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ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC Public Private Partnerships A Financier’s Perspective Transport Policy and Tourism Section Transport and Tourism Division UN ESCAP United Nations

PPPs a Financiabcders Perspective

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Page 1: PPPs a Financiabcders Perspective

ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC

Public Private Partnerships A Financier’s Perspective

Transport Policy and Tourism Section Transport and Tourism Division

UN ESCAP

United Nations

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Public Private Partnerships

Table of Contents Overview .......................................................................................................................... 3 1. An Introduction to PPPs.......................................................................................... 4

1.1 The Special Purpose Vehicle .............................................................................5 1.2 The Government ................................................................................................5 1.3 The Financiers....................................................................................................6 1.4 The Experts ........................................................................................................7 1.5 The Customers...................................................................................................9 1.6 Advantages of the PPP structure .....................................................................10 1.7 Small and Medium Projects: Applying the PPP structure.................................11

2. Financing Public Private Partnerships ................................................................ 13

2.1 Sources of Capital ............................................................................................13 2.2 Factors contributing to the capital structure .....................................................17 2.3 Financing Small and Medium Projects .............................................................22

3. Financial Appraisal ............................................................................................... 25

3.1 Developing a Cash Flow Model........................................................................25 3.2 Analytical Methodology ....................................................................................30 3.3 Sensitivity Analysis...........................................................................................34 3.4 Conclusion........................................................................................................35

4. Risk ......................................................................................................................... 36

4.1 What is Risk? ...................................................................................................36 4.2 Risk and the cost of capital ..............................................................................37 4.3 Identifying Risk .................................................................................................37 4.4 Managing Risk..................................................................................................39

5. Environment ........................................................................................................... 42

5.1 Barriers to Private Sector Involvement.............................................................42 5.2 Enhancing the investment climate....................................................................42

Appendix 1 - Financial Models..................................................................................... 45 Appendix 2 - Debt Issues ............................................................................................ 46 Appendix 3 - Financial Calculations............................................................................ 47 Appendix 4 - Risk Matrix ............................................................................................. 49 Appendix 5 - Moody’s Rating Methodology ............................................................... 51 Appendix 6 - Sample Financial Information requirements........................................ 53 Appendix 7 - Loan Agreements ................................................................................... 56 Appendix 8 - Innovative Approaches to Financing.................................................... 67 Acronyms....................................................................................................................... 70 Glossary......................................................................................................................... 71 Directory ...................................................................................................................... 76 References..................................................................................................................... 80

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Overview Governments have historically financed infrastructure projects through budgetary allotments. However, as the demand for infrastructure grows and access to resources has become limited the public sector has increasingly looked to the private sector to provide financial resources, innovation, and technical expertise. Though working relationships between the public and private sector are not new, public private partnerships (PPP) are a relatively recent addition to an ever-evolving relationship. PPPs are a “cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards”.1 PPPs can be quite complex, involving many different participants including government, private sector experts, financiers and customers, each having a different perspective, which is not always fully understood by the other participants. The purpose of this report is to provide the reader with a better understanding of the financier’s perspective of PPP structures. Though some of the financing issues and examples may not be applicable to everyone, it is hoped that this report will provide an increased understanding of the financier’s perspective; and in doing so a framework to increase the capacity of governments in order that they may be able to mobilize additional resources for the provision of infrastructure and basic services. The report is broken up into five sections, each section representing a different segment in the development and assessment of PPPs. The first section provides a quick review of PPP structures and some of the key financial benefits. The second section looks at the financing of PPPs - what it is, how it is put together, and the different sources of financing available. The third section provides an overview of the activities that financiers use to assess the commercial viability of a project. The fourth section looks at risk and how it is defined. The fifth and final section provides an overview of environmental issues that affect private sector financing. Included in the Appendix are worksheets and background information to be used while reading the report.

1 As defined by the Canadian Council for Public-Private Partnerships

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1. An Introduction to PPPs PPPs are a means by which the public and private sectors can work together as they provide a contractual and formalized framework needed for easier cooperation between all parties. A typical PPP structure can be quite complex involving contractual agreements between a number of different participants including Financiers, Government, Engineers, Contractors, Operators, and Customers (see Figure1 - 1).

Figure 1 - 1

Public Private Partnerships

Government

Project company

(SPV)

Financiers

Private and/or Public Sponsors

Debt Financiers

Equity Financiers

Multilateral Institutions

Expertise

Engineer

Contractor

Other – Insurers

Operator

Customers/ Community Escrow Agent

Revenue

Debt Service Payments

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1.1 The Special Purpose Vehicle

Figure 1 - 2

Unlike traditional private sector concessions, the creation of a separate commercial venture called a Special Project Vehicle (SPV) is a key feature of PPPs. The SPV is usually set up by the private sponsors(s)2 who, in exchange for shares representing ownership in the SPV, agree to lead the project and contribute the long-term equity capital. The SPV is a legal entity that enables the coming together (see Figure 1 - 2) of many different parties and facilitates the allocation and diversification of risk and financing requirements to more than one party. From a legal perspective, it is the SPV that undertakes the project and therefore all contractual agreements between the various parties will be negotiated between themselves and the SPV.

1.2 The Government As previously mentioned, PPPs are a partnership between the public (government) and the private sector (see Figure 1 - 3), and thus a strong commitment on the part of the government is key to the success of a PPP. If the government has contributed equity, in exchange for shares in the SPV, they have equal rights and equivalent interests to the assets within the SPV as other shareholders.

2 The government can also act as a sponsor.

Government

Financiers

Customers/ Community

Escrow Agent

Revenue

Debt Service Payment

Project company

(SPV) Experts

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Figure 1 - 3

1.3 The Financiers The financing of a project will be made up of different amounts of debt and equity3, the source and structure of which will vary depending on the project. As previously mentioned, the equity financing will generally be provided by the private sponsors, in exchange for ownership in the SPV.

Figure 1 - 4

3 To be discussed in Chapter 2

Financiers

Private and/or Public Equity

Debt Financiers

Equity Financiers

Multilateral Institutions

Government

Customers/ Community

Escrow Agent

Revenue

Project company

(SPV) Experts

Debt Service Payments

Government

Financiers

Customers/ Community

Escrow Agent

Revenue

Debt Service Payment

Projectcompany

(SPV) Experts

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The balance of the financing is usually, though not always, provided using project financing. Project financing, unlike traditional lending, is based on the financial strength of a project with little or no recourse4 back to the sponsor(s), thus the specific risks of that project remain separate from the existing business of the sponsors. In the case where project financing is being used, the SPV borrows the funds and the debt is paid back using the cash flow generated from the project.

1.4 The Experts The PPP structure helps facilitate the cooperation and allocation of resources and risks among those who are best able to manage it. Thus, depending on the project, the private sector may choose, or be asked, to provide one or more services ranging from the design, building, and/or operating of a project.

Figure 1 - 5 There are many different PPP models of which some5 have been characterized below. The following should not be viewed as a definitive or complete list, but as a guideline to some of the more commonly used ones. Build-operate-and-transfer A contractual arrangement whereby the project

company undertakes the construction, including financing, of a given infrastructure facility, and

4 Recourse refers to the ability of creditors to seek financial compensation for funds lent to a project, such as interest and/or principal.

5 As defined in the Philippine BOT Law – www.botcenter.gov.ph

Experts

Engineers (Design)

Contractors (Build)

Operators (Operate)

Other - Insurers

Government

Customers/ Community

Escrow Agent

Revenue

Project company

(SPV) Financier

Debt Service Payments

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the operation maintenance thereof. The project company operates the facility over a fixed term during which it is allowed to charge facility users (customers) appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as negotiated and incorporated in the contract to enable the project company to recover its investment, and operating and maintenance expenses in the project. At the end of the fixed term, the project company transfers the facility to the government agency or local government unit concerned

Build-and-transfer A contractual arrangement whereby the project company undertakes the financing and construction of a given infrastructure or development facility and upon completion turns it over to the government agency or local government unit concerned, which shall pay the company on an agreed schedule its total investments expended on the project, plus a reasonable rate of return thereon.

Build-own-and-operate A contractual arrangement whereby a project company is authorized to finance, construct, own, operate and maintain an infrastructure or development facility from which it is allowed to recover its total investment, operating and maintenance costs plus a reasonable return thereon by collecting tolls, fees, rentals or other charges from facility users.

Build-lease-and-transfer A contractual arrangement whereby a project company is authorized to finance and construct an infrastructure or development facility and upon its completion turns it over to the government agency or local government unit concerned on a lease arrangement for a fixed period after which ownership of the facility is automatically transferred to the government agency or local government unit concerned.

Build-transfer-and-operate A contractual arrangement whereby the public sector contracts out the building of an infrastructure facility to a private entity such that the contractor builds the facility on a turn-key basis, assuming cost overrun, delay and specified performance risks. Once the facility is commissioned satisfactorily, title is transferred to the implementing agency/LGU. The private entity, however, operates the facility on behalf of the implementing agency/LGU under an agreement.

Rehabilitate-operate-and-transfer A contractual arrangement whereby an existing

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facility is turned over to the private sector to refurbish, operate and maintain for a franchise period, at the expiry of which the legal title to the facility is turned over to the government.

Finance Only6 A contractual agreement entitling a private entity to fund a project directly or using various mechanisms such as a long-term lease or bond issue.

1.5 The Customers There can be numerous benefactors to a project such as the motorists using a toll road, or a community benefiting from a new power plant. Regardless of who the benefactors are, it is important that they be well identified in order to accurately assess who will be paying for the services, how they are to benefit, and what their success criteria are.

Figure 1 - 6

6 Canadian Council for Public Private Partnerships

Government

Financier

Customers/ Community

Escrow Agent

Revenue

Debt Service Payment

Projectcompany

(SPV) Experts

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i. The Escrow Account An escrow account is an account that is set up, usually at the request of financiers, and managed by a third party in order to safeguard project revenues for the purpose of insuring that debt service obligations are met. An escrow account can also be used to hold a deposit in trust until certain specified conditions have been met.

Figure 1 - 7

1.6 Advantages of the PPP structure Though the working relationships between the public and private sectors are not new, the use of PPP structures is becoming increasingly popular. PPPs enable the participants to transfer the various risks inherent in a project to those who are best equipped to manage it. If a PPP is well structured it should enable all parties to better utilize resources by promoting efficiency and transparency, as well as provide a number of benefits including:

i. Risk Diversification - The creation of an SPV enables the coming together of many different parties and facilitates the allocation and diversification of risk and financing requirements to more than one party. This diversification enables the undertaking of projects where the financial requirements or risks might be too great for any one party by itself.

ii. Risk Mitigation - The SPV facilitates the use of project financing which is intended to keep the specific risks of that project separate from the existing business of the private sponsors. This is beneficial in that the financial integrity of the project sponsor’s business will not be jeopardized should the project fail.

iii. Project financing - unlike traditional lending, is based on the financial strength of a project with little or no recourse back to the sponsor. The SPV borrows the funds and the debt is paid back using the cash flow generated from the project. Since it is the SPV that is borrowing the funds, this will not affect the

Government

Financier

Customers/ Community

Escrow Agent

Revenue

Debt Service Payment

Project company

(SPV) Experts

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sponsor’s credit rating and therefore not affect future borrowing by the project sponsor.

iv. Leverage – Leverage is the amount of debt in relation to the amount of equity

used to finance a project. Projects financed using project-financing methods are usually highly leveraged in order to increase the equity return. The use of leverage can make projects more financially viable.

v. Credit Ratings - Traditional corporate lending is based on the sponsor’s credit rating. Project financing facilitates the borrowing for a profitable project and is not restrained by the project sponsor’s borrowing limitations.

vi. Tax Benefits - Depending on the country, tax benefits and holidays sometime exist for new enterprises. The establishment of an SPV to undertake a PPP can help sponsors take advantage of these tax saving mechanisms.

1.7 Small and Medium Projects: Applying the PPP structure Though PPPs can be quite complex, they can be useful in assisting governments to develop community projects which by themselves may not be financially viable. As detailed in Box 1 -1, a local government body, using a PPP structure, was able to rebuild a public market which they did not have the funds to finance.

Box 1 - 1 Mandaluyong City’s Marketplace

After a fire destroyed the public market in Mandaluyong, the Mandaluyong City Government (MCG) lacking the resources to build a new one, decided on a public private partnership to help finance and build a new market place. The private sponsor, under a Build-Transfer-Operate scheme and a 40-year concession contract, agreed to develop, finance and construct a new public market with a shopping mall above it. At a construction cost of Php 500 million the revenues from the shopping mall would service the debt that was borrowed to finance both projects. The financing structure was based on fifty percent debt and fifty percent equity. Short-term project financing was provided by local commercial banks while longer term financing was provided by the Asian Financing and Investment Corporation, a subsidiary of the Asian Development Bank. Twenty-Five percent of the equity was provided by the private sponsors, while the other twenty-five percent was made up of advances by shop keepers and stall holders. Upon completion the ownership of both the shopping mall and public market was transferred back to the MCG. Though management of the public market became the responsibility of the MCG, management of the shopping mall was left to the private sponsor, as per the concession agreement. The building of a new public market and shopping mall has benefited the community as a whole by providing long-term employment opportunities to locals, as well as improved living standards in this and neighbouring communities due to new sewage facilities.

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In the case of some countries, it is not the size of the project that is limiting, but the economical and political situation. The following project in Tajikistan (Box 1 -2) demonstrates how a PPP structure facilitated the involvement of a multilateral institution thus lowering the cost of capital and improving the risk profile of a project.

Box 1 -2 The Pamir Private Power project, Tajikistan 7

Tajikistan gained its independence from the Soviet Union in 1991. However, with a per capita income of $160, Tajikistan is the poorest country in the former Soviet Union. Due to its economic situation and a civil war, Tajikistan has been unable to meet the demand for power and has suffered from significant power shortages. Pamir Energy, a special purpose vehicle formed to undertake the project, has a 25-year concession agreement and is responsible for all existing electricity generation, transmission, and distribution facilities. As the physical assets are to remain with the government, Pamir Energy’s only asset is the concession agreement. The agreement set out the legal, regulatory, technical, operational, environmental and financial framework for the project. The total cost of the project was $26 million, with 45% equity financing provided by the International Finance Corporation ($3.5 million) and the Aga Khan Fund for Economic Development ($8.2 million), the private sector sponsor. The remaining 55% was financed using debt provided by the International Finance Corporation (IFC) and the International Development Association (IDA).

With the assistance, guarantees, and funding by the IDA and IFC, the project was able to secure the private sector sponsor and improve the risk profile which in turn helped lower the cost of capital.

7 See Appendix for a detailed profile of the project.

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2. Financing Public Private Partnerships As the demand for infrastructure grows, governments are increasingly looking to public private partnerships as an innovative way of financing infrastructure projects. However, regardless of who provides the financing, projects are financed using a mix of debt and equity instruments. The following chapter will review debt and equity as sources of financing, as well as the factors that contribute to their use. The capital structure, as it is called, is the mix of debt and equity instruments that are used to finance a project. The capital structure can be made up of three components - equity, debt, and quasi equity/debt; the optimum of each, in theory, existing “when the capital structure balances the risk of bankruptcy with the tax savings of debt”. 8 However, the ‘optimum’ level of debt and equity for a project, as well as the sources of funding, are dependent on a number of factors including the project, stage of development, access to financial markets, and the project sponsors’ own corporate finance strategy as demonstrated in Box 2-1.

Box 2-1

Capital Structure 9 Hopewell Holdings Ltd and New World Development, both development companies, who during the 1990’s generated approximately 80% of their revenues in Asia, each have a very different approach when putting together a financing structure for an infrastructure project. Hopewell, a pioneer in using project financing for infrastructure investments, believes in maximizing its use of external debt when funding projects and targets a capital structure that is approximately 75% debt and 25% equity. New World Development, unlike Hopewell, follows a completely different strategy. First, New World chooses a financing structure with a higher equity to debt ratio, with many of its project financed with 80% equity and only 20% debt. Second, its debt financing is full-recourse and on-balance sheet, rather than the more common non-recourse and off-balance sheet financing which is a key characteristic of project financing and a benefit of PPP structures.

2.1 Sources of Capital The capital structure of a project is not static and different sources can be used at different times during the project cycle. Furthermore, different sources of capital have different characteristics and a different risk/return profile based on their claim to assets. As seen in Figure 2 - 1, debt capital is ‘cheaper’ than equity as it is less risky than equity due to the fact that debt holders have a prior claim to revenue and assets and debt financing has covenants governing some of management’s actions.

