Indian School of Business Infrastructure & Project Finance Academic Year & Term: 2011 12: Term: VIII,

, Feb 27, 2012 April 8, 2012 Office Hours: Will be announced later

Instructor: P. S. Srinivas Affiliation: Indian School of Business. Email: ISB id: Not yet available Current id: psrinivas@worldbank.org Course Objective and Outline

This course has been designed with an emphasis on the real world and practical application. The idea is to enable you to hit-the-ground-running if you choose to have a career in infrastructure project finance or give you the toolkit to understand this field, even if you dont plan to have a career in this area. It builds on your understanding of several aspects of finance theory that you have no doubt learned during your core courses. It will help you ask the right questions, know the right places to go to for leads, and gain the knowledge to do the analysis necessary for project finance transactions. The course will cover within a practical case based context the concepts of capital structure, developments in structured financial products, corporate governance, risk management, structure of Indian and global project finance markets, and key players involved in the infrastructure financing space. Project financing issues will be examined from several, often conflicting, perspectives to understand the trade-offs involved cases will focus on understanding the view points of the project developer, the contractors, the government, domestic and international financial institutions active in infrastructure financing, regulators, and the consumers. Indias infrastructure sector - widely recognized as a major bottleneck to more rapid economic growth is growing rapidly. Firms in the infrastructure sector are experiencing rapid growth and some of these old-economy bricks-and-mortar firms are now among the most valuable on the stock market. Indias infrastructure investment plans are of the order of $500 billion over the next five years. Across emerging Asia and the developing world more generally similar trends are emerging. Infrastructure investments in the order of trillions of dollars are planned over the next decade. Infrastructure in many of these countries was traditionally the preserve of governments with the public sector financing most of the investments. But with tight government budgets in many countries, much of this new round of infrastructure investment is expected to come from private investors. This course will focus on large privately-financed infrastructure projects. The course will examine the financing, structuring, and risk management decisions involved in such projects and the impact of these decisions on project performance and firm value. The course will provide you with a perspective that in infrastructure financing, structure matters. Financing and investment decisions in infrastructure projects are often not separable decisions and financial structuring affects incentives and performance. Structuring and risk management within particular regulatory and institutional contexts - are the keys to enhancing project performance and increasing firm value. Learning Goals In addition to the core technical and managerial knowledge in the area of infrastructure project finance, this course also helps meet many of the other learning goals for the ISBs PGP. Specifically,

students are required to have critical and integrative thinking, be able to communicate effectively both in written and oral form and be good responsive listeners, demonstrate an ability to work effectively in a team, exhibit an understanding of the importance of individual roles and tasks, and have the ability to manage conflict and compromise, so that team goals are achieved. Many of the cases will also consider ethical issues that require students to be able to identify and understand the impact of a particular issue on various stakeholders, recognize the rights and responsibilities of the stakeholders, and systematically analyze the pros and cons of any decision related to the issue. Finally, the course is truly global we will consider examples and cases from all over the world. This will assist the students in gaining further awareness of global issues affecting the infrastructure and project finance business. Required Text Book/Material The course packet contains assignments, readings, and the cases that will be discussed during the course. The course packet is the only required text. Recommended Text Books A lot of interesting, up-to-date, and practical information is available in academic and trade journals and websites. I will provide a detailed list of these sources prior to the course so that you can refer to them as necessary during the course and in your later professional career. Depending on your interests, I am happy to discuss these with you during office hours. If there are any particular transactions or policy issues you would like to explore further, I am happy to do so as well. Course Procedures This course is designed to be a challenging course that gives you useful perspectives on infrastructure project finance. What you learn from this course will depend, to a very large extent, on what you are willing to put into it. You will gain most from the course if you have the time and willingness to prepare the assigned cases throughout the course. For each case, I will assign study questions concerning the case and these will be posted on the course website. For most of the class time, we will consider these questions and the material in the case. Background readings and articles will also be included in your packet. For students planning a career in this area, I strongly recommend reading all the readings. Assigned readings should not necessarily be cited in the case discussion. You should argue as if you are making a recommendation to the decision maker. Put yourself in the shoes of the decision maker and think about what issues are most important to you in decision making. The process of arriving at the answer is as important as the answer itself. Because of the nature of this course (and its evaluation), it is important that you attend every class, arrive on time and be prepared to participate. To help me out, you should bring your name cards to each class. I may not remember who said what without those cards. I will not hand out my own case analysis after the class has discussed the case. This is largely because there are usually no absolute right answers. As a group we will explore as many sides of the case as possible. This discussion should help each of us reach our own decision and try and convince others of our points of view. This is a very realistic scenario in the real world after you leave ISB. Session-Wise Topics/Readings ** Please see Course class schedule below.

