Oct. 2015

Project Fund- An Instrument to Finance Infrastructure Projects

Two Case Studies

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Methods of Financing Infrastructure Projects in Iran

Projects Finance Facilities Establishing Project Fund in Tehran Stock Echange

Partnership Between Investors and Government

Structured Finance Mechanisms

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Theta Energy was founded in December 2013

Initial shareholder equity was 100 Billion Rials.

Theta Energy’s Shareholders:

Theta Energy’s main goal is to finance, develop and manage energy sector projects via project funds in TSE.

Introduction of Theta Energy

Shareholders Share

Tejarat Bank 20%

Iranian Investment company 20%

Bank Staffs Pension Fund 20%

Asia Insurance Company 20%

Kayson Company 15%

Kayon Oil, Gas & Energy company 5%

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Closed-end structure: Unlike open-ended ones no new shares are issued, and shares are not redeemable.

Possibility to use supporting instruments such as put option to ensure minimum return on investment.

Past experience in Tehran Stock Exchange

– Project companies owned and financed via holding companies whose stocks were traded in the public market: Midco

– Open ended mutual funds

– Fixed income assets like Sukuk and company bonds

– Recently Islamic Treasury Bills were offered to investors at a discount (Zero-coupon bill) to pay back government’s debt to contractors.

Features of Project Fund In Tehran Stock Exchange

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Structure of Project Fund

Contractor 2 Contractor 3Contractor 1

Exchange Traded Project Fund

Fund Manager

100% ownership of project company

Supervision

Technical supervisor

Trustee

Auditor

Stock Exchange

Underwriter

Market maker

Stock Exchange Organization

Project company

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FIPPA Law: Recognizing the rights and interests of foreign investors, immunity against noncommercial risks, facilitating the free flow of investment return, and full and just compensation for expropriation and/or halting foreign investor activities.

Projects’ Partnership Law:

– At the time of expiration of exploitation right, in case the expenses of the plan shall not be amortized, transference of exploitation utilities will be extended until full amortization of the plan costs.

– Partnership projects in infrastructure are tax-exempt until reimbursement of principal and interest of the amount invested by the private sector partner.

Clause V of Note 5 of the Annual Budget Law of 1394 (2015-16): The possibility to use the resources of the National Development Fund to develop “Transportation Infrastructure” projects including roads, railways, etc.

Incentives to Invest in Infrastructure in Iran

1Case Study 1 -

A BOT Railway Project

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Construction of Second Track of Chadormalu- Ardakan Railway

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Project Datasheet

MOU AgreementBetween National railway company and Kayson-

Theta Energy Consortium

Contract Type BOT, Brownfield

Total Investment Costs 6000 Billion Rial ($ 180 Million)

Project Length 200 Km

Current Annual Frieght Capacity 9 Million Tons

Approximate Future Annual Freight Capacity

19 Million Tons

Project Financing StructureProject Fund, Loan from National Development

Fund of Iran

Construction Phase 3 years

Operation Phase 10 years

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10% Internal Rate of Return in Dollar and 20% Internal Rate of Return in Rial will be guaranteed by Iranian National Railway Company.

Beginning from second year of construction, the revenue of existing track is owned by the investor.

Insuring more than 10% annual exchange rate fluctuations for investing in railway projects.

Access to loans from National Development Fund.

Insuring the principal and interests of the project loans.

Exchange of Rial to the foreign currencies on daily basis of official rates.

Possibility of issuing the required guarantees for Stock Exchange Organization.

Investment Incentives

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Financial Results

6,000Billion Rial

Total Investment Costs

200Million Tons Total Cargo Transit

30% Project Internal Rate of Return (Rial)

45% Equity Internal Rate of Return(Rial)

584,635Million Rial

Project Net Present Value @30%

The Financial Model

Investment Assumptions

23,000Million Rial

Total Investment Costs per Km

200 Project Length (Km)

10 Construction Phase (year)

15% Inflation of Construction Costs

25%Share of Local Loan of Total Investments

(24% interest rate in Rial)

25%Share of Foreign Loan of Total Investments

(6% interest rate )

10% Annual Exchange Rate Inflation

640 Freight Fares Per Ton Km (Rial)

0% Annual Income Inflation

9 Current Freight Capacity (Million Tons)

19 Future Frieght Capacity (Million Tons)

25% Tax Rate

The freight fares will be determined to achieve the internal rate of return of 30% (in Rial).

