Project Finance Case

Project Finance -Case

– Metropolitan Region Development Authority (Authority) is thinking of building a 2 lane toll bridge on a creek connecting the mainland of the city to the suburbs. – But is short of funds…approached State Govt. – …State Government agrees to support some portion of the project finance if the Authority could structure the project and mobilize resources – Authority prepares detailed cost estimates and revenue streams and financing plan for the project (to be operated on BOT basis) in consensus with state government and then approaches funding agencies with the same.

• Authority intends to sign the financial agreement by 31st Dec 2010 and start construction which is assumed to go on for 2 years. And single party will operate it for period of 15 years from date of commissioning. • Prepare project time table.

• The length of the Bridge is 2.5 Kms • The Approach to the bridge is in environmentally sensitive zone (CRZ) • The land is under the Ownership of state revenue department and would have to be transferred to Authority. • The site clearance will have to be carried out to remove wild vegetation in the right of way for a distance of 500 m on either side (Approach) of the bridge. This would cost about 100 Rs. Per sqm. • The soil condition is marshy and hence the cost of construction per Km is 1.2 crores.

• It will require 4 engineers and 1 head supervisor on site during construction • During construction phase an administrative office shall have to be set up at site with two permanent staff • Due to limited technical know how available with the Authority. ..they will hire technical consultant for detailed design and engineering, traffic projections and recommendations on toll. • State Govt. shall also appoint independent Expert to approve work submitted by appointed consultants • Prepare capital cost estimates for project

• Traffic Projections • Traffic and Toll rate in the first year of operation Toll Rate Rs./Km – Two wheelers 20000 – Four Wheelers 75000 – State Transport Buses 1000

7.5 10 Annual payment of Rs. 1000 per vehicle

• Average Annual growth to be applied for each mode is 4% • Assume inflation of 10% for toll rates every 3 years • Prepare Traffic Projections

• Since the financing mechanism is not clear….Authority makes following assumptions for initial inhouse financial analysis of the project – – – – –

25% Equity by private operator 15% Equity by Authority 10% Equity by the state government 10% Subordinated debt by State Government at 6% 40% Debt From senior lenders at 10 %

Prepare Financing Plan

• The Project once completed shall operate for 15 years • During operations it will mainly generate revenues from – differential toll collection – Some revenues from small advertisement panels on the road median lamp posts

• At the same time it will also incur expenses during operation phase. – operation and maintenance of the bridge (inflation of 4% every year) – periodic resurfacing (every 3rd year) – Operating toll plazas (Increase 10% every year)

• Use WDV method to calculate depreciation at the average rate of 15% • Applicable tax is 40% Prepare P & L Account Prepare Cash Flow Find out NPV for the project if the cost of equity is 15% and cost of debt is 10%. Comment on project viability?