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Infrastructure Projects & Management

Dr. E. Sankara RaoInfrastructure Development Finance Company

Ltd.

August 27, 2009

Think Infrastructure Think IDFC

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Contents

Indian Economy and Infrastructure Progress Infrastructure Projects, Policies and Investments Features of Infrastructure Projects Infrastructure Projects & Management

Typical Project Participants Typical Structuring Types of Risks & Mitigation

Conclusions

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Indian Economy – Scorching Growth

Significant infrastructure requirement needed to sustain this growth…

Growth in sectors at Current Prices (2007-08):

Industry: 10.7%Services: 8.9%

Agriculture: 2.6%

Growth in sectors at Current Prices (2007-08):

Industry: 10.7%Services: 8.9%

Agriculture: 2.6%

105 105 135 145 176103 125

204 231270

561

191237

398453

1999-00 2002-03 2005-06 2006-07 2007-08

US

D B

illio

n

Agriculture Industry Services

India's GDP at Current Prices: 2002-07

469 556 638 737 8301006

0

200

400

600

800

1000

1200

2002-032003-04 2004-05 2005-06 2006-07 2007-08(AE)

• India’s GDP has witnessed high growth, and

was the second fastest growing GDP after

China in 2006-07

• Fastest GDP growth in 18 years - 9.4%

(2006-07 )

• Consistently sound performance of various

segments is leading to robust performance of

the Indian economy

US

D B

illio

n

4

Present Status of Infrastructure in the Country

Telecom – Total Sub’s 479 Mn - Mobile 441Mn and Fixed 37.4Mn and going increase to 500Mn by 2010

Electricity – 1,40,000 MW and going to add another 1,00,000MW by 2012

Roads – 3.3 Mn Km road network ( 67% Freight and 87% Passenger Traffic)

Ports – 12 Major and 150 Minor on a coastline of 7560 Km

Airports -126 airports,100 are civilian including,11 International airports and 4 metros account for 65% India passenger traffic

SEZ’s – Notified more than 160 SEZ’s and 98 functional SEZ’s housing 2279 Units

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Infrastructure Requirements - The Macro Picture

• Highways- 40000 km to be developed by 2012

• Ports- Cargo handling capacity to be increased to 1500 MTPA by

2012 (Currently 737 MTPA) • Railways

- Development of manufacturing plants for rolling stock - Development of dedicated freight corridors & metro rail

projects• Airports

- Development of greenfield airports - Development of 35 non-metro airports

• Power- 60000 MW of new generation capacity to be added by 2012.

Telecom - To increase the tele-density to 50 by 2010

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Investment Requirements …• To sustain 9% GDP growth, investment in infrastructure

will need to increase from 4.6% of GDP to around 8% of GDP over the period 2007-12

• Planning Commission estimates that of the required investment- 65 % will come from the Government - 23% from private sector and - 12% from multilateral/bilateral agencies.

• Substantial increase in private investment envisaged. Public Private Partnerships (PPPs) essential for attracting private capital in Infrastructure

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Investment Targets

Significant private sector participation needed to meet this target…

Source: Planning Commission Government of India

Infrastructure Investment Targets

76

65

62

53

18

8

6

150

5

49

0 20 40 60 80 100 120 140 160

Power

Roads

Telecom

Railways

Irrigation

Water & Sanitation

Ports

Airports

Storage

Gas

USD Bn

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The Story So Far. . . . . . . .

Telecom - Competitive Growth Story

Power - Distribution reforms have started

Roads - Success from Determination

Ports - About to Consolidate

Airports/ Civil Aviation - Taking off

Tourism - looks positive

Urban - Not off the ground

SEZs - A few will happen

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Good Policies = Good Progress

TelecomTransport

Power

Ports (Container berths)

Roads (NH)

Airlines Airports

Competition *

Private Participation

Effective

Regulation *Progress

* Where applicable

Poised to take-off High Low

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UK

Argentina

US

South KoreaSpain

Germany

FranceAsian Countries

African Countries

China

India

RegulationCompetition

Man

agemen

tS

tate Con

trol

Relative speed & direction of change

Reforms and Competition Leading To QoS

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Korea Partially Liberralised -International

