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FINANCING INFRASTRUCTURE
ROLE OF IIFCLProf D. C. Pai
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India Growth Story continues
Indian economy has shifted to highgrowth trajectory GDP growth for 2007-08 was 9%
2008-09 growth was at 6.75% 2009-10 growth forecasted at above 8% Fundamentals remain strong despite global
uncertainties / melt downs.
Right policy mix can help sustain thegrowth momentum
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Infrastructure deficit is loomingRobust economic growth has resulted in overstretchedinfrastructure
Infrastructure constraint is threatening to becomebinding on growth
11 th Five Year Plan (2007-2012) has envisaged totalinvestment requirement of infrastructure sector at $515billion $150 billion is to come from private sector Large part of remaining is to come as debt component from
banks and other institutions
PPP model is being encouraged
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Constraints in promotion of PPP
Inadequate availability of long term finance(10 years plus tenor)Lack of capacity in public institutions tomanage PPP
Absence of shelf of bankable infrastructureprojectsNeed for greater acceptance of PPPs by
public - user charges
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Slew of measures by Government
Opening of infrastructure sectors forprivate and foreign investmentPromotion of levy of user charges
Evolving model concession agreements Viability Gap Funding (VGF) schemeSetting up of India Infrastructure Finance
Company Ltd (IIFCL)Establishment of India InfrastructureDevelopment Fund (IIPDF) with corpus of Rs100 crore
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India Infrastructure Finance Co Ltd
Following Budget announcement in 2005-06,IIFCL was set up in January 2006
IIFCL is a Special Purpose Vehicle to providelong term finance to eligible infrastructure
projects
Registered as a Wholly Owned Government of India Company under Companies Act 1956
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Objectives
IIFCL shall finance only commercially viableprojects implemented by: A Public sector company A Private sector company selected under PPP
initiative or Private sector company ( only throughrefinance mode)
Overriding priority to PPP projects implementedby private sector companies selected throughcompetitive bidding process
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Financing by IIFCLFinancing modes
Long term debt Refinance to banks and FIs for loans with tenor exceeding 10years, granted by them
IIFCL will rely upon credit appraisal of the lead bank and will notnormally carry out any independent appraisal of the project.
The risk exposure of IIFCL shall be less than that of the lead bank in aproject
Total lending by IIFCL to any project company shall not exceed 20%of the total project cost
Rate of interest charged by IIFCL shall cover all funding costsincluding administrative and guarantee fee
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Activities: Sectors which IIFCL can financeIIFCL provides financial assistance to
Roads and bridges, railways, seaports, airports, inlandwaterways, other transportation projects
Power
Urban transport, water supply, sewerage, watertreatment, solid waste management and other urbaninfrastructure
Gas pipelines
Infrastructure projects in Special Economic Zones(SEZs)
International Convention Centres & other tourismrelated infrastructure
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Activities: Resource MobilisationFund Raising Initiatives
Multilateral / bilateral sourcesWorld Bank
Asian Development Bank KfW, Germany
JBICExternal Commercial Borrowings
Domestic markets
All borrowings of IIFCL have backing of Sovereignguarantee
However, IIFCL does not enjoy any specialdispensation in mobilization of resources
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Sector No of Projects
ProjectCost
LoanSanctioned
Road 55 31712 5723
Port 5 3772 580
Power 23 93241 9913
Airport 2 14716 2150
Urban infrastructure 1 70 14
Total 86 1,43,511 18,380
Sector-wise Financial Assistance by IIFCL(Rs crore)
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No. of Projects
ProjectCost
Rs crore
LoanSanctioned
Rs crore
Road 45 24,292 4,465
Port 4 2,756 380Airport 2 14,716 2,150
Power 18 65,421 8,078
UrbanInfrastructure 1 70 14
Total 70 1,07,255 15,087
Sector-wise projects which have achieved financial closure
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STATE No. of Projects Project CostRs crore
Loan Sanctioned by IIFCLRs crore
1 ANDHRA PRADESH 9 4727.00 862.00
2 CHHATISHGARH 2 866.00 165.00
3 DELHI 1 8890.00 1000.00
4 GUJARAT 8 30290.00 3539.005 HARAYANA 2 2501.00 495.00
6 HIMACHAL PRADESH 2 999.00 183.00
7 KARNATAKA 5 6307.00 842.00
8 KERALA 1 565.00 100.00
9 MADHYA PRADESH 8 2374.00 1195.00
10 MAHARASHTRA 11 16477.00 2657.00
11 ORISSA 1 1350.00 250.00
12 PONDICHERRY 2 734.00 113.00
13 PUNJAB 2 883.00 140.00
14 RAJASTHAN 1 5000.00 500.00
15 SIKKIM 2 8900.00 940.0016 TAMIL NADU 14 8039.00 1475.00
17 UTTAR PRADESH 9 9994.00 1770.00
18 UTTARAKHAND 3 2681.00 514.00
19 WEST BENGAL 3 10568.00 1640.00
Grand Total 86 143511.00 18380.00
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Strategic PartnershipsIIFCL has entered intostrategic partnerships with 3iGroup PLC , one of worldleaders in private equity &
