Urban Infrastructure: Issues in structuring bankable
projectsASCI-World Bank Programme on
Strengthening Urban Management (SUM)
January 23, 2003
Often heard at seminars …
Small is beautifulGet your act togetherFirm up YOUR objectives first
but recognize that others have their objectives too
Experiment … but be willing to correct yourself
Stand by your commitments Do not ignore the ultimate customer/userBeware of smart/over-confident developersSounds like preaching? Read on ...
Structure of the Presentation
Select illustrations of PSP in infrastructure Urban Infrastructure projectsPort sector projectsRoad sector projects
Lessons from experience so far
Objectives & Concerns of various stakeholders
Illustrations with wide coverage
Sectors CoveredUrban InfrastructurePortsRoads
States Covered
Power/Telecom omitted141012
Projects from 10 statesKerala, Karnataka, Tamil Nadu, Andhra PradeshMaharashtra, Goa, Gujarat, Madhya Pradesh, ChhattisgarhWest Bengal, OrissaRajasthan, U.P., Bihar
Well, there are lots of cases and a few good lessons!
Ahmedabad Municipal Corporation
AMC became the country’s first municipality to raise bonds from capital markets
Bond raising preceded by an internal restructuring and revenue enhancement measuresBond proceeds used for water supply schemes Bonds secured by a charge on octroi revenues of AMCUtilisation of bond proceeds have been slow as project implementation has been delayed
Lesson: Careful planning & timing is necessary for sustainable project implementation processes
Bangalore Water Supply Project
Private participation was sought for 500 MLD BOOT project by BWSSB
Bidding preceded by technical and demand studiesAfter pre-qualification, three consortia submitted final proposalsThe project was nearly awarded to a consortium led by Biwater International but the bidding process has been questioned and resulted in delays
Lesson: Clear bidding parameters required to be stipulated & process transparency to be ensured
Chhattisgarh - Borai Water Supply Project
Borai Bulk Water Supply Project is set up on BOOT basis as an industrial bulk water supply for Borai Industrial Growth Centre (BIGC) in Durg district, Chattisgarh under concession from CIDC
It is a Project 30 MLD project with a cost of Rs. 420 mn. (including existing assets valued at Rs. 160 mn.)Radius Water Ltd. promoted by Kailash Engineering is the concessionaireThe first phase (12 MLD) of this project is already operational but there are some hiccups as to drawal rights and further expansion
Lesson: Risk taking ability of the promoter helped this project go quickly through the initial stages.
Chennai Desalination Project
Chennai Metropolitan Water Supply and Sewerage Board (CMWSSB) mooted a project for implementing the tertiary treatment / Reverse Osmosis plant of 50 MLD capacity at Kodungaiyur, Chennai on a Design, Build, Own and Operate basis
The submission dates were postponed a number of times as CMWSSB was not sure of attractiveness to investors Ultimately it bid out both EPC & DBOO as alternate optionsResult: There were only two bids – both on an EPC basis (L&T and BHEL). Meanwhile VA Tech Wabag another party chose to bid for a limited size project on captive basis for CPCL one of the major clients of CMWSSB
Lesson: There is no harm in experimenting but first get your objectives right
Cochin Industrial Water Supply
Mooted by KSIDC, which invited IFC to assistBasic project preparation was carried out including detailed technical studies as well as demand estimatesAlternate project structures were evaluatedMeanwhile KWA signed an agreement with Cochin Refineries, a major user allowing an off-take of waterLesson: Co-ordination among government agencies required for project development
Goa Salaulim Water Supply
Goa PWD had invited proposals for water supply project on a BOOT basis (with an option to bid in an alternative innovative format)
BOOT bids were found very costly and then the GoG thought of alternative concession routeThe bidder questioned GoG's demand forecastAt present due to successive changes in the Government the process has been temporarily suspended
Lesson: Inadequate homework by the state authorities
Haldia Industrial Water Supply Scheme
HDA has sought private participation and received over 25 Expressions of Interest
Despite adequate demand many technical issues (salinity, mix of ground water and river water, etc.) remain unresolved HDA decided against technical study, no project parameters have been set up & may instead go directly for BOT or EPC/O&M contracts (but may not have funds)Potential investors/bidders are unhappy as there is no progress
Lesson: Project has not been thought through clearly
Nagpur Municipal Bonds
NMC proposed a Rs. 1.17 bn. capital expenditure programme under Pench-III Stage-I project of the Corporation, which envisages capacity creation in the water supply servicesNagpur Municipal Corporation proposed to raise Rs. 0.90 bn. from issue of Bonds to partially meet its requirement, the balance coming from from internal accruals and grants from State Government
With a AA-(SO) rating by CRISIL SBI Capital Markets as arranger could raise only ~ Rs. 0.30 bn. even after extending dates several times.NMC however carried through with its tariff reforms (water & property taxes) & postponed the implementation till it could generate adequate internal accruals
Lesson: Bhagwan ke pas der hai lekin Andher nahi.
