2. IMPORTANCE OF INFRASTRUCTURE
In the words of ADB Chairman Mr. Tadao Chino:
“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.”
3. IMPORTANCE OF INFRASTRUCTURE
• Infrastructure is defined differently by different
Government agencies, but broadly includes the following
sectors
- Energy
- Logistics and Transportation
- Telecom
- Urban and Industrial Infrastructure
- Water and sanitation
Multiplier effect of Infrastructure Projects is
very high.
4. DEFINITION OF INFRASTRUCTURE
• RBI Definition (Nov 30, 2007)
Developing or developing and operating or developing, operating
and maintaining an infrastructure facility in
- Energy
- Logistics and Transportation
- Telecom
- Urban and Industrial Infrastructure
- Agro Processing, Construction
for storage of Agro Products
- Schools and Hospitals
- Pipelines for Oil, Petroleum and Gas
- Water and sanitation
5. CATEGORIES OF PROJECTS
Brown field:
• Expansion of capacity of product lines by existing ventures.
• Expansion by adding new product lines.
• Investment by existing ventures for new technologies.
Green field:
• Entirely new industrial venture being established.
6. METHODS OF FINANCING CAPEX
• Traditional Financing or Balance Sheet Financing
• Project Financing or Off-balance sheet Financing
7. TRADITIONAL FINANCING
In traditional financing of 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.
8. WHAT IS PROJECT FINANCING
• 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.”
• 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.”
9. PROJECT FINANCE
• Dependence only on Project Cash Flow means:
• Lower Tolerance for risks
• Determine all risks and mitigate them
• Mitigation is by allocating the risk to the entity best
placed to mitigate them.
• Done through the process of contracting
with the multiple agencies involved.
10. HOW IS INFRASTRUCTURE LENDING
DIFFERENT FROM OTHER PROJECT
LENDING?
• Investments Mostly through project companies
(SPVs)
• Reliance on project cash flows rather than parental
support.
• Highly capital intensive and has long gestation
period
• Higher risks- to be evaluated carefully and proper
structure for mitigation provided
11. PROJECT FINANCE VS. CORPORATE
FINANCE
Project Finance Corporate Finance (Balance Sheet
Funding)
Previous Track Record: Nil Previous Track Record: Yes
Recourse limited to cash flows Recourse Limited to all
borrower assets
Debt: Equity- 70:30 to 80:20 Debt: Equity- 50:50 to 66:33
DSRA: 6months DSRA: Nil
Sponsors Cost Overrun Support
: Limited
Sponsors Cost Overrun Support
: 100%
12. TYPES OF PROJECT FINANCING
• Project Financing
– With Recourse – To sponsors
– Non Recourse – Recourse only to Project
Cash Flows & Project Assets
– Limited Recourse – Recourse to
sponsors under certain defined
circumstances
13. WHYA SPECIAL PURPOSE ENTITY?
Lenders
• Legal and structural separation (Bankruptcy remoteness)
• Ring fencing from sponsor’s cash flows
• Focused entity with a limited purpose (Cash flow protection)
• restrict additional debt issuances
Sponsor
• Derisk own balance sheet from high project leverage
• Creates an exit option for equity investors
• Tax structuring
14. CONCESSIONARY FINANCING
INSTRUMENTS
• Rupee Term Loans – Banks /FIs/ Insurance Co’s
• External Commercial Borrowings
• Export Credit Agency
• Suppliers Credit
• Subordinated Loans
• Bonds – No covenants for straight instruments, tradable.
• Soft Loans or Grants by Government
- Viability Gap Funding: Loans/Grants from Govt.
- Defrayment of set up costs: Grants to meet the set up
costs of setting up a Project
- Combination of Soft Loans with commercial
funding so that the COC is lowered
16. PROJECT APPRAISAL
• 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
• Determination of the viability of a project
18. STAGES IN PROJECT
• Project Development Stage
• Project Construction Stage
• Project Operational Stage
• Project Termination/Abandonment Stage
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. STAGES IN FINANCING
• Identification of the market (3 – 6 months)
• Technical Feasibility (6- 12 months)
• Financial Feasibility ( 3-6 months)
• Commitment Letter from Financiers( 2-9 months)
• Mandate to financier ( 1-2 months)
• Syndication Process (2-6months)
• Documentation (3- 15 months)
• Financial Closure ( 1 month)
• Project Follow up and monitoring
21. ISSUES RELATED TO APPRAISAL
• High value projects:
- High stakes, needs thorough understanding of project
details and risks involved.
