•

•
Mona Iyer
CEPT University
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 Session Outline
• Trends in Infrastructure service provision
• Distinctive features Infrastructure Project Finance
• Basic Components and concepts for financial
assessment
– Capital cost
– Exp and Revenues
– Means of financing
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 What is Infrastructure
– The internal framework structure OR basic facilities, services, and
installations needed for the functioning of a community or society,
industry or business
• such as transportation and communications systems, water and power lines, and public
institutions including schools, post offices, and prisons etc..
– Infrastructure is about delivering essential services that are the
foundation for development. (The World Bank)
–
– The term infrastructure has been used since 1927
–
– people now use infrastructure to refer to any substructure or underlying
system. Eg. financial infrastructure of business firm, research and
development Infrastructure of a pharmaceutical company etc…
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 Why is it important
• Raise productivity of capital and labour
• Essential for economic development of country
• Chicken and egg situation:
– Does Infrastructure investment cause growth
or growth causes infrastructure investment
– However, a strong association exists between
the two.
•
 Trends in Infrastructure Service Provision
• Historical prominence of public sector
• Central Govt: interstate facilities like railways, highways,
airports, major ports, telecommunications etc.
• State or Local Govt. : Water supply, sewerage, roads, SWM,
street lighting etc
• Basing project proposals on
– social and political priorities and
– budget constraints
– NOT commercial considerations
•

•
 Trends in Infrastructure Service
Provision
Why Public Sector
•

• Assumption that they are natural monopolies

• (it can only be provided efficiently by one large-scale
producer/supplier)
• Considered as social goods to be provided by Govt.
free of cost
• Externalities linked to the projects
• (positive or negative impacts on nonusers. Private benefits or costs of
use are not consistent with the public (social) benefits and costs, and
therefore public and private demand are at odds.)
• Funds provided through Govt. Budgetary system
 Trends in Infrastructure Service
Provision
• Wave of privatization and deregulation to achieve
improved efficiency and service quality
– 1970s- US deregulated natural gas, power and airlines
– 1980s- Chile, New Zealand and UK implemented
deregulation of almost all infrastructure sectors
– Late 1980s more than 30 countries privatized some
components of infrastructure
– 1990s Govt. of India initiated efforts for
commercialization of Infrastructure projects
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 Issues in Infrastructure
Development
• Commercialization/Financing/Privatizatio
n
• Structuring and risk sharing
• Project appraisal
• Implementation
 How Infrastructure Project Financing
Differs?
• Traditional Balance Sheet Financing
• Project proponent raises debt and equity for
financing the project
• Recourse Debt- (recourse to the existing assets in
case of default)
• Debt holders rely considerably on balance sheet of
the project proponent to decide the risk premium on
the debt/loans.
• Therefore--Not excessive stress on agreements.
•

•
 How Infrastructure Project Financing
Differs? Contd…

• Infrastructure Project Financing

• New company/corporate entity comprising of sponsor (s)
eg. SPV
• Sponsor (s) subscribe to equity in SPV
• Cash flows of SPV kept separate from individual cash
flows of sponsor(s)
• debt holders rely on cash flow of SPV
• Non-recourse (alternative) or limited recourse
debt/financing
• Therefore- watertight contracts important
•
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 Project Structure

NOIDA DDA IL & FS Concessio

n
Agreemen
t
Support
Govt. of NCT of Delhi Govt. of UP Agreemen
t
•Maintenance including road surface
NTBCL
Indpt. Engineer Share holders
overlays
formation
Indpt. Auditor •The replacement
Agreementand maintenance of
bridge equipment
•Toll collection and management
•Assured Returns through •Salient features
NTBCL
•Concession period extension •Leasing of the lands
•Land development rights •Clearances from the
Loan •Once the targeted return has Municipal corporation
Agreement
been achieved, the project of Delhi
Banks/ FIs facilities would revert to •Restriction Investors
for
NOIDA for a nominal value on construction of new
Rs 1. competitor bridge
•Recovery Intertoll
Mitsui Marubeni Corp. of costs through fees/ tolls
Japan •
•Fees Review Mechanism South Africa• O&M
EPC Contra
Contract
ct
Prepared by : URP 0507 Pranjali Deshpande, URP 2507 ShwetaGupta, HSG
Roles & Responsibilities
Financing Plan

Equity Debt Ratio is 30 - 70

Measures for Risk Mitigation of NTBCL
•Guaranteed returns – 20 % IRR per •Exercising development rights
annum on total project cost •Revision in concession period
•Tariff adjustments
 Components of Financial Assessment