venture capital & MacquarieBank Ltd , Australia
MoU arrangements with 27banks/ financial institutionsfor deal flows, syndication& other financial services
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Off-shore SubsidiaryUnion Budget 2007-08 has set up wholly owned
subsidiary of IIFCL which will
Borrow foreign currency funds from Reserve Bank of India and
Lend to Indian companies implementing infrastructureprojects or co-finance their ECBs solely for theircapital expenditure outside India
IIFC (UK) Ltd has been set up at London To supplement role of IIFCL in financing
infrastructure
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IIFCLs experience in financing PPP
Delays in land acquisitionDifficulties in provision of State Support
Agreement
Lack of machinery and skill setsLack of risk capitalLimited number of sponsors
Inadequate skills for appraisal of infrastructure projects among banks
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Urban Infrastructure Finance:
New Financing Initiatives &
Problems Relating To OldMethods
Infrastructure development finance corporation
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Presentation Structure
Old methods of financing urbaninfrastructure projects
Common issues in infrastructure financing
New methods Challenges
Way forward
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Old Methods
Of financing urban infrastructure
projects
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Traditional FinancingMethods
By the GovernmentBy the Local AuthorityBy the Utility/ Agency
through budgetary allocation through own resources through loans taken by the State/ LA/
Agency
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Characteristics of Old
methods
Generally based on state/ sovereignguaranteesNot on a Project Recourse basis, withdemonstrated project viabilityGenerally short/ medium tenure
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Some concerns with oldmethods
Improper project selection, on grounds otherthan inherent sustainability
Creation of large capital assets, but with pooroperations, maintenance, management
AND - State/ agencies running out of financialresources and guarantee capacity
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Infrastructure Investment
As per the India Infrastructure Report,estimated infrastructure investment up to the11 th 5 year plan ending 2011 estimated isabout $575 billion. The estimated actual investment is of the
order of 30%, all said
Adding the backlog of investment, therequirement for further investment ininfrastructure is therefore gargantuan
This represents both an opportunity and a challenge
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Changing Mindsets
About half of the investment requirementfor infrastructure can be raised by the
Government/ Agencies
The balance funds have to be raised fromprivate sources There is rapidly growing awareness at all levels
that a partnership has to be forged with theprivate sector developers and/or investors
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Common Issues
In infrastructure financing
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Common Issues In Infra
Financing 1
Possible higher cost of services User willingness-to-pay
Or Willingness to Charge?Cost of Service should consider inefficiencies in existing players
ULBs, Water Boards, etcCross subsidy (existing and possible) tobe taken into account
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Common Issues In Infra
Financing 2
Need for proper demand estimation E.g., Water or Energy Demand
Consideration of Competition for services E.g: Alternate sources, cheaper power
Stable and clear Government Policyregime: Lack of clarity effects development and
investments
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Common Issues In Infra
Financing 3
Need for proper Regulatory Structures,generally on a common basis across
the country: Urban Services (including water),
Transport projects (roads, airports,pipelines), have no regulatory frameworksin place
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No Mantras and Magic Bullets! While there are many essential precepts to
establishing and improving urbaninfrastructure services, the need of the dayis a coherent and concerted attempt by allstakeholders working in a partnership
Mantras & Magic Bullets
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Some Key Precepts 1
Reform (of methods and practices) AccountingProcurementTechnical and process control
These are important and vital conditions, but notsufficient in themselves to address the problems onhand
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Some Key Precepts 2
Privatization of services
Private sector brings in certain efficiencies, skillsand investments
But in Urban Infrastructure, it is more essential toforge a strong partnership between the skills,efficiencies and risk appetites of the Governmentagencies and the Private Sector
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Some Key Precepts 3
User Pay
User charges have to be kept in line with the cost ofproviding services
But in Urban Infrastructure there are social issues,willingness -to-charge issues, and questions of affordability for essential services. A clear balancehas to be struck between user charges, subsidies,and risk allocation between the Government and