Pune Water Supply Project
Water Supply Project conceived with structuring assistance from USAID
Project conceived as EPC+O&M with funding from funds raised by PMCAlso a separate contract for management of billing & limited collectionsProject generated considerable investor interest as careful planning had gone into the project preparationBidding Process was terminated prematurelyPMC is now implementing the project on its own
Lesson: Political risk (the power of lobbying groups) in the project was underestimated
Tiruppur Water Supply Project
Project was conceived by IL&FS with support from GoTN, TACID and Industry
Proposed as a BOOT project for sourcing, treatment and supply water mainly to industry with some social coverageTiruppur industry comprises of garment exports and willingness to pay is higherHowever, the project has taken considerable time to develop resulting in cost escalationThe cost of water for the commercial users has more than doubled during this periodReached financial closure 8 years after conceiving!
Lesson: Complex projects are difficult to implement and subject to diverse risks
Consider this … the city of Ahmedabad
GIDB has proposed an Integrated Public Transit System for Ahmedabad (IPTS) and appointed a consultant for the studiesAMC became the country’s first municipality to raise bonds from capital markets for various projects (primarily water)Sabarmati Riverfront Development Corporation (SRFDC) an organisation set up by AMC is proposing a massive area development project with the help of a local not-for-profit organisation (EPC)
Lesson: Lack of integrated project development for the same city (and now watch out Mumbai’s “integrated” development)
Mumbai: non-toll bridge within city
Project conceived as self-financing bridge1.5 kms long flyover bypassing three junctions at Andheri on Western Express Highway.To be financed by selling commercial property under the bridge.Underground car park, two storeys of commercial property with a six lane carriageway on top.Project delayed initially due to delay in approvals and later due to litigation over alleged environmental issues; now real estate prices not at high levels.
Lessons: Lack of coordinated efforts, insensitivity to local and environmental issues and non-transparent procedures.
50 flyovers in Mumbai
50 flyovers to be financed initially through bond issue and recovery through an entry toll (Rs. 20/-)
Tolling commenced sometime back but was met with stiff resistance from Transporters’ Associations and court has put a stay on tollingMSRDC is fast running out of funds (on account of the flyovers as well as the Express way) but revenues not as per expectationsNow MSRDC would be reimbursed through a fuel cess on all Mumbai Petrol Pumps
Lesson: Realistic assessment of willingness to pay (also, “pay for use” principle flouted)
Kolkata Car Park (Rowden Street)
Kolkata Municipal Corporation (CMC) awarded multi-level automated car park project to Simplex Projects Project details:
Location: Rowden Street (in the vicinity of Park Street) Project Cost: Rs. 90 mn. (CMC interest free advance Rs. 30 mn.)Car Parking: 216 cars at Ground+ 2 levelsTechnology: Machinefabriek Aarding BV of NetherlandsRevenues from Car Parking & Advertisements
Performance: Revised estimate for first full year of operations are at 55% of projected as the “no parking zone” has not been fully enforced resulting in lower car parking revenue
Lesson: The corporation needs to stand by its commitments
Mumbai - Car Park at Breech Candy
Municipal Corporation of Greater Mumbai (MCGM) has bid out Car Park cum Commercial Development Project near Breech Candy Hospital on a BOOT basisBidding Parameters:
Upfront payment of premium to MCGMNo. of cars & two wheelers that can be parked
Bids received are a veritable mix of combinations of no. of car parks promised and upfront premium payment assuredCurrent Status: Bidders have been asked to make presentations on their project proposals showcasing the technologies used (capital cost, operating cost & access time)
Lesson: Lack of adequate project preparation to ensure clear & transparent bidding process
Bidding Results (Mumbai Car Park)
Bidder Car Parks Premium (Rs.crore)
No. of Cars
Rank Amount(Rs. Cr.)
