1. INFRASTRUCTURE FINANCING

2. What is Infrastructure? “Infrastructure is define as the physical framework of facilities through which goods and services are provided to the public.” Includes: Roads, Ports, Highways, Power plant, Airports, Godowns, Telecom etc.

3. Main Characteristics of the Infrastructure Project Finance Market I.Limited or non-recourse II.Complex contractual arrangements Demanding risk management techniques III. Project is a collateral &repayment from cash flow.

4. Model Adopted for Infrastructure Development BOT (Build, Operate, Transfer) BOOT (Build, Own, Operate, Transfer) BOLT (Build, Own, Lease, Transfer) BOO (Build, Own, Operate)

5. Major Parties to Project Security of Debt Payment and Collateral (concession agreement) Build, Operate, Raise Finances to Provide Infrastructure Services Concession Rights, l Incentives, Guarantees Government Creditors Project Promoters Security and Assurance of Debt Repayment Term Debt Capital  Each party maximizes its own objectives subject to the constraints set by others’ willingness to participate.

6. Project Financing: Uses of Cash Flows Revenue Streams Depreciation & Interest Taxes Principal Payments Depreciation O & M, Insurance Expenses Dividend to Shareholders  Driven by a hierarchy of claims

7. u Have a claim to fixed contractual payments from the project’s cash flows independent of the borrower’s income u Good credit risk, i.e. secure cash flows u Government support and guarantees u The cost of debt = Real return + Expected inflation + Project risk premium + Country risk premium + Regulatory/political risk Incentives/Objectives of Creditors

8. u Sponsor holds a residual claim, after the payment of contractual claims u Limited recourse structure u Cost of equity = cost of debt + risk premium u Reasonable return on investment: = f(debt characteristics, tariff, leverage ratio, government support ) Incentives/Objectives of Sponsors

9. u Serve public interest u Low tariff rate u Quality of services u Future tax revenues Incentives/Objectives of the Government

10. Example: Power Producer Fuel Supplier GovernmentMinistries/ Local Agencies Equity Investors Lenders Escrow Agent Power Utility Project Operator Engineering, Construction Contractor Project Insurers Project Company Implementation Agreement Permits Shareholders Agreement Escrow Agreement Power Purchase Agreements O &M Agreement Construction Contract Insurance Policies Fuel Supply Agreement

11. [--|--|--|--|--|--|--|--|--|--|--|--|--|--|--] Construction Operation Main Risks: Completion Risk Cost Overrun Risk Performance Risk Environmental Risk Main Risks: Performance Risk Regulatory Risk Environmental Risk Off-take Risk (Power) Market Risk (Toll Roads) [--|--|--|--|--|--|--|--|--] Project Life Cycle: Main Risks

12. RISK Project completion risk Liquidation damages Contract specifies the parameter Standby credit facility Promoter ready tom fund cost overrun Market risk Demand & price variation Take or pay Escrow Mechanism Clause ensure min. revenue Shadow financing Foreign exchange risk Largest concern for foreign investor Revenue in local currency Revenue equal to foreign debt payment Tariff escalation clause if currency depreciate Supply of input Control through contract Price variation and supply risk

13. Financing Method Average ratio of Debt Equity:-70: 30 Takeout Financing Developed by IDFC. Bank provide loan for 5 to 6 years. Buyers available for after specific period Case study:Delhi-Noida toll bridge; Rs 500 Million deep discount bond Maturity period: 16 years. Holder will find a buyer in IDFC and IL& FS after 5 th & 9 th years at 13.7% and 14.19 %.

14. Financing Method Structured Financing Sale & Leaseback ABS (Asset Backed) Subordinated debt (Mezzanine Financing): considered as equity and give leverage to the project. Case study:Ras Laffan Qatar/Korea (LNG) Project: structured financing.

15. Providers of Private Finance Commercial banks Export credit agencies/ development banks Multilateral financial institutions Vendors/contractors Institutional investors Private investment funds Individual/Strategic investors

16. Issues In Infrastructure Privatization Project Structuring Project Financing Project Implementation

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