective: Providing affordable • & quality public transport 2004 2005 2012 2006 • Private operator responsibilities: • Owns, operates, and maintains fleet • Collects fare from passengers • Pays premium to AICTSL for right to operate on route 2011 2007 2010 2008 2009