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Transcript of infrastructure
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