Urban Infrastructure: Issues in structuring bankable projects

1
Urban Infrastructure Issues in structuring
bankable projects

• ASCI-World Bank Programme on Strengthening Urban
  Management (SUM)
• January 23, 2003

2
Often heard at seminars

• Small is beautiful
• Get your act together
• Firm 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/user
• Beware of smart/over-confident developers

Sounds like preaching? Read on ...
3
Structure of the Presentation

• Select illustrations of PSP in infrastructure
• Urban Infrastructure projects
• Port sector projects
• Road sector projects
• Lessons from experience so far
• Objectives Concerns of various stakeholders

4
Illustrations with wide coverage

• Sectors Covered
• Urban Infrastructure
• Ports
• Roads
• States Covered

• Power/Telecom omitted
• 14
• 10
• 12
• Projects from 10 states
• Kerala, Karnataka, Tamil Nadu, Andhra Pradesh
• Maharashtra, Goa, Gujarat, Madhya Pradesh,
  Chhattisgarh
• West Bengal, Orissa
• Rajasthan, U.P., Bihar

Well, there are lots of cases and a few good
lessons!
5
Ahmedabad Municipal Corporation

• AMC became the countrys first municipality to
  raise bonds from capital markets
• Bond raising preceded by an internal
  restructuring and revenue enhancement measures
• Bond proceeds used for water supply schemes
• Bonds secured by a charge on octroi revenues of
  AMC
• Utilisation of bond proceeds have been slow as
  project implementation has been delayed
• Lesson Careful planning timing is necessary
  for sustainable project implementation processes

6
Bangalore Water Supply Project

• Private participation was sought for 500 MLD BOOT
  project by BWSSB
• Bidding preceded by technical and demand studies
• After pre-qualification, three consortia
  submitted final proposals
• The 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

7
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 concessionaire
• The 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.

8
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 options
• Result There were only two bids both on an EPC
  basis (LT 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

9
Cochin Industrial Water Supply

• Mooted by KSIDC, which invited IFC to assist
• Basic project preparation was carried out
  including detailed technical studies as well as
  demand estimates
• Alternate project structures were evaluated
• Meanwhile KWA signed an agreement with Cochin
  Refineries, a major user allowing an off-take of
  water
• Lesson Co-ordination among government agencies
  required for project development

10
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 route
• The bidder questioned GoG's demand forecast
• At present due to successive changes in the
  Government the process has been temporarily
  suspended
• Lesson Inadequate homework by the state
  authorities

11
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/OM contracts (but may
  not have funds)
• Potential investors/bidders are unhappy as there
  is no progress
• Lesson Project has not been thought through
  clearly

12
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 services
• Nagpur 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.

13
Pune Water Supply Project

• Water Supply Project conceived with structuring
  assistance from USAID
• Project conceived as EPCOM with funding from
  funds raised by PMC
• Also a separate contract for management of
  billing limited collections
• Project generated considerable investor interest
  as careful planning had gone into the project
  preparation
• Bidding Process was terminated prematurely
• PMC is now implementing the project on its own
• Lesson Political risk (the power of lobbying
  groups) in the project was underestimated

14
Tiruppur Water Supply Project

• Project was conceived by ILFS with support from
  GoTN, TACID and Industry
• Proposed as a BOOT project for sourcing,
  treatment and supply water mainly to industry
  with some social coverage
• Tiruppur industry comprises of garment exports
  and willingness to pay is higher
• However, the project has taken considerable time
  to develop resulting in cost escalation
• The cost of water for the commercial users has
  more than doubled during this period
• Reached financial closure 8 years after
  conceiving!
• Lesson Complex projects are difficult to
  implement and subject to diverse risks

15
Consider this the city of Ahmedabad

• GIDB has proposed an Integrated Public Transit
  System for Ahmedabad (IPTS) and appointed a
  consultant for the studies
• AMC became the countrys 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 Mumbais
  integrated development)

16
Mumbai non-toll bridge within city

• Project conceived as self-financing bridge
• 1.5 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.

17
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 tolling
• MSRDC is fast running out of funds (on account of
  the flyovers as well as the Express way) but
  revenues not as per expectations
• Now 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)

18
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 levels
• Technology Machinefabriek Aarding BV of
  Netherlands
• Revenues 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

19
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
  basis
• Bidding Parameters
• Upfront payment of premium to MCGM
• No. 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 assured
• Current 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

20
Bidding Results (Mumbai Car Park)
21
Structure of the Presentation

• Select experience of PSP in infrastructure
• Urban Infrastructure projects
• Port sector projects
• Road sector projects
• Lessons from experience so far
• Objectives Concerns of various stakeholders

22
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 PO a large international Ports Shipping
  group at Kandla, JNPT, Cochin Chennai
• Despite 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 PO
  as some comforts were not forthcoming.
• Lesson The Government was unable to resolve key
  issues and/or read the real issues in competitive
  behaviour

23
Container terminal at JNPT

• BOT Project with a world class facility at a
  cost of Rs. 7.50 bn.
• Promoted by one of the worlds leading maritime
  business group.
• JNPT did not allow first charge on project assets
  to the lenders and other amendments to the
  concession agreement.

