case project finance

7/30/2019 Case Project Finance

http://slidepdf.com/reader/full/case-project-finance 1/9

SYNOPSISThe execution of Viramgam -Mehsana GC project has been discussed in detail, the financing , executionand operational models. The writer has been involved in the execution of this project. He has compared financing and execution model of this project with those of Pipavav Railway Corporation Limited (PRCL)and Kutch Rail Corporation Limited (KRCL). He has critically mentioned some international experiencesin PPP and highlighted the lessons learnt from his experience while the working on Viramgam -MehsanaGC project.

particularly in developing countries and emerging markets.1.0 Introduction :Financial institutions and project sponsors may concludeProject finance is the financing of long-term infrastructurethat the risks inherent in project development and operationand industrial projects based upon a complex financialare unacceptable. To cope with these risks, projects in

structure where project debt and equity are used to financethese industries (such as power plants or railway lines) are

the project. Usually, a project financing scheme involves a generally completed by a number of specialist companiesnumber of equity investors, known as sponsors, as well as operating in a network with each other that allocates risk ina syndicate of banks which provide loans to the operation. a way that is proportional to their exposure to the project.

The loans are secured by the project itself and paid entirelyOnce the project's risks are identified, the likelihood of their from its cash flow, rather than from the general assets or occurrence assessed and their impact on the project

creditworthiness of the project sponsors. The financing isdetermined, the sponsor must allocate those risks. Briefly,

typically secured by all of the project assets, including the its options are to absorb the risk, lay off the risk with thirdrevenue-producing contracts. Project lenders are given a parties, such as insurers, or allocate the risk amonglien on all of these assets. And they are able to assume contractors and lenders. The sponsor will be acting, morecontrol of a project if the project company has difficulties often than not, on behalf of a sponsor at a time when the

equity participants are unknown. Nevertheless, each of thecomplying with the loan terms.participants in the project must be satisfied with the risk

Generally, a special purpose entity is created for each allocation, the creditworthiness of the risk taker and theproject, thereby shielding other assets owned by a project reward that flows to the party taking the risk. In this respect,

each party takes a quasi equity risk in the project.Thesponsor from the detrimental effects of a project failure. Asessences of project financing are:a special purpose entity, the project company has no assetsThe essences of project financing are:

other than the project. Capital contribution commitments by

the owners of the project company are sometimes (I) The lenders to the project look primarily at thenecessary to ensure that the project is financially sound. earnings of the project as the source from which loan

repayments will be made. Their credit assessment isTraditionally, project financing has been most commonly

based on the project, not on the credit worthiness of used in the mining, transportation, telecommunication and the borrowing entity.public utility industries. More recently, particularly in Europe,

project financing principles have been applied to quasi- (ii) The security taken by the lenders is largely confinedprivatizations of publicly-held infrastructure (e.g. schools, to the project assets. As such, project financing ishospitals, light rail, prisons, government buildings, etc.) often referred to as "limited recourse" financing

because lenders are given only a limited recourseunder so-called public-private partnerships (PPP) or, in theagainst the borrower.UK, Private Finance Initiative (PFI) transactions.

(iii) The debtor is a project company set up on ad hocRisk identification and allocation is a key component of

basis that is legally and financially independent fromproject finance. A project may be subject to a number of the sponsors.technical, environmental, economic and political risks,

ByNeeraj Agrawal *

Alternative Project Finance :Case studies

*CE/TM/SWR36 IRICEN JOURNAL OF CIVIL ENGINEERING



(Iv) Project risks are allocated equitably between all 2.0 : Case I:International Example - Eurotunnelparties involved in the transaction, with theobjective of assigning risks to the contractualcounterparties best able to control and managethem.

(v) Cash flow generated by the SPV must be sufficientto cover payments for operating costs andservicing the debt in terms of capital repaymentand interest. Only the residual funds are allocatedto pay dividend to sponsors.

