Project Finance Slides

Presentation Outline
Due Diligence
for Highway PPP Projects:
Economic & Financial Analysis
Assessing Revenue Risks
Public Sector Comparator
Henry Kerali
Sector Manager, Transport
The World Bank
Selecting PPP Projects

Due Diligence & Feasibility Studies
Socio-Economic Evaluation
Building Blocks for PPP projects
Assessment of Traffic Risks
Sharing Revenue Risks
Finally .
Project Identification
Potential PPP projects should come from a Public
Investment Program (PIP), e.g. 5 year development plan
Other projects may be suggested by government agencies
or those about to be considered for the PIP
Some projects may come from the private sector as
unsolicited bids, but these need careful consideration
All of the projects should have feasibility studies
undertaken, including economic evaluation
These Public sector projects will form the long list of
candidates
Selecting PPP Projects
Prioritization Process
Due Diligence
This defines the necessary studies undertaken by the
relevant (contracting) authority
Initial criterion should be economic viability

Multi Criteria Analysis (MCA) can be used for
further prioritization of competing projects
Typical criteria used in MCA include:
4 4
Studies provide the basis for the Government to:

Understand fully the physical, socio-economic, financial, risks and
other characteristics of each project
Prepare the detailed Business Case for each project including
preliminary allocation of risks
Prepare draft tender documentation
Procure the private partner
Negotiate from a position of strength following tender submission
Assist inputs to operational project monitoring
Minimum and maximum capital requirements

Traffic levels,
Financial viability,
Risk Assessment,
Social and environmental impacts
Includes a variety of studies/assessments
5 5
7 7
Socio-Economic Evaluation
Purpose is to:
Conduct Cost-Benefit Analysis (CBA)

Optimize the socio-economic impact of the investment
Identify projects that contribute to economic development
Assess the rationale for public intervention
Identify non-quantifiable impacts:
Accident savings
Environmental Impacts
Social Impacts
8 8
Value for Money Comparison
Purpose:
A Public Sector Comparator (PSC) is used by a
government to make decisions by testing whether a private
investment proposal offers value for money in comparison
with the most efficient form of public procurement.
Definition:
The PSC estimates the hypothetical risk-adjusted cost if a
project were to be financed, owned and implemented by
government.
PSC provides a benchmark for estimating value for

money from alternative bids.
Public
Private
10
Public Sector Procurement
11
General Principles
Tends not to value risk,
Capital costs:
Budgets for projects are often optimistic

Tendency to budget for the best possible, lowest cost
and earliest completion outcome
should reflect the full resource costs of the project,

including opportunity cost of public assets used in the
project, and adjusted for risks.
Estimates should be for the most likely outcome!

Private sector generally includes risks in cost
estimates.
However, if most risks are transferred to the private
sector, value for money will decline since the
premium demanded will outweigh the benefit
13
Operating costs:
whole life cost of maintaining the asset to the same
standard as required from the Private operator.
Revenue streams:
Included only if bidders will be allowed to set tolls.
15
Key functions of the PSC

The PSC is intended to provide a FAIR means of
comparing PPP projects and/or competing bids
against Public procurement.
Inherent biases in public procurement (overheads,
subsidies, etc.) must be estimated and included
Risks should be allocated and valued
Sensitivity analysis provides an indication of the
most likely outcome and not only the mean value.
The main benefit of PPP is the value added
through better construction, O&M and risk sharing.
Assessing Traffic Risks
18
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Traffic Risk Error Drivers
Assessment of Traffic Risks

Traffic risks are usually assigned to the concessionaire
But, traffic is not primarily within concessionaires control
Some concessions have a traffic/revenue risk sharing
agreement with client:
underwriting a part of losses if traffic is low
sharing profits if traffic is high
Sound mechanisms for toll rate review are therefore

essential
Traffic forecast is normally the main determinant of
revenues
Miscalculation of road user willingness-to-pay

(WTP) especially for frequent users/commuters,
and trucks
Recession/economic downturn
Future-year land use scenarios that never
transpired
Inaccurate estimate of Value of Time
Time savings less than expected
20
Traffic Risk Error Drivers...
21
Traffic Forecasting Risk Index
Less usage by trucks

Complexity of the charging mechanism (hence
modelling process)
Underestimate of ramp-up period (traffic stability),
both severity and duration
Longer-term traffic forecasts are very sensitive to
GDP assumptions
Improvements to competitive (toll-free) routes
History/experience with toll roads
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More Reliable
Less Reliable
Shadow tolls
User-paid tolls
Tolls well established
No toll roads in country
Estuarial crossings
Dense urban networks
Extension of existing road
Green field site
Alignment: strong economics
Alignment: strong politics
Highly congested corridor
Limited/no congestion
Few competing roads
Many alternative routes
Only highway competition
Multi-modal competition
Stand-alone facility
Reliant on other, proposed highway

improvements
23
S&P Research Results 2005
Even worse for countries with no Toll

Road experience .
25
Impact of Forecast Assumptions
26
Building a PPP Project
$14
$12
Revenue
(millions)
$10
Scope
Risk
Revenues
Finance
+57%
+149%
$8
$6
$4
Public
Accounting
$2
$0
2004
GDP 6%Base
Forecaster
2009
2014
2019
2024
2029
GDP Base
4.5%
Auditor
GDPWorst
3%
Auditor
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Scope
28
Risk Evolution
Nature of project
Packaging tasks (horizontal / geographic)
Packaging projects (vertical / stages)
Influence on competition
Performance indicators for maintenance works
29
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Traffic Risk Sharing is Common
Risks associated with guarantees

Minimum Revenue Guarantee (MRG) reduces the risk to the private
partner of lower than forecasted revenue
Government contribution can be significant, especially given usually
over-optimistic traffic forecasts
Affordability Calculation for Government should include sensitivity
analysis on lower revenues impact on Government payments
Affordability Calculation for Government is therefore extremely sensitive
to quality of demand forecasts and user willingness to pay
Revenue
Revenue shared with Government
Minimum Revenue
Guarantee
Payment by Government
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Finally Contract Management !
Availability Payment Risks
From a budget perspective,

availability payments replace
capital by recurrent expenditures
Maintenance
Traffic risk is transferred to the

Government, baring the cost of
any downturn in traffic
Affordability assessment should
include future payments and take
into consideration the net cost of
lower than expected traffic
The final stage in the PPP project cycle that extends for
many years
Requires the most inputs from Government, but is often
neglected
The contracting authority should establish the appropriate
mechanisms before signing the concession contract to:
Capital Expenditure
Conventional Procurement
PPP with Availability Payments

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Ensure compliance with laws and regulations

Ensure delivery of contracted services
Ensure asset management
Deal with performance variations
Maintain Value for Money
Handle and resolve disputes
Ensure proper transfer of ownership of assets (at the end)
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Value for Money Analysis for

PublicPrivate Partnerships (P3s)
U
TO
IT
K
L
P3 TOOLKIT
Quick Facts
hh Value for Money (VfM)
analysis is a process used to
compare the financial impacts
of a P3 project against those
for the traditional public
delivery alternative.
hh The Public Sector Comparator
estimates the hypothetical
risk-adjusted cost if a project
were to be financed, built,
and operated by the public
sector using its traditional
procurement approach.
hh With P3 procurement,
the Government trades away
significant risks in exchange
for higher baseline costs and
financing costs in the P3 scenario.
For Further Information

See FHWAs Value for Money
Analysis for PublicPrivate
Partnerships: A Primer,
available at
http://www.fhwa.dot.gov/ipd/
forum/vfm_for_ppps/index.htm.
nder a publicprivate partnership (P3)

for highway projects, a private partner
may participate in some combination of
design, construction, financing, operations, and
maintenance, including the collection of toll
revenues. Value for Money (VfM) analysis is a
process used to compare the financial impacts of
a P3 project against those for the traditional public
delivery alternative. The methodology for carrying
out a VfM analysis involves:
Creating a Public Sector Comparator (PSC), which

estimates the whole-life cost of carrying out the
project through a traditional approach.
Estimating the whole-life cost of the P3
alternative (either as proposed by a private
bidder or a hypothetical shadow bid at the
pre-procurement stage).
Completing an apples-to-apples comparison of
the costs of the two approaches.
The Public Sector Comparator

The PSC estimates the hypothetical risk-adjusted
cost if a project were to be financed, built, and
operated by the public sector by using its traditional
procurement approach. It includes the baseline PSC
cost, ancillary costs, financing costs, retained risk,
transferable risk, and competitive neutrality.
The baseline PSC includes all capital and
operating costs associated with building, owning,
maintaining, and delivering the service over the
pre-determined period of time. Ancillary costs
include other costs, such as rightofway and
procurement costs. Financing costs are those
associated with interest costs on public debt and
issuance fees. Retained risk refers to the value of
any risk that is not transferable to the bidder, and
transferable risk refers to the value of any risk that
is transferable to the bidder. Competitive neutrality
adjustments remove any competitive advantages
and disadvantages that accrue to a public agency by
virtue of its public ownership, such as its freedom
from taxes. The present value of forecasted toll
2013 USDOT FEDERAL HIGHWAY ADMINISTRATION
revenue is generally subtracted from total PSC

costs to get net present cost.
The P3 Option
The cost elements of a P3 option are:
The present value of payments to be made to the
private partner, which account for transferred
risks and financing costs.
The value of any risks retained by the public sector.
Any ancillary costs borne by the public agency.
At the pre-procurement stage, a shadow bid is
constructed to estimate what the private sector
would bid in response to a P3 request for proposals.
Comparing the Public Sector

Comparator to the P3 Option
Generally, a P3 proposal must cost less than the
PSC to be preferable to a traditional procurement
approach; however, even if P3 costs are higher,
qualitative factors not included in the quantitative
analysis may still make the P3 approach preferable.
When a P3 presents overall savings, it is said to
provide value for money. This value is usually
expressed as the percent difference by which the
continued on side 2
continued from side 1
120
Total = 114
8
100
80
Millions of dollars
PROGRAM AREAS OF THE OFFICE OF

INNOVATIVE PROGRAM DELIVERY
20
Competitive
neutrality
Retained risk
15
Ancillary costs
Total = 105
Financing
11
15
17
Base cost
60
40
60
65
20
PSC
P3 OPTION
Figure 1. Comparison Between a Public Procurement and a P3 Shadow Bid. PSC = Public Sector Comparator,
P3 = publicprivate partnership.
PSC cost exceeds the P3 cost. Small changes in

the assumptions underlying the analysis can tip
the balance; thus, it is important to undertake
a sensitivity analysis to understand the critical
assumptions.
An Example: Comparing a Public Sector

Comparator Against a P3 Shadow Bid
The example depicted in Figure 1 portrays a
comparison between a public procurement with
a baseline present cost of $60 million and a P3
shadow bid for which the baseline present cost
(net of financing costs) is $65 million. Although
the baseline P3 cost is $5 million more and imposes
an additional $6 million in ancillary and financing
costs, the $13-million reduction in the cost of
risk due to transfer of some risks to the private
sector and $8 million in competitive neutrality
adjustments overcome these cost differences and
result in a net savings to the Government of $9
2013 USDOT FEDERAL HIGHWAY ADMINISTRATION
IPD provides a one-stop source for expertise, guidance, research, decision

tools, and publications on program
delivery innovations. Our Web page,
workshops, and other resources help
build the capacity of transportation
professionals to deliver innovation.
million overall, offering 8% in value for money. This

example illustrates the central trade-offs that often
characterize P3 procurement: The Government
trades away significant risks in exchange for higher
baseline costs and financing costs in the P3 scenario.
PROJECT DELIVERY
IPDs project delivery team covers cost
estimate reviews, financial planning, and
project management and assists FHWA
Divisions with statutory requirements for
major projects (e.g., cost estimate reviews,
financial plans, and project management
plans).
PROJECT FINANCE
IPDs project finance program focuses
on alternative financing, including State
Infrastructure Banks (SIBs), Grant Anticipation Revenue Vehicles (GARVEEs), and Build
America Bonds (BABs).
PUBLICPRIVATE PARTNERSHIPS
IPDs P3 program covers alternative procurement and payment models (e.g., toll and
availability payments), which can reduce
cost, improve project quality, and provide
additional financing options.
REVENUE
IPDs revenue program focuses on how
governments can use innovation to generate revenue from transportation projects
(e.g., value capture, developer mitigation
fees, air rights, and road pricing).
TIFIA
The Transportation Infrastructure Finance
and Innovation Act (TIFIA) program
provides credit assistance for significant
projects. Many surface transportation
projectshighway, transit, railroad,
intermodal freight, and port access
are eligible to apply for assistance.
12/20/2014
Characteristics of Securitisation
Asset Securitisation
Legal true sale of assets to an SPV with narrowly defined

purposes and activities
Issuance of securities by the SPV to the investors
collateralized by the underlying assets
Dr Manoj Anand
Reliance by the investors on the performance of assets for
repayment
Rather than the credit of their originator (Seller)
Or the Issuer (the SPV)
Parties Involved in
Securitisation Transaction
Characteristics of Securitisation
Bankruptcy Remoteness from the originator
Administration of the assets, including continuation of relationships
with obligers
Support for timely interest and principal repayments in the form of
suitable credit enhancements
Ancillary facilities to cover interest rate/forex risk, guarantees
Originator or Sponsor (initial owner of the assets), who has

loan agreement with the borrower (Obligors)
SPV Issuer of debt instrument
Investment Bankers Structuring the transaction
Rating Agencies Credit quality of instrument
Formal rating from one or more rating agencies
Parties Involved in
Securitisation Transaction
Ancillary Service
Providers
Obligator(s)
Interest &
Principal
Credit Enhancement, Liquidity Support,

Forex & Interest Rate Hedging etc.
Credit Enhancer Bank / Surety company / Insurer

Original
Loan
Servicer usually the originator, who collects the

payments on underlying assets and after, retaining a
servicing fee, pays them over to security holders
Trustees who deal with the issuer, credit enhancer, &
servicer on behalf of security holders
Sale of Asset
Issue of Securities
Special purpose
Originator
Consideration for
Assets Purchased
Vehicle
(Assignee & Issuer)
Credit Rating of
Securities
Servicing of
Securities
Investors
Subscription to
Securities
Rating Agency
Legal Counsel
Structurer
Securitisation Structure
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Credit Enhancement
Senior-Subordinate Structure
External Credit Enhancement

Letter of credit
Bond insurance
Internal Credit Enhancement

Senior/subordinate structure
Over collateralization
Reserve funds
Bond Class
Rating
Percent of
Structure
Par Value
AAA
65%
$130 million
AA
20%
$40million
BBB
10%
$20 million
Not Rated
5%
$10 million
Senior/Subordinate Structure
Shifting interest
mechanism
Senior % + (Shifting
interest % x Subordinate
Interest)
Year after
Issuance
1-5
Shifting interest
percentage
100
70
60
40
20
After year 9
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Loan Syndication
Loan Syndication
Obligations are not joint but several in nature
Different Commitment amounts
Banks Motivations
Arranging Banks
Generating Fee Income

Advise & manage syndication process
Sole vs. joint mandate
Participating Banks
Structuring
Prepares Information Memorandum

Designing and negotiating the deal with the borrower
Distribution - Structures the syndicate in tiers
Banks share funding, repayment, certain fees on prorata basis
Funding Certainty
Fully underwritten deal
Specific terms and pricing
Best efforts underwritten deal
To pay higher fees or spread
Generating loan assets

Diversification of credit exposure across borrowers,
industries and countries
Make loan in markets where they lack origination capabilites
Lead Arranger
Two or more bank lenders united by a single set of

legal documents
Commitment amounts, closing fees, banks to invite

Titles based on commitment amount
Mandated Arranger
Lead Arranger
Arranger
Co-Arranger
Lead Manager
Manager
Scaling Back Criteria
Fairness
Consistency
Client considerations
Minimum Compensation
Total Amount
Determines final allocations
Right to scale back the commitments
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Syndication Strategies
Single-stage General Syndication
Lender Compensation
Closing Fees
Commitment Fees
Underwriting Fees
Interest
Pool Income
Two-stage Syndication with Sub-Underwriting
General syndication
Lead arranger & small group of banks underwrite

Sub-underwriting may be optional
Wholesale syndication
Sole Mandate with Sub-Underwriting
Joint Mandate with no Sub-Underwriting
Sole Mandate with no Sub-Underwriting
Up-front or participation fees

On any loan amount that is committed, but un-borrowed
Funding risk
On the amount that is borrowed
Difference between total available fee income and total
payable fee income
Titles
Hold
Amt
#1
#2
#3
#4
#5
#6
Mandated Arranger
$300
Ors Mandated
Arranger
$300
Lead Arranger Subunderwriters
$300
Arrangers
$250
12
Co-Arrangers
$150
Lead Manager
$100
30
Expenses
Administrative / Operating
Expense Loan Loss (PD = 2%)
0.10%
0.50%
0.10%
0.50%
Cost of Funds
Regulatory Risk weight
Required Capital Ratio
Debt Charge (Interest)
100%
8.00%
4.60%
150%
12.00%
4.40%
Equity (Capital) Charge
1.60%
2.40%
<Capital ratio*Risk weight*Target

2.40% ROE>
Economic Return
0.00%
-0.60%
0.00%
20.00%
15.00%
0.10%
0.50% <PD*LGD>
Example of a Capital Charge on a Project Loan Portfolio
Supervisory
Rating Category
Basel II Risk
Weights - IRB
Target Capital
Approach - Ex 1 Ratio
Basel I Risk
Weights
AAA to ABBB+ to BBBBB+

BB
BB-
100%
100%
100%
100%
100%
Increase in Regulatory Capital
75%
75%
150%
150%
150%
<(9.6%-8%)/8%>
8%
8%
8%
8%
8%
Weighted
Distribution of a Average Capital
Loan Portfolio
Charge
20%
20%
20%
20%
20%
100%
1.2%
1.2%
2.4%
2.4%
2.4%
9.6%
20%
Basel II: Loan Economics

3-m LIBOR
Loan Spread
Debt-funding cost LIBOR
Interest Income
5%
1.80%
5%
Loss Given
Default (LGD)
Target ROE (pretax)
Basel II Capital
ratio - Target
25%
20%
8%
Under Basel II
Under Basel I Hold Spread
Increase Spread
6.80%
6.80%
7.40% <LIBOR+Loan Spread>
Implied ROE (pre-tax)
150%
12.00%
4.40% <(1-Capital ratio)*Debt funding cost>
<(Economic Return+Equity Capital

20.00% Charge)/Required Capital Ratio>
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Agenda for Discussion
Introduction to Project Finance
Analysing Risks in Infrastructure

Project Finance Transactions
Risk Evaluation Framework

Financial Evaluation Concepts
Case Studies
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What do we mean by project financing?
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Where are project finance transactions employed?
Creation and operation of an asset, financed without recourse to its sponsors.
Infrastructure and industrial projects, which are highly capital intensive.
The cash flows generated from the asset so created are principally used for
servicing the capital raised to finance it.
In cases, where the balance sheets of sponsors would not be able to support
risks associated with such projects.
Such projects, implemented within SPVs are bound to various participants

through a network of contracts.
In businesses, where risks are easily identifiable and can be easily allocated to
entities best equipped to handle them.
Typical project participants include sponsors, O&M contractors, lenders, fuel/

raw material suppliers, off-takers, etc.
Sectors, which have seen activity in this area include;
Energy- power and oil and gas

