Ppp Cases Pvr May07

7/31/2019 Ppp Cases Pvr May07

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Financing InfrastructureProjects

An Analysis of Issues and

Cases


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Presentation Structure

Project Finance Transactions

Issues in Infrastructure Finance

Case Studies


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IDFC : A Summary


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Who We Are

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

We are a specialty financial institution focused only on infrastructure funding

With a balance sheet size in excess of Rs. 17,000 Crore, and NIL NPAs, IDFC ranks amongst thelargest financial institutions focused on financing Indian infrastructure


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Project Finance Transactions


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Financing a Project

Project Finance doesnt meanfinancing a project!


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Financing a Project 2

How does Joe Blo Inc. finance a chemical factory?

Joe Blo Inc.

Lenders

ChemFac

Equity

Equity

Returns

Debt

Debt

Repayment


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Financing a Project 3

Such financing is also called:

Balance Sheet Financing, orRecourse Financing

Here the project Lenders have a low levelof due-diligence on the project itself, but a

high level of due diligence on Joe Blo Inc.!


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Project Finance

How does Joe Blo Inc. finance an airport?

Joe Blo Inc.

Lenders

Airport

Equity

EquityReturns

Debt

Debt

Repayment

Other Equity

Investors

Other Lenders/Bondholders


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Project Finance Defined

Raising of funds to finance aneconomically separable

capital investment project inwhich the providers of funds

look primarily to cash flow

from the project to servicetheir debt and providereturns on their equity


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Emergence of ProjectFinancing:

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 debtMulti-source financing: syndicated commercial

banks, bonds, ECAs, multilaterals


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Why Project Finance?

Isolate Risk

Project Transparency

Greater Leverage

Control/ Ownership issues


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Characteristics of Project Finance

Complex contractual arrangements

Limited or non-recourse financing

Risk management strategies and techniques

Changing perceptions, new innovations


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Demand Supply Gap

Annual investment needs in UrbanInfrastructure alone are about Rs.

400 billion*as against an availabilityofRs. 50 billion, (excluding new mass

transit and township development

projects)

*give or take a few hundred billion!


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Equity

Sponsor/ Corporate

Equity Funds

Financial Institutions

Multi-lateral InstitutionsWorld Bank, IFC

Public


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Debt

Banks

FIs

Debt Funds

Multilateral Institutions

World Bank, ADB, IADBExport Credit Agencies (ECA)

Public


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Principles of Risk Management

Allocate project-specific risks to parties best

able to bear them

Control performance risks through incentivecontracts

Use market-hedging instruments (derivatives)

for covering market-wide risks (interest andexchange rate fluctuations)


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Risk Management


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Risk Management

Base

Value2

2

0

5.184802

13.600926

0.15

Goods Traffic Growth Scenario

Tariff Growth Scenario

Project Cost Sensitivity Factor

Variable Operating Expenses as per KRC norms (per MT)

Fixed Operating Expenses as per KRC norms

Percentage of Traffic Startup

Min DSCR, with DSRA

0.0 0.3 0.6 0.9 1.2 1.5 1.8 2.1 2.4 2.7 3.0

Base Value: 1.1

1 3

1 3

0.1 0.1

4.89606 4.89606

13.600926 12.981576

0 0.3


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Oh What A Web!Concession Agreement

Government & Project SPV

SHA

Equity Investors

Equity Investment Agreements

With Pvt Equity Investors

Construction/O&M Contracts

Project SPV & Contractors/ Operators

DLA/ Substitution

Project SPV, Promoters,

Lenders, Government

State Support Agreement

Government & Project SPV

Loan Agreements

Lenders & Project SPV

Inter-Creditor Agreements

Inter-se the LendersPledges & Hypothecations

Lenders & Promoters Site Lease AgreementProject SPV & Land Owner

TRA Agreement

Trustee Bank, SPV, Lenders

Bank Guarantees etc


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Issues in InfrastructureFinance


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Service Provision Options

Infrastructure

Services

Status Quo:

Govt creates assets

& provides services

Privatization:

Private Sector

creates assets &

provides services

Commercialization:

Govt creates assets

& hands over to

Pvt Sector to

provide services

PPP/ PFPI


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How Much Time Did They Take?

Airports:Started in 1998-99

Bidder identified in 2001

SHA in 2002

Concession/ FC in 2005


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How Much Time(2)

(Industrial) Water Supply:Started in 1995-96


Concession in 2003

FC in 2004


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How Much Time(3)

Commercial Complex:Started in May 2002

Bidder identified in June 2004Government approval June 2005

Concession/ FC just now

SEZ:Started in 2002


Approvals not yet in place


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How Much Time(4)

Industrial RoadsStarted in 2002


Concession/ FC just now


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How Much Time(5)

How many large (> Rs. 500 Cr) projectshave reached financial closure, and work

commencedLast 8-10 years of PPP4 Airports1 Water supply projectNumber of Road (NHAI/ MORTH only)

Number of Telecom/ Power ProjectsAnd how many are completed

In round figures noneExcept in Roads, Telecom, Power


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Why are the projects delayed?