• Project Cost/ Capital cost , Revenues and

Expenditure
• Means of Financing (Deciding debt equity)
• Sensitivity Analysis
• Overall Financial Assessment (Cash flow
analysis- NPV, IRR, financial ratios)
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• Capital Expenditure Capital Cost
•
– Capital Expenditures (CapEx): Long-
term expenditures for property, plant, and
equipment.
• Physical ( fixed and mobile
assets) like
– land and site development,
– plant and machinery (free on
board charges+
transportation+insurance+ta
x etc..), Royalty in case of
technology transfer,
– building and civil works
• Capital Expenditure Capital Cost
•

– Capital Expenditures (CapEx): Long-term expenditures

for property, plant, and equipment.
•

• Intellectual investments like

– technical and engineering fees,
– foreign experts and
– training of Indian technicians abroad
• Preliminary Expenses (Feasibility studies,
MoUs, Incorporation of company etc..)
• Capital Issue Expenses (Legal, stationary,
publicity etc for issue of shares)
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 Capital Cost
•
– Capital Account: An account stating the
amount of funds and assets invested in a
business by the owners or stockholders.
– Capital Budget: The cost of planned
investment projects.
– Capital Gains/Loss: The difference
between the cost of an asset held for
investment and its resale price.
•
Expenditure and Revenues
– Expenditure:
• Operation and Maintenance
• Periodic spare replacements, repairs
• Repayment of loans
– Revenues:
• Revenue from sale of products,
• Collection of user fees
• From sale of land.
• Renting facilities created
• Royalty
 Means of Financing
• Equity
– In a project financing, the cash or
assets contributed by the sponsors.
–
– In accounting, the difference between
total assets and total liabilities.
–
– Equity finance is difficult to attract,
specially in initial stages of project as
the risk is high and returns uncertain
•
 Means of Financing
• Equity
– Equity investors are last in the priority
of repayment
– Lenders look at equity very critically
for following reasons :
• Lenders want the investors in a position that they cannot
walk away easily from the project! They must have
enough stake to motivate them to see the project through
•
• The more burden the debt component puts on project, the
greater the lenders risk
•
• (unless sometimes guarantees are provided by very
creditworthy guarantors)
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 Means of Financing

Debt
•

– Money, owed by one person to another

– Commonly called loan !
– The obligation to repay an agreed
amount of money
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 Means of Financing
Subordinated debts/loans (Mezzanine finance)
•

– Quasi-equity, senior to equity and junior to

senior debts
•

– Often used by sponsor to provide capital to a

project which will support senior borrowings
from third party lenders
•

– Can be advanced by the investor as part of

its original investment on project
–
•
 Means of Financing
Subordinated debts/loans (Mezzanine finance)
•

–
– The possible sponsors for such loans are
• one of the owners (equity holders in the
project),
• user anxious to get the project operational, or
• government interested in getting the project
done and is not allowed to take equity position
in a project for policy reasons
–
– Subordinated loan is usually considered as equity
by lenders for purpose of computing the proportion
of equity and debt
–
 Means of Financing
Senior Debts
•

– Debt with the highest ranking for repayment, security, or action

– Borrowings from commercial bank lenders
– Unsecured Debts
• No security except the creditworthiness of the borrower
• Project tend to be new enterprises and have no operating histories,
lenders rely upon the reputation of project partners
• Industry specialist or project financing specialist hired by
commercial banks as they are traditional balance sheet lenders
•
•
 Means of Financing
• Senior Debts
– Secured Debts
• Assets are required to secure the debt-
collateral, guarantees by govt. etc
• Senior lenders may hold security interest
(first right) in key project assets
• Security trustee appointed to act on behalf of
all secured lenders in case of multiple
secured lenders
– Distributes the debt service in order of priority.
• Recourse: In the event a project cannot service the financing or achieve
completion, the financiers have recourse to either cash from the sponsor
or other non–project security.
• Non-recourse: The lenders rely on the project's cash flows and security
over the project vehicle's assets as the only means to repay debt service.
• Risk Premium: The reward for holding a risky investment rather than a risk-
free one.
• Royalty: A share of revenue or cash flow to the government or grantor of
the concession or license. Compensation (i.e., royalty fees) for the use
of intellectual property belonging to another party, usually calculated as a
percentage of sales.
• Collateral: Assets pledged as security under a loan to assure repayment of
debt obligations.
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