Infrastructure Financing

By : Murtuza Kapasi
murtuza.kapasi@gmail.com
Student of PGPM 609 (1 year MBA)

Bhartiya Vidya Bhavan’s

S P Jain Institute of Management & Research, Mumbai
 Content
1. Introduction : Purpose and Scope
2. Indian Infrastructure Sector
3. Business Environment - Policy frame work
4. Source of Fund - Funding Agencies
5. Source of Fund - Type of Fund
6. Various Models for Financing Infrastructure
7. Challenges and Opportunity
8. Case Study : UMPP Projects
9. Company Analysis

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 Introduction : Current activity Level
Snap shot of a week (31.03.10 - 06.04.10)

Shapoorji Pallonji Group, is setting up fund to

participate in developments worth over $2 billion
- 01.04.10 Reuters

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 Introduction – Purpose and Scope
• Study Infrastructure Financing
• Analyze the environment
• Role of various agency
• Type of funds and Capital Structure
• Various funding models and risk sharing
• Case study of projects and Company

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 Indian Infrastructure Sector
• Definition:
– Planning Commission’s Definition of
‘Infrastructure’
– RBI’s definition of ‘Infrastructure Landing’

• Importance:
– Infrastructure has been identified as serious
impediment for growth by Planning commission.

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 Indian Infrastructure Sector
• Characteristic:
a) Natural monopoly
b) High initial cost and low operating cost.
c) Non-tradability of output
d) Possibility of price exclusion
e) Bestowing externalities on society.

• Impact on risk profile and financing

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Indian Infrastructure Sector : Size and Trend

SIZE:

514 billion
US$

Size of
opportunity
!

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Indian Infrastructure Sector : Size and Trend
1200
Trend:
1000

800 218 billion to

Series 1
1020 billion
Series 2
600 US$

400 Five Fold

Increase!
200

0
2002-05 2007-12 2012-17

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Indian Infrastructure Sector : Size and Trend

Key
Projects

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 Business Environment and Policies
• Political : Highly Favorable – Consensus
• Economical : Moderate – Innovative ways
required
• Social : Willingness to pay in few
sectors, Resistance in others
• Technological : Mature Technology available
• Environmental : Favourable except Irrigation
• Legal : Moderate (Contractual Framework
is evolving)

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 Funding Agencies
• Government –Federal, State, Local
• Multi Lateral Agencies – WB, ADB, Exim Banks
• Private Participation
• Commercial Banks and NBFC
• Insurance and Pension Funds
• Development Agencies

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 Type of Funds
One or more of the followings are used to raise
money for financial closure of a projects
• Subsidy
• Equity
• Debt
• Bonds
• Other Instruments (ECBs, FCCBs)

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Financing Infrastructure – Various Models
1. Government Funded and Owned
– Mostly it funds socially and politically important
projects, project where user charges are not defined
– Implementing agencies - R&B Dept., DoT, PSUs, etc.
– Increasingly going for EPC route
– Example : Irrigation, rural roads and electrification.
2. Private Funded and Owned
– Govt. issues License, Allots Resources.
– Licensee develops provides service and charges open
market rates dictated by competition.
– Example: Telecom, Mineral Mining, Airline etc.

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Financing Infrastructure – Various Models

3. Public Private Partnership (PPP)

– Annuity Based Model
– BOOT,
– BOO
– Viability GAP Funding
– Revenue Sharing Model
– Tariff based bidding
• OR A COMBINATION OF ABOVE MODEL IS
POSSIBLE
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Financing Infrastructure – Various Models
• Public Private Partnership
– Annuity Based Model :
» Variation of EPC based contact
» Ensured payments in semi annual installments
» Minimal Risk
» Debt can be raised easily
» Mainly used for road project

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Financing Infrastructure – Various Models
• Public Private Partnership
– BOOT:
» Concessionaire to Build, Own, Operate and Transfer the
infrastructure facility.
» Concessionaire to collect pre defined user charges (toll.fees, etc.)
during concession period to recover cost and profit.
» Demand risk largely transferred to concessionaire. Hence
accurate demand forecast is must.
» Concession period ranges from 20-30 years.
» Successfully implemented in roads and ports sector.

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Financing Infrastructure – Various Models
• Public Private Partnership
– Viability GAP Funding (VGF) :
» This model is similar to BOOT Model, But here govt. agrees to
provide some fund to private bidders
» This is generally done for the projects which are otherwise not
feasible.
» Bidders asking for least VGF will win. Cases are there where VGF
projects went at (–Ve) negative grants. i.e. bidder agreed to pay
fixed sum for award of contarct.

