Urban Infrastructure: Issues in structuring bankable

projectsASCI-World Bank Programme on

Strengthening Urban Management (SUM)

January 23, 2003

Often heard at seminars …

Small is beautifulGet your act togetherFirm 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/userBeware of smart/over-confident developersSounds like preaching? Read on ...

Structure of the Presentation

Select illustrations of PSP in infrastructure Urban Infrastructure projectsPort sector projectsRoad sector projects

Lessons from experience so far

Objectives & Concerns of various stakeholders

Illustrations with wide coverage

Sectors CoveredUrban InfrastructurePortsRoads

States Covered

Power/Telecom omitted141012

Projects from 10 statesKerala, Karnataka, Tamil Nadu, Andhra PradeshMaharashtra, Goa, Gujarat, Madhya Pradesh, ChhattisgarhWest Bengal, OrissaRajasthan, U.P., Bihar

Well, there are lots of cases and a few good lessons!

Ahmedabad Municipal Corporation

AMC became the country’s first municipality to raise bonds from capital markets

Bond raising preceded by an internal restructuring and revenue enhancement measuresBond proceeds used for water supply schemes Bonds secured by a charge on octroi revenues of AMCUtilisation of bond proceeds have been slow as project implementation has been delayed

Lesson: Careful planning & timing is necessary for sustainable project implementation processes

Bangalore Water Supply Project

Private participation was sought for 500 MLD BOOT project by BWSSB

Bidding preceded by technical and demand studiesAfter pre-qualification, three consortia submitted final proposalsThe 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

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 concessionaireThe 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.

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 optionsResult: There were only two bids – both on an EPC basis (L&T 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

Cochin Industrial Water Supply

Mooted by KSIDC, which invited IFC to assistBasic project preparation was carried out including detailed technical studies as well as demand estimatesAlternate project structures were evaluatedMeanwhile KWA signed an agreement with Cochin Refineries, a major user allowing an off-take of waterLesson: Co-ordination among government agencies required for project development

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 routeThe bidder questioned GoG's demand forecastAt present due to successive changes in the Government the process has been temporarily suspended

Lesson: Inadequate homework by the state authorities

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/O&M contracts (but may not have funds)Potential investors/bidders are unhappy as there is no progress

Lesson: Project has not been thought through clearly

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 servicesNagpur 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.

Pune Water Supply Project

Water Supply Project conceived with structuring assistance from USAID

Project conceived as EPC+O&M with funding from funds raised by PMCAlso a separate contract for management of billing & limited collectionsProject generated considerable investor interest as careful planning had gone into the project preparationBidding Process was terminated prematurelyPMC is now implementing the project on its own

Lesson: Political risk (the power of lobbying groups) in the project was underestimated

Tiruppur Water Supply Project

Project was conceived by IL&FS with support from GoTN, TACID and Industry

Proposed as a BOOT project for sourcing, treatment and supply water mainly to industry with some social coverageTiruppur industry comprises of garment exports and willingness to pay is higherHowever, the project has taken considerable time to develop resulting in cost escalationThe cost of water for the commercial users has more than doubled during this periodReached financial closure 8 years after conceiving!

Lesson: Complex projects are difficult to implement and subject to diverse risks

Consider this … the city of Ahmedabad

GIDB has proposed an Integrated Public Transit System for Ahmedabad (IPTS) and appointed a consultant for the studiesAMC became the country’s 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 Mumbai’s “integrated” development)

Mumbai: non-toll bridge within city

Project conceived as self-financing bridge1.5 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.

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 tollingMSRDC is fast running out of funds (on account of the flyovers as well as the Express way) but revenues not as per expectationsNow 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)

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 levelsTechnology: Machinefabriek Aarding BV of NetherlandsRevenues 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

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 basisBidding Parameters:

Upfront payment of premium to MCGMNo. 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 assuredCurrent 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

Bidding Results (Mumbai Car Park)

Bidder Car Parks Premium (Rs.crore)

No. of Cars

Rank Amount(Rs. Cr.)