Pre-requisite Course(s) Students taking this class must be thoroughly familiar with the material covered in the Core courses especially those relating to Financial Accounting, Corporate Finance, Investment Analysis, Managerial Economics, and Strategy. There are no pre-requisite elective courses. This course requires and applies many of the concepts and techniques learned in the core courses Since the course is aimed at being real world and application oriented, it has as much to do with overall business strategy and implementation as it does with finance, we will discuss strategic and implementation issues also in class. This course also places a strong emphasis on presentation and discussion skills. It will be important to explain your positions or arguments to each other and to try to argue for the implementation of your recommendations. Evaluation Components The overall course grade will be determined by assigning weights to the following four different types of work: Case analyses: Each group of students will submit a two-page memorandum of analysis and recommendations at the beginning of each case discussion. (In sessions where two cases are scheduled, students are expected to hand in their analyses for both cases at the beginning of the class). These memoranda will count for 20 percent of the final grade. Each memorandum should be typed and double-spaced. Write these as if you were writing a recommendation to the major decision-maker in the case. The two-page limit is for text only. You may attach as many numerical calculations as you wish. Memoranda will not be accepted after the class has met. Class participation: Class participation will count for 20% of the final grade. I will judge your performance based both on the quality and the quantity of your comments. We plan to cover over ten cases in this class. This should give everyone in the class enough opportunity to participate. Because so much of the learning in this course occurs in the classroom, it is important that you attend every class. Low class participation combined with several absences can lead to a failing grade. Group class assignments: One group assignment will be given to you during the course at mid-term. You will have one week to turn it in. This assignment will be graded and will count for 30 per cent of your final grade. One assignment should be submitted for each group and all members of the group will get the same grade. Individual class assignment: One individual assignment will be given to you towards the end of the course. As the name implies, this will need to be submitted individually. You will have one week to turn in the assignment. Group work is not permitted for this assignment. This will be graded and count for 30% of your final grade. Final Examination: There will be no final examination.

Assignment Schedule Name of the Component Case analyses Group Assignment Class participation Individual assignment Date of Submission /Deadline Beginning of each class End of Session 5 Throughout the course End of session 8 Take-home or in-class Take home Take home In-class Take-home Group Instructions to Coding Assignment students on word Schem (Y/N) limit/format of e submission etc Yes Two-page limit 3 Yes No No Will be given along with assignment See description above Will be given along with assignment 7 1 7

Group Information Group Size Group Composition Can groups be formed across different sections? Any other instructions? Minimum 3, maximum 5 Up to the group Yes, with the stipulation that case analyses have to turned in at the beginning of the section that meets the first for each session. Please list names of all members of the group on each memorandum and assignment submitted. Once formed, groups cannot be changed during the course.

Attendance & Punctuality Learning is an interactive process. ISB students are admitted partly based on the experiences they bring to the learning community and what they can add to class discussions. Therefore attendance is an important aspect of studying here. You have to be present in all the classes. Absence is only appropriate in cases of extreme personal illness, injury, or close family bereavement. Voluntary activities such as job interviews, business school competitions, travel plans, joyous family occasions, etc. are never valid reasons for missing any class. With the assistance of the Academic Associate, I will keep track of your attendance and decide on the nature and extent of penalty for any absence from the class. Penalty may include reduction in grade. Late arrival is disruptive to the learning environment; so you have to be in class before the scheduled time. Most courses meet twice a week during the day. Normally there are no classes scheduled on Friday or in the evenings, but there are exceptions. Class and Exam schedules are posted on the PGP intranet site. Any change in the class schedule is notified in advance.

Please see more details on class participation in Evaluation Components section above. If you find it necessary to miss a class or make a late submission, you must seek permission from me in advance. Online Course Management I will host a course page on LMS and post all your course-related material there. For all the cases in the course, I will arrange for EXCEL worksheets to be created and made available online. Each worksheet will contain one or more of the exhibits in each case. This will make it easier for you to spend time on the analysis, rather than punching in numbers. Class Schedule Note: We will have some guest lecturers from industry give us talks on specific aspects of the infrastructure and project finance space in India. I will be finalizing the speakers and the subject areas of their talks within the next few weeks. These lectures will be held during the regular classroom sessions as far as possible and we will correspondingly modify the content of some of the sessions i.e we will, in all likelihood, cover fewer cases than those listed below and replace them with guest lectures and discussions with practitioners. Session 1 A. Feb 28, 2012

Course introduction/market overview

Provide an overview of the project finance industry, from its historical beginnings to current and future trends, and an overview of infrastructure finance. Will include descriptive statistics on the use of project finance (e.g., the size of the market, the types of projects, and the location of projects, etc.), as well as data on the major participants in the field. B. Overview of key concepts in infrastructure and project finance