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Cumulative Annual Cash Flow of The Project

1 2 3 4 5 6 7 8 9 10 11 12 13 (1,587)

(2,947) (3,825)

(2,010)

(196)

1,617

3,428

5,237

6,603

7,922

9,725

10,937 12,087

Cu

mu

lativ

e I

nve

stm

en

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ost

(B

illio

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ial)

Because of early revenue of the project, total required investment will approximately be 4000 billion rials (120 million dollars).

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Project Contract and Financing Structure

Project Company

Fixed Income Instruments :2,500 Billion Rials

Loan Repayment

Preferred Freight Fares

EPC Contract

Payment to Contractor

ContractorNational Railway

Company

Loan Providers

Expected Return of 30%

1,000 Billion Rials 250 Billion Rials

125 Billion Rials

Other Institutional

Investors

Steel and Mining Industry

Investors

Theta Energy’s ShareholdersUnderwriting

125 Billion Rials

BOT Contract

Projec Fund Investment of 1,500

Billion Rials

Project Fund

1Case Study 2 -

A BOT Road Project

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Sirjan- BandarAbbas Freeway

LegendSirjan-

BandarAbbas

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Project Datasheet

Project Name Sirjan- Bandarabbas Freeway

Project Type BOT, Brownfield

Total Length of The Road 321 km

Number of Lanes Four-lane

Total Investment Cost 28,220 Billion Rials

Project ScopeCompletion of The First Part (33 km of total 85 km completed),

10,000 Billion Rials (No Land acquisition funds included)

Construction Phase 3 yearsOperation Phase 20 years

Financial Structure

40% Viability Gap Funding by Road Ministry 30% Project Fund 30% Loan from local banks

Attractions North- South corridor Links The Most Important Port of Iran to Tehran

Capacities in 15th year of operation

Trucks: 9100/day, Light vehicles: 10300/day

Path Topography Flat: 112km, Hills: 80km, Mountainous: 129km

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Current average daily traffic of 12,000 vehicles

F level of service in the available highway

Nearly 60% of the traffic of the highway will be absorbed by new freeway.

Traffic Estimation

Estimated Number of Vehicles Year

9,674 2018

12,946 2023

17,325 2028

21,872 2032

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Financial Results

30% Project Internal Rate of Return (Rial)

32% Equity Internal Rate of Return(Rial)

112,000 Toll Rates for Light Vehicles (Rials)

The Financial Model

The Toll Rates will be determined to achieve the internal rate of return of 30% (in Rial).

Investment Assumptions

10,000 Total Investment Cost (Billion Rial)

40% Viability Gap Funding by Government

30% Share of Local Loan of Total Investments (24% interest rate in Rial)

Free Tax Rate

12% Annual Toll Increase Rate

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Cumulative Annual Cash Flow of Total Investment (Government’s Share Excluded)

Because of early revenue of the project, total required investment (other than 40% share of government) will approximately be 4700 billion rials (100 million dollars).

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 (1,607) (3,443) (4,698) (3,833) (2,805) (1,585) (136)

1,583 3,625 6,049 8,926 12,342 16,398 20,746 25,925

Cum

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ive

Inve

stm

ent

Cos

t (B

illio

n R

ial)

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Project Contract and Financing Structure

Fixed Income Instruments

2,350 Billion Rials

Loan Repayments

Viability Gap Funding (40% of

total Investment) Payments

ContractorRoad Ministry

Loan Providers

Tolls Revenue

Partnership Contract

Projec Fund Investment of 2350

Billion Rials

Project Company

Project Fund

EPC Contract