2. 2
Presentation Structure
I. Suggested Framework: Definitions and Typology
II. Developed Country Experience- Debt and Equity
III. Developing Countries Experience- Debt and Equity
IV. India – Traditional and Modern
V. India - Case Studies
VI. Some Next Steps
3. 3
1.Suggested Framework: Definitions
Equity PPP’s as Special Purpose Vehicles
with limited recourse
PPP’s as Raising Debt for Public Owned
Infrastructure
PPP’s as mobilizes of finance
PPP”s as efficiency in service delivery
4. 4
Equity PPP’s- assets which can service equity or debt through third
party sales toll roads etc’ Projects such as stand alone commercial
complexes recover debt service from rentals are not worth investing
in and do not constitute infrastructure in any real sense.
Debt PPP’s - environmental infrastructure namely water supply,
sanitation and solid waste need a mixture of debt and grant financing
and should attempt to recover appropriate user charges.
Entity Financing-other municipal infrastructure such as internal
roads, parks, crematoriums etc would have to rely solely on general
revenues to service debt.
I. Suggested Framework: Assets
5. 5
1.Suggested Framework-Types and
Sources of Finance
Assets – Capital Intensive, generate
externalities across space and over time
Smaller cities constrained by scale and
hence limited scope of full cost
recovery
Appropriateness of local currency, long
term debt
6. 6
In general, factors enabling private equity
investment in urban infrastructure are when:
project cash flows can support dividend
expectations
the regulatory framework is in place;
contractual obligations amongst the various
participants with respect to risks,
performance, and returns are clearly defined;
and
there is a sufficient tail in the project life.
1.Suggested Framework- Equity
8. 8
2. Developed Country Experience- Debt
US Capital Market Approach where low capital recourse
to Munis (around US 15 billion 22% going to towns less than
10000 population)
Europe – State Owned Financial Intermediaries – Dexia.
Kommuninvest, Norwegian Bank. PWB in the UK (accounting
for 95% of finance)
Framework developed after 1970 Acts, Accession
Conditions
9. 9
2. Developed Country -Equity
Quantitatively insignificant – 94% of
water and sanitation in the US public
ally owned and privately financed
Europe most waste water Grant finance
of over 35-40 percent
Case Studies – Victoria, Atlanta display
problems of overestimation of demand
10. 10
2. Developing Countries - Debt
Larger Cities established credit
relationships – Joburg, Shanghai,
Mexico City
Smaller Cities – thro intermediaries,
INCA in SA, Finditer in Columbia, DFV
in China…
Macro Adjustments for fiscal space-
Russia, Brazil
11. 11
2.Developing Countries -Equity
Quantitatively insignificant – Brazil
(1.5%) China (4%) South Africa (1%)
Mostly in telecom and expressways
(87%)
Concession usually need renegotiation on
accounted of overestimated
profitability – Malaysia, Brazil,
12. 12
Viable urban financing strategies usually need:
Rational and predictable devolution- largely formula based as in
South Africa, India, Mexico.
Legal frameworks for borrowing, such as The Municipal Finance
Management Act (MFMA) in SA, Urban Local Bodies Act (Tamilnadu),
Master Trust Structure (Mexico).
Domestic market oriented financial intermediaries working with
cities such as DBSA, INCA in S. Africa, Finditer in Columbia and
Dexia in Mexico.
Fiscal space allowing affordable long term interest rates for
financing city infrastructure.
2. Developing Country: Debt
13. 13
3. India – Traditional Financing
City get debt/grants from governments/government
owned financial institutions on basis of guarantees.
Project Implementation by Parastatals/Cities with no
clear duties and responsibilities for servicing debt or
asset maintenance.
Under investment in Urban.
User charges rarely covering even O&M.
Usually resulting in:
Drying up of institutional sources based on state
guarantees on account of ceilings on national liabilities.
Limited low cost / equity / grant type funds.
Excess supply of commercial funds including
multilateral.
14. 14
4. India- Traditional Financing-Functional
and Geographic Fragmentation
What was wrong with this Debt ?
The decisions on accessing debt, competitiveness of its tenor,
interest rate etc – not decided by the cities – but by the State
The most capital intensive projects of water supply, sewerage
etc – had to be implemented by Statutory bodies or
Departments of State Government
The loan – although on the books of the local body – the cash
would actually not reach the city, but would enter State
Governments Accounts – then to the Statutory Water Board
Badly leveraged mainly because – no due diligence on the
capacity to bear debt, level of user charges needed –
sustainability etc.
All this led to a situation of cities – becoming subsistence level
institutions with total apathy to their debt status
15. 15
4.India –74 CA Institutional Setting
The GOI passed the 74th amendment to the
constitution in 1992 :
Mandatory Elections with reservation for women
and weaker sections.
