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LOVELY PROFESSIONAL UNIVERSITY
DEPARTMENT OF MANAGEMENT
Report on Summer Training
Project Financing in Delhi Metro Rail Corporation (DMRC)
Submitted to Lovely Professional University
In partial fulfillment of the
Requirements for the award of Degree of
Master of Business Administration
Submitted by:
Name of the student: Anubhav Sharma
University Roll No : 11301927(A14)
DEPARTMENT OF MANAGEMENT
LOVELY PROFESSIONAL UNIVERSITY
JALANDHAR NEW DELHI GT ROAD
PHAGWARA
PUNJAB
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Table of Contents
DECLARATION .......................................................................................................................................................... 6
ACKNOWLEDGEMENT .............................................................................................................................................. 7
PREFACE .................................................................................................................................................................. 8
EXECUTIVE SUMMARY ............................................................................................................................................. 9
REASEARCH METHODOLOGY ............................................................................................................................................................. 9 1) Introduction:- .................................................................................................................................................................................... 9 2) Objectives of Project Report:- ........................................................................................................................................................... 9 Sources of Data Collection: - ................................................................................................................................................................. 9 Primary Sources: - .................................................................................................................................................................................. 9 Secondary Sources:- ............................................................................................................................................................................ 10 Hypothesis:- ......................................................................................................................................................................................... 10 Scope of the project:- .......................................................................................................................................................................... 10 Limitation of the study:- ...................................................................................................................................................................... 10
LITERATURE REVIEW .............................................................................................................................................. 11
COMPANY PROFILE ................................................................................................................................................ 14
Background ..................................................................................................................................................................................... 15
Network .......................................................................................................................................................................................... 15
Current routes ................................................................................................................................................................................. 16
Red Line .......................................................................................................................................................................................... 16
Yellow Line ...................................................................................................................................................................................... 17
Blue Line .......................................................................................................................................................................................... 17
Green Line ....................................................................................................................................................................................... 18
Violet Line ....................................................................................................................................................................................... 18
Airport Express ................................................................................................................................................................................ 19
Planned extensions ......................................................................................................................................................................... 19
Phase III ........................................................................................................................................................................................... 19
Phase IV .......................................................................................................................................................................................... 21
Operations ...................................................................................................................................................................................... 23
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Security ........................................................................................................................................................................................... 23
Ticketing & Recharge ....................................................................................................................................................................... 24
Problems ......................................................................................................................................................................................... 24
Ridership ......................................................................................................................................................................................... 24
Rolling stock .................................................................................................................................................................................... 25 Broad gauge ......................................................................................................................................................................................... 25 Standard gauge .................................................................................................................................................................................... 26
Airport Express ................................................................................................................................................................................ 26
Signaling and telecommunication.................................................................................................................................................... 26
Environment and aesthetics ............................................................................................................................................................ 27
INTRODUCTION TO PROJECT FINANCE ................................................................................................................... 28
Definition of Project ........................................................................................................................................................................ 28
What Is Project Finance ................................................................................................................................................................... 28
Methods of Project finance ............................................................................................................................................................. 29 Why is it important to understand project finance? ........................................................................................................................... 29 Project Finance .................................................................................................................................................................................... 29 Some Jargons: ...................................................................................................................................................................................... 30
Why Do Sponsors Use Project Finance? ........................................................................................................................................... 30
Who Are the Sponsors of a Project Finance Deal? ........................................................................................................................... 32 BOT (build, operate, and transfer) .............................................................................................................................................. 33 BOOT (build, own, operate, and transfer) .................................................................................................................................. 33 BOO (build, operate, and own) ................................................................................................................................................... 33
Overview of the Features of Project Finance- .................................................................................................................................. 35 The ‘‘Purely’’ Financial Investor ........................................................................................................................................................... 35 Project Financing Participants and Agreements .................................................................................................................................. 35
Principle advantages and disadvantages of Project financing: ......................................................................................................... 36 Advantages: ......................................................................................................................................................................................... 36 DISADVANTAGES. ................................................................................................................................................................................ 37 TYPICALCHARACTERISTICS OF PROJECT FINANCING ........................................................................................................................... 37
Stages in Project Financing .............................................................................................................................................................. 38 Project identification Pre Financing Stage ........................................................................................................................................... 38 Risk identification & minimizing .......................................................................................................................................................... 38 Technical and financial feasibility ........................................................................................................................................................ 38 Equity arrangement financing Stage ................................................................................................................................................... 38 Negotiation and syndication................................................................................................................................................................ 38 Commitments and documentation ..................................................................................................................................................... 38 Disbursement ...................................................................................................................................................................................... 38
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Monitoring and review Post Financing Stage ...................................................................................................................................... 38 Financial Closure / Project Closure ...................................................................................................................................................... 38 Repayments & Subsequent monitoring .............................................................................................................................................. 38 Preparation of Project Report ............................................................................................................................................................. 39
Methods of the Project Financing .................................................................................................................................................... 44
Sources for Financing Fixed Assets .................................................................................................................................................. 44 1. Term Loan:- ...................................................................................................................................................................................... 44 2. Deferred payment guarantee (DPG) - ............................................................................................................................................. 45 3. Soft loan - ........................................................................................................................................................................................ 45 4. Supplier's line of credit - .................................................................................................................................................................. 45 5. Buyer’s credit - ................................................................................................................................................................................. 45 6. Debentures - .................................................................................................................................................................................... 46 7. Leasing - ........................................................................................................................................................................................... 46 8. Public deposits - ............................................................................................................................................................................... 46 9. Own Fund: ....................................................................................................................................................................................... 46 Compliance with Different Laws & Regulations .................................................................................................................................. 48 10. Bridge Loans: ................................................................................................................................................................................. 48 11. Seed Capital: .................................................................................................................................................................................. 48 12. Government subsidies: .................................................................................................................................................................. 49
RESEARCH METHODOLOGY ................................................................................................................................... 50
SELECTION OF TOPIC ....................................................................................................................................................................... 50
RESEARCH DESIGN ........................................................................................................................................................................... 50
SOURCES OF DATA COLLECTION ...................................................................................................................................................... 50
LIMITATIONS OF THE STUDY ............................................................................................................................................................ 51
DATA ANALYSIS AND INTERPRETATION: ................................................................................................................. 52
Funding for Phase I and Phase II ...................................................................................................................................................... 52
Revenue and profits for Phase I and Phase II ................................................................................................................................... 53 Airport Line under PPP Model at New Delhi: ...................................................................................................................................... 54
Involvement of the government: ..................................................................................................................................................... 54
DMRC pattern of financing: ............................................................................................................................................................. 54 1.Subordinate debt: ............................................................................................................................................................................. 55 2. Debt: ................................................................................................................................................................................................ 55
Allocation Principles ........................................................................................................................................................................ 58 Indicating Allocation Formula: .................................................................................................................................................... 58
Need for Tax Exemption: - ............................................................................................................................................................. 59
RECOMMENDATIONS- ........................................................................................................................................... 60
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Option 1 ......................................................................................................................................................................................... 60
Option 2 ......................................................................................................................................................................................... 60
REFERENCES .......................................................................................................................................................... 61
CONCLUSION ......................................................................................................................................................... 62
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Declaration
I, Anubhav Sharma, hereby declare that the work presented herein is authentic and true to the best of my knowledge and abilities and that any part has not been presented or published elsewhere for the requirement of degree program. Any works done by others or cited within this report have been given due acknowledgement and listed in the reference section of this dissertation.
Anubhav Sharma
11301927
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Acknowledgement
This report may not be able to fully express my gratitude and respect that I have towards the people of Delhi Metro Rail Corporation Limited. This formal dissertation would not have been successful without the help and support of management and employees with whom I have had the chance of interaction during the period of this internship. I am indebted to many of the good people of DMRC who always lent a helping hand. The knowledge and the experience gained during this internship from the credit worthy people will be the most rewarding phase of my career.
I would like to thank Mr. Manish Jain (Assistant manager, Finance) and Mr. Pankaj Chand Thakur (Finance) for guiding and supporting me throughout this period of six weeks. Without their immaculate and intellectual guidance, sustained efforts and friendly approach, it would have been impossible to achieve result in a short span of time.
Value the contribution of all other staff members of Finance department for sharing the wealth of knowledge, wisdom and experience.
Anubhav Sharma
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Preface
MBA is stepping stone to management career. In order to achieve practical, positive and concrete results, the classroom learning needs to be effectively tied to the realities of the situation existing outside classroom. This is particularly true for management.
To develop healthy managerial and administrative skills in potential managers, it is imperative that the theoretical knowledge be supplemented with the exposure of the real environment. Actually, it is quintessential that the management focuses on practiced learning.
I took summer training in well managed organization and fortunate enough to get a good exposure. An attempt has been made to cover and showcase different aspects of internship as a part of undertaking this dissertation.
Anubhav Sharma
11301927
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EXECUTIVE SUMMARY
The main purpose of the project is to understand the whole concept of Project financing, and its methods and
needs of project financing in the form of different recommendation and methods. To know the needs and methods
of project financing for term loan and various guidelines issued by the RBI for banking sector for Project finance.
The project has been divided into two parts. In initial chapters of the project was given to general concept and
fundamental principles for project financing, method of project financing, requirement of project financing in
rapid transport systems, the finance requirement to the borrowers and the various approaches adopted by the
borrowers for selecting the mode of financing. The later chapter covers various methods of project financing and
its sub methods. Funding the requirement of the loan by following suitable procedures. And finally various
committees’ recommendation and current scenario were elaborated in detail. And the project includes the case
study on Delhi Metro for which the procedure actually holds true and the details of projection are highlighted.
REASEARCH METHODOLOGY
1) Introduction:-
The most of important part and main strength of project comes from the process of collecting; classification and
analyzing work will depend upon the methodology. It is in proposed plan of the study.
2) Objectives of Project Report:-
To know the history and growth of company .To know and understand the definition of the term “Project
financing”, to know and understand the meaning & definition of Projections and financial statements. To be
acquainted with annual reports & contents .To study the financial alternatives with the help of Project financing.
To understanding the project financing system and actualization in practical.
Sources of Data Collection: -
Data Collection is key part of project work. There are two types of data collection, first is primary source and
second is secondary of data collection.
Primary Sources: -
The primary data includes company profile, financial statements, and documents relevant have been obtained
from Delhi metro.
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Secondary Sources:-
The secondary data relating to the procedures of assessment of project financing in MRTS, RBI guidelines etc.
have been sourced from reference books and websites.
Hypothesis:-
Project finance is the one of the biggest source of borrowing the debts.
Scope of the project:-
Company has given various guidelines, advice and projection for obtaining the finance from the banking
institutions and other financial services. And developing of the company keeping in the view economic of the
country. It is necessary to under taken the impact of Delhi Metro & various services provide to their clients.
Limitation of the study:-
The time limitation is the most important problem to collect the various information.
Study is not related to the current market position
It requires lot of time & is more expensive
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LITERATURE REVIEW
The growing demand for public transport in mega cities has serious effects on urban ecosystems,
especially due to the increased atmospheric pollution and changes in land use patterns. An ecologically
sustainable urban transport system could be obtained by an appropriate mix of alternative modes of
transport resulting in the use of environmentally friendly fuels and land use patterns. The introduction of
CNG in certain vehicles and switching of some portion of the transport demand to the metro rail have
resulted in a significant reduction of atmospheric pollution in Delhi. The Delhi Metro provides multiple
benefits: reduction in air pollution, time saving to passengers, reduction in accidents, reduction in traffic
congestion and fuel savings. There are incremental benefits and costs to a number of economic agents:
government, private transporters, passengers, general public and unskilled labor. The financial internal
rate of return on investments in the Metro is estimated as 17 percent while the economic rate of return is
24 percent. Accounting for benefits from the reduction of urban air pollution due to the Metro has
increased the economic rate of return by 1.4 percent.
-M N Murty, Kishore Kumar Dhavala, Meenakshi Ghosh and Rashmi Singh (Institute of
Economic growth)
The use of non-recourse project financing has grown steadily in emerging markets, especially in basic
infrastructure, natural resources and energy sector. Because of its cost and complexity, project finance is
aimed at large-scale investments. The key is in the precise estimation of cash flows and risk analysis and
allocation, which enables a high leverage and in ensuring that the project can be easily separated from
the sponsors involved. Project financing is difficult because there are unpredictable risks associated with
unfavorably biased results. This imposes the need to introduce contractual financing and structural
elements that yield the maximum possible expatriation of operating flows.
