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Financing Infrastructure Projects

Financing Infrastructure Projects. An Analysis of Issues and Cases…. Presentation Structure. Project Finance Transactions Issues in Infrastructure Finance Case Studies. IDFC : A Summary. Who We Are…. We are a specialty financial institution focused only on infrastructure funding.

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Financing Infrastructure Projects

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  1. Financing Infrastructure Projects An Analysis of Issues and Cases…

  2. Presentation Structure • Project Finance Transactions • Issues in Infrastructure Finance • Case Studies

  3. IDFC : A Summary

  4. Who We Are… We are a specialty financial institution focused only on infrastructure funding • Established by the GoI in 1997 • Lead private capital to commercially viable infrastructure projects; promote public-private partnerships • Bring innovation to private financing in Indian infrastructure • Provide policy advice to encourage private financing in infrastructure With a balance sheet size in excess of Rs. 17,000 Crore, and NIL NPAs, IDFC ranks amongst the largest financial institutions focused on financing Indian infrastructure

  5. Project Finance Transactions

  6. ‘Financing a Project’ • Project Finance doesn’t mean ‘financing a project’!

  7. ‘Financing a Project’ …2 • How does Joe Blo Inc. finance a chemical factory? Debt Repayment Joe Blo Inc. Lenders Equity Debt Equity Returns ChemFac

  8. ‘Financing a Project’ …3 • Such financing is also called: • Balance Sheet Financing, or • Recourse Financing • Here the project ‘Lenders’ have a low level of due-diligence on the project itself, but a high level of due diligence on Joe Blo Inc.!

  9. ‘Project Finance’ • How does Joe Blo Inc. finance an airport? Joe Blo Inc. Other Equity Investors Lenders Equity Other Lenders/ Bondholders Debt Repayment Equity Returns Debt Airport

  10. Project Finance Defined “Raising of funds to finance an economically separable capital investment project in which the providers of funds look primarily to cash flow from the project to service their debt and provide returns on their equity”

  11. Emergence of Project Financing: • Appropriate techniques for projects with high capital requirements and a complex risk profile • Payouts are based only on the projects’ own assets and cash flows stream • Creditors rely on the ability of the project for repayment of related debt obligations, non-recourse debt • Multi-source financing: syndicated commercial banks, bonds, ECAs, multilaterals

  12. Why Project Finance? • Isolate ‘Risk’ • Project ‘Transparency’ • Greater ‘Leverage’ • Control/ Ownership issues

  13. Characteristics of Project Finance • Complex contractual arrangements • Limited or non-recourse financing • Risk management strategies and techniques • Changing perceptions, new innovations

  14. Demand Supply Gap Annual investment needs in Urban Infrastructure alone are about Rs. 400 billion* as against an availability of Rs. 50 billion, (excluding new mass transit and township development projects) *give or take a few hundred billion!

  15. Equity • Sponsor/ Corporate • Equity Funds • Financial Institutions • Multi-lateral Institutions • World Bank, IFC • Public

  16. Debt • Banks • FIs • Debt Funds • Multilateral Institutions • World Bank, ADB, IADB • Export Credit Agencies (ECA) • Public

  17. Principles of Risk Management • Allocate project-specific risks to parties best able to bear them • Control performance risks through incentive contracts • Use market-hedging instruments (derivatives) for covering market-wide risks (interest and exchange rate fluctuations)

  18. Risk Management

  19. Risk Management

  20. Oh What A Web! Concession Agreement Government & Project SPV State Support Agreement Government & Project SPV Loan Agreements Lenders & Project SPV DLA/ Substitution Project SPV, Promoters, Lenders, Government SHA Equity Investors Equity Investment Agreements With Pvt Equity Investors Inter-Creditor Agreements Inter-se the Lenders Pledges & Hypothecations Lenders & Promoters Site Lease Agreement Project SPV & Land Owner Construction/O&M Contracts Project SPV & Contractors/ Operators TRA Agreement Trustee Bank, SPV, Lenders Bank Guarantees etc