the Private Sector
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New Methods
Of financing urban infrastructure
projects
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Project Recourse Financing
Various attempts are being made to convertUrban Services (water, waste-water, Solid
waste, etc) into Bankable projects This is likely to open a new area for investments And a new breed of Operating companies to
provide these services
But projects have to be systematically identified,structured and developed
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Infrastructure Funds
Set up by a collaboration of governmentagencies, Financial Institutions (and insome cases, Developers) Dedicated funds Debt and/or equity
Diversified set of infrastructure projects
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Private Financing of PublicInfrastructure (PFPI)
In this format, the State purchases Servicesrather than assets
For instance, purchases pre-determined hospitalservices for the public, on a determinate paymentplan for a fixed (long) period
Rather than paying up-front for a hospitalconstruction
Would be a fresh approach to involve privatesector participation in India, especially in newareas
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New Financial Instruments
To address the typical asset-liabilitymismatch of long-gestationinfrastructure projectsTo facilitate participation of banks andother commercial institutions which
cannot lend long-term money IDFC s take -out structures are a step in this
direction
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Pool Finance Structures
Set of projects, with diversified risk-return profiles
Financial Institutions/ Investors
Credit Enhancing Structures(Guarantees, DSRA)
Pool Fund
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The Way Forward:
Convergence
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Clear Policy/ LegislativeFramework
Many projects are stalled because thepolicy and legislative framework has notbeen properly thought-through and/orput in place This includes the procurement strategy
And acceptable risk allocation frameworks
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Project Development
State and its agencies have to deployadequate resources to properly develop a
bankable shelf of projects Else difficult to attract private sector interest Leap into the dark process
State and private sector need to thinkseriously about setting aside adequate,dedicated project development funds
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Equity Funds
Need for adequate equity investments Strategic investors in infra projects may not
be in a position to raise a substantiveportion of the equity
GoI nominating IDFC as a Nodal
Agency for an Infrastructure EquityFund with participation of other financialinstitutions is a step in this direction
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State and Local Initiatives
More and more State Governments andeven Local Bodies are commencingPublic-Private-Partnership initiatives IDFC s own experience with iDECK
(Karnataka), Uttaranchal, TN, Kerala, and
many other States reflects the imperativeneed felt by the States to fast forwardinfrastructure development at a local level
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Suggested Approach
To fix the leaking buckets Before opting for large capex projects
Develop replicable frameworks Identify GDP drivers From successful pilot projects
Have a City Focus/ Strategy Instead of spreading too thin
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State Bank of IndiaProject Finance-SBU .
Infrastructure Financing andCommercial Banks
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State Bank of India
Project Finance- SBU
Infrastructure Financing andCommercial Banks
Infrastructure Development is certain to turn into agrowth Driver for future Development.With the concept of universal Banking taking roots inthe system and relaxations permitted by RBI from
time to time, Commercial Banks have shownenthusiasm in participating in this specialised field of financing. SBI has established a Project FinanceStrategic Business Unit. Specialised domainknowledge in power, roads, ports, telecom etc isavailable.
I f t t Fi i g d C i l
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State Bank of India
Project Finance- SBU
Infrastructure Financing and CommercialBanks- contd
There is a large potential for commercial banks tofurther develop this area of business.Commercial Banks face two major issues inparticipating in infrastructure projects:
a) Assets Liability Mismatch.b) Exposure to market risk.
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State Bank of India
Project Finance- SBU
Asset Liability Mismatch
Banks usually carry short term liabilities. The infrastructure loansare long term in nature, usually 10-12 years.The present financing structure is usually 70% debt and 30%equity, the debt coming from FIs and Banks.To address Asset Liability Mismatch related issues, the worldwide
practice is to have bond financing either at initial stage or moreoften project finance being taken out by bond financing aftercommercial operation.