-Henrique Ghersi Y and Jaime Sabal
Project finance is the process of financing a specific economic unit that the sponsors create, in which
creditors share much of the venture’s business risk and funding is obtained strictly for the project itself.
Project finance, often used for capital-intensive facilities and utilities, is commonly used to segregate the
credit risk of the project from that of its sponsors so that lenders, investors, and other parties will
appraise the project strictly on its own merits. Project finance creates value by reducing the costs of
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funding, maintaining the sponsors financial flexibility, increasing the leverage ratios, avoiding
contamination risk, reducing corporate taxes, improving risk management, and reducing the costs
associated with market imperfections.
-João Pinto
"Project finance" is not the same thing as "financing projects," because projects may be financed in
many different ways. Traditionally, large scale public sector projects in developed countries were
financed by public-sector debt; private-sector projects were financed by large companies raising
corporate loans. In developing countries, projects were financed by the government borrowing from the
international banking market, multilateral institutions such as the World Bank, through export credits.
These approaches have begun to change, however, as privatization and deregulation have changed the
approach to financing investment in major projects, transferring a significant share of the financing
burden to the private sector.
-E R Yescombe
Project finance techniques have enabled projects to be built in markets using private capital. These private
finance techniques are a key element in scaling back government financing, a central pillar of
The current ideological agenda whose goals are well articulated by Grover Norquist, a, a US Republican
ideologue and lobbyist, who says ‘I don’t want to abolish government. I simply want to reduce it to the
size where I can drag it into the bathroom and drown it in the bathtub.’ On the basis of such ideological
agendas and lobbyists’ machinations are the macroeconomic policies, upon which project finance feeds,
Made, thus transferring the control of public services from the electorate to private, unaccountable
And uncoordinated interests. Such agendas make project financing a key method of using private capital
to achieve private ownership of public services such as energy, transportation and other infrastructure
Development initiatives. The goal ultimately is to make government irrelevant and achieve a two-tier
Society where government panders to the marginalized and infrastructure development and exploitation
Are handed over to private capital, free from the encumbrances of electoral mandates.
-Andrew Fight
Project financing is not a new financing technique. Venture-by-venture financing of finite-life projects
has a long history; it was, in fact, the rule in commerce until the 17th century. For example, in 1299—
nearly 700 years ago—the English Crown negotiated a loan from the Frescobaldi (a leading Italian
merchant bank of that period) to develop the Devon silver mines.
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The loan contract provided that the lender would be entitled to control the operation of the mines for one
year. The lender could take as much unrefined ore as it could extract during that year, but it had to pay
all costs of operating the mines. There was no provision for interest. The English Crown did not provide
any guarantees (nor did anyone else) concerning the quantity or quality of silver that could be extracted
during that period. Such a loan arrangement was a forebear of what is known today as a production
payment loan.
-John D Finnerty
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Company Profile
A metro system serving Delhi, Gurgaon, Noida, and Ghaziabad in the National Capital Region of India, the
world's thirteenth largest metro system in terms of length is Delhi Metro. It is India's first modern public
transportation system. As of June 2014, the network consists of six lines, plus a seventh Airport Express line,
with a total length of 193.2 kilometers covering 139 stations, of which 38 are underground, five are at-grade, and
the rest are elevated. All stations have escalators, elevators, and tactile tiles to guide the visually impaired from
station entrances to trains. It uses both broad gauge and standard gauge rolling stock. Four types of rolling stock
are used: Mitsubishi Rotem broad gauge, Bombardier Movia, Mitsubishi Rotem standard gauge, and CAF
Beasain standard gauge.
Delhi Metro Rail Corporation Limited (DMRC), a state-owned company with equal equity participation
from Government of India and Government of National Capital Territory of Delhi built and operates the Delhi
Metro. However, the organization is under administrative control of Ministry of Urban
Development, Government of India. Besides construction and operation of Delhi metro, DMRC is also involved
in the planning and implementation of metro rail, monorail and high-speed rail projects in India and providing
consultancy services to other metro projects in the country as well as abroad.
The trains are usually of four and six coaches, but due to increase in the number of passengers, eight-coach trains
are added on the Yellow Line (Jahangirpuri to HUDA city centre) and Blue line (Dwarka Sector-21 to Noida City
Centre/Vaishali). Yellow line being the first one with eight coach trains. The power output is supplied by 25-
kilovolt, 50-hertz alternating current through overhead catenary. The metro has an average daily ridership of 2.4
million commuters, and, as of August 2010, had already carried over 1.25 billion commuters since its
inception. The Delhi Metro Rail Corporation has been certified by the United Nations as the first metro rail and
rail-based system in the world to get "carbon credits for reducing greenhouse gas emissions" and helping in
reducing pollution levels in the city by 630,000 tonnes every year.
Planning started in 1984, when the Delhi Development Authority and the Urban Arts Commission came up with
a proposal for developing a multi-modal transport system for the city. The Government of India and
the Government of Delhi jointly set up the Delhi Metro Rail Corporation (DMRC) registered on 3 May 1995
under The Companies Act, 1956. Construction started in 1998, and the first section, on the Red Line, opened in
2002, followed by the Yellow Line in 2004, the Blue Line in 2005, its branch line in 2009, the Green and Violet
Lines in 2010, and the Delhi Airport Metro Express in 2011.
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The recently opened Rapid Metro Rail Gurgaon, whilst linked to it by the Yellow Line is a separate metro system,
although tickets from the Delhi Metro can be used in its network.
The voice overs for the Delhi Metro have been given by Rini Simon Khanna and Shammi Narang.
Background
The concept of a mass rapid transit for New Delhi first emerged from a traffic and travel characteristics study
which was carried out in the city in 1969. Over the next several years, many official committees by a variety of
government departments were commissioned to examine issues related to technology, route alignment, and
governmental jurisdiction. In 1984, the Delhi Development Authority and the Urban Arts Commission came up
with a proposal for developing a multi-modal transport system, which would consist of constructing three
underground mass rapid transit corridors as well augmenting the city's existing suburban railway and road
transport networks.
While extensive technical studies and the raising of finance for the project were in progress, the city expanded
significantly resulting in a twofold rise in population and a fivefold rise in the number of vehicles between 1981
and 1998. Consequently, traffic congestion and pollution soared, as an increasing number of commuters took to
private vehicles with the existing bus system unable to bear the load. An attempt at privatizing the bus transport
system in 1992 merely compounded the problem, with inexperienced operators plying poorly maintained, noisy
and polluting buses on lengthy routes, resulting in long waiting times, unreliable service, extreme overcrowding,
unqualified drivers, speeding and reckless driving. To rectify the situation, the Government of India and the
Government of Delhi jointly set up a company called the Delhi Metro Rail Corporation (DMRC) on 3 May 1995,
with E. Sreedharan as the managing director.
Network
The Delhi Metro is being built in phases. Phase I completed 58 stations and 65.0 km (40.4 mi) of route length, of
which 13.0 km (8.1 mi) is underground and 52.1 km (32.4 mi) surface or elevated. The inauguration of
the Dwarka–Barakhamba Road corridor of the Blue Line marked the completion of Phase I on October
2006. Phase II of the network comprises 124.6 km (77.4 mi) of route length and 85 stations, and is fully completed,
with the first section opened in June 2008 and the last line opened in August 2011. Phase III (103 km, 69 stations)
and Phase IV (113.2 km) are planned to be completed by 2016 and 2021 respectively, with the network spanning
413 km (257 mi) by then.
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Current routes
As of September 2013, with the completion of Phase I, Phase II and the beginning of operations on Phase III, the
Delhi Metro network comprises six lines (plus the Airport Express line), serving 135 metro stations (plus 6 Airport
Express stations, for a total of 141), and operating on a total route length of 193.2 km (120.0 mi) (including the
Airport Express line).
Line Stations Length
(km) Terminals Rolling stock
Red Line 21 25.09 Dilshad Garden Rithala 26 trains
Yellow Line 35 44.65 Jahangirpuri HUDA City Centre 60 trains
Blue Line
43 49.93 Noida City Centre Dwarka Sector 21
70 trains
7 8.74 Yamuna Bank Vaishali
Green Line
14 15.14 Inderlok Mundka
15 trains
1 3.32 Ashok Park Main Kirti Nagar
Violet Line 15 23.24 Mandi House Badarpur 30 trains
Airport Express 6 22.70 New Delhi Dwarka Sector 21 8 trains
TOTAL 141 192.81
Red Line
The Red Line was the first line of the Metro to be opened and connects Rithala in the west to Dilshad Garden in
the east, covering a distance of 25.09 kilometers (15.59 mi). It is partly elevated and partly at grade, and crosses
the Yamuna River between Kashmere Gate and Shastri Park stations. The inauguration of the first stretch
between Shahdara and Tis Hazari on 24 December 2002 caused the ticketing system to collapse due to the line
being crowded to four times its capacity by citizens eager to have a ride. Subsequent sections were inaugurated
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from Tis Hazari – Trinagar (later renamed Inderlok) on 4 October 2003, Inderlok – Rithala on 31 March 2004,
and Shahdara – Dilshad Garden on 4 June 2008. The red line has two interchange stations, the first being
Kashmere Gate with the yellow line and the second Inderlok with the green line. Starting from 24 November
2013 six coach trains will be inducted in a phased manner in red line.
Yellow Line
The Yellow Line was the second line of the Metro and was the first underground line to be opened. It runs for
44.36 kilometers (27.56 mi) from north to south and connects Jahangirpuri with HUDA City Centre in Gurgaon.
The northern and southern parts of the line are elevated, while the central section through some of the most
congested parts of Delhi is underground. The first section between Vishwa Vidyalaya and Kashmere Gate opened
on 20 December 2004, and the subsequent sections of Kashmere Gate – Central Secretariat opened on 3 July
2005, and Vishwa Vidyalaya – Jahangirpuri on 4 February 2009. This line also possesses the country's deepest
Metro station at Chawri Bazaar, situated 30 meters (98 ft.) below ground level. On 21 June 2010, an additional
stretch from Qutub Minar to HUDA City Centre was opened, initially operating separately from the main line.
However, Chhatarpur station on this line opened on 26 August 2010. Due to delay in acquiring the land for
constructing the station, it was constructed using pre-fabricated structures in a record time of nine months and is
the only station in the Delhi metro network to be made completely of steel. The connecting link between Central
Secretariat and Qutub Minar opened on 3 September 2010. Interchanges are available with the Red
Line and Kashmere Gate ISBT at Kashmere Gate station, Blue Line at Rajiv Chowk Station, Violet Line at Central
Secretariat, Rapid MetroRail Gurgaon at Sikandarpur and with the Indian Railways network at Chandni
chowk Delhi Junction Railway station and New Delhi railway stations. Yellow line is the first line of Delhi Metro
which has phased out all four coach trains with six and eight coach configuration. The Metro Museum at Patel
Chowk Metro station is a collection of display panels, historical photographs and exhibits, traces the genesis of
the Delhi Metro.
Blue Line
The Blue Line was the third line of the Metro to be opened, and the first to connect areas outside Delhi. Mainly
elevated and partly underground, it connects Dwarka Sub City in the west with the satellite city of Noida in the
east, covering a distance of 47.4 kilometres (29.5 mi). The first section of this line
between Dwarka and Barakhamba Road was inaugurated on 31 December 2005, and subsequent sections opened
between Dwarka – Dwarka Sector 9 on 1 April 2006, Barakhamba Road – Indraprastha on 11 November 2006,
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Indraprastha – Yamuna Bank on 10 May 2009, Yamuna Bank – Noida City Centre on 12 November 2009, and
Dwarka Sector 9 – Dwarka Sector 21 on 30 October 2010. This line crosses the Yamuna River
between Indraprastha and Yamuna Bank stations, and has India's first extra dosed bridge across the Northern
Railways mainlines near Pragati Maidan. A branch of the Blue line, inaugurated on 8 January 2010, takes off
from Yamuna Bank station and runs for 6.25 kilometres (3.88 mi) up to Anand Vihar in east Delhi. It was further
extended up to Vaishali which was opened to public on 14 July 2011. A small stretch of 2.76 kilometres (1.71 mi)
from Dwarka Sector 9 to Dwarka Sector 21 was inaugurated on 30 October 2010. Interchanges are available with
the Yellow Line at Rajiv Chowk station, Green line at Kirti Nagar, Violet line at Mandi House and with the Indian
Railways network at the Anand Vihar Railway Terminal and Anand Vihar ISBT.