Malaysia Fully Liberalised

China/India Further Liberalised -Local -Long Distance -Mobile

Taiwan Fully Liberalised

HongKong Fully Liberalised Thailand Partially Liberalised -Mobile -Basic Telephony Singapore Partially Liberalised

Phillippines Fully Liberalised

Japan Fully Liberalised

China Partially Liberalised -Mobile (Limited) -VAS

Hong Kong Partially Liberalised -Mobile (Limited) -VAS

Korea Partially Liberalised -Mobile (Limited) -VAS

ChinaPartially Liberalised -Local (Limited) -Long Distance(Limited)

Malaysia Partially Liberalised -Basic Telephony -Mobile

Hong Kong Partially Liberalised -Local -International

Singapore Partially Liberalised -Mobile

Korea Fully Liberalised

Taiwan Partially Liberalised -Mobile -VADSr

‘93 ‘94‘95 ‘96

‘97‘98

‘99

‘00 onwards

Liberalization

Asian telecoms were virtually a closed industry in the early 1990s

IndiaPartially

Liberalized

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SEZ Philosophy

Policy Framework

Fiscal Incentives & regulatory benefits

Operating Environment

Ease, self-certification,Efficiency & productivity

InfrastructureSelf-contained,

Integrated, connected & Self-

managed

13

Evolution of SEZ

EOUTrading

FTZ

Port & Duty Free Enclave

Free Port

Cluster of EOUs & Bonded Area

EPZ

Integrated Infrastructure

Special Economic Zone

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Suzhou Industrial Park, China

Before

15

Suzhou Industrial Park, China

After a decade

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Infrastructure Eco System Development

Benefits

Common Man

Enhanced Markets

Benefits the SME’s

& Big

Enterprises

Infrastructure Project

Social Welfare Improvement

Growth

Lower Costs

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Infrastructure Types

Physical Infrastructure : Transportation & Logistics : Roadways, Railways,

Airways, water transportation, urban mass transportation , Ports & Logistics

Energy : Power generation, transmission, distribution, Gas Distribution

Telecommunications &IT: Mobile, Fixed, DTH, CTV & Broadband Services

Urban : Water supply & distribution, sewage disposal systems, urban industrial parks and irrigation.

Social Infrastructue: Healthcare Educational Tourism

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Infrastructure Project – Key Features

Large capital costs / bulky Long gestation periods Sector vulnerable to regulatory and policy changes. Tariff sensitivity / public / Government Highly Cash Flow Driven User pay charges (willingness to pay) Security of the Project Mostly Non Recourse Finance Prudential Norms Many stakeholders Contract driven Concession / license

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Project Appraisal

Sponsor/ ManagementTechnicalFinancialMarketEnvironmentRisk Analysis

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Typical Infrastructure Project Structuring

Special Purpose Vehicle (SPV) Contracts/ Concession/ License/

CapsProject based fundingNon recourse or limited recourse

financingEquity from EPC contractors,

vendors, public, strategic investors-conflicting interest

Debt - various sources

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Infrastructure Project Finance Transaction Structure

Government

Project SPV

Financial, Technical & Legal

Advisers

Invt. Bankers,Technical & Legal

Advisers

UsersOff-take Contracts

InsuranceCompanies

Insurance Policies

EPC Contractor

EPC ContractTRA/Escrow

Bank

TRA/Escrow Agreement

Concession / Licence Agreement

O&M Operator

O&M Contract

Sponsors

Equity

FinancialInvestors

Equity /Sub-Debt

Lenders

Debt SubstitutionAgreement

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Contracts In Infrastructure Project Finance are very Important

KEY CONTRACTS :

Concession / Licence Agreement

Shareholders / JV Agreement

EPC Contract

O&M Contract

Trust & Retention Agreement

Substitution Agreement / Direct Agreement

State Support Agreement

EFFICIENT STRUCTURING OF CONTRACTS IS A MUST and should be tailored to suit the project’s expected profitability and cash flow. If the project performs better than anticipated, lenders will be repaid sooner and have better Equity returns.