Rank

Nandesh Constr. 205 2 3.33 2

Akruti 204 3 3.30 3

Fasqua 167 5 4.00 1

Earth Estate 208 1 2.20 5

Prime 167 5 2.61 4

Simplex 187 4 0.42 7

Rockline 160 7 1.00 6

Structure of the Presentation

Select experience of PSP in infrastructure Urban Infrastructure projectsPort sector projectsRoad sector projects

Lessons from experience so far

Objectives & Concerns of various stakeholders

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 P&O a large international Ports & Shipping group at Kandla, JNPT, Cochin & ChennaiDespite 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 P&O as some comforts were not forthcoming.

Lesson: The Government was unable to resolve key issues and/or read the real issues in competitive behaviour

Container terminal at JNPT

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

4%

13%

43%

19%1%

9% 5%6%

Kandla Mumbai JNPTCochin Tuticorin ChennaiVizag Haldia/ Calcutta

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.

Container Terminals – current status

As everyone is aware, JNPT (P&O) is a major success storyBut despite this, and an aggressive lobbying effort by P&O, the new (revised) bidding conditions for the proposed new container terminal at JNPT explicitly disallows bidding or investment by P&O in any formCochin 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 proceedAdani sponsored Mundhra Port is now developing a Container Terminal which may be divested in favour of P&O

Lesson: At times it is difficult for the Government to understand the machinations of the private sector

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 O&M for the project

Lesson: Lack of application and push by all parties.

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.

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 DabholProject: Comprising of state of the art 4 tugs costing Rs. 800 mn. To be built to the specifications of The DPC’s O&M operator (a subsidiary of Enron) and operate for 20 yearsProject reached financial closure despite on-going problems at DPC and the tug-of-war with MSEBBy 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.

Haldia – Berth 4A for coking coal

Haldia Port bid out development of Berth 4A for handling coking coal imports required by steel plantsISPL 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 ProductionProject 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

Structure of the Presentation

Select experience of PSP in infrastructure Urban Infrastructure projectsPort sector projectsRoad sector projects

Lessons from experience so far

Objectives & Concerns of various stakeholders

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.

Coimbatore By-pass

By-pass on NH-47 developed by L&T on BOT basisToll-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

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.

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. PremiumThe 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?

Mattancherry Bridge at Cochin

First BOT bridge project in Kerala State; GCDA acted as the sponsor authorityOther 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 biddersProject has been awarded to Gammon IndiaLesson: Initial investment on project preparation yields high returns

PPP in NHDP

The NHDP has been partially successful in attracting private sector investment.

Type of project No. of contrac

ts

Total Length (km)

Total Project

cost (Rs. Bn)

Cost per Km.

(Rs. Mn.)

BOT toll-based 8 454 33.02 Rs. 72.7

BOT annuity-based

8 475 23.54 Rs. 49.6

NHAI SPVs 13 453 23.00 Rs. 50.8

NHAI Contracts 99 5846 169.00 Rs. 28.9

PPP or not to P(rivatise)

Construction ContractRs. 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 CostRs. 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.

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

PPP in roads are maturing

Toll-based BOTAnnuity SchemeGrant/Capital Subsidy

Reverse Grant/PremiumO&M/Tolling Contracts

Real-estate linked project

Many state level projects6 projects awardedJaipur-Kishengarh (NHAI)Many projects in M.P.Delhi-Gurgaon4-lane NHDP stretchesMumbai-Pune Exp. WayMahakali Flyover, MumbaiVivekanand Flyover, KolkataBangalore-Mysore Infrastructure Corridor

Comparison of Expressways dev.

Particulars Mumbai-Pune AVExpressway BMIC

Promoter (Development)

MSRDC (public)

NHAI (Public-Private)

Kalyani Group (Private)

Year of start 1995 1995 1995

Cost (Rs. Crs.) 1.630 130+51+680 826+150

Length (kms.) 94 93 62

From-To Kon-Dehu A’bad – Vadodara Bangalore-Mysore

No. of lanes 6-lane 4-lane 2-lane/4-lane

Pavement type Concrete Bitumen Bitumen/concrete

Funding by MSRDC bonds (G’teed by GoM)

Project debt and equity

Advance sale of land, senior debt, sub-debt and

equity

Current Status In operation Under construction

Under development

Extent of PSP Item rate contracts Debt, item rate contracts

Equity, debt, EPC contracts

Revenue Direct Toll Direct toll Direct Toll, real est.