(vi) It is provided for a ring fenced project -Figure-1

Different Parties to Project Financing – One which is legally and economicallyself contained

Commissioning of Eurotunnel is a pioneering example o – Project is through a special purpose legalentity (company) project financing, involving two countries, with huge

– Only business is the project technological and economic risks. British and Frencgovernments signed concession on BOOT basis to CTG

(vii) Usually raised for a new project rather than an (Channel tunnel group) in UK and FM (France Manche) iestablished business france in Feb. 1986 for 55 years from the date o

ratification. The project cost £ 9.5 bn. to build, abou(viii) High ratio of debt to equity: project finance debt double of original estimate of £ 4.8 bn. The project wa

may cover 70-90% of the cost of a project funded with debt of more than £8 bn. and rest with equitywhich was raised in phases with many perks to investors

(ix) Main security to lenders is the project's contracts; The project was scheduled for completion in 1993 but gothLicenses or ownership of rights to natural commissioned on 6 May 1994. Construction agreemen

resources had detailed clauses for variation, change in scope andspecifications and damages on account of delays. It wa

(x) Project company's physical assets are likely to beexpected that revenue would come from 1) Shuttle

worth much less than the debt if they are sold off service, 2) Railway charges and tolls 3) ancillary revenue

after a default on the financingcomprising catering and duty free sales and charges onconduit to cables. The revenue projections were based

(xi) Project has a finite life, based on such factors ason considering certain economic growth, inflation levelsthe length of the contracts or licenses or theexchange rates and competition from ferry services andreserves of natural resources, and therefore theairways.project finance debt must be fully repaid by the end

The final benefit to cost did not work in favour of theof this life. project. Traffic projections were extremely optimistic andEurotunnel faced stiff competition from airways and ferrOne major drawback of project finance option is that theservices after commissioning. Construction cost alsodeal is much more costly than conventional corporatewent up due to many technological changes not foreseenfinance options. Impact is about 5 to 10% of the project

cost. The various factors attributed to cost increase are at initial stage e.g. requirement of air conditioning. Due to

high debt servicing and operational cost, the project could- The legal, technical and insurance advisors of the not meet debt service obligations and filed for bankruptcsponsors and the loan arranger need a great deal of time in 2006.In may 2007, restructuring of debt has been doneto evaluate the project and negotiate the contract. as an out of court settlement and formed new company

called “groupe Eurotunnel” with long term debt from- The cost of monitoring the project is high

consortium of banks and concession period of 80 years- Lenders are expected to pay significant cost in

(2086). First time in 2007, Eurotunnel has shown smaexchange for taking on greater risks.

profit.On the other hand, although project finance do not In spite of so many difficulties Eurotunnel has becomeoffer cost advantage, there are definitely other realty with involvement of project financing. Inbenefits.conventional financing, it is almost impossible to handle- Project finance allows for higher level of riskthe projects of such magnitude.allocation among participant therefore higher debt

to equity ratio.3.0 : Case II: Indian Example: Ultra Mega Power - Off balance sheet item from accounting practices.Projects (UMPP):- Isolating sponsors in case project do not performUMPP is a successful example of project finance in Indiawell.Power Finance Corporation floats the SPV or she- Reduces agency conflictscompany with representatives from power distribution- Most project finance structures are complex. The

risks in the project are spread between the various companies and state government as its 100% subsidiaryparties. SPVs are responsible for carrying out various activities o

3

Contractor Supplier

Government Sponsor Project Sponsor

Customers Lender



ii) GPPL & (Others) : 50%behalf of its procurers (or successful bidder) to enhanceinvestor's confidence and to allocate/mitigate the various

The amount already spent by the Indian Railways on therisks. Some of the main activities undertaken by SPVs are:-proposed Broad Gauge Rail Connectivity has been

reckoned towards the equity contribution of MOR. The land,- Appointment of consultants to undertake

station Buildings, MG formation, bridges and all other preparation of project report, preparation of

existing assets of the MG system will continue to be theenvironment impact assessment report etc.

property of IR. These assets have been made available to- Appointment of consultants for International

the SPV on lease at a pre – specified rental after competitive bidding, documentation and

considering the capital- at-charge at historical cost.

evaluation. About Operation and Maintenance (O&M)- To finalise RFQ/RFP

- Acquisition of land for projectUnder this agreement signed between PRCL and Railways

- Obtaining Coal linkageson 4-2-2003 operations and maintenance of the Broad

- Getting clearances from state government for gauge Rail Link between Pipavav and Surendranagar shall

allocation of water remain the responsibility of MOR. Ministry of Railways, will,

- Clearance from pollution boards, initiate however, be fully compensated for such services based onforest clearance an agreed methodology. The revenue generated through

