Transcript Urban Infrastructure: Issues in structuring bankable projects ASCI-World Bank Programme on Strengthening Urban Management (SUM) January 23, 2003

Urban Infrastructure:
Issues in structuring bankable projects
ASCI-World Bank Programme on
Strengthening Urban Management (SUM)
January 23, 2003
Often heard at seminars …
Small is beautiful
Get your act together
Firm up YOUR objectives first
but recognize that others have their objectives too
Experiment
… but be willing to correct yourself
Stand by your commitments
Do not ignore the ultimate customer/user
Beware of smart/over-confident developers
Sounds like preaching? Read on ...
Structure of the Presentation
Select illustrations of PSP in infrastructure
Urban Infrastructure projects
Port sector projects
Road sector projects
Lessons from experience so far
Objectives & Concerns of various stakeholders
Illustrations with wide coverage
Sectors Covered
Urban Infrastructure
Ports
Roads
States Covered
Power/Telecom omitted
14
10
12
Projects from 10 states
Kerala, Karnataka, Tamil
Nadu, Andhra Pradesh
Maharashtra, Goa,
Gujarat, Madhya
Pradesh, Chhattisgarh
West Bengal, Orissa
Rajasthan, U.P., Bihar
Well, there are lots of cases and a few good lessons!
Ahmedabad Municipal Corporation
AMC became the country’s first municipality to
raise bonds from capital markets
Bond raising preceded by an internal restructuring and
revenue enhancement measures
Bond proceeds used for water supply schemes
Bonds secured by a charge on octroi revenues of AMC
Utilisation of bond proceeds have been slow as project
implementation has been delayed
Lesson: Careful planning & timing is necessary for
sustainable project implementation processes
Bangalore Water Supply Project
Private participation was sought for 500 MLD BOOT
project by BWSSB
Bidding preceded by technical and demand studies
After pre-qualification, three consortia submitted final
proposals
The project was nearly awarded to a consortium led by
Biwater International but the bidding process has been
questioned and resulted in delays
Lesson: Clear bidding parameters required to be
stipulated & process transparency to be ensured
Chhattisgarh - Borai Water Supply
Project
Borai Bulk Water Supply Project is set up on BOOT
basis as an industrial bulk water supply for Borai
Industrial Growth Centre (BIGC) in Durg district,
Chattisgarh under concession from CIDC
It is a Project 30 MLD project with a cost of Rs. 420 mn.
(including existing assets valued at Rs. 160 mn.)
Radius Water Ltd. promoted by Kailash Engineering is
the concessionaire
The first phase (12 MLD) of this project is already
operational but there are some hiccups as to drawal
rights and further expansion
Lesson: Risk taking ability of the promoter helped this project
go quickly through the initial stages.
Chennai Desalination Project
Chennai Metropolitan Water Supply and Sewerage Board
(CMWSSB) mooted a project for implementing the tertiary
treatment / Reverse Osmosis plant of 50 MLD capacity at
Kodungaiyur, Chennai on a Design, Build, Own and Operate
basis
The submission dates were postponed a number of times as
CMWSSB was not sure of attractiveness to investors
Ultimately it bid out both EPC & DBOO as alternate options
Result: There were only two bids – both on an EPC basis (L&T
and BHEL). Meanwhile VA Tech Wabag another party chose to
bid for a limited size project on captive basis for CPCL one of
the major clients of CMWSSB
Lesson: There is no harm in experimenting but first get your
objectives right
Cochin Industrial Water Supply
Mooted by KSIDC, which invited IFC to assist
Basic project preparation was carried out including
detailed technical studies as well as demand
estimates
Alternate project structures were evaluated
Meanwhile KWA signed an agreement with Cochin
Refineries, a major user allowing an off-take of
water
Lesson: Co-ordination among government agencies
required for project development
Goa Salaulim Water Supply
Goa PWD had invited proposals for water supply
project on a BOOT basis (with an option to bid in
an alternative innovative format)
BOOT bids were found very costly and then the GoG
thought of alternative concession route
The bidder questioned GoG's demand forecast
At present due to successive changes in the Government
the process has been temporarily suspended
Lesson: Inadequate
authorities
homework
by
the
state
Haldia Industrial
Scheme
Water
Supply
HDA has sought private participation and received
over 25 Expressions of Interest
Despite adequate demand many technical issues
(salinity, mix of ground water and river water, etc.)