Green Line
Opened in 2010, the Green Line was the first standard-gauge corridor of the Delhi Metro. The fully elevated line
connects Mundka with Inderlok, running for 15.1 kilometres (9.4 mi) mostly along Rohtak Road with a branch
line connecting the line's Ashok Park Main station with Kirti Nagar station on the Blue Line. The line consists of
17 stations including an interchange station covering a total length of 18.46 km. The line was opened in two
stages, with the 15.1 km Inderlok - Mundka section opening on 3 April 2010, and the 3.5 km Kirti Nagar - Ashok
Park Main branch line on 27 August 2011. An interchange with the Red line is available at Inderlok station via
an integrated concourse. This line also has the country's first standard-gauge maintenance depot at Mundka.
Violet Line
The Violet Line is the most recent line of the Metro to be opened, and the second standard-gauge corridor after
the Green Line. The 23.2 km (14.4 mi) long line connects Badarpur to Mandi House, with 9 km (5.6 mi) being
overhead and the rest underground. The first section between Central Secretariat and Sarita Vihar was inaugurated
on 3 October 2010,that just hours before the inaugural ceremony of the 2010 Commonwealth Games, and
connects the Jawaharlal Nehru Stadium, which was the venue for the opening and closing ceremonies of the
event. Completed in just 41 months, it includes a 100 m (330 ft.) long bridge over the Indian Railways mainlines
and a 167.5 m (550 ft.) long cable-stayed bridge across an operational road flyover, and connects several hospitals,
tourist attractions, and a major industrial estate along its route. Services are provided at intervals of 5 min. An
interchange with the Yellow Line is available at Central Secretariat through an integrated concourse. On 14
January 2011, the remaining portion from Sarita Vihar to Badarpur was opened for commercial service, adding
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three new stations to the network and marking the completion of the line. The most recent section, between Mandi
House and Central Secretariat, was opened on 26 June 2014.
Airport Express
The Airport Express line runs for 22.7 km (14.1 mi) from New Delhi Railway Station to Dwarka Sector 21,
linking the Indira Gandhi International Airport. The line was operated by Delhi Airport Metro Express Pvt.
Limited (DAMEL), a subsidiary of Reliance Infrastructure, the concessionaire of the line till 30 June 2013 and is
now being operated by DMRC. The line was constructed at a cost of 57 billion (US$960 million), of which
Reliance Infrastructure invested 28.85 billion (US$480 million) and will pay fees on a revenue-share model. The
line has six stations (Dhaula Kuan and Delhi Aerocity became operational on 15 August 2011), with some
featuring check-in facilities, parking, and eateries. Rolling stock consists of six-coach trains operating at intervals
of ten minutes and having a maximum speed of 135 km/h (84 mph). Originally scheduled to open before the 2010
Commonwealth Games, the line failed to obtain the mandatory safety clearance, and was opened on 24 February
2011, after a delay of around 5 months. After 16 months of commencement of operations, the line was shut down
for repairs of the viaducts on 8 July 2012. The line reopened on 22 January 2013. On 27 June 2013 Reliance
Infrastructure Ltd intimated DMRC that they are unable to operate the line beyond 30 June 2013. Following this
DMRC took over operations of Airport Express line from 1 July 2013 with an Operations and Maintenance team
of 100 officials to handle the line.
Planned extensions
Delhi Metro was planned to be built in phases spread over around 20 years as with each phase having a target of
five years and end of one phase marking the beginning of another. Phase I (65 km) and Phase II (125 km) were
completed in 2006 and 2011, respectively, and Phase III and Phase IV are scheduled for completion in 2016 and
2021, respectively. Work on Phase III started in 2011 while planning for Phase IV has begun. Ex-chief of DMRC
hinted that by the time Phase IV is completed, the city will need Phase V to cope with rising population and
transport needs.
Phase III
Out of 2 new lines and 10 route extensions proposed for Phase III, cabinet approvals have been obtained for 2
new lines and 7 line extensions totaling 160.27 km, with an estimated cost of 350
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billion (US$5.9 billion). Construction has already begun on many of these. In April 2014 the Delhi governor gave
approval for two further extensions. All the approved lines are:
Line Stations Length
(km) Terminals
No. of
interchanges
planned
Yellow Line extension 3 4.48 Jahangirpuri Badli 0
Violet Line
7 9.36 Central
Secretariat
Kashmere Gate 2
11 13.875 Badarpur Ballabgarh 0
Blue Line branch
4 5.5 Dwarka Najafgarh 1
5 6 Noida City
Centre
Noida Sector 62 0
Green Line 6 11.182 Mundka Bahadurgarh 0
Brown Line-Inner Ring Road
Line (Line 7) 37 58.40 Mukundpur Shiv Vihar 10
Magenta Line-Outer Ring Road
Line (Line 8) 26 37.25 Janakpuri West Botanical Garden 4
Red Line 6 9.6 Dilshad Garden
New Bus Stand,
Ghaziabad 0
Airport Express 5 11.63 Dwarka Sector
21
IFFCO Chowk 1
Total 104 167.277 18
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Other than these approved lines, there are several other proposed lines which are awaiting approval for inclusion
in Phase III. These line extensions are:
Line Stations Length
(km) Terminals
No. of interchanges
planned
Red Line 6 12 Rithala Bawana 0
Phase III will have 28 underground stations covering 41 km. More than 20 tunnel boring machines are expected
to be simultaneously used during construction of Phase III. Delhi Metro is expecting a ridership of 4 million after
completion of Phase III. DMRC has decided to use communication based train control (CBTC) for signaling
which will allow trains to run at a short headway of 90 seconds. Keeping this in mind and other constraints,
DMRC changed its decision to build 9 car long stations for new lines and instead opting for shorter stations which
can accommodate 6 car trains.
For the first time Delhi Metro will construct ring lines in Phase III. Till Phase II, Delhi Metro focused on
expanding the reach of metro and thus built long radial lines. However, in Phase III, Delhi Metro is aiming to
interconnect existing lines by ring lines to improve connectivity. This will not only help in reducing distances but
will also relieve radial lines of some congestion.
Phase IV
Phase IV has a 2021 deadline, and tentatively includes further extensions to Sonia Vihar, Burari, Mukundpur,
Reola Khanpur, Palam, Najafgarh, Narela, Ghazipur, Noida sector 62, extensions of Violet line, Green line, Line
8, having a total length of over 100 km. There might be some changes in plan before actual construction starts on
these lines.
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Apart from these lines in Phases I to IV, plans have been mooted to construct a new line from Noida Sector 62 to
Greater Noida which will intersect Indraprastha – Noida Sector 32 line. The Ghaziabad Development Authority
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is planning to extend Delhi Metro lines deeper into Ghaziabad through extension of the Blue Line from Vaishali
to Mehrauli via Indirapuram. The independently operated Gurgaon Metro, work on which is going on and has a
deadline of 2013, will also interchange with the Delhi Metro at Sikandarpur station on Yellow line. For the year
2012-13, Noida development Authority has allocated Rs 5 billion for Metro extension, with City Center Metro
line being extended till the crossing of Sector 71 and 72.
Operations
Trains operate at a frequency of 2 minutes 40 seconds to 5–10 minutes between 6:00 and 23:00 depending peak
and off-peak time. Trains operating within the network typically travel at speed up to 80 km/h (50 mph), and stop
for about 20 seconds at each station. Automated station announcements are recorded in Hindi and English. Many
stations have services such as ATMs, food outlets, cafés, convenience and mobile recharge. Eating, drinking,
smoking, and chewing of gum are prohibited in the entire system. The Metro also has a sophisticated fire alarm
system for advance warning in emergencies, and fire retardant material is used in trains as well as on the premises
of stations. Navigation information is available on Google Transit. The first coach of every train is reserved for
women. To make travelling by metro easier Delhi metro has launched an app for
smartphones(iPhone and Android) that will provide information on various facilities like nearest metro
station,fare,parking availability, tourist spots near metro stations, security and emergency helpline numbers.
Security
Security on the Delhi Metro is handled by the Central Industrial Security Force (CISF), who have been guarding
the system ever since they took over from the Delhi Police in 2007. Closed-circuit cameras are used to monitor
trains and stations, and feed from these is monitored by both the CISF and Delhi Metro authorities at their
respective control rooms. Over 3500 CISF personnel have been deployed to deal with law and order issues in the
system, in addition to metal detectors, X-ray baggage inspection systems, and dog squads which are used to secure
the system. About 5,200 CCTV cameras have been installed, which cover every nook and corner of each Metro
station. Each of the underground stations has about 45 to 50 cameras installed while the elevated stations have
about 16 to 20 cameras each. The monitoring of these cameras is done by the CISF, which is in charge of security
of the Metro, as well as the Delhi Metro Rail Corporation. Intercoms are provided in each train car for emergency
communication between the passengers and the train operator. Periodic security drills are carried out at stations
and on trains to ensure preparedness of security agencies in emergency situations. DMRC is also looking at raising
the station walls and railings for the safety of passengers.
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Ticketing & Recharge
For the convenience of customers, Delhi Metro commuters have three choices for ticket purchase.
The RFID tokens are valid only for a single journey on the day of purchase and the value depends on the distance
travelled, with fares for a single journey ranging from 8(13¢ US) to 30 (50¢ US). Fares are calculated based on
the origin and destination stations using a fare chart. A common ticketing facility for commuters travelling on
Delhi Transport Corporation (DTC) buses and the Metro was introduced in 2011. Travel cards are available for
longer durations and are most convenient for frequent commuters. They are valid for one year from the date of
purchase or the date of last recharge, and are available in denominations of 100 (US$1.70) to 800 (US$13.40).
A 10% discount is given on all travel made on it. A deposit of 50 (84¢ US) needs to be made to buy a new card
which is refundable on the return of the card any time before its expiry if the card is not physically
damaged. Tourist cards can be used for unlimited travel on the Delhi Metro network over short periods of time.
There are two kinds of tourist cards valid for one and three days respectively. The cost of a one-day card is
100(US$1.70) and that of a three-day card is 250 (US$4.20), besides a refundable deposit of 50 (84¢ US) that
must be paid at the time of purchasing the card.
Problems
As the network has expanded, high ridership in new trains have led to increasing instances of overcrowding and
delays on the Delhi Metro. To alleviate the problem, 8 coach trains have been introduced in yellow line and Blue
line and an increase in the frequency of trains has been proposed. Infrequent, overcrowded and erratic feeder bus
services connecting stations to nearby localities have also been reported as an area of concern. In 2010, severe
overcrowding on the Yellow Line, which connects the north and south campuses of Delhi University, was reported
to be a reason for students missing or reporting late for classes.
Ridership
Delhi Metro recorded its highest ever ridership figure of 2,606,364 on 19 August 2013 which surpassed the earlier
record set on 8 August 2013, when 2,504,900 people travelled by the Metro.
Currently, DMRC has a pool of 200 train sets with 69 of these being six coach formations. At present, the Delhi
Metro is operational on six lines where more than 2500 train trips are made each day traversing over 69000 km
in a day. With Phase-III of the network expected to cover about 108 km, the Delhi Metro network will become
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295 km by 2016, making it one of the fastest expanding Metro networks in the world carrying about 40 lakh
(4 million) passengers.
Rolling stock
The Metro uses rolling stock of two different gauges. Phase I lines use 1,676 mm (5.499 ft.) broad gauge rolling
stock, while three Phase II lines use 1,435 mm (4.708 ft) standard gauge rolling stock. Trains are maintained at
seven depots at Khyber Pass and Sultanpur for the Yellow Line, Mundka for the Green Line, Najafgarh and
Yamuna Bank for the Blue Line, Shastri Park for the Red Line, and Sarita Vihar for the Violet Line.
Maglev trains were initially considered for some lines of Phase 3, but DMRC decided to continue with
conventional rail in August 2012.
Broad gauge
The broad gauge rolling stock is manufactured by two major suppliers. For the Phase I, the rolling stock was
supplied by a consortium of companies comprising Hyundai Rotem, Mitsubishi Corporation, and MELCO.The
coaches have a very similar look to MTR Rotem EMU,except with only 4 doors and use sliding doors. The
coaches were initially built in South Korea by ROTEM, then in Bangalore by BEML through a technology
transfer arrangement. These trains consist of four 3.2-metre (10 ft) wide stainless steel lightweight coaches with
vestibules permitting movement throughout their length and can carry up to 1500 passengers, with 50 seated and
330 standing passengers per coach. The coaches are fully air conditioned, equipped with automatic doors,
microprocessor-controlled brakes and secondary air suspension, and are capable of maintaining an average speed
of 32 km/h (20 mph) over a distance of 1.1 km (0.68 mi). The system is extensible up to eight coaches, and
platforms have been designed accordingly.