- Obtain geological reports operation of line shall be shared equally between GPPL- Tie up the sale of power. and Railways and subtracting cost of operation and

maintenance of line.Ministry of power plays a crucial role in development of shell companies and coordinating between various About Transportation and Traffic Guarantee:

It guarantees to PRCL the rolling stock from WR and railministries/Agencies of central and state government. After Cargo from GPPL. GPPL has guaranteed one, two andformation of SPVs, the developer is selected on the basis of three million traffic in first, second and third year two stage competitive bidding. The successful bidder isrespectively. The agreement has been signed on 10-1-selected on the basis of the lowest tariff.2003

4.0. Case III :Pipavav Railway Corporation limitedThe execution of gauge conversion between 5.0. Case IV :Kutch Rail Corporation Limited (KRCL) :

KRCL is first PPP initiative under the umbrella of RVNL. InSurendranagar – Rajula City (has been got done throughorder to expedite this important port connectivity project,Pipavav Railway Corporation limited (PRCL). The PRCLbetween Kandla port and Palanpur, a special purposewas formed on 13th March, 2003. PRCL is the first public –vehicle was created by participation of RVNL, Governmentprivate partnership in rail sector at the initiative of Ministry of

Railways (MOR). It is joint sector of Ministry of Railways of Gujarat, Kandla port Trust (KPT), and Gujarat Adani Portand Gujarat Pipavav Port Limited (GPPL). It is the first Non Limited (GAPL). The SPV is called Kutch Rail Company

Government Railways, a “Special Purpose vehicle” (SPV) Limited (KRCL). Before creation of the SPV the work wasfor transport of freight traffic originating from Pipavav Port. being done by Western Railway. Later on KRCL enteredRailway line has been leased to PRCL for 33 years as per into a construction agreement with Western railway tolease agreement. It is fundamentally, a MOR driven project execute the work on similar pattern of PRCL. The work wasfor following reasons. completed in two phases. The overall model is on same

pattern as was in case of PRCL except the provision of - 50 % equity by MOR

traffic guarantee and variation in lease charges.- Chairman being Member traffic /Railway Board at all

times apart from four other directors from MOR. 6.0. Case V : Viramgam Mehesana Gauge ConversionProject:- Construction carried out by MOR through WR.

- Operation and maintenance (O & M) carried out byBackground of the Project :

MOR through WR. The Gauge conversion of Viramgam-Mahesana section- Revenue collect ion by MOR through WR was included in the Viramgam-Bhildi Gauge conversion

apportionment to PRCL cum new line project, which is a part of proposed KandlaBhandita BG rail link project. This work was earlier taken in

The project has been funded in the following pattern:hand by Railways under BOLT (Built, Own Lease Transfer)Scheme in 1996-97. However, the agency fixed under thisl 66 % of the Project Cost has been funded through ascheme could not execute the project. Railway decided toshare holding Equity.commence the work with own funds. Widening of

l 33 % of the Project Cost has been funded throughembankment, strengthening of major and minor bridges,

Debt.various platform and station building works were executed

by the Railways. Later on (2000-01) Railway decided toEquity holding pattern:take balance works under BOT scheme. The cost of

i) Ministry of Railways & its PSUs : 50% balance works for the project was approximately Rs.70

38



9 Concessionaire : M/s VMPL, New Delhicrores. These works were mainly procurement of P.Waymaterials and Ballast, linking of track, left over structure 10 Letter of Award : 27.12.2002and level crossing works, signaling & telecom works, 11 I.E. appointed : 27.01.2003augmentation of power supply etc. In this scheme, the

12 SCOD to beagency selected by Railway shall design, procure, execute

achieved : 26.06.2004and commission the project with its own investments. This(18 months from LOA)project was lingering for a long period just to become a test

13 Performance securitycase of privatization concept. The salient features of thisscheme are as under: deposited : 21.02.2003

14 Signing of Agreement : 23.05.2003l The agency shall arrange for both financing and15 Site lease Agreement : 23.05.2003execution of the project.

16 I.E. services started : 04.06.2003l Railways through a `Tripartite Agreement’ secure the

17 Permission to start theinvestments of lenders to the agency.work granted beforel The complete supervision of the work is through anFC : 17.07.2003`Independent Engineer (IE)’.

18 Tripartite Agreement : 31.07.2003l The scheme has very clear bonus/ penalty clause so

19 Possession of Land : 05.09.2003as to control project scheduling.

20 Permission of workl The agency shall in turn get “Access charges” for a

withdrawn : 01.10.2003period of 12 years.