• Long gestation period & turnaround time:
- Loan structuring
- Assets-liability mismatch.
• Multi-agency involvement i.e. Govt., nodal
agency, multiple lenders, etc.
- Needs co-ordination among all the above.
22. ISSUES…..
Complex Project Structure:
- needs thorough understanding of project
documents, agreements, etc.- Lenders’ legal
Counsel / Lenders’ independent Engineer.
- Detailed Project Report from good
consultant is required.
- ALL ABOVE ISSUES EMANATE VARIOUS
RISKS:
- Risks have to be mitigated.
24. PRE SANCTION CHECKS
• Bank's lending policy and other relevant
guidelines/RBI guidelines
• Prudential Exposure norms
• Industry Exposure restrictions
• Group Exposure restrictions
• Industry related risk factors
• Acceptability of the promoters
25. CREDIT INVESTIGATION
• Promoters
– Know your customer(KYC):
Antecedents of the Promoters
– Expertise of the promoters as regards to
technology, financial, marketing and general
management concepts
– Experience of the promoters in the line of
activity
– Track record of promoters
26. PROMOTER EVALUATION
• Track Record of Promoters
- Net Worth / Availability of Funds
• Management
- Experience of Management
- Ownership Pattern
• Check RBI Defaulters Risk
• Check CIBIL Records
28. CONCESSION AGREEMENT
An agreement between Government
(Grantor of Concession or Permission)
and Project company (Grantee or
Beneficiary) giving permission to
execute a project.
29. PROJECT CONTRACTS
• Concession Agreement
- Specified Term/Period
- Duties and Obligations of Project Company
- Payment of Concession Fees
- Technical Specifications
- Force Majeur Protection
-Events of default and termination,
-SSA (Direct Agreement)
• EPC Contract
- Scope of Work, Single Point Responsibility,
- Price and Payment terms, Construction Schedule,
- Performance test and Guarantees and Warranties,
- Agreement with EPC Contractor.
• O & M Contract
- Covers the term of concession, Guarantees, Termination Clause
- Scope of work
- Payments and Incentives
30. FINANCING FRAMEWORK
Telecom
PAST
• Classical Project Finance Framework
PRESENT
• Corporate Finance Framework
Power
PAST
• Generation Project with Long Term PPA’s with SEBS’s. – Escrow
Accounts
PRESENT
• Financing Based on Competitiveness of Tariff
• Detailed study of supply demand scenario, assured supply of fuel and
availability of transmission lines.
Road
PAST
• Primarily on tolling basis
PRESENT
• PPP Framework including viability Gap Funding, Annuity
Framework Projects with a right to develop real estate.
31. FINANCING FRAMEWORK
Ports
• Greenfield Minor Ports with market risk
• Captive Facilities
• Private Berth in major ports with market risk
Airports
• BOT Projects with Market Risks
Urban Infrastructure
• Limited Financing Transactions based on recourse to specific revenue
streams
• Pooled Financing – a single entity raising Finance to fund a group of ULB’s
SEZ
• Project with implementation risks and market risk
• R & R and occupancy important elements for SEZ projects
32. PROJECT STRUCTURE
Successful project structure entails a win-win situation for all
Project SPV
Sovereign Sponsors
Suppliers Guarantor EPC
Lenders
O&M
Off takers
A set of transaction agreements between stakeholders
Protect Contracts
• Concession Agreement
• EPC Contract (Price, Perf.)
• Guarantee
LD Retention Money, Defect Liability
• O&M
• Supplier Contract (Supplier & Transport)
Financial Agreements
• Lender’s Agreement
• Shareholder’s Pledge
• Project Cost Comparison
33. STRUCTURAL / CONTRACTUAL FRAMEWORK
• Concession Agreement
- Rights, Responsibilities and Obligations
- Operating Procedures, Specifications
- User Charges, Collection Mechanism
- Events of Default
- Termination Compensation
- Force Majeure Clause and Compensation Mechanism
- Applicability of Law and Arbitration Process
• EPC & O&M contract
• Structure Adopted – BOO, BOT, BOOT etc
• PPA
• Development Agreement ( Airport, Port)
• SSA ( Tripartite Agreement)
• Land Lease Agreement
• Loan Agreement