• 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.

24
Container Terminals current status

• As everyone is aware, JNPT (PO) is a major
  success story
• But despite this, and an aggressive lobbying
  effort by PO, the new (revised) bidding
  conditions for the proposed new container
  terminal at JNPT explicitly disallows bidding or
  investment by PO in any form
• Cochin 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 proceed
• Adani sponsored Mundhra Port is now developing a
  Container Terminal which may be divested in
  favour of PO
• Lesson At times it is difficult for the
  Government to understand the machinations of the
  private sector

25
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 OM for the project
• Lesson Lack of application and push by all
  parties.

26
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.

27
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 Dabhol
• Project Comprising of state of the art 4 tugs
  costing Rs. 800 mn. To be built to the
  specifications of The DPCs OM operator (a
  subsidiary of Enron) and operate for 20 years
• Project reached financial closure despite
  on-going problems at DPC and the tug-of-war with
  MSEB
• By 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.

28
Haldia Berth 4A for coking coal

• Haldia Port bid out development of Berth 4A for
  handling coking coal imports required by steel
  plants
• ISPL 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 Production
• Project 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

29
Structure of the Presentation

• Select experience of PSP in infrastructure
• Urban Infrastructure projects
• Port sector projects
• Road sector projects
• Lessons from experience so far
• Objectives Concerns of various stakeholders

30
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.

31
Coimbatore By-pass

• By-pass on NH-47 developed by LT on BOT basis
• Toll-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

32
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.

33
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. Premium
• The 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?

34
Mattancherry Bridge at Cochin

• First BOT bridge project in Kerala State GCDA
  acted as the sponsor authority
• Other 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 bidders
• Project has been awarded to Gammon India
• Lesson Initial investment on project preparation
  yields high returns

35
PPP in NHDP
The NHDP has been partially successful in
attracting private sector investment.
36
PPP or not to P(rivatise)
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

• Construction Contract
• Rs. 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 Cost
• Rs. 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.

37
PPP in roads are maturing

• Toll-based BOT
• Annuity Scheme
• Grant/Capital Subsidy
• Reverse Grant/Premium
• OM/Tolling Contracts
• Real-estate linked project

• Many state level projects
• 6 projects awarded
• Jaipur-Kishengarh (NHAI)
• Many projects in M.P.
• Delhi-Gurgaon
• 4-lane NHDP stretches
• Mumbai-Pune Exp. Way
• Mahakali Flyover, Mumbai
• Vivekanand Flyover, Kolkata
• Bangalore-Mysore Infrastructure Corridor

38
Comparison of Expressways dev.
39
Structure of the Presentation

• Select experience of PSP in infrastructure
• Urban Infrastructure projects
• Port sector projects
• Road sector projects
• Lessons from experience so far
• Objectives Concerns of various stakeholders

40
Some case studies ..1

• East Coast Road vs. Tiruppur Noida Toll Bridge
• Durg Bypass vs. Jaipur-Kishengarh
• Bhiwandi Bypass vs. Mumbai-Pune Expressway
• Dhamra vs. Haldia berth 4A Kakinada
• Small is beautiful

41
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

42
Some case studies 3

• AMC Bonds (Utilisation of proceeds)
• City of Ahemedabad (GIDB vs. SRFDC)
• Cochin Industrial Water Supply (KSIDC vs. KWA)
• Haldia Development Authoritys Water Supply
  Project
• Get your act together

43
Some case studies 4

• Goa Salaulim Water Project (BOOT or Concession)
• CMWSSBs Chennai Desalination Project (EPC or
  BOT)
• Mumbai Car Park (upfront payment or no. of cars)
• Firm up YOUR objectives first

44
Some case studies 5

• Mattancherry Bridge (insisted on upfront payment
  but later relented)
• NHAIs Palasit Panagarh (rebid after initial high
  bids)
• Durg Bypass (selected weak promoter but later
  extended guarantee sub-debt support)
• MMRDAs Convention Centre (bidding failed twice)
• Experiment but be willing to correct yourself

45
Some case studies 6

• Jaipur-Kotputli Toll Collection Operations
• Mahakali Flyover (PIL subsequent developments)
• NOIDAs Dadri Bridge (UPSBC upstages Simplex)
• Bidding for Container Terminals in the country
• Beware of smart/over-confident developers

46
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

47
Summary Some practical lessons

• Small is beautiful
• Do not ignore the ultimate customer/user
• Get your act together
• Firm up YOUR objectives first
• but recognize that others have their objectives
  too
• Experiment
• but be willing to correct yourself
• Beware of smart/over-confident developers
• Stand by your commitments

Still sounds like preaching?
48
Some practical approaches

• Institutionalize your approach through a vehicle
• PIDB, GIDB, I-Deck, I-Kin, I-Win, APIIF, MPIDB,
  CIDC
• Find 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
  projects
• Keep the bidding simple evaluate on just one
  key parameter
• Hire advisors to help!

