Agenda PURA – A Background Project Risks – Assessment Framework

Agenda PURA – A Background Project Risks – Assessment Framework

Agenda PURA – A Background Project Risks – Assessment Framework

PURA Scheme – A Background > Holistic and accelerated development of compact areas around a potential growth centre in a gram panchayat (or a group of gram panchayats) for providing livelihood opportunities and urban amenities to improve the quality of life in rural areas > PPP framework > Core funding from GoI’s scheme and other supplemental programmes > Private sector investment and operational expertise > “Project-based” development

3

PURA Scheme – A Background (cont.)

Amenities/activities to be provided under MoRD schemes (mandatory) (a)

Amenities to be provided under schemes of other ministries (non-MoRD schemes) – illustrative list (b)

Add-on projects (revenue earning, people centric projects) – illustrative list (c)

1.

Water and sewerage

7.

Village street lighting

10. Village linked tourism

2.

Construction and maintenance of village streets

8.

Telecom

9.

Electricity generation, etc

11. Integrated rural hub, rural market

3.

Drainage

12. Agri – common services centre and warehousing

4.

Solid waste management

13. Any other rural-economy based project

5.

Skill development

6.

Development of economic activities

Source: MoRD, GoI 4

Agenda PURA – A Background Project Risks – Assessment Framework

Project Risks – Assessment Framework >

Overall programme-level factors to be considered –

Revenue generation ability of projects in rural areas may be limited; levy of user fees for infrastructure services not an automatic given; therefore, project(s) viability and attractiveness for the private sector will heavily depend on government subsidies and grants and the way these are built into concession payments under the PPP model

–

Government’s fiscal ability to budget these subsidies is not in question but the mechanics to deliver shortfall payments in full and on time is an important consideration >

–

Advance notification, escrow accounts & trustee oversight can all impart mechanical rigour to the structure

Individual rural projects would be too small economically, so pooling of projects could be the solution >

Inter-governmental jurisdiction and coordination issues at lower tiers of government would be key

6

Project Risks – Assessment Framework (cont.) > Structure and information – Ownership & sponsors >

Assessment of developer/sponsor, including their credit worthiness, technical strength and experience, track record on similar projects and ability to raise resources and honor commitments

>

Resources committed, strategic importance of the project

>

Involvement of local parties advantageous, as they may be more knowledgeable of and responsive to the regional business environment and political dynamics

– Project vehicle status and project structure >

SPV structure

>

Ring fencing of assets and cash flows

7

Project Risks – Assessment Framework (cont.) – Jurisdiction & other legal >

Contractual, statute, codified law

>

Contract clarity, especially regarding allocation or transfer of risk within the project structure

>

Key features of the concession –

Duration

–

Commercial – pricing mechanism (availability payment, revenue share, tariff setting…)

–

Service delivery requirements/performance standards

–

Government support

–

Penalties for delays/overruns

–

Exclusivity/non-compete clauses

8

Project Risks – Assessment Framework (cont.) – Use of expert reports >

Baseline Studies, reports, forecasts or opinions provided by various experts including legal advisors, independent engineers, market or environmental consultants, insurance advisors and others

– Information quality > >

Quantitative & qualitative Timeliness and frequency, reliability, level of detail, independence and scope

9

Project Risks – Assessment Framework (cont.) > Completion risk Construction, commissioning & ramp-up risks – Contractors > > > > >

Experience, track record & credit quality of the main contractors Involvement of local partners, subcontractors and/or suppliers is an advantage based on their local business and political experience Contractor’s relationship with other transaction parties for potential conflicts or incentives Availability of suitable replacement contractors and contractual provisions to effect a replacement Performance bonds and completion guarantees

– Cost structure > >

Independent expert review of the cost budget and conclusions as to its competitiveness and achievability Fixed-price turnkey contracts 10

Project Risks – Assessment Framework (cont.) – Delay risk >

Factors that could delay scheduled completion of the project –

Strengths and experience of the contractors

–

Length of the projected construction period

–

Availability of building materials and supplies

–

Terrain over which the project is being constructed

–

Risk of not receiving permits as and when required

–

Exposure to labour problems

–

Connecting infrastructure

–

Dispute resolution and

–

Political risks

11

Project Risks – Assessment Framework (cont.) – Contract terms >

Retentions, penalty payments, long-stop dates and liquidated damages if the project is not completed on time, on budget or to the required performance standards

>

Dispute resolution mechanisms in contracts, regulatory approvals or statutes that provide a reliable forum and a clear mechanism should a dispute arise

>

Insurance

– Technology risk >

May contribute to delays or lower performance leading to lower operational cash flows