8 Simerly R. and Li M. Environmental dynamism, capital structure and performance: A theoretical integration and empirical test,

Strategic Management Journal, Vol. 21, 31-49, 2000

9 All information pertaining to the capital structures of Hopewell and New World Development have been derived from research found

in “Project Finance in Asia” by L.H.P. Lang.

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Figure 2 - 1 Claim to Assets

i.

ii.

i. Debt Debt financing is money borrowed to finance a project10 and the investment return for debt holders is limited to the interest earned on the principal. Debt capital can come from many sources and be structured in many ways. However, regardless of its source or structure, debt has a number of distinguishing features that differentiate it from equity: Maturity – All debt has a maturity date at which time the outstanding amount is paid in full. Long-term debt refers to any debt obligation with a due date of longer than 1 year and short-term debt is defined as any outstanding debt obligations whose due date is less than, or equal to, 1 year. Repayment Provision – Every debt instrument has a repayment provision which specifies how and when the interest and principal are to be repaid. Depending on the project’s cash flow, some lenders may provide a grace period where payments can be delayed until positive cash flow has been achieved. Seniority – Though the returns for debt holders are limited to the interest, they have a senior claim to income and assets of the company or project. Different rights or claims to cash flow may also exist among different debt holders. Subordinated debt holders are junior to general or senior creditors and will only be paid once they have been satisfied. Security – When establishing the terms of a debt agreement, the parties must decide if it will be issued on a secured or unsecured basis. A key aspect of project financing is that there is no, or limited, recourse back to the project sponsors and that project loans are secured only by the cash flows and assets of that specific project. Floating versus Fixed rates – Interest rates on debt instruments will either be stated as a fixed rate or as a floating rate. For example, floating rates may be stated as being 100 basis points, or 1%, above an indicator rate such as a banks prime rate or LIBOR11. The interest rate on a floating rate loan will fluctuate as the indicator rate changes. Fixed rates are set for the term of the loan and are based on prevailing rates for similar term loans.

10 See Appendix 2 - Debt Issues for a breakdown of issues that have to be considered when looking to finance with debt.

11 LIBOR - London Interbank Offered Rate

Expected rate of return

Risk to investor

■ Senior Debt

■ Risk-free Government Debt

■ Subordinated Debt

■ Common Equity

■ Preferred Equity

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Voting Rights – Unlike equity holders, lenders are not regarded as owners and therefore do not have any voting powers. As previously mentioned, debt financing can come from a number of different sources with commercial loans usually ranked as senior debt and all other debt being subordinated debt. However, the priority to assets will depend on a number of factors and will be dealt with in the loan agreement between the parties involved.

a) Commercial Loans Commercial loans are funds lent by commercial banks and other financial institutions. Funds are usually securitized by the project’s underlying assets and dependent on the financial strength of the borrower, though many commercial banks are now giving greater consideration to a project's expected cash flow. Commercial loans are usually considered “senior debt” and thus have, in the event of default, first rights to project assets and cash over equity and subordinated debt holders.

b) Bridge Financing Bridge financing is short-term financing which is generally used until longer term financing can be implemented. Bridge financing can come from a variety of institutions including commercial banks and thus may be considered “senior debt” depending on the loan agreement.

c) Bonds Bonds are long-term interest bearing debt instruments generally purchased by institutional investors through the public capital markets, though they can also be purchased through private placements12. There are many different institutional investors including pension funds, insurance companies, and fund managers. Due to restrictions on investment mandates, many institutional investors may require a credit rating for the project from an independent credit rating agency.

d) Subordinated Loans Subordinated loans take priority over equity in repayment priority, but are secondary (subordinated) to commercial loans or other senior debt holders in their claim on assets. As such, the rate of return on subordinated loans is higher than commercial or senior debt as the perceived risk is greater.

ii. Quasi-debt/equity Some financial instruments are often referred to as “quasi” or “hybrid” debt or equity instruments as they have traits that are both debt and equity. Quasi instruments can include subordinated convertible debt, mezzanine, and yield-based preferred shares. They are often structured with warrants or options and have a claim to assets that is between traditional debt and equity instruments. Quasi instruments are an attractive alternative to traditional equity or debt financing for a number of reasons. First, from the sponsor’s perspective, it does not require them to relinquish any control or voting rights as it would if they were to issue common shares. Second, in exchange for a claim to assets superior to equity, the cost of quasi debt/equity capital is less. Third, this type of financing provides greater

12 See Glossary

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flexibility as it does not have the same restrictive covenants as traditional debt financing.

a) Preferred Shares Preferred shares are technically an equity security, however, they do possess some characteristics similar to debt and can therefore be labeled quasi debt. Preferred shares have a fixed rate dividend similar to a debt instrument however, unlike debt, payment ultimately rests at the discretion of management and failure to pay dividends will not force a company into default. However, dividends to preferred shareholders must be paid out prior to any distributions to holders of common shares and in most, if not all, preferred share issues there is a stipulation that any missed dividend payments to preferred shareholders be cumulative and must be paid out in full before other payments to shareholders. In case of default, holders of preferred shares are junior to debt holders, but senior to ordinary equity shareholders.

b) Mezzanine Financing13

Mezzanine financing, another quasi source of capital, is placed between equity and debt in the capital structure of a project. Mezzanine financing can range in value from $5 million to $100 million and a maturity of two to five years. Mezzanine debt is subordinated to senior debt and is considered a quasi debt/equity instrument as it may have features that enable it to be converted to equity.

iii. Common Equity Common equity financing is long-term capital provided by an investor in exchange for shares, representing ownership in the company or project. A key characteristic that distinguishes equity from debt is the holder’s claim to assets. Equity holders receive dividends and capital gains, which are based on net earnings and distributed only after all debt holders have been paid. In the event of default, equity holders have a claim on the income and assets which is secondary to debt holders. In exchange equity holders have unlimited potential returns compared to debt holders whose investment returns are limited to the interest earned on the debt. Equity capital can come from project sponsors, government, third party private investors or internally generated cash14.

iv. Other Sources of Capital

a) Grants Grants are non-returnable sources of funding usually provided by organizations with an interest to seeing a project developed. Grants can be used to reduce risk exposure and therefore can encourage developers to consider projects, which have high risks and uncertain returns. 15 Grant providers do not have any claims to assets should the project default.

13 Houston Business Journal – www.houston.bizjournals.com

14 Internally generated cash, also referred to as retained earnings, are a source of funds that are generated from operations and that

are retained and available for reinvestment into the project rather than being distributed to equity holders as a dividend.

15 www.greentie.org/index.php

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b) Short- term financing Funds available for a period of less than one year are called short-term funds. Short-term financing is usually not included in the capital structure of a project as it is usually considered working capital and used for the day to day operations and not as a source of capital financing. However, it has been included in this report as it may be an acceptable source of financing for smaller short term projects.

• Supplier Credit Supplier credit, or trade credit as it is sometimes referred to, is a source of financing provided by suppliers for short-term periods usually 10, 30 or 90 days.

• Line of Credit A line of credit is a loan arrangement between a financial institution, usually a bank, and the borrower. It can either be secured or unsecured and allows the borrower to borrow up to a pre-specified amount. The borrower can also borrow and payback the funds as needed, and interest will only be charged on the funds borrowed. A line of credit is only used for day-to-day operational financial needs rather than capital requirements.

2.2 Factors contributing to the capital structure Historically, the responsibility of financing infrastructure projects lay with the government sector. However, with the use of PPPs the responsibility has often been transferred to the private sponsor. Regardless of the government or private sponsor’s role in the financing of a project, who will finance and how much debt relative to the amount of equity used will depend on a number of factors.

i. Project Cycle and Cash Flow The capital structure for PPP projects is not static as capital requirements and cash flow vary depending on the stage of the project development. Some sponsors may be required to provide a significant amount of equity capital at the beginning of a project during the construction phase when the risk is high.16 Once the construction is complete, the construction risks associated with it have been overcome, and the cash flow begins to materialize, the expensive equity or debt capital can be refinanced using cheaper debt capital thus lowering the total cost of capital. Figure 2 – 2 highlights the relationship between risk and return during the project phase. The highest level of risk exists during the construction phase of a project when construction delays and cost overruns can have serious consequences to a projects success. It is during this phase that investors require the highest return on their capital to compensate for the risk, thus the higher cost of capital. Once construction is over and the cash flow from operations has begun, project risks drop off substantially and it is possible for sponsors to refinance at a much lower cost.

16 Risk will be defined and explained in Chapter 4.

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Figure 2 - 2

The Project Development Cycle Risk versus Reward 17

ii. Taxes

Project sponsors need to consider tax implications when assessing the debt and equity mix as it can impact the cost of capital, earnings, and the source of capital. Interest on debt, if tax deductible, can substantially reduce the overall cost of capital, and combined with the fact that the cost of debt is less than the cost of equity there is an incentive for sponsors to use debt instead of equity to finance projects. The example in Box 2 – 2 shows how substituting equity capital for debt capital can reduce the total cost of capital from 15% to 10.2%. It also shows how that cost is further reduced to 8.9% once the tax benefit of debt is considered.

Box 2 - 2 Cost of Capital

The following example compares the weighted cost of capital18 when only equity financing is used compared to when both equity and debt capital are used but the tax benefits are not factored in, and when both equity and debt capital are used but the tax benefits are factored in. Cost of Debt 7% Cost of Equity 15%19 60% of project costs are financed with debt and 40% with equity Corporate Income Tax Rate = 30%

17 Risk/Return profile, derived from “Overview of Transportation Public-Private Partnership Project Financing”, courtesy of Lehman

Brothers December 16, 2003 - http://ncppp.org/councilinstitutes/texas_presentations/howard.pdf

18 See Appendix 3 - Financial Calculations for a description and methodology of WACC

19 Though 15% is used in this example, the cost of equity capital will vary depending on the source and can be as high as 25% or

more.

Construction

Development

Proposal

Level of Risk

Years

Operation Residual

Risk Reward

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WACC equity only = (15% x 100%) = 15% WACC without tax benefit = (7% x 60%) + (15% x 40%) = 10.2% WACC with tax benefit = (7% x 60% x (1-30%)) + (15% x 40%) = 8.9% However, should a government be willing to provide tax holidays on earnings, there might be an opposite incentive to reduce debt financing in favour of equity in the short term. Box 2 - 3 helps demonstrate the impact of taxes and the use of debt versus equity to the income statement of a project. Project A, with its use of leverage, has lower net income, but offers its shareholders a return on equity (ROE) of 28% whereas Project B shareholders have a higher net income, but a larger tax expenditure and a more modest 15% ROE. However, Project B’s ROE increases to 21% with the benefit of a tax-free holiday.

Box 2 - 3

Debt versus Equity – Impact to the Income Statement 20

Consider two projects worth $100 million. One is financed using 60% debt financing the other only 10% debt. Assuming a cost of debt capital of 7% and a 30% tax rate, the income statement may look something like this: In many countries, the interest income earned on bonds is taxable. In turn, some countries, such as the United States and India (see Box 2 – 4), have implemented legislation which enables the issuance of tax-free infrastructure bonds. This legislation helps separate the financing from the ownership structure of the PPP and provides different levels of government easier access to the capital markets. 20 EBIT = Earnings Before Interest and Tax

EBT = Earnings Before Tax

EAT = Earnings After Tax

ROE = Return on Equity

Project A Project B Project BTax-free holiday

60% debt / 40% equity 10% debt / 90% equity 10% debt / 90% equity

Revenue 100 100 100Expenses 80 80 80EBIT 20 20 20- Interest 4.2 0.7 0.7

EBT 15.8 19.3 19.3- Tax 4.74 5.79 0

Net Income (EAT) 11.06 13.51 19.3

ROE = (EAT/Equity) 28% 15% 21%

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Box 2 - 4 India21

In 2001, the Government of India permitted the floatation of a tax-free bond to finance the development of urban infrastructure. The bonds carried an interest rate of 10.5% and a minimum maturity of five years. Bond issuance guidelines stipulated that the maximum amount of tax-free bonds, as a percentage of the total project cost, would be 33% or Rs. 50 crore, whichever was lower. The issuer would also contribute at least 20% of the project cost either from internal sources or from grants, or a mix of the two. The funds raised from the bonds were to be used only for capital investment in the setting up of new projects and expansion or augmentation of existing systems relating to urban infrastructure services including water supply, sewerage, drainage, solid waste management, roads, bridges, and urban transport. Also stipulated, was the issuer’s responsibility of setting up an escrow account where revenue proceeds earmarked for debt servicing were to be deposited.

United States 22 The United States has legislation allowing the issuance of Municipal Revenue Bonds in order to pay for infrastructure projects. The bonds are interest-bearing obligations issued by state or local governments and secured by the revenue of the projects they fund. Unlike other bonds, Municipal Revenue Bonds are free of federal income taxes on interest distributions and free of state and local taxes in the state in which they are issued. Governments and communities have also benefited from innovative tax structures such as Tax Increment Financing Districts (see Box 2 – 5) that have provided a mechanism with which to secure cash flow in order to raise debt financing.

Box 2 - 5 Tax Increment Financing 23 & 24

The creation of tax increment financing funds (TIF) and TIF districts is an innovative way of securing the necessary cash flow in order to raise debt financing for infrastructure projects. Under tax increment financing, project sponsors pay property taxes based on the value of the property prior to any improvements. However, due to the improvements or new infrastructure there is an increase in property values and thus an increase in property taxes within the designated TIF. The difference between the pre-improvement taxes and the new tax amount is directed into a fund, which in turn will go to finance the improvements or service the debt. The TIF system relies on the appreciation in value of the land and buildings in the TIF district. If a development is profitable, then the debt and other costs will be paid for by the growth of property tax revenues. If the property fails to increase in value, the improvement costs fall back on the general taxpayer. Though there is an obvious risk to the taxpayer if the project is not successful, the risk must be weighed against the alternative, which for some communities means no improvements. 21 http://www.hindu.com/thehindu/2001/02/25/stories/0225000k.htm

22 http://www.bondsonline.com/

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iii. Financial Risk and Flexibility

As previously mentioned, it is argued that the optimum level of debt and equity will exist when the capital structure “balances the risk of bankruptcy with the tax savings of debt”. The risk with having too much debt is that a project with fluctuating cash flow may be forced into default if the debt covenants25 are not met, even though the project may still be financial profitable and cash flow positive. Furthermore, project sponsors should maintain some flexibility in case unforeseen situations, such as construction delays and labour unrest, require additional financing.

iv. Cost of Capital The actual cost of capital also factors into the decision making process, as the cost of equity is greater than the cost of debt and therefore there is an incentive by sponsors to maximize the use of debt capital. However, those costs can fluctuate and are dependent on a number of factors. Risk and recourse – For a financier, risk is the chance of an event occurring which would cause actual project circumstances to differ from those assumed and which would in turn effect a project’s ability to generate cash flow. Furthermore, different issuers have different priority and recourse to assets and cash flow. Therefore, the required return on investment or the cost of capital will be dependent on how the investor perceives the risk of a project and their order of priority to any assets or cash flow in the event of default, as illustrated in Figure 2 -1. Timing – Timing is an important factor as it can affect the cost of capital as well as the availability of funds. Figure 2 - 3 highlights the reduction in corporate bond yields over a period of five-years. Though a detailed analysis is beyond the scope of this paper, factors contributing to this reduction can include a reduced perception of risk within the region, an increase in available funds, and/or an increase in the credit quality of the bonds issued. Regardless, the fact remains that the yield (or cost of capital) on debt issued in 1999 was 12% whereas in 2004 corporate debt financing was substantially lower at approximately 6%.

23 Melby J. and Hall J. “Tax Increment Financing: An Infrastructure Financing Solution”

24 TIF has been used throughout the state of Ohio in the US, including Columbus, Easton Town Center and Polaris Fashion Place

25 See Glossary

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Figure 2 - 3 Corporate Bond Yields Jan. 1999 – May 2004

JP Morgan Asia Bond Corporates Weighted Yield

02468

101214

1-Jan

-99

1-May

-99

1-Sep

-99

1-Jan

-00

1-May

-00

1-Sep

-00

1-Jan

-01

1-May

-01

1-Sep

-01

1-Jan

-02

1-May

-02

1-Sep

-02

1-Jan

-03

1-May

-03

1-Sep

-03

1-Jan

-04

1-May

-04

Term of the Loan – In theory, the longer the term of a loan the greater the cost as the longer-term loans are seen to be riskier due to the increased possibility of unforeseeable events. The Normal Yield Curve as shown in Figure 2 - 4 illustrates the relationship between the yield on bonds and time. The curve illustrates that the yield on a bond increases over time to account for the increased risk that comes with the unpredictability of the future.