Rank
Nandesh Constr. 205 2 3.33 2
Akruti 204 3 3.30 3
Fasqua 167 5 4.00 1
Earth Estate 208 1 2.20 5
Prime 167 5 2.61 4
Simplex 187 4 0.42 7
Rockline 160 7 1.00 6
Structure of the Presentation
Select experience of PSP in infrastructure Urban Infrastructure projectsPort sector projectsRoad sector projects
Lessons from experience so far
Objectives & Concerns of various stakeholders
Container terminals at Chennai & Kandla & JNPT
In the mid-90s a number of projects were bid out in major ports for private sector Privatisation of container terminals was awarded to P&O a large international Ports & Shipping group at Kandla, JNPT, Cochin & ChennaiDespite some initial hiccups the JNPT project went through to financial closure. The Chennai Container Terminal took some further time (in years!) while Kandla became a major controversy leading to a showdown between the Port Trust & MoST. Cochin was not pursued by P&O as some comforts were not forthcoming.
Lesson: The Government was unable to resolve key issues and/or read the real issues in competitive behaviour
Container terminal at JNPT
BOT Project with a world class facility at a cost of Rs. 7.50 bn.Promoted by one of the world’s leading maritime business group.JNPT did not allow first charge on project assets to the lenders and other amendments to the concession agreement.
4%
13%
43%
19%1%
9% 5%6%
Kandla Mumbai JNPTCochin Tuticorin ChennaiVizag Haldia/ Calcutta
So project financing was not available and ultimately the project was financed with the support of sponsor guarantee.
Lesson: Despite hurdles, strong promoters can make project happen.
Container Terminals – current status
As everyone is aware, JNPT (P&O) is a major success storyBut despite this, and an aggressive lobbying effort by P&O, the new (revised) bidding conditions for the proposed new container terminal at JNPT explicitly disallows bidding or investment by P&O in any formCochin Container Terminal now comes as a package of phased development (handing over of existing terminal followed by development of Vallarpadam) Kandla Container Terminal finally did not proceedAdani sponsored Mundhra Port is now developing a Container Terminal which may be divested in favour of P&O
Lesson: At times it is difficult for the Government to understand the machinations of the private sector
Dharma port project in Orissa
Proposed green-field port for dry bulk cargo at an estimated cost of Rs. 15 bn.To be developed on BOOST framework.Promoted by a JV of an Indian engineering company and two foreign companies.Significant delays in finalization of changes in concession suggested by lenders.Meanwhile both foreign sponsors have walked out of the deal – while one firm ran into financial difficulties the other had lost interest due to delays and disagreement with respect to its potential role in O&M for the project
Lesson: Lack of application and push by all parties.
Chemical terminal at Dahej, Gujarat
Greenfield liquid chemical handling facility at an estimated cost of Rs. 8 bn.Developed on a BOOT framework.Promoted by a JV of GMB, GIIC and four Indian petrochemical and fertiliser PSUs.Project physically complete and operational without the concession being signed and without financial closure.Multiplicity of promoters and speed of response is a key issue.
Lesson: Too many cooks spoil the broth.
Enron, Dabhol & OWMSL
Ocean Sparkle Ltd. based in Hyderabad formed a JV with Weismueller of Netherlands to bid for and win a mandate for providing port services to the LNG Terminal at DabholProject: Comprising of state of the art 4 tugs costing Rs. 800 mn. To be built to the specifications of The DPC’s O&M operator (a subsidiary of Enron) and operate for 20 yearsProject reached financial closure despite on-going problems at DPC and the tug-of-war with MSEBBy the time the plant closed down, the tugs were ready for delivery but no Enron to certify! Weismueller agreed to buy the tugs for redeployment and settled loans
Lesson: In large projects, the smaller parties fall by the wayside but are saved only if they have some back-up.
