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.

Main Characteristics of the Infrastructure Project Finance Market

I. Limited or non-recourse II. Complex contractual arrangements• Demanding risk management

techniquesIII. Project is a collateral &repayment

from cash flow.

Model Adopted for Infrastructure Development

• BOT (Build, Operate, Transfer)• BOOT (Build, Own, Operate, Transfer)• BOLT (Build, Own, Lease, Transfer)• BOO (Build, Own, Operate)

Major Parties to ProjectSe

curit

y of D

ebt

Paym

ent

and

Collat

eral

(conc

essio

n

agre

emen

t)

Build, Operate,

Raise

Finances to Provide

Infrastructure

Services

Concession

Rights,

l Incentives,

Guarantees

Government

Creditors ProjectPromoters

Security and Assurance

of Debt Repayment

Term Debt Capital

Each party maximizes its own objectives subject to the constraints set by others’ willingness to participate.

Project Financing: Uses of Cash Flows

Revenue Streams

Depreciation &

Interest Taxes

Principal Payments

Depreciation

O & M, Insurance Expenses

Dividend to Shareholders

Driven by a hierarchy of claims

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

Incentives/Objectives of Creditors

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)

Incentives/Objectives of Sponsors

Serve public interestLow tariff rateQuality of services Future tax revenues

Incentives/Objectives of the Government

Example: Power ProducerFuel

SupplierGovernment Ministries/

Local Agencies

Equity Investors

Lenders

Escrow AgentPower

Utility

Project Operator

Engineering, Construction Contractor

Project Insurers

Project Project CompanyCompany

Implementation Agreement

Permits

Shareholders Agreement

Escrow AgreementPower

Purchase Agreements

O &M Agreement

Construction Contract

Insurance Policies

Fuel Supply Agreement

[--|--|--|--|--|--|--|--|--|--|--|--|--|--|--]Construction Operation

Main Risks:

•Completion Risk•Cost Overrun Risk•Performance Risk•Environmental Risk

Main Risks:

•Performance Risk•Regulatory Risk•Environmental Risk•Off-take Risk (Power)•Market Risk (Toll Roads)

[--|--|--|--|--|--|--|--|--]

Project Life Cycle: Main Risks

RISK

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

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 %.

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.

Providers of Private Finance

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

Issues In Infrastructure

•Privatization

•Project Structuring

•Project Financing

•Project Implementation

THANK YOU