21 Again permission of Details of Project :

work to be continued : 14.10.2003The balance works for the project were of approximately22 Appointed Date /Rs.72 crores, which were under the scope of BOT scheme.

Financial Close : 30.10.2003These were mainly procurement of P.Way materials,23 Provisional CertificateBallast, linking of track, left over structure and level

with Punch Listcrossing works, signaling & telecom works, augmentationItems, Issued byof power supply etc.. This project was awarded to M/s.IndependentVMPL, New Delhi (A joint venture firm of M/s. D.S.Engineer (IE) : 25.10.2004Construction Co with Tantia Construction and Vogue

24 Goods Train OperationConstruction & Consultancy Pvt. Ltd.). It was expected thatstarted by Railway : 25.11.2004the project shall be completed under this scheme by June

25 CRS Inspection : 01.12.2004 to 02.12.20042004 or even before.

26 COD Achieved : 02.12.2004Important Events :27 Supplementary Punch

List issued by IE : 06.12.20041. Name of Work : V i r a m g a m - M a h e s a n a

28 Handing over of Gauge Conversion Project Assets to Railway : 06.12.2004On BOT basis

29 Payment of Access2 Tender No. : CPM/ADI/VMGC/BOT/2

Charges raised by3 Estimated Cost : Rs. 70 Crore approximately.M/s VMPL : 13.12.20044 Completion period : 18 Months

30 Payment of Ist Installed5 Addendum/released by ADIcorrigendumdivision : 31.12.2004to RFP bidding

31 Issue of “ Performancedocuments issued : 14-02-2002, 25.02.2002, &Certificate” by IE : 31.10.200505.04.2002

6 Date of opening of 32 Issue of Completion

Certificate by IE : 19.03.2008offer (M/s D.S.

Construction,Role of Railways:

New Delhi) : 13.05.2002 As per essence and spirit of BOT agreement, role of railwa

should be minimal to avoid bureaucratic hurdles. As pe7 Special purposeagreement, Railway appointed Independent Engineer focompany formed : M/s VMPL, New Delhioverall management and day to day supervision of the wor8 ConcessionaireRITES was selected to work as an independent Engineer

Agreement No : C&S/1013 datedRITES is a subsidiary of Railways and manned by railwa

23.05.2003

3



one of the initial experiments therefore in spite of proper professionals on deputation. In this case, BOT meant “Builtdue diligence there were conflicts and the project can beown Transfer”. Although the ownership of project vestedtaken as a learning for risk management for future railwaywith the concessionaire during the concession period butprojects. Various risks, how they were managed arethe project was not considered as a case of 'private railway'.discussed as under. All the plans and designs used to be approved by

Departmental officials and they also conducted regular - Demand risk: Railway operation is a monopoly activity of

inspections. Therefore intended purpose of independentrailways. Private Player has a very little role in traffic

engineer could not be harnessed properly. movement except in case of captive lines. This project wasa broken link having other alternative routes also. InflowRole of Independent Engineer:

through traffic revenue would have exposed VMPL to As per concession agreement broader role of theuncertainty. This risk was mitigated by developing fixedindependent engineer was defined as under;annuity payment to SPC irrespective of usage of line. Thus

- The Independent Engineer shall nominate a entire risk was transferred to Railways.responsible and qualified person, who shall carryout the

- Construction risk: Risk of successful completion wasduties as specified in this agreement and any additionalvested with the concessionaire. First they had to depositduties assigned by Railway, through a team of experts andperformance guarantee of Rs 5 crore, second, completionshall be in the overall charge for the project management toperiod was linked with bonus and penalty clauses.discharge their duties, role and responsibility in accordance

with the provisions of concession agreement.- Supply risk: Most of the items and equipment required for railway project are not available off the shelf. For example- The Independent Engineer shall obtain specificRails, sleepers, signal point machines are monopolyapproval from the Railway, before exercising such authority,markets. Before using this material, inspection of RDSO iswhich has been specifically mentioned in this agreement or mandatory. Railway is the only consumer of these items; nois outside the scope of his responsibility in concessionsupplier sells these items to private player without priorityagreement.letter from Railways. There was big uncertainty about the

