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
Government
Creditors
Project
Promoters
Security and
Assurance
of Debt Repayment
Term Debt Capital
Each party maximizes its own objectives subject to the
constraints set by others willingness to participate.

Project Financing: Uses of Cash Flows
Revenue Streams
Depreciation
&
Interest
Taxes
Principal
Payments
Depreciation
O & M,
Insurance
Expenses

Dividend to
Shareholders
Driven by a hierarchy of claims
Have a claim to fixed contractual
payments from the projects cash flows
independent of the borrowers 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
Creditors
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 Sponsors
Serve public interest
Low tariff rate
Quality of services
Future tax revenues


Incentives/Objectives of the Government
Example: Power Producer
Fuel
Supplier
Government Ministries/
Local
Agencies
Equity
Investors
Lenders
Escrow
Agent
Power
Utility
Project
Operator
Engineering,
Construction
Contractor
Project
Insurers
Project
Company
Implementation
Agreement
Permits
Shareholders
Agreement
Escrow
Agreement
Power
Purchase
Agreements
O &M
Agreement
Construction
Contract
Insurance
Policies
Fuel Supply
Agreement
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Construction
Operation
Main Risks:

Completion Risk
Cost Overrun Risk
Performance Risk
Environmental Risk
Main Risks:

Performance Risk
Regulatory Risk
Environmental Risk
Off-take Risk (Power)
Market Risk (Toll Roads)
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Project Life Cycle: Main Risks
RISK
Project completion
risk
Liquidation damages
Contract specifies the
parameter
Standby credit facility
Promoter ready tom
fund cost overrun
Market risk
Demand & price
variation
Take or pay
Escrow Mechanism
Clause ensure min.
revenue
Shadow financing
Foreign exchange
risk
Largest concern for
foreign investor
Revenue in local
currency
Revenue equal to
foreign debt payment
Tariff escalation
clause if currency
depreciate
Supply of input
Control through contract
Price variation and supply
risk
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
5
th
& 9
th
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

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