Dr. V. Sathyanarayana

Chief Legal Counsel - iDeCK

Infrastructure Development Finance Company Ltd

28th April 2011

Agenda PPP Transactions & Learnings

Key Issues

Pre-bid Queries

Summary & Way Forward

Key Contractual Provisions

To incorporate

To avoid

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Water PPPs in the country Water PPPs in the country are far & few, with mixed success

Industrial water supply, with drinking water components - Tiruppur & Vizag

Pilots – Hubli-Dharwad, Gulbarga & Belgaum (KUWASIP), Bhopal, Indore, Gwalior, Nagpur

Smaller cities – Latur, Shivpuri, Khandwa

Large cities – Aurangabad, Mysore

New city (bulk water) – Naya Raipur

Sewerage – Kolhapur

Except KUWASIP/ Nagpur pilot, which has finished initially envisaged contract period, other projects are at various stages of contract life – mostly in development/construction stages

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Water & Sewerage Contracts SNo. Year Name of the Project/ City Type of Contract

1 2004 KUWASIP Management

Contract

2 2009 Bulk Water Supply System in Naya Raipur BOT

3 2010 Aurangabad Water Supply Project BOT

4 2009 MIHAN Management

Contract

5 2008 Mysore Management

Contract

6 2011 Improvement of Water Supply Services –

Reduction in NRW -

Bhopal, Gwalior and Indore

BOT

Sewerage

1 2010 Kolhapur Sewage Treatment Plant BOT4

SN

o.

City No. of

Queries

Bidders

1 Aurangabad 545 (170

categories)

CASCAL-EA-NCC, IL&FS-Acciona, Jindal-HCC-Manila, JMC-MBL-

SREI, SPML-NWSC-VTWL, Veolia, UPL-PIL-SEB, Ranhill-JUSCO

2 KUWASIP

(Gulbarga,

Belgaum, Hubli-

Dharwad)

220 Black & Veatch, Severn Trent, Gelsenwasser, Veolia,Thames

Water, Brisbane City, Compagnie Generale des Eaux, United

Utilities

3 MIHAN - Nagpur 34 4 bidders – Nagarjuna, Berlinwasser, JUSCO, Veolia

4 Naya Raipur 185 SEL-GKC Consortium, Jindal Water Infrastructure Ltd., Nagarjuna

Construction Co.ltd., SOMA-GEO MILLER Consortium, Doshion

Ltd.& Doshion Veolia water Solutions Pvt.ltd. Consortium, JUSCO,

Vishwa Infrastructures & Services Pvt. Ltd.& United Gulf

Construction Co., W.L.L Consortium

Water Contracts

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SN

o.

City No. of

Queries

Bidders

5 Bhopal, Gwalior

and Indore

41 Suez Environnment, Veolia Water India Pvt Ltd, L&T Ltd, Indu

Projects Ltd, JMC Projects (India) Ltd, Ramky Infrastructure Ltd,

Pratibha Industries Ltd - SMS Pariyavaran JV, Jamshedpur

Utilities and Services Company limited, Subhash Projects and

Marketing Limited, EA Infrastructure Operations Private Limited,

Gemini Communications Limited - East coast constructions Limited

6 Kolhapur 470 10 bidders

7 Mysore 407 JUSCO, L&T, SPML – Ranhill, Jain Irrigation

Water Contracts

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KUWASIPQueries: PROCESS RELATED Learning

1. Purely financial evaluation without consideration of

bidder‟s understanding of the project

1. Need for technical proposal

to be reviewed

Queries: COMMERCIAL Learning

1. Compensation for illegal water connections

2. Employment status of deputed employees – whether they

are employees of the concessionaire or government

3. Rules applicable to deputed employees

4. Timescale of the preparatory period short

5. Timescale for the project is too short

6. Ratio of fixed vs. variable payment is low

7. Timely payment is not structured in the agreement

8. Reduction in the raw water supply does not qualify for

compensation

9. Scope of insurance coverage of the operator

• Clarity on

• „assigned‟ or „deputed‟

employees of MC

• Connection and

disconnection rights

• „Preparatory Phase‟ – to be

made mandatory with

adequate time

• Assured quantity of raw

water/water shortage

periods to be defined

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Queries: TECHNICAL Learning

1. Outdated database of existing assets

2. The state of the assets is not uniform

• Technical inputs to be more thorough,

and not depend totally on private

operators „due-diligence‟

KUWASIP

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Naya RaipurQueries: COMMERCIAL Learning