Advantages of bond financing:- rating required, better disclosure.- closer monitoring, better discipline in reserves
maintenance.- better discipline required by project company because
cost overrun, delays etc would lead to problems.- Exit option available to the Banks/FIs.
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State Bank of India
Project Finance- SBU
Exposure to Market Risk
Market Risk arises from:(a) Tariff fixation(b) Payment security mechanism
(c ) Offtake Risk (d) Toll Fixation(e) Lack of market intelligence
Banks have an expertise and appetite for appraising
and taking on credit risk. The market risk associatedwith Infrastructure would need to be addressed.
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State Bank of India
Project Finance- SBU
Exposure to Market Risk- contd
A mechanism needs to be put in place to facilitatebanks in mitigating market risk.Power Sector :
1. Payment mechanism.
2. Fallback mechanism.3. Dispute settlement mechanism.
Road Sector:1. Toll alone may not be adequate to make
projects viable.2. International practice of providing additionalrevenues from support structures such as realestate, restaurants, shopping, township etc.
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State Bank of India
Project Finance- SBU
Exposure to Market Risk- contd
Hydrocarbon Sector: 1. Level playing field for all players.2. Independent Regulatory body.
Telecom Sector:1. Level playing field for all players. 2. Issues relating to Inter-Connect Usage
charges (IUC).
Other Sectors:1. Revenue shortfall support mechanisms.
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State Bank of India
Project Finance- SBU
Suggestions
Establishing of Project Working Group: Projectsoften face problems which need to be resolvedquickly. A working group of high levelfunctionaries required for each sector to resolve
problems in a timely manner. In some ways akinto the erstwhile working group for project exports.Hedge Funds: Hedge Funds may be considered forproviding credit enhancement to the Lenders.Projects may contribute to the corpus to assist thefuture green field projects.
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R.Rengarajan, Consultant Trainer
Infrastructure Financing-An Introduction
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R.Rengarajan, Consultant Trainer
Agenda Meaning of infrastructure
Principles for reforms Recommendations of Rakesh Mohan Committee for
Financial Sectors
Issues in Infrastructure
Privatisation Unbundling Project appraisal, financing and implementation
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Meaning of Infrastructure
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Infrastructure
Natural monopoly Public goods characteristics which make
revenue collection difficult.
Spillovers / externalities both negative and+ve
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P i i l f i t ti i ti i
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Principles of private participation ininfrastructure financing
Allocation of risks Manage infrastructure like a business and not a
bureaucracy
Introduce competition
Give users and other stakeholders a strong voiceand responsibilities
Public private partnerships in financing
Government will continue to have some role ininfrastructure
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R d ti f R k h M h
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R.Rengarajan, Consultant Trainer
Recommendations of Rakesh MohanCommittee for Financial Sectors
Rebate in Income tax like then 80CC Introduction of competition in insurance sector Splitting up of EPF
Floating of new pension and provident fund Fiscal incentives for contribution to pension funds Introduction of forward and futures
Creation of IFDC as the apex authority
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Recommendations for Financial
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R.Rengarajan, Consultant Trainer
Recommendations for FinancialSectors
Debt Market Reforms Creation of bench mark and yield curve Widening and deepening of Debt Markets Regulatory Reforms Setting up of Primary Dealers
Reintroduction of Repo
Tax free bonds by private sector infrastructurecompanies
Development of Municipal bond market
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Aspects of infrastructure financing
Large capital costs withsub stantial sunk cost Upfront commitment of cost before project
becoming operational
Long gestation period with slowrevenuestreams
High cost of entry and exit
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Aspects-contd.
Services produced are non tradable-no
imports for excess demand and no exportsfor excess supply
Vulnerable to Regulatory and policychanges
Politically sensitive tariffs Investments are open to certain risks
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Aspects-Contd.
Projects are not homogenous, neither aresolutions-characteristics differ betweensectors and within sectors between different
phases of project Finance has to be disaggregated-by
origin(foreign or domestic),by sector(public,
private, joint)
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Aspects-Contd.
