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FINANCING OF INFRASTRUCTURE FINANCING OF INFRASTRUCTURE PROJECTS byPROJECTS by

IFCI LimitedIFCI Limited

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INFRASTRUCTURE PROJECTS

•Power ProjectsPower Projects•Thermal-Coal, Naphtha, Gas•Hydro- Run of River, Dam•Non-Conventional-Wind, Co-generation, Solar

•Telecom ProjectsTelecom Projects•Basic Telecom Services•Cellular Services•Paging Services

•Ports-Container Terminal, Dry & Bulk TerminalPorts-Container Terminal, Dry & Bulk Terminal•Roads, Bridges & BypassRoads, Bridges & Bypass•RailwaysRailways•Sewerage & Water SupplySewerage & Water Supply

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• Rupee Loans• Foreign Currency Loans• Underwriting Commitments• Guarantees

Foreign Loans Deferred Payments

TYPES OF FINANCIAL ASSISTANCE

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WHY PRIVATE SECTOR PARTICIPATION?

Most Favourite for Infrastructure1. Funds – Private Investment & Foreign

Investment2. Viability – Investors and lenders make long term

commitment3. Efficiency – Balance of Construction &

Operation costs.4. Transfer of advanced technology5. Good management6. Speed of Construction7. Standards & Performance of facility

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MODELS OF PRIVATE SECTOR PARTICIPATION (PSP)

BT- Build-Transfer: Simple Construction contract

BOT- Build-Operate-Transfer

BOOT- Build-Own-Operate-Transfer

BTO- Build-Transfer-Operate

BOO- Build-Own-Operate

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TYPICAL BOT STRUCTURE

Off taker

Investors

EPC ContractorLenders

Principal

O & M Contractor

Raw Material Supplier

Promoter / SPV

Supply contract

Concession Agreement Off take

agreement

Turnkey

Contract

O & M Contract

Shareholder agreement

Lenders agreement

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STRUCTURE IN POWER PROJECT

SPV

Principal/Govt.

Suppliers

Lenders Investor Contractor

Operator

User/SEB

Dev. agreement

Supply Contract

LoanAgreement

ShareholderAgreement

EPCContract

O&MContract

PPA

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STRUCTURE IN ROAD PROJECT

SPV

Principal/Govt.

Operator

User

Concession agreement

LoanAgreement

ShareholderAgreement

EPCContract

O&MContract

Toll

Lenders

Investors Contractor

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CONTRACTUAL ARRANGEMENT ASSOCIATED WITH BOT

AppraisalDesign

Construction

Commissioning

Time

Cum

mulative C

ashflow

Traditional Construction

Turnkey

Produit-en-main

Build – Operate - TransferO & M cotracts

Decommissioning

Project Cashflow

+

_

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ROLE OF GOVERNMENTRegulator•Reduce Political Risk

•Reduce Bidding Risk

•Reduce Financing Risk – Land, Infrastructure

•Reduce Demand Risk – Market

•Transfer from Promoter to Principal

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SUITABILITY OF BOT CONTRACTS

BOOT / BOT – Tunnels, Bridges, Roads, Rail Infrastructure, Power Generation & Distribution, Water & Sewerage System & Telecommunication

Franchising – Rail Operating Services\

BOO – Water & Sewerage System, Clinical Waste, Hospital Equipment & Prison (Custodial Services).

Leasing/Contracting Out – Hospital Building, School Building, Prison Building & Airport.

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RISKS IN INFRASTRUCTURE PROJECTS

Global Risk

•Political: Country and Concession

•Legal: Host country and Agreement

•Commercial: Market, Reservoir and Currency

•Environmental: Sensitivity, Impact and Ecological

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RISKS IN INFRASTRUCTURE PROJECTS

Elemental Risk

•Construction: Physical, Construction, design and Technology

•Operation: Maintenance, Training, Operation

•Finance: Interest, Payback, Loan and Equity

•Revenue: Demand, Toll and Development

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INFRASTRUCTURE PROJECTS : RISKS

Risk FactorsSupply / Traffic / ReserveMarketForeign ExchangeOperating: TechnicalOperating: CostOperating: ManagementEnvironmentalInfrastructureForce MajeureCompletionEngineeringPoliticalFundingSyndicationLegal

Royalties, TaxProj. Loan, Capital Exp., InterestProj. Loan, InterestOverheads.