Figure 2 - 4 Normal Yield Curve

Credit quality of the project26 – The credit quality refers to a project’s ability to generate enough revenue to meet its debt obligation. The riskier the project appears to be the lower the credit quality and thus the higher the cost of capital. Depending on the source of capital, some lenders such as insurance companies or pension funds may require an independent credit rating.

2.3 Financing Small and Medium Projects It can be difficult to finance smaller projects as the costs associated with setting up partnerships and accessing the capital markets can be excessive and problematic for 26 See Appendix 5 - Moody’s Rating Methodology for a review of the criteria used by Moody’s rating service

Yield

Time

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projects of less than $20 million. However, as outlined below, some countries and municipalities have developed innovative ways to encourage private sector financing of these projects.

i. Pooling Using a State Bank model27 derived from the United States, some Indian states developed a pooled financing mechanism to structure a bond issue that could then be used to finance smaller infrastructure projects (see Box 2 - 6 & Box 2 – 7). The pooling together of projects can create a portfolio like structure, where the default risk is reduced as debt payments are secured by a number of different cash flows, not just one.

Box 2 - 6

Water & Sanitation Pooled Fund (WSPF)

The Water and Sanitation Pooled Fund (WSPF), the first pooled financing in India, was registered under the Indian Trust Act. Subsequently, 14 ULB water and sanitation projects were pooled and Rs 304.1 million was raised via a private placement. Investors included various banks and the Provident Fund Trust. The bonds paid a 9.2% interest rate and had a 15-year maturity.

27 State Banks are state sponsored intermediaries that borrow from the capital markets and are designed to support borrowing by

smaller municipalities. State Bank issued bonds are secured by loan repayments from a pool of local borrowers, as opposed to

one locality, which helps to further reduce risk for investors and therefore interest rate for borrowers.

Private Placement Bondholders

Water & Sanitation Pooled Fund (WSPF)

Municipalities

Projects

Loan/Bond Disbursements

1 Escrow

2 DSF

3 Third Party Guarantee

Debt Service Payment

1. An escrow account managed by the Tamil Nadu Urban Infrastructure Financial Services Ltd. All revenues are directly deposited into the Escrow Account.

2. The Debt Service Fund (DSF), also called the Bond Service Fund, backed by an initial reserve contribution by the state government to cover any bond payment shortfalls.

3. USAID has guaranteed up to 50% of the principal.

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Box 2 – 7

Tamil Nadu Urban Development Fund (TNUDF)

The TNUDF was created in 1996 as a PPP between the Government of Tamil Nadu and three Indian financial institutions (ICICI, HDFC and IL&FS) and backed with a line of credit from the World Bank. The fund lends to Urban Local Bodies (ULBs), statutory boards, and private corporations involved with the development of local infrastructure projects. In order to finance projects, the TNUDF issued a bond in 2000, the first with no state guarantee and based only on municipal cash flows. The structure of the TNUDF is similar to that of the WSBF described above, in that its fund management is set up with an Escrow Account, DSF, and a third party Guarantee. However, unlike the WSBF which had identified 14 projects prior to the bond issue, the TNUDF is unsecured and is raising funds prior to identify projects.

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3. Financial Appraisal 28 At an APEC conference29 in 1996 it was discovered that a major financing issue for the power sector was not a lack of funds, but in fact a lack of bankable30 projects. Eight years later anecdotal research shows that the challenge of developing bankable projects still exists. This section will address that challenge and provide a review of the basic steps necessary to develop and assess the financial viability of a project31 including the development of a cash flow model, financial analysis, and a sensitivity analysis. Before developing a financial appraisal it is important to understand what is meant by a financial appraisal and how it differs from an economic appraisal. A financial appraisal measures only cash flow and any items that can have a financial impact on those cash flows. In contrast, an economic appraisal considers not only the financial impact, but also any external benefits and costs to stakeholders – regardless of whether or not impacts have a monetary value. For example, a financier will not look at the time saving or economic benefits that a new bridge or road will provide to a local economy, but instead focus on traffic projections and revenue and what expenses will the project have and what factors can impact either those revenues or expenses.

3.1 Developing a Cash Flow Model Significant importance is placed on the analysis of a project’s cash flow, as it is this cash flow that is used to service any debt obligations. Thus that is why the first step in completing a financial appraisal is the development of a cash flow model. Cash flow models are set up on a case-by-case basis and can either be very simply or incredibly complex depending on the type and size of the project. The following components (see Figure 3 -1) are critical to the development and analyses of any model - Capital Investment, Net Cash Flows, Terminal Cash Flow, Discount Rate, and Assumptions.

Figure 3 -1 Cash Flow

28 See Appendix 1 - Financial Models for a financial analysis and model based on a fictitious toll-road project.

29 Malhotra A., “Private Participation in Infrastructure: Lessons from Asia’s Power Sector”

Finance & Development December 1997

30 Bankability refers to a projects ability to raise financing

31 See Appendix 6 - Sample Financial Information requirements for a detailed list of information that financiers may request in order

to assess a project.

Capital Investment

Operating Cash flowCash flow

Time

Terminal Cash flow

100

50 0

-50

-100

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i. Capital Investment The capital investment is the cost, regardless of funding sources, of developing the project. It can also be the one-time cost of acquiring an asset. Assuming a greenfield project, the investment costs for an infrastructure project usually include:

Buildings and civil works Land and site development costs Plant and machinery Technical and engineering fees

ii. Operating Cash Flow For an operator, operating cash flow can simply mean revenues minus expenses. However, many debt financiers, for the purpose of assessing a project’s ability to service debt, assess a project’s cash flow based on earnings before interest, tax, depreciation and amortization (EBITDA). This is in contrast to a project sponsor who will define net cash flow as earnings after tax (EAT) plus depreciation added back (see Box 3 -1 for a comparison of each). This variation exists because debt financiers are interested in assessing the cash flow that goes directly to servicing debt, whereas equity financiers, like project sponsors, look at cash flow after tax in order to assess a project’s return on equity (ROE).

iii. Terminal Cash flow

The terminal cash flow is the cash that is generated from the sale or transfer of the project’s assets upon termination or liquidation. It can generally be quite difficult to estimate the value of capital assets due to wear and tear, changes in technology, inflation, and demand. However, in the case of a PPP the residual or transfer price will be negotiated ahead of time, if it is applicable.

Box 3 – 1

Cash Flow

Debt Financier

Project Sponsor / Equity Financier

Revenues 100,000 100,000 - Expenses 75,000 75,000 EBITDA 25,000 25,000 - Interest 1,500 - Depreciation 10,000 EBT 13,500 - Tax (30%) 4,050 EAT 9,450 + Depreciation 10,000 Net Cash flow 19,450

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iv. Discount Rate

The discount rate is the rate that is used to calculate the present value of future cash flows. In assessing new projects it is often the cost of capital that is used as the discount rate32. Given that a project can have numerous sources of capital, the discount rate is calculated using a weighted average of the cost of capital (WACC) for the various debt and equity instruments used to finance the project. The simplified calculation for WACC is: WACC = [cost of debt x (Debt/Total Financing)] + [cost of equity x (Equity /Total Financing)] Example 1 in Box 3 -2 illustrates the calculation of the discount rate for a project when only equity financing is used. Example 2 calculates the WACC assuming the same cost of capital as in Example 1, but this time the project is financed using 60% debt and 40% equity. As many countries offer tax benefits when using debt financing Example 3, using the assumptions from Example 2, shows what happens to WACC when the tax benefits are factored into the calculation.

Box 3 - 2 Weighted Average Cost of Capital

Cost of Debt 7% Cost of Equity 15%33 Example 1 WACC equity only = (15% x 100%) = 15% Example 2 60% of project costs are financed with debt and 40% with equity WACC without tax benefit = (7% x 60%) + (15% x 40%) = 10.2% Example 3 Corporate Income Tax Rate = 30% WACC with tax benefit = (7% x 60% x (1-30%)) + (15% x 40%) = 8.9%

32 Different financiers may have different discount rates based on another set of criteria.

33 Though 15% is used in this example, the cost of equity capital will vary depending on the source and can be as high as 25% or

more.

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v. Assumptions

As many infrastructure projects have contractual agreements that go out fifteen or more years, assumptions must be made in order to estimate future cash flow. It is thus inevitable then that errors in forecasting will occur. It is also for that reason that all assumptions need to be identified and clearly stated. Depending on the project, assumptions can include:

Interest rates Inflation rates Rate of tariff increase (if applicable) Traffic projections (if applicable) Construction time Depreciation schedule Tax structure Physical life of the assets Technological life of assets

Box 3 – 3 on the following page is an extract from the assumption spreadsheet constructed for the sample toll-way project in Appendix 1 - Financial Models. Though simplistic, it highlights assumptions made in regards to operating revenues and expenses, taxes, construction costs and capital structure. The project assumes daily vehicle traffic flow at 14,330 for years one and two and annual cash flow based on varying toll rates for each type of vehicle. Also assumed is a 70 percent debt to 30 percent equity capital structure with a tax holiday until year six.

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Box 3 - 3 Assumption Worksheet

Operating Cash flow Year 1 - 2 Revenues

Type of Vehicle Daily Traffic Projection Toll per Vehicle

Annual cash flow

Traffic Increase Motorcycle 1,500 2.00 1,095,000 Passenger 8,500 3.00 9,307,500 Commercial 1 1,680 4.00 2,452,800 Commercial 2 850 4.00 1,241,000 Commercial 3 1,800 5.00 3,285,000 Total 14,330 17,381,300 Operating Expenditures Fixed Operating Costs 3,300,000 Variable - per vehicle/day 0.75 3,922,838 Total Expenditures 7,222,838

Taxes Year 1 - 5 Year 6 - 10 Rate 0% 25% Financing % Amount Cost of Capital Debt 70% £49,350,000 8.5% Equity 30% £21,150,000 15.0% Total 100% 70,500,000

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3.2 Analytical Methodology Once the cash flow model has been developed, an analysis is done using various criteria including:

Debt service coverage; Net Present Value; Project Internal Rate of Return; Payback Period; Return on Equity; Ratio analysis

i. Debt Service Coverage As illustrated in Figure 3 -2 below, cash flow in relation to debt coverage can be calculated over three time periods. (i) historical (DSCR), (ii) remaining life of the loan (LSCR), and (iii) life of the whole project (PLCR)

Figure 3 - 2

Project Cash Flow

The Debt Service Coverage Ratio (DSCR) is an historical measure that calculates the cash flow for the previous period in relation to the amount of loan interest and principal payable for that same period. As it is an historic measure, it will only indicate financial difficulties after the event, but by tracking it, lenders will be able to identify trends. Box 3 – 4 below, an extract from the cash flow analysis included in Appendix 1 - Financial Models, shows DSCR over three periods. DSCR is equal to the cash flow available for debt servicing divided by the amount of the debt service. At a minimum, the ratio should be equal to 1 as that demonstrates that the project is earning enough income to pay its debt obligations.

Loan Life Debt servicing requirements

Cash flow

Period

DSCR

LLCR

PLCR

Net cash flow

1 2 3 4 5 6 7 8

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Box 3 - 4 Debt Service Coverage Ratios

Period DSCR 0 1 2 3

Cash flow available for debt servicing (CF) £0 £10,158,463 £10,158,463 £12,565,658

Debt Service (DS) £0 £8,194,750 £8,551,304 £9,241,611 DSCR = (CF/DS) 0.00 1.24 1.19 1.36

The Loan Life Coverage Ratio (LLCR), unlike DSCR, is not historical but rather forward looking as it provides a snapshot of interest coverage on a given date based on the Net Present Value (NPV)34 of the projected cash flows from that date until retirement of the loan relative to the loan outstanding on that particular date. The Project Life Coverage Ratio (PLCR), like LLCR is also a forward-looking ratio. However, it provides a snapshot of interest coverage on a given date based on the NPV of the projected cash flows from that date until the end of the project (rather than the end of the loan), relative to the loan outstanding on that particular date. This ratio enables lenders to assess whether or not there is sufficient cash flow, after the loan is scheduled for retirement, to be able to service the debt in the event that the debt needs to be restructured. Though three coverage ratios have been discussed, many financiers will usually only focus on the DSCR and set three levels – base case, dividend lock-up, and default (see Figure 3 - 3) – to monitor a project. Coverage ratios above the base case and between the base case and dividend lock-up level are usually not a concern for lenders, though they will generally watch for trends. Once a coverage ratio falls below the dividend lock-up level, equity holders will be restricted from withdrawing funds to pay dividends until the ratios are at or above the base case level. If the ratios continue to fall towards the default level, lenders may take a more active approach in their dealing with management as they seek to better understand and rectify the downward trend in order to prevent a default35.

Figure 3 - 3 Cash flow and coverage ratios

34 See Glossary

35 See Glossary

Base Case Dividend Lock-Up Default

Ratio levels

Time

x x

xx x

x

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Coverage ratio requirements are dependent on a number of factors and are generally a reflection of actual or perceived risk. Ratio requirements will differ between different sectors due to the varying degrees of cash flow predictability and decreased market risk36. They can also vary depending on the level of competition between lenders wishing to be involved in a project. That is, the more competition to finance a deal, the more financiers may be willing to lower coverage limits. According to Pollio37 (p.114), the “conventional rule of thumb is that coverage ratios should be at least twice the contractual debt service payments”. However, that is in fact only a guideline, and as highlighted in Box 3 - 5, different organizations will set their own requirements.

ii. Net Present Value38

The Net Present Value (NPV) of a project is the sum of the all future cash flows discounted to present value. As previously mentioned, the discount rate used is usually, though not always, equal to the WACC. An NPV equal to 0 signifies that the financial benefits of a project are enough to recoup the capital investment. An NPV greater than 0 implies that the project will earn excess returns, which will be distributed to the equity holders. Should the NPV be less than 0, this implies that the financial benefits are not enough to recoup the costs of the project. Box 3 – 6 below is an excerpt from the cash flow model included in Appendix 1 - Financial Models. The NPV of this 10-year project, assuming a discount rate of 9.56%, is equal to £11,118,969, which means that the project’s cash flow will be sufficient to recoup any capital investments. In calculating NPV, this example looks at net cash flow before financing and therefore looks only at the risk of the project and does not consider the impact and cost of debt.

36 Partnerships Victoria Guidance Material Contract Management Guide June 2003

www.partnerships.vic.gov.au/domino/web_notes/PartVic/PVSite.nsf/Frameset/PV?OpenDocument

37 Pollio, G., “International Project Analysis and Financing” 2002 University of Michigan Press

38 See Appendix 3 - Financial Calculations

Natural Resources

Roads User-pays

Power Water

DSCR min 1.25 1.25 1.25 1.20 LLCR min 1.75 1.50 1.35 1.30 PLCR min 2.00 1.80 1.50 1.40

The above represents minimum coverage ratio requirements set out by Partnerships Victoria. This is only an example of limit requirements and different financiers will set their own limits based on their own criteria and analysis. As illustrated, cash flow revenues from water projects are seen as less risky than Toll-roads and therefore, coverage ratio requirements are less.

Box 3 - 5 Sample Coverage Ratios

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10, 158, 463 10, 158, 463 10, 158, 463 70,500,000 NPV39 = (1+ .0956)^1 +

(1+ .0956)^2 +

(1+ .0956)^10 -

= 11,118,969

iii. Project Internal Rate of Return40 The Project Internal Rate of Return (PIRR) represents the yield of a project, regardless of the financing structure. Unlike the NPV where the discount rate is stated and the NPV is calculated, the PIRR is calculated by setting NPV = 0. The higher the PIRR for a project the better, though the expected PIRR value will vary depending on the project sector as well as the financier’s investment mandate. Using the same project data from Box 3 – 6 above, the PIRR (see Box 3 – 7) for this project is 12.26%.

