Transcript 7. Infrastructure Projects & Management

Infrastructure Projects & Management
Dr. E. Sankara Rao
Infrastructure Development Finance Company Ltd.
August 27, 2009
Think Infrastructure Think IDFC
1
Contents

Indian Economy and Infrastructure Progress

Infrastructure Projects, Policies and Investments

Features of Infrastructure Projects

Infrastructure Projects & Management


Typical Project Participants

Typical Structuring

Types of Risks & Mitigation
Conclusions
2
Indian Economy – Scorching Growth
•
India’s GDP has witnessed high growth, and
was the second fastest growing GDP after
China in 2006-07
•
Fastest GDP growth in 18 years - 9.4%
(2006-07 )
•
Consistently sound performance of various
segments is leading to robust performance of
the Indian economy
India's GDP at Current Prices: 2002-07
1000
800
600
400
200
469
556
638
737
830
1006
0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
(AE)
Growth in sectors at Current Prices (2007-08):
Industry: 10.7%
Services: 8.9%
Agriculture: 2.6%
561
USD Billion
USD Billion
1200
453
398
191
103
105
237
204
231
135
145
270
125
105
1999-00
2002-03
Agriculture
2005-06
Industry
2006-07
Services
176
2007-08
Significant infrastructure requirement needed to sustain this growth…
3
Present Status of Infrastructure in the Country
 Telecom – Total Sub’s 479 Mn - Mobile 441Mn and Fixed
37.4Mn and going increase to 500Mn by 2010
 Electricity – 1,40,000 MW and going to add another
1,00,000MW by 2012
 Roads – 3.3 Mn Km road network ( 67% Freight and 87%
Passenger Traffic)
 Ports – 12 Major and 150 Minor on a coastline of 7560
Km
 Airports -126 airports,100 are civilian including,11
International airports and 4 metros account for 65%
India passenger traffic
 SEZ’s – Notified more than 160 SEZ’s and 98 functional
SEZ’s housing 2279 Units
4
Infrastructure Requirements - The Macro Picture
• Highways
- 40000 km to be developed by 2012
• Ports
- Cargo handling capacity to be increased to 1500 MTPA by 2012
(Currently 737 MTPA)
• Railways
- Development of manufacturing plants for rolling stock
- Development of dedicated freight corridors & metro rail projects
• Airports
- Development of greenfield airports
- Development of 35 non-metro airports
• Power
- 60000 MW of new generation capacity to be added by 2012.
 Telecom
- To increase the tele-density to 50 by 2010
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Investment Requirements …
• To sustain 9% GDP growth, investment in infrastructure will
need to increase from 4.6% of GDP to around 8% of GDP over
the period 2007-12
• Planning Commission estimates that of the required
investment
- 65 % will come from the Government
- 23% from private sector and
- 12% from multilateral/bilateral agencies.
• Substantial increase in private investment envisaged. Public
Private Partnerships (PPPs) essential for attracting private
capital in Infrastructure
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Investment Targets
Infrastructure Investment Targets
Gas
5
Storage
6
Airports
Ports
Water & Sanitation
Irrigation
8
18
49
53
Railways
Telecom
Roads
62
65
76
150
Power
Source: Planning Commission Government of India
USD
Bn
0
20
40
60
80
100
120
140
Significant private sector participation needed to meet this target…
160
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The Story So Far. . . . . . . .
 Telecom - Competitive
Growth Story
 Power - Distribution
reforms have started
 Roads - Success from
Determination
 Ports - About to
Consolidate
 Airports/ Civil Aviation Taking off
 Tourism - looks positive
 Urban - Not off the
ground
 SEZs - A few will
happen
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Good Policies = Good Progress
Transport
Telecom
Power
Ports
Roads
(Container berths)
(NH)
Airlines
Airports 
Competition *
Private
Participation
Effective
Regulation *
Progress
* Where applicable
 Poised to take-off
High
Low
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Reforms and Competition Leading To QoS
Management
UK
Argentina
US
South Korea
Spain
Germany
Asian Countries
France
State Control
African
Countries
China
Regulation
India
Relative
speed &
direction of
change
Competition
10
Liberalization
Asian telecoms were virtually a closed industry in the early 1990s
Phillippines
Fully Liberalised
Japan
Fully Liberalised
Malaysia
Partially Liberalised
-Basic Telephony
-Mobile
Hong Kong
Taiwan
China
Partially Liberalised
Partially Liberalised
Korea
Partially Liberalised
Singapore
-Mobile
Partially Liberalised -Local
-Mobile (Limited)
-International Partially
-VADSr
-Mobile (Limited)
-VAS
Liberalised
-VAS
-Mobile
‘00 onwards
Hong Kong
China
Partially Liberalised
Korea
Partially Liberalised
-Mobile (Limited)
Fully
-Local (Limited)
-VAS
‘99
Liberalised
-Long Distance(Limited)
‘98
Taiwan
‘97
‘96
Fully Liberalised
‘95
‘93
China/India
‘94
Further Liberalised HongKong
Fully Liberalised
Korea
-Local
India
Thailand
Partially Liberralised -Long Distance
Partially
Partially Liberalised
-International
-Mobile
Liberalized
-Mobile
Malaysia
-Basic Telephony
Fully Liberalised
Singapore
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Partially Liberalised
SEZ Philosophy
Operating
Environment
Ease, self-certification,
Efficiency & productivity
Policy
Framework
Fiscal Incentives &
regulatory benefits
Infrastructure
Self-contained, Integrated,
connected & Self-managed
12
Evolution of SEZ
EOU
Cluster of EOUs
& Bonded Area
Trading
Port & Duty
Free Enclave
EPZ
FTZ
Free Port
Integrated
Infrastructure
Special Economic Zone
13
Suzhou Industrial Park, China
Before
14
Suzhou Industrial Park, China
After a decade
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Infrastructure Eco System Development
Infrastructure Project
Benefits
Common Man
Benefits the SME’s
& Big
Enterprises
Enhanced Markets
Lower Costs
Growth
Social Welfare Improvement
16
Infrastructure Types
 Physical Infrastructure :
 Transportation & Logistics : Roadways, Railways, Airways,
water transportation, urban mass transportation , Ports &
Logistics
 Energy : Power generation, transmission, distribution, Gas
Distribution
 Telecommunications &IT: Mobile, Fixed, DTH, CTV
&
Broadband Services
 Urban : Water supply & distribution, sewage disposal
systems, urban industrial parks and irrigation.
 Social Infrastructue:
 Healthcare
 Educational
 Tourism
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Infrastructure Project – Key Features