remain unresolved
HDA decided against technical study, no project
parameters have been set up & may instead go directly
for BOT or EPC/O&M contracts (but may not have funds)
Potential investors/bidders are unhappy as there is no
progress
Lesson: Project has not been thought through
clearly
Nagpur Municipal Bonds
NMC proposed a Rs. 1.17 bn. capital expenditure programme
under Pench-III Stage-I project of the Corporation, which
envisages capacity creation in the water supply services
Nagpur Municipal Corporation proposed to raise Rs. 0.90 bn.
from issue of Bonds to partially meet its requirement, the
balance coming from from internal accruals and grants from
State Government
With a AA-(SO) rating by CRISIL SBI Capital Markets as
arranger could raise only ~ Rs. 0.30 bn. even after extending
dates several times.
NMC however carried through with its tariff reforms (water &
property taxes) & postponed the implementation till it could
generate adequate internal accruals
Lesson: Bhagwan ke pas der hai lekin Andher nahi.
Pune Water Supply Project
Water Supply Project conceived with structuring assistance
from USAID
Project conceived as EPC+O&M with funding from funds raised
by PMC
Also a separate contract for management of billing & limited
collections
Project generated considerable investor interest as careful
planning had gone into the project preparation
Bidding Process was terminated prematurely
PMC is now implementing the project on its own
Lesson: Political risk (the power of lobbying groups) in the
project was underestimated
Tiruppur Water Supply Project
Project was conceived by IL&FS with support from GoTN,
TACID and Industry
Proposed as a BOOT project for sourcing, treatment and
supply water mainly to industry with some social coverage
Tiruppur industry comprises of garment exports and
willingness to pay is higher
However, the project has taken considerable time to develop
resulting in cost escalation
The cost of water for the commercial users has more than
doubled during this period
Reached financial closure 8 years after conceiving!
Lesson: Complex projects are difficult to implement and
subject to diverse risks
Consider this … the city of
Ahmedabad
GIDB has proposed an Integrated Public Transit System for
Ahmedabad (IPTS) and appointed a consultant for the
studies
AMC became the country’s first municipality to raise bonds
from capital markets for various projects (primarily water)
Sabarmati Riverfront Development Corporation (SRFDC) an
organisation set up by AMC is proposing a massive area
development project with the help of a local not-for-profit
organisation (EPC)
Lesson: Lack of integrated project development for the same
city (and now watch out Mumbai’s “integrated” development)
Mumbai: non-toll bridge within city
Project conceived as self-financing bridge
1.5 kms long flyover bypassing three junctions at
Andheri on Western Express Highway.
To be financed by selling commercial property under the
bridge.
Underground car park, two storeys of commercial
property with a six lane carriageway on top.
Project delayed initially due to delay in approvals and
later due to litigation over alleged environmental issues;
now real estate prices not at high levels.
Lessons: Lack of coordinated efforts, insensitivity to local and
environmental issues and non-transparent procedures.
50 flyovers in Mumbai
50 flyovers to be financed initially through bond issue and
recovery through an entry toll (Rs. 20/-)
Tolling commenced sometime back but was met with stiff
resistance from Transporters’ Associations and court has put a
stay on tolling
MSRDC is fast running out of funds (on account of the flyovers
as well as the Express way) but revenues not as per
expectations
Now MSRDC would be reimbursed through a fuel cess on all
Mumbai Petrol Pumps
Lesson: Realistic assessment of willingness to pay (also, “pay
for use” principle flouted)
Kolkata Car Park (Rowden Street)
Kolkata Municipal Corporation (CMC) awarded multi-level
automated car park project to Simplex Projects
Project details:
Location: Rowden Street (in the vicinity of Park Street)
Project Cost: Rs. 90 mn. (CMC interest free advance Rs. 30
mn.)