Transportation sector- roads, ports and airports.
Other large infrastructure projects.
Some major industrial projects - steel plants
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Project finance vs. corporate lending
Disadvantages of project finance transactions..
High transaction costs
High cost of debt relative to on-balance sheet funding (where sponsors have
strong balance sheets).
Project Finance
Corporate Lending
Recourse to all the assets of the
Recourse limited to identified
High legal costs
Some project finance transactions become too restrictive
borrower
pool of assets/amount
Assignment of contracts/licenses
control over operations

special reporting
regular independent engineering reviews
constraints on security
Physical assets of the borrower
is the key security
is the key security
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Project Finance Participants
Off-taker
Export Credit
Agencies
Debt
Special Purpose Vehicle/

Project Company
EPC Contract
EPC
Contractor
Independent
experts/lawyers
Escrow agent/
Trustee
Sponsors
Case Studies
Suppliers
Delays/
Insurance
Guarantee
Arrangers/
Lead funders
Government
Sales
contract
Introduction
Insurers/
Surety companies
Lessors
O&M
Contractor
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Key project risks

Permitting
Risk
Regulatory
Risk
Completion
Risk
Political Risk
Foreign
Exchange Risk
Financial Risk
Participant
Risk
A Project is essentially
a Web of Contracts
that mitigates (but does
not eliminate) these
risks
Operating
Risk
Environmental
Risk
Demand Risk /
Market Risk
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Evaluate contractual structure for consistency, and ability to bind various

various participants to the project.
Focus on economic fundamentals (viability) of the project and the

effectiveness of its contractual and financing structure in being able to
mitigate the principal risks it is exposed to.
Project has access to a single source of cash flow; thereby focus is on

evaluating the projects ability to generate and sustain the targeted level of
cash flows.
Evaluating sponsors interest in the project- What would keep the sponsor
interested over the life of the project?
Funding Risk
Force Majeure
Risk
Engineering/
Design Risk
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Risks can broadly be categorised into the following types.
Completion Risks
Financing Risks
Market Risks
Operating and Technology Risks
Political and Regulatory Risks
Force Majeure Risks
Risks often act in tandem, thus a lender also needs to understand the
interplay between various risk factors.
Risks in a project can be handled in 3 ways;
Financed- through creation of reserves, calls on contingent equity support from

sponsors/ other project participants.
Allocated/ Transferred- through O&M and offtake contracts
Managed
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Completion risks
Inability of the project to commence operations on time and within the

stated capital cost.
Risk profile changes quite considerably as the project moves from precompletion to post completion e.g road projects.
There is usually a strong recourse to sponsors during the completion stage

e.g Petronet LNG project.
Mitigated partially by fixed cost, date certain EPC contracts, with liquidated
damage clauses. Evaluation usually involves an assessment of financial
strength of EPC contractor/ sponsor.
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Financing Risks
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Market Risks
Ability to tie up necessary finances for the project and also meet all conditions
necessary prior to disbursal.
Arise due to insufficient demand, changing industry structures and pricing

volatility.
Evaluation of funding risk involves
Commodity projects
Natural monopoly projects
Ability to tie up equity

Ability and willingness of sponsors to fund cost over runs
Changing dynamics of global supply chains- movement from long term

contracts to shorter-term flexible contracts.- e.g the LNG business, which
presents challenges for lenders/ rating agencies.
Financing structure reviewed for
Exposure to all the above

Primarily exposed to demand risks
The capital structure

Liquidity support provided to debt holders for meeting unforeseen circumstances
Matching of cash flows with debt service obligations
Pricing structure for debt; sensitivity to interest rate and forex risks
Presence of experienced trustee for monitoring cash flows
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Market Risks
Focus on cost competitiveness, and availability and sustainability of demand,

and its price sensitivity over extended periods of time (e.g toll road projects).
While evaluating market risks, the focus is primarily on evaluating merchant

viability: eg comparison of the cost of supply for an IPP relative to the
average cost of purchase for a TRANSCO.
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Risks associated with inability of the project to operate consistently at

the desired production levels and within the design parameters- eg.
risks associated with inadequacies of fuel supplies
Evaluation of the sustainability of the technology platform, past track

record, possibility of obsolescence (key rating issue in telecom
projects).
Performance guarantees from technology supplier, credit quality of

technology supplier are evaluated.
Risks of operating disruptions mitigated through O&M contracts
Credit risks associated with important counter-parties like offtakers; e.g Enron
16
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Regulatory and Political Risks
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Force Majeure Risks
Most infrastructure projects carry an element of political and regulatory risk,

which are often difficult to quantify.
Infrastructure projects, particularly those financed on a project finance

basis are highly vulnerable to force majeure risks due to asset
concentration.
Analysis focuses on the definition of FM, - a broad based definition is

often viewed negatively.
Usually mitigated through insurance covers- sufficiency and coverage

in relation to debt service, availability of liquid surpluses, which could
be drawn down to meet disruptions
Often difficult to predict, this risk could manifest itself in various forms;
Functioning of various ERCs for the power sector.

Open access to gas transmission infrastructure
Resistance to increasing user charges for toll roads.
Changes in environmental norms for refineries/ power plants.
Problems in land acquisition for laying of roads.
18
Confidential
The Sponsors perspective...
One needs to understand what drives the sponsors interest in the

project.
Returns for the sponsor could come from
Up-front fees.
Through refinancing of debt, as the credit risk of the project improves.
Through other roles that they might assume in the project.
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Introduction

Case Studies
19
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Financial Evaluation- Key concepts
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Financial Evaluation- Key concepts
Focus is on adequacy of cash flow for servicing debt.
Interest and principal cannot be serviced out of earnings, which is an

accounting concept- payment has to be made in cash. Many transactions
and accounting entries can affect earnings, but not cash and vice versa
Standard and Poors
Present value numbers are not the best indicators of project viability,
given that they reduces the importance of sizeable amounts of
residual cash flow that may be available towards the latter periods of
the projects life.
IRR is not an useful measure of project viability as it assumes

reinvestment of cash flows at the IRR- often an incorrect assumption.
Calculating NPV necessitates making assumptions on the cost of
capital- often difficult to estimate.
21
Thus, from a lenders perspective the key ratio is the DSCR.

The most widely accepted method for computing DSCR is as follows;
Available Cash Flow (ACF)/ Principal + Interest, where ACF is defined as
Operating Cash Flow

(Revenues minus operating expenses)
less Taxes
less Working Capital Increase
less Maintenance Capital Expenditure
less Monies for replenishment of reserves such as maintenance and
debt service reserves
plus Callable Capital
less Clean up/ abandonment costs

plus Residual/ Salvage value
At the end of the project
Net Net Cash Flow = ACF- Principal - Interest

22
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Other indicators evaluated
Interest Cover Ratio

Principal Cover Ratio
Loan Life Ratios
ACF/ Interest
ACF-Interest/ Principal
Measure of surplus that would be available for prepayment/
servicing subordinate debt holders/ dividend.
PV of ACF over relevant period/ Max debt outstanding

Measures cash flow cover available for servicing debt
This ratio is a function of discount rate used.
Does not measure year to year variations in cash flows.
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Typical sensitivities
Price
Escalated
Building cycles
Breakeven
Volume
Opex
Interest rates
+/- 3-5%
Escalation changes
Capex
Foreign exchange
Debt Equity Ratios

Leveraged IRR
No correct level for a project.

Would depend upon what cash flows the project can support
Measure of returns available to equity investors.
Impact of variation in each

parameter on key ratios like IRR,
DSCR, needs to be analysed
5% change in price/volume may

have much worse off impact on
project viability as compared to say,
a 2% increase in the interest rates
Therefore, only the key factors that

adversely impact the project
viability needs to be highlighted
+/- 20%
Specific costs, such as fuel costs etc
+/- 20%
Breakeven
+/- 10-20%
1 year delay
+/- 3-5%
Differential inflation (purchasing power
parity)
23
Confidential
Some points to remember
Confidential
Security package and Credit enhancement measures
The financing structure of a project should take into account the profile of its cash
flows.
The threshold ratios of DSCR, interest cover and LLR varies across industry segments
A security package may include (list is only indicative)
Infrastructure
Power
Mining
Oil and Gas
Telecoms
Annual DSCR
Good
Target
1.2
1.5
1.15
1.4
1.4
1.6
1.5
1.7
1.7
2.0
Risky
1.8
1.6
2.0
2.0
2.8
Loan Life Ratio

Good
Target
1.3
1.5
1.3
1.35
1.5
1.6
1.6
1.7
1.8
2.2
Risky
2.0
1.6
1.8
2.0
3.0
Credit enhancement measures
Source: Advanced Project Finance- Richard Tinsley
First charge (ranking pari-passu with the existing lenders) on fixed assets and second charge on
receivables (other movables)
Pledge of promoters shareholding
Escrow mechanism
Assignment of all project contracts in favour of lenders
The project should balance the needs of all project participants- one should evaluate,
whether the project makes economic sense for all project participants.
Cash-collateral/committed equity support with pre-defined triggers such as fall in DSCR / D-E /
EBITDA levels below target levels
Corporate / Bank guarantee
Creation of 12 month debt service reserve (typical is 3-6 months)
Restriction on payment of dividends, take up additional borrowings (except for meeting working
capital requirements, and with some pre-set limits)
25
Confidential
Confidential
What is common to
Introduction
Suez Canal
Panama Canal
Euro Tunnel
Euro Disney
Paiton Power Project- Indonesia
Concorde Supersonic Aeroplane
Brooklyn Bridge
Sydney Opera House

Case Studies
They represent some of the biggest disasters in the project

finance world
Confidential
Risk Evaluation of an LNG Project
Confidential
Risk Evaluation of an LNG Project
Project profile
Contractual Structure
LNG Regasification project

Cross border with strong vertical linkages
Estimated project cost around Rs 25 billion
Project period: 25 years
Sponsors : Large and financially strong oil companies
EPC Contractors/
Technology Licenser
LNG Supplier
Lenders /
Security Package
Sponsors & Other

Shareholders
GSPA
LNG
SPA
Gas Offtakers
Petronet LNG
Gas Take or Pay
LNG Take or Pay
Shipping Consortium
Time
Charter
O&M
Contractor
Port Management Service

Contractor
29
Confidential
Market Risk : High
Established technology
O&M contract with one of the largest players in Europe, a strategic partner in the
project
High level of subsidisation in the domestic gas market

Delivered price of gas on the higher side, so acceptability was an issue.
The project had a take or pay liability towards the LNG supplier.
Market risks partially mitigated through strong offtake contract with AAA
rated entities
Political risk : Moderate
High Government interest in the project.

Unfavorable taxation structure an issue affecting economics of gas usage
Financing Risks :Moderate
31
Strong EPC contractors

Sufficient LD covers available
Debt issuance (long-term) post completion
Operating and Technology Risk : Low
Confidential
Risk Evaluation of a LNG project
Completion risk : Low
Project Management
Consultant
30
Project Management
Team
Debt:equity ratio - 2.5 x

Financial closure completed
Strong sponsors and high Government interest in the project.
Transaction structure risk : Low
Payment security mechanism

DSRA account for providing liquidity to debt investors in case of force
majeure.
32
Confidential
Cash flow analysis
Confidential
Risk Evaluation of a road project
Base Case DSCR : 1.5-1.6

Project IRR- 12%, Equity IRR- 8-9%
Net cash flow available to the project was the tolling margin (regasification
charge)
Key Rating Sensitivities
Lower offtake
Sensitivity results : DSCR : 1x to 1.15 x
Overall view
Despite the high market risks associated with the gas business in India, the strong
parentage of the project, the criticality of gas supplies to all the owners, some of
whom were also the marketers and transmitters of gas led us to take a favorable
view on the project.
Equity returns from the project were low, however, the sponsors were being
compensated through their access to marketing rights on the gas that was available
from the project.
Project profile:
Existing high speed corridor, linking two major cities

Project operational- tolling rights auctioned to a private party
Concession involved development of a parallel road, which would also be tolled
Estimated project cost close to Rs 1400 Crores
Concession period- 15 years
Concessionaire credit quality weak
Toll revenues would be the only source of revenue
34
33
Confidential
Concessionaire has adequate experience in toll collections. Leakage risks are

likely to be low.
O&M risk of the stretches would be assumed by the concessionaire through an
O&M contract.
Risks associated with forecasting of O&M outflows, and the inflation sensitivity of
these estimates.
Financing Risks :High
35
Road 1: complete in all respects

Road 2: Requires upgradation. Land acquisition risks low.
Concessionaire would also be the EPC contractor. Fixed price, date certain
contract.
Market Risk : Significant
Both highways have different toll rate structures, thus exposing the project to toll
diversion risks.
Value savings between both stretches not significant.
Inadequate data available on traffic history, makes forecasting traffic difficult.
Changes in traffic pattern could affect revenue levels.
Operating and Technology Risk : Moderate
Confidential
Very high leverage: 11:1

Considerable exposure to interest rate and refinancing risks.
Political risks absorbed by project owner, the state road development corporation.
In the event of political force majeure, compensation would need to be paid by this
entity.
Credit quality of the project owner quite weak.
Waterfall mechanism
DSRA providing liquidity support
Collateralisation of O&M reserves
36
Confidential
Cash flow analysis
Confidential
Summing up..
Base Case DSCR : 1.2

Ramp up in traffic volumes
Escalations in toll rates
Changes in traffic patterns
Higher than anticipated O&M
Stress test results : DSCR < 1
No two projects are alike- every project has its own structure and its own set
of risk drivers.
The risk levels associated with the project also change over time.
Focus on economics (fundamental viability)- contractual structure although

important should be viewed more as a support system.
Focus on robustness of cash flows for evaluating both project viability and
also the credit risk associated with the project.
Overall Analysis
On an overall basis, despite the high market risks, the project was inherently
viable due to the cost at which the concession was acquired.
However, a disproportionately high amount of risks were being assumed by the

debt investors, which led us to take a negative rating view on the project.
37
38
Confidential
Confidential
Some References
Project Finance Journal/Magazine

Introduction to Project Finance Andrew Fight
Project Financing Nevit and Fabozzi
Rating agency websites e.g Fitch
Thank you
10
Introduction
Key issues and constraints to private sector
investment in infrastructure
Infrastructure Public Private Partnerships in India
Public Private Partnerships (PPPs) in

infrastructure
Summary & Conclusions
Key successes and failures of select PPP projects in
South India
Need for private capital in Infrastructure

Key Drivers of change
Key Issues
Pressure on the fiscal position of

governments coupled with need for massive
investments in infrastructure
Globalization and breakdown of trade barriers

which is compelling local industry and services to
become more competitive
Emergence of successful models for engaging

the private sector and increased access to capital
across borders in providing infrastructure services
Large infrastructure investments needed to sustain GDP

growth in India...
1) Investment in infrastructure not

kept pace with economic growth
and targets envisaged
Role of public sector/state shifting from that of a

financier, owner and manager of facilities to that
of a facilitator and enabler of efficient
infrastructure creation and provision by multiple
players with an independent regulator
2) Private sector investment as a

proportion of GDP also not
increased substantially especially
compared to other developing
economies
Implications & Steps taken

1) Main six infrastructure sectors
projected to face a huge
investment gap of the order of
Rs. 5500 billion
2) Some initiatives by government 1)
Viability gap fund
2)
Financial SPV named

India Infrastructure
Finance Company (IIFC)
Changing economic models leading to

breakdown of erstwhile infrastructure natural
monopolies, that have made possible the
creation of competitive market structures
Constraints to flow of private sector capital (and capacity)

into infrastructure sectors in India...
Key issues in financing infrastructure projects...
Inadequate number of economically and financially viable
Demand side
infrastructure projects due to:
constraints
(relating to
Lack of supportive legal and regulatory framework
governments and
private
High transaction and bidding costs
infrastructure
developers)
Uncertainty of demand/use
Improper risk allocation

Absence of a deep and diversified financial sector
Supply side
constraints
(relating to
providers of
capital)
Most infrastructure projects tend to get financed

by limited recourse project finance structures
Single asset specificity and near non-recourse
structures make infrastructure projects funded
through the project finance route an inherently
risky proposition
Size and uncertainty the biggest issues in
financing infrastructure projects
Structural gaps in the domestic capital markets
Lack of long-term funding sources and

under-developed debt markets the primary
constraints from the supply side
Further aggravated as development financial
institutions (DFIs) withdrawn from project
finance business
Commercial banks in India also not been able
to lend to infrastructure projects
Lack of long term funding sources in particular - equity financing

Lack of innovative financing instruments which could help to
deepen the market
Underdeveloped long term corporate bond markets
Therefore, the solutions would have to lie in addressing these issues: both
from the supply and the demand side of infrastructure finance
Inadequate participation by Financial Institutions (FIs)
Patil Committee Report recommendations...
Key constraints in the overall process of enabling private

and institutional capital in infrastructure projects...
Possible solutions
Some of the supply side issues on undeveloped debt markets been addressed in
recent Patil committee report on corporate bonds and securitized debt market
(December 2005)
The study has suggested various policy and legislative changes on developing the
primary and secondary debt markets
Rationalizing differential stamp duty and
TDS on debt instruments
Inefficient risk allocation:

Design of concessions and
modes of PPPs
Inadequate preparatory work in project

conception and design (on part of
Government/licensor)
Risks not allocated to the party which can
best bear the same
Using different solutions including

different project structures for
different sectors
Unbundled mechanisms
Forming Joint Venture (JV)
projects with the government
holding 26% or less stake
Developing the securitized debt market
Market making and listing of issues
Enabling better credit enhancement

mechanisms
Enhancing investor and issuer base
Specialized debt fund for infrastructure financing
Improving clearing and settlement systems
Fiscal concessions for infrastructure SPV bonds
Lack of enabling
policy/institutional, legal and
regulatory frameworks
Inadequate legal framework and inability to Dedicated institutions with crosscutting PPP legislation
implement reforms
Cross-sectoral PPP advisory units to
Unclear and uncertain regulation leading to help line departments
higher regulatory risks; roll back of reforms Relying on line departments and
sectoral agencies to build capacities
Lack of financial engineering/

instruments and ineffective
intermediation
Need for - matching cash flows from the

project with repayments and providing an
appropriate risk-return profile
Structured finance/securitization
Layered credit enhancement
Risk tranched debt
Risk capital from private equity (PE)
firms and promoters contribution
Financial engineering/innovative financial instruments...