The rolling stock for Phase II is being supplied by Bombardier Transportation, which has received an order for
614 cars worth approximately US$ 1100 million. While initial trains were made in Gorlitz, Germany and Sweden,
the remainder will be built at Bombardier's factory in Savli, near Vadodara. These trains are a mix of four-car and
six-car consists, capable of accommodating 1178 and 1792 commuters per train respectively. The coaches possess
several improved features like Closed Circuit Television (CCTV) cameras with eight-hour backup for added
security, charging points in all coaches for cell phones and laptops, improved air conditioning to provide a
temperature of 25 degrees Celsius even in packed conditions and heaters for winter.
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Standard gauge
The standard gauge rolling stock is manufactured by BEML at its factory in Bangalore. The trains are four-car
consists with a capacity of 1506 commuters per train, accommodating 50 seated and 292 standing passengers in
each coach. These trains will have CCTV cameras in and outside the coaches, power supply connections inside
coaches to charge mobiles and laptops, better humidity control, microprocessor-controlled disc brakes, and will
be capable of maintaining an average speed of 34 km/h (21 mph) over a distance of 1.1 km (0.68 mi).
Airport Express
Eight 6-car trains supplied by CAF Beasain were imported from Spain. CAF holds 5% equity in the DAME
project, Reliance Infrastructure holds the remaining 95%. The trains on this line are of a premium standard
compared to the existing metro trains and have in-built noise reduction and padded fabric seats. The coaches are
equipped with LCD screens for entertainment of the passengers and also provide flight information for
convenience of air travelers. The trains are fitted with an event recorder which can withstand high levels of
temperature and impact and the wheels have flange lubrication system for less noise and better riding comfort.
Signaling and telecommunication
The Delhi Metro uses cab signaling along with a centralized automatic train control system consisting
of operation, Automatic and automatic train signaling modules. A 380 MHz digital trunked TETRA radio
communication system from Motorola is used on all lines to carry both voice and data information. For Blue
Line Siemens Transportation Systems has supplied the electronic interlocking Sicas, the operation control system
Vicos OC 500 and the automation control system LZB 700 M. An integrated system comprising optical fiber
cable, on-train radio, CCTV, and a centralized clock and public address system is used for
telecommunication during train operations as well as emergencies. For Red and Yellow lines ALSTOM has
supplied signaling system and for line Green and Violet Bombardier Transportation has supplied CITYFLO 350
signaling system.
The Airport Express line has introduced Wi-Fi services at all stations along the route on 13 January 2012.
Connectivity inside metro trains travelling on the route is expected in the future. The Wi-Fi service is provided
by YOU Broadband & Cable India Limited. The service makes Delhi Metro the second metro in India to provide
Wi-Fi services to passengers after the Namma Metro in Bangalore.
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A fully automated, operator less train system has been offered to Delhi Metro by the French defense and civilian
technologies major Thales.
Environment and aesthetics
The Delhi Metro has won awards for environmentally friendly practices from organizations including the United
Nations, RINA, and the International Organization for Standardization, becoming the second metro in the world,
after the New York City Subway, to be ISO 14001 certified for environmentally friendly construction. Most of
the Metro stations on the Blue Line conduct rainwater harvesting as an environmental protection measure. It is
also the first railway project in the world to earn carbon credits after being registered with the United Nations
under the Clean Development Mechanism, and has so far earned 400,000 carbon credits by saving energy through
the use of regenerative braking systems on its trains. In order to reduce its dependence on non-renewable sources
of energy, DMRC is looking forward to harness solar energy and install solar panels at the Karkardooma and
Noida Sector-21 metro stations.
The Metro has been promoted as an integral part of community infrastructure, and community artwork depicting
the local way of life has been put on display at stations. Students of local art colleges have also designed decorative
murals at Metro stations, while pillars of the viaduct on some elevated sections have been decorated with mosaic
murals created by local schoolchildren. The Metro station at INA Colony has a gallery showcasing artwork and
handicrafts from across India, while all stations on the Central Secretariat – Qutub Minar section of the Yellow
Line have panels installed on the monumental architectural heritage of Delhi. The Nobel Memorial Wall at Rajiv
Chowk has portraits of the seven Nobel Laureates from India: Rabindranath Tagore, CV Raman, Hargobind
Khorana, Mother Teresa, Subrahmanyan Chandrasekhar,Amartya Sen and Venkatraman Ramakrishnan and
provide details about their contribution to society and a panel each on Alfred Nobel and the Nobel Prizes.
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Introduction to Project Finance
Definition of Project
Organizations perform work continuously. These works include operations or projects though some works may
overlap with each other. For the organizations, projects are important elements of change. They are considered to
be the leading edge of change in organizations. A project consists of a combination of organizational resources
pulled together to create something that did not previously exist and that will provide a performance capability in
the design and execution of organizational strategies. Projects are conceptualized, designed, engineered and
produced (or constructed); something is created that did not previously exist. An organizational strategy has been
executed to facilitate the support of ongoing organizational life. Projects therefore support the ongoing activities
of a going concern.
What Is Project Finance
Project finance is the structured financing of a specific economic entity—the SPV,or special-purpose vehicle,
also known as the project company—created by sponsors using equity and for which the lender considers cash
cows as being the primary source of loan reimbursement, whereas assets represent only collateral.
The following five points are, in essence, the distinctive features of a project Finance deal:
1. The debtor is a project company set up on an ad hoc basis that is financially and legally independent from the
sponsors.
2. Lenders have only limited recourse (or in some cases no recourse at all) to the sponsors after the project is
completed. The sponsors’ involvement in the deal is, in fact, limited in terms of time (generally during the setup
to start-up period), amount (they can be called on for equity injections if certain economic-financial tests prove
unsatisfactory), and quality (managing the system efficiently and ensuring certain performance levels). This
means that risks associated with the deal must be assessed in a different way than risks concerning companies
already in operation.
3. Project risks are allocated equitably between all parties involved in the transaction, with the objective of
assigning risks to the contractual counterparties best able to control and manage them.
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4. Cash cows generated by the SPV must be sufficient to cover payments for operating costs and to service the
debt in terms of capital repayment and interest. Because the priority use of cash cow is to fund operating costs
and to service the debt, only residual funds after the latter are covered can be used to pay dividends to sponsors.
5. Collateral is given by the sponsors to lenders as security for receipts and assets tied up in managing the project.
Methods of Project finance
Why is it important to understand project finance?
The people involved in a project are used to find financing deal for major construction projects such as mining,
transportation and public utility industries that may result such risks and compensation for repayment of loan,
insurance and assets in process. That’s why they need to learn about project finance in order to manage project
cash flow for ensuring profits so it can be distributed among multiple parties, such as investors, lenders and other
parties.
Project Finance
Project finance is a method of financing very large capital intensive projects, with long gestation period, where
the lenders rely on the assets created for the project as security and the cash flow generated by the project as
source of funds for repaying their dues.
Simply put, project finance is essentially financing on the security of the project itself, with limited or no recourse
against the sponsors of the project or other parties involved in the development and implementation of the project.
Due to such characteristics of project finance, the loans sought by the borrowers are always approved by the
lenders on the basis of strong in-house appraisal of the cost and viability of the ventures as well as the credit
standing of project promoters.
Project finance generally covers green-field industrial projects, capacity expansion at existing manufacturing
units, construction ventures or other infrastructure projects. The term ‘infrastructure projects’ is used here in its
general and wide meaning to describe physical structures (such as roads, highways, ports, airports etc.) or systems
(such as electricity transmission system, pipeline distribution systems) that are designed, built, operated and
maintained to provide for certain physical facilities (such as roads, railways, airports, urban mass rapid transit
systems) or commodities (such as natural gas, petroleum, electricity) or for the due utilization of natural resources
(water, crude oil, minerals) or provision of services.
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(Telecommunications, broadcasting, air transport services, waste handling and treatment) through the general
public within the specified geographical area. Capital intensive business expansion and diversification as well as
replacement of equipment may also be covered under project finance.
An understanding of the possible money streams into a particular project and the possible expenditure streams
out of the same is essential to structure the finance. Such understanding would be based on an analysis of the legal
framework governing the project, all of the project’s documentation including all government approvals with
regard to the implementation and financing of the project and the finance documentations.
Project finance is quite often channeled through a project company known as special purpose vehicle or project
development vehicle. Internationally, in addition to a private limited company, a limited company, a partnership
and an unincorporated entity structure are all recognized as suitable project development vehicle. However, in
India, a private limited company is regarded to be an appropriate project development vehicle as it ensures limited
liability for the developers of the project, enables the shareholders to incorporate the various terms and conditions
agreed to between them in the articles of association of the project company, thereby binding not only the
shareholders themselves but also the company to such agreed terms. Besides, a private limited company also has
greater avenues open for equity and loan financing.
Some Jargons:
1. Full Recourse Loan: A loan in which the lender can claim more than the collateral as repayment in the event
that the loan is enforced. Thus a full recourse loan places the Sponsor’s assets at risk.
2. Non-Recourse Loan: A loan in which the lender cannot claim more than the collateral as repayment in the
event that the loan is enforced.
3. Limited Recourse Loan: A loan in which the lender can claim more than the collateral, subject to some
restrictions, as repayment in the event that the loan is enforced.
Why Do Sponsors Use Project Finance?
A sponsor can choose to finance a new project using two alternatives:
1. The new initiative is financed on balance sheet (corporate Financing).
2. The new project is incorporated into a newly created economic entity, the SPV, and Financed off balance sheet
(project Financing).
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Alternative 1 means that sponsors use all the assets and cash Cows from the existing firm to guarantee the
additional credit provided by lenders. If the project is not successful, all the remaining assets and cash Cows can
serve as a source of repayment for all the creditors (old and new) of the combined entity (existing Firm plus new
project).
Alternative 2 means, instead, that the new project and the existing Firm live two separate lives. If the project is
not successful, project creditors have no (or very limited) claim on the sponsoring Firms’ assets and cash Cows.
The existing Firm’s shareholders can then benefit from the separate incorporation of the new project into an SPV.
One major drawback of alternative 2 is that structuring and organizing such a deal is actually much more costly
than the corporate Financing option. The small amount of evidence available on the subject shows an average
incidence of transaction costs on the total investment of around 5–10%. There are several different reasons for
these high costs.
1. The legal, technical, and insurance advisors of the sponsors and the loan arranger need a great deal of time to
evaluate the project and negotiate the contract terms to be included in the documentation.
2. The cost of monitoring the project in process is very high.
3. Lenders are expected to pay significant costs in exchange for taking on greater risks. On the other hand,
although project Finance does not offer a cost advantage, there are definitely other benefits as compared to
corporate Financing.
Project Finance allows for a high level of risk allocation among participants in the transaction. Therefore the deal
can support a debt-to-equity ratio that could not otherwise be attained. This has a major impact on the return of
the transaction for sponsors (the equity IRR).
2. From the accounting standpoint, contracts between sponsors and SPVs are essentially comparable to
commercial guarantees. Nonetheless, with project Finance initiatives they do not always appear ‘‘off balance
sheet’’ or in the notes of the directors.
3. Corporate-based Financing can always count on guarantees constituted by personal assets of the sponsor, which
are different from those utilized for the investment project. In project Finance deals, the loans only collateral
refers to assets that serve to carry out the initiative; the result is advantageous for sponsors since their assets can
be used as collateral in case further recourse for funding is needed.
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4. Creating a project company makes it possible to isolate the sponsors almost completely from events involving
the project if Financing is done on a nonrecourse (or more often a limited-recourse) basis. This is often a decisive
point, since corporate Financing could instead have negative repercussions on riskiness (therefore cost of capital)
for the investor Firm if the project does not make a profit or fails completely.
Who Are the Sponsors of a Project Finance Deal?
By participating in a project financing venture, each project sponsor pursues a clear objective, which differs
depending on the type of sponsor. In brief, four types of sponsors are very often involved in such transactions:
Industrial sponsors, who see the initiative as upstream or downstream integrated or in some way as linked
to their core business
Public sponsors (central or local government, municipalities, or municipalized companies), whose aims
center on social welfare
Contractor/sponsors, who develop, build, or run plants and are interested in participating in the initiative
by providing equity and/or subordinated debt
Purely Financial investors
Industrial Sponsors in Project Finance Initiatives
Let’s use an example to illustrate the involvement of sponsors who see project Finance as an initiative linked to
their core business.