Box 3 – 7

Project IRR Period 0 1 2 … 10 Net Cash flow before financing -£70,500,000 £10,158,463 £10,158,463 £16,413,357Discount Value -£70,500,000 £9,049,206 £8,061,075 £5,164,430NPV = 0 £0 Project IRR 12.26%

iv. Payback Method The simple payback method measures the number of years it takes before cumulative forecasted cash flow equals the initial investment. The simple payback method does not discount cash flow to a present value.

v. Return on Equity41 Return on Equity (ROE) calculates the yield of a project based on dividends paid out to the shareholders. The higher the ROE the better, but as previously mentioned, the expected ROE will vary depending on the sector and financier (see Box 3 – 8).

39 This calculation assumes that NPV is calculated using periods 1 through 10, though only 1, 2, and 10 are shown. 40 See Appendix 3 - Financial Calculations

41 See Appendix 3 - Financial Calculations

Box 3 – 6 Net Present Value

Period 0 1 2 … 10 Net Cash flow before financing -£70,500,000 £10,158,463 £10,158,463 £16,413,357Discount Rate (WACC) 0% 9.56% 9.56% 9.56%Discounted Value -£70,500,000 £9,272,266 £8,463,378 £6,588,344NPV £11,118,969

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Box 3 – 8

Return on Equity Period 0 1 2 … 10 Equity contribution -£21,150,000 £0 £0 £0Dividend distributions £0 £1,669,156 £1,366,085 £9,051,911Cash Available for distribution -£21,150,000 £1,669,156 £1,366,085 £9,051,911 Discount Rate 9.56% 9.56% 9.56% 9.56%Present Value of Cash Distributions -£21,150,000 £1,517,414 £1,128,996 £3,489,904Net Present Value of Cash Distributions £25,179,619 ROE 19.05%

vi. Accounting Ratios Besides the coverage ratios previously discussed, there are a number of other ratios42 that financiers use to analyze cash flow and other financial statements. However, ratios by themselves mean almost nothing and need to be compared or benchmarked against other ratios in order to provide the greatest use. Ratio analysis can help to indicate whether a project’s situation is getting better, worse, or staying the same. Ratios can also be used to indicate areas of strength and weakness within a project. Ratios can be analyzed in a number of different ways and for different purposes:

Actual ratios achieved can be compared with an acceptable or safe norm, as per the sample coverage ratios in Box 3 - 5;

Ratios in the current and most recent years can be compared with the same ratios achieved in earlier years to detect an improving or declining trend;

Company or project ratios can be compared with similar ratios of other companies or projects;

Ratios can be used to analyze trends in a number of different areas including revenues and expenses. For example, an upward trend in revenues could indicate expansion or may be a result of inflation, whereas a downward trend could be the result of deflation, a lack of competitiveness, technical obsolescence or marketing problems;

Liquidity ratios can measure short-term cash flow relative to short-term commitments.

Long-term debt and solvency ratios can be used to assess the projects capital structure.

3.3 Sensitivity Analysis A sensitivity analysis, also referred to as a ‘what-if’ statement, will show the potential impact to a project’s cash flow and financial statements, based on changes to various inputs. Given that a number of assumptions must be made in order to construct the necessary financial statements and evaluate a project, a sensitivity analysis helps to test those assumptions and develop ‘worst case’ scenarios. These scenarios can then be used to set risk parameters and establish tolerances and limits. 42 See Appendix 3 - Financial Calculations for a detailed list

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A sensitivity analysis will consider how changes in:

Concession Life Length of construction period Amount of capital subsidies, if any Amount of fixed annual operational subsidies, if any Structure and cost of capital Traffic projections or annual growth rates Inflation Rates Interest rates

Will impact:

Construction costs Operating costs Revenues NPV ROE

3.4 Conclusion Regardless of the methods used, a financial analysis is as much an art as it is a science and that there are a number of methods that can be used to evaluate a project’s viability. Each method has its benefits and which one is used varies on the user. as seen in Box 3 – 9.

Box 3 - 9 Preferred Quantitative Methodology

In a CBI survey done in 1994 that assessed the financial analytical tools used by British manufacturing companies when evaluating a project, 90% of respondents acknowledged using some sort of quantitative method. However, only 53% preferred a discounted cash flow rate method such as PIRR or NPV, compared to the simple payback method.

Of those who used quantitative assessments, methodology used: An accounting rate 13% A discounted cash flow rate 53% Simple payback 75% Return on Capital 49% Return on Equity 12% Other 3% Required return is based on: Real figures 35% Nominal figures 63% Sensitivity analysis is employed 48%

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4. Risk

4.1 What is Risk? In an ideal world, a project would be constructed on time and on budget, operating revenues and expenses would meet forecasted targets, and the quality of delivered services would meet everyone’s expectations. Unfortunately, this is not always the case. Furthermore, other unexpected events – insolvency, failure by parties to perform as expected or as contractually required, site conditions or uncontrollable external events (wars, earthquakes, flooding, or fires) - can prevent a project from meeting expectations and leaving it’s commercial viability and ultimate success in question. Risk is a concept that is used to express concerns about the probable effects of an uncertain environment and can be characterized by its probability of occurring and the magnitude, or effect, it would have on expected returns or outcomes should it occur. Every aspect of a project has risks (see Figure 4 – 1) and because the future cannot be predicted with certainty, all parties to a PPP must consider a range of possible events that could take place; each of these events potentially having a material effect on the project and its goals. Risk analysis is the art of identifying those possible events, measuring them, prioritizing them, and then managing them. In fact, a key aspect of the PPP structure is its ability to help facilitate the transferring of risk to the party that is best suited to manage or minimize it.

Figure 4 -1 Project Risk 43

When considering risk, it is imperative to recognize that each party involved will have a different perspective and thus a different approach to risk assessment. Given the number of different parties to a project, this section will focus only on risk from a financier’s perspective.

43 http://rru.worldbank.org/Documents/Toolkits/Highways/2_carac/22/224.htm

Construction Start Up Operation Phase

Service quality standard

Traffic (ramp up)

Refinancing risk

Delay

Construction risk

Financial risk

Project Risk

Time

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4.2 Risk and the cost of capital As each party assesses a project’s risk, they will establish a price for their services taking into account a profit margin that is required and expected to compensate for taking on the project and bearing the risks. If risks are not accurately assessed, too many risks at too high of a premium can be transferred to the wrong parties substantially increasing the cost of the project. Ultimately, all these are integrated into the project cost, which will ultimately be paid for in either higher taxes or user fees. All financial arrangements involve exposure to various types of risk, what financiers do is to minimize the possible impact of this exposure. Financiers look to negotiate financial structures designed to protect themselves from potential downsides due to identified project risks. Financiers want to assess all potential events or factors that can impact a project’s cash flow. Then they are looking at the probability of one of these events occurring and the probability of that event forcing the project to default on its debt obligations. The level of risk perceived is priced into the risk premium, which is then priced into the cost of capital. The greater the perceived risk by the financier, the greater the risk premium. Different weightings will be put on different risk criteria depending on the financier’s risk appetite; and the decision to invest will be based on whether the potential returns are greater than the perceived risk. Ultimately, the risk premium is based on a number of factors as highlighted in a recent World Bank study (see Box 4 – 1).

Box 4 - 1 Risk Premiums on Project Bonds 44

Dilami and Hauswald evaluated a representative sample of 105 US Dollar denominated emerging market project bonds issued between January 1993 and March 2002 in order to evaluate credit spreads and covenants. Their study found that emerging-economy project bonds had, on average, a risk premium of approximately 300 basis points over US-Treasuries45, a maturity of slightly less than 12-years and a credit rating of BBB- and BBB (slightly below investment grade). They also found a “high degree of variation across bonds…depending on project-specific characteristics, bond features, and the quality of host-countries’ legal institutions in determining investor rights and the degree of their protection”.

4.3 Identifying Risk As previously discussed, financiers carry out a thorough financial analysis of a project, including an assessment of all potential events or factors that can impact a project’s cash flow. The lender will look at all the project assumptions, consider if the projections are reasonable and then consider the likelihood that the project can maintain sufficient cash flow to meet its loan obligations. Equity investors will also examine the project’s projected performance but will focus more on their Return on Equity and those factors that can affect it.

44 Dailami and Hauswald World Bank Policy Research Working Paper “The Emerging Project Bond Market - Covenant Provisions

and Credit Spreads”, July 2003

45 For US$ denominated bonds, US Treasuries represent the risk-free rate.

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i. Types of Risk Risks can vary depending on the size of the project, sector, project cycle (see Figure 4 – 1), and the number of parties involved. Furthermore, risk is interrelated, meaning that each risk not only affects the project directly, but also affects the other risk factors. The following is a brief outline of a number of key risks that are considered when doing a risk assessment. It is not exhaustive and will vary from project to project.

a) Construction Risk Construction risk includes anything that can cause non-completion, late completion, and cost over-runs. Any delays in the completion of the project delays the cash flow and thus repayment of any outstanding loans. Any cost over-runs will ultimately impact the net cash flow, which will affect a project’s profitability. As the construction period is limited to the construction phase, the risks associated with this phase of a project are relatively easy to mitigate. For example, construction risk can be transferred to the contractor by negotiating a turnkey (ideally fixed price) construction contract. Contracts can also include provisions for the risk of non-completion, late completion, or cost over-runs.

b) Sponsor Risk The identity of the sponsors and their commitment to the project is a vital part of any financier’s assessment of a project. As it is the sponsors who will provide the equity or subordinate debt, the financiers will need to assess the levels of capital provided and the ability of the sponsors to access additional capital, if required. Financiers also look for evidence that the sponsors have the resources and skills necessary to deliver a project on time and on budget and have the ability to resolve any problems encountered during the construction phase.

c) Operating Risk Once a project is constructed the financiers will be primarily concerned with the project operator. The financiers will require an appropriately qualified operator to maintain the project and to meet the projected operating budget. They will also review proposed operations to see if sufficient funds have been allocated for the operations and maintenance and that sufficient trained personnel are available to operate the project facility.

d) Technology Risk A financier’s main concern is that technology under-performance will adversely affect the operations to the extent that the project is unable to make its debt repayments. As technology risk is seen by lenders as the responsibility of the sponsor, they will ask for additional support and guarantees from the sponsors. Sponsors will not generally be prepared to assume the full risk themselves, and will in turn require guarantees and warranties from the manufacturers of equipment and component suppliers.

e) Environmental Risks The environment is a growing concern to financiers, and they are increasingly concerned to protect themselves against environmental liabilities. Financiers will

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require that all planning, environmental and other consents and approvals have been obtained. They may also look at potential changes in future environmental regulation for risks to the project’s future economic operation.

f) Legal Risks Legal risks exist where laws are uncertain or can change. Lenders will seek legal opinions from local counsel to ensure that all the project contracts are legal, valid, binding and enforceable under the relevant laws.

g) Force Majeure Risk Force majeure risk means a risk that is beyond the control of all parties to the project, typically ‘acts of God’ such as severe weather. Often, a force majeure clause is used to excuse any party’s performance in the face of occurrences beyond their control.

4.4 Managing Risk46 A thorough identification of risk will enable all parties to ascertain whether risk mitigating actions should be taken, and if so how. Risk mitigation is an action that is taken to (i) reduce the likelihood of a risk materializing, and (ii) reduce the consequences should that risk materialize. The action taken will vary depending on the risk and the party potentially being impacted by that risk.

a) Portfolio management

Financiers, in an effort to manage their risk exposure, have investment mandates and criteria that govern how much exposure to each investment they should have. These mandates dictate the type of projects, loan limits, and sectors that they are willing to invest in. Furthermore, international financial institutions set country specific lending limits; the more unstable a country’s economic health, the lower the limit. Financiers may also use syndication arrangements to spread the risk by involving other experienced financial institutions.

b) Guarantees A common belief about PPPs is that they should be entirely self-supporting with no recourse or guarantees from the government or private sponsor. In fact guarantees, from either party, are inconsistent with the concept of non-recourse PPP financing. Never the less, guarantees are sometimes necessary depending on the nature of the project and given the fact that the economic benefits of some projects are greater than the financial benefits and cannot be financially captured by the private sponsor. Therefore, financiers may ask for sponsor guarantees to support debt servicing obligations until the project has achieved certified operational completion or to support the entire debt servicing period (depending on the outcome of the risk assessment). Private sponsors may also request government guarantees against such things as market or commercial risk if there is some concern about a projects financial viability. Furthermore, clear and unambiguous statements of government support for the type of investment being made are very useful, especially if linked to some form of guarantee. This will also provide an increased level of comfort to potential investors as the action will reaffirm that the project is compatible with national programs. 46 See Appendix 4 - Risk Matrix for a sample Risk Matrix used by Partnerships Victoria to identify and manage risk.

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Guarantees need not add to the cost of a project and can be as simple as the assurance that no change in the environmental, tax, or other laws and regulatory framework will be applicable to the project if such change will have a material adverse effect on the rights of the project sponsors or the lenders.

c) Financial Accounts Many projects require that an escrow account, managed by a third party, be set up so that all revenues from a project can be deposited directly into it, with payments to bond holders being made first, prior to any other disbursements. Many lenders will also request that a debt reserve account be set up to carry a cash balance that covers debt-servicing requirements, typically for six month. Such arrangements can also be denominated in a chosen currency to minimize short-term foreign exchange fluctuations.

d) Swaps To protect themselves against fluctuations in interest rates and currency exchange rates, sponsors may be required by the lenders to enter into hedging contracts such as swaps. A swap is an agreement whereby two parties agree to exchange currencies, interest payments or commodities at preset future dates. These are financial devices used to reduce losses as a result of future price movements.

• Interest rate swaps Interest rate swaps can be used to mitigate risks that can occur when an interest payment mismatch occurs. For example, if a project is financed based on a floating rate, as are many long-term financings, but the revenues are based on a fixed revenue stream the project, or SPV, is exposed to interest rate volatility. The SPV can enter into an interest rate swap, where it pays a fixed payment rate to a financial institution and in exchange receives a payment based on a floating rate. The diagram below shows the cash flows associated with such swaps. Since the company's debt service on its floating-rate loan is matched by the floating-rate cash flow received from financial institution under the swap, the company is left with a fixed-rate obligation. As a result, the interest rate swap has enabled the SPV to eliminate the risk caused by any interest rate volatility and effectively achieved fixed-rate funding for the project.

Figure 4 – 2

Interest Rate Swap

Financial Institution

Loan

SPV

USD fixed payment

USD floating payment USD floating

payment

Fixed USD Revenue payment

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• Currency Swaps Currency swaps, like interest rate swaps, allow two parties to exchange payments on specific dates at predetermined rates. However, instead of fixed and floating interest rate payments currency swaps involve the exchange of different currencies. For example, when a liability, such as a loan, is in one country currency but the revenues are in another it causes a currency mismatch exposing the parties to risk caused from exchange rate movements. A currency swap will enable the SPV to swap its local currency revenues for foreign denominated revenues, and like the interest rate swap, the cash flows can be structured to exactly match the loan amounts. As a result future volatility in income resulting from the currency mismatch on this particular loan is eliminated.

Figure 4 – 3 Currency Swaps

Currency and Interest swaps can also be combined in situations where the loan payment is in both a foreign currency and is based on a floating rate.

e) Insurance Though there are many types of risks that can be managed, there are some that cannot. It is possible to buy insurance that will protect a project against such risks including force majeure47 and political risk. Though the terms of the insurance policy will be specific to the project and will be outlined in the contract, the proceeds from an insurance claim will enable the sponsors to use the funds to restore production to pre-event status or repay any outstanding loans.

47 See Glossary

Financial Institution

Loan

SPV

Thai Baht Revenue

Japanese Yen Payment Japanese Yen

Payment

Thai Baht Revenue

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5. Environment

5.1 Barriers to Private Sector Involvement A barrier to entry is any institutional, government, technological, or economic restriction that prevents entry into a market or industry. Barriers to entry, while they may provide competitive advantages to some, can also generate inefficiencies and prevent the private sector from participating in what may seem like a commercially viable project by the public sector. Barriers can include, but are not limited to:

A weak domestic capital market which may prevent the private sponsor from accessing the long-term financing needed for large infrastructure projects that have long pay-back times;

A policy and regulatory environment that is not conducive or accepting of PPPs;

Poor enforcement mechanisms in legal and regulatory systems; Inability to accurately value assets; High transaction and bidding costs; Red tape and efficiencies, which increases the amount of time and ultimately

the cost of project development and implementation; Size of the infrastructure project – if it’s too small, the cost of due diligence

may not be recoverable; Lack of stakeholder buy-in. PPPs can be highly complex given the number of

stakeholders. As lack of support can increase risks and the final cost of development lack of buy-in may prevent some investors and project sponsors from participating;

Unwillingness by users or the public to pay for infrastructure services rendered;

Poor public sector track record in negotiating and working with the private sector; and

Lack of transparency in the bidding procedures and financial management.