  21. Issues in Infrastructure Finance

  22. Infrastructure Services Status Quo: Govt creates assets & provides services PPP/ PFPI Privatization: Private Sector creates assets & provides services Commercialization: Govt creates assets & hands over to Pvt Sector to provide services Service Provision Options

  23. How Much Time Did They Take? • Airports: • Started in 1998-99 • Bidder identified in 2001 • SHA in 2002 • Concession/ FC in 2005

  24. How Much Time…(2) • (Industrial) Water Supply: • Started in 1995-96 • Bidder identified in 1997 • Concession in 2003 • FC in 2004

  25. How Much Time…(3) • Commercial Complex: • Started in May 2002 • Bidder identified in June 2004 • Government approval June 2005 • Concession/ FC just now… • SEZ: • Started in 2002 • Bidder identified in 2003 • Approvals not yet in place…

  26. How Much Time…(4) • Industrial Roads • Started in 2002 • Bidder identified in 2005 • Concession/ FC just now…

  27. How Much Time…(5) • How many large (> Rs. 500 Cr) projects have reached financial closure, and work commenced • Last 8-10 years of PPP • 4 Airports • 1 Water supply project • Number of Road (NHAI/ MORTH only) • Number of Telecom/ Power Projects • And how many are completed • In round figures – none • Except in Roads, Telecom, Power

  28. Why are the projects delayed? • Possible Reasons? • Finance • Inadequate Project Development • Hasten to bid? • Approval structures/ processes not being in place • Plug-and-play approach? • Social/ Environmental reasons • LAND

  29. Then why PPP? • PPP Projects • Take more time, more effort, and are also – prima-facie – more cost BUT • Shortage of budgetary funds • Improvement in levels of service to users • Innovation in designs, project management and implementation of projects • Long-term operations and maintenance of assets • Focus on service to users – not just asset creation

  30. Are Funds an Issue? • Yes and No • YES • Project Development Funds • Equity • Debt in Urban Infra (water, city roads, metro transport projects, sanitation, solid waste) • NO • Commercial debt (sectors other than mentioned above)

  31. Inadequate Project Development • Hasten to set up project/ bid • Bidders/ lenders then start asking for data/ studies • Thin slice method to get all the DPRs done • Re(negotiation) of project and contract parameters along the way

  32. Approval Process/ Structures • Once the bidder is identified: • Land, Environmental Clearances • Cabinet approvals • Searching for consensus • Legislative/ legal amendments required • Searching for sources of Government funds/ equity/ grants • User unwillingness to pay

  33. Approval Process/ Structures… (2) • Since there are no replicable frameworks • Each project is a “stand-alone” experiment • Rarely is precedent used. Bangalore and Hyderabad airports are rare instances of projects using precedent • Infra Acts/ Polices have enough flexibility to… • Enable frequent by-pass of their intent! • Transparency conditions are applied regardless of whether they are regular “Contracts” or BOT Projects

  34. Key Lessons - Roads • Bypasses on national highways and river bridges have demonstrated reasonable success • Common sense approach to traffic forecasting along with statistical analysis • Emphasis on getting base year traffic right • Small state highway projects have also done well in states such as Maharashtra, MP • Developed by local promoter groups with a strong ‘ears to the ground’ philosophy • Certain large projects such have not been able to generate the expected numbers in the early years • High project cost, competing routes, service roads, higher growth rate expectations being the primary reasons

  35. Key Lessons - Telecom • Limited mobility not sustainable leading to migration to full mobility. • Mass-market model for the sector (based on high penetration and low ARPUs). • Consolidation in the sector.