For instance, a major project involving IGCC (integrated gasification combined cycle) cogeneration includes
outputs (energy and steam) generated by fuels derived from refinery by-products. The residue resulting from
refining crude oil consists of heavy substances such as tar; the disposal of this toxic waste represents a cost for
the producer. The sponsors of these project Finance deals are often oil companies that own refineries. In fact, an
IGCC plant allows them to convert the tar residue into energy by means of eco-compatible technologies. The by-
product is transformed into fuel for the plant (downstream integration). The sponsor, in turn, by supplying
feedstock for the power plant, converts a cost component into revenue, hence a cash in inflow. Lenders in this
kind of project carefully assess the position of the sponsor, since the SPV should face a low supply risk. The
sponsor/supplier has every interest in selling the tar promptly to the SPV. If this does not happen, the supplier not
only will forfeit related revenue but will be subject to penalties as well.
Public Sponsors with Social Welfare Goals- Historically, project Finance was first used in the oil extraction and
power production sectors .These were the more appropriate sectors for developing this structured Financing
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technique because they were marked by low technological risks, a reasonably predictable market, and the
possibility of selling what was produced to a single buyer or a few large buyers based on multiyear contracts .So
project Finance initially was a technique that mainly involved parties in the private sector. Over the years,
however, this contractual form has been used increasingly to Finance projects in which the public sector plays an
important role (governments or other public bodies). As we see in the next chapter, governments in developing
countries have begun to encourage the involvement of private parties to realize public works. From this
standpoint, it is therefore important to distinguish between projects launched and developed exclusively in a
private context (where success depends entirely on the project’s ability to generate sufficient cash cow to cover
operating costs, to service the debt, and to remunerate shareholders) from those concerning public works. In the
latter cases success depends above all on efficient management of relations with the public administration and, in
certain cases, also on the contribution the public sector is able to make to the project. Private-sector participation
in realizing public works is often referred to as PPP (public–private partnership). In these partnerships the role of
the public administration is usually based on a concession agreement that provides for one of two alternatives. In
the first case, the private party constructs works that will be used directly by the public administration itself, which
therefore pays for the product or service made available. This, for instance, is the case of public works constructing
hospitals, schools, prisons, etc. The second possibility is that the concession concerns construction of works in
which the product/service will be purchased directly by the general public. The private party concerned will
receive the operating revenues, and on this basis (possibly with an injection in the form of a public grant) it will
be able to repay the investment made. Examples of this type of project are the construction of toll roads, the
creation of a cell phone network, and the supply of water and sewage plants. Various acronyms are used in practice
for the different types of concession. Even if the same acronyms often refer to different forms of contract, the
following are very common:
BOT (build, operate, and transfer)
BOOT (build, own, operate, and transfer)
BOO (build, operate, and own)
In a BOT framework, the public administration delegates planning and realization of the project to the private
party together with operating management of the facility for a given period of time. During this period the private
party is entitled to retain all receipts generated by the operation but is not the owner of the structure concerned.
The facility will then be transferred to the public administration at the end of the concession agreement without
any payment being due to the private party involved.
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A BOOT framework differs from the BOT framework in that the private party owns the works. At the end of the
concession term the works are transferred to the public administration, and in this case a payment for them can
be established.
Lastly, the BOO framework has characteristics in common with the other two. The private party owns the works
(as in the BOOT case), but ownership is not transferred at the end of the concession agreement. Therefore the
residual value of the project is exploited entirely by the private sector. The country that first launched a systematic
program of such projects was the UK, where these PPPs formed part of what was known as the PFI, or Private
Finance Initiative. The PFI (Private Finance Initiative) is a strategic economic policy introduced in the United
Kingdom in 1992 to migrate the public administration from being the owner of assets and infrastructures to
becoming a purchaser of services from private parties. Every year a special department of the Treasury Ministry
establishes general plans for ventures involving private capital, subdivided into three categories:
(1) Completely self-Financed works (not requiring any public sector capital);
(2) Joint ventures (works for which the public sector provides grants while operations remain in the hands of
private parties);
(3) Contracted sale of services to the public sector (where private parties bear the cost of the necessary structures
to provide the services purchased).
Contractor/Sponsors Who Develop, Build, or Run the Plant- Clearly, in this case a contractor is interested in
supplying plants, materials, and services to the SPV. This aim of this player is to participate in the project Finance
deal:
1. in the initial phase by handling design and construction of the plant;
2. during the operational phase, as shareholder of the SPV.
This interest is entirely possible, and is in fact legitimate, in private projects. However, PPPs involving the public
administration are normally subject to more rigid procurement procedures. These rules serve to safeguard the
public’s interest and ensure that sponsors win contracts for a given project only after undergoing a more or less
complex public tender. When the contractor is also a shareholder in the SPV, there is an additional advantage:
The contractor will benefit directly if the project succeeds. As builder, this company will be highly motivated to
finish the plant on time, within budget, and in accordance with the performance specifications set down in the
contract. In fact, in this way operations can be activated as planned, the project will begin to generate cash Cows,
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and, as a shareholder in the SPV, the contractor will start earning dividends after having collected down payments
for construction.
Overview of the Features of Project Finance- It is quite common to find contractors who also offer to
run the plant once it is operational. Plant managers have a clear interest in sponsoring a project Finance deal
because they would benefit both from cash Cows deriving from the operation and maintenance (O&M) contract
as well as from dividends paid out by the SPV during the operational phase.
The ‘‘Purely’’ Financial Investor
The purely Financial investor plays the part of sponsor of a project Finance initiative with a single goal in mind:
to invest capital in high-profit deals. These players seek substantial returns on their investments and have a high
propensity for risk; as such they are similar in many ways to venture capitalists. Their involvement in a structured
Finance deal is seen (from the perspective of the banks providing Financial backing) as a private equity activity
in which purely financial investors play a passive role.
In other words, they have no say in the industrial policies of the SPV. In practice, cases in which purely financial
investors are shareholders in the SPV are still few, but the number is growing. In addition to traditional loans,
almost all multilateral development banks implement investment plans in the equity capital of the project
companies. What is more, private banks are also developing private equity alternatives to granting loans for
project Finance deals. In the UK, for instance, with various project Finance ventures in the health Weld, banks
have opted to Finance projects with equity rather than loans, in particular in cases where project Finance could
not sustain sufficient debt-to-equity ratios.
Project Financing Participants and Agreements
Sponsor/Developer: The sponsor(s) or developer(s) of a project financing is the party that organizes all of the
other parties and typically controls, and makes an equity investment in, the company or other entity that owns the
project. If there is more than one sponsor, the sponsors typically will form a corporation or enter into a partnership
or other arrangement pursuant to which the sponsors will form a "project company" to own the project and
establish their respective rights and responsibilities regarding the project.
Additional Equity Investors: In addition to the sponsor(s), there frequently are additional equity investors in the
project company. These additional investors may include one or more of the other project participants.
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Construction Contractor: The construction contractor enters into a contract with the project company for the
design, engineering, and construction of the project.
Operator: The project operator enters into a long-term agreement with the project company for the day-to-day
operation and maintenance of the project.
Feedstock Supplier: The feedstock supplier(s) enters into a long-term agreement with the project company for
the supply of feedstock (i.e., energy, raw materials or other resources) to the project (e.g., for a power plant, the
feedstock supplier will supply fuel; for a paper mill, the feedstock supplier will supply wood pulp).
Product Off taker: The product off taker(s) enters into a long-term agreement with the project company for the
purchase of all of the energy, goods or other product produced at the project.
Lender: The lender in a project financing is a financial institution or group of financial institutions that provide
a loan to the project company to develop and construct the project and that take a security interest in all of the
project assets.
Principle advantages and disadvantages of Project financing:
Advantages:
1. Non-Recourse: The typical project financing involves a loan to enable the sponsor to construct a project where
the loan is completely ‘non-recourse’ to the sponsor, i.e., the sponsor has no obligation to make payments on the
project loan if revenues generated by the project is insufficient to cover the principal and interest payments on the
loan. In order to minimize the risks associated with a non-recourse loan, a lender typically will require indirect
credit supports in the form of guarantees, warranties and other covenants from the sponsor, its affiliates and third
parties involved with the project.
2. Maximize Leverage: In a project financing, the sponsor typically seeks to finance the cost of development and
construction of the project on a highly leveraged basis. Frequently, such costs are financed using 80 to 100 percent
debt. High leverage in a non-recourse project financing permits a sponsor to put less in funds at risk, permits a
sponsor to finance the project without diluting its equity investment in the project and, in certain circumstances,
also may permit reductions in the cost of capital by substituting lower-cost, tax-deductible interest for higher-
cost, taxable returns on equity.
3. Off-Balance-Sheet Treatment: Depending upon the structure of project financing, the project sponsor may
not be required to report any of the project debt on its balance sheet because such debt is non-recourse to the
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sponsor. Off-balance-sheet treatment can have the added practical benefit of helping the sponsor comply with
covenants and restrictions relating to borrowing funds contained in other indentures and credit agreements to
which the sponsor is a party.
4. Maximize tax benefit: Project financings should be structured to maximize tax benefits and to assure that all
possible tax benefits are used by the sponsor or transferred, to the extent permissible, to another party through a
partnership, lease or other vehicle.
DISADVANTAGES.
Project financings are extremely complex.
It may take a much longer period of time to structure, negotiate and document a project financing than a traditional
financing, and the legal fees and related costs associated with a project financing can be very high. Because the
risks assumed by lenders may be greater in a non-recourse project financing than in a more traditional financing,
the cost of capital may be greater than with a traditional financing.
TYPICALCHARACTERISTICS OF PROJECT FINANCING
Some of the typical characteristics are: -
1. Large capital costs
2. Long gestation periods
3. Assets are not easily transferable
4. Services provided are not tradable
5. Revenues only in local currency;
6. Borrowing may be in foreign currency
7. Tariffs are politically sensitive
8. Social aspects involved
9. Vulnerable to regulatory policies
10. Limited recourse financing needed
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What are the features of limited recourse/ non-recourse Project financing?
Some of the features are following:-
* Financing through Special Purpose Vehicles (SPV)
* Sponsor support obligation for SPV
* Use of Trust and Retention Arrangement to capture the cash Flow
* Govt. guarantee may be available to the Project
Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan,
assess the risks, design the financing mix, and raise the funds. In addition, one must understand the cogent
analyses of why some project financing plans have succeeded while others have failed. A knowledge-base is
required regarding the design of contractual arrangements to support project financing; issues for the host
government legislative provisions, public/private infrastructure partnerships, public/private financing structures;
credit requirements of lenders, and how to determine the project's borrowing capacity; how to prepare cash flow
projections and use them to measure expected rates of return; tax and accounting considerations; and analytical
techniques to validate the project's feasibility.
Stages in Project Financing
Project identification Pre Financing Stage
Risk identification & minimizing
Technical and financial feasibility
Equity arrangement financing Stage
Negotiation and syndication
Commitments and documentation
Disbursement
Monitoring and review Post Financing Stage
Financial Closure / Project Closure
Repayments & Subsequent monitoring
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Preparation of Project Report
A project report is essential before a decision for setting-up of any project is taken. The most important thing in
any project financing is preparation of Detailed Project Report (DPR) which should be made beautifully for
getting the project approved from banks/financial institutions. After preparation of DPR the proposal is moved to
the banks/financial institutions for processing of the file.
Project Report must include the followings:
A. Technical Feasibility
All the factors relating to infrastructure needs, technology, availability of machine, material etc. are required to
be scrutinized under this head. Broadly speaking the factors that are covered under this aspect include:
1. Availability of basic infrastructure- It includes the land and its location as per present and future needs, lay
out and building plan including finalization of structure, availability of water and power, availability of cheap
labor in abundant supply.
2. Licensing/ registration requirements
3. Selection of technology/ technical process- The technical process/technology selected for the project must be
readily available either indigenously or necessary arrangements for foreign collaboration must be finalized.
Further the selected technology must find a successful application in Indian environment and the management
shall be capable of fully absorbing the technology.
4. Availability of suitable machinery/raw material/ skilled labor etc- After selection of technical process, the
availability of suitable kind of machinery is most important factor which needs to be considered. It should be
ensured that the suppliers are capable to supply the plant and machinery timely along with all spare parts
B. Managerial Competence
The ultimate success of even well-conceived and viable project may depend on how competently it is managed.
The promoters of the project have to provide necessary leadership and their qualification, experience and track
record will be closely examined by lending institution. The detail of other projects successfully implemented by
the same promoters may provide the necessary confidence of these institutions and help final approval of the
project.
