Session4a Basics Of Project Finance Equity-grant,subsidy

Infrastructure Project Finance Basics • • •

Mona Iyer CEPT University

Session Outline • Means and Sources of financing – Equity – Debt – Guarantees – Grant/subsidy •

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• Recourse: In the event a project cannot service the financing or achieve completion, the financiers have recourse to either cash from the sponsor or other non–project security. • Non-recourse: The lenders rely on the project's cash flows and security over the project vehicle's assets as the only means to repay debt service. • Risk Premium: The reward for holding a risky investment rather than a riskfree one. • Royalty: A share of revenue or cash flow to the government or grantor of the concession or license. Compensation (i.e., royalty fees) for the use of intellectual property belonging to another party, usually calculated as a percentage of sales. • Collateral: Assets pledged as security under a loan to assure repayment of debt obligations. • •

Sources of Equity •

Equity -Primary source of investment – Promoter’s equity/ Equity Capital – Promoters who launch the project • These may include Indian, Foreign, both, NRIs, Overseas Corporate bodies, investment banks

– Finance raised from public/ capital market. • • • •

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Preference capital/shares with fixed dividend rates Shares Maturity period, rate of interest, tax exemption Can also be called as tradable debt!!

Sources of Debt Debt

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– Institutional Borrowings • • • • •

Multilateral/Bilateral Development Banks WB, ADB, JBIC,KfW, Development Banks like SIDBI,NABARD, IDBI Financial facilitating organisations HUDCO Investment Institutions like UTI, LIC, VC funds, Pension funds Infrastructure finance institutions IL&FS, IDFC

– commercial borrowings • • • • •

Commercial Banks Upto 35% of project cost Limitation to individual clients, sector, country Usually 15-22% interest rate per annum

Sources of Financing – Sovereign Guarantees Credit enhancement of Infrastructure project Increases comfort level of lenders State/Central Govt. IDFC Extensive use may lead to fiscal stress of Govt. RBI stipulation – sovereign guarantees to be issued by govt. as per SDP • Guarantees by commercial banks (initial charge 3% and annual commission 1.6 % • • • • •

Sources of Financing •

Grants/Subsidies

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– Are provided in those projects which are usually not financially viable or sustainable with only commercial funding. – – Grant/subsidies usually given for projects that have high economic or environmental impacts. For example, health, sanitation, environmental protection and other similar projects. – – Often used for promoting new technology and institutional development. – – In most cases, these are public infrastructures. – – General Sources: Government, multilateral of bilateral donor agencies, international agencies , Foreign aids and donations etc.

– Venture Capital: Risk capital extended to start–up or small going concerns. – Credit: Granting of goods, services, or money in return for a promise of future payment. Most credit is accompanied by an interest charge, which usually makes the future payment greater than an immediate payment would have been. – Multilateral Agency: An institution organized by a group of countries to promote development (e.g., the World Bank, the IFC, and the InterAmerican Development Bank). – Bilateral Agency : An institution established by one country to promote trade with other countries, such as an export-import agency or an export credit agency (ECA). JBIC (Japan), US EXIM (USA) –

– Development Bank: A lending agency that provides funds to encourage the creation or expansion of productive facilities in developing countries. •

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