5.2 Enhancing the investment climate Governments can chose to develop or adopt practices and policies that will further enhance the investment climate for private sponsors and potentially lower the cost of borrowing for projects within their country. These include:

i. Political and Fiscal stability Political and fiscal stability are basic conditions for encouraging investment and fostering competition. Political stability will minimize risks to investors such as expropriation, renegotiation of contracts, and political violence. Fiscal stability will increase confidence in the local currency, lower exchange rate risk, and minimize the risk of default by government agencies. Investment grade sovereign and debt ratings issued by rating agencies take into account the level of political and fiscal stability and influence the availability and terms of financing, particularly for long-term investments such as power plants.

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ii. Development of local capital markets There are substantial benefits to be had if project sponsors can finance the project debt in the same currency as the revenues. However, in order to do this there has to be an institutional framework made up of pension funds, insurance companies, and other institutional investors with longer-term investment objectives; and a legal framework allowing investors to purchase such securities. Unfortunately, many countries do not have well developed financial markets to provide long-term financing or the risk mitigating financial instruments, as described in chapter 4, that are required finance infrastructure projects.

iii. Credit Rating Credit ratings are another tool used by investors, especially individual investors who may not have the resources to do a thorough credit analysis, to assess the creditworthiness of an investment/project. Though not a guarantee of the success of a project, a credit rating provides a snapshot in time of the creditworthiness of a project and is a tool by which investors can benchmark against other investments. Furthermore, many institutional investors such as pension funds and insurance companies are restricted from investing in non-rated or low credit rating instruments. Therefore, issuers may want to get a credit rating on the project or consider using various credit enhancement mechanisms. Furthermore, an investment-grade country rating from an international rating agency may make it easier for private sponsors to attract a larger array of financing options, including long-term bonds.

iv. Currency convertibility Policies that ensure that the currency is fully convertible, that it can be repatriated, and that sufficient foreign exchange will be available to allow investors to transfer profits out of the country, will help encourage private foreign investment. Currency convertibility can have significant impacts on investment as some project expenses, such as the cost of equipment, fuel and financing, can be in foreign currencies. The best practice is if there is both a law and a provision within the contract guaranteeing the ability of the investor to convert the currency, the availability of such currency, and the ability to repatriate it.

v. Property Rights

Well defined and enforced property rights encourage private sector investment as individuals and business’ can be assured that their legal title to property and any income that is generated from the use of that property will be protected.

vi. Good Governance and Low Corruption

Good governance and low corruption have been found to be directly correlated with higher investment and growth rates. Thus policies and practices by government that help foster good governance and minimize corruption will encourage private sector investments.

vii. Transparent and Efficient Administrative Environment Red tape and bureaucratic inefficiencies can substantially increase the amount of time and ultimately the cost of developing and implementing a project. Ultimately, that increased cost will either be passed on to the consumer or tax payer. Thus, a

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transparent and efficient administrative environment will not only directly impact the ability of the private sector to participate, but also impact the final cost to government of delivering infrastructure and basic services.

viii. Fair and transparent tax structure A fair, efficient and transparent tax structure can impact the economic competitiveness and attractiveness to foreign investors as well as providing a good revenue base to be able to provide the necessary infrastructure and basic services to communities.

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Appendix 1 - Financial Models The financial data, assumptions, and cash flow model on the following pages were developed as an educational tool. They are based on a fictitious toll-road project and were structured for the sole purpose of demonstrating how financial models are constructed. This financial tool has not been audited and all revenue and expense assumptions are for demonstration purposes only.

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Appendix 2 - Debt Issues 48 The following chart depicts some of the financial issues that the project sponsor needs to ascertain when considering debt financing for a project.

48 BC Construction Roundtable - Public Private Partnerships Seminar November 2001 – Russell & De Zoysa

Debt Interest Rate Type

1. Fixed rate 2. Floating rate

Drawdown (Advance/Tranche) Methods

1. Single tranche drawn at debt start 2. Several tranches drawn at:

• Start of work packages (wps), % loan • Finish of wps, % loan • Specified dates, % loan

3. Several tranches mirroring actual capital expenditure in capital expenditure component

Debt Repayment Methods 1. Bullet – single Principal (PR) repayment 2. Amortized PR & separate interest 3. Amortized PR with balloon & separate interest 4. Amortized blended PR & interest 5. Uniform gradient PR and separate interest 6. Uniform gradient blended PR & interest 7. Geometric gradient PR & separate interest 8. Geometric gradient blended PR & interest 9. Cash flow dependent

Debt Stream: debt type

General term loan Syndicated term loan General bond Private placement bond Floating rate notes

Time Parameters

1. Time for fixed and flexible maturity; grace period, repayments; floating interest; commitment fee; and tranches

Debt Fees

1. Arrangement fee, % of loan at signing 2. Legal, accounting, printing fee, $ at signing 3. Annual agency expenses, $ annual 4. Commitment fees on undrawn part (loans) or forward fee

for private placement

Debt Exchange Rate

1. Debt & projection of different currencies 2. Physical payment for syndicated loans

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Appendix 3 - Financial Calculations For the purpose of demonstrating the following formulas: CF = Cash Flow PV = Present Value of Cash Flow FV = Future Value of Cash Flow R = interest rate or discount value n = number of years or periods t = Tax

d = Debt Cd = Cost of Debt e = Equity Ce = Cost of Equity tc = Debt + Equity NOI = Net Operating Income WACC = Weighted Average Cost of Capital

Ratio Formula Comments

Weighted average cost of capital (WACC)

= [(d/tc) x (Cd (1-t))] + [(e/tc) x Ce]

The WACC is used as the discount rate when assessing the net present value of a project's future cash flows.

Debt service cover ratio (DSCR) 49

= NOI / Debt Service Ability of operating earnings to service debt requirements.

Loan life cover ratio (LLCR)

= NPV of cash flow for the remainder of loan life / Outstanding loan

Project life cover ratio (PLCR)

= NPV of cash flow for the remainder of project / Outstanding loan

Return on Equity (ROE)

= Net Income available to equity holders / Equity

Measures the investment return on the capital invested by shareholders.

Discounted Payback

Length of time required to recover initial investment on project – using discounted cash flow.

Simple Payback Length of time required to recover initial investment on project – using non-discounted cash flow.

Present Value = FVn / (1 + r)n The value today of a future cash 49 Formula calculations can differ slightly between sectors and stakeholders and therefore formulas and required cash flow levels and

service coverage ratios should be clearly outlined within the loan agreement.

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flow or series of cash flows discounted using WACC or another appropriate discount rate.

Net Present Value (NPV)

= ∑ [FVn / (1 + r)n] Sum of the present value of all future cash flows.

Project Internal Rate of Return (PIRR)

Rate at which the NPV = 0. However, if the cash flows are not uniform, the IRR may not provide an accurate assessment.

Current Ratio = Current Assets / Current Liabilities

A commonly used measure of short-term solvency.

Debt Ratio = Total Debt / Total Assets Measures the percentage of funds provided by creditors. Total Debt includes short-term and long-term debt.

Debt-to-Equity Ratio = Total Debt / Total Equity Similar to the above mentioned debt ratio in that it measures the percentage of funds provided by creditors in relation to equity.

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Appendix 4 - Risk Matrix 50 The following risk matrix has been reproduced with permission from the State of Victoria in Australia. Though it is set up from the perspective of the government, it provides an example of how risk can be identified, assessed, and mitigated.

Risk Category

Description Consequence Mitigation Preferred Allocation

Interest rates pre-completion

The risk that prior to completion interests rates move adversely thereby undermining the bid pricing

Increased project cost

Interest rate hedging may occur including under Project Development Agreement

Government may assume or share

Sponsor Risk Risk that the private party is unable to provide the required services or becomes insolvent or is later found to be an improper person for involvement in the provision of these services or financial demands on the private party or its sponsors exceed its or their financial capacity causing corporate failure

Cessation of service to government and possible loss of investment for equity providers

Ensure project is financially remote from external financial liabilities, ensure adequacy of finances under loan facilities or sponsor commitments supported by performance guarantees; also through the use of non financial evaluation criteria and due diligence on private parties (and their sponsors)

Government

Financing Unavailable

Risk that when debt and/or equity is required by the private party for the project it is not available then and in the amounts and on the conditions anticipated

No funding to progress or complete construction

Government requires all bids to have fully documented financial commitments with minimal and easily achievable conditionality

Private Party

Further Finance Risk that by reason of a change in law, policy or other event additional funding is needed to rebuild, alter, re-equip etc. the facility which cannot be obtained by the private party

No funding available to complete further works required by government

Private party must assume best endeavours obligation to fund at agreed rate of return with option on government to pay by way of uplift in the services charge over the balance of the term or by a separate capital expenditure payment; government to satisfy itself as to likelihood of this need arising, its likely critically if it does arise, and as to financial capacity of private party to provide required funds and (if appropriate) budget allocation if government itself is required to fund it.

Government takes the risk that private finance is unavailable

50 Reproduced with permission from the State of Victoria with all copyrights belong to the State of Victoria. Partnerships Victoria

Guidance Material Contract Management Guide June 2003

www.partnerships.vic.gov.au/domino/web_notes/PartVic/PVSite.nsf/Frameset/PV?OpenDocument

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Risk

Category Description Consequence Mitigation Preferred

Allocation Change in Ownership

Risk that a change in ownership or control of private party results in a weakening in its financial standing or support or other detriment to the project

Government assurance of the financial robustness of the private party may be diminished and, depending on the type of project, probity and other non-financial risks may arise from a change in ownership or control, which may be unacceptable to government.

Government requirement for its consent prior to any change in control. (Private party will seek to limit this control to circumstances where substantive issues are of concern such as financial capacity and probity).

Government risk as to the adverse consequence of a change if it occurs; private party risk that its commercial objectives may be inhibited by a restrictive requirement for government consent to a change

Tax Changes Risk that before or after completion the tax imposed on the private party, its assets, or on the project will change

Negative effect on the private party’s financial returns and in extreme cases, it may undermine the financial structure of the project so that it cannot proceed in that form

Financial returns of the private party should be sufficient to withstand such change; with respect to specific infrastructure taxation particularly that relating to transactions with government, the private party should obtain a private tax ruling.

Private party

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Appendix 5 - Moody’s Rating Methodology The following are two examples of rating methodology that Moody’s Credit Rating Services uses to assess credit worthiness.

i. Start-Up Toll Roads Moody’s methodology for rating toll-roads is consistent with what has been previously discussed. The following outlines the methodology that they use when providing a credit rating for a start-up toll-road in an emerging market. Political and Economic Environment To begin, Moody’s completes a review of the political and economic environment in the country. They look for:

Political consensus on the need for the project; Clear legal authorization and enforceability of contracts; Predictable environment for toll road increases; Transparency in the project selection and concession development process.

Project Economics At the core of Moody’s assessment are the economics of the project and whether or not it is self-supporting. Moody’s will “assess the balance between the cost of developing and operating a project and the revenues it is expected to generate over its useful life”. Due diligence will include a review of:

Location of road; Link to population centers and employment dispersion patterns; Type of road and necessity of road to service area population; Potential users and their socio-economic characteristics; Price elasticity/inelasticity in the demand, Diversity of user base; Economic diversification of the service area; Competition (current and planned); and size of the project.

Project Feasibility Using third party feasibility reports along with a number of other credit factors, Moody’s develops its own probability assessments in order to answer five questions:

What is the global demand in the travel corridor for the proposed highway? What is the expected growth in demand? What percentage of global demand is expected to use the proposed road? What competition, present or planned, does the project face? How much are users willing to pay?

Financial Measures and risk analysis Sensitivity Analysis

As part of the project assessment, Moody’s looks at cash flow projections using best-case and worst-case scenarios; with their ultimate goal being to determine how much

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revenue is needed to cover debt obligations and operating expenses. In doing a sensitivity analysis, they may use one or a combination of the following scenarios:

Zero or reduced traffic growth (25-30%) Ability to withstand economic recession Currency devaluation Delays in project construction

Debt Service Coverage Ratio (DSCR) Debt Service Coverage Ratio (DSCR) is a key financial indicator that is used by Moody’s. Accordingly, they look for projects with a DSCR of 1.5 or higher for start-up toll-road projects. Construction and Operating Risk Construction risk can be a major obstacle to a project’s financial viability and its ability to obtain an investment-grade rating. Some key issues that are considered when assessing a projects construction and operational risks are:

Right-of-way acquisition policies; Environmental Permits; Technology and design risk; Contractor qualifications and experience; Type of construction contract and terms; Early completion incentives; Availability of cash reserves.

ii. Non-US sub-sovereign Government Owned Infrastructure Companies

Moody's has observed that “an increasing number of local government owned companies are accessing the public debt markets with rated debt instruments”. These companies are involved in a number of different industries including transportation, power, water and sewer infrastructure. Moody’s approach to rating these companies has been to focus on the “underlying business fundamentals of the issuer and its legal and economic relationship with its public sector owner”. Key credit factors include:

The nature of the issuer's corporate structure; and the legal and political relationship with the owners;

The degree of independence in setting rates and tariffs; Segregation of finances from the parent owners; Whether there is a historic practice of using company revenues to fund

unrelated capital projects, issue debt for non strategic purposes, or make loans to other unrelated entities;

History of respect by the national legal system for indenture covenants that protect the bondholders.

Moody’s recognizes that the process by which they assess the relationship between the issuer and the subsovereign government owner is “not formulaic”, and is in fact assessed on a case-by-case basis.

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Appendix 6 - Sample Financial Information Requirements Although specific requirements will differ depending on the size of the project and the funding organizations, project sponsors will be required to provide a minimum level of technical and financial information in order to get a project financed.

iii. National Level51 PROJECT DESCRIPTION

a Project name and description including:

i Proposed ownership structure and sponsor information ii Legal status of project and status of government approvals (including

government and/or local authorities' attitude toward project, exemptions/advantages to be enjoyed by project, licenses, permissions required, proposed measures/actions that could affect the project), and

iii Project's anticipated economic contributions (e.g., in the generation of foreign exchange, employment, technology transfer)

CAPITAL INVESTMENT a Project site

i Size and location of project site (in relation to availability of raw materials, utilities, labor, and accessibility to its markets)

ii Current use and value of land for project site; estimated value in new use iii Infrastructure requirements iv Legal agreements for land use rights v Existing pollution-related liabilities

b Civil works and buildings c Major and auxiliary equipment

i Estimated requirements and costs (imported vs. local and duties) ii Potential suppliers/contractors

d Project management (plant construction and supervision services, including background and experience of supervisor

e Pre-operating requirements and costs f Contingencies (physical) and escalations (financial) g Initial working capital requirements h Contracting and purchasing procedures to be used

PROJECT SCHEDULES

a. Construction, startup, operations b. Expenditures c. Funding (including timing of funds needed during project implementation) d. Regulatory compliance

PRODUCTION PROCESS (if applicable)

a Production technology vs. state of the art b Scale and scope of production

i Rated capacity and comparison with optimal sizes ii Expected operating efficiency iii Frequency of shutdowns, changeovers iv Previous experience with technology (including patents, licenses held)

51 Information has been assembled using IFC’s project appraisal requirements

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c Production process i Plant layout and production flow diagram ii Critical operations/bottlenecks iii Options for future expansion or modification

d Production requirements and costs (per unit) i Raw materials (sources, quality, local vs. domestic, contractual

arrangements) ii Consumables iii Utilities (sources, reliability) iv Labor v Maintenance vi Fees and royalties vii Expected changes in operating efficiency

e Annual capital investment f Quality control g Technical assistance agreements

i Status of negotiations (proposed terms) ii Patents and proprietary technology iii Training and support for plant staff

ENVIRONMENTAL IMPACT

a. Description of environmental impact b. Plans for treatment of emissions and disposal of effluents c. Occupational health and safety issues d. Local regulations (plans for compliance)