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The reputation of the promoters group in the market is also very important factor which the banks/ financial
institutions consider while lending to the companies. Also the bank/ financial institutions check the payment
history of past loan raised by the companies in which the promoters are directors which shows their willingness
of repayment of the loans. CIBIL is a very strong tool in the hand of banks/ financial institutions to verify the
payment history and the number of loans raised by the companies from the date of existence.
C. Commercial Viability
Any project can be commercially viable only if it is able to sell its product at profit. For this purpose it would be
necessary to study demand and supply pattern of that particular product to determine its marketability. Various
methods such as trend method, regression method for estimation of demand are employed which is than to be
matched with the available supply of a particular product.
D. Financial Viability
Factors need to consider for financial viability:
1. Cost of project: A realistic assessment of cost of project is necessary to determine the source for its availability
and to properly evaluate the financial viability of the projects. For this purpose, the various items of cost may be
sub-divided as many sub-heads as possible so that all factor are taken into consideration for arriving at the total
cost.
Cost includes the following:
a. Land Cost- Acquisition of project land, registry charges, and charges for other clearance
b. Site Development Cost- to make the project easily accessible it is necessary to build roads, water tank,
boundary walls ,arranging electricity, levelling the site, demarcation of site, making available the basic amenities
etc.
c. Buildings Cost- it includes lay out and building plan along with the structure cost, building the site office,
factory sheds, warehouse, residential flats for staff etc.
d. Plant and Machinery- cost of plant and machinery, any foreign assistance for installation, salary of technical
staff, transportation cost, foreign currency fluctuations (if any), bank commissions, L/C Charges etc.
e. Miscellaneous Fixed Assets
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f. Preliminary Expenses- license required to start commercial production from the local authorities along with
other clearances etc.
g. Contingencies- normally 5% extra cost is taken as contingency to avoid any kind of cost over-run at the end
of implementation of project.
h. Margin for Working Capital- for running a project it is necessary to fuel it with the working capital. It works
like a lubricant for any kind of business. It is financed against receivables and stock. A proper assessment of the
same should be done. Banks now generally require that 25% of the total current assets (working capital) shall be
the margin to be provided from the long term resources and 75% shall be financed by them.
2. Means of Finance: After estimation of the cost of the project, the next step will be to find out the source of
funds by means of which the project will be financed. The project will be financed by contribution of funds by
the promoter himself and also by raising loans from others including term loans from banks and financial
institutions.
The means of financing will include:
I. Issue of share capital including ordinary/preference shares.
II. Issue of secured debentures.
III. Secured long-term and medium-term loans (including the loans for which the application is being put up
to term lending institutions).
IV. Unsecured loans and deposits from promoters, directors etc.
V. Deferred payments.
VI. Capital subsidy from Central/State Government.
3. Security Coverage and Promoters Contribution: In today scenario and being to play safe, the bankers wants
that at least the promoters should contribute 40% of the total project cost. The long term sources of funds are
utilized for acquisition of land, procuring the fixed assets and construction of building etc. But for day to day
expenses, payment of staff salary, purchasing the stocks etc. the project require short term loan or working capital
loans. Hence the financing for a project is the mix of both long term and short term loans. In project funding the
bank has charge on the land, building, any super structure thereof and hypothecation of stocks & receivables and
all the current assets relating to project. It is considered as primary security but the bankers may ask for collaterals
also in addition to the primary security.
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4. Profitability Analysis: After determine the cost of the project and means of financing, the viability of the
project will depend on its capacity to earn profits to service the debts and capital. To undertake the profitability
analysis, it will be necessary to draw estimates of the cost of production and working results. These estimates are
made for a period which should at least cover the moratorium and repayment periods. Generally in case of project
loans repayment begins after 2-3 years, the time gap between the disbursement of loan and repayment of first
installment is called moratorium period. Further repayment should start in that quarter or month when it is assured
that the project will have sufficient cash profit to service the same in that particular quarter or month. Also, the
moratorium and repayment period is decided while submitting the proposal to the banks hence while selecting
these periods’ accurate calculations should be done.
5. Projected Balance Sheet, Profit and Loss Account and Projected Cash Flow: The projected financials of
the project is prepared for the entire tenure as estimated above.
6. Break-Even Point: Estimations of working results pre-suppose a definite level of production and sales and all
calculations are based on that level. The minimum level of production and sales at which the unit will run on “no
profit no loss” is known as break-even point and the first goal of any project would be to reach that level. The
break-even point can be expressed in terms of volume of production or as a percentage of plant capacity
utilization.
Break-even in terms of volume of production = Total Fixed Cost/ Contribution per unit
7. Debt Service Coverage Ratio (DSCR): Debt Service Coverage Ratio is calculated to find out the capacity of
the project servicing its debt i.e. in repayment of the term loan borrowings and interest. The DSCR is worked out
in the following manner:
D.S.C.R = (PAT + Depreciation + Interest on Long Term Borrowings) / (Repayments of Term Borrowings during
the year + Interest on long-term borrowings)
The higher D.S.C.R. would impart intrinsic strength to the project to repay its term borrowings and interest as per
the schedule even if some of the projections are not fully realized. Normally a minimum D.S.C.R. of 2:1 is insisted
upon by the term lending institutions and repayment is fixed on that basis.
8. Sensitivity Analysis: While evaluating profitability projections, the sensitivity analysis may be carried in
relation to changes in the sale price and raw material costs, i.e. sale price may reduce by 5% to 10% and raw
material costs may be increased by 5% to 10% and the impact of these changes on DSCR shall be analyzed. If
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the new DSCR, so calculated after changes, still proves that the project is viable, the financial institution may go
ahead in funding the project.
9. Internal Rate of Return: This is an indicator of earning capacity of the project and a higher IRR indicates
better prospects for the project. The present investment in the cash flow which is assumed to be negative cash
flow and the return (cash inflow) are assumed to be positive cash flows. Normally bankers want that internal rate
of return should be at least 18% because it depicts the strength of the project and its earning and repayment
capacity at the same time. Better the IRR better rating to the project.
E. Environmental, Political and Economic Viability
The performance of the project is also influenced by the external factors also such as existing government policies
regarding particular sector, easiness in getting the license to operate in a particular region or state, effects of the
project on the environment, tax exemptions for particular region etc. Hence while compiling the project report it
is important to study the industry scenario, government policies etc. and these should be covered in the project
report.
Project Appraisal
Project Appraisal is a process of detailed examination of several aspects of a given project before recommending
the same. The lending institution has to ensure that the investment on the proposed project will generate sufficient
returns on the investments made and that loan amount disbursed for the implementation of the project will be
recovered along with interest within a reasonable period of time. The various aspects of Project appraisal are:
1. Technical Appraisal
2. Commercial Appraisal or Market Appraisal (Demand of the product, supply of the product, distribution
channels, pricing of the product and government policies.
3. Economic Appraisal
4. Management Appraisal (assessing the willingness of the borrower to repay the loan)
5. Financial Appraisal
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Methods of the Project Financing
There are three methods in Project Financing:
1. Cost Share Financing or Low interest loan financing.
2. Debts Financing.
3. Equity Financing.
Sources for Financing Fixed Assets
The type of funds required for acquiring fixed assets have to be of longer duration and these would normally
comprise of borrowed funds and own funds. There are several types of longer term loans and credit facilities
available which a company may utilize to acquire the desired fixed assets. These are briefly explained as under.
1. Term Loan:-
(a) Rupee loan- Rupee loan is available from financial institutions and banks for setting up new projects as, well
as for expansion, modernization or rehabilitation of existing units. The rupee term loan can be utilized for
incurring expenditure in rupees for purchase of land, building, plant and machinery, electric fittings, etc.
The duration of such loan varies from 5 to 10 years including a moratorium of up to a period of 3 years. Projects
costing up to Rs. 500 lakhs are eligible for refinance from all India financial institutions and are financed by the
State level financial institutions in participation with commercial banks.
Projects with a cost of over Rs. 500 lakhs are considered for financing by all India financial institutions. They
entertain applications for foreign currency loan assistance for smaller amounts also irrespective of whether the
machinery to be financed is being procured by way of balancing equipment, modernization or as a composite part
of a new project.
For the convenience of entrepreneurs, the financial institutions have devised a standard application form. All
projects whether in the nature of new, expansion, diversification, modernization or rehabilitation with a capital
cost up to 5 crores can be financed by the financial institution either on its own or in participation with State level
financial institutions and banks.
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(b) Foreign Currency term loan- Assistance in the nature of foreign currency loan is available for incurring
foreign currency expenditure towards import of plant and machinery, for payment of remuneration and expenses
in foreign currency to foreign technicians for obtaining technical knowhow.
Foreign currency loans are sanctioned by term lending institutions and commercial banks under the various lines
of credits already procured by them from the international markets. The liability of the borrower under the foreign
currency loan remains in the foreign currency in which the borrowing has been made. The currency allocation is
made by the lending financial institution on the basis of the available lines of credit and the time duration within
which the entire line of credit has to be, fully utilized.
2. Deferred payment guarantee (DPG) - Assistance in the nature of Deferred Payment Guarantee is available
for purchase of indigenous as well as imported plant and, machinery. Under this scheme guarantee is given by
concerned bank/financial institutions about repayment of the principal along with interest and deferred
instalments. This is a very important type of assistance particularly useful for existing profit making companies
who can acquire additional plant and machinery without much loss of time. Even the banks and financial
institutions grant assistance under Deferred Payment Guarantee more easily than term loan as there is no
immediate outflow of cash.
3. Soft loan - This is available under special scheme operated through all India financial institutions. Under this
scheme assistance is granted for modernization and rehabilitation of industrial units. The loans are extended at a
lower rate of interest and assistance is also provided in respect of promoters’ contribution, debt equity ratio,
repayment period as well as initial moratorium.
4. Supplier's line of credit - Under this scheme revolving line of credit is extended to the seller to be utilized
within a stipulated period. Assistance is provided to manufacturers for promoting sale of their industrial
equipment on deferred payment basis. While on the other hand this credit facility can be availed of by actual users
for purchase of plant/equipment for replacement or modernization schemes only.
5. Buyer’s credit - Under a buyer's credit arrangement, a specific long-term loan is granted by a designated
lending agency in the exporter's country to the buyer in the import, country against a guarantee by an acceptable
bank or financial institution. The supplier receives payment for the exports on his delivering to the lending agency
the requisite documents specified in the loan agreement and the relative commercial contract. The lending agency
realizes the payment from the buy (importer) in instalments as and when they fall due. Ordinarily, the supplier of
his obligation reckons the period credit as the duration from the date of completion.
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6. Debentures - Long - term funds can also be raised through debenture with the objective of financing new
undertakings, expansion, and diversification and also for augmenting the longer term resources of the company
or working capital requirements. Debenture holders are long term creditors of the company. As a secured
instrument, it is a promise to pay interest and repay principal at stipulated times. In the contrast to equity capital
which is a variable income (dividend/ security, the debenture / notes are fixed income (interest) security).
7. Leasing - Leasing is a general contract between the owner and user of the assets over a specified period of
time. The asset is purchased initially by the lessor (leasing company) and thereafter leased to the user (Lessee
Company) which pays a specified rent at periodical intervals. The ownership of the asset lies with the lessor while
the lessee only acquires possession and right to use the assets subject to the agreement. Thus, leasing is an
alternative to the purchase of an asset out of own or borrowed funds. Moreover, lease finance can be arranged
much faster as compared to term loans from financial institutions.
8. Public deposits - Deposits from public is a valuable source of finance particularly for well-established large
companies with a huge capital base. As the amount of deposits that can he accepted by a company is restricted to
25 per cent of the paid up share capital and free reserves, smaller companies find this source less attractive.
Moreover, the period of deposits is restricted to a maximum of 3 years at a time. Consequently, this source can
provide finance only for short to medium term, which could be more useful for meeting working capital
requirements. In other words, public deposits as a source of finance cannot be utilized for project financing or for
buying capital goods unless the payback period is very short or the company uses it as a means of bridge finance
to be replaced by a regular term loan.
Before accepting deposits a company has to comply with the requirements of section 58A of the Companies Act,
1956 and Companies (Acceptance of Deposits) Rules, 1975 that lay down the various conditions applicable in
this regard.
9. Own Fund:
a. Equity: Promoters of a project have to involve themselves in the financing of the project by providing adequate
equity base. From the bankers/financial institutions' point of view the level of equity proposed by the promoters
is an important indicator about the seriousness and capacity of the promoters.