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
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
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





Large capital costs / bulky
Long gestation periods
Sector vulnerable to regulatory and policy changes.
Tariff sensitivity / public / Government
Highly Cash Flow Driven
User pay charges (willingness to pay)
Security of the Project
Mostly Non Recourse Finance
Prudential Norms
Many stakeholders
Contract driven
Concession / license
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Project Appraisal
Sponsor/ Management
Technical
Financial
Market
Environment
Risk Analysis
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Typical Infrastructure Project Structuring
Special Purpose Vehicle (SPV)
Contracts/ Concession/ License/ Caps
Project based funding
Non recourse or limited recourse financing
Equity from EPC contractors, vendors,
public,
strategic
investors-conflicting
interest
Debt - various sources
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Infrastructure Project Finance Transaction
Structure
Sponsors
Government
Advisers
Financial,
Technical & Legal
Advisers
Equity
Invt. Bankers,
Technical & Legal
Concession / Licence
Agreement
Financial
Investors
Equity /
Sub-Debt
Users
TRA/Escrow
Bank
Off-take
Contracts
Insurance
Companies
Insurance Policies
Project SPV
O&M
Contract
TRA/Escrow
Agreement
O&M
Operator
EPC Contract
Debt
Lenders
Substitution
Agreement
EPC
Contractor
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Contracts In Infrastructure Project Finance are very Important
KEY CONTRACTS :
 Concession / Licence Agreement
 Shareholders / JV Agreement
 EPC Contract
 O&M Contract
 Trust & Retention Agreement
 Substitution Agreement / Direct Agreement
 State Support Agreement
EFFICIENT STRUCTURING OF CONTRACTS IS A MUST and should be tailored to suit the
project’s expected profitability and cash flow. If the project performs better
than anticipated, lenders will be repaid sooner and have better Equity
returns.
22
Typical Infrastructure Project Contracts
Power Infra :








Concession/ License Agreement
Shareholders’ Agreement
EPC Contract
O & M Contract
Fuel/ Water/ Transport Agreement
State Support Agreement
Power Purchase Agreement
State Guarantee
Transport Infra :






Concession Agreement
Shareholders’ Agreement
EPC/ O & M Contract
Environment and Land Procurement
Toll Collection Agreement
State Support Agreement
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Infrastructure Project Finance –Risk Stages
Development Stage
Construction Stage
Operations
Stage
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Typical Infrastructure Project Financial
Model Development
Input Data
Output Results
Market Data
Technology
Assumptions
Capacity Size
Design
Project Structuring
&
Modeling
Capital
Investment
Revenues
Cost Data
Policy &
Regulation
Rules
Financial
Statements
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Typical Means of Finance
PROJECT COST
Rs. 1000 crore
Means of finance
 Equity







