Project Finance -Case

– Metropolitan Region Development Authority

(Authority) is thinking of building a 2 lane toll bridge
on a creek connecting the mainland of the city to the
suburbs.
– But is short of funds…approached State Govt.
– …State Government agrees to support some portion of
the project finance if the Authority could structure the
project and mobilize resources
– Authority prepares detailed cost estimates and revenue
streams and financing plan for the project (to be
operated on BOT basis) in consensus with state
government and then approaches funding agencies with
the same.
• Authority intends to sign the financial agreement by
31st Dec 2010 and start construction which is
assumed to go on for 2 years. And single party will
operate it for period of 15 years from date of
commissioning.
• Prepare project time table.
• The length of the Bridge is 2.5 Kms
• The Approach to the bridge is in environmentally sensitive zone
(CRZ)
• The land is under the Ownership of state revenue department and
would have to be transferred to Authority.
• The site clearance will have to be carried out to remove wild
vegetation in the right of way for a distance of 500 m on either side
(Approach) of the bridge. This would cost about 100 Rs. Per sqm.
• The soil condition is marshy and hence the cost of construction per
Km is 1.2 crores.
• It will require 4 engineers and 1 head supervisor on site
during construction
• During construction phase an administrative office shall
have to be set up at site with two permanent staff
• Due to limited technical know how available with the
Authority. ..they will hire technical consultant for
detailed design and engineering, traffic projections and
recommendations on toll.
• State Govt. shall also appoint independent Expert to
approve work submitted by appointed consultants
• Prepare capital cost estimates for project
• Traffic Projections
• Traffic and Toll rate in the first year of operation
Toll Rate Rs./Km
– Two wheelers 20000 7.5
– Four Wheelers 75000 10
– State Transport Buses 1000 Annual payment of Rs. 1000 per vehicle

• Average Annual growth to be applied for each mode is

4%
• Assume inflation of 10% for toll rates every 3 years

• Prepare Traffic Projections

• Since the financing mechanism is not
clear….Authority makes following assumptions
for initial inhouse financial analysis of the project
– 25% Equity by private operator
– 15% Equity by Authority
– 10% Equity by the state government
– 10% Subordinated debt by State Government at 6%
– 40% Debt From senior lenders at 10 %

Prepare Financing Plan

• The Project once completed shall operate for 15 years
• During operations it will mainly generate revenues from
– differential toll collection
– Some revenues from small advertisement panels on the road
median lamp posts
• At the same time it will also incur expenses during
operation phase.
– operation and maintenance of the bridge (inflation of 4% every
year)
– periodic resurfacing (every 3rd year)
– Operating toll plazas (Increase 10% every year)
• Use WDV method to calculate depreciation at the
average rate of 15%
• Applicable tax is 40%

Prepare P & L Account

Prepare Cash Flow
Find out NPV for the project if the cost of equity is
15% and cost of debt is 10%.
Comment on project viability?