Cash Costs, RoyaltiesOutput/Qty., PrincipalCapital Exp., InterestCash Costs, Capital Exp.

Cash CostsCash Costs, Increase in Wkg. CapitalCash Costs, OverheadsOutput/Qty., Cash Costs

Output/Qty.Output/Qty., Price, Increase in Wkg. Cap.Price, Interest, Principal

Areas of impact

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INFRASTRUCTURE PROJECTS – RISK TRADE OFF

Supply / Traffic / ReserveFuel Supply Agreement; Traffic/Reserve Reports of Consultants.

Market PPA / Sales Contract

Foreign exchange Government Support; PPA/ Sales Contract;FX Hedging/ Swaps

Operating Technology:SPV / JVA; Maintenance Guarantee; O & M Agreement

Operating CostSPV / JVA; PPA / Sales Contract; Fuel Supply Agreement.

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INFRASTRUCTURE PROJECTS – RISK TRADE OFF

Operating ManagementSPV / JVA; O & M Agreement.

EnvironmentalO & M Agreement; Environmental Warranty; Insurance; Environmental Report.

Infrastructure Concession; Government Support.

Force MajeureLDs;Insurance.

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INFRASTRUCTURE PROJECTS – RISK TRADE OFF

CompletionConcession; Implementation Agreement; Completion Support; Turnkey Contract; Performance Guarantee; LDs; Engineering Report of Independent Engineer

EngineeringTurnkey Contract; Engineering Report of Independent Engineer

PoliticalConcession; Comfort Letter from Govt.; Implementation Agreement; SPV / JVA; LDs; legal opinion

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INFRASTRUCTURE PROJECTS – RISK TRADE OFF

ParticipationImplementation Agreement; SPV / JVA; Completion Support; PPA / Sales Contract.

SyndicationLoan Agreement; Inter - Creditor Agreement

LegalConcession; Implementation Agreement; Comfort Letter of Govt.; Loan Agreement; Inter – Creditor Agreement; Mortgages / Charges; Legal Opinion.

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POWERPOWER

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HYDRO POWER PROJECT - ROR

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HYDRO POWER PROJECT – DAM

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HYDRO POWER PROJECT – DAM

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HYDRO POWER PROJECT – MICRO

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POWER GRID

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HYDRO PROJECT-MAJOR RISKS

•Hydrology

North India –Snow Fed- Capacity Utilization-50-60 %

Central & South India-Monsoon- Capacity Utilization-20-30%

• Project Completion

Force Majeure

Geological Uncertainties

•Rehabilitation & Resettlement

•Environmental

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THERMAL PROJECT - COAL

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THERMAL PROJECT - COAL

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THERMAL PROJECT - COAL

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COAL BASED PROJECT- MAJOR RISKS

•Location from Coal Mine

•Coal Transportation Arrangement

•Ash Content in Coal

•Availability of Water

•Environmental-Disposal of Fly Ash

•Off take Arrangement-Transmission Line

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GAS BASED PROJECT-MAJOR RISKS

• Location from Gas wells

•Availability of Gas

•Availability of Water

•Technology

•Gas Pricing Policy in India

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DG BASED PROJECT- MAJOR RISKS

•High Variable Cost of Power

•High Maintenance Cost

•Transportation Risk of Fuel

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WIND ENERGY BASED PROJECT- MAJOR RISKS

•Availability of Wind Energy Potential- Capacity Utilization-25-30% ( Tamil Nadu and Karnataka)

•Financial Policies- 80% Depreciation in the first year of operation

•O & M contract

•Technology- 1 MW , Height of Tower-80 M

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• Debt Equity ratio : 70 : 30 Core promoters’ contribution : 15 - 20%(in

large projects) Preference to existing power companies

with Good Track Record Satisfactory track record of participants

Promoters

EPC contractors

O&M contractors

LENDING NORMS: POWER PROJECTS

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LENDING NORMS: Contd…

Statutory clearances and approvals to be obtained from CEA (if applicable) Environment agencies Signing of power purchase agreements Fuel allocation

POWER EVACUATION ARRANGEMENTS

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• Security mechanism & credit enhancement Creation of English mortgage

Pledge of shares aggregating to minimum 51% of

equity

Assignment of licenses, rights and titles to project

documents etc.