Moreover, the amount of equity that ought to be subscribed by the promoters will also depend upon the debt:
equity norms, stock exchange regulations and the level of investment, which will be adequate to ensure control
of the company.
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The total equity amount may be either contributed by the promoters themselves or they may partly raise the equity
from the public. So far as the promoters’ stake in the equity is concerned, it may be raised from the directors, their
relatives and friends. Equity may also be raised from associate companies in the group who have surplus funds
available with them. Besides, equity participation may be obtained from State financial corporation/industrial
development corporations.
Another important source for equity could be the foreign collaborations. Of course, the participation of foreign
collaborators will depend upon the terms of collaboration agreement and the investment would be subject to
approval from Government and Reserve Bank of India. Normally, the Government has been granting approvals
for equity investment by foreign collaborators as per the prevailing policy. The equity participation by foreign
collaborators may be by way of direct payment in foreign currency or supply of technical know-how/ plant and
machinery.
Amongst the various participants in the equity, the most important group would be the general investing public.
The existence of giant corporations would impossible but for the investment by small shareholders. In fact, it
would be no exaggeration to say that the real foundation of the corporate sector are the small shareholders who
contribute the bulk of equity funds. The equity capital raised from the public will depend upon several factors
viz. prevailing market conditions, investors' psychology, promoters track record, nature of industry, government
policy, listing requirements, etc.
The promoters will have to undertake an exercise to ascertain the maximum amount that may have to be raised
by way of equity from the public after asking into account the investment in equity by the promoters, their
associates and from various sources mentioned earlier. Besides, some equity may also be possible through private
placement. Hence, only the remaining gap will have to be filled by making an issue to the public.
b. Preference share: Though preference shares constitute an independent source of finance, unfortunately, over
the years preference shares have lost the ground to equity and as a result today preference shares enjoy limited
patronage. Due to fixed dividend, no voting rights except under certain circumstances and lack of participation in
the profitability of the company, fewer shareholders are interested to invest moneys in preference shares.
However, section of the investors who prefer low risks fixed income securities do invest in preference shares.
Nevertheless, as a source of finance it is of limited import and much reliance cannot be placed on it.
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Compliance with Different Laws & Regulations
In this context it would be pertinent to note that while initiating the process for making a public issue of equity
/preference shares, the promoters will have to comply with the requirements of different laws and regulations
including Securities Contracts (Regulation) Act, 1956, Companies Act, 1956 and SEBI guide-lines etc., and
various rules, administrative guidelines, circulars, notifications and clarifications issued there under by the
concerned authorities from time to time.
c. Retained earnings: Plough back of profits or generated surplus constitutes one of the major sources of finance.
However, this source is available only to existing successful companies with good internal generation. The
quantum and availability of retained earnings depends upon several factors including the market conditions,
dividend distribution policy of the company, profitability, Government policy, etc. Hence, retained earnings as a
source plays an important role in expansion, diversification or modernization of an existing successful company.
There are several companies who believe in financing growth through internal generation as this enables them to
further consolidate their financial position. In fact, retained earnings play a much greater role in the financing of
working capital requirements.
d. Unsecured Loans: If there is some shortfall in the mean-of-finance, the promoters/ directors can mobilize
funds from their friends, relatives and well-wishers. Such loans are always unsecured i.e., the lenders cannot have
any charge over the assets of the company. Banks and financial institutions stipulate the following conditions if
unsecured loan is to form part of the means-of-finance.
- The promoters shall not repay the unsecured loan till the term loan persists.
- Interest if any payable on unsecured loan shall be paid only after meeting the term loan repayment committees.
-The rate of interest payable on unsecured loan shall not be higher than the rate of interest applicable for term
loans. Normally unsecured loan component is expected not to exceed 50% of the equity capital.
10. Bridge Loans: This is a temporary loan meant for tying up the capital cost of the project. The necessity for
bridge finance arises in situations where finance from particular source is being delayed. However, the availability
of finance from that source is certain.
11. Seed Capital: In consonance with the Government policy which encourages a new class of entrepreneurs and
also intends wider dispersal of ownership and control of manufacturing units, a special scheme to supplement the
resource & of an entrepreneur has been introduced by the Government. Assistance under this scheme is available
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in the nature of seed capital which is normally given by way of long term interest free loan. Seed capital assistance
is provided to small as well as medium scale units promoted by eligible entrepreneurs.
12. Government subsidies: Subsidies extended by the Central as well as State Government form a very important
type of funds available to a company for implementing its project. Subsidies may be available in the nature of
outright cash grant or long - term interest free loan. In fact, while finalizing the mean of finance, Government
subsidy forms an important source having a vital bearing on the implementation of many a project.
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RESEARCH METHODOLOGY
Research methodology is a systematic approach in management research to achieve pre-defined objectives. It
helps a researcher to guide during the course of research work. Rules and techniques stated in research
methodology save time and labor of the researcher as researcher know how to proceed to conduct the study as per
the objective.
SELECTION OF TOPIC
The selection of topic is a crucial factor in any research study. There should be newness and it should give
maximum scope to explore the ideas from different angles.
Due to increase in competition, finding suitable and capable sources of Project finance is becoming vital for the
organization. Funding a project appropriately is necessary to undertake day by day expenditure of the business
organization. Whatever may be the organization, the mix of project finance sources play an important role, as the
company needs money for its day to day expenditure. Thousands of companies fail each year due to poor finance
management practices. Entrepreneurs often don't account for short term disruptions and are forced to close their
operations. Now in a cut throat competitive era where each firm competes with each other to increase their
production and sales, holding of sufficient funds for the smooth operation of the project plays a crucial role for
smooth operations of the firm. If the funds are not appropriately allocated and tapped, then the firm may have to
pay more interest and tax rather than what it can if these funds sources are taken care of in a suitable mix. Here
creeps the importance and need of efficient project financing. After due to consultation with the external guide
/internal guide, the topic was finalized and titled as-“Project financing in Delhi Metro”
RESEARCH DESIGN
“A Research design is the arrangement of conditions for collection and analysis of data in a manner that aims to
combine relevance to the research purpose with economy in procedure” The research design followed to study
the project financing techniques in Delhi Metro Rail Corporation Pvt Ltd is Descriptive Research Design.
SOURCES OF DATA COLLECTION
Primary Sources (which includes excerpts from the interviews of AGM’s and GM).
Secondary data collection
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The secondary data are those which have already collected and stored. Secondary data easily get those secondary
data from records, journals, annual reports of the company etc. It will save the time, money and efforts to collect
the data. Secondary data also made available through trade magazines, annual reports, books etc.
This project is based on secondary data collected through annual reports of the organization. The data collection
was aimed at study of project financing techniques of the company.
Project is based on
Annual report of Delhi Metro Rail Corporation
Schedule of Powers
Schedule of Rates
General Conditions of contract
Detailed Project Report (DPR) for different phases
Interviews conducted of senior managers.
The overall sources of funds of DMRC is studied and analyzed
Suggestions are given on the basis of findings for better understanding of Project financing techniques.
LIMITATIONS OF THE STUDY
The sources of funds keep on changing due to time variability of the commuters i.e. the exact amount may not be
provided accurately for each of the projects undertaken due to government policies that are updated from time to
time.
Investment of funds are also made by corporate office, so it becomes difficult to know that how much investment
is made in different ways for continuous availability of funds.
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Data Analysis and Interpretation:
Metro rail projects are always capital intensive long gestation period. Given the tariff constraints, they are not
commercially attractive for investment. However, DMRTS phase –III project is estimated to give a high economic
rate of return to the tune of 20%, which means investment on this project will be recovered by the city within 5-
6 years of time. Only a few metros in the world make operational profits and Delhi metro is one of them. Thus,
the government involvement in the funding of metro system is a foregone conclusion.
Experience all over the world reveals that both construction and operations of a metro are highly subsidized and
funded by the government. Singapore had a 100% capital contribution by the government. Hong Kong had 78%
for three times and then 66% for the next 2 times. Others run on government support and subsidies. Some of the
metros which have metro system on self-sustainable basis, it is necessary to keep down the capital cost as much
as possible by exempting taxes for the project and also required funding is made available from the government
sources.
Delhi metro was incorporated in the year 1995 to construct metro rail system in the Indian capital city of Delhi.
The company was formed as a joint venture between GOI and GNCTD with equal equity contribution by these
two governments. The first phase covering 65.1 Kms route length was commissioned in phased manner. The last
section was commissioned in Nov 2006. About 60% of the project was funded by Japanese ODA loan through
JICA. The balance cot was contributed by GOI and GNCTD as equity and subordinate debt apart from raising
funds from property development. The second phase of DMRTS project covering a distance of 82.11Kms within
Delhi Area has also been funded by both the governments in the same pattern with JICA funding of 46% and
raising of part funding from PD and internal accruals. In addition to the expansion of metro network in the city
of Delhi, extension to NCR viz Noida, Gurgaon and Vaishali has also been undertaken by DMRC as a deposit
work with the entire cost other than rolling stock being contributed by these states.
Funding for Phase I and Phase II
The capital cost of Phases I and II has been estimated to be 144.30 billion (US$2.4 billion) at 2004
prices. However, more recent estimates have placed the cost of construction at 2 billion (US$34 million) per
kilometer. Thirty percent of the total investment for Phases I and II has been raised through equity capital with
the Government of India (GOI) and Government of Delhi contributing equal shares, and approximately another
60 percent has been raised as either long-term or subordinate debt, through soft loans from the Japan Bank for
International Cooperation. The rest of the investment is proposed to be recovered from internal revenues through
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operations and property development. The Metro also received 19143 million (US$321.6 million) as grant-in-
aid from various agencies for the financial year ending March 2009. As of 7 August 2010, Delhi Metro has paid
back an amount of 5676.3 million (US$95 million), which includes loan amount for Phase I and interest amounts
for Phases I and II, to the Japan International Cooperation Agency (JICA).
Delhi Metro's implementation of Phase-I, which connected 65 km in the national capital, has been rated as
"excellent" by the project's funding agency, the Japan International Cooperation Agency (JICA).
Revenue and profits for Phase I and Phase II
Delhi Metro is one of the few metro systems in the world having an operational profit from the first day. In 2007,
the Delhi Metro claimed to be one of only five metro systems in the world that operated at a profit without
government subsidies. This was enabled by keeping maintenance costs to a minimum and harnessing additional
revenue from advertisements and property development, apart from ticket sales. The Metro also generates revenue
by leasing out its trains and stations for film shoots. Due to its increasing association with Delhi as an image of
the city's everyday life, it has been a popular filming location for production houses, and several films and
advertisements have been shot on board. Producers have to pay a minimum of 1 lakh (equivalent to 1.5 lakh or
US$2,500 in 2014) for every hour of filming, excluding taxes, security deposit and insurance.
For the financial year ended March 2008, the Metro reported operating revenues of 3.053
billion (US$51.3 million) and a profit before tax of 199.8 million (US$3.4 million) which rose to 7237.7
million (US$121.6 million) and 904.3 million (US$15.2 million) respectively for the financial year ended March
2009.
For the financial year ended March 2011, DMRC reported operating revenues of 16.08
billion (US$270.1 million), a loss before tax of 130 million (US$2.2 million), and EBITDA (operating income
before interest and depreciation) of 7.68 billion (US$129.0 million). Property development (advertising and
retail) contributed almost 980 million (US$16.5 million) to the revenue. Ticket sales fetched 9.38
billion (US$157.6 million), with the remainder coming from consultancy for other Metro projects in the country
and miscellaneous sources. DMRC made an operating profit of 0.48 (0.81¢ US) per traveler. In the same period,
"core" revenues were 9.39 billion (US$157.8 million) and EBITDA 4.89 billion (US$82.2 million), with the
remainder coming from external projects (e.g. Jaipur Metro), real estate, and consultancy.
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Airport Line under PPP Model at New Delhi:
Apart from the above , DMRC is also executing a high speed Airport link from New Delhi Railway Station to
IGI Airport and further extension to sector-21, Dwarka covering a distance of 22.7KMs with an estimated cost of
3869 crores under a unique model of PPP where in DMRC has undertaken the civil works with the funds being
contributed by GOI, GNCTD, DIAL and DDA to the tune of 54% and Rolling stock (46%) is being met by a
private operator who will operate the system for 30Years, after which the system will then be under the control
of DMRC. The approved funding pattern is depicted in figure below.
Involvement of the government:
Government contribution is essential to keep debt-servicing levels of metro systems low with a view to maintain
overall long term sustainability of the system. Government involvement also generates considerable amount of
confidence in other players involved in the process of construction and operation .The capital investment of Phase-
III project is estimated to give an EIRR of 20% and the city would be able to recover within 5-6 years, therefore
the government is very much essential to provide integrated, efficient public transport system in the city of Delhi.