A State Finance Commission to recommend basis
for transfer of resources from state to local
bodies
Division of responsibilities between state and local
bodies
Tamil Nadu passed the conformity legislation to the
amendment in 1994
16. 16
4.Modern Financing- Institutional
Reform
Elections held to all local bodies in 1996 – after a fairly long gap
Chennai Corporation saw an elected body after 23 years
The 1st Finance Commission was set up & recommendations
implemented from 97-98
3.6% of State’s tax revenue passed on urban local bodies
Inter-se allocation based on population, per capita
expenditure and per capita revenue.
15% set apart as an equalization cum incentive fund to
reward performance and ‘handhold’ weak and unviable cities
90% of Entertainment tax passed on to local bodies
The formula based fiscal transfers – resulted in a more buoyant
stream for the local bodies & therefore the issue of bad
leveraging was addressed to same extent.
Institutionalizing of the Finance Commission
17. India: Trends in Equity PPP’s
WB study (2008) 104 projects
Low materiality
Senior Debt from Public Sector banks
(75%)
Most Equity Invested in Airports (USD
167m) Urban less than 2%
Grants substituting equity
17
18. India: Trends in Equity PPP’s
Fitch 2009
Majority need restructuring of debt
(85%)
Projects priced on sponsor- bank
relationships rather than rigorous
appraisals
Two rated projects with cost and time
overruns – Chennai Desal the only Urban
18
20. 20
Karur Bridge Tolls:
The tolls are as follows:
Vehicle Type Single Multiple Monthly
Pass (Rs.) Pass (Rs.) Pass(Rs.)
Car/Jeep/Van 10 15 300
LCV, Tractors 25 35 1050
Trucks 30 45 1350
Bus 30 60 1800
Multi-axle trucks, Cranes,
Earth-moving machines & 50 -- --
similar heavy vehicles
5. TN -Some Transactions-Equity
21. 21
5.TN Some Transactions: Debt
MADURAI INNER RING ROAD
TOLL COLLECTION
(All Fig Rs Million)
Qtr. Months Amt. Cumm Avg Daily Avg. Avg p.m
I. Nov - Dec 00 7.579 7.579 0.124 3.727
II Jan - March 01 12.681 20.259 0.141 4.227
III April - June 01 13.494 33.754 0.148 4.449
IV July - Sep 01 14.203 47.957 0.154 4.631
V Oct - Dec 01 12.107 60.063 0.132 3.948
VI Jan - March 02 11.642 71.706 0.129 3.881
VII April - June 02 14.539 86.245 0.160 4.793
VIII July-Sept 02 12.288 98.533 0.134 4.007
IX Oct - Dec 02 15.245 113.778 0.166 4.971
X Jan-Mar 03 13.255 127.033 0.147 4.418
XI Apr-May 03 7.932 134.965 0.147 4.407
Average 134.965 0.149 4.820
ANALYSIS :
Aggregate Collection till date 134.965 Rs Million
No. of Days of operation 905 Days
Avg. Daily Collection 0.149 Rs Million
Avg. Monthly Collection 4.820 Rs Million
Madurai Bye Pass
22. 22
Madurai replaced its traditional borrowings in the
form of long term loan by its own debt paper.
Madurai is the first municipal corporation in Tamil
Nadu, which has issued debentures for its project
refinancing viz., the Inner Ring Road.
The servicing of the bonds would be met out of
the toll collections arising out of the traffic on the
road.
This issue resulted in a flat cost saving of about
2.50 to 3.00 percentage points to the corporation.
V. Way Forward – Linking Capital Markets
Madurai Bye Pass Bond Issue
23. 23
Alandur Waste-Water Treatment-
Community Equity
Works at Alandur – undertaken after commissioning a
study to access the feasibility of the project based on
user charges.
Tariff rate to cover O&M expenses, debt servicing and
sinking fund allocation;
Deposit mobilization
From household : Rs.5,000/-
From commercial and industrial customers :
Rs.10,000/-
Cross-subsidy scheme for fixation of tariff:
Household : Commercial : Industrial Users = 1:3:5
5.TN Some Transactions
24. 24
6. Next Steps – Linking Capital Markets
Urban Infrastructure, especially water and sanitation
investments require:
long term debt on account of externalities over time and
space
severe fiscal constraints on the supply of equity from
State and local Governments for new investments
substantial low income populations constraining the ability
to pay for high financing costs.
Consequently, the need to link city infrastructure financing
requirements with domestic capital markets is well understood.
Debt finance is a pre-requisite for undertaking essential civic
investments, and in the long run, domestic savings through capital
markets would have to be, the predominant source of supply.