Haldia – Berth 4A for coking coal
Haldia Port bid out development of Berth 4A for handling coking coal imports required by steel plantsISPL was awarded the contract and they simultaneously approached project financiers and Steel Authority (a likely major off-taker)Despite considerable delays, ISPL was able to reach a 20 year contract with SAIL for using their facility for importing coking coal, an important ingredient in Steel ProductionProject lenders unsuccessfully sought a number of amendments to the Concession Agreement (essentially in line with the Model Agreement drafted by IDFC for MoS)
Lesson: Small project, long off-take contract, viability beyond doubt; a formula for success
Structure of the Presentation
Select experience of PSP in infrastructure Urban Infrastructure projectsPort sector projectsRoad sector projects
Lessons from experience so far
Objectives & Concerns of various stakeholders
Noida Toll Bridge
Project comprises a 6-lane bridge over Yamuna river and approach roads costing Rs. 4.00 billion.Flyover at Ashram road junction required for smooth traffic flow from the project delayed.Traffic significantly lower than appraisal estimates.Average daily collection is Rs. 0.27 million(Debt service liability about Rs. 1.70 million/day)
Lesson: Co-ordinated development of linkages and accurate traffic estimation key for project success.
Coimbatore By-pass
By-pass on NH-47 developed by L&T on BOT basisToll-free alternative available to local traffic
Subsequent to the award of the project, scope enlarged to include strengthening of Attupalam bridge before the by-pass
Toll-free alternative no longer available
Hence local opposition to toll collection
Earlier, willingness to pay did not capture such an event
Lesson: Project structure should be sensitive to local traffic
Durg by-pass
By-pass on NH-6 developed by Sancheti group on BOT basis
Toll-free alternative available to local traffic.Project scope includes a river bridge and ROB.NHAI provided sub-debt and limited shortfall guarantee.Project completed almost as per schedule.No local opposition to toll collection.Project in operation for two years.
Lesson: Being first project, project reached closure with help of financial support from NHAI.
Delhi-Gurgaon Expressway Project
Originally conceived in mid 1990s, CIDB, Malaysia was to be mandated in 2000 to complete this project as part of govt-to-govt initiative, but the proposal sought a grant of Rs. 1.20 bn. from NHAI, and was thus rejected.This year the project bid out by NHAI for Capital Subsidy (Grant) received a number of bids promising premium instead and was awarded to Jaiprakash Industries-D.S.Construction consortium which offered the highest Rs. 615 mn. PremiumThe project is adversely affected by recent Court order on ban of polluting vehicles (non-CNG trucks/busesa) entering New Delhi
Lesson: Classic case of the nature of risks in infrastructure projects. Who is right CIDB or Jaiprakash?
Mattancherry Bridge at Cochin
First BOT bridge project in Kerala State; GCDA acted as the sponsor authorityOther agencies involved - KSIDC, CPT, Cochin Corporation and PWD Project was offered on a BOT basis and bid for concession period. At bidding stage Traffic studies, technical studies & draft concession agreement was given to biddersProject has been awarded to Gammon IndiaLesson: Initial investment on project preparation yields high returns
PPP in NHDP
The NHDP has been partially successful in attracting private sector investment.
Type of project No. of contrac
ts
Total Length (km)
Total Project
cost (Rs. Bn)
Cost per Km.
(Rs. Mn.)
BOT toll-based 8 454 33.02 Rs. 72.7
BOT annuity-based
8 475 23.54 Rs. 49.6
NHAI SPVs 13 453 23.00 Rs. 50.8
NHAI Contracts 99 5846 169.00 Rs. 28.9
PPP or not to P(rivatise)
Construction ContractRs. 280 mn. Per Km. This is an item rate contract (not FTFC EPC)Add a further Rs. 80 mn. (Pre-op, IDC, Fees, etc.)At Rs. 360 mn. per km. this is still far lower than …..
Annuity Project CostRs. 500 mn. per km.A typical BOT project (either annuity or toll based)
Rs. 500 mn. per km. Now add Rs. 140 mn. for escalation due to extra work to get Rs. 500 mn. Add now for 15-20 years of repairs & maintenance
No further addition, Project cost still Rs. 500 mn. per km. Project cost still Rs. 500 mn. per km.