  36. Key Lessons - Power • It is essential to first fix the ‘leaky bucket’ • Competitiveness of tariff essential to ensure viability of a generation project. • Retail tariffs to ultimately mirror the cost of supply. • Factors to attract private sector participation in the sector: • Regulatory confidence longer term regulatory tariff regime (“No Moving Goal Post”) • Legal and Administration support freedom and support from Government to disconnect consumers • Government credit risk mitigation appropriate mechanism for delivery of subsidy to be developed • Credible business plan to meet transition period funding requirements past unfunded liabilities to be taken over by Government • Credible base line data

  37. Key Lessons - Urban • It is essential to first fix the ‘leaky bucket’ • User charge regime has to come into place - tariffs to ultimately mirror the cost of supply • Subsidy to be explicit • Large governance issues to be addressed • Factors to attract private sector participation in the sector: • Regulators to be in place • Ring-fenced ULB revenues • Legal and Administration support freedom and support from Government to disconnect consumers • Government credit risk mitigation appropriate mechanism for delivery of subsidy to be developed • Credible base line data

  38. Way Forward…? • Not to rush into a Project bid/ implement approach • Get frameworks/ approvals/ funds in place before doing so • Capacity building and reform should go ahead • Now there is enough project experience/ expertise to set up a “precedent” basis • Adequate project preparation • Funding required to do so • Not too many “money bags” waiting to invest into infrastructure…

  39. Larger Number Of Marginally Profitable Projects Unprofitable, But Imperative Projects Small Number Of Profitable Projects Maintenance Works Govt. ‘Leveraged’ Privatisation Budgetary Allocation BOT Dedicated Funds (Road Fund) Way Forward… (2)

  40. Concept of PFPI • Traditional Approach • Asset creation funded through government borrowings • Service provision and maintenance of assets by public sector • PFI Approach • Asset creation funded by private finance • Service provision and maintenance of assets by private sector • Fundamental Tenets • Value for Money • Risk Transfer to Private Sector

  41. What PFPI is not .. What it is (1) • PFPI is not privatisation or disinvestment • PFPI is not about borrowing money from the private sector • PFPI is more about creating a structure • in which greater value for money is achieved for services • through private sector innovation and management skills • delivering significant improvement in service efficiency levels

  42. What PFPI is not .. What it is (2) • This means that Government • no longer builds roads, it purchases miles of maintained highway • no longer builds hospitals, it buys health services • no longer buys computers and software, but pays for managed IT services

  43. Case Studies Experiences in Project Finance

  44. An Airport Project • Total Cost, 2.1 Mio Euro

  45. A Road Project

  46. Case Study - Waste to Energy…

  47. Case Studies - 12 • Garbage to Gold • Easy for any self-respecting alchemist?! • Technically superior, but also more expensive • Can the returns (financial or economic) justify the higher costs? • Obviously cannot be termed as the cost-equivalent of a regular power plant

  48. Case Study - The SWERF Project at Lucknow • Project to generate about 5 MW of power from MSW • Project to offer a MSW Management solution to the city • About 1000 TPD; of this about 750-800 Tons lifted the same day • Projected population of 25 lac in 2001 • Present disposal practices are far from being sanitary • Waste composition would be heterogeneous in most respects • Project had its Award process satisfactory • LoI issued on August 1996 thro’ competitive bidding • Waste Supply Agreement in Feb 1997, PPA signed on July 1998, Land Lease agreement in March 1999, GoUP Guarantee in Feb 2000 • Project enjoyed the commitment of its Stakeholders • the LNN, UPPCL, MNES, local community, Pollution Control Board etc.

  49. Case Study - Structuring The Project • Financial closure achieved through tie-up of • Equity (Rs 20.00 crs); Senior Debt (Rs 26.50 crs); Deferred Credit (Rs 11.50 crs);Capital Subsidy (Rs 15.00 crs) • Contractual structure completed thro’ execution of • Waste Supply Agreement by LNN • Power Purchase Agreement with UPPCL • Equipment Supply & Know-how provision agreements with Entec/ IUT/ Janbacher • EPC arrangements with Jurong/ Jeevitha/ L&T • O&M arrangements with Haustle • Commercial tightness ensured thro’ provisions of • Contracts - Defect Liability provisions, Financial G’tee backed performance, & LD’s • Offtake agreement - LC’s and Government Guarantee

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