Structure of the Presentation

Select experience of PSP in infrastructure Urban Infrastructure projectsPort sector projectsRoad sector projects

Lessons from experience so far

Objectives & Concerns of various stakeholders

Some case studies ..1

East Coast Road vs. Tiruppur & Noida Toll BridgeDurg Bypass vs. Jaipur-Kishengarh Bhiwandi Bypass vs. Mumbai-Pune ExpresswayDhamra vs. Haldia berth 4A & Kakinada

Small is beautiful

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

Some case studies …3

AMC Bonds (Utilisation of proceeds)City of Ahemedabad (GIDB vs. SRFDC)Cochin Industrial Water Supply (KSIDC vs. KWA)Haldia Development Authority’s Water Supply Project

Get your act together

Some case studies …4

Goa Salaulim Water Project (BOOT or Concession)CMWSSB’s Chennai Desalination Project (EPC or BOT)Mumbai Car Park (upfront payment or no. of cars)

Firm up YOUR objectives first

Some case studies …5

Mattancherry Bridge (insisted on upfront payment but later relented)NHAI’s Palasit Panagarh (rebid after initial high bids)Durg Bypass (selected weak promoter but later extended guarantee & sub-debt support)MMRDA’s Convention Centre (bidding failed twice)

Experiment but be willing to correct yourself

Some case studies …6

Jaipur-Kotputli Toll Collection OperationsMahakali Flyover (PIL & subsequent developments)NOIDA’s Dadri Bridge (UPSBC upstages Simplex)Bidding for Container Terminals in the country

Beware of smart/over-confident developers

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

Summary: Some practical lessons

Small is beautifulDo not ignore the ultimate customer/userGet your act togetherFirm up YOUR objectives first

but recognize that others have their objectives too

Experiment … but be willing to correct yourself

Beware of smart/over-confident developersStand by your commitments Still sounds like preaching?

Some practical approaches

Institutionalize your approach through a vehiclePIDB, GIDB, I-Deck, I-Kin, I-Win, APIIF, MPIDB, CIDCFind 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 projectsKeep the bidding simple & evaluate on just one key parameter

Hire advisors to help!

Need for PSPPrivate Sector Participation is sought to essentially bring in:

Private capitalPrivate managementNew & better technology

The modality of PSP critically depends on exact objectives sought to be achieved

Why private sector participation?

Economic/Political Reasons

Policy of privatisationFostering competitionCommercial principles Pay-for-use culture

Political bottlenecks in tariff restructuring or reduction in subsidies

Management Reasons Better management of all resources & operational efficiencyImproved level of service and responsiveness to users

Financial ReasonsBudgetary priorities and constraintsAdditionality of fundsBetter utilisation of financial resources

Other reasonsNew and better technology Involvement of users and other stake holdersEnvironmental requirements

Different modes of PSP can be explored

Mode Asset Ownershi

p

O&M Capital Investme

nt

Commercial Risk

Duration (Years)

Management Contract

Public Public &

private

Public Public 3-5

Lease Public Private Public Shared 8-15

Concession Public Private Private Private 25-30

BOT Private/ Public

Private Private Private 20-30

Divestiture Private/ Pvt. & Public

Private Private Private Indefinite

Lessons from past experience

Reasons for failure attributable to one or more of the following:

Inadequate framework for PSPInsufficient project preparation & developmentFailure to address concerns of all stakeholders

Framework for PSP

Clarity in objectives of PSP Institutional restructuring to coincide with PSP initiativesRegulatory framework to be put in placeManaging political risk and willingness to pay issues

Project preparation & development

Co-ordination issues: Identification of nodal agency and defining roles of other agenciesEstablishing independent commercial viability of the project: demand, revenues & costsIdentification of risks, allocation & mitigationProject structuring & role of private sectorComprehensive information memorandum covering studies & draft contract agreementsDesigning transparent competitive bidding processTransparent & fair procurement process

Stakeholder concerns

Capacity building of government / public agenciesInterest and capacity among private sector operatorsBuilding awareness for “pay for use” principle among consumers and communities within societyAddressing financing issues of lenders and investorsEnsuring adequacy of services at affordable rates to the urban poor

Structure of the Presentation

Select experience of PSP in infrastructure Urban Infrastructure projectsPort sector projectsRoad sector projects