Mumbai Pune Expressway cost was Rs. 16 bn. (as per contractors’ bids) and now on completion it is Rs. 22
bn. Reliance had quoted Rs. 30 bn. including 1000 hectares
of land acquisition
PPP in roads are maturing
Toll-based BOTAnnuity SchemeGrant/Capital Subsidy
Reverse Grant/PremiumO&M/Tolling Contracts
Real-estate linked project
Many state level projects6 projects awardedJaipur-Kishengarh (NHAI)Many projects in M.P.Delhi-Gurgaon4-lane NHDP stretchesMumbai-Pune Exp. WayMahakali Flyover, MumbaiVivekanand Flyover, KolkataBangalore-Mysore Infrastructure Corridor
Comparison of Expressways dev.
Particulars Mumbai-Pune AVExpressway BMIC
Promoter (Development)
MSRDC (public)
NHAI (Public-Private)
Kalyani Group (Private)
Year of start 1995 1995 1995
Cost (Rs. Crs.) 1.630 130+51+680 826+150
Length (kms.) 94 93 62
From-To Kon-Dehu A’bad – Vadodara Bangalore-Mysore
No. of lanes 6-lane 4-lane 2-lane/4-lane
Pavement type Concrete Bitumen Bitumen/concrete
Funding by MSRDC bonds (G’teed by GoM)
Project debt and equity
Advance sale of land, senior debt, sub-debt and
equity
Current Status In operation Under construction
Under development
Extent of PSP Item rate contracts Debt, item rate contracts
Equity, debt, EPC contracts
Revenue Direct Toll Direct toll Direct Toll, real est.
Structure of the Presentation
Select experience of PSP in infrastructure Urban Infrastructure projectsPort sector projectsRoad sector projects
Lessons from experience so far
Objectives & Concerns of various stakeholders
Some case studies ..1
East Coast Road vs. Tiruppur & Noida Toll BridgeDurg Bypass vs. Jaipur-Kishengarh Bhiwandi Bypass vs. Mumbai-Pune ExpresswayDhamra vs. Haldia berth 4A & Kakinada
Small is beautiful
Some case studies ..2
Coimbatore Bypass (sensitivity to local traffic)Mumbai Entry Point Tolls (user pay principle challenged)Noida Toll Bridge (international class but low turnout)
Do not ignore the ultimate customer/user
Some case studies …3
AMC Bonds (Utilisation of proceeds)City of Ahemedabad (GIDB vs. SRFDC)Cochin Industrial Water Supply (KSIDC vs. KWA)Haldia Development Authority’s Water Supply Project
Get your act together
Some case studies …4
Goa Salaulim Water Project (BOOT or Concession)CMWSSB’s Chennai Desalination Project (EPC or BOT)Mumbai Car Park (upfront payment or no. of cars)
Firm up YOUR objectives first
Some case studies …5
Mattancherry Bridge (insisted on upfront payment but later relented)NHAI’s Palasit Panagarh (rebid after initial high bids)Durg Bypass (selected weak promoter but later extended guarantee & sub-debt support)MMRDA’s Convention Centre (bidding failed twice)
Experiment but be willing to correct yourself
Some case studies …6
Jaipur-Kotputli Toll Collection OperationsMahakali Flyover (PIL & subsequent developments)NOIDA’s Dadri Bridge (UPSBC upstages Simplex)Bidding for Container Terminals in the country
Beware of smart/over-confident developers
Some case studies …7
Kolkata Car Park (enforcement of no-parking zone)BOT Roads in general (timely toll notification)Road Bypasses (enforcement of ban on through traffic)Tax benefits under 10-23 (g) (delays/denial of Certificate) Enron !!!!!
Stand by your commitments
Summary: Some practical lessons
Small is beautifulDo not ignore the ultimate customer/userGet your act togetherFirm up YOUR objectives first
but recognize that others have their objectives too
Experiment … but be willing to correct yourself
Beware of smart/over-confident developersStand by your commitments Still sounds like preaching?