Car Parking: 216 cars at Ground+ 2 levels
Technology: Machinefabriek Aarding BV of Netherlands
Revenues from Car Parking & Advertisements
Performance: Revised estimate for first full year of operations
are at 55% of projected as the “no parking zone” has not
been fully enforced resulting in lower car parking revenue
Lesson: The corporation needs to stand by its commitments
Mumbai - Car Park at Breech Candy
Municipal Corporation of Greater Mumbai (MCGM) has bid out
Car Park cum Commercial Development Project near Breech
Candy Hospital on a BOOT basis
Bidding Parameters:
Upfront payment of premium to MCGM
No. of cars & two wheelers that can be parked
Bids received are a veritable mix of combinations of no. of
car parks promised and upfront premium payment assured
Current Status: Bidders have been asked to make
presentations on their project proposals showcasing the
technologies used (capital cost, operating cost & access time)
Lesson: Lack of adequate project preparation to ensure clear
& transparent bidding process
Bidding Results (Mumbai Car Park)
Bidder
Car Parks
Premium (Rs.crore)
No. of
Cars
Rank
Amount
(Rs. Cr.)
Rank
Nandesh Constr.
205
2
3.33
2
Akruti
204
3
3.30
3
Fasqua
167
5
4.00
1
Earth Estate
208
1
2.20
5
Prime
167
5
2.61
4
Simplex
187
4
0.42
7
Rockline
160
7
1.00
6
Structure of the Presentation
Select experience of PSP in infrastructure
Urban Infrastructure projects
Port sector projects
Road sector projects
Lessons from experience so far
Objectives & Concerns of various stakeholders
Container terminals at Chennai &
Kandla & JNPT
In the mid-90s a number of projects were bid out in major
ports for private sector
Privatisation of container terminals was awarded to P&O a
large international Ports & Shipping group at Kandla, JNPT,
Cochin & Chennai
Despite some initial hiccups the JNPT project went through to
financial closure.
The Chennai Container Terminal took some further time (in
years!) while Kandla became a major controversy leading to a
showdown between the Port Trust & MoST. Cochin was not
pursued by P&O as some comforts were not forthcoming.
Lesson: The Government was unable to resolve key issues
and/or read the real issues in competitive behaviour
Container terminal at JNPT
BOT Project with a world class
facility at a cost of Rs. 7.50 bn.
Promoted by one of the world’s
leading maritime business
group.
JNPT did not allow first charge
on project assets to the
lenders and other amendments
to the concession agreement.
43%
13%
4%
6%
9%
1%
Kandla
Cochin
Vizag
5%
19%
Mumbai
Tuticorin
Haldia/Calcutta
JNPT
Chennai
So project financing was not available and ultimately the project
was financed with the support of sponsor guarantee.
Lesson: Despite hurdles, strong promoters can make project
happen.
Container Terminals – current
status
As everyone is aware, JNPT (P&O) is a major success story
But despite this, and an aggressive lobbying effort by P&O,
the new (revised) bidding conditions for the proposed new
container terminal at JNPT explicitly disallows bidding or
investment by P&O in any form
Cochin Container Terminal now comes as a package of
phased development (handing over of existing terminal
followed by development of Vallarpadam)
Kandla Container Terminal finally did not proceed
Adani sponsored Mundhra Port is now developing a Container
Terminal which may be divested in favour of P&O
Lesson: At times it is difficult for the Government to
understand the machinations of the private sector
Dharma port project in Orissa
Proposed green-field port for dry bulk cargo at an estimated
cost of Rs. 15 bn.
To be developed on BOOST framework.
Promoted by a JV of an Indian engineering company and two
foreign companies.
Significant delays in finalization of changes in concession
suggested by lenders.
Meanwhile both foreign sponsors have walked out of the deal
– while one firm ran into financial difficulties the other had
lost interest due to delays and disagreement with respect to
its potential role in O&M for the project
Lesson: Lack of application and push by all parties.
Chemical terminal at Dahej, Gujarat
Greenfield liquid chemical handling facility at an estimated
cost of Rs. 8 bn.
Developed on a BOOT framework.
Promoted by a JV of GMB, GIIC and four Indian
petrochemical and fertiliser PSUs.
Project physically complete and operational without the
concession being signed and without financial closure.
Multiplicity of promoters and speed of response is a key
issue.
Lesson: Too many cooks spoil the broth.
Enron, Dabhol & OWMSL
Ocean Sparkle Ltd. based in Hyderabad formed a JV with
Weismueller of Netherlands to bid for and win a mandate for
providing port services to the LNG Terminal at Dabhol
Project: Comprising of state of the art 4 tugs costing Rs. 800
mn. To be built to the specifications of The DPC’s O&M
operator (a subsidiary of Enron) and operate for 20 years
Project reached financial closure despite on-going problems
at DPC and the tug-of-war with MSEB
By the time the plant closed down, the tugs were ready for
delivery but no Enron to certify! Weismueller agreed to buy
the tugs for redeployment and settled loans
Lesson: In large projects, the smaller parties fall by the
wayside but are saved only if they have some back-up.
