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ADVISORY Water PPP: Overview and Training Workshop February 26-27, 2009 Financial Management and Management Overview – Tips for financial modeling INFRASTRUCTURE.

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Presentation on theme: "ADVISORY Water PPP: Overview and Training Workshop February 26-27, 2009 Financial Management and Management Overview – Tips for financial modeling INFRASTRUCTURE."— Presentation transcript:

1 ADVISORY Water PPP: Overview and Training Workshop February 26-27, 2009 Financial Management and Management Overview – Tips for financial modeling INFRASTRUCTURE & GOVERNMENT

2 © 2009 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Risks The importance of the Concessioning Authority to have a good Financial Model while inviting PPP bids Understand project financials, and implications for Tariff / user charges Need for additional revenue sources Need for financial support (Viability Gap funding) Potential “negative grant” Test bankability based on project cash flows (Cash Flow Available for Debt Servicing – CFADS) Lender ratios (DSCR, LLCR..) Loan covenants (Debt service reserve….) Test implication of Risk sharing Demand variation / Tariff variation…. Inflation Choice of bidding parameter (fixed, variable, combination) Scenario analysis to design SPV commitments Performance levels Investment commitments Need for “transfer value” at end of contract Revenue – Operating Expenses Financing Costs Return to shareholders RISKS Project viability (compare with WACC) Bankability (DSCR, …) Equity return (compare with CoE)

3 © 2009 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 1. Structuring the model – think through the business logic to be used Growth Projections need to apply to actual demand Or, work on a Cash inflow minus, basis DemandCapex Performance levels Inter linkages between primary variables and dependent variables important to avoid unrealistic scenarios Periodicity of the model Quarterly, Annual, Combination Linkage with variables like inflation

4 © 2009 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 2. External variables need to be factored carefully Capital Expenditure in INR million Base costInflationTaxesTotal Design & Supervision costs100 Detailed construction costs300 Pipelines75 Meters75 Water treatment plant50 Storage tanks50 Detailed Engg. & Const. management50 Other Installations50 Total450 Interest during Construction Financing costs TOTAL PROJECT COST Capex schedule on timeline important for projects which have multi- year construction period Similarly, consistency in inflation assumptions across construction and operations period important to understand IRR, Discount rate, WACC, etc TRATIVEILLUS

5 © 2009 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. External variables need to be factored carefully- Inflation Capital ExpenditureInflation Rate Civil Construction5.4% Other Equipment4.5% Assumptions Civil construction Past inflation 5 Year13 Year Cement5.8%5.4% Iron and Steel13.2%7.4% Plant and Machinery3.8%3.5% Pipes, Wires & Drawing8.6%5.6% Fuel, Power, Lights & Lubricants7.5%9.5% Labour5.1%6.9% Other Materials5.0%5.7% Construction Inflation*6.0%5.4% Note: * Based on weighting each expenditure component Source: RBI Inflation Index till 2007 Domestic – 50%Imports – 50% Inflation for the import component - Average inflation in Asia excl. Japan over 9 years was 3.25% p.a.* Also, any rupee depreciation could affect the purchase price. The conversion factor assumed is Rs. 42 per USD. A buffer of 1.25% is considered for this reason. 4.5% * Source: HSBC – Global Research Q2-2008 2008200920102011201220132014 Year BudgetingFinancial Close 9 %19 %22 %34 %15 % % Capex Back-ended expenditure – 72% Average payments in 4 – 5 years TRATIVEILLUS

6 © 2009 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Lender expectations & requirements ItemLender feedbackAssumptionRationale Maximum Loan tenor (door-to-door) Domestic commercial: 15 years typical. Higher can be structured as has been done for some projects IIFCL: = Upto 2 years more than Lead bank Multilateral: Upto 20 years Foreign commercial: 12 years Rupee loan: 18 years Dollar loan: 15 years While the domestic banks indicated 15 years as maximum tenure, some projects in the recent past have received funding for 18 years. Multilateral FI’s have shown high interest in the project Interest rate Domestic commercial: 12-12.5% IIFCL: = Lead bank Multilateral: 10-11% Foreign commercial: 10%-11% floating Rupee loan: 12% Dollar loan: 11% Principal Moratorium Principal repayment be can structured through ballooning repayments Annuity based principal repayment considered The annuity based principal method results in a very low principal repayment in the beginning of operations period Initial operation period <1 DSCR Domestic commercial: Promoter support required or Interest in initial year of operation can be included in project cost (can be structured) IIFCL: = Lead bank Multilateral: Interest ballooning can be structured. However, RBI regulations unclear-- further diligence by bank required post project award Promoter support considered in base case TRATIVEILLUS

7 © 2009 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 3. Modeling of initial cash gaps needs careful consideration and will impact financing assumptions Cashflows inadequate for interest payments in the initial years. Cashflows available for debt service (Rs. Million) TRATIVEILLUS Options that could be considered and modeled in the financial model (not exhaustive) Equity infusion in the initial operation period Longer tenure of debt drawdown Moratorium on interest payments? Subordinate-debt financing with bullet repayment of principal and interest Lender interface useful to understand debt servicing flexibility available

8 © 2009 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 4. A user-friendly output which supports sensitivitity analysis and aids decision making is important Key InputsKey Outputs TRATIVEILLUS

9 © 2009 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Two illustrative KPMG engagements involving PPP modeling Distribution Franchisee in Madhya Pradesh: KPMG spearheaded the exercise of introducing the Public-Private Partnership Model in electricity distribution in the state of Madhya Pradesh, including the following key areas of support: Identification of potential areas for Private Partnership, across locations and functions. Designed and developed Technical and Commercial agreements for private sector participation in electricity distribution through franchising mode Provided assistance in management of various distribution franchisee initiatives through resolution of issues pertaining to operational coordination and franchise agreement in the three Distribution Companies across Madhya Pradesh Interaction with various private players for promotion of distribution franchise initiative and responding to their queries during pre and post bid process Developed financial models for assessing the implication of various terms of agreement on project profitability, Estimating net financial savings to the Discom based on short listed bid, Determining probable range of bid rate expected from the bidder, Development of key performance indicators to enable the Distribution Companies to monitor franchisee operations, Monitoring performance, conducting reviews and identifying course corrections, Development of MIS formats for measuring the progress of Franchisee on various performance parameters Provided information to Central Govt on the Franchisee initiative on behalf of the Distribution Utilities Preparation of Bid Documents and Bid Process Management was undertaken in Burhanpur, Dewas, Satna and Ujjain. Hyderabad Metro: Provided bid advisory services for a leading conglomerate bidding for the Hyderabad Metro Project. Scope of work included providing inputs on key risks in the Model Concession Agreement, participation in discussion on modifications required in the Model Concession Agreement, Development of financial model, liasoning with the various technical consultants and equipment/service providers to ensure accurate inter-linkages between revenue, costs and quality

10 © 2009 KPMG Advisory Services Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Presenter’s contact details Manish Agarwal Executive Director KPMG in India +91 9967574800 manishagarwal@kpmg.com www.in.kpmg.com


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