The presentation covers infrastructure project financing, typical configurations, key project parties, project contracts, It explains financing of a power project, security mechanism, SPV payment hierarchy and risk mitigation mechanism

1. Financing Infrastructure Projects
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2. Infrastructure Projects
• provides essential services
• play vital role in economic development
• Has important social dimensions
• Government regulations provide level playing field for public and private
sector
Characteristics of Infrastructure projects
▪ They are highly capital intensive.
▪ They involve huge sunk costs.
▪ They have a long operating life
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3. Infrastructure Projects
• Traditionally infrastructure projects were owned by government
• Due to huge investment and demand for infrastructure projects, focus is shifting
towards involvement of private sector in infrastructure projects (Ex. PPP model)
• Infrastructure financing is different from conventional project financing
• Most infrastructure projects are based on Public private partnership (PPP) model so it
requires careful evaluation of complexities
ex. A Power project developed using PPP model will require off take of power by State
owned electricity board (SEB’s). So the project risks have components of receipts from SEB
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4. Infrastructure Projects: Typical project configurations
• Projects are typically implemented in a SPV which is a distinct entity with objective of
implementing and operating the project. It ensures that risk associated with the project
are ring fenced and do not flow back to sponsoring entities.
• Sponsors take an equity stake in SPV (minimum 15-30 % of the project cost) and is
referred as sponsors contribution
• The SPV make contractual obligations with contractors, suppliers, off-takers, government
and lenders. (referred as project parties)
• Infrastructure projects have relatively high gearing (debt equity ratio) than conventional
projects (gearing rarely 2:1). Ex. NHAI projects build on PPP model have gearing ratio
of 4:1. in this private operator construct, operate, maintain the road during concession
period and get an assured annuity from NHAI, irrespective of the traffic.
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5. Infrastructure Projects: Key project Parties
• Project sponsors: converts idea into the project and have role in setting of SPV, recruiting
managerial talents and subscribing significant equity.
• Project Vehicle: SPV is responsible for delivering a bankable project in financing phase,
implementation and operation. Selects, negotiates and enters into contractual obligation
with contractors, supervises construction and commissioning and operates the project
(through O & M contractor if necessary)
• Project lenders: Provide debt to finance the project. Typically a consortium of project
lenders led by a ‘lead bank’ ascertain a bankable project cost, develops the financing
pattern or structure, and monitor the progress and performance till the debt is repaid.
They are secured by project assets and normally do not interfere with functioning of SPV
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6. Infrastructure Projects: Key project Parties
• EPC contractor: It designs, erects the facilities, and commissions the project on
turnkey basis. It delivers the project as per pre defined specification, with in certain
cost and time frame. It also provides performance guarantee to SPV.
• O & M contractor: responsible for operation and maintenance of project in line with
industry best practices on performance parameters .
• Government: a key project party. It provides concession to SPV , proper legislative
and regulatory framework that allows SPV to compete on a level playing field, with
possibly other government owned entities.
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7. Infrastructure Projects: Contracts
Project
Contract
Contracts
Shareholder
agreement
An agreement between all shareholders of SPV that establishes
• Share holding pattern
• Shareholders representation in the management and Decision making
• Proposed pattern of cash call and remedies against default
• Shareholder exit process
EPC
Contract
An agreement between SPV and EPC contractor that establishes.
• EPC role and responsibilities
• Guaranteed and minimum performance parameters.
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8. Infrastructure Projects: Contracts
Project
Contract
Contracts
Project loan
agreements
An agreement between all SPV and project lenders that establishes
• Conditions precedent (CP’s) on fulfilment of which SPV can draw the loan
• Loan amount, tenure, repayment obligations, interest rate, processing fee
• Events of defaults and remedies
• Shareholder exit process
O & M
Contract
An agreement between SPV and O & M contractor that establishes.
• Responsibilities of O&M contractor
• Maintenance obligations
• Bonus payment to O & M contractor
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9. Financing a Power project
• The SPV owns the generation assets and enters into power purchase agreement (PPA)
with state electricity board (SEB). State government guarantees the payment by SEB.
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Project company SPV
EPC
Contractor
Sponsors/
Other shareholders
Fuel
Supplier
O&M
Contractor
Project lenders
State
Govt.
SEB
Offtaker
Parties in a power project

10. Financing a Power project
• Features of Power purchase agreement (PPA)
o The PPA, sets the conditions of selling/ buying power to/ by SEB
o SEB guarantees a minimum offtake from SPV and minimum payment to SPV in case
of failure of minimum offtake
o A payment mechanism and a security mechanism that ensures availability of
payments on time. In India it is a 3-tier security mechanism
o Lays down the formulae for computing tariff
o Responsibility of SEB including construction of interconnection facilities on time
o Termination clause under condition of sustained default by either SPV or SEB and
termination conditions and obligations
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11. Financing a Power project: 3 tier security mechanism
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SPV
present
invoice
SEB
Presents to bank under LC
(1.5 months average billing amount
Direct payment in specified period
Default by SEB
Payment
received
Dedicated circle Escrow account
LC non operative
Payment
received
Government guarantee
Escrow non operative
Payment
received

12. Financing a Power project: SPV payment hierarchy
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Dedicated SPV
account
O& M
expences
Debt
service
ROE

13. Financing a Power project: Risk mitigation mechanisms
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Key risks Mitigation mechanisms Parties expected to cover
risks
Project cost
overruns
• Fixed price, date certain EPC contract
• Project cost to include contingencies
• Careful evaluation of EPC contractor qualifications
• Cost comparison with similar project
• Loan disbursement after statuary approvals
• Undertaking from sponsor to finance cost overruns
EPC contractors/ project
Sponsors
Shortfall in
financing
• Draw down allowed only in case of financial closure
• Undertaking from sponsors to finance shortfalls
Sponsors
Commercial
risks
• Careful evaluation of electricity demand supply in
the state
• Ability of SEB to meet committed Offtake targets
• SEB.
• State Government
• Lenders (under conditions)

14. Thank You
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Contact
Email: naimkidwai@gmail.com
https://nrkidwai.wordpress.com/