Infrastructure finance nibm


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Infrastructure finance nibm

  1. 1. Infrastructure Finance D. C. Pai Prof. PIMSR
  2. 2. IMPORTANCE OF INFRASTRUCTURE <ul><li>In the words of ADB Chairman Mr. Tadao Chino: </li></ul><ul><li>“ Infrastructure development offers the foundation on which a country can seize and capitalise on the opportunities ushered in by globalisation and regional integration. Experiences across the region show that FDI and new technologies are most likely to bypass countries with inadequate and poor infrastructure investment climates.” </li></ul>
  3. 3. IMPORTANCE OF INFRASTRUCTURE <ul><li>Infrastructure is defined differently by different Government agencies, but broadly includes the following sectors </li></ul><ul><li>Energy </li></ul><ul><li>Logistics and Transportation </li></ul><ul><li>Telecom </li></ul><ul><li>Urban and Industrial Infrastructure </li></ul><ul><li>Water and sanitation </li></ul><ul><li>Multiplier effect of Infrastructure Projects is very high. </li></ul>
  4. 4. DEFINITION OF INFRASTRUCTURE <ul><li>RBI Definition (Nov 30, 2007) </li></ul><ul><li>Developing or developing and operating or developing, operating and maintaining an infrastructure facility in </li></ul><ul><li>Energy </li></ul><ul><li>Logistics and Transportation </li></ul><ul><li>Telecom </li></ul><ul><li>Urban and Industrial Infrastructure </li></ul><ul><li>Agro Processing, Construction for storage of Agro Products </li></ul><ul><li>Schools and Hospitals </li></ul><ul><li>Pipelines for Oil, Petroleum and Gas </li></ul><ul><li>Water and sanitation </li></ul>
  5. 5. Categories of Projects <ul><li>Brown field: </li></ul><ul><li>Expansion of capacity of product lines by existing ventures. </li></ul><ul><li>Expansion by adding new product lines. </li></ul><ul><li>Investment by existing ventures for new technologies. </li></ul><ul><li>Green field: </li></ul><ul><li>Entirely new industrial venture being established. </li></ul>
  6. 6. Methods of Financing CapEx <ul><li>Traditional Financing or Balance Sheet Financing </li></ul><ul><li>Project Financing or Off-balance sheet Financing </li></ul>
  7. 7. Traditional Financing <ul><li>In traditional financing or conventional direct financing, financing of capital expenditure is done through retained earnings and long term full recourse debt issued to the parent company by lenders where lenders look to the firm’s entire asset portfolio to generate the cash flow to service their loan. </li></ul>
  8. 8. What is Project Financing <ul><li>According to Finnerty (1996), “….the raising of funds to finance an economically separable capital investment project in which the providers of the funds look primarily to the cash flow from the project as the source of funds to service their loans and provide the return on their equity invested in the project.” </li></ul><ul><li>According to Nevitt & Fabozzi (2000), “A financing of a particular economic unit in which a lender is satisfied to look initially to the cash flow and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan.” </li></ul>
  9. 9. Project Finance <ul><li>Dependence only on Project Cash Flow means: </li></ul><ul><li>Lower Tolerance for risks </li></ul><ul><li>Determine all risks and mitigate them </li></ul><ul><li>Mitigation is by allocating the risk to the entity best placed to mitigate them. </li></ul><ul><li>Done through the process of contracting with the multiple agencies involved. </li></ul>
  10. 10. <ul><li>Investments Mostly through project companies (SPVs) </li></ul><ul><li>Reliance on project cash flows rather than parental support. </li></ul><ul><li>Highly capital intensive and has long gestation period </li></ul><ul><li>Higher risks- to be evaluated carefully and proper structure for mitigation provided </li></ul>How is infrastructure lending different from other project lending?