- The Independent Engineer shall have no authority to supplies with the concessionaire. This risk needs morerelieve the Concessionaire of any of his duties, obligations clarity.or responsibilities under the Agreement. Any proposal

- Human resource risk: Railway projects are very technicalinspection, examination, testing, consent, approval or in execution and trained man power is not available in thesimilar act by the Independent Engineer (including absencemarket. Therefore, the concessionaire depended on retiredof disapproval) shall not relieve the Concessionaire fromrailway employees. This affected the performance of any responsibility.project. There is need to address this issue in futureContracts.- Unless it is legally or physically impossible, the

Concessionaire shall comply with the instruction given by- Design risk: This risk was allocated to the concessionaire,the Independent Engineer.who transferred this risk by way of insurance” TheConcessionaire shall affect professional indemnityEconomics of Funding:

The cost of work planned to be undertaken was estimated insurance, which shall insure his liability by reason of at Rs.70 crores in 2001. Considering debt equity ratio of professional negligence in the design of the works. Such2.75, Rs 50 crore was planned as long term loan from bank insurance shall be for Rs 25 Lakhs (Rupees twenty fiveand rest from promoter's equity. Considering cost of lakhs) for a period of 5 years beyond the CODinsurance, bank guarantee and profit on construction, a

- Principal Agent conflict: To avoid the agency conflictscenario was built with 12% interest rate, and project costIndependent Engineer was appointed for day to daywas computed at Rs.81.92 crore. Based on an IRR of 17%,supervision of work and to arbitrate to some extant withsix monthly access charges were internally worked out atrailways. But due to complex nature of working involved,Rs 8.225 crore. Bids were invited on the access charge.Independent Engineer was not competent to approve,Lowest bidder asked the access charge of 7.9695 croreallow, supervise and certify many activities. Thereforewith IRR of 16.27% and accordingly was awarded the

intended benefit could not be derived out of theproject. Independent Engineer. Moreover the whole processBut considering inflation risk and additional liability of became more complex and lengthy.interest burden due to delay of six months in COD the

- Project management risk: To ensure smooth execution of Project cost went up to 92 Crore giving IRR of about 12%the project, detailed sequencing of project was done andonly.intermediate mile stone were fixed jointly within eightEven then, looking into assured annuity, IRR of 12% isweeks of signing of agreement. These mile stones wereconsidered as good return to SPC and at the same time, it isapplicable for both the railway’ and SPC’ obligations.not a very high cost to railways.

- Litigation risk: A detailed resolution mechanism has beenRisk Management:This type of project structure allows identification and specified in the concession agreement in case of anyallocation of various risks systematically. This project was dispute.

40



- Inflation risk: The risk of inflation entirely rested with the Implications:This was the first BOT contract being handled in railwayconcessionaire. In this case rates for major items had

therefore everyone was very apprehensive and carefuinflated between the date of RFP and real execution. For while dealing the case. Railway project execution involveexample Rail, Ballast, Sleeper had inflated fromclose coordination of at least five departments such asRs.31000/MT, Rs1170/No., Rs.395/Cum to Rs 35458/MT,Engineering, Signaling, Electrical, Operating and AccountsRs 1300/No., Rs550/cum respectively. The impact of theseIn traditional working, most of the projects get delayed due

items only works out to Rs 7.51 Crore for three componentsto non coordination among these departments. Although a

only (7500*4458+155*165000+130*125000).these departments have common head at the level o

General Manger but due to inherent strong paralle- Change of scope risk: This project was earlier partly departmental culture it takes a long time for a matter toexecuted with railway finances and some physical civil reach to top for decision.engineering works of earthwork, bridges, and platforms

In this contract, Deputy Chief Engineer of engineeringwere partly executed. Balance works were quantified asdepartment was nodal officer from railway side to interac‘requirement of railways’ under the concession agreement.with concessionaire without having any control on otheThis exact quantification hedged the concessionairedepartments. Therefore against the basic essence of BOTagainst any contingencies but exposed railway to thetype concept, the concessionaire had to run pillar to post fo

uncertainty of unforeseen requirement or leftover. Suchgetting approvals and decisions pertaining to respective

quantification impeded the spirit of innovation by privatedepartment. This rigidity of system led to a lot o

sector. correspondence and scope for disputes and conflicts suc

as;- Maintenance risk: Subsequent maintenance the project

after COD lies with railways, there is tendency on part of 1. Delay in finalization of yard plans and its signainterlocking pans.concessionaire to follow only basic minimum level of design

