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INFRASTRUCTURE FINANCING

INFRASTRUCTURE FINANCING. What is Infrastructure? “Infrastructure is define as the physical framework of facilities through which goods and services are provided to the public.” Includes: Roads, Ports, Highways, Power plant, Airports, Godowns, Telecom etc.

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INFRASTRUCTURE FINANCING

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  1. INFRASTRUCTURE FINANCING

  2. What is Infrastructure?“Infrastructure is define as the physical framework of facilities through which goods and services are provided to the public.”Includes: Roads, Ports, Highways, Power plant, Airports, Godowns, Telecom etc.

  3. Main Characteristics of the Infrastructure Project Finance Market • Limited or non-recourse • Complex contractual arrangements • Demanding risk management techniques • III. Project is a collateral &repayment from cash flow.

  4. Model Adopted for Infrastructure Development • BOT (Build, Operate, Transfer) • BOOT (Build, Own, Operate, Transfer) • BOLT (Build, Own, Lease, Transfer) • BOO (Build, Own, Operate)

  5. Major Parties to Project • Each party maximizes its own objectives subject to the constraints set by others’ willingness to participate. Build, Operate, Raise Finances to Provide Infrastructure Services Security of Debt Payment and Collateral (concession agreement) Government Concession Rights, l Incentives, Guarantees Security and Assurance of Debt Repayment Project Promoters Creditors Term Debt Capital

  6. Project Financing: Uses of Cash Flows • Driven by a hierarchy of claims Revenue Streams O & M, Insurance Expenses Depreciation & Interest Depreciation Taxes Principal Payments Dividend to Shareholders

  7. Incentives/Objectives of Creditors • Have a claim to fixed contractual payments from the project’s cash flows independent of the borrower’s income • Good credit risk, i.e. secure cash flows • Government support and guarantees • The cost of debt = Real return + Expected inflation + Project risk premium + Country risk premium + Regulatory/political risk

  8. Incentives/Objectives of Sponsors • Sponsor holds a residual claim, after the payment of contractual claims • Limited recourse structure • Cost of equity = cost of debt + risk premium • Reasonable return on investment: = f(debt characteristics, tariff, leverage ratio, government support)

  9. Incentives/Objectives of the Government • Serve public interest • Low tariff rate • Quality of services • Future tax revenues

  10. Example: Power Producer Fuel Supplier Government Ministries/ Local Agencies Implementation Agreement Permits Fuel Supply Agreement Project Insurers Equity Investors Insurance Policies Shareholders Agreement Project Company Engineering, Construction Contractor Construction Contract Lenders Escrow Agreement Power Purchase Agreements O &M Agreement Project Operator Escrow Agent Power Utility

  11. Project Life Cycle: Main Risks Construction Operation [--|--|--|--|--|--|--|--|--] [--|--|--|--|--|--|--|--|--|--|--|--|--|--|--] • Main Risks: • Performance Risk • Regulatory Risk • Environmental Risk • Off-take Risk (Power) • Market Risk (Toll Roads) • Main Risks: • Completion Risk • Cost Overrun Risk • Performance Risk • Environmental Risk

  12. Project completion risk • Liquidation damages • Contract specifies the parameter • Standby credit facility • Promoter ready tom fund cost overrun • Market risk • Demand & price variation • Take or pay • Escrow Mechanism • Clause ensure min. revenue • Shadow financing • Foreign exchange risk • Largest concern for foreign investor • Revenue in local currency • Revenue equal to foreign debt payment • Tariff escalation clause if currency depreciate • Supply of input • Control through contract • Price variation and supply risk RISK

  13. Financing Method • Average ratio of Debt Equity:-70: 30 Takeout Financing • Developed by IDFC. • Bank provide loan for 5 to 6 years. • Buyers available for after specific period • Case study:Delhi-Noida toll bridge; Rs 500 Million deep discount bond Maturity period: 16 years. • Holder will find a buyer in IDFC and IL& FS after 5th & 9th years at 13.7% and 14.19 %.

  14. Financing Method Structured Financing • Sale & Leaseback • ABS (Asset Backed) • Subordinated debt (Mezzanine Financing): considered as equity and give leverage to the project. • Case study:Ras Laffan Qatar/Korea (LNG) Project: structured financing.

  15. Providers of Private Finance • Commercial banks • Export credit agencies/ development banks • Multilateral financial institutions • Vendors/contractors • Institutional investors • Private investment funds • Individual/Strategic investors

  16. Issues In Infrastructure Privatization Project Structuring Project Financing Project Implementation

  17. THANK YOU

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