  11. 11. Project Finance Vs. Corporate Finance Sponsors Cost Overrun Support : 100% Sponsors Cost Overrun Support : Limited DSRA: Nil DSRA: 6months Debt: Equity- 50:50 to 66:33 Debt: Equity- 70:30 to 80:20 Recourse Limited to all borrower assets Recourse limited to cash flows Previous Track Record: Yes Previous Track Record: Nil Corporate Finance (Balance Sheet Funding) Project Finance
  12. 12. Types of Project Financing <ul><li>Project Financing </li></ul><ul><ul><li>With Recourse – To sponsors </li></ul></ul><ul><ul><li>Non Recourse – Recourse only to Project Cash Flows & Project Assets </li></ul></ul><ul><ul><li>Limited Recourse – Recourse to sponsors under certain defined circumstances </li></ul></ul>
  13. 13. Why a special purpose entity? <ul><li>Lenders </li></ul><ul><li>Legal and structural separation (Bankruptcy remoteness) </li></ul><ul><li>Ring fencing from sponsor’s cash flows </li></ul><ul><li>Focused entity with a limited purpose (Cash flow protection) </li></ul><ul><li>restrict additional debt issuances </li></ul><ul><li>Sponsor </li></ul><ul><li>Derisk own balance sheet from high project leverage </li></ul><ul><li>Creates an exit option for equity investors </li></ul><ul><li>Tax structuring </li></ul>
  14. 14. Concessionary Financing Instruments <ul><li>Rupee Term Loans – Banks /FIs/ Insurance Co’s </li></ul><ul><li>External Commercial Borrowings </li></ul><ul><li>Export Credit Agency </li></ul><ul><li>Suppliers Credit </li></ul><ul><li>Subordinated Loans </li></ul><ul><li>Bonds – No covenants for straight instruments, tradable. </li></ul><ul><li>Soft Loans or Grants by Government </li></ul><ul><li>Viability Gap Funding: Loans/Grants from Govt. </li></ul><ul><li>Defrayment of set up costs: Grants to meet the set up costs of setting up a Project </li></ul><ul><li>Combination of Soft Loans with commercial funding so that the COC is lowered </li></ul>
  15. 15. Cost of Various Financing Instruments Maturity 5 – 12 years, Typical Cost 11 -13% 50 – 80% Senior Debt 4 Maturity 7 – 15 years Typical Cost : 12 – 15% 0 -20% Subordinate Debt 3 14 – 20% Equity IRR 15% - 30% Equity 2 Nil 0% - 20% Grants (if applicable) 1 Costs/Tenor Percentage of Project Cost Instrument S.No.
  16. 16. Project Appraisal <ul><li>Adoption of a process to enable an independent & objective assessment of the inter-relationship between Technical, Financial, Commercial, Economic, Managerial, Ecological and Social aspects of an investment proposition for arriving at a financing decision </li></ul><ul><li>Determination of the viability of a project </li></ul><ul><li>Help re-shape project to enhance viability </li></ul>
  17. 17. PROJECT APPRAISAL PROCESS <ul><li>Promoter Evaluation </li></ul><ul><li>Contractual Framework </li></ul><ul><li>Risk analysis and mitigation </li></ul><ul><li>Commercial Assessment </li></ul><ul><li>Financial Feasibility Assessment </li></ul>
  18. 18. Stages in Project <ul><li>Project Development Stage </li></ul><ul><li>Project Construction Stage </li></ul><ul><li>Project Operational Stage </li></ul><ul><li>Project Termination/Abandonment Stage </li></ul>
  19. 19. Time Distribution of Project Effort Level of effort (%) Conception Selection Planning & Implementation Evaluation & Termination or Transfer Stages of Project Development Construction & Operational Abandonment
  20. 20. Stages in Financing <ul><li>Identification of the market (3 – 6 months) </li></ul><ul><li>Technical Feasibility (6- 12 months) </li></ul><ul><li>Financial Feasibility ( 3-6 months) </li></ul><ul><li>Commitment Letter from Financiers( 2-9 months) </li></ul><ul><li>Mandate to financier ( 1-2 months) </li></ul><ul><li>Syndication Process (2-6months) </li></ul><ul><li>Documentation (3- 15 months) </li></ul><ul><li>Financial Closure ( 1 month) </li></ul><ul><li>Project Follow up and monitoring </li></ul>
  21. 21. Issues related to appraisal <ul><li>High value projects: </li></ul><ul><li>High stakes, needs thorough understanding of project details and risks involved. </li></ul><ul><li>Long gestation period & turnaround time: </li></ul><ul><li>Loan structuring </li></ul><ul><li>Assets-liability mismatch. </li></ul><ul><li>Multi-agency involvement i.e. Govt., nodal agency, multiple lenders, etc. </li></ul><ul><li>- Needs co-ordination among all the above . </li></ul>
  22. 22. Issues….. <ul><li>Complex project structure: </li></ul><ul><li>needs thorough understanding of project documents, agreements, etc.- Lenders’ legal Counsel / Lenders’ independent Engineer. </li></ul><ul><li>Detailed Project Report from good consultant is required. </li></ul><ul><li>ALL ABOVE ISSUES EMANATE VARIOUS RISKS: </li></ul><ul><li>Risks have to be mitigated. </li></ul>
  23. 23. PROJECT APPRAISAL PROCESS <ul><li>Promoter Evaluation </li></ul><ul><li>Contractual Framework </li></ul><ul><li>Risk analysis and mitigation </li></ul><ul><li>Commercial Assessment </li></ul><ul><li>Financial Feasibility Assessment </li></ul>