Haldia – Berth 4A for coking coal
Haldia Port bid out development of Berth 4A for handling
coking coal imports required by steel plants
ISPL was awarded the contract and they simultaneously
approached project financiers and Steel Authority (a likely
major off-taker)
Despite considerable delays, ISPL was able to reach a 20 year
contract with SAIL for using their facility for importing coking
coal, an important ingredient in Steel Production
Project lenders unsuccessfully sought a number of
amendments to the Concession Agreement (essentially in line
with the Model Agreement drafted by IDFC for MoS)
Lesson: Small project, long off-take contract, viability beyond
doubt; a formula for success
Structure of the Presentation
Select experience of PSP in infrastructure
Urban Infrastructure projects
Port sector projects
Road sector projects
Lessons from experience so far
Objectives & Concerns of various stakeholders
Noida Toll Bridge
Project comprises a 6-lane bridge over Yamuna
river and approach roads costing Rs. 4.00 billion.
Flyover at Ashram road junction required for
smooth traffic flow from the project delayed.
Traffic significantly lower than appraisal estimates.
Average daily collection is Rs. 0.27 million(Debt
service liability about Rs. 1.70 million/day)
Lesson: Co-ordinated development of linkages and
accurate traffic estimation key for project success.
Coimbatore By-pass
By-pass on NH-47 developed by L&T on BOT basis
Toll-free alternative available to local traffic
Subsequent to the award of the project, scope enlarged
to include strengthening of Attupalam bridge before the
by-pass
Toll-free alternative no longer available
Hence local opposition to toll collection
Earlier, willingness to pay did not capture such an event
Lesson: Project structure should be sensitive to
local traffic
Durg by-pass
By-pass on NH-6 developed by Sancheti group on
BOT basis
Toll-free alternative available to local traffic.
Project scope includes a river bridge and ROB.
NHAI provided sub-debt and limited shortfall guarantee.
Project completed almost as per schedule.
No local opposition to toll collection.
Project in operation for two years.
Lesson: Being first project, project reached closure
with help of financial support from NHAI.
Delhi-Gurgaon Expressway Project
Originally conceived in mid 1990s, CIDB, Malaysia was to be
mandated in 2000 to complete this project as part of govt-togovt initiative, but the proposal sought a grant of Rs. 1.20
bn. from NHAI, and was thus rejected.
This year the project bid out by NHAI for Capital Subsidy
(Grant) received a number of bids promising premium instead
and was awarded to Jaiprakash Industries-D.S.Construction
consortium which offered the highest Rs. 615 mn. Premium
The project is adversely affected by recent Court order on
ban of polluting vehicles (non-CNG trucks/busesa) entering
New Delhi
Lesson: Classic case of the nature of risks in infrastructure
projects. Who is right CIDB or Jaiprakash?
Mattancherry Bridge at Cochin
First BOT bridge project in Kerala State; GCDA
acted as the sponsor authority
Other agencies involved - KSIDC, CPT, Cochin
Corporation and PWD
Project was offered on a BOT basis and bid for
concession period. At bidding stage Traffic studies,
technical studies & draft concession agreement
was given to bidders
Project has been awarded to Gammon India
Lesson: Initial investment on project preparation
yields high returns
PPP in NHDP
The NHDP has been partially successful in attracting private
sector investment.
Type of project
No. of Total Length Total Project
contracts
(km)
cost (Rs.
Bn)
Cost per
Km.
(Rs. Mn.)
BOT toll-based
8
454
33.02
Rs. 72.7
BOT annuitybased
8
475
23.54
Rs. 49.6
NHAI SPVs
13
453
23.00
Rs. 50.8
NHAI Contracts
99
5846
169.00
Rs. 28.9
PPP or not to P(rivatise)
Construction Contract
Rs. 280 mn. Per Km.
This is an item rate
contract (not FTFC EPC)
Add a further Rs. 80 mn.
(Pre-op, IDC, Fees, etc.)
At Rs. 360 mn. per km. this
is still far lower than …..
Now add Rs. 140 mn. for
escalation due to extra
work to get Rs. 500 mn.