Possible Reasons?Finance

Inadequate Project DevelopmentHasten to bid?

Approval structures/ processes not being inplace

Plug-and-play approach?Social/ Environmental reasons

LAND


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Then why PPP?

PPP ProjectsTake more time, more effort, and are also prima-facie

more cost BUTShortage of budgetary funds

Improvement in levels of service to users

Innovation in designs, project management and

implementation of projectsLong-term operations and maintenance of assets

Focus on service to users not just asset creation


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Are Funds an Issue?

Yes and No

YES

Project Development FundsEquity

Debt in Urban Infra (water, city roads, metrotransport projects, sanitation, solid waste)

NOCommercial debt (sectors other than mentionedabove)


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Inadequate Project Development

Hasten to set up project/ bid

Bidders/ lenders then start askingfor data/ studies

Thin slice method to get all the DPRsdone

Re(negotiation) of project andcontract parameters along the way


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Approval Process/ Structures (2)

Since there are no replicable frameworksEach project is a stand-alone experiment

Rarely is precedent used. Bangalore and Hyderabadairports are rare instances of projects usingprecedent

Infra Acts/ Polices have enough flexibility toEnable frequent by-pass of their intent!

Transparency conditions are applied regardlessof whether they are regular Contracts orBOT Projects


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Key Lessons - Roads

Bypasses on national highways and river bridges havedemonstrated 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 groundphilosophy

Certain large projects such have not been able togenerate the expected numbers in the early years

High project cost, competing routes, service roads, higher growthrate expectations being the primary reasons


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Key Lessons - Telecom

Limited mobility not sustainable leading tomigration to full mobility. Mass-market model for the sector (based on

high penetration and low ARPUs).

Consolidation in the sector.


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Key Lessons - Power It is essential to first fix the leakybucket

Competitiveness of tariff essential to ensure viability of ageneration 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 (NoMoving Goal Post)

Legal and Administration support freedom and support fromGovernment to disconnect consumers

Government credit risk mitigation appropriate mechanism for deliveryof subsidy to be developed

Credible business plan to meet transition period funding requirementspast unfunded liabilities to be taken over by Government

Credible base line data


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Way Forward?

Not to rush into a Project bid/ implementapproach

Get frameworks/ approvals/ funds in placebefore doing soCapacity building and reform should go aheadNow there is enough project experience/expertise to set up a precedent basis

Adequate project preparationFunding required to do soNot too many money bags waiting to investinto infrastructure


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Small

Number Of

ProfitableProjects

BOT

Larger

Number Of

MarginallyProfitable

Projects

Govt. Leveraged

Privatisation

Unprofitable,

But Imperative

Projects

Budgetary

Allocation

Maintenance

Works

Dedicated

Funds (Road

Fund)

Way Forward (2)


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Concept of PFPI

Traditional ApproachAsset creation funded through governmentborrowings

Service provision and maintenance of assets bypublic sector

PFI ApproachAsset creation funded by private finance

Service provision and maintenance of assets byprivate sectorFundamental Tenets

Value for MoneyRisk Transfer to Private Sector


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What PFPI is not .. What it is (2)

This means that Governmentno longer builds roads, it purchases miles of

maintained highwayno longer builds hospitals, it buys healthservices

no longer buys computers and software, but

pays for managed IT services


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Case Studies

Experiences in Project Finance


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A Road Project

66%

17%17%

Debt

Sub-Debt

Equity


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Case Study - Waste to Energy


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Case Studies - 12

Garbage to GoldEasy for any self-respecting alchemist?!

Technically superior, but also moreexpensive

Can the returns (financial or economic)

justify the higher costs?Obviously cannot be termed as the cost-equivalent of a regular power plant


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Case Study - The SWERF Project at LucknowProject to generate about 5 MW of power from MSW

Project to offer a MSW Management solution to the cityAbout 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 satisfactoryLoI issued on August 1996 thro competitive bidding

Waste Supply Agreement in Feb 1997, PPA signed on July 1998, LandLease agreement in March 1999, GoUP Guarantee in Feb 2000

Project enjoyed the commitment of its Stakeholdersthe LNN, UPPCL, MNES, local community, Pollution Control Board etc.


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Case Study - Structuring The ProjectFinancial closure achieved through tie-up of

Equity (Rs 20.00 crs); Senior Debt (Rs 26.50 crs); DeferredCredit (Rs 11.50 crs);Capital Subsidy (Rs 15.00 crs)

Contractual structure completed thro execution ofWaste 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 ofContracts - Defect Liability provisions, Financial Gtee backedperformance, & LDs

Offtake agreement - LCs and Government Guarantee


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Thank You

Documents

Ppp Cases Pvr May07