2. Delay in grant of traffic blocks for movement oand execution standards. To hedge against it railway hadmaterial and carrying out additions and alterations in

clause” Concessionaire shall be obliged to provideexisting running yards.

warranty in respect of the works carried out for a period of 3. Procurement of materials from RDSO approvemonths from the date of issue of Performance Certificate. sources.The Concessionaire shall be liable to the Railway under this 4. Availability of track machines and USFD equipment

got delayed.warranty Article in respect of defective workmanship and

material during the Warranty Period specified herein”. ButComparison with traditional system of working:

12 month period is very short for judging the performance of In traditional system of working such projects normally takerailway project. For example defect in cable jointing is likely three to four years if funds are not major constraints. Work

are divided into many portions and tenders are finalized foto surface after two to three monsoons. There is need to

each portion. Procurement of material is done separatelymodify this clause for proper sharing of maintenance risk.Tenders for signaling and electrical are also invited and

- Regulatory risk: The risk has been shared between finalized separately. Main danger in such working is failure

of one or two contracts which are on critical path. BOTRailways and concessionaire as per force majeure clause.agreement is better in terms of ensuring consistent fundFor tax revision also the risk has been shared if implicationflow and it takes care of failure of other contracts.is beyond Rs.1 crore

Comparison with other mode of private participation in- Risk of obtaining clearances from other agencies: Railway

Railway for similar works :had taken this responsibility with the clause” The Railway Around Ahemedabad area two more projects have beeshall have obtained required permissions as described in executed involving equity partnership from othethe Railway’s Requirements and shall indemnify and hold stakeholder forming special purpose vehicle (SPV). In thi

the Concessionaire harmless against and from the scheme execution remained with railway and railway acted

as execution partner to SPV on actual cost. SPV was ablconsequences of any failure to do so.”to finalize the work tenders fast and was also able to

- Future Cash flow risk: The agreement has ensured that procure material much faster because many departmentathe railway pays the access (annuity) on time. Failure to do rigidities and rules are not applicable on these SPVsso has been defined as ‘Event of Default’ Revenue generation model in such case is based on actua

operational income where as in case of BOT it is fixed- Land Acquisition risk: The risk has been allocated to

annuity. As far as speed of execution and easiness of fundRailways by incorporating this activity in Railway’s

flow is concerned both the concepts have same impact. Iobligations.

case of SPV risk of return is shared and in case of BOT it ientirely on the department.- Force Majeure risk: The risk has been shared between

Railways and concessionaire depending on type of forcemajeure i.e. political and non political.

4



42

7.0. Comparison on Key issues: Comparison of various models on different key issues is listed below;

S.N. Item VMPL PRCL KRCL

1 Project structure BOT BOOT BOOT

2. Length 65 Km 250.83 Km 300.81 Km

3. Cost of project 70 cr. 362 cr. 500 cr.

4. Debt to Equity 2.75:1 0.63:1 1.5:1

5. Year of COD 2004(December) 2003(March) 2006( May)

6. Number of equity partner 3 (Initially DS 2 4construction, VCC, MOR 50% RVNL 50%

Tantia construction), GPPL 50% GOG 4%Later only sole firm GAPL 20%zleft i.e. DS KPT 26%Construction

7. Concession period 12 years + CP From 33 years from 32 years fromappointed date appointed date appointed date( Finance Closure) ( Date of signing ( Date of signingBut access charges of CA) of CA)from COD

8. Control of Government Negligible Significant Significant

9. CAG audit No Yes Yes

10. Lease charges Nominal (Rs.1000) Significant, PLR on Nominal (Rs 1000)book value of assets(Rs.16.46 cr)(Rs 2 crore)

11. Risk Management

a Demand risk Risk transferred Risk shared by GPPL Risk borne by KRCLto MOR( annuity ( Rs 105 cr. Due inBased) 2007-08, have started