Add now for 15-20 years of
repairs & maintenance
Mumbai Pune Expressway cost
was Rs. 16 bn. (as per
contractors’ bids) and now on
completion it is Rs. 22 bn.
Reliance had quoted Rs. 30 bn.
including 1000 hectares of
land acquisition
Annuity Project Cost
Rs. 500 mn. per km.
A typical BOT project
(either annuity or toll
based)
Rs. 500 mn. per km.
No further addition, Project
cost still Rs. 500 mn. per
km.
Project cost still Rs. 500
mn. per km.
PPP in roads are maturing
Toll-based BOT
Annuity Scheme
Grant/Capital Subsidy
Reverse Grant/Premium
O&M/Tolling Contracts
Real-estate linked project
Many state level projects
6 projects awarded
Jaipur-Kishengarh (NHAI)
Many projects in M.P.
Delhi-Gurgaon
4-lane NHDP stretches
Mumbai-Pune Exp. Way
Mahakali Flyover, Mumbai
Vivekanand Flyover, Kolkata
Bangalore-Mysore
Infrastructure Corridor
Comparison of Expressways dev.
Particulars
Mumbai-Pune
AVExpressway
BMIC
MSRDC
(public)
NHAI
(Public-Private)
Kalyani Group (Private)
Year of start
1995
1995
1995
Cost (Rs. Crs.)
1.630
130+51+680
826+150
Length (kms.)
94
93
62
Kon-Dehu
A’bad – Vadodara
Bangalore-Mysore
6-lane
4-lane
2-lane/4-lane
Concrete
Bitumen
Bitumen/concrete
MSRDC bonds (G’teed
by GoM)
Project debt and
equity
Advance sale of land, senior
debt, sub-debt and equity
Current Status
In operation
Under construction
Under development
Extent of PSP
Item rate contracts
Debt, item rate
contracts
Equity, debt, EPC contracts
Direct Toll
Direct toll
Direct Toll, real est.
Promoter
(Development)
From-To
No. of lanes
Pavement type
Funding by
Revenue
Structure of the Presentation
Select experience of PSP in infrastructure
Urban Infrastructure projects
Port sector projects
Road sector projects
Lessons from experience so far
Objectives & Concerns of various stakeholders
Some case studies ..1
East Coast Road vs. Tiruppur & Noida Toll
Bridge
Durg Bypass vs. Jaipur-Kishengarh
Bhiwandi Bypass vs. Mumbai-Pune Expressway
Dhamra vs. Haldia berth 4A & Kakinada
Small is beautiful
Some case studies ..2
Coimbatore Bypass (sensitivity to local traffic)
Mumbai Entry Point Tolls (user pay principle
challenged)
Noida Toll Bridge (international class but low
turnout)
Do not ignore the ultimate customer/user
Some case studies …3
AMC Bonds (Utilisation of proceeds)
City of Ahemedabad (GIDB vs. SRFDC)
Cochin Industrial Water Supply (KSIDC vs.
KWA)
Haldia Development Authority’s Water Supply
Project
Get your act together
Some case studies …4
Goa Salaulim Water Project (BOOT or
Concession)
CMWSSB’s Chennai Desalination Project (EPC
or BOT)
Mumbai Car Park (upfront payment or no. of
cars)
Firm up YOUR objectives first
Some case studies …5
Mattancherry Bridge (insisted on upfront
payment but later relented)
NHAI’s Palasit Panagarh (rebid after initial high
bids)
Durg Bypass (selected weak promoter but later
extended guarantee & sub-debt support)
MMRDA’s Convention Centre (bidding failed
twice)
Experiment but be willing to correct
yourself
Some case studies …6
Jaipur-Kotputli Toll Collection Operations
Mahakali Flyover (PIL & subsequent
developments)
NOIDA’s Dadri Bridge (UPSBC upstages
Simplex)
Bidding for Container Terminals in the country
Beware of smart/over-confident developers
Some case studies …7
Kolkata Car Park (enforcement of no-parking
zone)
BOT Roads in general (timely toll notification)
Road Bypasses (enforcement of ban on
through traffic)
Tax benefits under 10-23 (g) (delays/denial of
Certificate)
Enron !!!!!
Stand by your commitments
Summary: Some practical lessons
Small is beautiful
Do not ignore the ultimate customer/user
Get your act together
Firm up YOUR objectives first
but recognize that others have their objectives too
Experiment
… but be willing to correct yourself
Beware of smart/over-confident developers
Stand by your commitments
Still sounds like preaching?