GoI / state govt. Guarantee

Escrow & Trust and Retention Account

LENDING NORMS: Contd…

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30% of total equity to be brought upfront by promoters. The balance 70% should be backed by acceptable credit support

Completion support

Prudential norms Exposure to the industry

Exposure to the company

Exposure to the group

LENDING NORMS: Contd..

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WORKING CAPITAL ESTIMATION

Covered under PPA

•Fuel Inventory : 2 Months

•Secondary Fuel Inventory : 2 Months

•O & M expenses : 1 Month

•Receivables : 2 Months

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PROCUREMENT PROCESSMoU Route

•Fixed Tariff •Interest Payment •Depreciation/ Debt Repayment•O & M Expenses (Coal -2.5 %, Gas-2.5 % ,DG-4 %)•16 % return on Equity•Tax

Fixed Charges payable at 68.5 % PLF Incentive on return on Equity @ 0.7 % for 1% increase in PLF

•Variable Tariff•Fuel cost at specified heat rate ( Coal-2500 Kcal/ Unit, Gas-2900 Kcal/unit combined-2000Kcal/unit)

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PROCUREMENT PROCESS: Contd…

Competitive Bidding

•Fixed Tariff- Lowest- Criteria for selection

•Variable Tariff- Based on Heat Rate

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MAJOR CONCERNS/ISSUES IN POWER SECTOR

• STATE ELECTRICITY BOARDS (SEB)- CREDIT WORTHINESS

- UNBUNDLING OF SEBs

- HIGH T&D LOSSESTechnical Commercial Total

Andhra Pradesh 23% 13% 36%

Madhya Pradesh 25% 22% 47%

(Based on latest study by ICRA and CRISIL)

- UNMETERED SUPPLY

- LOW COLLECTION EFFICIENCY

- LOW EFFICIENCY OF SEB’s POWER PLANTS

(SEBs - 62%(approx.), Central Sector - 72%)

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ISSUES IN POWER SECTOR (Contd..)LOW AGRICULTURE/DOMESTIC TARIFF.SEBs REQUIRE GOVT. SUPPORT FOR MEETING DEFECIT

LIMITED ESCROWABLE CAPACITY OF SEBs

DELAY IN OBTAINING GOVT. CLEARANCES LEADING TO TIME & COST OVERRUNS.

REVISION OF PPAs BY SEBs EVEN AFTER FINANCIAL CLOSURE

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ISSUES IN POWER SECTOR (Contd.)

• RATIONALISATION OF STAMP DUTY RATES PREFERABLY BY FIXING A CAP AS IS DONE IN STATES LIKE GUJARAT, MAHARASHTRA & MP ETC. TO ENABLE THE IPPs TO CREATE ENGLISH MORTGAGE

• STANDARDISATION OF TENDERING PROCEDURE FOR COMPETITIVELY BID PROJECTS

• EXPOSURE LIMITS FOR FIs

• ABSENCE OF ACTIVE SECONDARY DEBT MARKET FOR SECURITISATION OF ASSETS

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ISSUES IN POWER SECTOR (contd..)

•BOTTLENCKS IN AVAILABILITY / TRANSPORTION OF FUEL

•ENVIRONMENTAL ISSUES - EFFECTS OF FLY ASH, THERMAL DISCHARGE AND EFFLUENTS ON FLORA, FAUNA ETC.

- RESETTLEMENT AND REHABILITATION OF AFFECTED PERSONS ESPECIALLY FOR HYDRO PROJECTS

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ISSUES REGARDING POWER TARIFF

• LOW AGRICULTURE / DOMESTIC TARIFF

• HIGH COMMERCIAL AND INDUSTRIAL TARIFF

• AGRICULTURE / DOMESTIC TARIFF BEING SUBSIDISED BY HIGH INDUSTRIAL TARIFF

• HIGH INDUSTRIAL TARIFF LEADS TO HIGHER COST OF PRODUCTION IN POWER INTENSIVE INDUSTRY

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POWER TARIFF ISSUES (Contd..)

• POWER INTENSIVE INDUSTRY PRODUCTS WOULD BE LESS COMPETITIVE IN GLOBAL SCENARIO.