Paying)

b Construction risk Risk borne by VMPL Risk shared by MOR Risk shared by MORPG Rs 5 Crore through construction through construction

agreement agreement

c Inflation risk Risk borne by VMPL Risk borne by PRCL Risk borne by KRCL

d Supply risk Risk borne by VMPL Risk shared by MOR Risk shared by MORe Design risk Shared with insurance Transferred to MOR Transferred to MOR

company (25 lacs)

f HR risk Risk borne by VMPL Transferred to MOR Transferred to MOR And mitigated byemploying retiredrailway personals

h Maintenance risk Transferred to MOR Risk shared by MOR Risk shared by MORthrough O&M through O&M

agreement agreement

i PA conflict risk Little scope Scope exist - Scope exist -PlanningContainer license - doubling on theSiding as a deposit section -25 lacs giftedwork -Remuneration to MOR relief To Management funds

j Project management Mitigated with the Shared with MOR Shared with MOR

Risk help of IE. Provision CPRB(Construction CPRB(Construction

of bonus and penalty progress review progress reviewBoard) board)

K Future cash flow Transferred to MOR Borne by PRCL Borne by KRCL

l Regulatory risk During construction Mitigated with proper Mitigated with proper borne by VMPL and board structure. board structure.after COD transferredto MOR

m Change of scope risk Transferred to MOR Borne by PRCL Borne by KRCL



N Litigation risk Mitigated with Mitigated with Mitigated witharbitration clause arbitration clause arbitration clause

and proper board and proper boardStructure structure

o Land acquisition risk Transferred to MOR Shared between Shared betweenas Railway's obligation PRCL and MOR KRCL and MOR( event of default)

p Risk of clearance Transferred to MOR Shared between Shared betweenfrom other agencies as Railway's obligation PRCL and MOR KRCL and MOR

( event of default)

q Force majeure Shared, based No such classification. No suchclassification political, Natural with PRCL and classification. Naturalindirect political, others are shared with KRCL andnon political others are shared

r Tax risk Shared only upto With PRCL With KRCLimplication of Rs.1 crore

12 Future Passenger No restriction No restriction but No restriction withoperation by Railway with approval of PRCL approval of KRCL

free of charges but with accesscharges( not yet fixed)

13 COD After CRS for After goods train After goodspassenger opening opening by train opening byat 75 KMPH Chief Engineer Chief Engineer

14 On Termination Lease terminated MOR would buy the MOR would buy theand assets reverts project assets at project assets atback to MOR DRV(Depreciated DRV(Depreciated

replacement value) replacement value)by straight line method by straight line

method

15 CRS inspection Responsibility of Responsibility of MOR, Responsibility of VMPL through IE PRCL would assist MOR, KRCL wouldand MOR assist

16 Replacement of assets Entirely with MOR In case of accident In case of accidentdamage by MOR In damage by MOR Incase of codal case of codalreplacement by PRCL replacement by KRCLthrough MOR In case through MOR In caseof force majeure By of force majaeure By

MOR chargeable to MOR chargeable toPRCL KRCL

17 Status Only ownership Private Railway Private Railwaywith private.

fixed costs of Operation and Maintenance,Issues with KRCL and PRCL:Discussions with Railway officials and SPV officials have - Codal life of assetsrevealed that both the parties have many issues having - More autonomy to SPVscontradicting interests resulting into disagreement. There

- Diversion of traffic from project railwayis need of more clarity in the agreements to have smoothfunctioning. Many in Railway circle believe that such Lessons Learnt .project schemes are just management gimmicks and only Over all concept of execution of projects on project finance isprofitable projects are getting executed through project very successful with respect to timely completion and qualityfinance. Some also believe that such financing has very measures. To get most benefit and to attract more suchhigh cost to Railways and profit is being channeled to projects following should be taken care of in future projects.private participants.

1. Railway should have dedicated and empowered teamOn the other hand SPV officials believe that projects, to deal with such projects. Traditional hierarchicawhich lingered with railways for many years due to lack of organizational structure is not suited for such projectsfunds and delayed due to rigid procedures of Railways, looking into the value of time.have been executed very expeditiously. Railway has 2. Role of independent Engineer needs more elaborationbeen able to deploy fund on other important social and in terms of responsibility and dealing with CRS.

3. There should be some fixed time frame to freezetraffic facility works. With early completion of projects,design and drawings. Mid way alterations should noRailway attracted traffic which could have been lost tobe allowed.roadways and grabbed the emerging opportunity which

4. Quantum of work should be more clearly specifiedcould have been missed.More clarity is needed in terms of quantification oList of some contentious issues;

- Working of maintenance practices and payment of various items.