Some practical approaches
Institutionalize your approach through a vehiclePIDB, GIDB, I-Deck, I-Kin, I-Win, APIIF, MPIDB, CIDCFind a champion & give him a long tenure
First develop small & medium projects to demonstrate success
… then replicate
Give importance to good project preparation … and not just to announcing good sounding projectsKeep the bidding simple & evaluate on just one key parameter
Hire advisors to help!
Need for PSPPrivate Sector Participation is sought to essentially bring in:
Private capitalPrivate managementNew & better technology
The modality of PSP critically depends on exact objectives sought to be achieved
Why private sector participation?
Economic/Political Reasons
Policy of privatisationFostering competitionCommercial principles Pay-for-use culture
Political bottlenecks in tariff restructuring or reduction in subsidies
Management Reasons Better management of all resources & operational efficiencyImproved level of service and responsiveness to users
Financial ReasonsBudgetary priorities and constraintsAdditionality of fundsBetter utilisation of financial resources
Other reasonsNew and better technology Involvement of users and other stake holdersEnvironmental requirements
Different modes of PSP can be explored
Mode Asset Ownershi
p
O&M Capital Investme
nt
Commercial Risk
Duration (Years)
Management Contract
Public Public &
private
Public Public 3-5
Lease Public Private Public Shared 8-15
Concession Public Private Private Private 25-30
BOT Private/ Public
Private Private Private 20-30
Divestiture Private/ Pvt. & Public
Private Private Private Indefinite
Lessons from past experience
Reasons for failure attributable to one or more of the following:
Inadequate framework for PSPInsufficient project preparation & developmentFailure to address concerns of all stakeholders
Framework for PSP
Clarity in objectives of PSP Institutional restructuring to coincide with PSP initiativesRegulatory framework to be put in placeManaging political risk and willingness to pay issues
Project preparation & development
Co-ordination issues: Identification of nodal agency and defining roles of other agenciesEstablishing independent commercial viability of the project: demand, revenues & costsIdentification of risks, allocation & mitigationProject structuring & role of private sectorComprehensive information memorandum covering studies & draft contract agreementsDesigning transparent competitive bidding processTransparent & fair procurement process
Stakeholder concerns
Capacity building of government / public agenciesInterest and capacity among private sector operatorsBuilding awareness for “pay for use” principle among consumers and communities within societyAddressing financing issues of lenders and investorsEnsuring adequacy of services at affordable rates to the urban poor
Structure of the Presentation
Select experience of PSP in infrastructure Urban Infrastructure projectsPort sector projectsRoad sector projects
Lessons from experience so far
Objectives & Concerns of various stakeholders
Government/Local Authority
Sustained improvement in provision of InfrastructureConserving scarce public resourcesCreation of facilities and provision of efficient servicesTransparency and fair processProtection of Social/Developmental commitments
Developer/Investor
Commercial viability of projectFreedom & flexibility in conduct of businessAvoidance of risks beyond controlFairness in transactionDelays in approvals
Project Financiers/Lenders
Financial viability of projectAcceptable concession frameworkFreedom to exercise step-in-and-cure-rightsProtection against defaults by Government and developer
Consumers/Users
Availability of facilities & servicesAcceptable levels of tariffs/taxes/tollsAppropriate grievance redress system
Thank You
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What is project finance
Project Finance is a technique of non-recourse or limited recourse financing in
which the project lender principally look to the cash flow of a single project as security
for their long-term loans.
In India the term Project Finance was generally applied to long term loans given by Term Lending institutions (Fis) to new (or modernisation/ upgradation) industrial projects as compared to working capital facility extended by commercial banks.
Extent of sponsor recourse
Full-recourseAkin to corporate finance
Non-recourse financeExtremely rare
Limited recourse financeCompletion guaranteesUndertakings to cover cost overruns
Limited recourse financing...