Rs. 300 crore
Sponsors
EPC Contractors/ Vendors
Government Agencies
Strategic Investors/ Venture Funds
Financial Investors
Grants
Subordinated Debt
 Debt (Rupee)
Rs. 500 crore
 Financial Institutions
 Banks (domestic and Foreign)
 Debt (Foreign Currency)
Rs. 150 crore
 Financial Institutions/ Banks
 Multilateral Agencies
 Export Credit Agencies
 Lease Financing
Rs. 50 crore
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Typical Financing Norms
Debt Norms redefined
 Debt-Equity
70 : 30 or 80 : 20
 Asset Cover >1 + collaterals & credit
enhancement
 Cost
Competitive
 Pricing Linked to risk, cash flows
 Tenor
>12 years - linked to cash flow
 Loan
Structured
 Repayment
Equated, ballooned, step-up
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Cash Flows Management
Investors
Equity
dividend
Equity
Lenders
Operation costs
Loan
Operator
Project co.
dividend
Debt Service
Construction costs
Payments
Insurers
Premium
Payments
Fees
/
Reve
nue
dividend
Equity
Contractor
Users
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Infrastructure Projects & Financial Engineering
Cashflow projections based on technical,
market and financial analysis & engineering
Risk allocation & mitigation through project
contracts and financing agreements
Structured financing
Loan documentation and security creation
Project monitoring and compliance
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Typical Structured Project Finance by Risk Leverage
• Guarantee in case of a guaranteecum-take-out
FI
Banks / FIs
Life of the loan facility
Period of high risk -Development
& Construction
• Low cost funds from banks /
FIs based on IDFC Guarantee
Period of low risk-Operation
• Low cost funds based on lower project
risk
• IDFC takes over the asset from
Banks at the end of 5 yrs.
• Benefits
•The project gets Lower cost funds
•The project gets 10 year money (3 years with Banks & 7 years with IDFC)
•Bank funds are channelised to infrastructure
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Financial Analysis
 Model building
 Project Cost Phasing
 Capital Structuring
 Profitability Projections
 DCF Analysis
 NPV
 IRR
 Financial Ratios
 DSCR
 Breakeven
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Risk and Uncertainty
The origins of modern risk management: Renaissance Italy, where seafarers used
the term ‘rischiare’ to describe the challenge of a voyage.
Primary source:
random acts of nature
Secondary source:
behavioral uncertainty,
business transactions
Rembrandt, Storm on the Sea of Galilee
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Type of Risks
Within Financier's
control
SPV can control
(Endo-geneous)
SPV cannot
control (Exogeneous)
Internal
Operations :
External
Operations:
Technical
Supply
Syndication
Cost
Market
Funding
Management
External
Infrastructure
Legal
Engineering
Environmental
Completion
Political
Force Majeure
FX (Currency)
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Risk Analysis & Mitigation
 Risk Sharing : Is advantageous when economic, technical, environmental, or
regulatory risks are of such magnitude that it would be impractical or
imprudent for a single party to undertake them.
 Risk Identification
 Completion Risk
 Operating Risk
 Revenue Risk
 Financial Risk
 Sponsor Risk
 Force Majeure Risk
 Political Risk
 Environmental & Social Risk
 Risks Mitigation
 mitigated by financial, contractual or legal means
 some risks may be sufficiently well studied and accepted
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General Approach to Risk Analysis