4



5. With development of Model Concession Agreements, RFQ Request for Qualificationthe issues of basic nature are taken care of but RITES Rail India Technical Engineering Servicesdepartment should be well supported by competent Limitedlegal aid to handle such issues from initial stage.

RVNL Rail Vikas Nigam Limited6. There is need to change perception in the

SPC Special Purpose Companydepartment about such mega project anddepartment need to be aware about the implications SPV Special Purpose Vehicleof non compliance of railway obligations in the UMPP Ultra Mega Power Projectconcession agreement.

VMPL Viramgam Mehesana Project Limited7. Key lessons from global experience are;

References:

l Detailed policy for implementing PPP 1. Conference Report, 'International Conference onl Proper planning by government Meeting India's Infrastructure Needs with Publicl Project development by government Private Partnerships, The International Experience

and Perspective” ,New Delhi, February 5-6, 2007l Full support by government

2. Inputs from Shri Sanjay Gupta, Deputy Chief l Proactive public communicationEngineer (Construction) /Planning and Design,l Transparent bidding processWestern Railway, Ahemedabad.

l Clear policy on unsolicited proposals3. Inputs from Shri Praveen Kumar , Deputy Chief

l Defined sources of revenueEngineer( Construction )/ GP, Western Railway,

l Proper allocation of risk Ahemedabadl Adequate protection for lenders

4. Inputs from Shri Pankaj Malviya, Managing Director,l Robust and credible mechanism for dispute PRCL

resolution.5. Inputs from Shri Budh Prakash, Managing Director,

8. The misconception that the private sector can do KRCLeverything itself leads to a poor understanding of 6. Inputs from Shri Rajesh Jaiswal, Sr DEN/PRCL,the Government's own role in project finance, which Bhavnagar is critical. There is need to change the mind set.

7. Inputs from Shri Vikas Kumar, Sr DEN/NW, Ano the r mis take i s hav ing un rea l i s t i c Ahemedabadexpectationsthinking that they provide “free money”

8. www.pppinindia.comor that they're the solution to all problems.9. www.indianrailways.gov.in8.0 In Sum :10. Montek S. Ahluwalia , “Financing Private

As an experiment it can be concluded that Viramgam Infrastructure: Lessons from India”Mehesana project has been successful but such

11. Concession Agreement of Viramgam Mehesanamechanism do not share the risk of revenue generation.project.Over all execution turned out like a turnkey contract with

12. Inputs from Shri R.K. Agrawal , Deputy Chief differed payment. To some extent, this project could use theEngineer( Construction )/ BOT, Western Railway,efficiency of private sector in execution. Whereas other two

Ahemedabadmodels discussed above share the risk as well as efficiencyof the private sector. Monopoly of railway operations leads 13. Construction Agreement, Concession agreement,to non transparency and only few players who know about Shareholders agreement, Operation andinternal information of Railway can have advantage of such Maintenance agreement, of Kutch Railwayopportunities. In my view this may lead to Crony capitalism. Corporation Ltd.To have level playing field, there is need of proper 14. Construction Agreement, Concession agreement,information and suitable regulation otherwise profitable Shareholders agreement, Operation androutes will go in private participation and unremunerative Maintenance agreement, Traffic guaranteeprojects will be left with the public sector. agreement of Pipav Railway Corporation Ltd.Abbreviations : 15. Anil Kumar Gupta, Director (PPP), Railway Board,

“Management Control Systems in SPVs for BOLT Built Operate Lease transfer Infrastructure Projects”BOT Built own Transfer/Built Operate Transfer

16. Anil Kumar Gupta, Shyamal Roy, Public- PrivateCOD Date of Commercial OperationPartnerships in Railways: A New Approach, IIMB

CRS Commissioner of Railway Safety Management Review, March 2008IE Independent Engineer

17. Gatti Stefano, Project Finance in Theory andKMPH Kilometer per Hour Practice, Academic press.KRCL Kutch Rail Corporation Limited 18. www.pfcindia.comMCA Model Concession agreement 19. Finnaty Jhon D., Project FinancingMG Meter Gauge 20. Wiki pages on Eurotunnel on net Academic press.MOR Ministry of Railways 18. www.pfcindia.comPPP Public Private Partnership 19. Finnaty Jhon D., Project FinancingPRCL Pipav Rail Corporation Limited 20. Wiki pages on Eurotunnel on netRDSO Railway Design Standards Organisation

RFP Request for proposal

44

case project finance

Documents