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LESSONS:

Private Sector Infrastructure Facility at State Level Project

sector: Finance | country: India

The pipeline of eligible subprojects was weak. In addition, the subprojects at the state level funded under the loan were developed by the Infrastructure Leasing & Financial Services Limited (IL&FS) in partnership with the state governments. This points towards a need to develop the capacities of the state governments in developing and structuring projects, and to offer those projects on a competitive bidding basis.

IL&FS’s social safeguard capacity was a critical factor in the successful financing of two of the subprojects-Ahmedabad Mehsana Toll Road Project (AMTRP) and New Tirupur Area Development Project (NTADP). ADB must ensure that the financial intermediary that it partners with for infrastructure projects has adequate capacity with respect to safeguards and, if required, ADB should take steps to enhance the capacity.

Some of the pipeline subprojects could not be financed because of difficulties in complying with ADB’s social safeguard requirements, and the advanced stage of subproject progress. ADB’s involvement at an early stage of subproject development may have facilitated compliance with ADB’s social safeguard requirements, as well as timely completion of resettlement plan implementation. Moreover, during most of PSIF II implementation the India Resident Mission did not have a designated social safeguard resource, resulting in a longer ADB response time on social safeguard issues under the Private Sector Infrastructure Facility at State Level Project (PSIF II). This added to difficulties in financing potential subprojects.

IL&FS’s experience suggests that the role of the sponsoring authority-the central or state government or other statutory authority initiating or bidding out the project-is essential for successful implementation of public-private partnership (PPP) projects. The sponsoring authority’s role should include sound rehabilitation and resettlement policies, providing land free from encumbrances and encroachments, expeditious assistance in shifting of utilities, and equitable distribution of risks of the project. At the time of PSIF II, there was a lack of model concession agreements that incorporate these features in many sectors other than the road sector. Further, the social safeguard policies and practices of the sponsoring authorities are, in many cases, not completely aligned with ADB’s requirements, especially with respect to compensation requirements for affected persons. As a result, the project company has difficulty ensuring compliance with ADB’s social safeguard norms since the land is typically acquired by the sponsoring authority.

The demand risk factor is important in the success of projects in which the demand risk is borne by the project. It is important to mitigate this risk through a realistic demand analysis and forecasts at appraisal or structuring the projects as an annuity-based project.

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