Infrastructure Finance_hp_heero_niks

Infrastructure Finance -hp -niks -heero

Definition Infrastructure Financing refers to any credit facility extended by banks and financial institutions for developing, operating and maintaining any infrastructure facility

Coverage Toll Road, Bridge, Rail System, Highway Project, Port, Airport, Inland Waterway, Water Supply Project, Irrigation Project, Water Treatment System, Sanitation, Sewerage, Solid Waste Management System, Telecommunications Services, SEZ, Network of transmission/distribution lines for generation and distribution of power

Important Considerations for Finance • Length of the gestation periods • Magnitude of Infrastructure Projects • Relatively high risks

Two Approaches • The Concession Approach • The Structured Financing Option

The Concession Approach • The concessionaire who is thereafter granted a franchise to operate the project for a specified period, builds the project. • Costs and returns will be recovered by the franchisee from the operations of the project.

Concession Approach •

This approach works under various modes as described below:

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BOT: “BUILD, OPERATE & TRANSFER”

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BOLT: “BUILD, OPERATE, LEASE & TRANSFER”

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BOOT: “BUILD, OWN, OPERATE & TRANSFER”

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BOO: “BUILD, OWN & OPERATE”

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BOOS: “BUILD, OWN, OPERATE & SELL”

Structured Financing Option •

Non-Recourse Financing: _ Cash flows generated by the project secure the debt instrument or the collateral value of the specified assets financed by the instrument. _ Default: Recourse is only upto the value of the assets (mortgaged).

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Limited Recourse Financing: _ To improve the credit worthiness, attaches other assets also. _ Lenders have limited recourse to the assets of a company sponsoring the project.

Limited Recourse Financing _various methods available •

SPV: Special Purpose Vehicle _ Created for the project. _ Have the benefit of spreading risk among like-minded investors. (MTNL & VSNL, Noida toll bridge [DelhiNoida, bridge project])

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GPV: General Purpose Vehicle _ Innovative equity structuring which picks up equity even in basic services with a different set of partners.

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FG: Financial Guarantee _ Internationally prevalent financing option. _ Credit rating (high rating) _ Lower interest cost and easier marketability due to perception of improved safety of the instrument.

Financing Instruments • Asset-Backed Securitization • Municipal Bonds – Issued by municipal bodies or local governments – For financing core urban infrastructure facilities like drinking water, sanitary systems, roads, bridges etc. •General Obligation Bond •Revenue Bond

Infrastructure Financing- Issues in India • High Levels of Lag • Local Revenue • Project Risk (environmental, financial, operating, demand risks)

RBI Guidelines 1. 2. 3. 4. 5. 6.

Loan Amount Expertise Nature of loans and units Safeguards Cash flow adequacy Funding Private Sector

Types of financing by Banks • •

Take-out Financing Inter-institutional Guarantees (Separation of credit risks and funding not allowed; however RBI permits banks to issue guarantees favoring other lending institutions for infrastructure projects, providing the bank issuing the guarantee takes a funded share in the project to the extent of at least 5 percent of the project cost, and undertakes normal credit appraisal, monitoring and follow up of the project.)

Financing Promoter’s Equity • Banks are advised not to grant advances towards taking up shares of other companies??? • However, RBI under certain exceptional circumstances allows the financing of the acquisition of promoter’s shares in ana existing Company, which is engaged in implementing/operating an infrastructure project in India. There are 13 conditions to be satisfied.

Appraisal Factors 1. Due Diligence: • Viability of projects. • Returns of the projects are well defined. • State govt. guarantees may not be taken as a substitute for the appraisal. 2. Special Skills: • Often financed through SPV’s. • Special appraisal skills for lending agencies.

3.Screening committees: • Identification of various project risks. • Evaluation of credit worthiness. • Conducting the above, they need a screening committees for appraisal credit proposals & monitoring the progress. 4.Joint financing: • Size of the funding necessitate joint financing by banks/ FI’s or financing by more than one banks. • In this case, the appraisal report is given to them for reference or appraise it jointly.

Prudentials Requirements PR recommended by RBI. 1.Prudential credit exposure limits: • Credit exposure to borrowers belonging to group may exceed norm of 40% of banks capital funds by 10%( i.e, 50%) provided it is in account of extension of credit to infrastructure projects. • Credit exposure to a single borrower may exceed norm of 15% to about 5% (i.e,20%).

2.Assignment of risk wt. for capital adequacy. Banks may assign a risk wt of 50% for capital adequacy purposes on investment in securitized paper, subject to foll. conditions: a) Only for financing pre members equity. b) The facility should generate income, which would ensure servicing/repayment of the securitized paper. c) Securitized paper should be rated atleast ‘AAA’ by the rating agencies. Its should be current & valid.

d) It will be current & valid if its not more than 1 month old on the date of opening of the issue. e) Securitized paper should be a performing asset in the books of the investing institution.

3. Asset liability Mgmt. • Long term financing of the project may lead to asst-liability mismatches. • Therefore they need to observe their asset-liability position to ensure that they do not run into liquidity mis-matches by lending to such projects.

4.Administrative arrangements. • •

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Clearly specify the procedure for approval of loan proposals. Many appraisals may arrive at the same time. Delays should be avoided and the banks should be prepared to accept the technical parameters of the leading fin,. Institution. Continous monitoring is to be done to ensure that the money is used for what it has been sanctioned for.

Recent Developments. •

A new concept in infrastructure financing called ‘public-private partnership’ was announced by the finance minister.

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According to this concept, public investment in a project will be critical while the private sector will be encouraged to participate in a big way through some innovative moves.

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In short, public money will be leveraged more meaningfully through private partnership.

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This arrangement will facilitate a more equitable risk sharing by the govt. with the private sector.