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Financing Infrastructure – Various Models
• Public Private Partnership
– BOO:
» Concessionaire to Build, Own and Operate the facility
perpetually.
» Government / Nominated agency to regulate tariff charged by
concessionaire based on predefined parameters.
» Operational risk transferred to concessionaire.
» Suitable for ports and electricity distribution.
» To avoid duplication, ensure monopoly with open access for all.

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Financing Infrastructure – Various Models
• Public Private Partnership
– Revenue Sharing Model
» Projects are awarded based on how much % of revenue will be
shared by the concessionaire. Highest bidder wins.
» Upfront payment is not required and govt. will be paid from
accruing revenue.
» More suitable for brown field expansion , where government
hand over existing facility to the winning bidder.
» Mumbai and Delhi airport modernization has been carried out on
this model.

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Financing Infrastructure – Various Models
• Public Private Partnership
– Tariff based bidding
» Tariff based bids are invited by government to supply a
particular service or facility for fixed tenure and fixed
quantity.
» Lowest bidders is awarded the contact. Demand and
purchase is ensured in terms of PPAs (Pre Purchase
Agreements)
» Bidders risk is limited to implementation and operation.
There is no upper limit set for RoI or profit.
» Success fully implemented in Electricity generation and
Water treatment sector.

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Infrastructure Financing – Appraisal Process
1. Promoter Appraisal:
Background, Resources, Experience
2. Technical Appraisal:
Location, Land, Technology, Input
3. Financial Appraisal:
Cost, Capital Structure, Financial
Projection, Viability, Sensitivity
4. Marketing Appraisal:
Off –take agreement, Demand forecast, PPAs
etc.
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 Challenges and Opportunity
Challenges:
• Shallow Debt market i.e. Corporate Bond market
• Develop mechanism for cost recovery
• Highly sensitive to government policy and political priority – High
perceived risk
• Plethora of Clearance agency and department involved; causing time delay

Possible Measures:
• Increase participation of Pension Funds and Insurance Companies;
Incentivize domestic bond issue
• Define user cost and state subsidy, Reform cross subsidy regime
• Strengthen the Contractual framework , Establish Strong Monitoring and
Implementation Mechanism
• Development of skilled resources and capabilities

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 Case Study
Jalandhar-Amritsar Road Project (NH1)
• PPP Model followed : BOT
• Project Cost : 2.37 bn. Rs.
• NHAI Grant : 0.39 bn. Rs.
• Equity (By IVRCL) : 0.41 bn. Rs.
• Debt : 1.57 bn. Rs.
• Banks Involved : State bank of Bikaner &
Jaipur, Canara, Allahabad.

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 Case Study
Mundra 4000 MW UMMP
• PPP Model followed : Tariff Based Bids
• Project Cost : 4.2 bn. US$
• Equity (Tata Power) : 1.0 bn. US$
• Debt : 3.2 bn. US$
• ECB from IFC (450 m), ADB (450 m), Korean
ECAs (800 m) in US $
• Local banks, SBI Consortium (1500 m) in Rs.
• Levelized tariff of US 5.65 cents per kWh (Unit)

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 Company Analysis
GVK Power and Infrastructure - Structure
• Company Structure

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 Company Analysis
GVK Power and Infrastructure
• SWOT STRENGTH
Analysis
Strong Cash flow from 900MW Plants
Secured fuel linkage for proposed Plants
Lucrative Airport Portfolio with limited risk
Focus on Infra Sector - Highly competitive
WEAKNESS
Smaller Size of Balance Sheet
Lower Reserves, Critical for Infra Projects
Lack of In House EPC, Construction
Expertise, Higher debt Cost

SWOT
OPPORTUNITY
Huge Supply Gap in Most of THREAT
the business Segments Except power, revenues are prone to
Economic Turbulence.
Availability of FII, ECB finance.
Entry of Big players, Change in Policy
Favorable policy regime regime will impact growth

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 Company Analysis
GVK Power and Infrastructure
• Capital Structure – (and Interest coverage)
3.5

2.5

2
D/E
1.5
Int. Coverage
1

0.5

0
FY 08 FY 09 FY 10 FY 11
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 Company Analysis
GVK Power and Infrastructure
• Financial Performance (in Rs. Cr.)
2500

2000

1500
PAT

1000 EBITDA
REVENUE
500

0
FY 08 FY 09 FY 10 FY 11

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 References
• Planning Commission Reports and Website
• RBI Circulars
• Indian Infrastructure monthly – Jan 2009 to May 2010
• ProjectsMonitor.com
• An address by Dr. K. C. Chakravarthy of RBI
• Financial news websites and promoter co.’s websites
• IFC Presentations
• SBI Mutual fund presentation
• Project report of SPJIMR Students on – “Infrastructure
Development”
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 Are we ready for the Biggest
Opportunity of Next Decade…?
For further details contact murtuza.kapasi@gmail.com

Thank You
Murtuza Kapasi – PGPM609 - 27