• POWER INTENSIVE MANUFACTURING SECTOR WOULD ALSO REQUIRE SUBSIDY FROM GOVT. FOR COMPETITIVENESS.

• SEBs REQUIRE SUBSIDY FROM GOVT. TO MEET CASH FLOW DEFECIT (Rs.34000 CRORES IN THE YEAR 1999-2000)

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REFORMS & RESTRUCTURING OF SEBS

RESTRUCTURING OF SEBs- UNBUNDLING/CORPORATISATION OF OF SEBs IN TO GENERATION, TRANSMISSION & DISTRIBUTION COMPANIES.- PRIVATISATION OF DISTRIBUTION ZONES/COMPANIES• SETTING UP OF STATE ELECTRICITY REGULATORY COMMISSION (SERC)- OPERATIONALISATION OF SERC - ISSUING OF TARIFF ORDERS• REFORMS TO IMPROVE OPERATIONAL/FINANCIAL PARAMETERS OF SEBs- IMPROVING THE T&D INFRASTRUCTURE AND 100% METERING.

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REFORMS OF SEBS (contd..)

- ESTIMATION OF T&D LOSSES AND REALISTIC TIME FRAME FOR REDUCTION OF LOSSES - IMPROVING BILLING & COLLECTION EFFICIENCY- ENERGY AUDIT• MAJOR MILESTONES PROPOSED FOR REFORMS

- 100% METERING

- T&D LOSS REDUCTION

- T&D SYSTEM AUGMENTATION

- ENERGY AUDIT

- IMPROVEMENT IN COLLECTION EFFICIENCY

- COMPUTERISATION OF BILLING

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REFORMS (contd..)

-IMPROVEMENT IN PLF & AVAILABILITY OF SEB PLANT

- RATIONALISATION OF TARIFF BY REDUCING CROSS SUBSIDY.

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P O R T S

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MAJOR CONCERNS

• Mortgaging of jetty area in favour of lenders as security for financial assistance.

Limitation for fixing tariffs by the sponsors at major ports.

Requirement of explicit provision under major ports trust act for private sector participation.

Environmental issues: affect on estuaries and coastal zone flora, fauna, etc.

Labour is extremely unionized in ports and oppose modernization

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MAJOR CONCERNS: Contd…

Insufficient back-up land for bulk cargo storage /container yards at ports.

• Lack of road and railway linkage between ports and hinterland.

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REFORMS contd..

• National Port AuthorityEnsuring a well defined process with

clear objective and firm political commitment for and towards port reforms.

Ensuring sound, stable and pro-active regulatory framework with appropriate regulatory procedures.

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REFORMS contd..

• Privatisation New capacity addition should come entirely

through the private sector. Encourage private sector participation in new

terminals at existing ports including cargo handling services.

Encourage private sector participation in Port Services, like Labour, Pilotage, Towage etc.

Encourage private participation in minor port / green field projects.

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REFORMS contd..

Excess Port Labour and Labour reforms Initiate labour reforms and improve labour

relations Compensate port labour suitably while going

ahead with the privatisation process Need to buyout existing labour keeping pace

with improvements in cargo handling technology

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REFORMS contd..

• Connectivity Development of infrastructure linkages to the

hinterland, like Railway and Road network for smooth and faster movement of cargo.

• Bankable concessions for port projects Ensuring adequate security for loans by

allowing mortgaging of the "Marine works" and other assets like land acquired in Lender's favour.

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ROADS & BRIDGES

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ISSUES• Land acquisition and resettlement: normally lead to

delay in project completion and higher contingency provisions.

• Leakage in toll collection.• Resistance by users to pay tolls• Alternative routes increase uncertainty in toll

collections• Absence of security by way of mortgage to lenders.• Environmental issues: felling of roadside trees,

increase in noise pollution, drainage of the area .

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PROCUREMENT PROCESS•Small Projects- Bridges, By pass-Tolls are fixed- Minimum Concession period criteria for selection.

•Large Projects- (4 laning)

•Tolls are fixed and concession period are fixed- minimum upfront grant criteria for selection.

•Annuity Based Projects-Concession period fixed , min. annuity payable biannually criteria for selection.

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THANK YOU