Apart from the financial support social considerations require the involvement of the government to ensure a
minimum essential level of service to the society.
Alternative models of financing for phase-III of Delhi metro
There are two models of project financing:
1. Special purpose Vehicle under state control
2. Public private partnership (PPP) mode
-Built Operate Transfer (BOT) model
-Other PPP mode
DMRC pattern of financing: A special purpose vehicle is set up for the implementation of the project and
for its subsequent operation and maintenance. Under this arrangement GOI and GNCTD shall make equal equity
contribution and run SPV as a commercial enterprise. As per the prevalent practice, central government was
willing to contribute 20% of the project cost as equity contribution. An equal amount can be contributed by
GNCTD aggregating the total equity to 40%. With equal ownership of the SPV, both the governments nominate
their representatives as members of board of directors, which in turn select functional directors. Such as SPV has
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the benefit of independent management under the aegis of Indian Companies Act, 1956. DMRC, BMRC, CMRC
and KMRC are some of the examples of success of such an SPV. For the balance 60% funding requirement,
options available are as follows:
1.Subordinate debt: For existing phase-I and phase-II projects of DMRC, land and rehabilitation and
resettlement cost have been borne by GOI and GNCTD equally as interest free subordinate debt. Similarly, the
cost of land has to be contributed equally as interest free subordinate debt by GOI and GNCTD.This mezzanine
financing is of extreme help in quickening the pace of land acquisition. The loan is of longer duration and becomes
repayable only after other loans raised for the project are repaid.
2. Debt: The balance cost is to be met through loans from various institutions, namely JICA, local borrowings,
loans from ADB/World bank and suppliers credit.
-JICA loan- overseas development loan (ODL) from Japan bank for international co-operation JICA can be
availed of for Metro rail projects. The prevailing interest rate is 1.40% pa.
The loan is repayable in 30 years including moratorium period of 10 years. The loan is to be provided to central
government which in turn releases the same to SPV under a pass through assistance (PTA) mechanism.
Normally, JICA agrees to fund for underground civil works, electrical, signaling and telecom and rolling stock
only. Since the loan will be in Japanese Yen, any fluctuation in exchange rate at the time of repayment shall be
borne by the central government and GNCTD in proportion to their shareholding. The loan in equivalent INR
shall be repaid by SPV from the income streams of metro operations.
-Loan from ADB-The loan shall be available from ADB, but as per the experience, it’s processing and approval
normally takes 8-12 months. This may delay the implementation of projects resulting in avoidable increase in
completion cost.
-Domestic loan from banks and financial institutions- Funds can be arranged from Indian financial institutions
like IIFCL, IDFC, LIC, SBI, IDBI bank, ICICI bank etc. These institutions are increasingly engaged to fund
infrastructure projects subject to their commercial viability. There are many models available under which the
funds can be arranged by the FI’s with or without syndicating with other commercial banks.IIFCL example fund
20% of the project cost and arrange the balance through the syndication of commercial banks with the lead banker
in the consortium of bankers. The loan can be given for a period of 20-30 years with interest rate ranging from
9.50% to 12% per annum. The funding arrangement may require submission of central government guarantee as
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well. Since the rate of Interest of these FI’s is much higher than the interest rates of soft loan provided by JICA ,
central government and GNCTD shall have to bear the interest difference and provide subsidy to SPV.
Government contribution-The contribution from both the governments viz GOI and GNCTD should be as
equity due to the following reasons.
For continued support of two governments
For not diluting the debt-equity proportions ad infrastructure projects cannot be highly leveraged.
Whether the money comes as equity or grant, it has the same cost to the government as per the extant arrangement.
As per extant arrangement, equity is to be serviced (dividend) by the company after all the debts have been repaid
which shall not be payable if the same is given as grant.
Public private partnership- The phase –II corridors should be taken up in the same mode as phase-I and phase-
II of Delhi metro due to operational impossibility of a multi-operator network. The private operator would expect
minimum 12% return on its equity (Equity IRR). To sustain this level of return, the viability gap funding VGF
would be very huge.
Tax free bonds to be serviced against dedicated mass transit funds-Because of the requirement of lumpy
upfront investment in case of a metro rail, it is imperative to raise money through government guaranteed tax
free bonds to get the upfront finances, to accelerate the project. And to service the bonds as a combination of
interest payments and initial repayments of principal to bond holders on maturity, a. Dedicated Mass Transit Fund
(DMTF) needs to be created. The amount of principal repaid by DMTF to bondholder on behalf of DMRC shall
be repaid by DMRC to DMTF in turn once its senior debt (JICA Loan) is paid back or from its internal accruals
whichever is earlier, however, the interest liability shall be paid from the accrual to the DMTF. The tax free bonds
shall be issued )y DMRC and the repayment to the bond holders shall be linked to DMTF accruals, a
Government guarantee to make good any shortfall in the fund is considered essential to increase the maturity
profile of the bonds and to keep the interest rate minimal. DMRC should also bear the annual cost of
guarantee charges to the Government.
Bilateral Loan - As approved for Phase-I and Phase-II project the JICA loan should be targeted even for
Phase III to the maximum possible amount and under any circumstances to the extent of at least 40%
to 50% of the completion cost. The loan should be made available to DMRC in the same pattern as it was in
Phase I & Phase II, as rupee loan where foreign exchange fluctuation risk was the responsibility of the
Government.
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Value Capture from Real Estate - Value from real estate should .be captured after completion of the
project along its alignment. Further there is always an issue of timing mismatch in the requirement of funds and
availability of money from value capture during the construction stage. It is prudent to have a conservative
approach towards value capture during construction’ period, it is more ideally suited for supplementing the fare-
box revenues during the operating stage.
Dedicated Mass Transit Fund: As financing of Phase-III is one of the most intractable issue to be resolved,
DMRC had commissioned a study for looking at financing options and to arrive at the most optimal financial
strategy for development of' Phase-III. The consultant's recommendations have been deliberated upon at length
and implementation of the same can truly herald in a new era of sustainable financing of all the capital
requirement of providing complementary transport solutions. In this regard, it may be mentioned that the
proposal for setting up of a Dedicated Muss Rapid Transit Fund (DMTF) is central to the sustainability of
the financing proposition.
a) To reduce personalized motorized transport.
b) Non users and polluters to pay for ,provisioning of public transport and eventually become a user in
the long run.
c) Let ultimate beneficiaries-Employers bear a part of the burden
d) Intergenerational sustainability & equity
e) Decelerate and eventually reduce ‘in absolute terms, the dependence on petroleum products for urban
mobility.
The various possible alternatives for setting up and managing DMTF have been examined along with the required
statutory framework and the governance structure for the same. This has been needed because of the necessity
to ensure that the accruals in the fund can be used on for specified purpose i.e. fund is non-fungible and its
balance of one year are usable in subsequent years i.e. is non lapsable and its usage and disbursement patterns
are pre-determined and its free reserves are properly invested and managed. The report has made a study of some
of the well-established precedents and based on the same the DMTF is proposed with the following feature:
Structure: The DMTF should be setup as a company and unlike the IRFC, which is incorporated as a
company under the Companies Act (1956), the DMTF should be incorporated as statutory company.
Statute: The statute shall be a GNCTD Act because of the source of the fund.
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Non Fungibility: The areas of accruals, disbursal and management of fund should be based on a prefixed
formula established in the statute with minimal discretionary powers so as to ensure non Fungibility of the funds.
Governance and oversight: The DMTF should be a very lean institution and should have best practices
governance structure and should include independent, oversight, including but not limited to C&AG audit and
other safeguards.
Collection Methodology for Accruals: The methodology of collection of cess and duties as prescribed in
the act would be a subject matter, of act itself.
Allocation Principles
This should be allocated and utilized for the matters directly related to the provisioning of urban transport
infrastructure i.e. metro rail, bus based transport and non-motorized infrastructure
The money allocated from the fund to existing or future institutions (DMRC, DTC, DIMTS etc.) should be
given only for the purpose of asset acquisition or repayment of earlier costly loans.
The money allocated from the fund should not be in the nature of either equity or grants, rather it shall be in
the nature of no interest bearing but repayable subordinate debts.
This recommendation is considered as the backbone of the health of the fund and the institution
being funded because with the urban transport delivery institutions, largely relieved of the
capital expenditure related worries and interest thereon, there can be no excuse whatsoever to provide
good service and over a reasonable period achieve the path of sustainable profitability to repay the
principal amount invested at the historical cost.
Indicating Allocation Formula: The allocation of funds as shown in Table 10.4 below is
suggested for the DMTF funds with the caveat that concerned entities getting the proceeds from the
fund shall maintain proper accounts and other relevant records and release of next year fund should be
subject to satisfactory utilization of the previous year proceeds.
Tax Free Bond: The accruals against DMTF can take care of the capital funding related expenditure
of DMRC and other modes of public transport in Delhi. However, because of the requirement of lumpy
upfront investment in case of metro rail which results in a mismatch between accruals from DMTF
and actual requirements, it is imperative to raise money through government guaranteed tax free bonds
to get the upfront finances, to accelerate the project and service the bonds through combination
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of interest payments and initial repayments of principal from DMTF to bond holders on maturity. In
case the GNCTD is reluctant to create Dedicated Mass Transit Fund and also GOI do not
authorize DMRC to issue tax free bonds, then the equity contribution of GOI & GNCTD has to be
increased suitably
Need for Tax Exemption: -
It may be seen that even though the FIRR is not very high, EIRR is quite encouraging, being to the tune of
17.10%, which means the project is very well justified in terms of social benefits that will accrue to the
society/Delhi city. This project, thus serving primarily a social purpose/goal, is needed for improving the overall
health of the city and therefore to make the system self-sustainable and to achieve its potentials and desired
social goals to the fullest extent possible, its construction cost needs to be kept bare minimum in view of the
reasons explained the following paragraph.
If the taxes are not exempted the cost of the project will go up which necessitates a higher cost of providing
service and therefore a higher tariff. This, however, is not in the interest of the bulk of the population that is likely
to use the system as their affordability is low and this may only lead to fall in ridership. A higher project cost al
so leads to a higher provisioning for depreciation and debt servicing. The capital servicing of a
metro rail system which though inescapable, is very low in the initial Phases. Therefore, necessary
exemption from the taxes should not be viewed from the narrow context of bolstering Government
revenues. Metros will need this help from the Government only till such a time the projects take
root in our major cities and indigenization and standardization take place in a big way reducing the
import contents for such projects.
Unless the Government of India gives exemption from Customs and Excise Duties, the state
Government will not give exemption from their own taxes. Foreign Aid Agencies generally do not
fund the Tax and Duty component of the project. Therefore it becomes a local burden. Delhi Metro Phase-
III project should be exempted from taxes and duties purely as a promotional measure and also
to let this project not be dependent on government support or subsidies in the operational stage.
Therefore, the applicable taxes i.e. both central and state taxes on the Phase-III project have to be
exempted to make it operationally sustainable in the long run.
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Recommendations-
The recommended financing strategy for funding the Phase III project is with the following two
Options: -
Option 1 JICA loan to the extent of 51% is available and GOI & GNCTD agree to
contribute equity of 20% each on the total cost
Option 2 JICA loan to the extent of 41 % is available and GOI & GNCTD agree to
contribute equity of 20% each on the total cost. In that case, the balance 10% of the project
completion cost has been assumed to be sourced from Tax Free Bonds repayable from DMTF
accruals.
Sources Option 1 Option 2
Equity from GOI 20% 20%
Equity from GNCTD 20% 20%
JICA funding 51% 41%
Tax free bonds repayable from
DMTF sources
0% 10%
Value capture from real estate and
internal accruals
5% 5%
Interest free loan available from
government from land
4% 4%
Total 100% 100%
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References
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Conclusion
The key to any project finance is to use a right mix of debt and equity. Further, there should be a right mix of
foreign currency and rupee loans. It is also essential that there should be flexibility in respect of switching from
foreign currency to rupee loan and vice versa. There are a number of issues highlighted herein above which need
to be considered for the purpose of financing of the project. Besides, it is important that due care is taken in
drafting the documents concerning the financing of the project.
The companies should adopt the project financing structures so that the objective of shareholder’s wealth
maximization can be achieved. As the world is heading towards a global integrated market and the failure of
governments as well as the demand for private capital in infrastructure assets is increasing, project finance will
continue to play an important role in both developed and developing markets.