1. Performance Security high

2. No compensation in case of delay in land acquisition

3. Change in taxes/ duties will not be compensated

4. Quarterly payments as opposed to monthly

5. Non availability or reduction in supply of raw water

6. Dilution of equity stake of the holding members not

allowed during the concession period

1. Assured quantity of raw

water/water shortage periods

to be defined

2. Planning Commission norms to

be followed for

• Performance Security

• Shareholding patterns and

lock-in periods

Queries: TECHNICAL Learning

Project costs- capital and O&M not specified

Details of the sectors and customer profile not provided

• Technical inputs to be more

thorough, and not depend

totally on private operators

„due-diligence‟

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Aurangabad Water Supply ProjectQueries: PROCESS RELATED Learning

1. Insufficient time for bid submissions

2. High Performance Security- can be reduced especially

where Operator/ Developer is making investments

1. JV participants submitting proportional security amounts

3. Submission of Financial Model as part of test of

responsiveness

4. Purely financial evaluation without consideration of

bidder‟s understanding of the project

5. Lock in period is same as the concession period. This is

not typical of infrastructure projects

1. Sufficient time to be given for

bidding

2. Revenue Model / fiscal strength

of ULB

3. Generally agreed, (non sector

specific) commercial terms –

(Planning Commission) norms

could be adopted

• Bid Security

• Performance Security

• Bid Validity

• Shareholding patterns and

lock-in periods

4. Need for technical proposal to

be reviewed

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Aurangabad Water Supply ProjectQueries: COMMERCIAL Learning

1. Payments from AMC

• No mention of consequences on non payment or delay in project

grant

• Payments dependent on AMC‟s compliance with some GoI and

Government of Maharashtra conditions

• 5% retention in annual operational grant till COD

• Financial Standing of AMC- past 5 years

• Termination payment in the case of AMC default

• The ratio of fixed payment should be higher vis-a-vis the variable

payment

• Monthly payment of grant instead of quarterly payment

2. No revenue during construction period

3. Concessionaire to bear the hike in the cost of raw water and

electricity charges and not pass through

4. Service level requirements with low current knowledge on water

system

5. Handover of land and ROW timelines not defined

6. Definition of concessionaire‟s assets – only new assets or assets under

rehabilitation

• Payment Guarantee

mechanisms to be

established

• Baseline standards

to be agreed prior

to establishing

Performance Targets

• Project Assets to be

defined/ identified

• Termination

Payments to be

well- defined

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Aurangabad Water Supply ProjectQueries: COMMERCIAL…contd Learning

7. Compensation under change of scope

8. Timelines for raising invoices to end users

9. AMC Employees- associated HR problems and legal

employment status

10. Right to disconnect illegal connections not with

concessionaire but with AMC

11. Compensation of equity IRR is fixed and not based

on the model of the concessionaire

• Change of Scope

• Billing and Collection mechanisms

to be specified

• Clarity on

• „assigned‟ or „deputed‟

employees of MC

• Connection and disconnection

rights

Queries: TECHNICAL Learning

1. Responsibility of billing and collection of water tariff

without a sound database

2. Number of connections not specified

3. Inadequate time given to bring unforeseen ground

conditions to AMC‟s attention

1. Inadequate relief to the Concessionaire for

unforeseen ground conditions

4. Ratio of water allotted to industrial

• System information to be made

available

• Technical inputs to be more

thorough, and not depend totally

on private operators „due-

diligence‟

• „Preparatory Phase‟ – to be

made mandatory12

MihanQueries:

1. Extent of spares during O&M is not specifically given

2. Concessionaire liable for non performance of the plants built by other contractors

3. Increase in power costs not factored

4. Increase in taxes and duties not reimbursable

5. Provision for exemption of service tax in the case of SEZ

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MysoreQueries: TECHNICAL

1. BOQ does not account for extra connections

2. Unclear status regarding the databank of existing distribution network

3. No clarity on existing billing efficiency

4. Requirements of schedule of manpower difficult to ascertain at the time of bidding

Queries: PROCESS RELATED

1. Time scale is too short

2. Clarity on award of marks in technical round

Queries: COMMERCIAL

1. Change in taxes should be absorbed by the bidder

2. Tariff structure for damaged meters not defined

3. Billing impractical in rehab phase

4. O&M cannot be undertaken in the preparatory phase

5. Fixed price without price escalation for the agreement period

6. Ratio of fixed vs. variable payments low

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Reduction in NRW- Indore, Bhopal, Gwalior Queries:

1. Assurance for exclusive right for the Operator for the entire duration of the

agreement and for all aspects thereof

2. Provision for year-on-year escalation on Operator Payment

3. Extension of bid submission timeline

4. Extension of service area upto 10% (without compensation)could be reduced.

5. Appointment of third party auditor to be mutual

6. Payment of taxes to be done directly by the MC

7. Right to connect/disconnect to be transferred to operator

8. Change in the percentages of fixed and variable payments

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KolhapurQueries:

1. Insistence on a technical tie-up

2. Clarity and inconsistency in technical requirements, output and input specifications,

disposal logistics etc.

3. Ambiguity in additional scope/ not defined in the current context

4. Payment structure, payment guarantee mechanism and strength of ULB to make

payments

5. Land acquisition and utility shifting obligations

6. Non-protection of developers in case of Government delays

7. Pass through of power charges

8. Allow assignment of assets to lenders

9. Even though grant is being given, extent of control on Government monitoring –

grant is a % of developer‟s cost

10. Communication and social responsibility costs

11. Employee deputation clarity

12. Increase in concession period

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Summary Lack of baseline information – difficult to establish

performance standards and capital investments

Selection method – need for technical evaluation, qualification criteria

Project boundary and scope (technical specifications)

Capital expenditure – timing, periodic capex

Payments – structure, periodicity and timeliness, defaults, performance evaluation

Payment guarantee and strength of municipal finances

Pass-through – power charges, bulk water charges

Termination events and payments

Tariff risks17

Suggested Way Forward – Policy Level Where funding available use management contracts

Where funding not available BOT is an option provided

Contracts are fair with equitable risk distribution

Money set aside under 12th Plan for

Collation of accurate data on underlying existing asset and their condition

O&M expenses wherever tariff recovery is inadequate

Have comprehensive contracts with water supply and sanitation

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Contract Formation - Key Suggestions Contract Rebasing

Inability to make assumptions on capex and opex requirements

Changes in water consumption patterns

Separate pricing risks from performance risks

Pass on demand risk rather than tariff

Legally tenable institutional framework

Appropriate amendments, clarity in rights & obligations, ownership, investments,

collections, connections & disconnections

Realistic commercial criteria

Qualification & selection

Performance standards

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Key Clauses Key obligations of the parties

Authority to -

To provide ROW in a timely manner and assist in shifting of utilities

Set up payment guarantee mechanism (could be escalated based on

performance)

Set out clear definition of performance standards & the method of

measuring the same

Assure source supply throughout the contract period

Developer to -

Develop and maintain assets

Supply, billing and collection (performance based payment mechanism)

Training of ULB employees

Submit performance guarantee

Comply with environmental requirements

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Key Clauses Conditions leading to breach and remedies

Authority - compensation for equity returns & loans outstanding

Developer - unfair benefit to any party should be avoided– market value principle

Appropriate damages for non-adherence

Force majeure conditions

Dispute resolution mechanism

Project monitoring unit

NGOs to support Authority (wherever necessary)

“Shipwreck” clauses

If tariff risk is passed on, a clear and objective rebasing mechanism

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What should not be done in water PPPs

Do not go for bidding without -

Having adequate information on the status of existing assets

Putting in place a payment guarantee mechanism

Without public need assessment for the project

Political commitment

Guaranteed availability of source supply during contract

period

Making an assessment of developers‟ appetite to invest

(especially where large-scale investment is envisaged)

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What should not be done in water PPPs

Concession conditions (not to include)

Grant rights to the developer to fix and revise tariff

Asking the developer to obtain ROW and acquisition of land

on his own

Onus on developer to shift utilities

Asking developer to recover old arrears (if collection risk is

passed on)

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