By techniques and instruments of finance andby types of finance(newinvestment,maintenance and working capital)
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Traditional Financing of
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Traditional Financing of Infrastructure
Tax revenues and Govt. Borrowing Govt.bore the investment risk Finance from bilateral/multilateral countries Govt. funding due to natural monopoly
features of many of these facilities Public good characteristic which make
revenue collection difficult
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Contd.
Large investments and long gestation periodswould be disincentive to private initiative
Capacity of Govts.to preempt resources at lowcost in view of their credibility
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Deficiencies of Traditional method
Lack of accountability Poor Management Cost over runs Neglect of operation and maintenance Backlog of unmet demands
Macro economic constraints on Govt.like BOPproblems and widening fiscal deficit
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Contd.
Vulnerability to cuts in Govt.Budget Inadequate cost recovery due to politically
sensitive tariff structure
These issues called for an altogether newapproach to Infrastructure Financing with afocus on Private Participation facilitated bytechnical/financial innovation.
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Issues in Infrastructure
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Issues
Privatisation Unbundling Project appraisal, financing and
implementation
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Issues - Privatisation
Efficiency Resources
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Contract ase - Un un ing-
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R.Rengarajan, Consultant Trainer
gmonopoly-public goods
BOO-Build Own Operate -Cellular phones and IPP BOT-Build Operate Transfer : Concessionaire build
and operate for certain time to recover his cost and
transfer assets to the government - Roads, Enronpower
BOLT-Built Operate Lease and Transfer- Railways
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Issues - Project appraisa
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j ppProject financing V/s Infrastructure
financing Different from balance sheet financing
Future cash and not assets are collateral Creation of SPV Non / limited recourse financing
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Risks in Infrastructure financing
Cash flow
Revenue from salesLess variable costLess fixed cost
Earning Before Interest and Tax (EBIT)
+ Depreciation (EBIDT)Less InterestLess Tax
Net Income (EAT)4/15/2012 79R.Rengarajan, Consultant Trainer
Risks in Infrastructure financing
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Risks in Infrastructure financing
Operational risks Pre operation
Post operation Market risks
Interest rate risk Foreign exchange risk Price risk and inflation
Credit risks Guarantees Counter guarantees
Escrow mechanism4/15/2012 80R.Rengarajan, Consultant Trainer
Management o
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gRisks in Infrastructure financing
Sell out risks by way of contracts,guarantees, ownership and escrow.
Ownership by stakeholders Contracts , guarantees and counter
guarantees by the undertakings, State
government and Central Government Escrowing revenue of the undertaking and
tax collection
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Management o
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gRisks in Infrastructure financing
Ownership by stakeholders
Contracts , guarantees and counterguarantees by the undertakings, stategovernment and Central Government
Escrowing revenue of the undertaking andtax collection
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Management o
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Risks in Infrastructure financing
Contract is king Concession EPC Equipment Purchase
Supply Operation and Maintenance Guarantees
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Management ok f f
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Risks in Infrastructure financing
Insurance
Financing Project finance Completion guarantee Equity Subscription Direct agreement Inter credit agreement Subordination agreement
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f
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Financing of projects
Creation of SPV Concession Investment by stakeholders Financing by Consortium of banks / FI Tax concession
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Financing of projects
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Financing of projects
SPVCONCESSIONSFROMGOVERNMENT
Investment by
Government bodyor department
Sponsor
Project supplierpublic, others
Financing by
Sponsors, Banks, FIs, Mutual fund , Pension fund,insurance .public
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Financing of projects by
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g p j yintermediaries
ALM issues Refinancing
IDFC Securitisation
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PROJECT FINANCE-
An overview
What is Project Financing ?
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What is Project Financing ? A funding structure, that relies on future
cash flow from a specific development asthe primary source of repayment with thatdevelopments assets,rights,and interestslegally held as collateral security.
It is an option granted by the financierexercisable when the entity demonstratesthat it can generate cash flows inaccordance with the long term cash flowforecasts.
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Contd.
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It involves-
Financing of an economically separablecapital investment project The providers of funds look primarily to the
cash flow from the project as the source of funds to service their loans
Provide the return of and return on theirequity invested
The terms of debt & equity securities aretailored to the cash flow characteristics of the project.