Structured
Finance/Securitizati
on
Raising funds in the capital markets by selling the future cash flows of an asset or a pool
of assets
Need to extend securitization beyond residential/consumer mortgage backed securities to
that of cash flows from infrastructure projects
Layered credit
enhancement
Introduction
Monoline insurance: Credit insurance for infrastructure project bonds and

commercial bank loans

Partial/Political Risk and Credit Guarantees: By multilateral institutions for some

specific risks such as political risk and by the government

infrastructure
Collateralized debt obligations and credit derivatives leading to further market

development and risk reduction
Risk tranched debt
Senior and subordinated debt, mezzanine/hybrid finance, and take-out finance
Differing priority of repayment obligations and corresponding risk adjusted returns

Risk capital from
private equity (PE)
firms and
promoters
contribution
PE funds enable institutional investors to invest in PPI projects while retaining the
benefits of risk diversification and professional fund management

South India
Significant upsurge in the PE business in India; growing perception that profitable

investments in infrastructure sector are possible for PE investors
Public Private Partnerships (PPPs) in infrastructure...
Forms of Public Private Partnerships (PPPs) in

infrastructure...
Range of infrastructure delivery options:
PPPs emerged as an increasingly

important mechanism for enabling
investments in infrastructure
In the absence of necessary regulatory

frameworks, uncertainty, and long gestation, the
private sector in India had initially shied away
from this sector in India
The government at many places has also been

wary of private participation because of certain
characteristics of the infrastructure sector
Social and distribution reasons
Management /
O & M contract
Concessions*
(BOT)
Privatization**
(BOO)
Divestiture By
License /Sale
Asset Ownership
State
State
Private
Private
Investment
Responsibility
State
Private
Private
Private
Primary
Commercial Risk
State
Private
Private
Private
Fear of creating a private monopoly

Strategic nature of large mega projects
However, over the last decade, PPPs in

infrastructure have gained momentum
Ownership and
Risk
In sectors such as telecommunications and to some extent electricity generation the process has often taken
the form of complete privatization; in other sectors, legal and political restraints have impeded sale of public
utilities to the private sector
Typically PPP/PSP have taken on the form of concessions, which have further taken various forms of asset
ownership such as Build-Operate-Transfer, i.e. BOT (the most common form), BOOT, BOOST, and BOO/DBFO
Sector specific PPP structures
Introduction
infrastructure
South India
Summary and conclusions...

1) Increasing recognition that private
BOT/BOO models are not as
powerful an answer to the
infrastructure needs of developing
countries as once thought

1) Some of the issues which should
also be addressed are:
1)
Lack of enabling policy and

legislation at the state level
2)
Inadequate project
preparation work
2) New partnership models between

the public and private sectors
emerging, both at the sovereign and
sub-sovereign levels
3)
Lack of transparent and

efficient bidding procedures
4)
Inadequate institutional
capacity with sponsor
agencies and regulators
3) Greater need for the government to

co-invest in infrastructure financing
using innovative structures and
instruments
5)
Lack of efficient
subsidization for high
positive externality
infrastructure projects
Introduction
infrastructure
South India
Key successes and failures in PPP projects in South

India...
The Tiruppur
Area
Development
Project (TADP)
Marks highest single private investment in urban infrastructure in the

country. Investments in water supply and sewerage systems are
proposed to be recovered through a composite water charge
East Coast Road

rehabilitation
project
The project demonstrates that a toll policy highlighting the guidelines

for toll plaza location and clarity on definition of local traffic is critical
to minimize the uncertainty relating to toll collection
Kakinada Deep
Water Port
(KDWP)
GoAP has incorporated several learnings from its privatization

experience here. Later private participation initiatives have been on a
revenue share model to facilitate appropriate sharing of risk. Also
highlighted the need for an independent authority for dispute
resolution
Key successes and failures in PPP projects in South India

(2)...
Alandur
sewerage project
A notable feature is the tariff structure, developed on full user charge

recovery with cross subsidies for the poor. While the project has faced a
number of challenges, it demonstrates the scope for implementing
sanitation schemes through PPP
Krishnapatnam
Port Company
Limited
In spite of the delays appears to be of vital importance to GoAPs port

sector given its strategic position to handle iron ore from the Hospet
Bellary region. However, rail connectivity to the port need to
addressed on a priority basis
Vizakhapatnam
Industrial Water
Supply Project
(VISWP)
While the Vizakhapatnam Steel Plan has started getting water, there
have been recent reports of delays in supply of water to the
municipality. Further, the project is understood to face financial
constraints and may require restructuring
The Coimbatore
bypass
Provides significant lessons for development of roads on PPP,

several of which (such as the case for annuity format) seem to have
been incorporated in NHDP road projects
12/20/2014
Table of Contents
Project Finance and

Credit Risk Management
1.
2.
3.
Project Finance Overview

Credit Risks in Project Finance
Credit Risk Management (Financial Risks)
1
2
3
4.
Cash Flow Analysis I (NPV and IRR)

Cash Flow Analysis II (Individual Cash Flows)
Stress Testing/Simulation
Credit Risk Management
Basels Definition of PF (in short)
A simple cash-flow stream
1. Project Finance Overview
Non- or limited-recourse
The value of PF relies on a simple cash-flow stream generated by a

single project and the collateral value of the project assets: the source
of the cash-flow may be a single buyer or consumers.
An independent SPE is created to hold the project assets and to
integrate all legal contracts in an effective and efficient manner for
funding, building and operating a single purpose project. SPE is owned
by one or a few sponsors and it is highly leveraged.
Risk allocation
PF is used for large, complex, and expensive industrial facilities such as

natural resources and infrastructure sectors, which involve a series of
legal contracts in a vertical chain from input supplier to output
purchaser.
Based on: International Convergence of Capital Management and Capital Standards, BIS, 2006, para 221,222
12/20/2014
Why PF Structure? Sponsors Motivation
Risk mitigation/Debt capacity
By isolating the asset in a standalone project company, project finance

reduces the possibility of risk contamination, the phenomenon whereby a
failing asset drags an otherwise healthy sponsoring firm into distress.
The sponsor can preserve corporate debt capacity.
Project Finance
To create asset specific governance structure
PF vs. Corporate Finance
Separate legal incorporation, which assumes a specific project and few

growth options, reduces both the cost of monitoring managerial actions
and assessing performance, and wasteful expenditures and sub-optimal
reinvestment.
Deterrent against strategic behavior by the third parties
Sponsor can involve the critical parties for the project, including the public
sector, as shareholders to prevent future conflict.
By involving international banks and multilateral agencies whose interest
is solely in cash-flow maximization by the project, the sponsor may
prevent harmful action by the host government.
Limited or non-recourse
Simple cash-flow structure
produced from one
independent waste asset
High-leverage at beginning,
but getting lower toward the
end of the debt repayment
Relatively a few layers of
debt and equity structure
(simple ownership)
Applied to projects attaining
a scale of economy
Corporate Finance
Full recourse
Complicated cash-flow
structure produced from a
set of various, replaceable
profit making projects
Leverage depends on a
companys target capital
structure
Various layers of debt and
equity structure
(complicated ownership)
Applied to all profit making
business types
Based on: The Economic Motivations for Using Project Finance, Benjamin C. Esty, 2003
Typical Structure of Conventional PF

Sponsors
Multilateral/
bilateral
agencies
Lenders
Shareholders Agreement
Equity
Loan Agreement
Debt
License/permit
Central/local
Government
Concession
Agreement
Concession
Authority
Insurance
Equipment
suppliers
Construction
2. Credit Risks in Project

Finance
Insurers
Contractors Agreement
Input
supplier
Power/utility
Supply
agreement
Off-take agreement
Project
company
(SPE)
Off-take
purchaser
Operation/maintenance Agreement
Operator
12/20/2014
Project Finance Credit Risks Overview

Force Majeure
Events
Political
Risks
Contractual
Risks
Financial
Risks
Natural
Disaster
War & Civil

Civil
Creeping
Commercial Market
Disturbances Movements Expropriation
Risks
Risks
Strike
Environment Corruption
Construction Interest rate
Insurrection Human rights Legal/regulatory Facility site Exchange rate
-irregularities
Equipment Inflation rate
Earthquake Terrorism CSR
War
Religion
License/Permit Technology Labor cost
Volcano
Nationalism Concession
Off-take
Product market
Disease Outright
Input
Input market
Expropriation Globalization Taxes
Equity-holding
Operation
Salvage cost
Expropriation
Currency
Utility
Confiscation
-inconvertibility Collateral
Nationalization
Expatriation
Mineral reserves
Preemption/priority Reporting accuracy
Breach of contract
Foreign worker limitation
Law enforcement
3. Credit Risk Management

(Financial Risks)
Fire
Flooding
Net Present Value (NPV) I

Financial Agreement (Closing)
t=5
Free
cash flow
3.1 Cash Flow Analysis I

(NPV and IRR)
t = 10
t = 20
t = 30
t = 40
Year
Salvage
value
Sank
costs
Sunk cost does not affect

cash flow analysis because
it is an existing fact regardless
of the investment decision
(it is not incremental costs).
Cash
out flow
t=0
t=1
t=2
Present Value
Example
- CF2
(1 + r ) 2
Present value of
cash out flow at t=2
PV =
Present value of
cash in flow at t=10
CF10
PV = (1 + r ) 10
12/20/2014
Net Present Value (NPV) II

PV0 =
- CF0
- CF2
Present value of
PV2 = (1 + r) 2
Present value of
CF10
PV10 = (1 + r) 10
Present value of
Net Present Value (NPV) III
Negative value because they

are cash out flow
Implication
Net of all present value of cash out flow and

all present value of cash in flow is:
Positive value because they

are cash in flow
Positive NPV: the project will generate more cash than the necessary
amount to repay debt to banks and deliver dividend to shareholders, the
excess cash solely to the projects shareholders.
Zero NPV: the project will generate exactly the necessarily amount of
cash to repay debt to the banks and deliver dividend to shareholders.
Negative NPV: the project cannot generate cash to repay debt to banks
and deliver dividend to shareholders.
Weak point of NPV is that it produces only absolute values.
$1 million investment and $1 thousand investment could, theoretically,
produce the same NPV values.
NPV = PV0 + PV1 + PV2 + PV3 + + PV42

CF10
CF42
- CF1
- CF2
= - CF0 + (1 + r ) 1 + (1 + r ) 2 + + (1 + r )10 + + (1 + r )42
42
CFt
As long as this value is positive, the project will produce
= t
= 0 (1 + r) t
more cash than necessary to repay debt and dividend.
Based on: Financial Management, Eugene F. Brigham and Michael C. Ehrhardt, 2008
Modified Internal Rate of Return (MIRR) I
Internal Rate of Return (IRR)
Method
IRR is defined as the discount rate that assumes NPV is equal to zero.
N
IRR =
Implication
CFt
(1 + r) t = 0
IRR > Hurdle Rate: the project will produce more cash than the necessary
amount to repay debt and deliver dividend to shareholders.
IRR = Hurdle Rate: the project will produce the exact amount of cash to
compromise investors cost of capital.
Year
Sank
costs
IRR is useful when investors assess the project against their hurdle
rate, which is a cost of capital.
t=0
N-t
(1 + r )
1
(1 + r ) t
Cash
out flow
Weak points of IRR
It applies the projects IRR to the reinvestment of cash in flows

When there are more than one change from cash out-flow to cash-in flow, or
from cash-in flow to cash out-flow in the projection, the value of IRR are
more than one: calculator would simply indicate error
Cost of capital
Free
cash flow
Cost of capital
Present Value
Future Value
42
(1 + MIRR) =
Future value of all cash in flows

Present value of all cash out flows
12/20/2014
Modified Internal Rate of Return (MIRR) II
Method
MIRR is defined as the discount rate that forces the present value of
cash in flows (CIF) to equal the present value of cash out flows (COF).
N
t=0
CIFt (1 + r )
COFt
t=0
(1 + r ) t = (1 + MIRR) N
Method
PI =
MIRR is better than IRR because it allows more than one changes in
plus and minus signs in cash flow projection.
Comparing two projects with NPV and IRR

Project B
$300
$100
-$1000
Cost of capital: 10%

NPV: $78.82 IRR: 14.5%
MIRR: 12.1% PI: 1.08
-$1000
$300
$400
$600
Cost of capital: 10%
NPV: $49.18 IRR: 11.8%

MIRR: 11.3% PI: 1.05
Project B
Crossover rate
$200
$78.82
$49.18
$0
5%
-$100
A conflict between NPV and IRR when:

(1) Project size differences exist
(2) Timing differences exist
below crossover rate.
Project A
$100
10%
15%
CFt
(1 + r ) t
CFt
t
t = 0 (1 + r )
PI tells the relative profitability of the project by indicating the value of

the future cash flows par dollar of initial investment. When PI > 1, the
project should be accepted. When PI = 1, this basically means NPV = 0
and MIRR = Hurdle Rate.
Take NPV rather than IRR. The logic is

That NPV selects the project that adds
r % most to shareholders wealth.
NPV of FCF during the life of the debt

Outstanding debt
Project life coverage ratio

=
Annual FCF
Annual debt service (principal and interest payments)
Loan life coverage ratio

=
$300
t=4
3
Debt service coverage ratio

=
NPV
$400
PV of future cash flows

Initial investment
Other Important Indicators
$100
t
CFt
(1 + r) t
CF0
$400
t=1
Implication
MIRR > Hurdle Rate: the project will produce more cash than the necessary
$500
42
PI =
Project A
PV of future cash flows

Initial investment
For the example cash flow projection:
MIRR is better than IRR because it reinvest the cash-in flow by using
the cost of capital which is more realistic. Thus, MIRR tells more
accurate profitability of the project.
Generally:
Implication
PI is another way of using NPV by dividing PV of future cash flow by

initial investment.
N
N-t
FV of cash in flows
(1 + MIRR) N
PV of cash out flows =
Profitability Index (PI)
NPV of FCF for the entire project life

Outstanding debt
Debt-to-equity ratio
=
Outstanding debt
Outstanding equity
7.2% 11.8% 14.5%
12/20/2014
Issues on Cost of Capital II
Issues on Cost of Capital I
Decreasing Debt/Equity Ratio
For calculating NPV for a project within a company or for a companys

valuation, generally WACC (weighted average cost of capital) is used.
CF1
CF2
CFn
NPVC = - CF0 + (1 + WACC)1 + (1 + WACC)2 + + (1 + WACC)n
CF1
CF2
CFn
NPVP1 = - CF0 + (1 + WACC1)1 + (1 + WACC2)2 + + (1 + WACCn)n
in which weight of debt is constantly adjusted

WACC = (weight debt x cost debt)(1 T) + (weight capital x cost equity)
[NOPAT: Net Operating Profit After Tax, t: tax rate, KD: debt cost,
D: debt outstanding, Rf: risk free rate, a: asset beta, Rp: risk premium]
Both NPVP1 and NPVP2 in the previous slide involve the concept of
CAPM (capital asset pricing model) to get debt, equity and asset beta,
which would not work appropriately in case of project finance for several
reasons:
In case of project finance the outstanding debt constantly declines and

debt/equity ratio keeps changing throughout the project life.
NOPAT1 + tKDD1
NOPAT2 + tKDD2
or NPVP2 = - CF0 + [1 + (Rf + a x Rp)] 1 + [1 + (Rf + a x Rp)] 2 +
Reliability of CAPM in Project Finance Situation
A country where project is located may not have integrated/efficient market

Data would be not available for market risk premium
An ideal instrument represents the risk free rate would not be available
CAPM may not able to incorporate all risks associated with the project
CAPM does not consider asymmetric down side risks
Required return on debt may different between construction and operating
periods
What if there is single purchaser located in other country?
What to do?
Tax shield
adjustment
Based on: Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows, Richard S. Ruback, 2000
Based on: Project Finance, Aditya Agarwal and Sandeep Kaul
Analysis of Individual Cash Flows
3.2 Cash Flow Analysis II

(Individual Cash Flows)
FCF used for NPV

(IRR) analysis
Free
Cash
Flow
(FCF)
Year
Sales
revenue
Anatomy of FCF
for project finance
Year
Input cost
Operating cost
Construciton
costs
Taxes
Net investment
(in maintenance)
12/20/2014
Construction I
Construction contracts
Fixed price contract (high premium/low risk, payment based on progress)

Turn-key contract
Construction II
Major risks I
Increase in construction cost (cost over-run)
The contractor accepts full responsibility for delivering a fully operational

facility on a date-certain, fixed price basis.
EPC contract (engineering, procurement, and construction contract)
Risk mitigation
Cost plus fee contract (low premium/high risk, frequent payments)

Cost plus fee contract with maximum price and incentive fee
Major risks II
Performance liquidated damage to cover the loss

Third party guarantees such as letter of credit or performance bond
(payment bond), when financially weak contractors
Bid bond/warranty bond/retention bond
Site acquisition and construction related facilities

Equipment, building material, and utility supply
Labor/environmental issues
Force majeure risks
Risk mitigation
Take-or-pay contract (a form of unconditional guarantee)
the purchaser required to pay for a certain amount (fixed cost) for the
product delivered, when the product meets the contract quality
requirements.
Long-term sales agreements (obligation to purchase)
the purchaser is required to pay for a certain amount (fixed cost), even the
product is not delivered. The rest of the amount (variable cost) will be paid if
the purchaser wants to buy.
Take-and-pay (a form of conditional guarantee)
Other risks
Off-take agreements
Breach of off-take contract/decrease in project revenue

Increase in maintenance costs and input/utility costs
Inability to the project company to repay debt
Risk mitigation
Off-take Purchase I
Project performance at less guaranteed levels
Turn-key contract
Stated milestones tied to construction loan contract
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
Construction III
Increase in construction costs and in debt service costs

Delay in the scheduled flow of revenue to cover debt service and expenses
Breach of project contracts, such as fuel supply or off-take
Risk mitigation
Turn-key contract
Contractual undertakingsinfusion of additional equity, standby equity
participants, contingency tranche in construction loan, standby cost over-run
funding agreements
Escrow funds, contingency account
Delay in completion
Unavailability of sufficient funds to complete construction

Inability to the project company to pay increased debt service during
operation, even if funded by debt
typically one- to five-year agreement for the purchase and sale of specified
quantities of the projects output. The purchaser has the obligation to
purchase the contract quantity only if it is produced and delivered, and meet
the contract quality requirements.
Off-take purchasers financial strength

Market for product or service (in the long run)
All risk contractors riks insurance
12/20/2014
Off-take Purchase II
Merchant project (Merchant facility)
Input
Merchant facility is a project finance without off-take contracts

Cash flow fully relies on the market for project output and forecasts of
future market conditions (revealed to market risks).
The analysis of market risk is similar to that used in any business model
(price, supply and demand).
Risk mitigation
Linking inputs and outputs

Reserve funds
Cash calls
Subordination of project costs to debt services
Hedging strategies
The commodity supplier as project partner
Major risks
Delay in completion of transportation facilities

Availability of supply
Disruption of transportation
Title and risk of loss
Force majeure
Financial strength of supplier
Operation
Major risks
Performance guarantees (liquidated damage)

Fixed price operation and maintenance contract (very rare)
Cost plus fee operation and maintenance contract
Cost plus fee contract with maximum price and incentive fee
Force majeure risks

Risk mitigation
Currency and exchange risks
Excessive equipment replacement and unscheduled maintenance

Poor productivity of labors, incorrect assumptions of required labor
Increase in utility costs
All risk operators risk insurance
Financial strength of the operator
Loan agreement
Export and import of equipment, input, out-put, operating costs

Cash flow will be affected depends who takes the risks and covers
Interest rate
Loan disbursements (construction loan and term loan)

Principal repayment and interest repayment
Availability of swap markets
All other agreement
Other risks
Risk mitigation
Exchange/Interest/Inflation Rate
Increase in operating costs
Supply-or-pay contract
Fixed amount contract
Requirements contract (cap/floor)
Output contract
Subordination of project costs to debt services
Other issues
Increase in input costs