The need for an institutionalized mechanism to raise low cost
funds for water and sanitation is clear cut with the US Bond Bank
as a potential model.
25. 25
Some Next Steps
Working Systemically on Demand and Supply
Develop legal framework – defining purpose, scope
and limits for borrowing at the state level.
Define a process for cities to obtain internal
consent for borrowings including pricing.
Unblock existing supply constraints on Insurance
and Pension Funds.
Assist in securing a potential blend of long term
institutional finance with domestic market.
26. 26
Water and sanitation pooled fund
What does Commercial Finance Assess?
Stable Revenue Streams from devolution and own sources
Demand driven Medium term Investment Plan, Commitment by cities to tariff
and collections
Strength of the Credit Enhancement
What do Cities and National Governments Get?
Systemic Access to Commercial Finance
Leveraging of scarce state grants
Maintenance of Assets built into budgets
Disclosure of Investments and Pricing
27. 27
SystemicAccess for Small and
Medium Cities-WSPF
Umbrella Crd
Enchanc.
Sov.Grant
Sov. Govt.
Transfer
Payments
MLA
WSPF
Reserve
Account
Revenue
Intercept
Partial Credit Guarantee
Technical Assistance
Investors
Bonds
Trustee
Local
Govt.
Project
Local
Govt.
Project
Local
Govt.
Project
Funds
Market Rate
Long term
Principal & Interest payments
If necessary
If necessary
28. 28
The terms of the issue are:
Mode : Private Placement Issue
Issuer : Water and Sanitation Pooled Fund (WSPF) a trust, which
pools infrastructure needs of 14 small cities
Issue Size : Rs. 30.41 Crores USD 10 million approx
Coupon : 9.20% p.a.
Tenor : 15 years (With a put and call option at the end of 10th years)
Redemption : In 15 equal annual instalments
Payment of Interest : Annual payment of coupon on a diminishing balance
method.
Security : Unsecured Issue
Water and Sanitation Fund
29. 29
The Cities and the Investments
LIST OF POOLED PROJECTS
Rs. In 100,000
S.No. Particulars
Project
Cost
Loan amt
sanctioned
Loan
disbursed
Water Supply Schemes:
1 Ambattur Municipality 336.56 67.32 67.32
2 Tambaram Municipality 182.00 109.20 109.20
3 Madhavaram Municipality 325.00 195.00 105.75
4 Rajapalayam Municipality 85.00 51.00 51.00
Adjacent Urban Areas - AUA
5 (I) Alandur Municipality 427.00 403.00 403.00
6 (ii) Pammal Municipality 378.00 357.00 357.00
7 (iii) Ankapathur Town Panchayat 188.00 178.00 178.00
8 (iv) Ullagaram Town Panchayat 298.00 281.00 281.00
9 (v) Porur Town Panchayat 579.00 547.00 547.00
10 (vi) Maduravoyal Town Panchayat 146.00 138.00 138.00
11 (vii) Valsaravakkam Town Panchayat 189.00 179.00 179.00
12 (viii) Meenambakkam Town Panchayat 17.00 16.00 16.00
Under Ground Drainage:
13 Madurai Corporation 1407.00 500.00 325.00
4557.56 3021.52 2757.27
30. 30
The Investors
Water and sanitation pooled fund
Sl. No. Subscribers No. of
Bonds
allotted
1. Karnataka Bank Ltd. 2000
2. ICICI Bank Ltd. 1000
3. Gujarat Industries Power Co.,
Ltd, Provident Fund Trust
11
4. Metlife India Employees
Provident Fund Trust
5
5. City Union Bank Ltd., 25
31. 31
WSPF bonds have created an active secondary market
Bonds sold by original holders to following entities
Beginnings of a New
Market…
1. The Karnataka Bank Ltd
2. The Tata Engineering And Locomotive Company Ltd Superannuation Fund
3. The Tata Engineering And Locomotive Company Ltd Provident Fund
4. Credit Capital Investment Trust Company Ltd Trustees Taurus Mutual Fund
A/C Libra Bond Fund
5. The Tata Engineering And Locomotive Co. Ltd Employees Pension Fund
6. The Baghat Urban Co Operative Bank Limited
7. The Indian Hotels Co. Ltd Employees Provident Fund
8. Trust Capital Services (India) Pvt. Ltd.
9. Digital Globalsoft Limited Provident Fund Trust
10. Staff Provident Fund of Nicholas Piramal India Ltd
11. City Union Bank Limited - Mount Branch
12. Gujarat Industries Power Co. Ltd. Provident Fund Trust
13. Metlife India Employees Provident Fund Trust
14. Advanta India Management Staff Provident Fund