Some practical approaches
Institutionalize your approach through a vehicle
PIDB, GIDB, I-Deck, I-Kin, I-Win, APIIF, MPIDB, CIDC
Find a champion & give him a long tenure
First develop small & medium projects to
demonstrate success
… then replicate
Give importance to good project preparation
… and not just to announcing good sounding projects
Keep the bidding simple & evaluate on just one key
parameter
Hire advisors to help!
Need for PSP
Private Sector Participation is sought to essentially
bring in:
Private capital
Private management
New & better technology
The modality of PSP critically depends on exact
objectives sought to be achieved
Why private sector participation?
Economic/Political Reasons
Financial Reasons
Management Reasons
Other reasons
Policy of privatisation
Fostering competition
Commercial principles
Pay-for-use culture
Political bottlenecks in tariff
restructuring or reduction
in subsidies
Better management of all
resources & operational
efficiency
Improved level of service
and responsiveness to users
Budgetary priorities and
constraints
Additionality of funds
Better utilisation of
financial resources
New and better
technology
Involvement of users
and other stake holders
Environmental
requirements
Different modes of PSP can be
explored
Mode
Asset
Ownership
O&M
Management
Contract
Public
Public &
private
Public
Public
3-5
Lease
Public
Private
Public
Shared
8-15
Concession
Public
Private
Private
Private
25-30
Private/
Public
Private
Private
Private
20-30
Private/ Pvt.
& Public
Private
Private
Private
Indefinite
BOT
Divestiture
Capital
Commer
Investment cial Risk
Duration
(Years)
Lessons from past experience
Reasons for failure attributable to one or more of
the following:
Inadequate framework for PSP
Insufficient project preparation & development
Failure to address concerns of all stakeholders
Framework for PSP
Clarity in objectives of PSP
Institutional restructuring to coincide with PSP
initiatives
Regulatory framework to be put in place
Managing political risk and willingness to pay
issues
Project preparation & development
Co-ordination issues: Identification of nodal agency
and defining roles of other agencies
Establishing independent commercial viability of
the project: demand, revenues & costs
Identification of risks, allocation & mitigation
Project structuring & role of private sector
Comprehensive information memorandum covering
studies & draft contract agreements
Designing transparent competitive bidding process
Transparent & fair procurement process
Stakeholder concerns
Capacity building of government / public agencies
Interest and capacity among private sector
operators
Building awareness for “pay for use” principle
among consumers and communities within society
Addressing financing issues of lenders and
investors
Ensuring adequacy of services at affordable rates
to the urban poor
Structure of the Presentation
Select experience of PSP in infrastructure
Urban Infrastructure projects
Port sector projects
Road sector projects
Lessons from experience so far
Objectives & Concerns of various stakeholders
Government/Local Authority
Sustained improvement in provision of
Infrastructure
Conserving scarce public resources
Creation of facilities and provision of efficient
services
Transparency and fair process
Protection of Social/Developmental commitments
Developer/Investor
Commercial viability of project
Freedom & flexibility in conduct of business
Avoidance of risks beyond control
Fairness in transaction
Delays in approvals
Project Financiers/Lenders
Financial viability of project
Acceptable concession framework
Freedom to exercise step-in-and-cure-rights
Protection against defaults by Government and
developer
Consumers/Users
Availability of facilities & services
Acceptable levels of tariffs/taxes/tolls
Appropriate grievance redress system
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What is project finance
Project Finance is a technique of non-recourse or
limited recourse financing in which the project
lender principally look to the cash flow of a single
project as security for their long-term loans.
In India the term Project Finance was generally applied to long term loans
given by Term Lending institutions (Fis) to new (or modernisation/
upgradation) industrial projects as compared to working capital facility
extended by commercial banks.
Extent of sponsor recourse
Full-recourse
Akin to corporate finance
Non-recourse finance
Extremely rare
Limited recourse finance
Completion guarantees
Undertakings to cover cost overruns
Limited recourse financing...