Risk mitigation
Incorrect interest rate projections can severely affect the ability of the
project revenue to service debt by
Inflation rate
Risk allocation
Cash flow projection
12/20/2014
Collateral I
The blanket lien
Personal (movable) property
A security interest in the cash flows generated by the project under long-term offtake agreements.
Accomplished through a cash collateral account in which off-take purchaser pays
all payments into the account established by the lenders.
Offshore accounts/escrow accounts
Ownership interests
The blanket lien covers all the assets of the project company, including real
(unmovable) and personal (movable), tangible and intangible.
Project cash flow
Collateral II
Pledge of ownership interests

Voting trust
Negative pledges
Intangible assets
Permits, licenses and concessions
Contracts
Insurance proceeds
Surety bonds
Guarantees
Liquidated damages
Political risk insurance
Accounts
Collateral III
Review the contracts to verify that they are each assignable under the
countrys law.
In the event of a foreclosure, the contracts will only have value to the lender
if they can be assumed by the lender and later assigned to a purchaser of
the project.
Other issues
Disbursement agreement
An agreement under which the project company will not create, directly or
indirectly, any security interest, lien or encumbrance in its assets for the benefit
of any other entity.
Types of liens allowed

Local formalities
Denomination of lien in local currency
Priority of lien (perfection)
Enforcement
Foreclosure
Equity and Dividneds
Timing and certainty of equity contribution
Condition precedents in loan agreement

Covenants in loan agreement
Some conditions for dividend payments
Requirement to replenish before dividend payments
A part of equity contributions to the project company may be planned

after the financial closing. Some funds may be injected with construction
draw-downs, or await investment until project completion.
Risk mitigation
Reserve (contingent) account

Off-shore account
Financial covenants: a financial covenant limiting the dividend payments

to a certain level
12/20/2014
Permit/License/Concession
Status
Permits already obtained and in full force and effect
Permits routinely and mandatorially granted on application and fulfillment
of applicable criteria and that would not normally be obtained before
construction (before loan agreement)
Other than above
3.3. Stress Testing/Simulation
Risks
Unable to operate/termination of project
Damage payments
Different policies between central and local governments
Permit vocation, additional permit requirements
Risk mitigation
Integrated management of all necessary permits: apply, obtain, maintenance,

renew processes
Basics of Risk Analysis Techniques I
Three stages of risk analysis techniques

1.
2.
3.
Sensitivity Analysis: a linear relation between a cash flow factor and

NPV
Scenario Analysis: estimate probabilities of each individual cash flow
on the basis of base-case, best-case, and worst-case scenario, which
in turn provides mean and standard diviation of NPV
Monte-Carlo Simulation: obtain expected NPV and standard deviation
from randomly selected scenarios based on the probability distribution
of each cash flow factors
Sensitivity Analysis I
Method
Sensitivity analysis is a risk analysis technique that tells how

much NPV will change in response to given changes in one cash
flow factor with other factors held constant.
NPV ($)
NPV when unit sales price

goes up by 15%
Unit sales price
NPV based on the originally

estimated unit sales price
$0
NPV when unit sales price
goes down by 20%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Deviation from Base-Case Value (%)
10
12/20/2014
Sensitivity Analysis II
Sensitivity Analysis III
The slopes of the lines indicate how sensitive NPV is to changes in

each individual cash flow.
Relatively small error in estimating individual cash flow with steeper
slope leads to a large error in estimating projects NPV.
Estimated values of cash

flow factors
Price growth rate

Sales quantity
Asset beta
$0
Input price
Operating costs
Construction costs
Input price growth
-20%
10%
15%
20%
Deviation from Base-Case Value (%)
-15%
-10%
-5%
0%
5%
Scenario Analysis I
Method
Example 1: sales price would drop by 6% with 25% probability for

worst case scenario.
Example 2: operating cost would be reduced by 2% with 25%
probability for best case scenario.
Then obtain base-case, best-case, and worst-case NPV and

calculate mean NPV and standard deviation to (roughly)
estimate the magnitude of the risk inherent to the project.
Implication
Scenario Analysis II
Simplified illustration of scenario analysis process
Scenario analysis examines a set of scenarios under tha

assamption that each scenario occurs with a certain probability
NPV breakeven analysis examines a value of each factor which makes

NPV exactly zero.
Utility price
NPV breakeven
analysis
Sensitivity analysis does not incorporate a concept of probability

It can deal with only one cash flow for each analysis
NPV Breakeven Analysis
Original NPV
value
Sensitivity analysis is a powerful technique to understand which factors

need to be more accurately examined to reduce the entire credit risk.
Weak Points
Unit sales price

NPV ($)
Implication
Scenario analysis is very useful technique to grasp the worst

case situation of the project (by assuming 1.0 correlation).
Excel
Sheet
Base-, best-, and worst-case
scenarios of each cash flow
Slot in all base-, best-,

and worst-case scenarios
of each cash
Standard Deviation
of NPV
Projected NPVs on the basis of the three scenarios

Probability (%)
50%
40%
30%
FCF from basecase scenario
FCF from worst- 20%

case scenario 10%
FCF from bestcase scenario

$0
Expected NPV
(mean value)
Mean value
NPV ($)
11
12/20/2014
Monte Carlo Simulation
Simplified illustration of monte-carlo simulation process

NPVs probability
Distribution
4. Credit Risk Management

(Political Risks)
Expected NPV
(mean value)
Probability distribution of each cash

flow and correlations between them
Randomly picking up
scenarios
Standard Deviation
of NPV
Simplified illustration of probability distribution of NPVs

Probability (%)
10%
8%
6%
4%
2%
NPV ($)
$0
Mechanism of Political Risks for PF

Irreversible
Investment
Weaker
negotiating
power
A large
standing out
asset
Easily attract
peoples
attention
Political shift
Corruption
Violation of law
High profit
Rival company
Potentially
high utility bills
Potential
environmental
damage
Project Fiannce: Introductory Manual on Project Finance for Managers of PPP

Projects, National Treasury, South Africa
Creeping
expropriation
Political
interest
Civil
movement
Potential
foreign
exploitation
Natural
resources/
infrastructure
Useful Documents
Tools for Project Evaluation, Nathaniel Osgood, 2004
Trigger
Civil
interest
War/civil
disturbance
Outright
Natural disaster
Environmental problem expropriation
Increased input costs
Inefficient operation
International relation
Although this document is prepared for public-private partnership (PPP) managers, it provides a
good overview of project finance credit analysis, by addressing the general structure of a project,
funding alternatives, investor profiles, and the criteria investors will consider. Also, it contains
good illustrations for cash flow analyses. (46 pages)
Available at:
http://www.finint.ase.ro/Masterate/Masterat_Alexandra/Bibliografie/Project_Finance_Manual.pdf
Detailed and clear explanation on time value of money, the concept of discounting, and NPV
and IRR methods, with cases. (41 slides)
Available at: http://ocw.mit.edu/NR/rdonlyres/Civil-and-Environmental-Engineering/1-040Spring2004/ABF26C4A-8572-498D-ACE3-98D2E8AD0685/0/l3prj_eval_fina2.pdf
Thought process during the project initiation pahse, H. Griesel, 2004
Glossary of Project Finance Terms, Foster Wyatt Training, 2003
An excellent summary of project finance risks in the mining sector. (6 pages)

Available at: http://www.platinum.org.za/Pt2004/Papers/237_Griesel.pdf
Useful glossary for project finance. (12 pages)
Available at: http://www.fosterwyatt.com/filesdownload/HNDOUT39.pdf
12
Confidential
Confidential
Project Finance: Risk Assessment and Appraisal

Public Private Partnerships ( PPP) in Road Sector
Project Finance : PPPs (Including Lenders Perspective)

Additional Lenders Perspectives
Confidential
Project Finance :
Confidential

The value of PF relies on a simple cash-flow stream generated by a single project
and the collateral value of the project assets: the source of the cash-flow may be a
single buyer or consumers.
Project Finance
An independent SPE is created to hold the project assets and to integrate all legal
contracts in an effective and efficient manner for funding, building and operating a
single purpose project. SPE is owned by one or a few sponsors and it is highly
leveraged.
Corporate Lending
borrower
Assignment of contracts/licenses Physical assets of the borrower

is the key security
is the key security
Non or limited-recourse
Risk allocation
PF is used for large, complex, and expensive industrial facilities such as natural
resources and infrastructure sectors, which involve a series of legal contracts in a
vertical chain from input supplier to output purchaser.
Confidential
A typical structure of contracts for Project Finance
Off-taker
Export Credit
Agencies
Insurers/
Surety companies
Suppliers
Delays/
Insurance
Arrangers/
Lead funders
Debt

Project Company
Risk is the probability by which actual results could be lower than plan/target
Or
A risk is the threat or possibility that an action or event will adversely affect an
organisations ability to achieve its objectives
Government
Sales
contract
Guarantee
Confidential
Risk: Project Risk
EPC Contract
EPC
Contractor
Independent
experts/lawyers
Escrow agent/
Trustee
Sponsors
Lessors
Reducing risks over time

Increasing free cash flows
O&M
Contractor
Confidential
Risk Evaluation Framework/ Approach
Confidential
Financial Evaluation- IRR/NPV
Development risks
Market Risks
Completion Risks
Financing Risks
Force Majeure Risks
Present value numbers are not the best indicators of project viability, given
that they reduces the importance of sizeable amounts of residual cash flow
that may be available towards the latter periods of the projects life.
IRR is not an useful measure of project viability as it assumes reinvestment of

cash flows at the IRR- often an incorrect assumption. Calculating NPV
necessitates making assumptions on the cost of capital- often difficult to
estimate.
Project IRR and Equity IRR ( Sponsors Perspective)
Risks in a project can be handled in many ways;

Allocated/ Transferred- through EPC, O&M, and off-take contracts
Managed/Bear
Guarantees/Credit Enhancement
Interest and principal cannot be serviced out of earnings, which is an accounting

concept- payment has to be made in cash. Many transactions and accounting
entries can affect earnings, but not cash and vice versa Standard and Poors
Commercial and Non Commercials Risks
Confidential
Lenders Perspective Coverage Ratios and DSCR

Available Cash Flow (ACF)/ Principal + Interest, where ACF is defined as
Operating Cash Flow

less Taxes

Confidential
Lenders Perspective Other measures
ACF/ Interest
Loan Life Ratios
Debt Equity Ratios
Leveraged/Equity IRR



9
10
Confidential
Typical suggested benchmarks
Infrastructure
Power
Mining
Oil and Gas
Telecoms
Annual
Good
1.2
1.15
1.4
1.5
1.7
DSCR
Target
1.5
1.4
1.6
1.7
2.0
Risky
1.8
1.6
2.0
2.0
2.8
Confidential
Typical sensitivities/correlations
Loan Life Ratio
Good
Target
1.3
1.5
1.3
1.35
1.5
1.6
1.6
1.7
1.8
2.2
Price
Escalated
Building cycles
Breakeven
Risky
2.0
1.6
1.8
2.0
3.0
Volume
+/- 20%
Breakeven
Opex
Interest rates
Source: Advanced Project Finance- Richard Tinsley
+/- 3-5%
Escalation changes
Capex
Foreign exchange
Impact of variation in each

parameter on key ratios like IRR,
DSCR, needs to be analyzed
5% change in price/volume may

have much worse off impact on
project viability as compared to say,
a 2% increase in the interest rates

adversely impact the project
viability needs to be highlighted
Use two factors together for better

results. Use tow way data tables
impact of two input parameters on
an output measure.
+/- 20%
+/- 10-20%
1 year delay
+/- 3-5%
Differential inflation (purchasing power
parity)
11
Confidential
PPPs in Infrastructure.
Ownership and
Risk
Management /
O&Mcontract
Concessions*
(BOT)
Privatization**
(BOO)
Divestiture By
License /Sale
Asset Ownership
State
State
Private
Private
Investment
Responsibility
Primary
Commercial Risk
State
Confidential
PPPs in Road Sector in India
Private
Private
National Highways (65,000km) account for 2% of the road network and carry 40% of the
total traffic
NHDP, aimed at 4/6 laning of 14,000km of NH corridors, launched in 1998
To address the twin-challenge of poor quality of corridors and paucity of resources
Many roads under NHDP developed through traditional cash contracts
Private
But, the Program also ushered in PPPs through two predominant modes
State
Private
Private
BOT-Tolling -- the traffic & toll collection risks are borne by the private operator
BOT-Annuity -- the operator paid a competitively bid out, fixed semi-annual

payments, beginning after completion of construction and through the remaining
concession period
Private
Spurred by the success achieved in first two phases, NHDP has been expanded to include
2/4/6 laning of about 40,000km of NH, through five additional phases
Confidential
BOT Toll Roads By NHAI in India
Confidential
Typical Risk Assessment (Matrix).

What is risk evaluation?
Provision of grant to bridge viability gap, if any, required up to 40% of project cost
Up to 20% during the construction and the remaining during the O&M phase
Concessionaire selection through open competitive bids based on a single parameter
Clearly defined framework for allocation of key risks
Amount of grant sought [or] the extent of project revenues sought to be shared with the govt.
Commercial & technical risks relating to construction and O&M allocated to Concessionaire
Traffic growth rate risk i.e., deviation from expected growth rate
Shared with provision for extending/reducing the concession period

Debt Buy back by NHAI
Defined time limit (180 days) for achieving financial closure

All direct and indirect political risks assigned to the Concessioning Authority
Protection to the Concessionaire from construction of competing roads
ExpectedLoss
User fees (tolls) as per the rates notified by the government
Provision for a fixed annual increase plus 40% of Wholesale Price Index (WPI)
Local traffic exempted until free service lanes are provided
Monitoring and supervision through an Independent Engineer (firm) selected by the Authority through
a transparent process
ConfidenceLevel
EconomicCapital
AmountofLoss
(increasingtothe
right)
Confidential
Road 1: complete in all respects

Road 2: Requires upgradation. Land acquisition risks low.
Concessionaire would also be the EPC contractor. Fixed price, date certain
contract.
Market Risk : Significant
Both highways have different toll rate structures, thus exposing the project to toll
diversion risks.
Value savings between both stretches not significant.
Inadequate data available on traffic history, makes forecasting traffic difficult.
Changes in traffic pattern could affect revenue levels.
Operating and Technology Risk : Moderate
Confidential
Concessionaire has adequate experience in toll collections. Leakage risks are

likely to be low.
O&M risk of the stretches would be assumed by the concessionaire through an
O&M contract.
Risks associated with forecasting of O&M outflows, and the inflation sensitivity of
these estimates.
Financing Risks :High
Very high leverage: 11:1

Considerable exposure to interest rate and refinancing risks.
17
Political risks absorbed by project owner, the state road development corporation.
In the event of political force majeure, compensation would need to be paid by this
entity.
Credit quality of the project owner quite weak.
Waterfall mechanism
DSRA providing liquidity support
Collateralisation of O&M reserves
18
Confidential
Cash flow analysis
19
Base Case DSCR : 1.2

Ramp up in traffic volumes
Escalations in toll rates
Changes in traffic patterns
Higher than anticipated O&M
Stress test results : DSCR < 1
Overall Analysis
On an overall basis, despite the high market risks, the project was inherently
viable due to the cost at which the concession was acquired.
However, a disproportionately high amount of risks were being assumed by the

debt investors, which led us to take a negative rating view on the project.
Confidential
Project profile:
Existing high speed corridor, linking two major cities

Project operational- tolling rights auctioned to a private party
Concession involved development of a parallel road, which would also be tolled
Estimated project cost close to Rs 1400 Crores
Concession period- 15 years
Concessionaire credit quality weak
Toll revenues would be the only source of revenue
20
Confidential
Confidential
Additional Lenders Issues

Security package / Credit enhancement
Infrastructure Project Finance Loans /Bonds in India
A security package may include (list is only indicative)
First charge (ranking pari-passu with the existing lenders) on fixed assets and second charge on
receivables (other movables)
Pledge of promoters shareholding
Escrow mechanism
Assignment of all project contracts in favour of lenders
Credit enhancement measures
Cash-collateral/committed equity support with pre-defined triggers such as fall in DSCR / D-E /
EBITDA levels below target levels
Corporate / Bank guarantee
Creation of 12 month debt service reserve (typical is 3-6 months)
Restriction on payment of dividends, take up additional borrowings (except for meeting working
capital requirements, and with some pre-set limits)
Source : Global PPP Network . William Streeter, MD Fitch Infrastructure ratings
Confidential
Expected loss and economic capital
Broadly, there are two types of losses arising from credit risks:
Confidential
Capital to protect against unexpected losses
Expected Loss
Unexpected Loss
Unexpected loss is the potential for actual loss to exceed the expected loss and is a
measure of the uncertainty inherent in the loss estimate
Economic capital should cover Unexpected credit losses and non-priced / under-provisioned
part of expected loss
ConfidenceLevel
ExpectedLoss
EconomicCapital
Expected losses represent a cost of doing business and are generally expected to be
absorbed by operating income
In the case of loan losses, for example, the expected loss should be priced into the yield and
an appropriate charge included in the allowance for loan and lease losses
Expected
Loss
LoanExposureX
Probabilityofdefault
X
(PD)
LossGivendefault
(LGD)
AmountofLoss(increasingtothe
right)
Confidential
Gradual reduction in mandatory use of external ratings..