>

Conventional proven technology – in similar terrain, climate and scale

>

Adequacy of commissioning and ramp-up time consistent with the technical risk 12

Project Risks – Assessment Framework (cont.) >

Operation risk –

Operator >

Operator’s compensation to reflect the risks and performance standards of the contract

>

Performance risk assessment based on the operator’s track record, financial position, independent engineering reports, peer analysis, operating complexity & contractual/structural flexibility. Grace periods, flexible maintenance schedules and other such features may act as mitigants

>

Penalties should be proportionate and ideally cover lost revenues that result from substandard performance by the operator and bonuses should be fully costed

>

An operator may also be a sponsor or constructor of the project or have some other interest. In this case, both incentives and possible conflicts are considered

>

Projects are typically exposed to their operators for a long period, raising risk and the importance of an available replacement –

Replacement of an operation and maintenance contract that was not originally “arms length” may incur additional cost or negotiation, particularly if the operator is affiliated to other project parties 13

Project Risks – Assessment Framework (cont.) – Costs >

The makeup, timing and potential volatility of operating costs that generally will include: Commodities and utilities, labour, taxes, insurance, maintenance and capital expenditure or “lifecycle” costs

– Supply risk >

Requirement of a resource or product to exist or be available in order for the project to operate

>

Long-term supply contracts that may fix the volume and/or price

– Technology risk >

Maintenance and performance within projected cost

>

Feasibility study by an independent recognised expert with a proven track record in the field –

Issues addressed should include: Capacity, availability, expected outages, repair and maintenance levels, future required capital investments, spare part requirements, expected efficiency levels and environmental issues 14

Project Risks – Assessment Framework (cont.) – Tail risk >

Reduced productivity or decommissioning, contractual obligations (such as handover) or renewal of licences, leases or concessions

>

Imminent termination of a long-term agreement or concession may provoke the sponsor to economise on long-term capital expenditure where that flexibility exists

15

Project Risks – Assessment Framework (cont.) > Revenue risk – Gross-revenue/off-take >

Driven by a combination of availability, price and usage/volume

>

One or a few payers such as a concession grantor or major off-takers or multiple payers/users

>

Availability-based payment structures in the context of a single or few payer projects are often less exposed to demand risk –

Counterparty risks associated with the off-taker or concession grantor >

–

>

Local panchayats/district rural development agencies

Failure to meet contracted standards (timeliness, availability, quality or quantity) may incur penalties or deductions, reducing gross revenues

Volatility of user-based fees/revenues –

Willingness and ability to pay user charges for services perceived as “public goods”

16

Project Risks – Assessment Framework (cont.) – Obsolescence/economic life/remediation >

Obsolescence risk due to more efficient variants, competing innovation or demand shift has to be considered against the capacity of the project to invest in upgrades to maintain competitiveness and revenues – – –

Contractual mitigants may exist via concession grantors, off-takers or suppliers Obsolescence risk without mitigants may result in shorter economic life and lower revenues Some sectors may have a higher risk of changing standards, requiring remediation expense during the operating phase, typically associated with safety or environmental issues

– Termination event risk (pre maturity) > > >

Termination of a concession, break clauses in off-take agreements or loss or failure to renew a licence Appropriate grace periods in contracts, reserves or liquidity to give time for remedy Contractual provisions for termination payments by the counterparty in the case of events of defaults by either concessionaire or concession grantor 17

Project Risks – Assessment Framework (cont.) > Macro risks – Regulatory and political risks >

Government’s commitment, public support and a consistent application of law and regulation –

Likelihood of the government interfering with the project during its life

>

Legal system that respects the validity of contracts and the rights of property owners and in which there exists well settled corporate and commercial law

>

Regulatory and legal framework - Is there a well-defined, unambiguous regulatory oversight for the project? –

Clear regulations

–

Legal history for honouring contractual relationships

–

Clear allocation of roles between public & private sectors

–

Workable dispute resolution process

18

Project Risks – Assessment Framework (cont.) – Industry risks >

Similar projects as well as other industry participants such as corporates, state-owned enterprises and not-for-profit organisations

>

General effect of macroeconomic factors, such as economic growth, commodity prices, inflation or exchange rate

19

Project Risks – Assessment Framework (cont.) > Debt structure – Debt characteristics & terms – Structural features >

Timeliness of subsidy payments/grants –

Escrow accounts

–

Aid intercept mechanisms – devolution

–

Trustee oversight

– External financial support – Security package & creditor rights – Refinance & recapitalisation

20

Project Risks – Assessment Framework (cont.) > Debt service & counterparty risk – Models – Base case – Project stresses – Financial stresses – Combined downside, breakeven and rating cases – Metrics – Project counterparty risks – Financial counterparty risks – Peer analysis

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