Lessons from experience so far

Objectives & Concerns of various stakeholders

Government/Local Authority

Sustained improvement in provision of InfrastructureConserving scarce public resourcesCreation of facilities and provision of efficient servicesTransparency and fair processProtection of Social/Developmental commitments

Developer/Investor

Commercial viability of projectFreedom & flexibility in conduct of businessAvoidance of risks beyond controlFairness in transactionDelays in approvals

Project Financiers/Lenders

Financial viability of projectAcceptable concession frameworkFreedom to exercise step-in-and-cure-rightsProtection against defaults by Government and developer

Consumers/Users

Availability of facilities & servicesAcceptable levels of tariffs/taxes/tollsAppropriate grievance redress system

Thank You

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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.

Extent of sponsor recourse

Full-recourseAkin to corporate finance

Non-recourse financeExtremely rare

Limited recourse financeCompletion guaranteesUndertakings to cover cost overruns

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

Future cash flows from the project are the primary source of debt repayment

Project finance is cash flow based

Cash flow based financing for infrastructure projectsSignificant value of the project is derived from intangibles and not from the assets createdEstimation 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

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 companyEscrow mechanism for cash flows of the companyAssignment in favour of lenders of all the project contracts

Project finance vs. corporate finance

Project Finance Corporate Finance(balance-sheet

funding)

Recourse limited to identified pool of assets

Recourse to all the assets of the borrower

Contracts/license agreement/Take-or-Pay contract is key security

Physical assets are the key security & market value may be realisable

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, O&M contractor, Licensor, etc)

Insist on complete financial closure before commitment of any funds

Arranging project finance requires substantial time and cost

Basis for lenders’ risk aversion

Lenders have the maximum money on a project rated at “BBB” and the minimum returns

whereasThe developers put a small money as equity and aspire for supernormal profitsThe 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

yetthe lenders’ lenders are not so easy on them and besides expecting a “AAA” rating also face stringent RBI/SEBI regulations

Risks over the 3 project phases

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

Engineering &Construction Phase

Start-up Phase

OperationPhase

CODPhysical Completion

Disbursements

Arranger Mandate

Operations &monitoring

Drafting of financing documents

Implementation &monitoring

Resolution of due diligence issues

Prelim. project assessment

Due diligenceIssue of LOI

Issue of term sheet

Term sheet negotiations

Term sheet signing

Financial closure Project completion

Project identification

Debt servicing

Project finance lifecycle

FIMMDA Annualised Spreads

Updated on 31st Oct 2002

Annualised spreads 1 2 3 4 5 6 7 8 9 10AAA 60 62 69 65 61 60 58 63 68 72 AA+ 85 86 96 93 90 88 86 91 96 101 AA 122 124 134 131 129 127 125 131 136 142 AA- 167 168 180 178 176 175 173 178 184 189 A+ 238 242 261 264 268 267 265 271 277 283 A 293 308 334 343 352 352 353 358 364 370 A- 360 383 419 429 437 438 439 445 451 456 BBB+ 457 460 482 479 475 480 485 495 506 517 BBB 479 510 556 570 583 585 586 592 598 604 BBB- 647 651 674 672 669 675 682 693 704 715

Spreads over Gilt curve in bps

Source: http://www.fimmda.org

Different modes of PSP can be explored

Mode Asset Ownershi

p

O&M Capital Investment

Commercial Risk

Duration (Years)

Management Contract

Public Public &

private

Public Public 3-5

Lease Public Private Public Shared 8-15

Concession Public Private Private Private 25-30

BOT Private/ Public

Private Private Private 20-30

Divestiture Private/ Pvt. & Public

Private Private Private Indefinite

Project Financing required

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 concessionownership vests with the public authorityused for highways, utilities and ports

Build-Own-Operate (BOO)similar to BOT but without the transfer of rightsmay also stipulate payment of some fee to the public authority for the right to operate the facilityused for telecom and power projects

Common Project Structures...2

Built-Own-Lease-Transfer (BOLT)assured revenue through lease rentalsproposed for Indian Railways

Built-Own-Operate-Share-Transfer (BOOST)revenue shared with the public authorityMinor ports proposed in some states

Annuity structureConcessionaire responsible for construction and O&MConcessionaire receives fixed “annuity” over the concessionProposed for National Highways projectsLikely to replace Railways BOLT scheme