Insulates sponsors from project debt and risk of
project failure
Enables them to share some risks in a large project
with other participants
Overcome the inability to borrow through a
corporate loan as balance sheet cannot support the
project debt
Project finance is cash flow based
Cash flow based financing for infrastructure projects
Significant value of the project is derived from intangibles
and not from the assets created
Estimation of debt requirement of the project depends on
the future cash flows of the project as against the capital
expenditure incurred in conventional projects
Telecom/ Ports : based on peak cash negative
Power/Roads : cash requirement till project completion
Future cash flows from the project are the primary source
of debt repayment
Project finance needs strong
security structure
Security structure needs to be more stringent than
a normal project assistance and typically includes Legal mortgage of all assets, including receivables (as
opposed to the normal equitable mortgage)
Pledge of promoter shareholdings in the project
company
Escrow mechanism for cash flows of the company
Assignment in favour of lenders of all the project
contracts
Project finance vs. corporate
finance
Project Finance
Corporate Finance
(balance-sheet funding)
Recourse limited to
identified pool of assets
Recourse to all the assets of
the borrower
Contracts/license
agreement/Take-or-Pay
contract is key security
Physical assets are the key
security & market value may
be realisable
Lenders’ approach to financing
Focus on economically strong projects
Back strong sponsors with successful track record in
implementing large projects
Comprehensive due diligence on all counterparties (incl.
EPC contractor, O&M contractor, Licensor, etc)
Insist on complete financial closure before commitment
of any funds
Arranging project finance requires substantial time and cost
Basis for lenders’ risk aversion
Lenders have the maximum money on a project rated at
“BBB” and the minimum returns
whereas
The developers put a small money as equity and aspire for
supernormal profits
The Users get a facility for which they can pay if they so wish
(or protest/use alternatives, etc.)
The Government puts no money but has the right to intervene,
take over if it is dissatisfied
yet
the lenders’ lenders are not so easy on them and besides
expecting a “AAA” rating also face stringent RBI/SEBI
regulations
Risks over the 3 project phases
Lenders identify three separate phase of risk over the life of the
project
Engineering &
Construction Phase
Start-up
Phase
Physical
Completion
Operation
Phase
COD
Project finance lifecycle
Project
identification
Prelim. project
assessment
Due diligence
Arranger Mandate
Issue of LOI
Resolution of due
diligence issues
Drafting of financing
Term sheet
documents
negotiations
Term sheet signing
Issue of term sheet
Implementation &
monitoring
Disbursements
Financial closure
Operations &
monitoring
Project completion
Debt servicing
FIMMDA Annualised Spreads
Spreads over Gilt curve in bps
Annualised
spreads
1
2
3
AAA
60
62
69
AA+
85
86
96
AA
122 124 134
AA167 168 180
A+
238 242 261
A
293 308 334
A360 383 419
BBB+
457 460 482
BBB
479 510 556
BBB647 651 674
Updated on 31st Oct 2002
4
65
93
131
178
264
343
429
479
570
672
5
61
90
129
176
268
352
437
475
583
669
6
60
88
127
175
267
352
438
480
585
675
7
58
86
125
173
265
353
439
485
586
682
8
63
91
131
178
271
358
445
495
592
693
9
68
96
136
184
277
364
451
506
598
704
10
72
101
142
189
283
370
456
517
604
715
Source: http://www.fimmda.org
Different modes of PSP can be
explored
Mode
Asset
Ownership
O&M
Capital
Investment
Commercial
Risk
Duration
(Years)
Management
Contract
Public
Public &
private
Public
Public
3-5
Lease
Public
Private
Public
Shared
8-15
Concession
Public
Private
Private
Private
25-30
Private/
Public
Private
Private
Private
20-30
Private/
Private
Pvt. &
Public required
Project Financing
Private
Private
Indefinite
BOT
Divestiture
Common Project Structures …1
Build-Operate-Transfer (BOT)
New Asset/facility against collection of user fee
investor rights revert back to the public authority at the
end of the concession
ownership vests with the public authority
used for highways, utilities and ports
Build-Own-Operate (BOO)
similar to BOT but without the transfer of rights
may also stipulate payment of some fee to the public
authority for the right to operate the facility
used for telecom and power projects
Common Project Structures...2
Built-Own-Lease-Transfer (BOLT)
assured revenue through lease rentals
proposed for Indian Railways
Built-Own-Operate-Share-Transfer (BOOST)
revenue shared with the public authority
Minor ports proposed in some states
Annuity structure
Concessionaire responsible for construction and O&M
Concessionaire receives fixed “annuity” over the concession
Proposed for National Highways projects
Likely to replace Railways BOLT scheme