Need for better credit information capacity
Confidential
Ideal usage of credit ratings pricing and capital

provisioning
1.Standardisedapproach
CreditratingsofborrowersasperExternalCreditAgency
(ECA)Rating
Weightsaredefinedbyregulatorw.r.t.totheECArating.
PRICING
RATING X
SPREAD
DefaultRate:
AAA:0.03%
AA:0.32%
A:5.16%
BBB:8.83%
CapitalAllocation
2.IRB Foundation
Components:PD,LGD,EAD
PDdefinedbyBankbasedoninternalrating
LGDandEADdefinedandprovidedbyregulator
CAPITAL CALCULATION
3.IRB Advanced
ComplexityofApproach
Components:PD,LGD,EAD,
Maturity
DefinedbyBank,subjectto
regulatoryapproval
From 2014
RISK WEIGHT
AAA:20%
AA:50%
A:100%
BBB:150%
Unrated:100%
Limited application in case of project finance

as ratings are usually sub investment grade
Confidential
Summing up..
No two projects are alike- every project has its own structure and its own set
of risk drivers.
The risk levels associated with the project also change over time. Usually
reduces.
Focus on economics (fundamental viability)- contractual structure although

important should be viewed more as a support system.
Focus on robustness of cash flows for evaluating both project viability and
also the credit risk associated with the project. Also remember a good credit
may not be attractive from returns point of view.
Confidential
Some References
Project Finance Journal/Magazine

Introduction to Project Finance Andrew Fight
Project Financing Nevit and Fabozzi
Rating agency websites e.g Fitch
27
Confidential
Thank you
Financial Structure & Cash Flow Statement for PetroMexico (US$ in thousands, unless otherwise indicated)
Year
Forecasted Total
Price of
Revenue
Maya crude
Oil
(Per Barrel)
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
$11.40
11.51
11.63
11.75
11.86
11.98
12.10
12.22
12.34
12.47
12.59
12.72
12.85
12.97
13.10
13.24
13.37
13.50
13.64
13.77
13.91
14.05
14.19
$0
0
0
$570,000
$575,700
$581,457
$587,272
$593,144
$599,076
$605,066
$611,117
$617,228
$623,401
$629,635
$635,931
$642,290
$648,713
$655,200
$661,752
$668,370
$675,054
$681,804
$688,622
$695,508
$702,463
$709,488
Operating
Costs
Earnings Depreciation Capital

Principal
Principal
Interest
Total
Earnings
Cash
Net
Increase in Funding
Cash
DSCR Equity
before
Expenditure Outstanding
Payments
Payments
Debt Service Before
Taxes
Working
NWC
of Debt
Available for
Cash
Interest &
Tax
Capital
Service
Debt service
Flows
Tax
(EBT)
(NWC)
Reserve account
(ECFs)
(EBIT)
$0
$0
$0
($300,000)
$0
$0
$0
$0
$0
$0
$0
0
$0
($300,000)
($300,000)
0 ($20,000)
20000
($800,000)
$700,000
$0
$70,000
($630,000)
($90,000)
0
0
0
0
($800,000)
($170,000)
0 ($73,333)
73333
($600,000)
$1,300,000
$0
$130,000
($470,000) ($203,333)
0
$46,849
($46,849)
($77,500)
($724,349)
($254,349)
200000 $256,667
113333
0
$1,300,000
$25,000
$130,000
$155,000
$126,667
($44,333)
47317
($468)
$1,250
$326,448
2.11
$171,448
202000 $260,367
113333
0
$1,275,000
$25,000
$127,500
$152,500
$132,867
($46,503)
47791
($473)
$1,250
$327,973
2.15
$175,473
204020 $264,104
113333
0
$1,250,000
$25,000
$125,000
$150,000
$139,104
($48,686)
48269
($478)
($11,250)
$317,023
2.11
$167,023
206060 $267,878
113333
0
$1,225,000
$50,000
$122,500
$172,500
$145,378
($50,882)
48751
($483)
$2,500
$332,346
1.93
$159,846
208121 $271,690
113333
0
$1,175,000
$50,000
$117,500
$167,500
$154,190
($53,967)
49239
($488)
($10,000)
$320,569
1.91
$153,069
210202 $275,541
113333
0
$1,125,000
$75,000
$112,500
$187,500
$163,041
($57,064)
49731
($492)
$3,750
$335,067
1.79
$147,567
212304 $279,429
113333
0
$1,050,000
$75,000
$105,000
$180,000
$174,429
($61,050)
50228
($497)
$3,750
$334,965
1.86
$154,965
214427 $283,357
113333
0
$975,000
$75,000
$97,500
$172,500
$185,857
($65,050)
50731
($502)
($8,750)
$322,388
1.87
$149,888
216571 $287,324
113333
0
$900,000
$100,000
$90,000
$190,000
$197,324
($69,063)
51238
($507)
$5,000
$336,086
1.77
$146,086
218737 $291,331
113333
0
$800,000
$100,000
$80,000
$180,000
$211,331
($73,966)
51750
($512)
($7,500)
$322,685
1.79
$142,685
220924 $295,377
113333
0
$700,000
$125,000
$70,000
$195,000
$225,377
($78,882)
52268
($518)
$6,250
$335,561
1.72
$140,561
223134 $299,464
113333
0
$575,000
$125,000
$57,500
$182,500
$241,964
($84,688)
52791
($523)
($6,250)
$321,337
1.76
$138,837
225365 $303,592
113333
0
$450,000
$150,000
$45,000
$195,000
$258,592
($90,507)
53319
($528)
$7,500
$333,390
1.71
$138,390
227619 $327,762
93333
0
$300,000
$150,000
$30,000
$180,000
$297,762
($104,217)
53852
($533)
$7,500
$323,845
1.80
$143,845
229895 $385,305
40000
0
$150,000
$150,000
$15,000
$165,000
$370,305
($129,607)
54390
($539)
$82,500
$377,660
2.29
$212,660
232194 $429,559
0
0
0
0
$0
$429,559
($150,345)
54934
($544)
0
$278,669
$278,669
234516 $433,854
0
0
0
0
$0
$433,854
($151,849)
55483
($549)
0
$281,456
$281,456
236861 $438,193
0
0
0
0
$0
$438,193
($153,367)
56038
($555)
0
$284,270
$284,270
239229 $442,575
0
0
0
0
$0
$442,575
($154,901)
56599
($560)
0
$287,113
$287,113
241622 $447,000
0
0
0
0
$0
$447,000
($156,450)
57165
($566)
0
$289,984
$289,984
244038 $451,470
0
0
0
0
$0
$451,470
($158,015)
57736
($572)
0
$292,884
$292,884
246478 $455,985
0
0
0
0
$0
$455,985
($159,595)
58314
($577)
0
$295,813
$295,813
248943 $460,545
0
0
0
0
$0
$460,545
($161,191)
58897
($583)
0
$298,771
$298,771
Valuation Using Book Value Weights (US$ in thousands)

Standard Approach (Book Value Leverage)
Multiple Discount Rate Approach
Year
ECF
Total
Total
D/V
Cost of
Discount
Present Value
(Book Value Leverage)
Equity
Debt
ratio
equity
factor
PV
Ke
Discount factoPV
0
($300,000) $300,000
$0
$0
20.40%
1.0000
($300,000)
0.1244
1.0000
($300,000)
1
($170,000) $470,000
$700,000
0.598
20.40%
0.8306
($141,196)
0.1905
0.8400
($142,794)
2
($254,349) $724,349 $1,300,000
0.642
20.40%
0.6898
($175,460)
0.2041
0.6976
($177,433)
3
$171,448
724349 $1,300,000
0.642
20.40%
0.5730
$98,232
0.2041
0.5794
$99,330
4
$175,473
724349 $1,275,000
0.638
20.40%
0.4759
$83,504
0.2026
0.4818
$84,538
5
$167,023
724349 $1,250,000
0.633
20.40%
0.3952
$66,015
0.2010
0.4011
$66,999
6
$159,846
724349 $1,225,000
0.628
20.40%
0.3283
$52,474
0.1995
0.3344
$53,456
7
$153,069
724349 $1,175,000
0.619
20.40%
0.2727
$41,735
0.1964
0.2795
$42,786
8
$147,567
724349 $1,125,000
0.608
20.40%
0.2265
$33,418
0.1934
0.2342
$34,564
9
$154,965
724349 $1,050,000
0.592
20.40%
0.1881
$29,147
0.1888
0.1970
$30,534
10
$149,888
724349
$975,000
0.574
20.40%
0.1562
$23,415
0.1842
0.1664
$24,940
11
$146,086
724349
$900,000
0.554
20.40%
0.1298
$18,955
0.1796
0.1411
$20,607
12
$142,685
724349
$800,000
0.525
20.40%
0.1078
$15,377
0.1734
0.1202
$17,153
13
$140,561
724349
$700,000
0.491
20.40%
0.0895
$12,581
0.1673
0.1030
$14,475
14
$138,837
724349
$575,000
0.443
20.40%
0.0743
$10,321
0.1596
0.0888
$12,330
15
$138,390
724349
$450,000
0.383
20.40%
0.0617
$8,545
0.1520
0.0771
$10,668
16
$143,845
724349
$300,000
0.293
20.40%
0.0513
$7,377
0.1428
0.0675
$9,703
17
$212,660
724349
$150,000
0.172
20.40%
0.0426
$9,058
0.1336
0.0595
$12,655
18
$278,669
724349
$0
0.000
20.40%
0.0354
$9,859
0.1244
0.0529
$14,748
19
$281,456
724349
$0
0.000
20.40%
0.0294
$8,270
0.1244
0.0471
$13,248
20
$284,270
724349
$0
0.000
20.40%
0.0244
$6,937
0.1244
0.0419
$11,900
21
$287,113
724349
$0
0.000
20.40%
0.0203
$5,820
0.1244
0.0372
$10,689
22
$289,984
724349
$0
0.000
20.40%
0.0168
$4,882
0.1244
0.0331
$9,602
23
$292,884
724349
$0
0.000
20.40%
0.0140
$4,095
0.1244
0.0294
$8,625
24
$295,813
724349
$0
0.000
20.40%
0.0116
$3,435
0.1244
0.0262
$7,747
25
$298,771
724349
$0
0.000
20.40%
0.0096
$2,882
0.1244
0.0233
$6,959
NPV
($60,322)
NPV
($1,972)
Quasi Market Valuation (US$ in thousands)

Year
Equity
Cash
Flows
(ECFs)
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
($300,000)
($170,000)
($254,349)
$171,448
$175,473
$167,023
$159,846
$153,069
$147,567
$154,965
$149,888
$146,086
$142,685
$140,561
$138,837
$138,390
$143,845
$212,660
$278,669
$281,456
$284,270
$287,113
$289,984
$292,884
$295,813
$298,771
Beginning Project
Equity
Return
Dividends
Equity
NPV
Investment on Equity
Value
(ROE)
(QuasiMarket)
$0
$92,289
$300,000
$0
$0
$392,289
170,000
$48,801
0
$611,089
254,349
$107,100
0
$972,538
$178,704
($171,448)
$979,793
$179,606
($175,473)
$983,926
$179,010
($167,023)
$995,914
$179,392
($159,846)
$1,015,460
$180,713
($153,069)
$1,043,104
$181,932
($147,567)
$1,077,469
$183,987
($154,965)
$1,106,491
$184,267
($149,888)
$1,140,870
$185,214
($146,086)
$1,179,998
$186,752
($142,685)
$1,224,065
$187,794
($140,561)
$1,271,298
$189,229
($138,837)
$1,321,690
$189,948
($138,390)
$1,373,248
$190,812
($143,845)
$1,420,216
$189,995
($212,660)
$1,397,550
$180,515
($278,669)
$1,299,396
$161,645
($281,456)
$1,179,586
$146,740
($284,270)
$1,042,056
$129,632
($287,113)
$884,574
$110,041
($289,984)
$704,631
$87,656
($292,884)
$499,403
$62,126
($295,813)
$265,716
$33,055
($298,771)
Ending
Equity
Value
(QuasiMarket)
$392,289
$611,089
$972,538
$979,793
$983,926
$995,914
$1,015,460
$1,043,104
$1,077,469
$1,106,491
$1,140,870
$1,179,998
$1,224,065
$1,271,298
$1,321,690
$1,373,248
$1,420,216
$1,397,550
$1,299,396
$1,179,586
$1,042,056
$884,574
$704,631
$499,403
$265,716
($0)
Total
Debt
(Book
Value)
$0
$700,000
$1,300,000
$1,300,000
$1,275,000
$1,250,000
$1,225,000
$1,175,000
$1,125,000
$1,050,000
$975,000
$900,000
$800,000
$700,000
$575,000
$450,000
$300,000
$150,000
$0
$0
$0
$0
$0
$0
$0
$0
Debt to
Debt to
Equity
Value ratio Equity
Beta
(D/V)
ratio (D/E)
0%
53%
57%
57%
56%
56%
55%
53%
51%
49%
46%
43%
40%
36%
30%
25%
17%
10%
0%
0%
0%
0%
0%
0%
0%
0%
0%
115%
134%
133%
130%
126%
121%
113%
104%
95%
85%
76%
65%
55%
44%
33%
21%
11%
0%
0%
0%
0%
0%
0%
0%
0%
Expected
return
on equity
(Ke)
0.6
1.29
1.40
1.40
1.38
1.35
1.32
1.28
1.23
1.17
1.11
1.06
0.99
0.93
0.86
0.80
0.73
0.66
0.60
0.60
0.60
0.60
0.60
0.60
0.60
0.60
0.1244
0.1753
0.1837
0.1833
0.1819
0.1801
0.1780
0.1744
0.1708
0.1665
0.1623
0.1583
0.1534
0.1488
0.1437
0.1389
0.1338
0.1292
0.1244
0.1244
0.1244
0.1244
0.1244
0.1244
0.1244
0.1244
Discount
Factor
1.0000
0.8894
0.7567
0.6393
0.5402
0.4571
0.3873
0.3288
0.2800
0.2391
0.2050
0.1764
0.1523
0.1320
0.1149
0.1005
0.0882
0.0778
0.0689
0.0613
0.0545
0.0485
0.0431
0.0383
0.0341
0.0303
Project NPV
Sum
Present
Value
of ECF
($300,000)
($151,192)
($192,475)
$109,602
$94,798
$76,343
$61,911
$50,329
$41,314
$37,058
$30,727
$25,764
$21,726
$18,556
$15,954
$13,904
$12,689
$16,546
$19,202
$17,248
$15,493
$13,917
$12,501
$11,229
$10,086
$9,060
$92,289
$92,289
Year
Equity
Cash Flows
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
($80,000)
($1,986)
($550,148)
$1,576
$185,047
$227,819
$221,589
$190,031
$214,719
$199,063
$220,578
$218,294
$236,588
$210,755
$204,461
$203,439
$246,435
$225,711
$249,243
$270,635
$301,785
$378,858
$369,361
$364,643
$350,537
$348,472
$324,119
$416,986
$428,838
$446,428
$452,818
$470,050
$486,703
$495,374
$499,512
$523,227
$536,947
$556,805
$565,039
Total
Debt
$0
$1,000,000
$1,024,299
$1,242,981
$1,450,000
$1,411,120
$1,372,240
$1,333,360
$1,268,892
$1,205,447
$1,103,295
$992,187
$864,195
$768,166
$680,692
$576,861
$456,838
$408,576
$354,212
$256,355
$136,753
$75,000
$75,000
$75,000
$75,000
$75,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Beginning
Equity
Value
Market
Equity
Value of
Investment
Project
(Estimate)
$0
$0
$80,000
$80,000
$1,986
$91,034
$550,148
$696,478
0
$819,767
0
$783,370
0
$709,400
0
$631,545
0
$574,693
0
$484,973
0
$397,861
0
$276,526
0
$139,155
0
($37,046)
0
($213,103)
0
($407,098)
0
($625,949)
0
($917,221)
0
($1,226,111)
0
($1,595,641)
0
($2,030,803)
0
($2,550,736)
0
($3,211,929)
0
($3,941,185)
0
($4,748,201)
0
($5,632,384)
0
($6,614,504)
0
($7,683,349)
0
($8,969,321)
0
($10,412,590)
0
($12,036,681)
0
($13,850,848)
0
($15,887,429)
0
($18,171,001)
0
($20,721,515)
0
($23,564,630)
0
($26,753,016)
0
($30,315,729)
0
($34,301,243)
0
Return on
Equity
0
$9,048
$55,296
$124,865
$148,650
$153,849
$143,734
$133,179
$124,999
$111,951
$99,243
$80,923
$60,387
$34,699
$10,466
($15,412)
($44,836)
($83,180)
($120,287)
($164,527)
($218,148)
($282,334)
($359,894)
($442,373)
($533,647)
($633,648)
($744,725)
($868,987)
($1,014,430)
($1,177,664)
($1,361,349)
($1,566,531)
($1,796,868)
($2,055,140)
($2,343,603)
($2,665,160)
($3,025,766)
($3,428,709)
($3,879,471)
Dividends
$0
$0
$0
($1,576)
($185,047)
($227,819)
($221,589)
($190,031)
($214,719)
($199,063)
($220,578)
($218,294)
($236,588)
($210,755)
($204,461)
($203,439)
($246,435)
($225,711)
($249,243)
($270,635)
($301,785)
($378,858)
($369,361)
($364,643)
($350,537)
($348,472)
($324,119)
($416,986)
($428,838)
($446,428)
($452,818)
($470,050)
($486,703)
($495,374)
($499,512)
($523,227)
($536,947)
($556,805)
($565,039)
Ending
Equity
Value
$80,000
$91,034
$696,478
$819,767
$783,370
$709,400
$631,545
$574,693
$484,973
$397,861
$276,526
$139,155
($37,046)
($213,103)
($407,098)
($625,949)
($917,221)
($1,226,111)
($1,595,641)
($2,030,803)
($2,550,736)
($3,211,929)
($3,941,185)
($4,748,201)
($5,632,384)
($6,614,504)
($7,683,349)
($8,969,321)
($10,412,590)
($12,036,681)
($13,850,848)
($15,887,429)
($18,171,001)
($20,721,515)
($23,564,630)
($26,753,016)
($30,315,729)
($34,301,243)
($38,745,753)
Equity as a
% of firm value
1
8%
40%
40%
35%
33%
32%
30%
28%
25%
20%
12%
-4%
-38%
-149%
1275%
199%
150%
129%
114%
106%
102%
102%
102%
101%
101%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Equity
beta
0.6
7.190944
1.482411
1.509757
1.710587
1.793504
1.903698
1.992076
2.169851
2.417893
2.993906
4.878057
-13.3964
-1.56281
-0.40323
0.047053
0.301159
0.400062
0.466808
0.52426
0.567832
0.58599
0.588582
0.590523
0.592011
0.593197
0.6
0.6
0.6
0.6
0.6
0.6
0.6
0.6
0.6
0.6
0.6
0.6
0.6
Required Discount
Present
rate of
factor
Value of
return on
Equity CFs
equity
0.1131
1
($80,000)
0.6074208 0.8983919
($1,784)
0.1792808 0.5589027
($307,479)
0.1813318 0.4739352
$747
0.196394 0.4011873
$74,238
0.2026128 0.3353304
$76,395
0.2108773 0.2788349
$61,787
0.2175057 0.2302751
$43,759
0.2308388 0.1891368
$40,611
0.249442 0.1536649
$30,589
0.2926429 0.1229868
$27,128
0.4339543 0.0951437
$20,769
-0.9366331 0.0663506
$15,698
-0.0491104 1.0470854
$220,679
0.0378574
1.101164
$225,145
0.071629 1.0609974
$215,848
0.0906869
0.990079
$243,990
0.0981047 0.9077573
$204,891
0.1031106 0.8266582
$206,038
0.1074195 0.7493884
$202,810
0.1106874 0.6766978
$204,218
0.1120492 0.6092604
$230,823
0.1122437 0.5478718
$202,363
0.1123892 0.4925825
$179,617
0.1125008 0.4428149
$155,223
0.1125898 0.3980356
$138,704
0.1131 0.3577559
$115,955
0.1131
0.321405
$134,021
0.1131 0.2887477
$123,826
0.1131 0.2594085
$115,807
0.1131 0.2330505
$105,530
0.1131 0.2093707
$98,415
0.1131 0.1880969
$91,547
0.1131 0.1689848
$83,711
0.1131 0.1518145
$75,833
0.1131
0.136389
$71,362
0.1131 0.1225307
$65,792
0.1131 0.1100806
$61,293
0.1131 0.0988955
$55,880
Net Present Value
$0
12/20/2014
Project Finance :
PPPs in Indian Infrastructure:
Challenges & Opportunities
Dr Manoj Anand
IIM Lucknow
Project Finance
Corporate Lending


borrower
Assignment of contracts/licenses Physical assets of the borrower

is the key security
is the key security

The value of PF relies on a simple cash-flow stream
generated by a single project and the collateral value of
the project assets: the source of the cash-flow may be a
single buyer or consumers.
Contractual Structure for Project Finance