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Project Finance-Basic Elements
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j
Assets comprising the project
LoanFunds
Debtrepayments Purchase
Contracts
Purchasers
output
Investors/
Sponsors
Return
to Investors
EquityInvestors
Cash deficiencyagreement/ othercredit support
EquityFunds
Suppliers
Supplycontracts
Raw Materials
Lenders
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Basic Features
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Basic Features An agreement by financially responsible
parties to complete the project and makeavailable all funds necessary to achievecompletion
An agreement (in the form of purchasecontract of out put) that on projectcompletion & commencement of operationthe project will have available sufficient
cash to meet all its operating expenses anddebt service requirements, even if theproject fails to perform for any reasons
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Contd. Project financing is not a means of raising funds
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Project financing is not a means of raising fundsto finance a project that is so weak economically,that it may not be able to service the debt orprovide an acceptable rate of return to equityinvestors.
Project financing requires careful financialengineering to allocate the risks and rewards
among involved parties in a manner that ismutually acceptable. The key to successful project financing is
structuring the financing part with as littlerecourse as possible to the sponsor while at thesame time providing sufficient credit supportthrough guarantees or undertakings of sponsor sothat lenders will be satisfied with credit risk.
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Requirements of Project Financing
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Requirements of Project Financing A project has no operating history at the
time of initial debt financing Its credit worthiness depends on the
indirect credit support provided by third
parties through contractual arrangements Lenders require assurance that once the
project is set up and operations begin it will
constitute an economically viableundertaking.This calls for a detailedproject analysis
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Facets of project Analysis
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Market analysis
What would be the aggregate demand of theproposed product/service in future ?
What would be the market share of the project underconsideration?
Technical analysisWhether the pre-requisites for successfulcommissioning of the project have been considered?
Whether reasonably good choices have been made in
regard to location,size, process etc.
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Project Analysis- contd.
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j y Financial Analysis
whether the project will be financially viable to meetthe debt service burden and the return expectation of providers of capital.It involves:
Investment outlay and cost of project, Means of Financing,
Cost of Capital Projected profitability, Break-even point, Cash flow of the project, Investment worth while ness judged in terms of various criteria of
merit, Projected financial position, Level of risk.
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Project Analysis- contd.
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Economic Analysis
Focus on social cost and benefits of project whichmay be different from its monetary costs andbenefits. It involves finding out;
What are the direct economic benefits and costs of the projectmeasured in terms of shadow(efficiency) prices and not in terms of market prices?
What would be the impact of the project on the distribution of income in the society?
What would be the impact of the project on the level of savings andinvestment in the society?
What would be the contribution of the project towards fulfillment of certain merit wants like self sufficiency,employment etc?
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Project Analysis- contd.
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Ecological Analysis
What would be the likely damage theproject may cause to the environment?
What is the cost of the restoration
measures required to ensure that thedamage to the environment is containedwithin acceptable limits?
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Feasibility study-A schematic Diagram
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Plan Feasibility study
Generation of Ideas
Initial screening
Is the idea promising
Conduct market Analysis
Terminateyes
No
Conduct Tech. Analysis
Conduct Fin. Analysis
Conduct Econ./Ecological Analysis
Is the proj. worth while ?
yes
Prepare Funding Proposal Terminate
No
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What is a viable project financing?
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The project must be backed by strong creditbacking,
Financial viability must be provable Supply contract for product and/or energy must
be ensured at a cost consistent with fin.
Projections Market for the product or service must be
assured at a price consistent with fin. Projections
Transportation of product into or out of projectmust be assured at a cost consistent withprojections
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Contd.
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Expertise of contractor to construct theproject facility must be established
Financial capability and technical expertisemust be available to cover cost over runs
Reliability of the process and equipment tobe used must be well established
The sponsor or the beneficiary of thesponsorship must have available expertise
to operate such a facility. Dependence onoutside expertise should be discouraged
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Contd.
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In addition to operating expertise ,
management personnel must be available,otherwise the project is a suspect.
Properties and facilities being financed
must have value as collateral Political environment for location of project
and type of project must be reasonably
friendly and stable
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Causes for Project Failures
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j Delays in completion with consequent delay in the
contemplated revenue flow, Capital cost over run Technical failure Financial failure of contractor
Govt. interference Uninsured casualty losses Increased price or shortage of raw materials Technical obsolescence of the plant Loss of competitive position in market place Expropriation