INFRASTRUCTURE

FINANCING
 What is Infrastructure?

“Infrastructure is define as the

physical framework of facilities
through which goods and services
are provided to the public.”
Includes: Roads, Ports, Highways, Power plant, Airports, Godowns,
Telecom etc.
 Main Characteristics of the
Infrastructure Project Finance Market
I. Limited or non-recourse
II. Complex contractual arrangements
• Demanding risk management
techniques
III. Project is a collateral &repayment
from cash flow.
Model Adopted for Infrastructure
Development
• BOT (Build, Operate, Transfer)
• BOOT (Build, Own, Operate, Transfer)
• BOLT (Build, Own, Lease, Transfer)
• BOO (Build, Own, Operate)
 Major Parties to Project
 Each party maximizes its own objectives subject to the
constraints set by others’ willingness to participate.

Government

Security and
Creditors Assurance Project
of Debt Repayment Promoters

Term Debt Capital

Project Financing: Uses of Cash Flows
Driven by a hierarchy of claims
Revenue Streams

O & M,
Insurance
Expenses Depreciation Depreciation
&
Interest Taxes

Principal
Payments
Dividend to
Shareholders
 Incentives/Objectives of
Creditors
Have a claim to fixed contractual
payments from the project’s cash flows
independent of the borrower’s income
Good credit risk, i.e. secure cash flows
Government support and guarantees
 The cost of debt =
Real return + Expected inflation +
Project risk premium + Country risk
premium + Regulatory/political risk
Incentives/Objectives of Sponsors
Sponsor holds a residual claim, after
the payment of contractual claims
Limited recourse structure
 Cost of equity =
cost of debt + risk premium
Reasonable return on investment:
= f(debt characteristics, tariff,
leverage ratio, government support)
Incentives/Objectives of the Government

Serve public interest

Low tariff rate
Quality of services
Future tax revenues
 Example: Power Producer
Fuel Government Ministries/
Supplier Local
Agencies
Implementation Permits
Fuel Supply
Agreement
Project Agreement
Equity
Insurance
Insurers Policies Shareholders Investors
Project Agreement
Company
Engineering, Construction
Contract Escrow Lenders
Construction Power
Agreement
O &M Purchase
Contractor Agreement Agreements

Project Escrow
Power
Operator Utility
Agent
Project Life Cycle: Main Risks

Construction Operation
[--|--|--|--|--|--|--|--|--] [--|--|--|--|--|--|--|--|--|--|--|--|--|--|--]
Main Risks: Main Risks:

• Performance Risk
• Completion Risk
• Regulatory Risk
• Cost Overrun Risk
• Environmental Risk
• Performance Risk
• Off-take Risk (Power)
• Environmental Risk
• Market Risk (Toll Roads)
 Project completion
risk Market risk
•Liquidation damages •Demand & price
•Contract specifies the variation
parameter •Take or pay
•Standby credit facility •Escrow Mechanism
•Promoter ready tom •Clause ensure min.
fund cost overrun revenue
•Shadow financing

RISK
Foreign exchange
risk
•Largest concern for
foreign investor
•Revenue in local
currency
Supply of input •Revenue equal to
•Control through contract foreign debt payment
•Price variation and supply •Tariff escalation
risk clause if currency
depreciate
 Financing Method
• Average ratio of Debt Equity:-70: 30

Takeout Financing

• Developed by IDFC.
• Bank provide loan for 5 to 6 years.
• Buyers available for after specific period
• Case study:Delhi-Noida toll bridge; Rs 500 Million
deep discount bond Maturity period: 16 years.
• Holder will find a buyer in IDFC and IL& FS after
5th & 9th years at 13.7% and 14.19 %.
 Financing Method
Structured Financing

• Sale & Leaseback

• ABS (Asset Backed)
• Subordinated debt (Mezzanine Financing):
considered as equity and give leverage to the
project.
• Case study:Ras Laffan Qatar/Korea (LNG)
Project: structured financing.
Providers of Private Finance
• Commercial banks
• Export credit agencies/ development banks
• Multilateral financial institutions
• Vendors/contractors
• Institutional investors
• Private investment funds
• Individual/Strategic investors
 Issues In Infrastructure

•Privatization

•Project Structuring

•Project Financing

•Project Implementation
THANK YOU