What is project finance? Why is it particularly relevant in infrastructure? Corporate vs. project financing Why companies use project financing to finance capital investments Types of project financing Project finance risks Required Reading: An Overview of Project Finance and Infrastructure Finance 2009 Update. HBS document No. 9-210-061 by Benjamin Esty and Aldo Sesia. Optional Reading: Bruner, R. and H. Langohr, Project Financing: An Economic Overview, Darden Schoolcase No. 295-026-6, University of Virginia, 1995 Esty, Benjamin C. Modern Project Finance: A Casebook. Hoboken, NJ: Wiley, 2004 Guasch, J.Luis Granting and Renegotiating Infrastructure Contracts: Doing it Right. Washington DC: WBI Development Series, World Bank, 2004

Session 2

March 2, 2012

A. Overview : Get a broad understanding of structuring, financing, risk management, and valuation issues in project finance. Case 1. Chad-Cameroon Petroleum Development and Pipeline Projects (HBS case No. 202-010). A US$ 4 billion oil pipeline in one of the poorest countries in the world, with the potential to dramatically reduce poverty of its people if the resources from the oil are used well, but with a President described as a warlord. A high-risk but potentially high-reward project illustrating most of the challenges faced by infrastructure projects in developing countries. First half of case discussion. B. The Hyderabad Airport project. Presentation by GMR. Discussion.

Required Reading: An Overview of Project Finance and Infrastructure Finance 2009 Update. HBS document No. 9210-061 by Benjamin Esty and Aldo Sesia. Optional Readings: Bruner, R. and H. Langohr, Project Financing: An Economic Overview, Darden Schoolcase No. 295-026-6, University of Virginia, 1995 Brealey, R., I. Cooper, and M. Habib, 1996. Using Project Finance to fund Infrastructure Investments, the Journal of Applied Corporate Finance, Fall 1996, pp. 25-38. Easterly, William, 2001, The Elusive Quest for Growth: Economists Adventures and Misadventures in the Tropics, MIT Press (Cambridge, MA) Session 3 A. March 6, 2012

Structuring Projects

Case 1 (continued). Chad-Cameroon Petroleum Development and Pipeline Projects (HBS case No. 202-010). A US$ 4 billion oil pipeline in one of the poorest countries in the world, with the potential to dramatically reduce poverty of its people if the resources from the oil are used well, but with a President described as a warlord. A high-risk but potentially high-reward project illustrating most of the challenges faced by infrastructure projects in developing countries. Second half of case discussion. B. The Indian Infrastructure Finance Scenario presentation by IDFC

Required Reading: An Overview of Project Finance and Infrastructure Finance 2009 Update. HBS document No. 9-210-061 by Benjamin Esty and Aldo Sesia.

Optional Readings: Bruner, R. and H. Langohr, Project Financing: An Economic Overview, Darden Schoolcase No. 295-026-6, University of Virginia, 1995 Brealey, R., I. Cooper, and M. Habib, 1996. Using Project Finance to fund Infrastructure Investments, the Journal of Applied Corporate Finance, Fall 1996, pp. 25-38. Easterly, William, 2001, The Elusive Quest for Growth: Economists Adventures and Misadventures in the Tropics, MIT Press (Cambridge, MA) Session 4 March 8, 2012

Understand different motivations for using project finance. Emphasize that structure matters in infrastructure project finance. For certain kinds of projects, project finance is more effective and efficient than corporate finance in resolving incentive conflicts, thereby resulting in higher expected cash flows. Case 2: BP-Amoco (A): Policy Statement on the use of Project Finance. Discuss the risk management motivation for using project finance Optional reading: Stulz, R., 1996, Rethinking Risk Management, Journal of Applied Corporate Finance, 9, 8-24. Session 5 March 9, 2012

Case 3: BP-Amoco (B): Financing the Development of the Caspian Oilfields (HBS no. 201-067). British Petroleum and Amoco are the two largest members of an 11-firm consortium spending $10 billion to develop oil fields in Azerbaijan. BP has used traditional on-balance sheet corporate finance while Amoco has used project finance to finance their shares of the first $1.9 billion in the project. Subsequently BP and Amoco merge. Is project finance or corporate finance the better way forward? Optional reading: Note on Caspian Oil Pipelines, 1999 (HBS No. 299-044) Sahlman, W.A., Aspects of financial contracting in venture capital, the Journal of Applied Corporate Finance, Summer, 1988, Vol. 1, No. 2, pp. 23-36. Group Assignment To be announced Session 6 March 13, 2012

A. Case 4: Australia-Japan Cable: Structuring the Project Company (HBS case no. 202-115). Telstra, Australia and Japan Telecom face the challenge of structuring a $520 million undersea telecom cable project. B. Role of financial advisors in infrastructure finance in India and regulatory and policy aspects. Presentation by CRISIL.