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Typical Infrastructure Project Contracts Power Infra : Concession/ License Agreement Shareholders’ Agreement EPC Contract O & M Contract Fuel/ Water/ Transport Agreement State Support Agreement Power Purchase Agreement State Guarantee

Transport Infra : Concession Agreement Shareholders’ Agreement EPC/ O & M Contract Environment and Land Procurement Toll Collection Agreement State Support Agreement

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Infrastructure Project Finance –Risk Stages

Development StageConstruction StageOperations Stage

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Typical Infrastructure Project Financial Model Development

Project Structuring &

Modeling

Input Data

Market Data

Technology Assumptions

Cost Data

Output Results

Capacity Size Design

Capital Investment

Revenues

Financial Statements

Policy & Regulation

Rules

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Typical Means of Finance

PROJECT COST Rs. 1000 crore

Means of finance Equity Rs. 300 crore

Sponsors EPC Contractors/ Vendors Government Agencies Strategic Investors/ Venture Funds Financial Investors Grants Subordinated Debt

Debt (Rupee) Rs. 500 crore Financial Institutions Banks (domestic and Foreign)

Debt (Foreign Currency) Rs. 150 crore Financial Institutions/ Banks Multilateral Agencies Export Credit Agencies

Lease Financing Rs. 50 crore

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Typical Financing Norms

Debt Norms redefined

Debt-Equity 70 : 30 or 80 : 20Asset Cover >1 + collaterals & credit

enhancementCost CompetitivePricing Linked to risk, cash flowsTenor >12 years - linked to cash

flowLoan StructuredRepayment Equated, ballooned, step-

up

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Project co.

Investors

Lenders

Insurers

Operator

Contractor

Users

dividend EquityEquity

Operation costs

dividend

Equity

dividend

Construction costs

Fees/ Revenue

Payments

Loan

Premium

Debt Service

Cash Flows Management

Payments

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Infrastructure Projects & Financial Engineering

Cashflow projections based on technical, market and financial analysis & engineering

Risk allocation & mitigation through project contracts and financing agreements

Structured financing

Loan documentation and security creation

Project monitoring and compliance

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Life of the loan facility

Banks / FIs FI

Period of high risk -Development & Construction

• Low cost funds from banks / FIs based on IDFC Guarantee

• IDFC takes over the asset from Banks at the end of 5 yrs.

Period of low risk-Operation

• Low cost funds based on lower project risk

• Benefits

•The project gets Lower cost funds

•The project gets 10 year money (3 years with Banks & 7 years with IDFC)

•Bank funds are channelised to infrastructure

• Guarantee in case of a guarantee-cum-take-out

Typical Structured Project Finance by Risk Leverage

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Financial Analysis

Model building Project Cost Phasing Capital Structuring Profitability Projections

DCF Analysis NPV IRR

Financial Ratios DSCR Breakeven

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Risk and Uncertainty

Primary source:

random acts of nature

Secondary source:

behavioral uncertainty, business transactions

Rembrandt, Storm on the Sea of Galilee

The origins of modern risk management: Renaissance Italy, where seafarers used the term ‘rischiare’ to describe the challenge of a voyage.

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Type of Risks

SPV can control (Endo-geneous)

SPV cannot control (Exo-geneous)

Within Financier's control

Internal Operations : Technical Cost Management Engineering Completion

External Operations: Supply Market External Infrastructure Environmental Political Force Majeure FX (Currency)

Syndication Funding Legal

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Risk Analysis & Mitigation

Risk Sharing : Is advantageous when economic, technical, environmental, or regulatory risks are of such magnitude that it would be impractical or imprudent for a single party to undertake them.

Risk Identification Completion Risk Operating Risk Revenue Risk Financial Risk Sponsor Risk Force Majeure Risk Political Risk Environmental & Social Risk

Risks Mitigation mitigated by financial, contractual or legal means some risks may be sufficiently well studied and accepted

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General Approach to Risk Analysis

The institutions adopt both qualitative and quantitative approaches to risk analysis

The qualitative approach is adopted for subjective factors such as management, environment, etc

The quantitative approach is adopted for objective parameters such as market, costs, etc

Qualitative risk factors are sought to be addressed by suitable covenants

Sensitivity analysis is done to study the impact of quantitative parameters on the project return and cost of capital

Structuring is done in a way as would ensure project viability under various possible scenarios

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Techniques of project risk analysis

Sensitivity AnalysisScenario AnalysisComputer Simulation Monte-carlo SimulationDecision Tree Analysis