  24. 24. Pre Sanction Checks <ul><li>Bank's lending policy and other relevant guidelines/RBI guidelines </li></ul><ul><li>Prudential Exposure norms </li></ul><ul><li>Industry Exposure restrictions </li></ul><ul><li>Group Exposure restrictions </li></ul><ul><li>Industry related risk factors </li></ul><ul><li>Acceptability of the promoters </li></ul>
  25. 25. Credit Investigation <ul><li>Promoters </li></ul><ul><ul><li>Know your customer(KYC): Antecedents of the Promoters </li></ul></ul><ul><ul><li>Expertise of the promoters as regards to technology, financial, marketing and general management concepts </li></ul></ul><ul><ul><li>Experience of the promoters in the line of activity </li></ul></ul><ul><ul><li>Track record of promoters </li></ul></ul>
  26. 26. PROMOTER EVALUATION <ul><li>Track Record of Promoters </li></ul><ul><li>- Net Worth / Availability of Funds </li></ul><ul><li>Management </li></ul><ul><li>- Experience of Management </li></ul><ul><li>- Ownership Pattern </li></ul><ul><li>Check RBI Defaulters Risk </li></ul><ul><li>Check CIBIL Records </li></ul>
  28. 28. Concession Agreement <ul><li>An agreement between Government ( Grantor of Concession or Permission) and Project company ( Grantee or Beneficiary) giving permission to execute a project. </li></ul>
  29. 29. Project Contracts <ul><li>Concession Agreement </li></ul><ul><li>- Specified Term/Period </li></ul><ul><li>- Duties and Obligations of Project Company </li></ul><ul><li>- Payment of Concession Fees </li></ul><ul><li>- Technical Specifications </li></ul><ul><li>- Force Majeur Protection </li></ul><ul><li>-Events of default and termination, </li></ul><ul><li>-SSA (Direct Agreement) </li></ul><ul><li>EPC Contract </li></ul><ul><li>- Scope of Work, Single Point Responsibility, </li></ul><ul><li>- Price and Payment terms, Construction Schedule, </li></ul><ul><li>- Performance test and Guarantees and Warranties, </li></ul><ul><li>- Agreement with EPC Contractor. </li></ul><ul><li>O & M Contract </li></ul><ul><li>- Covers the term of concession, Guarantees, Termination Clause </li></ul><ul><li>- Scope of work </li></ul><ul><li>- Payments and Incentives </li></ul>
  30. 30. Financing Framework <ul><li>Telecom </li></ul><ul><li>PAST </li></ul><ul><li>Classical Project Finance Framework </li></ul><ul><li>PRESENT </li></ul><ul><li>Corporate Finance Framework </li></ul><ul><li>Power </li></ul><ul><li>PAST </li></ul><ul><li>Generation Project with Long Term PPA’s with SEBS’s. – Escrow Accounts </li></ul><ul><li>PRESENT </li></ul><ul><li>Financing Based on Competitiveness of Tariff </li></ul><ul><li>Detailed study of supply demand scenario, assured supply of fuel and availability of transmission lines. </li></ul><ul><li>Road </li></ul><ul><li>PAST </li></ul><ul><li>Primarily on tolling basis </li></ul><ul><li>PRESENT </li></ul><ul><li>PPP Framework including viability Gap Funding, Annuity Framework, Projects with a right to develop real estate. </li></ul>
  31. 31. Financing Framework <ul><li>Ports </li></ul><ul><li>Greenfield Minor Ports with market risk </li></ul><ul><li>Captive Facilities </li></ul><ul><li>Private Berth in major ports with market risk </li></ul><ul><li>Airports </li></ul><ul><li>BOT Projects with Market Risks </li></ul><ul><li>Urban Infrastructure </li></ul><ul><li>Limited Financing Transactions based on recourse to specific revenue streams </li></ul><ul><li>Pooled Financing – a single entity raising Finance to fund a group of ULB’s </li></ul><ul><li>SEZ </li></ul><ul><li>Project with implementation risks and market risk </li></ul><ul><li>R & R and occupancy important elements for SEZ projects </li></ul>
  32. 32. Project Structure <ul><li>A set of transaction agreements between stakeholders </li></ul><ul><li>Protect Contracts Financial Agreements </li></ul><ul><li>Concession Agreement  Lender’s agreement </li></ul><ul><li>EPC contract(Price, Perf. </li></ul><ul><li>Guarantee  Shareholder’s pledge </li></ul><ul><li>L.D, Retention Money, Defect Liability) </li></ul><ul><li>O&M  Project Cost Comparison </li></ul><ul><li>Supplier contract (Supply & Transp) </li></ul>Successful project structure entails a win-win situation for all Project SPV Sovereign Sponsors Suppliers Guarantor EPC Lenders O&M Off takers
  33. 33. STRUCTURAL / CONTRACTUAL FRAMEWORK <ul><li>Concession Agreement </li></ul><ul><li>-Rights, Responsibilities and Obligations </li></ul><ul><li>- Operating Procedures, Specifications </li></ul><ul><li>- User Charges, Collection Mechanism </li></ul><ul><li>- Events of Default </li></ul><ul><li>- Termination Compensation </li></ul><ul><li>- Force Majeure Clause and Compensation Mechanism </li></ul><ul><li>- Applicability of Law and Arbitration Process </li></ul><ul><li>EPC & O&M contract </li></ul><ul><li>Structure Adopted – BOO, BOT, BOOT etc </li></ul><ul><li>PPA </li></ul><ul><li>Development Agreement ( Airport, Port) </li></ul><ul><li>SSA ( Tripartite Agreement) </li></ul><ul><li>Land Lease Agreement </li></ul><ul><li>Loan Agreement </li></ul>