Off-taker
Export Credit
Agencies
Sales
contract
Guarantee
Arrangers/
Lead funders
Debt
Insurers/
Surety companies
Government
Suppliers
Delays/
Insurance

Project Company
EPC Contract
Non or limited-recourse
An independent SPV is created to hold the project
assets and to integrate all legal contracts in an effective
and efficient manner for funding, building and operating
a single purpose project. SPV is owned by one or a few
sponsors and it is highly leveraged.
EPC
Contractor
Independent
experts/lawyers
Escrow agent/
Trustee
Sponsors
Lessors
O&M
Contractor
12/20/2014
Risk: Project Risk

Risk is the probability by which actual results could be lower than plan/target
Or
A risk is the threat or possibility that an action or event will adversely affect an
organisations ability to achieve its objectives
Reducing risks over time

Increasing free cash flows
Commercial and Non Commercials Risks
Risks in a project can be handled in many ways;
Key project risks

Political Risk
Permitting
Risk
Foreign
Exchange Risk
Financial Risk
Development risks
Market Risks
Completion Risks
Financing Risks
Force Majeure Risks

Allocated/ Transferred- through EPC, O&M, and off-take contracts
Managed/Bear
Guarantees/Credit Enhancement
Financial Evaluation- IRR/NPV

Regulatory
Risk
A Project is essentially
a Web of Contracts
that mitigates (but does
not eliminate) these
risks
Environmental
Risk
Demand Risk /
Market Risk
Completion
Risk
Participant
Risk
Operating
Risk
Funding Risk
Force Majeure
Risk
Engineering/
Design Risk
24
Interest and principal cannot be serviced out of earnings, which is an accounting

concept- payment has to be made in cash. Many transactions and accounting entries
can affect earnings, but not cash and vice versa Standard and Poors
Present value numbers are not the best indicators of project viability, given that
they reduces the importance of sizeable amounts of residual cash flow that
may be available towards the latter periods of the projects life.
IRR is not an useful measure of project viability as it assumes reinvestment of
cash flows at the IRR- often an incorrect assumption. Calculating NPV
necessitates making assumptions on the cost of capital- often difficult to
estimate.
Project IRR and Equity IRR ( Sponsors Perspective)
12/20/2014
Lenders Perspective Coverage Ratios and

DSCR
Available Cash Flow (ACF)/ Principal + Interest, where ACF is

defined as
Operating Cash Flow
Lenders Perspective Other measures
25
Loan Life Ratios
Debt Equity Ratios
Typical suggested benchmarks
Infrastructure
Pow er
Mining
Oil and Gas
Telecom s
Risky
1.8
1.6
2.0
2.0
2.8
Loan Life Ratio

Good
Target
1.3
1.5
1.3
1.35
1.5
1.6
1.6
1.7
1.8
2.2

Leveraged/Equity IRR
26
DSCR
Target
1.5
1.4
1.6
1.7
2.0
less Taxes
Annual
Good
1.2
1.15
1.4
1.5
1.7
ACF/ Interest
Net Present Value (NPV)

Risky
2.0
1.6
1.8
2.0
3.0

t=5
t = 10
Free
cash flow
t = 20
t = 30
Year
Salvage
value
Sunk
costs
Sunk cost does not affect

cash flow analysis because
it is an existing fact regardless
of the investment decision
(it is not incremental costs).
Cash
out flow
Source: Advanced Project Finance- Richard Tins ley

t=0
t=1
t=2
t = 40
.
Present Value
Example
Present value of
Present value of
PV =
- CF2
(1 + r )
CF10
PV =
(1 + r )
10
27
12/20/2014
Internal Rate of Return (IRR)

IRR is defined as the discount rate that assumes NPV
is equal to zero.
IRR =
t=0
CFt
(1 + r)t = 0
Analysis of Individual Cash Flows

FCF used for NPV (IRR)
analysis
Free
Cash
Flow
(FCF)
Sales
revenue
Implication
IRR is useful when investors assess the project against their hurdle
rate, which is a cost of capital.
IRR > Hurdle Rate: the project will produce more cash than the necessary
IRR = Hurdle Rate: the project will produce the exact amount of cash to
compromise investors cost of capital.
Weak points of IRR
Year
It applies the projects IRR to the reinvestment of cash in flows

When there are more than one change from cash out-flow to cash-in flow, or
from cash-in flow to cash out-flow in the projection, the value of IRR are more
than one: calculator would simply indicate error
Anatomy of FCF
for project finance
Year
Input cost
Operating cost
Construciton
costs
Taxes
Net investment
(in maintenance)
Typical sensitivities/correlations
Price
Escalated
Building cycles
Breakeven
Volume
+/- 20%
Breakeven
Opex
+/- 20%
Impact of variation in each parameter on

key ratios like IRR, DSCR, needs to be
analyzed
5% change in price/volume may have

much worse off impact on project
viability as compared to say, a 2%
increase in the interest rates

adversely impact the project viability
needs to be highlighted
Use two factors together for better

results. Use tow way data tables impact
of two input parameters on an output
measure.
Interest rates
+/- 3-5%
Escalation changes
Capex
+/- 10-20%
1 year delay
Power Transmission in India

- Next Steps in Network Development
Key Trends & Issues
Foreign exchange
+/- 3-5%
Differential inflation (purchasing power parity)
12/20/2014
Agenda
Transmission Infrastructure
Investment
Transmission Infrastructure
CTUs & STUs, which are responsible for interstate and intra-state
networks respectively, together own & operate a complex transmission
system comprising around
Key Trends
11th Five Year Plan objective is to ramp up this network
Key Issues
220,800 ct. Km lines

over 288,600 MVA &
4,000 MW of substation capacity at 220 KV and above voltages as of
March 2009
Over 269,400 ct. km of line length

Over 390,800 MVA &
25,000 MW of substation capacity at 220 KV & above voltages by March
2012
Project Finance
Project Financing
Manoj Anand
IIML
Economically separable capital

investment project which
operates under a concession
from the host government
Project cash flows as source of
funds
12/20/2014
Manoj Anand
Project Financing
Project is very big compared to

firms present size.
The Project has unacceptable
risk to be brought to the
balance sheet. (So, quarantine
the risk by forming a separate
company called Special
Purpose Vehicle)
12/20/2014
risk does not attach, but return

does!
Manoj Anand
12/20/2014
Manoj Anand
Project Financing
Non-recourse or Limitedrecourse to the promoter.
to service the loans

to provide the return of &
return on the equity invested in the
project
Comprehensive contractual
arrangements with suppliers
& customers
High ratio of debt to equity
with limited-recourse / nonrecourse
Cash waterfall / escrow
mechanism
12/20/2014
Manoj Anand
Project Finance
Project Financing
An agreement by financially
responsible parties
to complete the project

to purchase the project output
to supply the project inputs
to make available necessary
funds in the event of disruption
in operation occurs
12/20/2014
Manoj Anand
12/20/2014
EPC
contractor
EPC
Agreeme
nt
Special Project Vehicle
Provides limited recourse
Sharehol
der
BOT, BOOT, BOLT, BOO etc.
When raising finance in domestic

(developed) market means giving
out more information; so finance
these internal projects through
internal resources and mobilize
additional resources through
project finance.
Manoj Anand
Project Finance Architecture
Project Finance
Structures
When firm does not want to do

balance sheet financing because
of higher informational
requirements.
Direct
Agreem
ent
Lenders
Financin
g
Agreeme
nts
Security
Agreem
ent
Debt
Fuel
supply
Agreem
ent
Project SPV
Equi
ty
Essentially a public project.

Private finance is resorted
Should ownership with Private
sector be temporary or
permanent?
Sharehold
ers
Agreemen
t
Sharehol
der
Concess
ion
Agreeme
nt
Fuel
Supplier
Security
Trustee
Direct
Agreem
ent
Offtaker
All the stakeholders to a project are

bound by a
well-defined contractual
architecture to ensure mitigation of risk
12/20/2014
Manoj Anand
12/20/2014
Manoj Anand
Concession Agreement
An Agreement between
Government (Grantor of
Concession or Permission) and
Project Company (Grantee or
beneficiary) giving permission to
execute a Project.
Project Company
Government
Lender
12/20/2014
Manoj Anand
12/20/2014
Manoj Anand
10
Risks in PPP Projects
Types of PPPs
Regulatory
Political
Commerc
ial
Operational &
Maintenance
Public Private Partnership
Financial Risk
RISKS
Management
Contracts
Lease
Force Majeure
Risk
Full
BOT
O&M
Privatizatio
Concessio
Concessio
n
n
n
Market
Risk
High
Low
Cost Overrun
Risk
Extent of private sector

participation
Land
Acquisition
Risk
Technology Risk
Constructi
on Risk
12/20/2014
Manoj Anand
11
12/20/2014
Manoj Anand
12
Risk Mitigation Steps

Identify
Risk
Determin
e
Severity
of Risk
Allocate
Risk
Mitigate
the Risk
Management of Risks
Price the
Risk
Identifyin
g the
events
or
Actions
which
Effects
the
Viability
of the
Project
In Case
the
Event
occur
the
effect of
the
same on
the cost
/ time of
the
project
Identifyi
ng and
allocatin
g the
risk to
the
party
who can
manage
it best
Steps /
actions
which
can be
taking to
reduce
the
chances
of the
event
occurrin
g
Cost of
addressi
ng the
risk have
to be
determin
ed
What ?
Time and Cost Overruns or shortfall in

performance parameter of the competed project
Why?
High capital intensity and a relatively long

construction period
How to Mitigate?
Engineering, procurement, and construction

contracts to an experienced and reputed firm
Provisions for liquidated damages in the

contract(s)
Construction Risk
12/20/2014
Manoj Anand
13
Manoj Anand
14
Commercial Terms
(Project focused)
Management of Risks
12/20/2014
What ?
Technical performance of the project during its

operational phase can fall below the levels
projected by investors
Why?
Technology is untried or is changing rapidly or

inability of the operator to manage such big and
complex project i.e. Metro
How to Mitigate?
Entrusting operation to experienced operations

and maintenance contractors
Provisions for liquidated damages in the

contact(s)
Insurance against Force Majeure risks
Obligation to construct a project

to a certain specification by a
certain date
Mechanism by which the
specification may be varied
Warranties to the standard of
construction
Completion and testing
procedures
Operation, maintenance and
improvement procedures
Operations Risk
12/20/2014
Manoj Anand
15
12/20/2014
Manoj Anand
16
Financial terms (to ensure

bankability by satisfying the
lenders about the safety of
monies due to them)
Commercial Terms
(Project focused)
accounting and reporting procedures

payment of a concession fee
tariffs/revisions
termination rights and consequences
transfer of assets and personnel at the
commencement and expiry of
concession period.
The above imply an obligation for
Project Company to complete the
project on time, to specifications. So,
back-to-back agreements with other
suppliers.
12/20/2014
Manoj Anand
17
12/20/2014
Defensive and preventive

security vs negative pledge
Fixed vs floating security
it can attach - on crystallization- to
assets which are not owned by the
borower at the time of borrowing
(eg. petroleum in place or future
cash flows)
Need to prepare a security package
which will compare favourably in
different countries
Manoj Anand
18
Over which projects fixed

security be taken?
Can a floating security fix to
the assets on acceleration of
the loan?
Order of priority on
liquidation
Effect of second mortgage
remedies for enforcement
(they're limited !)
12/20/2014
Manoj Anand
Legal questions on
security taking
Role of security
Ability of lenders to create

Security over Concession
Agreements and Project
assets.
Recourse of the lenders to
the host govt.
Effect of pre-mature
termination of concession
agreement on projects
indebtedness.
19
can a receiver be appointed?
12/20/2014
Manoj Anand
20
What kind of
securities?
Methods to protect
lenders interests
Concession Agreement
Operating Agreement
Hardware
Sales contracts
Insurances
Production, proceeds.
12/20/2014
Manoj Anand
21
Recourse on default
12/20/2014
take charge over companys

shares
golden share
substitute entity
Manoj Anand
22
Purpose: Sharing and

minimizing project risks
12/20/2014
Manoj Anand
Host Govt. Support
Management control
Security, type of security

Direct agreement with third
party
Negative pledges
Host Govt. support
step in rights
23
demand uncertainty (market

risk)
uncertainty over future govt.
policy
land acquisition
changes in law
12/20/2014
Manoj Anand
24
Financial provisions of
govt. support
Form of support
Establish a framework of
support during project tenure
Provide comfort letters
regarding political and
regulatory environment
Complete lenders security
package by contractual
agreement
Legislation relating to the
project
12/20/2014
Manoj Anand
25
12/20/2014
Govt.s no objection to pattern of

financing
Guarantee the credit worthiness of the
SOE
No expropriation or nationalization
If license is terminated, mechanism to
compensate the lender
Lenders to know breach of concession
Step-in rights
Govt. to recognize receivers rights
Manoj Anand
26
claims of the State,

subordinate to claims of the
lenders
Govt. approval for
12/20/2014
Manoj Anand
Non-financial support
Non-financial support
Level of govt. off-take (taxes,

royalties etc.)
Financial contribution
Nonsupport to competitor
Right of sponsors to export, sell
to others
FE - availability, convertibility,
transferability, cover against
fluctuation
Nondiscrimination with locals
Non interference or intervention
free import/export
27
all securities created

project agreements to finance
and implementation
Waiver of sovereign
immunity
Dispute resolution procedure.
Governing law provision
12/20/2014
Manoj Anand
28
When Project Finance

Makes Sense?

makes sense?
Agency effects
Specializes & decentralizes

management
Makes possible the provision of
separate incentives for
managers
precludes waste of project FCF
Increases the outside scrutiny
of the projects
Improves incentives for
production of information
12/20/2014
Manoj Anand
29

makes sense?
Other effects
Crystallizes project cost for

regulatory purposes
Allows provision of services to
several companies rather than
just to sponsors
Partially transforms a sponsor
from an equity holder into
supplier to the project
May avoid double taxation
12/20/2014
Manoj Anand
31
Ownership structure
Permits JVs without requiring

the exhaustive mutual
evaluation of credit worthiness
of potential partners
Limits the liability of parents to
projects
Limits the exposure of
creditors to well defined
project risk
Allows project-specific debt
ratios
12/20/2014
Manoj Anand
30
12/20/2014
Project Finance
Project Financing is like a chameleon;
It always finds a way to take advantages of
changes in the business.
- An Overview
Project Financing
Project Financing
Economically separable capital investment project which

operates under a concession from the host government
Project cash flows as source of funds
to service the loans
to provide the return of &
return on the equity invested in the project
Comprehensive contractual arrangements with

suppliers & customers
High ratio of debt to equity with limited recourse
Project Angel
Basic Features of Project Financing
Government
An agreement by financially responsible parties
to complete the project
to purchase the project output
to supply the project inputs
to make available necessary funds in the
event of disruption in operation occurs
Contractor
Sponsors
Operator
Project
Suppliers
Company
Off-take parties
Banks Investors
12/20/2014
Off-Take Agreement
Sponsors
Petrozuata
Upgrader Facility
Right to sell to third
parties for the price
higher than paid by
Conoco
Syncrude
Conoco Lake
Charies Refinery
Syncrude39,000
BPCD
Purchase
syncrude based
on Maya crude
market price
1. 90 Day Operating
2. Debt Obligations Service

( 1 year 1.35x coverage
ratio)
BV MV
$200
0
$200
BV MV
Liabilities
LT Bonds
Equity
Total
$300
$300
$600
4. Distribution to Equity
Holders
Project Finance reduces Incentive Conflicts
Balance Sheet for Against the Wall Company
$200
$400
$600
(Bankers Trust)
3. Debt Service Res. Account

(6 m. worth of principal &
interest)
Maraven
Cardon Refinery
To allocate risks & rewards among the involved

parties in a manner that is mutually acceptable
Assets
Cash
FA
TA
Offshore Proceeds Account
Expense Account
Financial Engineering
Customers
($ Denominated Payments)
102,000 BPCD
Conoco
Syncrude
63,000 BPCD
* Cash Waterfall:
?
?
$200
Free cash flow conflict

Risk shifting
Debt overhang
Managerial risk aversion
Selfish Strategy 1: Take Large Risks
The Gamble
p
Win Big
10%
Loose Big
90%
Cost of Investment
$200 (all the
Required return
=
50%
Expected cash flow from the gamble
NPV =
-$200 + $100/(1+0.5)^1
Accept or Reject ???
Payoff
$1,000
$0
firms cash)
= $100
= -$133
12/20/2014
Selfish stockholders accept Negative NPV
Selfish Strategy 2: Underinvestment
projects with large risks

Expected CF from the Gamble
To bondholders
$300 x 0.10 +$0
= $30
To stockholders$700 x 0.10 + $0
= $70
PV of Bond without gamble
=
$200
PV of stock without gamble
=
$0
PV of Bonds with gamble
$30/(1+.5) = $20
PV of stock with gamble
$70/(1+ .5) = $47
Govt. sponsored project that guaranteed $350 in one

period
Cost of investment is $300 (the firm has $200 now)
Required return = 10%
NPV =
-$300 + $350/(1+.10)^1 = $18.18
Accept or Reject ???
Debt Overhang Problem
Selfish stockholders forego positive NPV projects

Expected CF from the project
To bondholders
To stockholders
=
PV of Bond without project
PV of stock without project
PV of Bonds with project
PV of stock with project
=
=
$300
$350 - $300 = $50
=
$200
=
$0
Firm with expected value = $110

$160 in good state and $60 in bad state
P(good state) = P(bad state) = 50%
Risky debt with a face value = $100
A safe project costs $40, payoff $50 in both the states
$300/(1+.1) = $272.73
$50/(1+ .1) - $100 = -$54.55
Example # 1 No Investment
(base case)
1/2 good
1/2 bad
Expected
Value
$160
100
60
$60
60
0
$110
80
30
How can the firm finance the project?
Firm
Debt
Equity
12/20/2014
Example # 2: Issue $40 of equity, Invest

in the Project
Change
Firm + Project
$210
110
160
+50
Debt
100
100
100
+20
Equity
110
10
60
+30
The overhang of risky debt prevents managers from
investing in positive NPV projects funded by equity
Good
Bad
Exp. Value
Example # 3: Issue $40 of junior debt,

Invest in the Project
Example # 4: Issue $40 of project debt,

Project
Good
Bad
Expected
Value
$50
40
10
$50
40
10
$50
40
10
Project
New Debt
Equity
A Comparison of Direct & Project Financing

- Organization, Control & Monitoring
Corporate Form
Cash Flows commingled
Limited direct monitoring
by investors
Limited liability company

Segregated cash flows
Close monitoring of
management
Greater accountability
Covenants in contractual
arrangements
Good
Bad
Exp. Value
Change
Firm + Project
$210
110
160
+50
Debt: Senior
100
100
100
+20
Debt: Junior
40
10
25
+25
Equity
70
0
35
+5
Junior debtholders wont invest $40 because the return is
only $25. They forgo positive NPV project rather than
finance it with equity
Example # 4: Issue $40 of project debt,

Good
Bad
Exp. Value
Change
Sponsor Firm
$170
70
120
+10
Debt
100
70
85
+5
Equity
70
0
35
+5
Project debtholders invest $40 because they are repaid in
full.
Sponsoring firm is willing to invest because it gets some of
the upside.

