FINANCIAL ANALYSIS

INTRODUCTION
Highway projects are characterized by heavy capital investments coupled with long gestation periods
leading to low financial rates of return although the economic benefits to the society are immense.
Decisions regarding investment in this are not easy because not only are the initial investments
prohibitive the returns too are uncertain.
Considering above, an attempt has been made to carry out the financial appraisal of a highway project
to examine the financing options to implement the project, i.e., EPC model, Annuity model and a Hybrid
model.
COST ESTIMATES
The capital cost estimates for the project are speculated around Rs 100 cr. And will take 1.5 years for
construction. Phasing of capital investment is taken as 40% in 1
st
half year, 30% in 2
nd
half year and 30%
3
rd
half year.
Rest of the details are present in the following file, along with the comparison of various models.
spreadsheets\Sample HW annu epc .xls
FINANCIAL ASSUMPTIONS:
i. Depreciation: Life of system and rolling stock has been taken as 25 years and straight line
method has been considered. In case of fixed assets a life of 50 years has been taken for
depreciation purpose
ii. Corporate Tax: A uniform tax rate of 30% has been assumed. Corporate Tax including
surcharge and applicable cess works out to be 33.99%
iii. Insurance: Insurance expense of 1% of current asset value has been considered.
iv. Loan Life and Moratorium Period: Loan life has been assumed to be 15 years and loan
moratorium period has been taken as 5 years.
v. Interest rate for soft loan has been taken as 3%
vi. Debt: Equity Ratio: Debt to Equity has been taken as 3:1 approx
vii. Cost of capital: Cost of equity is taken to be 15% and pre tax cost of debt is assumed to be
12%


PROJECT STRUCTURING ALTERNATIVE
In the present development plan, the capital cost has been divided into two categories:
1. Infrastructure costs: These include costs such as civil cost, cost of utilities shifting, and other
transport civil infrastructure.
2. System costs: These costs include the entire fleet procurement costs,
signalling/telecommunication, traction system, etc.
Based on these two costs, the following project structuring has been attempted.

Alternative 1: 100% ANNUITY MODEL
The Concessionaire is required to meet the entire upfront/construction cost and the expenditure on
annual maintenance. The Concessionaire recovers the entire investment and a predetermined cost of
return out of the annuities payable by the granting authority every year.
Alternative 2: 100% EPC MODEL
Under an EPC contract, the contractor designs the installation, procures the necessary materials and
builds the project, either directly or by of the work. In some cases, the contractor carries the project risk
for schedule as well as budget in return for a fixed price, called lump sum LSTK depending on the agreed
scope of work.
Alternative -3: HYBRID MODEL (40% EPC)
Under this model, the contractor would be getting 40% of the payment during the period of
construction and rest 60% as annuity over the next 10 years.
FINANCIAL INTERNAL RATE OF RETURN
The financial analysis for the project has been carried out considering the capital/O&M/Replacement
costs and revenues. The project FIRR and equity IRR for the all the alternatives have been worked out
and given in table below:
Sl
No.
Alternative Project
IRR
Equity
IRR
1 Alternative 1 : ANNUITY 37.2% 18%
2 Alternative 2 : EPC
3 Alternative 3 : HYBRID 34.6% 18%

BACKGROUND
Due to the inherent characteristics of the infrastructure projects, the capacity to attract capital is
limited. The changes necessary for flow of funds in infrastructure projects are needed in diverse areas
related to policy matters, legal and regulatory reforms, institutional changes, fiscal incentives, etc.
Infrastructure services have the characteristics of being natural monopolies, thereby reducing the role of
private sector participation in these projects. Infrastructure projects differ in some very significant ways
from manufacturing projects and expansion and modernisation projects undertaken by companies.
1. Longer Gestation Periods: Infrastructure finance tends to have maturities between 5 years
to 40 years. This reflects both the length of the construction period and the life of the
underlying asset that is created. These projects develop capability to repay bulk of their
debt only 3-7 years after dispersion of capital. Therefore, they require a higher moratorium
period.
2. Larger Amounts: While there could be several exceptions to this rule, a meaningful sized
infrastructure project costs a great deal of investment.
3. Higher Risk: Since large amounts are typically invested for long periods of time, the
underlying risks are also quite high. The risks arise from a variety of factors including
demand uncertainty, environmental considerations, technological obsolescence (in some
industries) and very importantly, political and policy related uncertainties.
This underlines the need for arranging capital on long-term lending basis, which is not much developed
in India. The borrowing in capital and debt market is mostly of short-term duration that favours projects
with short payback periods. Thus, the government would have to assist by giving certain assurances for
lenders to be interested in these projects.
SOURCES OF FINANCING
Following are the possible source of financing an infrastructure project:
Government (Central, State and Local)
Para-statal Bodies
Capital/ Debt Market
Secondary Debt
Private Sector/ Public Private Partnership
Users Group
Out of the total capital, 75% would be debt financed and rest is equity financed.
CONCLUSIONS