Optional reading: Pratt, T.A., and R. C. Siderman, 2001. Using project Finance to mitigate telecom risk, Journal of Project Finance 7, Summer, pp. 17-22. Session 7 March 15, 2012

A. Examine how project risks are managed, how to allocate project risk, and how to value project investments. Identify, assess, and mitigate project risks. Develop a framework and a set of guiding principles governing risk management in infrastructure project finance to achieve goals of efficiency and effectiveness. Will highlight the fact that risk mitigation is a continuum: you can have a lot of exposure or you can mitigate virtually all of it, but at some point, the cost of risk mitigation will exceed the benefits. To determine the optimal point is critical for project sponsors. Case 5: Polands A-2 Motorway (HBS no. 202-030). Poland's first private toll road developed and built by a consortium of 18 firms (Autostrada Wielkoploska S.A.). Bankers to the deal have concerns over the traffic forecasts and revenue projections and want additional equity from the sponsors. The concession has six weeks to expire if the project does not reach financial close and the sponsors dont want to put in more equity. How can risks to senior lenders be mitigated without further equity injections? Optional reading: Fortin, R. Jay, 1995, Defining force majeure, Project & Trade Finance, (January), pp. 58-59. Haddad, F., 1998, Assessing Start-up Toll Road Construction Risk, Standard & Poors Infrastructure Finance, September, pp. 40-45. Matesanz, M., C.H. Hu, R. Travis, and B. Cahill, 2000, Rating Methodology: Start-up Toll Roads, Moodys Investors Service: Global Credit Research, February. Stulz, R., 1996, Rethinking Risk Management, Journal of Applied Corporate Finance 9, 8-24. B. A lenders perspective on infrastructure finance. Presentation by IDBI.

Session 8: March 16, 2012 Managing project risks: Get a flavor of the types of political risks facing large infrastructure projects and the role of multilateral institutions in infrastructure finance. Case 6: Financing the Mozal Project (HBS Case No. 200-005). Mozal is a $1.4 billion aluminum smelter in Mozambique roughly equal in project cost to Mozambiques Gross Domestic Product (GDP) and close on the heels of a 20-year civil war. The International Finance Corporation (IFC, a member of the World Bank Group) is considering its largest ever investment (at the time) of $120 million in a project finance transaction. Provides an example of political risk management in a developing country and the role of multilateral institutions such as IFC and the World Bank in such projects. Optional readings:

Chambers, W.J., Understanding Sovereign Risk,, Standard & Poors Credit Week, January 1, 1997 Fortin, R. Jay, 1995, Defining force majeure, Project & Trade Finance, (January), pp. 58-59. International Finance Corporation, 1999, Project Finance in Developing Countries, Lessons of Experience #7, The World Bank, Washington DC. Deringer, H., J. Wang, and D. Spar, 1997, Note on Political Risk Analysis, HBS case No. 798-022. Session 9: March 20, 2012 Case 7: International Rivers Network and the Bujagali Dam Project. Bujagali Dam is a $582 million hydroelectric project in Uganda. US-based power major AES Corp. and a local firm are cosponsors of the projects. The World Bank believes it is a good project and has approved a loan. The International Rivers Network (IRN) a California, Berkeley based NGO believes that the project will benefit only the multinationals and not Ugandans. Provides an example in which to consider the ethical implications and related risks of large infrastructure projects, including the roles and responsibilities of the major parties involved (i.e., project sponsor, host government, and project financiers). Optional readings: William Easterly, 2001, The Elusive Quest for growth: Economists Adventures and Misadventures in the Tropics. The MIT Press (Cambridge, MA). Executive Summary of the World Commission on Dams final report available on www.internationalrivers.org Session 10: March 22, 2012 Understand different ways of financing infrastructure projects. Study capital and debt ownership structures in project finance and debt-based governance issues. Examine different sources of finance bank loans, project bonds, agency debt (from multilateral and bilateral agencies), and subordinated debt. Case 8: Iridium LLC, HBS Case no. 200-039. It is August 1999 and Iridium a global satellite telecommunications company has just declared bankruptcy. It had raised more than $5 billion in capital. The case challenges existing theories of capital structure and examines benefits and risks of issuing different kinds of securities in an infrastructure financing situation. Barclay, M.J., C.W. Smith, 1999, The Capital Structure Puzzle: Another look at the evidence, Journal of Applied Corporate Finance, 12: 8-20 Barclay, M.J., C.W. Smith, 1996, On financial architecture: leverage,, maturity, and priority, Journal of Applied Corporate Finance, 8:4-17 Reiling, H.B., 2000, Limited Liability Companies, HBS case study No. 9-298-097

Ruback, R.S., 1995, A note of Capital Flow Valuation, HBS Case No. 9-295-069 Simpson, P., and N. Avery, 1995, The Role of capital markets in project financing, Journal of Project Finance, Spring, pp. 43048