19. financing infrastrucutre projects

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19. financing infrastrucutre projects

  1. 1. 19. Financing Infrastructure Projects
  2. 2. Private Initiative  Traditionally, infrastructure projects in India were owned and managed by the government or a government undertaking. Given the massive investments required infrastructure, there is now a broad consensus that private sector participation in this activity must be encouraged.  Private initiative in infrastructure projects can take many forms, ranging from contracted operation of public utilities to full ownership, operation and maintenance of these facilities.  For a road project, the private sector may be invited simply to build the facility, operate it during Concession Period and finally, at the end of the concession period, transfer the facility back to the government (BOT) without actually ever owning the same.
  3. 3. Typical Project Configuration  The project is implemented by a Special Purpose Vehicle, which is a distinct corporate entity.  Project sponsors take an equity stake in the SPV.  The SPV enters into contractual arrangements with project contractors, operators, off takers, government, and project lenders.  The dependence on debt is usually high and lenders generally lend on a non-recourse basis. This means that project lenders would not have any fall-back on the resources/assets of the sponsors if the SPV fails to meet debt servicing obligations.
  4. 4. Key Project Parties  Project Sponsors  Project sponsors are responsible for converting a concept into a project and having a role in setting up a project vehicle, identifying and recruiting right managerial talent to implement and run the project, providing a clear mandate to such management on their expectations, and finally subscribing to a signinficant proporation of equity in the project.  Project Vehicle  It is responsible for delivering a bankable project during the financing phase, implementing the project and thereafter operating in a manner that is financially viable.  Project lenders  They provide debt to finance the construction of the project.  They are secured by project assests and nomally do not interfere in the day to day operations of the SPV.  EPC Contractors  EPC contractor designs the project, procures all the engineering skills and equipment to construct the project, erects all the project facilities, ensyre that test and trial run are completed, and finaaly commissions the project, all on the turn key basis.
  5. 5. Key Project Parties  O&M Contractor:  They are responsible for operating and maintaining the plant in the line with industry best pracitices.  Government  The Government is the key project party. It provides a Concession to the SPV to set up the project and ensures that ta proper legislative and regulatory framework exists that allows the concerned SPV to compete on a “level playing field” along with exisiting, possibly government owned entities.
  6. 6. Project Contracts  Shareholders Agreement  EPC Contract  Project Loan Agreement  O & M Contract
  7. 7. Parties in a Power Project EPC Contractor Sponsors/Other Shareholders Project Company (SPV) O and M Contractor Project Lenders Fuel Supplier State Electricity Board (Off taker) State Government
  8. 8. Features of the Power Purchase Agreement  The PPA establishes the conditions under which the SPV would sell power to the SEB.  The SEB guarantees a minimum off take from the SPV or, if it fails to do, a minimum payment  A payment mechanism and and a security mechanism that ensures availability of payments on time is established. In India, several large projects have been financed on the basis of a 3 tier security mechanism.  Level 1 : Letter of Credit  Level 2 : Escrow Account  Level 3 : Irrevocable guarantee of the State Government  PPA also lays down the formula for computing tariffs.  Termination under conditions of sustained default by either the SPV or the SEB.
  9. 9. Telecommunication Projects  Telecommunication projects are characterized by large project costs, a virtually continuous project implementation (or roll–out), long gestation periods, and a dispersed customer base that exposes the project to commercial risks and requires significant marketing and selling budgets.  In general, telecom projects incur cash losses in initial years and these need to be funded. Unlike a power project which generates reasonably flat revenues and profitability over its life, telecom projects, by virtue of their continued implementation and increase in subscriber base demonstrate increases in profitability over a period of time.  Private telecom projects operate under a license from the Department of Telecom and the projects framework is determined by the conditions of the license.
  10. 10. Factors considered by Project Financiers in a Telecommunication Project  Equipment Supply Contract  Financial strength of the project sponsors  Business Plan Assumption  Competitive Environment
  11. 11. Financing Telecommunication Projects  In general, telecom projects incur cash losses in initial years and these need to be funded. In determining a telecom project’s cost, lenders follow the concept of “ peak Negative Cash Flow Period,” which determines the maximum period over which the project requires external cash infusion and the total external financing requirements during the period.  Given the long gestation periods and the commercial risks, project lenders in India have funded telecom projects on a lower debt-equity ratio (DER) such as around 1:1
  12. 12. Managing Risk in Private Infrastructure Projects  Construction Risk  Operating Risk  Market Risk  Interest Rate Risk  Foreign Exchange Risk  Payment Risk  Regulatory Risk  Political Risk
  13. 13. What is a PPP?  Broadly a PPP refers to a contractual partnership between the public and private sector agencies in which the private sector is entrusted with the task of providing infrastructure facilities and services that were traditionally provided by the public sector. An example of a PPP is a toll expressway project financed, constructed, and operated by a private developer.  According to the Government of India, a PPP project is a project based on a contract or concession agreement between a government or statutory entity and a private sector company for delivering an infrastructure service on payment of user charges. A private sector company is a company in which 51 percent or more of equity is owned and controlled by a private entity.

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