The institutions adopt both qualitative and quantitative
approaches to risk analysis
The qualitative approach is adopted for subjective factors such
as management, environment, etc
The quantitative approach is adopted for objective parameters
such as market, costs, etc
Qualitative risk factors are sought to be addressed by suitable
covenants
Sensitivity analysis is done to study the impact of quantitative
parameters on the project return and cost of capital
Structuring is done in a way as would ensure project viability
under various possible scenarios
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Techniques of project risk analysis
Sensitivity Analysis
Scenario Analysis
Computer
Simulation
Monte-carlo Simulation
Decision Tree Analysis
36
“What-if” Analysis
 Scenarios
& Sensitivities
 Capital Cost
 Base Year Traffic/Throughout
 Growth Rates
 Base Tariff Levels
 Escalation Rates; and
 O&M Costs
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Variability of Profitability Projections
Max
290
270
250
230
210
190
170
150
US$ Millions
Max
Min
3
2
0
2
0
2
0
2
7
2
0
1
4
2
0
1
1
2
0
1
8
2
0
0
5
2
0
0
2
0
0
2
1
9
9
9
Min
6
9
9
1
Min
Max
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Sensitivity and Probability Analysis
DSCR (minimum)
1.00
1.10
1.20
3
Direct Cost Scenarios
1.30
1.40
1.50
2
Scenario For Capex
3
Indirect Cost Scenario
Scenario for ITS revenue
1
2
1
Scenario for NE revenue
1
2
3
1
2
1
1.60
3
2
3
Base Case = 1.23
1.0
.9
.8
.7
.6
Cumula tive
.5
Proba bility
.4
.3
.2
.1
0
0.80
0.91
1.02
1.13
1.24
1.35
1.46
Min DSCR
EV=1.30
1.57
1.68
1.79
1.90
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Risk Mitigation Contracts for Project
INSURANCE AND
CONTRACTUAL
PERFORMANCE
GUARANTEES
LONG TERM
OFFTAKE CONTRACTS/
OTHER REVENUE
CONTRACTS
MARKET/
REVENUE
RISK
PERFORMANCE
RISK
PROJECT COMPANY
RESIDUAL RISKS
LEGAL/REGULATORY
TURNKEY
CONTRACTOR
DELAY/
TECHNICAL
RISKS
POLITICAL
RISKS
FINANCIAL RISKS
DUE DILIGENCE
HEDGING/INSURANCE/
CREDIT ENHANCEMENT
INSURANCE/MULTILATERAL
FINANCING/HOST
GOVERNMENT ASSURANCES
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Risk Groups
Banks
Suppliers
Credit Agreements
Security Documents
Shareholder
Agreements
Sponsors
Offtakers
Supply
Agreements Offtake
Agreements
Market Risks
Financial Risk
Project Vehicle
Company Permit
Local Laws Construction
Agreement
Host Government
Legal & Regulatory Risk
Operating &
Maintenance Agreement
Construction
Agreement
Operator
Contractor
Construction & Operation Risks
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Typical Risk Allocation Management
Development
Construction
Operations
technical feasibility
schedule
market changes
commercial / financial
feasibility
cost
performance
capacity / production
shortfalls
project economics
design changes
permits / authorizations
interest rate
escalation
third-party intervention
fuel / materials supply
interruption and
cost escalation
consequential
damages
operations and
maintenance
cost escalation
Force Majeure /
country risk
interest rate
escalation
lender risk
currency changes
currency depreciation
host government /
offtaker risk
availability of
foreign exchange
statutory change /
civil unrest / strikes
political change
sponsor risk
contractor risk
1
act of God
third party liability
plant residual value
42
Risk Factors - Cover
Political
Market
Operating : Cost
Operating : Technical
Operating: Management
Sponsor/Participant
Environment
Contractor
Completion
Supply/Reserve
Infrastructure
Force Majeure
Engineering
Legal
Syndication
Funding
FX
Insurance, Co-Financing
Offtake Agreements, Market Depth/Traffic, Tradable,
Barriers to Entry
Competition, Cost Curve
Skill, Proven Technology
Track record
Credit Review, Checking
Insurance, Independent Review
Backlog, Reputation, Cashflow, Performance
Supports/Guarantees, standby facilities
Study/Independent Certification
Adequacy
Insurance
Independent Check
Opinions
Timing, Bank Types
Swaps
Hedging, Swaps
43
Insurance Against Risk







Special Purpose Vehicle (SPV)
Appointment of a good management team
Appointment Of good Auditors & Independent
Engineers
Capital Structuring to minimize Financial
Leverage and various Risks
Collaborator’s Participation In Equity
Good relations with Lenders and Investors
Good Governance with proper Systems and
Procedures
44
Well Managed and Transformed Project

Good Asset Formation
 Lower
Tax Liability

Lower Financial Distress Costs

Lower Risk Incentive Costs

Better Measurement of Performance

Lower Managerial Agency Costs

Higher Debt Capacity and Networth
45
Conclusion
In general there is a good consensus among
all political parties for reforms
Private sector has done reasonably well in
areas where they are operating viz.,
Energy, Telecom, Transport and Airlines
PPP Infra based model is one of the
solution where one can create a win-win
situation to all the STAKE HOLDERS
A Comprehensive MANAGEMENT SYSTEM
will lead to a good Infrastructure Service
46
Thank You
Dr E.Sankara Rao
I D F C Ltd.
www.idfc.com
Think Infrastructure Think IDFC
47