MARKETING AND SALES

a. Product definition b. Competitive position of product/company

i. Product advantages vs. competition (current and future-price, quality, etc.) ii. Target market(s) (including population and per capita GNP and their future

growth) c. Market structure

i. Demand (volume and value of annual consumption of products to be made by project-last five years, future five years)

ii. Supply (domestic vs. foreign-capacity, cost position, strategy) iii. Existing and projected tariff situation affecting products iv. Market trends in future (new products, potential competitors, etc.) v Projected market share by segment

d Marketing, distribution, and sales organizational arrangements and fees MANAGEMENT AND PERSONNEL

a. Organization chart and manpower requirements b. Key operational officers (including background and length of experience) c. Technical staff and consultants (background and experience) d. Management targets and incentives e. Management agreement f. Personnel practices

FINANCING

a. Total cost of project (including details on major items of fixed assets and working capital)

b. Background statement on all sponsors and participants, showing their financial or other interest in the project in construction, in operations, and in marketing

c. Capital structure (proposed amounts and sources)

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i Proposed debt/equity structure ii Equity

(a) Shareholder structure (b) Long-term plans (stay private/go public) (c) Quasi-equity (subordinated debt, etc.)

iii Debt (a) Long-term debt/working capital (b) Domestic/foreign (c) Desired terms and conditions (d) Funding sources already identified (note any funding restricted in use)

iv Overrun/standby arrangements d Margin and break-even analysis

i Unit cost structure as percent of unit sales price ii Cash and full-cost bases iii Fixed and variable costs

e Financial projections i Projected financial statements (income statements, cash flows, balance

sheets, sales revenues, production costs, depreciation, taxation, etc.) ii Clear statement of all assumptions iii Sensitivity analysis under different scenarios

COPIES OF LEGAL DOCUMENTS

a Joint venture agreements b Articles of association c Government approval documents/business license d Land certificate/red line map e Mortgages, if any f Loan agreements g Major contracts including

i. Off-take agreements ii. Supply agreements iii. Technical assistance agreement iv. Management agreement

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Appendix 7 - Loan Agreements Though every loan agreement is unique, financiers will generally seek certain levels of security and comfort within a project, including the provision to ‘step-in’ if the primary contractor is not performing its obligations as contracted. Loan agreements will contain many structural features and covenants including:

• The prevention of asset substitution; • Revenue or rate covenants that specify a minimum coverage of debt

service and definitions of default; • Specific financial documentation needed in order to monitor the

progress of a project52; • An order of priority of payment for operating expenses, debt service,

and other obligations. This may also include restrictions on making equity distributions if coverage ratios fall below certain levels;

• A restriction on additional debt, other than that initially agreed upon, in order to prevent excess leverage;

• Required reserved funds for things such as debt servicing, operating reserves, maintenance requirements, and slower than anticipated ramp up, and unforeseen problems;

• Covenants designed to maintain operational viability and to keep the facility in good condition;

• Timing and process structures that provide sufficient advance warning triggers during periods of economic or operational downturns;

• Recourse to assets – this may be limited by property ownership rights or valuation of an asset.

iv. National Highways Authority of India (“NHAI”)53 The NHAI is responsible for the development, maintenance and management of India’s national highways. In order to promote private participation in the construction and maintenance of the national highways, some projects have been developed on a Build Operate and Transfer basis. The following is the financing portion of the various concession agreement models used.

Concession Agreement for projects Rs 100 Crores and above

Chapter V FINANCING ARRANGEMENTS

XXII. FINANCIAL CLOSE 22.1 The Concessionaire shall provide to NHAI, a copy of the Financing Package

furnished by it to the prospective Senior Lenders. As and when such Financing Package is approved by the Senior Lenders, with or without modifications, a copy of the same shall be furnished by the Concessionaire to NHAI forthwith.

52 See Appendix 6 - Sample Financial Information requirements

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22.2 Notwithstanding anything to the contrary contained in this Agreement, the Concessionaire covenants with NHAI that it shall achieve Financial Close within 180 (one hundred eighty) days from the date of this Agreement. If the Concessionaire shall fail to achieve Financial Close within the said 180 (one hundred eighty) days period, the Concessionaire shall be entitled to a further period of 90 (ninety) days subject to an advance weekly payment by the Concessionaire to NHAI of a sum of Rs.100, 000 (Rupees one hundred thousand) per week or part thereof for any delay beyond the said 180 (one hundred eighty) day period, as Damages on account of such delay in achieving Financial Close within the said 180 (one hundred eighty) day period by the Concessionaire.

22.3 Notwithstanding anything to the contrary contained in this Agreement, NHAI shall be entitled to terminate this Agreement forthwith, without being liable in any manner whatsoever to the Concessionaire, by a communication in writing to the Concessionaire pursuant to Clause 32.2 if the Concessionaire shall have failed to pay in advance the Damages to NHAI under and in accordance with Clause 22.2 above.

22.4 Notwithstanding anything to the contrary contained in this Agreement, if the Financial Close shall not occur within 270 (two hundred seventy) days as set forth in Clause 22.2 above, all rights, privileges, claims and entitlements, if any, of the Concessionaire under or arising out of this Agreement shall be deemed to have been waived by and to have ceased with the concurrence of the Concessionaire, and the Concession Agreement shall be deemed to have been terminated by mutual agreement of the Parties.

22.5 Upon Termination of this Agreement under Clauses 22.2 and 22.3, NHAI shall be entitled to encash the Bid Security or the Performance Security, as the case may be, and appropriate the proceeds thereof as Damages.

XXIII. NEGATIVE GRANT/ GRANTS

23.1 The Concessionaire agrees to provide to NHAI cash payment (the “Negative Grant”) or NHAI agrees to provide to the Concessionaire cash support by way of an outright Grant (the “Grant”) equal to the sum, if any, set forth in the Bid of the Bidder and accepted by NHAI namely, Rs.________ million (Rupees________________ million) in accordance with the provisions of this Article XXIII.

23.2 The Concessionaire shall pay to NHAI the Negative Grant proposed in its Bid

as set forth below: Concession Year 1 2 3 ------ ------- 14 15 Negative Grant

53 Complete document can be accessed at www.nhai.org/concessionagreement.htm

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Negative Grant shall be paid in advance within 90 (ninety) days of the commencement of the year for which it is due and payable.

23.3 Subject to provisions of the Clause 23.4, the Grant shall be applied by the Concessionaire for meeting the capital cost of the Project and shall be treated as part of the shareholders’ funds (the “Equity Support”).

23.4 The Equity Support shall:

(a) not exceed 25% of the Total Project Cost; and (b) in no case be greater than total equity capital actually subscribed and

paid in cash by the shareholders for meeting the Total Project Cost as set forth in the Financing Package.

23.5 The balance of the Grant (if any) available after deducting there from the

amount of Equity Support shall be provided to the Concessionaire in accordance with this Article XXIII for meeting O&M Expenses of the Project (the “O&M Support”).

23.6 The whole or any part of the Grant shall be disbursed by NHAI to the Concessionaire if and only if

23.6.1 the Concessionaire is not in Material Breach of this Agreement at the time of

such disbursement; and 23.6.2 the Concessionaire has contributed and spent on the Project at least 80%

(eighty percent) of the total Equity (excluding Equity Support) required to be provided as part of the Total Project Cost.

23.7 The disbursement of the Equity Support pursuant to this Article XXIII shall be

made by NHAI to the Concessionaire proportionately along with the balance loan funds to be disbursed by the Senior Lenders under the Financing Documents for meeting the Total Project Cost. NHAI shall disburse each tranche of the Equity Support as aforesaid by credit to the Escrow Account within 15 (fifteen) days of the release of each loan installment by the Senior Lenders to the Concessionaire provided the Concessionaire has submitted to NHAI along with each disbursement request a certificate from its Statutory Auditors certifying the above particulars and has given at least 7 (seven) days to NHAI for processing such request.

23.8 The O&M Support shall be disbursed by NHAI to the Concessionaire by credit

to the Escrow Account in quarterly installments and the first such installment shall be released within 30 (thirty) days of the COD. Each such installment shall be a sum equal to 1 (one) per cent of the Total Project Cost and such installments shall be paid by NHAI until the Grant is fully disbursed to the

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Concessionaire.

23.9 If NHAI shall fail to disburse any tranche of the Equity Support or the O&M Support within the periods set forth for the payment thereof to the Concessionaire, NHAI shall pay interest on such delayed tranche @ SBI PLR plus two per cent.

XXIV. REVENUE SHORTFALL LOAN 24.1 If the Realisable Fees in any Accounting Year during the Concession Period

shall fall below the Subsistence Revenue Level as a result of an Indirect Political Event, or a Political Event as set forth in Article XXIX, NHAI agrees to provide to the Concessionaire such shortfall support, by way of a loan (“Revenue Shortfall Loan”) with interest thereon @ SBI PLR per annum. Provided, however, that any reserves of the Concessionaire and any sums received or likely to be received by the Concessionaire through insurance claims (except insurance payments for physical loss used to carry out requisite repairs) or payments by NHAI under Article XXIX shall first be deducted and only the balance remaining shall be disbursed as the Revenue Shortfall Loan.

24.2 For the purposes of claiming disbursements on account of Revenue Shortfall

loan pursuant to Clause 24.1 above in any Accounting Year, the Concessionaire shall:

(a) Submit a detailed account of the Indirect Political Event or the Political Event, as the case may be, and its impact on total revenues of the Concessionaire as soon as feasible and submit weekly reports thereafter;

(b) Provide to NHAI, the Schedule of Debt Service Payments under the Financing Documents for the Accounting year for which Revenue Shortfall Loan are claimed;

(c) Provide to NHAI the details of O&M Expense budget for such Accounting Year and the expenditure incurred in that year out of such budget;

(d) Within 15 (fifteen) days of the close of each Accounting Year in which

the shortfall in the referred to in Clause 24.1 shall occur, provide a certificate from the Statutory Auditors of the Concessionaire certifying the Subsistence Revenue Level, the Realisable Fees and the Revenue Shortfall Loan requirement after deducting reserves of the Concessionaire, if any; and

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(e) Submit a written request to NHAI under the hands of a Director of the Concessionaire requesting for disbursement of the Revenue Shortfall Loan to the Concessionaire by payment thereof into the Escrow Account.

24.3 Upon the receipt of the request and documents as set forth in Clause 24.2

above and provided the same is not found by NHAI to be wrong or incorrect, NHAI shall disburse the Revenue Shortfall Loan within 30 days (thirty) thereof.

24.4 In the event Realisable Fees during the first six months of an Accounting Year shall fall as a result of an Indirect Political Event or a Political Event and the amount of such Realisable Fees is less than the Debt Service Payments due for the first six months of such Accounting Year, NHAI shall upon request provide an advance to the Concessionaire for meeting the shortfall in such Debt Service Payments. For claiming such advance, the Concessionaire shall make a demand to NHAI accompanied by a certificate from the Statutory Auditors setting forth the Realisable Fees during the first six months of the Accounting Year, the reserves of the Concessionaire and the outstanding amount on account of Debt Service Payments due in the first six months of such year. The Statutory Auditors shall also certify the amount of advance required by the Concessionaire from NHAI for meeting such Debt Service Payments after deducting such Realisable Fees and the reserves of the Concessionaire. Within 15 (fifteen) days of receiving such demand, NHAI shall disburse the advance due to the Concessionaire at an interest rate equal to SBI PLR. Not later than 15 (fifteen) days after completion of such Accounting Year, the Concessionaire shall either refund such advance with interest to NHAI or adjust it against such Revenue Shortfall Loan as may be due to the Concessionaire under this Article.

24.5 The Revenue Shortfall Loan disbursed by NHAI pursuant hereto and the interest thereon shall be repaid by the Concessionaire in a sum equal to 50% (fifty per cent) of the Net Cash flow of the Concessionaire as and when made and such repayments shall be made in one or more years as necessary.

24.6 Notwithstanding anything to the contrary contained in Clause 24.5, the Concessionaire shall repay the entire Revenue Shortfall Loan and interest thereon at least two years before the expiry of the Concession Period. If any sum remains due or outstanding from the Concessionaire under this Article XXIV at any time during a period of two years preceding the Termination Date, it shall constitute a Concessionaire Event of Default under Article XXXII and NHAI shall be entitled to Terminate this Agreement under Clause 32.2.

XXV. ESCROW ACCOUNT 25.1 The Concessionaire shall within 60 days from the date of this Agreement

open and establish the Escrow Account with a Bank (the “Escrow Bank”) and

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all funds constituting the Financing Package for meeting the Total Project Cost shall be credited to such Escrow Account. During Operations Period all Fees collected by the Concessionaire from the users of the Project Highway shall be exclusively deposited therein. In addition, all Fees collected by NHAI in exercise of its rights under this Agreement during the Concession Period and all disbursements or payments by NHAI pursuant hereto shall also, subject to the rights of deductions and appropriations there from of NHAI under this Agreement, be deposited by NHAI in the Escrow Account.

25.2 Disbursements from Escrow Account

25.2.1 The Concessionaire shall give, at the time of the opening of the Escrow Account, irrevocable instructions by way of an Escrow Agreement substantially in form set forth in Schedule `Q’ (the “Escrow Agreement”) to the Escrow Bank instructing, inter alia, that the deposits into the Escrow Account shall subject to Clause 25.2.3, be appropriated in the following order every month and if not due in a month then appropriated proportionately in such month and retained in the Escrow Account and paid out therefrom in the month when due unless otherwise expressly provided in the instruction letter:

(a) All taxes due and payable by the Concessionaire; (b) All expenses in connection with and relevant to the Construction of

Project Highway by way of payment to the EPC Contractor and such other persons as may be specified in the Financing Documents;

(c) O&M Expenses including Fees collection expenses incurred by the Concessionaire directly or through O&M Contractor and/or Tolling Contractor, if any, subject to the items and ceiling in respect thereof as set forth in the Financing Documents but not exceeding 1/12 (one twelth) of the annual liability on this account;

(d) The whole or part of the expense on repair work or O&M Expense including Fees collection expenses incurred by NHAI on account of exercise of any of its rights under this Agreement provided NHAI certifies to the Escrow Bank that NHAI had incurred such expenses in accordance with the provisions of this Agreement;

(e) All Concession Fees and any Negative Grant due to NHAI from the Concessionaire under this Agreement;

(f) Monthly proportionate provision of Debt Service Payments due in an Accounting Year and payment of Debt Service Payments in the month when due;

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(g) Any payments and Damages due and payable by the Concessionaire to NHAI pursuant to this Agreement, including repayment of Revenue Shortfall Loans; and

(h) Balance in accordance with the instructions of the Concessionaire. 25.2.2 The Concessionaire shall not in any manner modify the order of payment

specified in this clause 25.2 except with the prior written approval of NHAI.

25.2.3 In the event the Grant, if any, to the Concessionaire shall exceed 10% of the Total Project Cost, all disbursements on account of Total Project Cost other than those to the EPC Contractor in accordance with the EPC Agreement, shall be made in accordance with the express provisions contained in that behalf in the Financing Documents. Provided, however, that if the total of such disbursements exceed 10% of the Total Project Cost, prior written consent of NHAI shall be required in respect of the disbursement arrangements for such excess amounts, and such consent shall not be unreasonably withheld by NHAI.

25.3 Notwithstanding anything to the contrary contained in the Escrow Agreement and subject to the provisions contained in Clauses 33.5 and Article XXXIV, upon Termination of this Agreement, all amounts standing to the credit of the Project Escrow Account shall be appropriated and dealt with in the following order:

(a) all Taxes due and payable by the Concessionaire;

(b) all Concession Fees (including Negative Grant) due and payable to

NHAI under this Agreement;

(c) all accrued Debt Service Payment;

(d) any payments and Damages due and payable by the Concessionaire to NHAI pursuant to this Agreement, including Termination claims and repayment of Revenue Shortfall Loans;

(e) all accrued O&M Expenses;

(f) any other payments required to be made under this Agreement; and

(g) balance, if any, on the instructions of the Concessionaire. 25.4 The instructions contained in the Escrow Agreement shall remain in full force

and effect until the obligations set forth in Clause 25.3 have been discharged.

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XXVI. STATE SUPPORT AGREEMENT 26.1 The Concessionaire acknowledges that for the performance of its obligations

under this Agreement, it requires support and certain services from GOR. The nature and scope of such support and services required by the Concessionaire from GOR are fully described in the draft State Support Agreement set forth at Schedule ‘R’.