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“What-if” Analysis

Scenarios & Sensitivities

Capital Cost

Base Year Traffic/Throughout

Growth Rates

Base Tariff Levels

Escalation Rates; and

O&M Costs

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150

170

190

210

230

250

270

290

Variability of Profitability ProjectionsU

S$

Mil

lion

s

Max

Min

Max

MinMax

Min

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Sensitivity and Probability Analysis

Base Case = 1.23

3

3

3

3

3

1

1

1

1

12

2

2

2

2

1.00 1.10 1.20 1.30 1.40 1.50 1.60

Direct Cost Scenarios

Scenario For Capex

Indirect Cost Scenario

Scenario for NE revenue

Scenario for ITS revenue

DSCR (minimum)

Min DSCR

Cumulative

Probability

0

.1

.2

.3

.4

.5

.6

.7

.8

.9

1.0

0.80 0.91 1.02 1.13 1.24 1.35 1.46 1.57 1.68 1.79 1.90

EV=1.30

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Risk Mitigation Contracts for Project

LONG TERMOFFTAKE CONTRACTS/

OTHER REVENUECONTRACTS

INSURANCE AND CONTRACTUALPERFORMANCEGUARANTEES

TURNKEYCONTRACTOR

DUE DILIGENCE

HEDGING/INSURANCE/CREDIT ENHANCEMENT

INSURANCE/MULTILATERALFINANCING/HOST

GOVERNMENT ASSURANCES

PERFORMANCERISK DELAY/

TECHNICALRISKS

MARKET/ REVENUE

RISK

LEGAL/REGULATORYPOLITICAL

RISKS

FINANCIAL RISKS

PROJECT COMPANY RESIDUAL RISKS

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Banks

Sponsors Credit Agreements Security DocumentsShareholder

Agreements

Suppliers

Supply Agreements

Offtakers

Offtake Agreements

Financial Risk Market Risks

Legal & Regulatory Risk

Local Laws

Host Government

Company Permit

Construction Agreement Contractor

Operator

Operating & Maintenance Agreement

Construction Agreement

Construction & Operation Risks

Project Vehicle

Risk Groups

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Typical Risk Allocation Management

technical feasibility

commercial / financial feasibility

project economics

permits / authorizations

third-party intervention

political change

schedule

cost

performance

design changes

interest rate escalation

consequential damages

Force Majeure / country risk

currency changes

availability offoreign exchange

market changes

capacity / production shortfalls

fuel / materials supply interruption and

cost escalation

operations and maintenance

cost escalation

interest rateescalation

currency depreciation

statutory change / civil unrest / strikes

act of God

third party liability

plant residual value

1

Development Construction Operations

sponsor risk

contractor risk

lender risk

host government / offtaker risk

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Risk Factors - Cover

Political Insurance, Co-Financing Market Offtake Agreements, Market Depth/Traffic, Tradable,

Barriers to Entry Operating : Cost Competition, Cost Curve Operating : Technical Skill, Proven Technology Operating: Management Track record Sponsor/Participant Credit Review, Checking Environment Insurance, Independent Review Contractor Backlog, Reputation, Cashflow, Performance Completion Supports/Guarantees, standby facilities Supply/Reserve Study/Independent Certification Infrastructure Adequacy Force Majeure Insurance Engineering Independent Check Legal Opinions Syndication Timing, Bank Types Funding Swaps FX Hedging, Swaps

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Insurance Against Risk

Special Purpose Vehicle (SPV) Appointment of a good management team Appointment Of good Auditors & Independent

Engineers Capital Structuring to minimize Financial

Leverage and various Risks Collaborator’s Participation In Equity Good relations with Lenders and Investors Good Governance with proper Systems and

Procedures

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Well Managed and Transformed Project

Good Asset Formation

Lower Tax Liability

Lower Financial Distress Costs

Lower Risk Incentive Costs

Better Measurement of Performance

Lower Managerial Agency Costs

Higher Debt Capacity and Networth

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Conclusion

In general there is a good consensus among all political parties for reforms

Private sector has done reasonably well in areas where they are operating viz., Energy, Telecom, Transport and Airlines

PPP Infra based model is one of the solution where one can create a win-win situation to all the STAKE HOLDERS

A Comprehensive MANAGEMENT SYSTEM will lead to a good Infrastructure Service

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Thank You

Dr E.Sankara Rao

I D F C Ltd.

www.idfc.com

Think Infrastructure Think IDFC