- Allocation of Risk
Full recourse
Risk diversification
Risk transfer
Limited recourse
Project specific financial
exposure
Redistribution of risk
contractual
arrangements
ability to bear
12/20/2014

- Financial Flexibility
Quick
Capital market discipline
??
Transaction cost
Time process
Specific use of funds

- Debt capacity & Structure of debt contracts
Sponsors debt capacity
Look to sponsors entire
assets
Unsecured
Credit support from other

channels
High leverage
Look to project CFs &
assets
Secured
When Project Finance Makes Sense

Agency effects
Specializes & decentralizes management
Makes possible the provision of separate
incentives for managers
precludes waste of project FCF
Increases the outside scrutiny of the projects
Improves incentives for production of
information

- Free Cash Flow & Agency Cost
Discretion
Corporate policy
Exposure
Management Incentives
project specific??
Limited discretion
Contract
Closer monitoring by
investors
Under investment
problem??

- Bankruptcy
Avoided
Lower cost
When Project Finance makes sense

Ownership structure
Permits JVs without requiring the exhaustive
mutual evaluation of credit worthiness of
potential partners
Limits the liability of parents to projects
Limits the exposure of creditors to well
defined project risk
Allows project-specific debt ratios
12/20/2014
When Project Finance makes sense

Other effects
Crystallizes project cost for regulatory
purposes
Allows provision of services to several
companies rather than just to sponsors
Partially transforms a sponsor from an equity
holder into supplier to the project
May avoid double taxation

Does Not make sense
Complex interactions of the project with the rest
of the firm
Default of the project is costly (lost coinsurance)
The optimal leverage of the project is low
The cost of contracting for the project are high
12/20/2014
LennarCorp Agenda
2
LENNARCORPORATION'S
JOINTVENTUREINVESTMENTS
ProjectFinanceCase
BusinessModel
JPMorgansStockAdvice
FraudDiscoveryInstitutePressRelease
LennarsJointVentures
AbhineetGauravPGP27198
DhavalChudasamaPGP27018
VikasSiddeshwarPGP27392
LennarCorp
ImplicationsofFinancingMethods
(NYSE:LEN)
AverageSalePriceof aLennarHome
LennarCorp
HomeBuilding
Construction&
saleofresidential
homes
Purchase,
developmentand
saleofresidential
land
FinancialServices
Mortgage
Financing
Fullrecourse:
2007
$297,000
Aguaranteethatnomatterwhathappens,theborrowerwillrepaythedebt.
2008
$270,000
Typicallywithafullrecourseloannooccurrence,suchaslossofjobor
sickness, cangettheborroweroutofthedebtobligation.
Inthissituation,ifthereisnocollateralfortheloan,thelendercangoafter
theborrowerspersonalassetstocollectiftheloanisdefaulted.
AtNovember30,2007
Homesites
Optioncontracts:
With3rdparties
Withunconsolidatedentities
AtNovember30,2008
Homesites
Optioncontracts:
With3rdparties
Withunconsolidatedentities
62,801
42.2%
22,877
62,993
148,671
15.4%
42.4%
74,681
65.9%
12,718
25,871
113,270
11.2%
22.8%
Alltheloansthatthecompanyoriginatedweresoldinthesecondarymortgagemarketonaservicing
released,nonrecoursebasis.
LimitedRecourse
alimitedrecourseloanwouldonlyallowthelenderto takeassetsthatare
listedascollateral inthesignedloanagreement.
NonRecourseLoan
Anonrecourseloanwouldhavenocollateralandthelenderwouldonlybe
abletotaketheassetthatisbeingfinanced,suchasa homeinanonrecourse
mortgage.
Source: http://www.investopedia.com/
12/20/2014
JPMorgansStockAdvice
5
LennarsStockPerformance
6
AsonJan8,2009
RelativeratingschangedtoOverweightfromNeutral
LENunderperformeddownby33%vs.thegroups23%
decline(S&P:36%)overlast12months,Exhibit1
DuetoconcernsregardingitsaboveaverageJVexposure
Conclusion:Investmentriskislessthanthatofitspeers
Valuationdiscountof35%toitspeersonaP/Bbasis,
currentlyat0.55xvslargecappeers0.77xaverage
Source: Exhibit1,Exhibit 4, http://data.cnbc.com
JointVentures
FraudDiscoveryInstitute(1/2)
Diversifyriskand
gainaccessto
partnersexpertise
Methodtofinance
investmentsoff
balancesheet
AllegationsincludinginappropriateuseofJointVenturesto:
PonziScheme:UsinginterestinoneJVtogetinterestinanotherJV
LargeoffbalancesheetdebtexposuresthroughJVs
Otherallegationsincludedmisappropriationoffunds(US$5mforitsCOO)anddisputes
withitsJVpartners
MarketsRespondedwith20%declineinstockpriceinasingledayonJanuary09,2009
CompanysResponse
EachJVgovernedbyitsownexecutivecommitteecomprisingallpartners
Nocross collaterizationofdebtsacrossJVs
Debtissecuredbyrealestateassetsadjustedforimpairmentquarterly
Companysexposuretonetrecoursedebt US$392Mn (netofagreementswithpartners)
Otherallegationoffraudandfundtransferrefuted
12/20/2014
FraudDiscoveryInstitute(2/2)
9
LennarsJointVentures(1/2)
10
UnconsolidatedJVSintotal
November 30,2008
November 30,2007
Debt
4,062,058
5,116,670
Equity
2,688,365
2,739,467
LennarsEquity
29%
34%
Debt Ratio
60.2%
65.1%
EquityInvestmentsinUnconsolidatedEntities
TheJVsarenotas leveragedasotherprojectfinancetransaction,Significantrisksremainastheassetsaremostly
inventoriesofHomeswhosepriceswereinfreefellinearly2009
November30,2008
(In000dollars)
November30,2007
(In000dollars)
Land Development
633,652
738,481
HomeBuilding
133,100
195,790
TotalInvestment
766,752(116 entities)
934,271(214entities)
MotivationtoinvestinUnconsolidatedentities
ThecompanySuccessfullysuedBarryMinkow,founderofFDI pleadedguiltyintradingwith
inappropriatematerialnon publicinformation.Healsoacceptedthatthereportwere
inaccurate.
Reduceandshareriskbylimitingthecapitalinvestedinland
Obtainaccesstopotentialfuturehomesites
Obtainaccesstolandswhichitcouldnthaveotherwise
ParticipantsintheJointventure
Landowners/Developers
Financialpartners
StrategicPartners
Homebuilders
LennarsJointVentures(2/2)
11
12
JVsweredesignedtoacquire,develop,and/orsellspecific
assetsduringalimitedlifetime
EachJVwasuniqueintermsofitsfundingrequirements,
liquidityneeds.
ProratacashcontributionstotheJVbypartners
SharingArrangements
ThankYou
1.Alliances
Contractualagreementtoworktogether,revenuesharingbutnoequityparticipation
StrategicAlliancescreateshareholdervalue(Studyconductedbetween198392)
2.MergersandAcquisitions
Acquisitionorcontrolofoneentitybyanother
Creationofthirdentityownedbyeachofthemergedparties
y
y
g p
3.JointVenture FinancialJointVenture(ProjectFinance)
Creatingseparateorganizationthroughequityparticipationofpartners
Avoidreportingjointventuredebtonpartnersbooks offbalancesheet
Project Finance
On June 6, 2000, the World Banks
& IFCs Board of Directors were
scheduled to vote on Whether to
approve funding for the $3.7 billion
Chad-Cameroon Petroleum
Development & Pipeline Project.
Chad & Cameroon Petroleum

Development & Pipeline
Project
12/20/2014
Manoj Anand
Dilemma
12/20/2014
Objectives
Project a unique opportunity to

alleviate poverty in Chad
Chad President warlord
Manoj Anand
Chad had a history of civil war &

oppression
How would Chad President

handle newfound wealth - US$
125 million p.a. (50% of
Political risk mitigation & risk

sharing two major motivations
for using project finance
Contractual bundling to what
extent project success depend on
Revenue Management Plan ?
Trade-off between project risks &
expected social returns
government revenues)
12/20/2014
Manoj Anand
12/20/2014
Manoj Anand
Project vs. Corporate

Finance
Objectives
Role of the World Bank & IFC
Structuring fair deals
Field System - $1.5 bn

corporate finance
Structuring Projects
Valuing Projects
Managing Risky Projects
Financing Projects
Social Cost Benefit Analysis
12/20/2014
Manoj Anand
Export System - $2.2 bn

project finance
Oil wells & drilling equipment
Pipeline & offshore loading

system
12/20/2014
Manoj Anand
Project Finance Architecture
Field System & Export

System
Oil Wells
Unincorporated
JV
D/TC = 0%
3 Sponsors
Exxon-Mobil
Exposure 40%
Internal
Monitoring
Org Structure simple
12/20/2014
EPC
contractor
EPC
Agreeme
nt
Pipeline
Incorporated JV
D/TC = 62% to
64%
3 Sponsors & 2
Govts
Exxon-Mobil
Exposure 40%
External
Monitoring
Org Structure complex
Manoj Anand
Sharehol
der
Direct
Agreem
ent
Lenders
Financin
g
Agreeme
nts
Security
Agreem
ent
Debt
Fuel
supply
Agreem
ent
Project SPV
Equi
ty
Sharehold
ers
Agreemen
t
Sharehol
der
Concess
ion
Agreeme
nt
Fuel
Supplier
Security
Trustee
Direct
Agreem
ent
Offtaker
All the stakeholders to a project are

bound by a
well-defined contractual
architecture to ensure mitigation of risk
12/20/2014
Manoj Anand
Why ExxonMobil did not use

100% corporate finance for the
deal?
Project Finance
Investment decision
Organizational decision
SPV BOOT / BOT / BOO

Finite life
Concession period
Manoj Anand
Risk Sharing
AAA debt rating
$16.2 billion Cash Flows
Banks / ECAs / Bondholders / World

Bank
$3.7 billion exposure in corporate

finance with no debt to $0.6
billion with project finance,
leverage at 60% and ExxonMobil
exposure at 40%
Manoj Anand
Manoj Anand
10
IFC / World Bank participation
Financing with debt
12/20/2014
12/20/2014
Risk Mitigation
Equity Partner Petronas &

Chevron
Limited recourse or non-recourse

debt
12/20/2014
$145 billion in Assets
Financing decision
Industrial asset
11
Inclusion of host government
lender of last resort
Loans from IBRD and EIB
Political Risk
Expropriation Full / Creeping
12/20/2014
Manoj Anand
12
Why sponsors are not using

100% Project Finance?
Project Finance deal structuring
Costly
Imperfections = Transaction cost
Does it make sense for the

sponsors who own the Field
System to also own the
Export System?
Risk Management benefits of

World Bank participation
How much participation needed to

obtain the deterrence (risk
mitigation) benefit?
12/20/2014
Manoj Anand
13
12/20/2014
World Banks Role
Environmental assessment
Is the deal fair?
Methodological issues
Minimize the social and environmental

impact
Long-term sustainability
IFC A loans
Syndicated B loans
12/20/2014
Manoj Anand
15
Timing of returns
Distribution of returns
Fairness & distribution of project risks
Deter Sovereign interference
Discount rate for equity cash flows
Output sensitivity
Fairness & distribution of project
returns
Direct Investment
Structure the project
14
World Banks Role
Appraise the project
Manoj Anand
Construction risk
Operating risk
Sovereign / political risk
Financial risk
12/20/2014
Manoj Anand
16
Reasons to approve
funding
Chad desperately needs help (Ex

7)
Persistent budget & trade deficits

GDP has fallen over past decade
80% of population lives on less than
$1 a day
Infant mortality 115 per 1000 births
Positive NPV in base case

Low break-even cost of F&D
Fairness in the deal structuring

Chad has few options for
development
12/20/2014
Manoj Anand
17
Single-hulled, offshore vessel rather than

double-hulled tanker
Manoj Anand
18
Other sponsors Shell & Elf, dropped

out of the consortium
Commercial viability
19
Chads return in distant years
Consortium membership
Lacks specificity
Lacks effective oversight mechanism
Invasion of sovereign rights
12/20/2014
Manoj Anand
Distribution of project returns is not

fair
Exxon-Mobil: Exxon Valdez incident

Chad and President Deby
Environmental & social risks are excessive
Built-in auditing & oversight mechanism
12/20/2014
Revenue Management Plan is massively

flawed
Revenue Management plan will work
Reasons to oppose
funding
Pipeline revenue may displace existing aid

Key participants have troublesome track
records
19 volumes in EAD
Public consultation process
World Bank knows how to structure

projects for success
Reasons to oppose
funding
Social & environmental risks have

been adequately addressed
Commercial viability of project
Reasons to approve
funding
If discount rate to incorporate political

risk
12/20/2014
Manoj Anand
20
Case B
World Bank & IFC Board overwhelmingly

approved the deal
President Deby used part of the signing
bonus to buy weapons ($4.5 million)
without security there can be no development
programme
Terminate the project
Amend the project
Proceed as planned
Renewed criticism from the activist groups

This should be a wake-up call.
Options
Bank argued that expenditure was an

anomaly
12/20/2014
Manoj Anand
21
Case (C)
12/20/2014
Construction began in October

2000
Last tranche of financing closed

in July 2001
Project Finance magazine named

it Oil & Gas Deal of the Year
Oil Production began in June
2003 & officially inaugurated the
project in October 2003
12/20/2014
22
Project Critique
Manoj Anand
Manoj Anand
23
Project lacked transparency

Govt could use indirect
revenues income tax the
way it desired
PRML applied only to
revenues generated from
three original oil filelds
12/20/2014
Manoj Anand
24
Critique by Chad Govt
World Banks Concerns
A new relationship based on

partnership between Chad & Oil
Consortium
Needed more revenues because

of mounting budget problems &
security issues
Fail to provide a lasting solution

to the recurring financial
problems
Threaten to undermine the
objectives of
Plan to abolish future generation

fund and adding military to the
priority list
12/20/2014
Manoj Anand
25
Chad Govt Action
12/20/2014
Act constituted breach of trust
Manoj Anand
Manoj Anand
26
World Banks Action
Passed the amendments on

December 29, 2005
12/20/2014
socio-economic development
Poverty reduction
Accountability & Transparency
27
On January 12, 2006 suspended

new loans & grants to Chad and
halted $124 million in previously
approved loans disbursements
from its IDA for education,
agriculture, power & water
Froze Chads escrow account at
Citigroup from which it received
its oil revenues
12/20/2014
Manoj Anand
28
Case (E)
Response of Oil Consortium
Overall structure & framework of RMP

are sound & effort be made to
continue the plan
Consortium held about $50 million of

oil revenue which it had not deposited
into Chads escrow account
What to do?
Hold the money until Chad and World Bank

reached a resolution
Circumvent the RMP and directly transfer
the money to Chad?
Whether to renegotiate the terms of RMP
to give Chad a larger share of the
revenues?
12/20/2014
Manoj Anand
29
Project Cost Actuals
Field System:
$ 2.648 bn
$1.521 bn
Export System
$2.169 bn
$2.202 bn
Total
$4.817 bn
$3.724 bn
12/20/2014
Manoj Anand
Chad remained locked in Civil War

Deby took personal control over Chads
oil revenues
Deby agreed to pre-pay the countrys
outstanding loan balance $66 million
for pipe-related financing in August
2008
Chad failed to comply with key
requirements of RMP, the Bank could
not continue to support this project
12/20/2014
Manoj Anand
30
Project Results (2003-08)
31
Production
Oil Revenues
$15 bn
$4.801 bn
Payment to Chad
$3.287 bn
$0.795 bn
12/20/2014
(mm bb/Yr)
Manoj Anand
265.8
325.5
32
With the World Bank out of

deal, the sponsors now
had to decide what to do?
12/20/2014
Manoj Anand
33
Krishnapatnam Thermal Power Project

Deal Structuring
Agenda
Introduction: Project Brief
Organization Structuring
Financial Structuring
Contractual Structuring
Risk Structuring
Submitted by:
Udit Aggarwal| PGP29104
Pratik Goyal| PGP29358
Saurabh Karodi| PGP29386
Rohit Kadel| PGP29399
Introduction
Organizational Structuring
Location of the
power plant
Krishnapatnam Thermal Power Project

Located in Nelatur village, near Krishnapatnam, A.P.
Coal based power plant of APPDCL (Andhra Pradesh Power
Development Company Limited)
Promoter: JV Between Andhra Pradesh Power Generation
Corporation Limited (APGENCO) and IL&FS
Revised Construction cost- INR 10,450 Crores (Initial estimated
cost- INR 84322 million (US$ 1.4 billion)
Operator: APGNECO
Primary fuel: Coal
Proposed capacity: 1600 MW (2x800 MW)
Debt: Equity- 80:20
EPC contract awarded in 2008 and BOP in 2009
PFC- loan of INR 4785.2 crores
KFW, Germany- loan of 281 M Euro
Name changed to Sri Damodaram Sanjeevaiah Thermal Power
Station
Blended coal as the main fuel in the ration- 70% washed
domestic coal and 30% imported coal
Bidding consultants appointed in 2006
Lender 1
KfW Bank
Andhra Pradesh
Power Generation
Corporation Limited
Lender 2
Rural Electrification
Corporation of India
50%
Andhra Pradesh
Power Development
Company Ltd
Krishnapatnam
Thermal Power
Station
IL&FS Ltd
50%
IL&FS Energy
Development
Company Limited
Transaction Advisor
Financial Structuring
Contractual Structuring
Comfort Letter
Available
INR 1686 cr.
PFC
KFW, Germany
Loan Repayment Terms
Bank facilities
Govt. of Andhra
Pradesh
Comfort Letter
IL&FS
APGENCO
Lender 1 : KfW Loan

Debt
INR 6746 cr.
Project Cost
INR 8432 cr.
Kfw Loan
INR 3900 cr.
Interest Rate : 11.5% p.a.