26.2 The Concessionaire acknowledges its obligation to enter into the State Support Agreement and accordingly the Concessionaire agrees and undertakes to enter into at its cost and expense the State Support Agreement with NHAI and GOR substantially in form and content as set forth in Schedule ‘R’.

XXVII. INSURANCE 27.1 Insurance during the Construction Period: The Concessionaire shall effect

and maintain, or cause to be effected and maintained, at no cost to NHAI during the Construction Period such insurances up to such maximum sums as may be required under and in accordance with the Financing Documents, Applicable Laws and such insurance as the Concessionaire may reasonably consider necessary or desirable in accordance with Good Industry Practice. The Concessionaire shall also effect and maintain such insurance as may be necessary for mitigating the risks that may devolve on NHAI as a consequence of any act of omission by the Concessionaire during the Construction Period.

27.2 Insurance during the Operations Period: Not later than 4 months prior to the anticipated Completion of the Project Highway, the Concessionaire shall obtain and maintain at no cost to NHAI during the Operations Period in respect of the Project Highway and its operations such insurance as may be required under any of the Financing Documents, Applicable Laws and such insurance as the Concessionaire may reasonably consider necessary or desirable in accordance with Good Industry Practice. Provided, however, the level of insurance to be maintained after satisfaction of Senior Lenders’ dues in full, shall be determined on the same principles as applicable for determining the level of Insurance prior to such date. This level shall be agreed with NHAI within 120 days of date of this Agreement.

For the sake of brevity, the aggregate of the maximum sums insured under the insurance taken out by the Concessionaire pursuant to this Article XXVII are herein referred to as the “Insurance Cover”.

27.3 Evidence of Insurance Cover: All insurance obtained by the Concessionaire in accordance with this Article XXVII shall be maintained with insurer or reinsurers, and on terms consistent with Good Industry Practice. Within thirty

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days of obtaining any insurance cover, the Concessionaire shall furnish to NHAI, copies of certificates of insurance, copies of the insurance policies signed by an authorised representative of the insurer and copies of all premia payment receipts in respect of such insurance received from each insurance carrier, and such insurance will not be cancelled, changed or not renewed until the expiration of at least 45 (forty five) days after written notice of such cancellation, change of non-renewal has been received by NHAI.

27.4 Remedy on Failure to Insure: If the Concessionaire shall fail to effect and keep in force the insurance for which it is responsible pursuant hereto, NHAI shall have the option to keep in force any such insurance, and pay such premia and recover the costs thereof from the Concessionaire, or for the purposes of computation of payments to the Concessionaire pursuant to Article XXIX treat the insurance cover i.e. the maximum sums which such insurance was providing for had it been in force and effect as being deemed to have been received by the Concessionaire.

27.5 Waiver of Subrogation: All insurance policies supplied by the Concessionaire shall include a waiver of any right of subrogation of the insurers thereunder against, inter alia, NHAI, and its assigns, subsidiaries, affiliates, employees, insurers and underwriters and of any right of the insurers of any set-off or counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of any such person insured under any such policy.

27.6 Concessionaire Waiver: The Concessionaire hereby further releases, assigns and waives any and all rights of recovery against, inter alia, the NHAI, and its affiliates, subsidiaries, employees, successors, permitted assigns, insurers and underwriters, which the Concessionaire may otherwise have or acquire in or from or in any way connected with any loss covered by policies of insurance maintained or required to be maintained by the Concessionaire pursuant to this Agreement (other than third party liability insurance policies) or because of deductible clauses in or inadequacy of limits of any such policies of insurance.

27.7 Application of Insurance Proceeds: The proceeds from all insurance claims, except life and injury, shall be paid to the Concessionaire by credit to the Escrow Account (unless otherwise required by the Financing Documents) who shall, subject to its obligations under the Financing Documents, and notwithstanding anything contained in Article XXV, apply such proceeds for any necessary repair, reconstruction, reinstatement, replacement, improvement, delivery or installation of the Project Highway.

XXVIII. ACCOUNTS AND AUDIT

28.1 The Concessionaire shall maintain full accounts of all Fees including Realisable Fees and other revenues derived/collected by it from and on account of use of the Project Highway and of O&M Expenses and other costs paid out of the Project Escrow Account and shall provide copies of the said

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accounts duly audited and certified by the Concessionaire’s Statutory Auditors within 120 (one hundred twenty) days of the close of each Accounting Year to which they pertain, during the subsistence of this Agreement. Such audited accounts shall form the basis of various payments by either Party under this Agreement. The Concessionaire shall also furnish, within one week of its publication, a certified copy of the audited accounts and annual report published by the Company under the Applicable Laws.

28.2 The Concessionaire shall appoint and have during the subsistence of this Agreement as its Statutory Auditors a firm of Chartered Accountants duly licensed to practice in India out of the mutually agreed list of 10 (ten) independent and reputable firms of Chartered Accountants in India (the “List of Chartered Accountants”). The criteria for preparing the List of Chartered Accountants are set forth in Schedule ‘T’. Subject to a 30 days notice to NHAI and the replacement Statutory Auditors being appointed from the List of Chartered Accountants, the Concessionaire may terminate the appointment of any Statutory Auditor appointed in accordance with this Article. The fees and expenses of the Statutory Auditors shall be borne by the Concessionaire.

28.3 On or before the fifteenth day of April each Year, the Concessionaire shall provide for the preceding Accounting Year a statement duly audited by its Statutory Auditors giving summarised vehicle/user wise information on (i) the traffic count for each category of vehicles using the Project Highway and liable for payment of Fees therefore, and (ii) Fees charged and the amount of Fees received, Realizable Fees and other revenues derived from the Project Highway and such other information as NHAI may reasonably require.

28.4 Notwithstanding anything to the contrary contained in this Agreement, NHAI shall have the right but not the obligation to appoint at its cost another firm of chartered accountants from the List of Chartered Accountants (the “Additional Auditor”) to audit and verify all those matters, expense, costs, realisations and things which the Statutory Auditors of the Concessionaire, are required to do, undertake or certify pursuant to this Agreement.

28.5 Where a Grant has been provided, NHAI shall have the right to appoint for the duration of the Construction Period as Concurrent Auditor a firm of Chartered Accountants from the List of Chartered Accountants (the “Concurrent Auditor”) who shall undertake concurrent audit of the Concessionaire during the Construction Period. The charges and expenses of such Concurrent Auditor shall be borne by the NHAI. After such Construction Period, NHAI may at its option have concurrent audit done at such time and for such period as NHAI may deem appropriate at its cost and expenses.

28.6 In the event of their being any difference between the finding of the Additional Auditor or the Concurrent Auditor, as the case may be, and the certification provided by the Statutory Auditors of the Concessionaire, such Auditors shall

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meet to resolve such differences and if they are unable to resolve the same such disputed certification shall be resolved by recourse to the Dispute Resolution Procedure.

Model Concession Agreement for Small Road Projects

(Rs 100 Crores and below)

Article 10 FINANCING ARRANGEMENT

10.1 Financing Arrangement

(a) The Concessionaire shall at its cost, expenses and risk make such financing arrangement as would be necessary to finance the Project and to meet its obligations under this Agreement in a timely manner.

(b) In the event of the Concessionaire employing the funds borrowed from the

Lenders to finance the Project, the provisions relating to Lenders including those relating to Financial Close and Substitution Agreement shall apply.

(c) The Concessionaire shall within 7 days of achieving Financial Close

submit to GOI one set of Financing Documents evidencing Financial Close.

10.2 Amendments to Financing Documents

For the avoidance of doubt the Parties agree that no amendment made to the Financing Documents without express consent of GOI shall have the effect of enlarging in any manner, the obligation of GOI in respect of Termination Payment under this Agreement.

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Appendix 8 - Innovative Approaches to Financing

i. United States

a) State Infrastructure Banks54 In 1995, the National Highway System Designation (NHS) Act authorized the establishment of State Infrastructure Banks (SIBs) in order to provide loans or other credit assistance for transportation projects to municipalities or other entities for the purpose of building infrastructure. A key feature of SIBs is their ability to issue bonds backed by SIB capital and secured by loan repayments from a pool of local borrowers, as opposed to one locality, which reduces risk for investors and therefore interest rate for borrowers. SIB loans can be repaid back from a number of different sources including dedicated tax revenues, special assessments, or toll revenues. SIBs can also offer credit enhancements such as loan guarantees, which enable private sponsors to borrow money at lower interest rates, and grants. However, the NHS Act prohibits federal funds that are contributed to the SIB from being used as grants. Instead, the SIB must use federal funds only for loans or credit enhancements. By using a SIB, a state may bypass its own constitutional or legislative limits on debt, especially if the debt is backed only by toll or other user fee revenues and not by taxes.

b) State Legislation Virgina In response to a growing interest in the private investment of transportation facilities, Virginia's General Assembly authorized the private development of toll roads in 1988. In addition, Virgina’s Public-Private Transportation Act of 1995 authorized the state government and sub-state entities, that meet certain qualifications, to enter into agreements with private firms to acquire, build, improve, maintain, and operate qualifying transportation facilities.

The Dulles Greenway

With the legislative backing of the General Assembly, the Toll Road Investors Partnership II (“the Partnership”), made up of a group of private investors, presented a plan to develop a 14-mile, limited access, toll road linking Washington's Dulles International Airport and Leesburg, Virginia. Initial research was based on residential and commercial growth in the area, which was causing increased congestion on existing arterial roads serving the corridor. The Dulles Greenway (“the Greenway”) was a build/operate/transfer facility with ownership reverting back to the state after 42.5 years. To finance the Greenway, investors put up $40 million in cash and secured $310 million in privately placed taxable debt. Ten institutional investors led by Cigna Investments, Prudential Power Funding Associates (a unit of the Prudential

54 US Congressional Budget Office - http://www.cbo.gov/showdoc.cfm?index=320&sequence=4

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Insurance Company of America), and John Hancock Mutual Life Insurance Company provided $258 million in long-term, fixed-rate notes (due in 2022 and 2026). Three banks (Barclays, NationsBank, and Deutsche Bank AG) agreed to provide part of the construction funding and $40 million in revolving credit. Loans were to be repaid with toll revenues, and the financing was secured by a first mortgage and security interest in the developer's right, title, and interest in the facility. Virginia's State Corporation Commission limited the rate of return on the project to 18 percent. California The California State Route 91 Express Lanes, unlike the Greenway in Virgina, is a build/transfer/operate facility. The 91 Express Lanes project was developed under a program authorized by the California legislature in 1989. The developer and operator, California Private Transportation Company (CPTC), is a limited partnership led by Peter Kiewit Sons, a large construction company. Other partners include Cofiroute Corporation, a French toll road company, and Granite Construction, a large locally based construction company. CPTC put up $19 million in equity with the balance of $107 million financed from several sources: $65 million in variable-rate loans from Citibank and two French banks; $35 million in a 24-year loan from Cigna; and $7 million in subordinated debt to repay a local agency's engineering and environmental studies. On completion of the project in 1995, the developer transferred ownership to the state. CPTC has a 35-year contract and is responsible for maintenance, law enforcement, property taxes, and other operating costs. After that period, control of the roadway reverts to the state. The state does not regulate tolls, but it limits the company to a rate of return of 17 percent on the project. The road has no tollbooths and tolls are collected electronically and vary by the time of day with relatively low tolls in the middle of the night, higher tolls at peak hours, and a series of steps leading up to and down from the peaks. The express lanes are adjacent to a heavily congested highway and therefore projections of revenues were less uncertain than they were for the Greenway. As of February 1997, more than 80,000 vehicles had been equipped with electronic transponders to pay tolls automatically.

c) Transportation Corridor Agencies. In 1986, the California legislature authorized local governments to create "joint-powers" agencies with the right to finance and build roads and collect tolls and development impact fees. Orange County responded by creating two transportation corridor agencies, the San Joaquin Hills TCA and the Foothill/Eastern TCA. The agencies consist of elected representatives from 15 cities and three supervisory districts within the county. The San Joaquin Hills and Foothill/Eastern TCAs have identical organizational structures, powers, and staff, and they are involved in similar financing arrangements. The two agencies combined have raised a total of about $3.6 billion to cover project costs. About 77 percent of that financing is from bonds, 7 percent from development impact fees, 9 percent from interest, 5 percent from the state, and 2 percent from other sources. The bonds are non-recourse bonds, and are therefore not backed by local or state governments. Bondholders can look only to toll revenues, development fees, and interest earnings for repayment, though they do qualify as municipal bonds, and therefore the interest is exempt from federal income

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taxes. In order to further enhance the marketability of these bonds, the federal government gave each of the transportation corridor agencies a standby line of credit of $120 million. Development impact fees have played a key role in financing the Orange County toll roads. The fees are based on the number of trips on the toll roads that development is projected to generate. Geographic locations close to the roads carry higher impact fees than those that are farther away. For residential development, rates are higher for single-family houses than for multiple-unit buildings. Commercial development fees are based on square footage. The development impact fees have provided seed capital for the projects, a responsibility that private investors have been reluctant to assume as they consider the initial stages of highway projects to be a risky period. Once opened to traffic, the Orange County toll roads are transferred to the state of California. The state, however, gives the TCAs the toll franchise until the debt is paid off (the bonds have 40-year maturities). The state assumes tort liability as well, but unlike the arrangements for the 91 Express Lanes, it also assumes responsibility for all operations and maintenance (except as related to the collection of tolls).

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Acronyms DSCR Debt Service Coverage Ratio LLCR Loan Life Coverage Ratio PLCR Project Life Coverage Ratio NHS National Highway System (United States) NHAI National Highway Authority of India NPV Net Present Value PPP Public Private Partnerships SPV Special Purpose Vehicle TCA Transportation Corridor Agencies

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Glossary Bond An interest-bearing promissory note to pay a specified sum of

money--the principal amount-due on a specific date for a specific period of time.

Bondholder Any person who is the bearer of any outstanding bond registered to the bearer or not registered. Also means the registered owner of a registered bond.

Bond Insurance

An optional policy purchased by the issuer to insure timely payment of principal and interest to bondholders.

Bond Rating Designation assigned by credit rating agencies to give indication of credit quality.

Bond Resolution

Resolution authorizing the issuance of securities, approving the Notice of Sale and the Official Statement. The resolution also contains the covenants and restrictions of the issue.

Build and Transfer

The government specifies the required outcomes and functionality, but is not necessarily prescriptive in how this is achieved. The private sector bears the risk and the asset is transferred to government to operate upon completion.

Build Own Operate Transfer

The private partner is responsible for financing the entire lifecycle of the project (design, construction, operations and maintenance) and owns and operates the project through a concession period. In addition, the private partner bears all commercial risk. The asset is then turned over to the government at the end of an agreed term.

Build Own Operate

As above, except private partner retains ownership of asset. Government agrees only to purchase services for a fixed period.

Callable Bonds

Bonds that are redeemable by the issuer prior to the maturity date at a specified price at or above par.

Closing Date The date on which all documents are finalized and signed. After an issue is declared to be closed, bond counsel authorizes the exchange of money and securities.

Competitive Bid

A sale of municipal securities by an issuer in which the underwriters or syndicates of underwriters submit sealed bids to purchase the securities. This is contrasted with a negotiated underwriting.

Costs of Issuance

Expenses paid by the issuer related to the authorization sale and issuance of bonds or notes, such as consultants' fees, legal fees and charges, trustee's fees, printing costs, bond or note discounts, costs of credit ratings, fees and charges for execution and safekeeping of bonds or notes, and filling and recording fees.

Conversion to Fixed Rate

Conversion of a variable or floating interest rate to a fixed rate. May occur automatically under predetermined conditions or may occur at

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the option of the issuer. Optional conversion could, under certain circumstances, be called a "reissuance" by the Treasury Department.

Covenants An agreement by a borrower to undertake (positive covenant) or not undertake (negative covenant) a specific action. Breaching a covenant is considered an event of default.

Credit Enhancement

A credit support purchased by the issuer to raise the credit rating on a debt issue. The most common credit enhancements consist of municipal bond insurance policies, direct or standby letters of credit, lines of credit and guaranteed investment contracts (GICs).

Currency Call Option 55

A contract that gives the holder the right to purchase a specific currency at a specified price (exchange rate) within a specific period of time.

Currency Exchange Risk

Uncertainty about the rate at which revenues or costs denominated in one currency can be converted into another currency.

Currency Futures Contract

Contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

Currency Hedge

A hedging technique to guard against foreign exchange fluctuations

Currency Swap

An agreement to swap a series of specified payment obligations denominated in one currency for a series of specified payment obligations denominated in a different currency.

