Infrastructure Finance & Risk Management

Infrastructure dimensions
core characteristics

Pioneering, longevity, project uncertainty, dependencies...

diversified stakeholder community ...

Sovereign, entrenched locals, NGOs, regulators, multilateral financiers

tied to macroeconomics, geopolitics, government budgets & policies

Misplaced priorities, political pressures, business cycles, globalisation

convergence of multidiscipline

Engineering, finance, legal, management

managing Specialised Contracts

PPA, FSA, CA, E&P, EPC

infrastructure varieties

Economic (power, logistics, airports), social (health, education)

unique Arrangements

Common access, BOOT, tolling, revenue sharing...

Infrastructure profiling
Definition
The physical components of interrelated systems providing commodities and
services essential to enable , sustain, or enhance societal living conditions
Sectors - 1. Transportation,
2. Energy,
3. Communication,
4. Water,
 5. Waste Management serving
6. Built Environment
7. Construction Industry

Public (basic) & Private purposes (discretionary)-poverty, Privatisation, PPP

Attractiveness of Infra business
Infra a system of systems (composite view), a third deficit along with National
Debt & Social Security
Infra-physical or operating e.g. Roads Cars, Trucks ; operating entities provide
public services-using roads owned by govt
 Infrastructure/Project Finance
Evolution of Project Finance Trade Companies, Railways, Suez, Resources

Link Infra with GDP

Infra Demand >71 trln $ by 2030

Project Finance, its evolution, range & trends

Definition Of Project Finance

1. Project Finance involves the creation of a legally independent project company
financed with nonrecourse debt (and equity from one or more corporate entities
known as sponsoring firms) for the purpose of financing investment in a single-
purpose capital asset, usually with a limited life.
2. Miller-Modigliani theory of capital structure :- in perfectly competitive capital
markets, company value would be independent of the degree of leverage.
3. Project Finance increases information transparency limits risk contamination,
improves projects tax status, solves agency conflicts, but is costly.
4. Project Finance & Other Financing mechanisms (not precise boundaries; using
insights)
1. Secured Debt; Covered Bonds; Subsidiary Debt. No recourse to corporate assets &
cash flows
2. Asset-Backed-Securities (ABS) or Real Estate Investments Trusts (REITS). No, hold
financial assets and not single-purpose capital asset.
3. Commercial Real Estate Development Yes, if developed as a single property
4. Privatisations or municipal development projects No, because they lack a
corporate sponsor.
5. Project holding companies Perhaps, but as number of projects increases, the holding
company begins to look more like a corporation with cross-collateralised debt
obligations

Some Interesting Statistics

1. 15 year CAGR for total project financed investment was 8%.
2. Proliferation of bonds issued in last 5 years (31 to 249 in 2013) but Bank loans
dominated.
3. ASIA accounted for 30% of all PF lending
4. 77% (2009-13) of Project Lending to Power, Transportation, Oil & Gas
5. Project Bonds show a greater tendency to have low investment grade cut-off : BBB-;
(concept of negotiated ratings - adjust leverage, covenants to reach investment
grade rating)
6. Projects tend to be larger than $100 million, have largely leveraged capital
structures, and have long but limited lives
7. Mean debt-to-total capitalization ratio is 74% one-third of the projects have more
than 80% leverage
8. League tables of lead arrangers, lead managers, advisers & lawyers (top 10
account for more than 51% of deals)

Infra Finance
Trends Infra Gap, financing issues (regulation, government deleveraging), NGOs,
expropriation risk government tax
Infra as Asset Class-then & now (stock & bonds)
Tax exempt municipal bonds, bond funds
Sector funds, infrastructure related mutual funds, listed Infra service providers/suppliers
REITS, ETFs, PE positions in infra operations
Mortgaged-Backed Securities
Management Model (based on Industry Integration ) for Infra services; eg Agri Logistics
take or pay contract, govt subsidy
Model Variables public or private, payment form (fee, capital charge, tax subsidy),
government involvement
General Financing Model (See Exhibits)
growthpaysitownway capital financing
Investment Banks issuance of stocks, bonds, trade in securities
 Sources of Capital - Infrastructure Bonds, Stock market, Private Equity, Bank Loans &
Mortgage lending, government grants, Current revenues, development fees, taxes
Development Banks World Bank, ADB, African Development Bank, BRICS bank (NDB)

Value
Infra Project Evaluation approach capital budgeting / investment appraisal
Techniques payback period, NPV, IRR
WACC calculations; COD, COE (beta, leverage)
Valuation using multiples MV / EV relative to earnings / cashflow / book value;
Social Cost Benefit Analysis

Risk
VUCADD, definition & relevance to informed investment decision, framework
(systematic & structured approach-ERM)
Risk Exposure =Probability * Impact (events with high probabilities & impacts)
Scope of risk management-objects (hazards), context, objectives, methods (RMS &
RMP)
Risk Management ..scope , framework
- objects (hazards) price/output (market) changes, contractual problems,
political, environmental
- context : inner (individual, groups, organization) external (political, legal,
technological)
- objectives - eliminate, reduce or control pure (only downside) risks & benefit
from speculative (both up & down)
- methods system (organization)-SIR & process (project) -IAPSM
- Risk-Cash flow (sensitivity ) & Financial (hedging)