Repayment : 40 quarterly payments
Additional
INR 2214 cr.
REC
INR 2846 cr.
Security
Lender 2 : REC Loan

Interest Rate : 10.5% p.a.
Equity
INR 1686 cr.
Mahanadi
Coalfields Ltd.
(Subsidiary of
Coal India Ltd.)
Repayment : 50 quarterly payments

Moratorium Period : 3 years upto 2015
ILFS 50%
Year
Financial Closure : February 2007

Estimation of Project Expenditure
Year
2009-10
2010-11(E)
2011-12(E)
2012-13(E)
Cost Outlay
913.20
2530
2530
2530
Cost Outlay
REC
KfW
Equity
Inflows
2009-10 2010-11(E) 2011-12(E) 2012-13(E)

913.2
913.2
843
1756.2
2506
1423
995.6
421.5
2840.1
2506
1423
995.6
421.5
2840.1
2506
995.6
995.6
Total
8432
2846
3900
1686
8432
Risk Structuring
Risks
Country
Host
Govt.
Facilities
Project
Promoter
Concessions and
permits
Moratorium Period : 2 years upto 2014
APPGSCL 50%
Commercial
Lending
Banks
Production/ Operations
Revenues
Force Majeure
Commercial
Any finance risk to be borne by the banks REC, KFW, Germany
Country
Any tax/tariff risk or political risk to be borne by the Shareholders (IL&FS) and Government (Andhra Pradesh Government).
Facilities
The project envisaged blended coal as main fuel in the ratio of 70% washed domestic coal and 30% imported coal suitable for
supercritical units proposed for this project. Foreign exchange risk to be mitigated by foreign currency hedging. Hedging cost comes in
cash flows.
Agreement with the coal suppliers (Mahanadi Coalfields Ltd.) to mitigate sourcing risks
External consultant to be hired for review of EPC design plans and operations
Production/ Operations
Operation and maintenance agreement to be signed with plant operator (APGENCO) to mitigate the operational risks. Any such risk is borne
by the developer or the SPV.
Revenues
Sales agreements with buyers (state utilities) for purchase of minimum amount of electricity per annum.
Penalty on the buyers for lower demand and penalty on the supplier if the minimum demand is not met.
Force Majeure
Risk to be borne by the Shareholders or the insurers in case there is an insurance agreement ( in most cases insurance exists)
APPDCL (Andhra Pradesh

Power Development
Company Limited)-SPV
Coal
Supply
Sales
Agreement
Raw Material supply

agreement
EPC
BHEL
L&T
Tata Projects Ltd.
Plant
Operator
APGENCO
Project
Consult
ant
Desein
Utilities
12/20/2014
Introduction
ProjectFinance
Organizational
structuring
Contract
Structuring
Financial
Structuring
Issues
affecting
project
Risk
Structuring
Conclusion
Salientfeaturesoftheproject
ProjectPresentation:DealStructuring
Name ofproject
Fourlaning ofBareilly Sitapur sectiononNH 24,fromkm263.000to

km413.000underNHDPIIIonDBFOTbasis
Group3
Shishir Ranjan (PGP29218)
Hansneet Kalra (PGP29232)
Satyendra Singh(PGP29177)
RKanisht Agarwal(PGP29085)
Organizational
structuring
Contract
Structuring
Financial
Structuring
Risk
Structuring
Issues
affecting
project
NHDPIII
Contractlength
Km262toKm413.2
Concessionaire
8th December2014
Introduction
FourLaning OfBareilly Sitapur SectionofNH24inthe

StateOfUttarPradesh
Contractsection
Conclusion
TheequitystakeholdersinBareilly
HighwaysprojectLtd.areEraInfra
EngineeringLtd.(74%)andOJSC
Sibmost (26%)
M/sBareillyHighwaysProjectLimited
EPCContractor
M/sEraInfraEngineeringPvt.Ltd.
ConcessionAgreementDate
DateofFinancialClosure
Appointeddate
Scheduleprojectcompletion
date
ConcessionPeriod
ConstructionPeriod
22nd June2010
21st May2011
1st March2011( ContestedbyConcessionaire)
Introduction
Organizational
structuring
910daysor30MonthsFromAppointedDate
20yearsfromAppointeddate
910daysor30MonthsFromAppointedDate
Contract
Structuring
Financial
Structuring
ContractStructuring
Debtequityratiois74%:26%
Issues
affecting
project
Conclusion
Contractualdocument
Participant
NHAI
(Authority)
SPV
M/sIntercontinentalConsultantsand
TechnocratsPvt.Ltd.isthe
independentengineer
M/sScottWilsonPvt.Ltd.isthe
engineerfromthelenders
Risk
Structuring
Concession
Agreement
StateBankofIndia
&
UnionBank
Loan
Agreement
BareillyhighwaysProjectLtd.
(SPV)
EPC
O&M
M/SIntercontinental
Consultantsand
TechnocratsPvt.Ltd.(ICT)
Construction
Management
ERAInfraEngineeringLtd.
12/20/2014
Introduction
Organizational
structuring
Contract
Structuring
Financial
Structuring
Risk
Structuring
Issues
affecting
project
Conclusion
ConcessionAgreement
AgreementbetweenConcessionaireBareily HighwaysProjectLtdandNationalHighwayAuthorityofIndia
Concessionperiodis20yearsfromdateofAppointment,March01,2011
ConcessionperiodincludesConstruction,operationandmaintenanceofProjecthighway
Concessionairecannotassign,transferorsubletanypartorwholeofconcessiongranted
Concessionaireshall,atitsowncostandexpense,procurefinancefordesign,engineering,procurement,
construction,operation,maintenanceofProjectHighway
Concessionaireshallensurethatitscontractorscomplywithallapplicablepermitsandlaws
Authority(NHAI)underapplicablelawsprovidereasonablesupportandassistancetoconcessionaireinprocuring
applicablepermits
AuthoritygrantconcessionairetheauthoritytoregulatetrafficonProjecthighway
Authorityshallsupport,cooperatetheconcessionaireinimplementationandoperationofproject
StatesupportAgreement
Notexecutedyet
Introduction
Organizational
structuring
Contract
Structuring
Financial
Structuring
Risk
Structuring
Issues
affecting
project
Conclusion
Introduction
Organizational
structuring
Contract
Structuring
Financial
Structuring
Risk
Structuring
Issues
affecting
project
Conclusion
Loan Agreement
SignedbetweenBareillyHighwaysProjectLtdandlenders
Majorlendingpartiestotheproject StatebankofIndia,UnionBankofIndia(inequalratio)
Engineering,ProcurementandConstructionAgreement
M/sEraInfraEngineeringLimitedactasEPCcontractor
Rs 290crore equitytobeinfusedbyEraInfraEngg.LtdonEPCbasis
ProjectbaggedonDesign,Build,Finance,OperateandTransfer(DBFOT)tollbasis
Operations&Maintenance
M/sEraInfraEngineeringLimitedinO&McontractwithSPVBareillyHighwaysProjectLtd.
Maintenancemanualtobedevelopedatleast180dayspriortoscheduledcommercialoperationsdate
Maintenanceprogramme tobesubmittedtoNHAIatleast45dayspriortostartingofeachaccountingyearduring
Operationperiod
ContractortocollectandappropriatefeespostconstructiononTollbasisfromcommuters
Introduction
Organizational
structuring
Contract
Structuring
Financial
Structuring
Risk
Structuring
Issues
affecting
project
Conclusion
FinancialStructure
Provisions w.r.t.commercialoperations
Deemedtobecompletewhencompletioncertificateorprovisionalcertificateissuedunderarticle14ofCA
Damagesonaccountofdelayamountto0.1%ofperformancesecurityoneachdaysdelaybeyondschedule
commercialoperationsdate
Provisionsw.r.ttrafficcensusandsampling
Trafficcensustobedoneusingelectroniccounters.Provisionsshouldalsobemadetomeasurewights
ofvehiclespassing
Detailedsurveyondaysandfrequencyasspecifiedauthoritysubjecttomax.14daysperyear
Concessionairetoprovideassistancetoauthorityforsamplingoftraffic(Onceasurveyistobedone,it
isundertakenatleastforaperiodof7days)
Financialclosewithin180daysfromthedateofagreement
Performancesecurity
TerminationduetofailuretoachieveFinancialClose
Bidsecurity
Grant
Theauthoritiesprovidestotheconcessionairecashsupportbyanoutrightgrant(Rs.255Crores)
Equitysupport
NotexceedingthesumspecifiedintheBidandasacceptedbytheauthority
Notgreaterthantwicetheequity
Restrictedtoasumnotexceeding40%ofthetotalprojectcost
ConcessionFee
TheconcessionaireshallpaytotheauthoritybywayofconcessionfeeasumofRe.1perannum
12/20/2014
Introduction
Organizational
structuring
Contract
Structuring
Financial
Structuring
Risk
Structuring
Issues
affecting
project
Conclusion
UserFee
Organizational
structuring
Contract
Structuring
Financial
Structuring
Issues
affecting
project
Risk
Structuring
Conclusion
RevenueshortfallLoan
CollectionandappropriationofFee
OnandfromtheCODtillthetransferdate,theconcessionaireshallhaveanexclusiverighttodemand,collectand
appropriatefeefromtheusersubjectinaccordancewiththeNationalHighwaysFeeRules,2008
ThenotificationforlevyandcollectionoffeeshallbeissuedbytheGovernmentunderSection8AoftheAct
RevisionofFee
Exemptionforlocalusers
TheconcessionaireshallnotcollectanyfeefromalocaluserfornoncommercialuseoftheprojectHighway
TheconcessionaireshallbeentitledtochargeamonthlyfeeofRs.150withreferencetothebaseyear200708,tobe
revisedannuallyinaccordancewiththeFeerulestoreflectvariationinWPI
Freeuseofserviceroad
Permitentryoflocalusers,tractors,animaldrawnvehicles,threewheelersandmotorcyclesonthecarriagewayofthe
projecthighway
DiscountedFeeforfrequentUsers
Theconcessionaireshallrequestuponanyperson,issueareturnpassonpaymentofasumto150%oftheFeepayable
fortherespectivevehicle
ReappropriationofexcessFee
Tollingcontractor
Feecollectionpoint
DisplayofFeerates
Introduction
Introduction
Organizational
structuring
Contract
Structuring
Financial
Structuring
Risk
Structuring
Issues
affecting
project
Conclusion
IftherealizablefeeinanyaccountingyearshallfallshortoftheSubsistenceRevenueasaresultofanIndirectPolitical
Event,aPoliticalEventoranAuthorityDefault,asthecasemaybe,theAuthorityshall,uponrequestoftheConcessionaire,
providealoanformeetingsuchshortfall(the"RevenueShortfallLoan")ataninterestrateequalto2%(twopercent)
abovetheBankRate
RepaymentofRevenueShortfallLoan
EscrowAccount
TheConcessionaireshall,priortotheAppointedDate,openandestablishanEscrowAccountwithaBank(the"Escrow
Bank)
EscrowAgreementtobeenteredamongsttheConcessionaire,theAuthority,theEscrowBankandtheSeniorLenders
throughtheLenders'Representative
DepositsintoEscrowAccount
Withdrawalsduringconcessionperiod
Withdrawalsupontermination
Insurance
Insuranceduringconcessionperiod
Noticetotheauthority
Evidenceofinsurancecover
Remedyforfailuretoinsure
Introduction
Organizational
structuring
Contract
Structuring
Financial
Structuring
Issues
affecting
project
Risk
Structuring
Conclusion
Insurance
Insuranceduringconcessionperiod
Noticetotheauthority
Evidenceofinsurancecover
Remedyforfailuretoinsure
Waiverofsubrogation
Concessionaireswaiver
Applicationofinsuranceproceeds
RiskStructuring
TotalRisk
Auditedaccounts
TheConcessionaireshallmaintainbooksofaccountsrecordingallitsreceipts(includingallRealizableFeesandother
revenuesderived/collectedbyitfromoronaccountoftheProjectHighwayand/oritsuse),income,expenditure,
payments(includingpaymentshmtheEscrowAccount),assetsandliabilities,inaccordancewiththisAgreement,Good
IndustryPractice,ApplicableLawsandApplicablePermits.
Appointmentofauditors
Certificationofclaimsbystatutoryauditors
Setoff
Disputeresolution
ExternalRisk
ProjectSpecificRisk
Accountsandaudit
Technology,
Construction
and
Operations
Risk
Counterparty
Risk
LegalRisk
MarketRisk
Transaction
Structure
Project
Financial
Strength
Regulatory
Risk
Force
MajeureRisk
Businessand
Legal
Institutional
Development
12/20/2014
Introduction
Organizational
structuring
Contract
Structuring
Financial
Structuring
Risk
Structuring
Issues
affecting
project
Conclusion
ProjectSpecificRisks
Introduction
Organizational
structuring
Contract
Structuring
Financial
Structuring
Risk
Structuring
Issues
affecting
project
Conclusion
2)CounterpartyRisk:
1)TechnologyConstructionandOperationRisk:
ItistherisktakenbyNHAIontheSPVthattheprojectwillbecompletedandoperatedaspertherequired
performancestandards
Itcoverstheengineeringanddesign,sitesplansandpermits,constructioncontracts,testingandcommissioning,
andoperatingtheproject
Contractorrisk
CoversanalysisofM/sEraInfraEngineeringPvt.Ltdw.r.tfollowingaspects
Financialandcredithealth
Previousexperience/Trackrecordandperformancewithsimilarprojects
Technicalcapacityandsufficientbaseofskilledandunskilledlabor
Organizational
structuring
Contract
Structuring
Financial
Structuring
Risk
Structuring
Sponsor
CoversanalysisofSBIandUnionBank
Financialandcredithealth
Strategicimportanceofprojecttothemandtime&resourcesinvested
Offtakerisk
Onceprojectisfullyoperational,thisriskismostimportantfordetermininglongtermcreditworthiness
Itistheriskthatthefinaldemandofthehighwaydoesnotmeetanticipateddemandsattheexistingpricesoftoll
orthetravelersarenotusingtheroadduetotheinabilityandinexperienceoftheoperator
Abilitytomarkettheprojecttogeneratedemand
Presenceofincentives
Thetermsoftheconcessionagreementw.r.ttrafficvariations
Operatorrisk
CoversanalysisofM/sEraInfraEngineeringPvt.Ltdw.r.tfollowingaspects
Ability,motivationtocarryoutitsmotivationsefficientlyandeffectively
Availabilityandqualificationoflocalstaff
Introduction
Toanalyzethefinancialstrength,creditquality,experienceandtrackrecordofallmajorpartiesinvolvedin
constructionandoperationi.e.M/sEraInfraEngineeringPvt.Ltd,OJSCSibmost andM/sScottWilsonPvt.Ltd.
Theultimateobjectiveistoassessthatthepartieswillbeabletomeetallfutureobligations
Issues
affecting
project
Conclusion
3)LegalRisk:
Adetailedreviewofthecommercialcontractsandcollateralagreementstobedonetoensurethattheinterestsof
allpartiesinvolvedintheprojectareprotectedandthatcontractsaredesignedtomotivatethemtocompletethe
projectsatisfactorilyandoperateit
Introduction
Organizational
structuring
Contract
Structuring
Financial
Structuring
Risk
Structuring
Issues
affecting
project
Conclusion
5)SupplyRisk:
TheriskthattherawmaterialsrequiredforthecompletionofconstructionoftheroadbytheEPCcontactorM/sEra
InfraEngineeringPvt.Ltdareavailableinsufficientquantitiesandatratesthatallowtheprojecttobeoperateas
projected.Sincetherawmaterialsrequiredherearenotuniqueandscarce,nolongtermbindingcontractsare
required.
4)MarketRisk:
6)TransactionStructureRisk:
Riskthatthereisnosufficientdemandfortheprojectatthecurrenttollpricestherebyeffectingthecashflows
requiredtomeetthefinancialobligationsincludingdebtserviceandtomaketheprojecteconomicallyprofitable
Pricingandtariffrisk
Supplyandcostrisk
Theprojectssourceofcompetitiveadvantage
Historicdatasupportingtheprojections
Thequantityofusers
Analysisofstructuretoassesspotentialtomanagecashflowandpreventchangeintheriskprofile.Thisincludes
choiceoflegaljurisdiction,documentationriskandtrusteeagreements
12/20/2014
Introduction
Organizational
structuring
Contract
Structuring
Financial
Structuring
Risk
Structuring
Issues
affecting
project
Conclusion
Theprojectisvulnerabletopotentialforcednaturerisks(floods,earthquakesetc),civilviolenceanddisturbances,
politicalinstabilityandanactofGod
Theforcemajeurecanleadtodefaultdependingonseverity
Relevantinsurancesshouldbesubscribedtosothatthelossesarerecovered.Thishasbeenmandatedinthe
concessionagreement
Theforcemajeureeventshavebeenmajorlydividedinto:
Nonpoliticalevent(actofGod,strikes,boycottsetc.)
Indirectpoliticalevent(actofwar,industrywidestrikes,civilcommotionetc.)
Politicalevent(changeinlaw,unlawfullicenserejectionetc.)
Thereportingofthiseventsandtheallocationofcostsarisingoutofforcemajeurehavebeenclearlyelaboratedin
theagreement
Organizational
structuring
Organizational
structuring
Contract
Structuring
Financial
Structuring
Risk
Structuring
Issues
affecting
project
Conclusion
Issuesaffectingproject
7)ForceMajeureRisk:
Introduction
Introduction
Contract
Structuring
Financial
Structuring
Risk
Structuring
Issues
affecting
project
Constructionworkmovingatslowpace.26th August2013isthescheduleddateforcompletion
construction.However,afinancialprogressof26.65%onlyhasbeenmade
WorkwasheldupduetocashflowproblemssinceJune2013.TheworkhasnowcommencedinJune2014
DelayinsubmissionofROBdesignsforRailwaysapproval
Frequentdesignchangesintheroadworks
Delayinmobilizationofmaterialresources
Delayinshiftingofutilities
Shortageofskilledmanpower
Conclusion
Conclusion
Theprojectsstructuringisnotverycomplexwithclearlydefined
stakeholders.
Theconcessionagreementlaysdownclearlytherequirementsfromthe
concessionairebytheauthority
However,theappointeddatefortheprojecthasbeenquestionedbythe
concessionairewhichconsidersittobe14th Dec2011.Concessionairehas
submittedscheduleinthepastbasedonthisdate.
Financialcovenantsandriskmanagementhasbeendefined
comprehensively.
Theprojecthasfacedtimeoverrunsandneedstobeexpedited.
References:Concessionagreementdated22June2010,ProjectstatusreportavailableatNHAI
website

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Presentation Outline

Selecting PPP Projects

Selecting PPP Projects

Initial criterion should be economic viability

Studies provide the basis for the Government to:

Minimum and maximum capital requirements

Includes a variety of studies/assessments

Conduct Cost-Benefit Analysis (CBA)

Identify non-quantifiable impacts:

Public Sector Comparator

Public Sector Comparator

Value for Money Comparison

PSC provides a benchmark for estimating value for

Public Sector Procurement

Tends not to value risk,

Budgets for projects are often optimistic

should reflect the full resource costs of the project,

Estimates should be for the most likely outcome!

Key functions of the PSC

Assessing Traffic Risks

Traffic Risk Error Drivers

Assessment of Traffic Risks

Sound mechanisms for toll rate review are therefore

Miscalculation of road user willingness-to-pay

Traffic Risk Error Drivers...

Traffic Forecasting Risk Index

Less usage by trucks

Tolls well established

No toll roads in country

Dense urban networks

Extension of existing road

Green field site

Alignment: strong economics

Alignment: strong politics

Highly congested corridor

Few competing roads

Many alternative routes

Only highway competition

Reliant on other, proposed highway

S&P Research Results 2005

Even worse for countries with no Toll

Impact of Forecast Assumptions

Building a PPP Project

Traffic Risk Sharing is Common

Risks associated with guarantees

Finally Contract Management !

Availability Payment Risks

From a budget perspective,

Traffic risk is transferred to the

PPP with Availability Payments

Ensure compliance with laws and regulations

Value for Money Analysis for

For Further Information

nder a publicprivate partnership (P3)

Creating a Public Sector Comparator (PSC), which

The Public Sector Comparator

2013 USDOT FEDERAL HIGHWAY ADMINISTRATION

revenue is generally subtracted from total PSC

Comparing the Public Sector

continued from side 1

PROGRAM AREAS OF THE OFFICE OF

PSC cost exceeds the P3 cost. Small changes in

An Example: Comparing a Public Sector

<Capital ratioRisk weightTarget