Debt Service Fund

Moneys pledged and set aside to repay debt. May be held by the issuer or the trustee.

Default This is the level at which the project vehicle is in breach of the lending document and the lender can call in the loan, exercise its step-in rights or enforce its security. A default can be the death of the project. Failure to pay principal or interest promptly when due

Design Build Operate

A combination of the Design & Construction and Operate and Maintain. The Private contractor is also responsible for financing the projects construction. Upon completion and either before or after commissioning, the government buys the asset. The management stays with the contractor but government retains ownership.

Dividend Lock-Up

A restriction on a project company’s ability to pay dividends.

Financial Institution

An enterprise such as a bank whose primary business and function is to collect money from the public and invest it in financial assets such as stocks and bonds.

55 http://www.trading-glossary.com/c0592.asp

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Financial intermediaries

Institutions that provide the market function of matching borrowers and lenders or traders

Financial structure

The way in which a company’s assets are financed, such as short-term borrowings, long-term debt, and ownership equity. Financial structure differs from capital structure in that capital structure accounts for long-term Debt and Equity only.

Force Majeure

An excuse for contractual non-performance due to events beyond the control of either party. These can include “acts of God” (floods, fires, earthquakes, or other natural disasters.

Forward Exchange rate

Exchange rate fixed today for exchanging currency at some future date

Indenture Agreement between lender and borrower that details specific terms of the bond issuance. Specifies legal obligations of bond issuer and rights of bondholders. An indenture spells out the specific terms of a bond, as well as the rights and responsibilities of both the issuer of the security and the holder.

Investment Banker

An individual or firm that underwrites new issues of municipal securities.

Issuer A state, political subdivision, agency, or authority that borrows money through the sale of bonds, notes, or certificates of participation.

Lease Own Operate

Private Partner leases an existing asset from the government for a specified time period. The asset may require refurbishment but no new assets are built. The private partner operates the asset throughout the life of the lease.

Letter of Credit

Bank credit facility wherein the bank agrees to lend a specified amount of funds for a limited term.

Management Fee

The portion of the spread received by the investment banking firm allocated to structuring financing alternatives, evaluating all aspects of the financing plan, securing ratings or credit enhancements, preparing the official statement, and coordinating the financing team to prepare a new issue of securities for sale to investors.

Maturity The date when the principal amount of a security becomes due and payable.

Operate and Maintain

An existing government asset is managed by the private sector. The contractor will be responsible for operating and maintaining the asset while providing the services to the customer.

Par Value The principal amount of a bond or note due at maturity. Paying Agent - Place where principal and interest are payable, usually a designated bank or the office of the treasurer of the issuer.

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Permitted Investments

Legal investments of the bond proceeds as allowed under the laws of the state and by the resolution of issuance.

Preliminary Official Statement

A preliminary version of the official statement which is used by the issuer and underwriter to describe the proposed issue prior to the determination of interest rate(s) and offering price(s). Contains a description of the project, the security, the call provisions, and the financial and economic condition of the issuer.

Private Placement

The sale of debt or equity securities directly to private investors such as institutional investors, mutual funds, insurance companies, or pension funds.

Prospectus

The official report prepared by or for the issuer indicating the economic, financial, and social characteristics of the issuer and the collateralization for the bond issue.

Put Option The investor's right to demand repayment of principal prior to a bond's maturity. In the case of variable or floating rate debt, this right is referred to as a demand option.

Refunding A system by which a bond issue is redeemed by a new bond issue under conditions generally more favorable to the issuer.

Reserve Fund Fund held by issuer or designated trustee for a portion of proceeds as required by law and the bond resolution. May not exceed 10% of the net proceeds of the bonds. Often is required on revenue bonds to maintain reasonably required reserve in the event of a shortfall in revenues to pay debt service.

Revenue Bond

A bond payable solely from net or gross tax revenues derived from general fund revenues, tax increment revenues, or tolls, charges or rents paid by users of the facility constructed with the proceeds of the bond issue.

Risk-free rate The return on a security that is free from default risk

Risk Sharing Alliance

Government and the Private contractor to share any potential risks or windfalls associated with project risk. Issues such as pricing, service delivery standards and costs are pre-determined between the government and the private partner.

Secured Bond

A bond backed by the pledge of collateral, a mortgage, or other lien, as opposed to an unsecured bond, called a debenture.

Securitization Creating a more or less standard investment instrument such as the mortgage pass-through security, by pooling assets to back the instrument. Also refers to the replacement of non-marketable loans and/or cash flows provided by financial intermediaries with negotiable securities issued in the public capital markets.

Serial Bonds Bonds that mature in each year over a period of years, usually at varying interest rates.

Sinking Fund A fund established by bond issuers, generally required in the bond

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resolution, that is increased through time for the purpose of either retiring some of the outstanding bonds before their maturity or reducing the risk of default of the bonds.

Special purpose vehicle (SPV)

The SPV is an entity created to act as the legal manifestation of a project consortium. The SPV itself has no historical financial or operating record which government can assess.

Spot Exchange Rates

Exchange rate on currency for immediate delivery.

Stand-Alone

The rating of bonds on their own merits without the use of credit enhancement.

Syndicated Loan

A commercial banking transaction in which two or more banks participate in making a loan to a borrower.

Trustee A bank designated by the issuer as the custodian of funds and official representative of bondholders. Trustees are appointed to insure compliance with the contract and represent bondholders to enforce their contract with the issuers.

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Directory 56 57 Project Finance Bankers: Commercial, Investment, and Development Bankers

ABN AMRO Bank NV ANZ Investment Bank Barclays Capital (UK) Bank of America BBVA Bank BNP Paribas Citigroup Credit Suisse First Boston Credit Agricole Indosuez Dexia: "The bank for sustainable development" DZ Bank HSBC Bank HypoVereinsbank ING Barings JPMorgan Chase Macquarie Bank Ltd. (Australia) Royal Bank of Canada--RBC Capital Markets (Canada) Société Générale--Project Finance Group Standard Chartered Bank Standard Bank (South Africa) The International Investor (Kuwait) WestLB

Private Political Risk/Credit Insurers

Zurich Sovereign Risk Insurance, Ltd (Bermuda)

Bond Guarantees

MBIA: provides Triple-A credit enhancement for a wide variety of asset classes.

Debt Restructuring

The Paris Club: The Paris Club is an informal group of official creditors whose role is to find co-ordinated and sustainable solutions to the payment difficulties experienced by debtor nations

Development Banks and Agencies Multilateral Development Banks and Agencies:

African Development Bank (ADB) Asian Development Bank (ADB) European Bank for Reconstruction and Development (EBRD) European Investment Bank (EIB) Inter-American Development Bank (IDB) Inter-American Investment Corporation (IIC) International Finance Corporation (IFC) International Monetary Fund (IMF)

56 Esty, B. “Modern Project Finance”, John Wiley & Sons Inc. 2004 p. 518-520 57 Harvard Business School Project Finance Portal www.hbs.edu/projfinportal

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Islamic Development Bank (IDB) Multilateral Investment Guarantee Agency (MIGA) Nordic Investment Bank (NIB) United Nations Development Program (UNDP) World Bank Group

Bilateral Development Banks and Agencies:

Agence Francaise de Development (AFD, France) Commonwealth Development Corporation (CDC, UK) Finnish Fund for Industrial Cooperation (FINNFUND, Finland) Industrial Development Corporation (IDC, South Africa) Industrialization Fund for Developing Countries (IFU, Denmark) Japan Bank for International Cooperation (OECF, Japan) Kreditanstalt fur Wiederaufbau (KfW, Germany) Overseas Private Investment Corporation (OPIC, US) Swedfund International AB (Swedfund, Sweden)

Export Credit Agencies (ECAs) Multilateral Export Credit Agencies

African Export-Import Bank (Afreximbank, Africa) Corporación Andina de Fomento (CAF, Andean Countries) European Bank for Reconstruction and Development (EBRD, Central and

Eastern Europe) Inter-American Development Bank (IADB, Latin America) Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC,

part of the Islamic Development Bank) Multilateral Investment Guarantee Agency (part of the World Bank)

Official Export Credit Agencies

Asuransi Ekspor Indonesia (ASEI, Indonesia) Banco de Inversión y Comercio Exterior (BICE, Argentina) Banco Nacional de Comercio Exterior SNC (Bancomext, Mexico) BNDES-Exim (Ex-Finamex, Brazil) Compagnie Francaise d. Assurance pour le Commerce Exterieur (COFACE,

France) Companhia de Seguro de Créditos S.A. (COSEC, Portugal) Compañía Española de Seguros de Crédito a la Exportación, S.A. (CESCE,

Spain) Corporación Financiera Nacional Fondo de Promoción de Exportaciones

(CFN/Fopex, Ecuador) Credit Guarantee Insurance Corporation of Africa Limited (CGIC, South

Africa) Credit Insurance Zimbabwe (Credsure, Zimbabwe) Croatian Bank for Reconstruction and Development (HBOR, Croatia) ECICS Credit Insurance Ltd. (ECICS, Singapore) Exgo (a division of State Insruance, New Zealand) Export Credit Guarantee Agency (ECGA, Oman) Export Credit Insurance Corporation (Kuke, Poland) Export Credits Guarantee Department (ECGD, UK) Export Development Canada (EDC, Canada) Export Finance and Insurance Corporation (EFIC, Australia) Export Guarantee and Insurance Corporation (Egap, Czech Republic) Export-Import Bank of India (I-Eximbank, India) Export-Import Bank of Korea (Keximbank, South Korea) Export-Import Bank of the Russian Federation (Eximbank, Russia)

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Export-Import Bank of Thailand (Thai Exim, Thailand) Export-Import Bank of Trinidad & Tobago (Eximbank, Trinidad & Tobago) Export-Import Bank of the United States (EXIM, US) Export Credit Insurance Organization (ECIO, Greece) Export Kredit Fonden (EFS, Denmark) Export Risk Guarantee Agency (ERG, Switzerland) Exportkreditnamnden (EKN, Sweden) Finnvera plc (Finnvera, Finland) Guarantee Institute for Export Credits (GIEK, Norway) Hermes Kreditversicherungs-AG (Hermes, Germany) Hong Kong Export Credit Insurance Corporation (HKEC, Hong Kong) Hungarian Export Credit Insurance Ltd. (MEHIB, Hungary) Israel Foreign Trade Risks Insurance Corporation (Iftric, Israel) Instituto per I Servizi Assicurativi e il Credito all’Espotazione Japan Bank for International Cooperation (formerly JExIm) Korea Export Insurance Corporation (KEIC, South Korea) KfW IPEX Bank (part of the KfW BankenGruppe, Germany) Malaysia Export Credit Insurance Berhad (MECIB, Malaysia) Nederlandsche Credietverzkering Maatschappij NV (NCM, Netherlands) Norwegian Guarantee Institute for Export Credits (Giek, Norway) Office National du Ducroire (OND, Belgium) Oesterreichische Kontrollbank Aktiengesellschaft (OeKB, Austria) Overseas Private Investment Corporation (OPIC, United States) Segurexpo de Columbia (Segurexpo, Columbia) Slovene Export Corporation (SEC, Slovenia) Sri Lanka Export Credit Insurance Corporation (SLECIC, Sri Lanka) Svensk Esportkredit (SEK, Sweden) Uzbekinvest National Export-Import Insurance Company (Unic, Uzbekistan)

Private Export Credit Insurance

CNA Insurance (CNA, USA) Cox Insurance Political Risk Unit (CPRU, UK) Crédito y Caución (Spain) EULER Group (France) Eurofactor (France) Exporters Insurance Company (Bermuda) Hiscox Trade Credit Insurance (UK) Seguradora Brasileira de Credito à Exportação (SBCE, Brazil)

ECA Oversight and Reform

ECA Watch: runs a reform campaign hoping to get ECAs to adopt and upgrade environmental and social policies.

Berne Union: The Berne Union, which was established in 1934, has 51 members from 42 countries and locations. The union works for international acceptance of sound principles of export credit insurance and foreign investment insurance.

PPP Information 58 Australia

Partnerships Victoria (Victoria) Public Private Partnership Policy (Queensland)

58 Australian Government – Department of Finance and Administration

http://www.dofa.gov.au/commercialprojects/private_financing_links.html#LinksFromPFPrinciples

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Policy and Guidelines for Privately Financed Projects (New South Wales) Public Private Partnerships (South Australia)

England Partnerships UK

Office of Government Commerce - Private Finance Initiative Ministry of Defence - Private Finance Initiative National Audit Office The PPP Forum PublicPrivateFinance.com Public Private Partnership Programme HM Treasury

Ireland

Public Private Partnerships Framework for Public Private Partnerships

Netherlands

Public-Private Partnership Knowledge Centre PPP and Public Procurement Guide

Canada

Treasury Board of Canada Canadian Council for PPP Public-Private Partnership (P3) Office

United States

Institute for Public-Private Partnerships National Council for Public-Private Partnerships

South Africa

South African Treasury - Public Private Partnerships Public-Private Partnership Resource Centre

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References BC Construction Roundtable 22nd November 2001: Public-Private Partnerships and the BC Infrastructure Agenda – Russell A. and De Zoysa S. Canadian Forum on Public Procurement, “Doing Business: Public Private Partnering Why Private Financing?” David Santangeli, Managing Director, Head of Infrastructure, Privatization and Power Scotia Capital Inc., October 1, 2001 Chege L. “Recent Trends in Private Financing of Public Infrastructure Projects in South Africa” Dailami M. and Hauswald R. (2003) “The Emerging Project Bond Market: Covenant

Provisions and Credit Spreads,” World Bank Policy Research Working Paper 3095

Department of Treasury and Finance, Victoria Australia “Partnership Victoria

Guidance Material – Risk Allocation and Contractual Issues a guide” June 2001

Esty, B. “Modern Project Finance”, John Wiley & Sons Inc. 2004 p. 518-520 Fabozzi F. & Modigliani F. “Capital Markets”, 1996 Prentice-Hall Inc, New Jersey, USA First Workshop on Economic Cooperation in Central Asia: “Challenges and Opportunities in Transportation”, Asia Development Bank 1999 Government of New South Wales, “Working with Government - Guidelines for

Privately Financed Projects” November 2001 Government of New South Wales, “Guidelines for Financial Appraisal (TPP 97-4)” July 1997 Inocencio A. and David C. (2001) “Public-Private-Community Partnerships in

Management and Delivery of Water to Urban Poor: The Case of Metro Manila ,” DISCUSSION PAPER SERIES NO. 2001-18 Philippine Institute for Development Studies

Lang, L.H.P., “Project Finance in Asia”, 1998 Elsevier Science B.V.

Amsterdam, The Netherlands Ocasio, R. “Identification of Financial Resources and Credit Mechanisms for the

Urban Sanitation Program in Jamaica”, Activity Report 39. August 1997 www.crosslink.net/~ehp/ar39sum.htm

Partnerships Victoria Guidance Material Contract Management Guide June 2003 www.partnerships.vic.gov.au/domino/web_notes/PartVic/ Plummer J. with Nhemachena G. January 2001 “Preparing a Concession: Working

towards Private Sector Participation in Water and Sanitation Services in Gweru, Zimbabwe” BUILDING MUNICIPAL CAPACITY for PRIVATE SECTOR PARTICIPATION DFID Knowledge and Research Project R7398 in

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collaboration with the UNDP PPPUE WORKING PAPER 442 04 www.undp.org/ppp/library/publications/gweru.pdf

Pollio, G., “International Project Analysis and Financing” 2002 University of Michigan

Press SGS Economics and Planning Pty Ltd “Guidelines for a Local Government Infrastructure Financing Manual” Final Report (July 2002) Sheppard R., “Capital Markets Financing for Developing Country Infrastructure

Projects”, DESA Discussion Paper No. 28, January 2003 Export Development Canada - www.edc.ca/prodserv/insurance/risk_pol_e.htm HM Treasury of the UK - www.hm-treasury.gov.uk/ International Finance Corporation - http://www.ifc.org Investor Words – www.investorwords.com McCann FitzGerald Solicitors - www.mccannfitzgerald.ie Moody’s Investor Services – http://www.moodys.com Multilateral Insurance Guarantee Agency - http://www.miga.org/ National Council of Health Facilities Finance Authority - http://www.nchffa.com/members.htm World Bank – www.worldbank.org