49
Need for PSP

• Private Sector Participation is sought to
  essentially bring in
• Private capital
• Private management
• New better technology
• The modality of PSP critically depends on exact
  objectives sought to be achieved

50
Why private sector participation?

• Economic/Political Reasons
• Policy of privatisation
• Fostering competition
• Commercial principles
• Pay-for-use culture
• Political bottlenecks in tariff restructuring or
  reduction in subsidies
• Management Reasons
• Better management of all resources operational
  efficiency
• Improved level of service and responsiveness to
  users

• Financial Reasons
• Budgetary priorities and constraints
• Additionality of funds
• Better utilisation of financial resources
• Other reasons
• New and better technology
• Involvement of users and other stake holders
• Environmental requirements

51
Different modes of PSP can be explored
52
Lessons from past experience

• Reasons for failure attributable to one or more
  of the following
• Inadequate framework for PSP
• Insufficient project preparation development
• Failure to address concerns of all stakeholders

53
Framework for PSP

• Clarity in objectives of PSP
• Institutional restructuring to coincide with PSP
  initiatives
• Regulatory framework to be put in place
• Managing political risk and willingness to pay
  issues

54
Project preparation development

• Co-ordination issues Identification of nodal
  agency and defining roles of other agencies
• Establishing independent commercial viability of
  the project demand, revenues costs
• Identification of risks, allocation mitigation
• Project structuring role of private sector
• Comprehensive information memorandum covering
  studies draft contract agreements
• Designing transparent competitive bidding process
• Transparent fair procurement process

55
Stakeholder concerns

• Capacity building of government / public agencies
• Interest and capacity among private sector
  operators
• Building awareness for pay for use principle
  among consumers and communities within society
• Addressing financing issues of lenders and
  investors
• Ensuring adequacy of services at affordable rates
  to the urban poor

56
Structure of the Presentation

• Select experience of PSP in infrastructure
• Urban Infrastructure projects
• Port sector projects
• Road sector projects
• Lessons from experience so far
• Objectives Concerns of various stakeholders

57
Government/Local Authority

• Sustained improvement in provision of
  Infrastructure
• Conserving scarce public resources
• Creation of facilities and provision of efficient
  services
• Transparency and fair process
• Protection of Social/Developmental commitments

58
Developer/Investor

• Commercial viability of project
• Freedom flexibility in conduct of business
• Avoidance of risks beyond control
• Fairness in transaction
• Delays in approvals

59
Project Financiers/Lenders

• Financial viability of project
• Acceptable concession framework
• Freedom to exercise step-in-and-cure-rights
• Protection against defaults by Government and
  developer

60
Consumers/Users

• Availability of facilities services
• Acceptable levels of tariffs/taxes/tolls
• Appropriate grievance redress system

61
Thank You
62
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63
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.

64
Extent of sponsor recourse

• Full-recourse
• Akin to corporate finance
• Non-recourse finance
• Extremely rare
• Limited recourse finance
• Completion guarantees
• Undertakings to cover cost overruns

65
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

66
Project finance is cash flow based

• Cash flow based financing for infrastructure
  projects
• Significant value of the project is derived from
  intangibles and not from the assets created
• Estimation 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

Future cash flows from the project are the
primary source of debt repayment
67
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
  company
• Escrow mechanism for cash flows of the company
• Assignment in favour of lenders of all the
  project contracts

68
Project finance vs. corporate finance
69
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, OM contractor, Licensor,
  etc)
• Insist on complete financial closure before
  commitment of any funds
• Arranging project finance requires substantial
  time and cost

70
Basis for lenders risk aversion

• Lenders have the maximum money on a project rated
  at BBB and the minimum returns
• whereas
• The developers put a small money as equity and
  aspire for supernormal profits
• The 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
• yet
• the lenders lenders are not so easy on them and
  besides expecting a AAA rating also face
  stringent RBI/SEBI regulations

71
Risks over the 3 project phases

• Lenders identify three separate phase of risk
  over the life of the project

Engineering Construction Phase
Operation Phase
Start-up Phase
Physical Completion
COD
72
Project finance lifecycle
Arranger Mandate
Disbursements
73
FIMMDA Annualised Spreads
Source http//www.fimmda.org
74
Different modes of PSP can be explored
Project Financing required
75
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 concession
• ownership vests with the public authority
• used for highways, utilities and ports
• Build-Own-Operate (BOO)
• similar to BOT but without the transfer of rights
• may also stipulate payment of some fee to the
  public authority for the right to operate the
  facility
• used for telecom and power projects

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Common Project Structures...2

• Built-Own-Lease-Transfer (BOLT)
• assured revenue through lease rentals
• proposed for Indian Railways
• Built-Own-Operate-Share-Transfer (BOOST)
• revenue shared with the public authority
• Minor ports proposed in some states
• Annuity structure
• Concessionaire responsible for construction and
  OM
• Concessionaire receives fixed annuity over the
  concession
• Proposed for National Highways projects
• Likely to replace Railways BOLT scheme