Insulates sponsors from project debt and risk of project failure
Enables them to share some risks in a large project with other participants
Overcome the inability to borrow through a corporate loan as balance sheet cannot support the project debt
Future cash flows from the project are the primary source of debt repayment
Project finance is cash flow based
Cash flow based financing for infrastructure projectsSignificant value of the project is derived from intangibles and not from the assets createdEstimation of debt requirement of the project depends on the future cash flows of the project as against the capital expenditure incurred in conventional projects
Telecom/ Ports : based on peak cash negative Power/Roads : cash requirement till project completion
Project finance needs strong security structure
Security structure needs to be more stringent than a normal project assistance and typically includes -
Legal mortgage of all assets, including receivables (as opposed to the normal equitable mortgage)Pledge of promoter shareholdings in the project companyEscrow mechanism for cash flows of the companyAssignment in favour of lenders of all the project contracts
Project finance vs. corporate finance
Project Finance Corporate Finance(balance-sheet
funding)
Recourse limited to identified pool of assets
Recourse to all the assets of the borrower
Contracts/license agreement/Take-or-Pay contract is key security
Physical assets are the key security & market value may be realisable
Lenders’ approach to financing
Focus on economically strong projects
Back strong sponsors with successful track record in implementing large projects
Comprehensive due diligence on all counterparties (incl. EPC contractor, O&M contractor, Licensor, etc)
Insist on complete financial closure before commitment of any funds
Arranging project finance requires substantial time and cost
Basis for lenders’ risk aversion
Lenders have the maximum money on a project rated at “BBB” and the minimum returns
whereasThe developers put a small money as equity and aspire for supernormal profitsThe Users get a facility for which they can pay if they so wish (or protest/use alternatives, etc.)The Government puts no money but has the right to intervene, take over if it is dissatisfied
yetthe lenders’ lenders are not so easy on them and besides expecting a “AAA” rating also face stringent RBI/SEBI regulations
Risks over the 3 project phases
Lenders identify three separate phase of risk over the life of the project
Engineering &Construction Phase
Start-up Phase
OperationPhase
CODPhysical Completion
Disbursements
Arranger Mandate
Operations &monitoring
Drafting of financing documents
Implementation &monitoring
Resolution of due diligence issues
Prelim. project assessment
Due diligenceIssue of LOI
Issue of term sheet
Term sheet negotiations
Term sheet signing
Financial closure Project completion
Project identification
Debt servicing
Project finance lifecycle
FIMMDA Annualised Spreads
Updated on 31st Oct 2002
Annualised spreads 1 2 3 4 5 6 7 8 9 10AAA 60 62 69 65 61 60 58 63 68 72 AA+ 85 86 96 93 90 88 86 91 96 101 AA 122 124 134 131 129 127 125 131 136 142 AA- 167 168 180 178 176 175 173 178 184 189 A+ 238 242 261 264 268 267 265 271 277 283 A 293 308 334 343 352 352 353 358 364 370 A- 360 383 419 429 437 438 439 445 451 456 BBB+ 457 460 482 479 475 480 485 495 506 517 BBB 479 510 556 570 583 585 586 592 598 604 BBB- 647 651 674 672 669 675 682 693 704 715
Spreads over Gilt curve in bps
Source: http://www.fimmda.org
Different modes of PSP can be explored
Mode Asset Ownershi
p
O&M Capital Investment
Commercial Risk
Duration (Years)
Management Contract
Public Public &
private
Public Public 3-5
Lease Public Private Public Shared 8-15
Concession Public Private Private Private 25-30
BOT Private/ Public
Private Private Private 20-30
Divestiture Private/ Pvt. & Public
Private Private Private Indefinite
Project Financing required
Common Project Structures …1
Build-Operate-Transfer (BOT)New Asset/facility against collection of user fee investor rights revert back to the public authority at the end of the concessionownership vests with the public authorityused for highways, utilities and ports
Build-Own-Operate (BOO)similar to BOT but without the transfer of rightsmay also stipulate payment of some fee to the public authority for the right to operate the facilityused for telecom and power projects
Common Project Structures...2
Built-Own-Lease-Transfer (BOLT)assured revenue through lease rentalsproposed for Indian Railways
Built-Own-Operate-Share-Transfer (BOOST)revenue shared with the public authorityMinor ports proposed in some states
Annuity structureConcessionaire responsible for construction and O&MConcessionaire receives fixed “annuity” over the concessionProposed for National Highways projectsLikely to replace Railways BOLT scheme