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 https://www.pppinindia.gov.in/faqs
 https://www.pppinindia.gov.in/toolkit/pdf/case_studies.pdf
 https://www.pppinindia.gov.in/ppp-toolkit

Project Finance And PPP Markets 


https://www.pppinindia.gov.in/toolkit/
https://pppknowledgelab.org/countries/india
 https://www.pppinindia.gov.in/toolkit/pdf/case_studies.pdf
 https://smartnet.niua.org/sites/default/files/resources/Compendium_July8.pdf
 https://www.cii.in/webcms/Upload/Whitepaper%20on%20Partnership%20in%20H
ealthcare1.pdf
 https://www.mycii.in/KmResourceApplication/38237.Public_Private_Partnerships_
in_CSR_in_India.pdf
 https://www.pppinindia.gov.in/infrastructureindia/project-
list?id=1&searchType=Government%20Infrastructure%20Projects%20(PPP)

Definition of Infrastructure
 Infrastructure is generally defined as the physical framework of facilities through which goods
and services are provided to the public. It creates positive and negative externalities, involves
large flow of expenditure and affects production and consumption directly.

 It has a multiplier effect: With 1% increase in infrastructure spending household access to safe
water increases by 0.3%, paved roads by 0.8%, power 1.5% and telecommunications 1.7%. (World
Bank, 1999)
P P P Projects
Why is Commercialization of Infrastructure services so important?
 A $1 investment in telecom leads to $ 6 increase in GDP (World Bank study).

 1% increase in road investment is associated with a 0.3% drop in poverty incidence over five
years. (ADB Study)

 For every 10,000 Yuan (~$1200) spent for electricity development in China, 2.3 persons are
brought out of poverty (ADB)
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Infrastructure Services Debate-The Infrastructure Funding Practices

Infrastructures are usually subject to economies of scale and thus are best produced and delivered
 Any investment is Infrastructure assets faces two issues: by monopolies. Since private monopolies may not produce socially optimal output, governments
--- Externalities (An externality is a cost or benefit caused by a producer that is not financially need to regulate the private monopolies, and the regulation cost may be too high.
incurred or received by that producer.)
The private rate of return is smaller than the social rate of return. In this case, infrastructure
--- Multipliers (It is the number of times a rise in national income exceeds the rise in injections of
demand that caused it) provision may be unprofitable and private enterprises may not be willing to provide the
infrastructures.

Environmental consequences and safety issues of infrastructure provision are unlikely to be fully
anticipated and incorporated in the market allocations.

Debate-The Infrastructure Funding Practices Distinguishing Features of a PPP Project

 High priority, government-planned project.
Infrastructure projects usually involve large investments that would be difficult for private firms
 The project must have emerged from a government-led planning and prioritization process.
to raise.
 The project must be such that, regardless of the source of public or private capital, the government
Private provisions may deprive the poor from getting needed infrastructure services. would still want the project to be implemented quickly.
Governments often redistribute income through the provision of infrastructures.  Genuine risk allocation
 Shared risk allocation .
It would be difficult for private firms to have a nationwide and long-run planning on
infrastructure constructions. All these factors justify the argument that the governments should  The private sector must genuinely assume some risk

be infrastructure providers.  Mutually valuable.

 Value should be for both sides
 government should also genuinely accept some risks
 not transfer the entire risk to the private sector, and vice versa.

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Potential Sources of Efficiencies from PPP

Type Definition
Resource Allocation Efficiencies are gained from the
Efficiencies private sector’s ability to allocate completion of the project to a set of performance
resources more effectively.
Production Efficiencies Resources from specific
applications can be used more
Economic and social
effectively
Access to more capital for more
efficiencies projects
Example
The private sector’s motivation is on the
standards. Conversely, the public sector will have
competing interests for operating resources,
which may reduce the performance of the project
The degree of Commercialization
over its life-cycle.
depends on the ease of bundling
The construction and operation may be
completed in less time.
Look at the PPP Types discussed in
More efficient movement of goods and people.
the following slides.

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PPP Types
Selected risks typically Ownership
Type of Ownership of
Selected responsibilities of borne by operator— of
arrangeme
nt
Definition of operator duties
the operator and typical share of operating
infrastructure
assets
Project Types
total project risk assets

Providing management Depends on the nature of BOT - Build Operate and Transfer The assets are owned by Government agency
Management Supplies management services to the utility Contracting Contracting
the performance bonus— which will take back assets after concession
contract in return for a fee services to the utility very small
authority authority (Road, Power, Sewage treatment)
period
Runs the business, retains a fee (generally Employing staff Operating and
Affermage
not equal to the customer tariff) based on
Operating and commercial risks— Operator
Contracting BOOT – Build, Own, Operate and Transfer Same as BOT except that asset ownership is with the
the volume of water sold, but does not authority
finance investments in infrastructure assets maintaining utility significant operator and sold to the Government for either a
Runs the business, retains revenue from
nominal/ preagreed fixed sum/ market value with a cap
Employing staff
customer tariffs, pays a lease fee to the Operating and commercial Contracting
Lease Operating and Operator
contracting authority, but does not finance risks—significant authority
investments in infrastructure assets maintaining utility BOO - Build, Own, Operate Same as BOOT except that asset is perpetually owned by
Employing staff the operator
Operating and Operating, commercial,
Concession
Runs the business and finances investment,
maintaining utility and investment-related Operator
Contracting BOOST - Build, Own, Operate, Share and Transfer Same as BOOT except that during the concession period
but does not own the infrastructure assets authority
Financing and risks—major revenue is shared with the Government agency
managing investment
Employing staff
Operating and Operating, commercial, BOLT – Build, Own, Lease and Transfer Subleased to other tenants after building in a leased land
Runs the business, finances investment, and
Divestiture
owns the infrastructure assets
maintaining utility and investment-related Operator Operator – IT Park Transfer to the Government agency after
Financing and risks—major concession period.
managing investment

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Project
Project Types
Types
DBFO – Design, Build, Finance and Operate Designed, financed and operated perpetually.

BTO – Build, Transfer, Operate Private operator transfers to Government and leases
it back collects revenues.

BBO – Buy, Build, Operate Buy an existing facility, modernise, operate and
collect user fees
(Old Mumbai-Pune road)

OMT – Operate, Maintain and Transfer Operated during the concession period and
transferred back to the government agency.

DBFO – Design, Build, Finance and Operate Designed, financed and operated perpetually.

Common Forms of PPP models in India What is Project Financing

 Modified Design Build Turnkey Contracts :Time and cost savings, efficient risk sharing and improved quality.
The turnkey approach with milestone linked payments and penalties or incentives can be linked to such a
contract.
 Build Operate Transfer Models: User fee based BOT models. Commonly used in medium to large PPPs in
energy and transport sectors. Annuity based BOT models. Commonly used for projects not meant for cost
recovery through user charges such as rural urban health and education sector.
 Performance based Management/Maintenance Contracts: PPP models that lead to improved efficiency are
encouraged in an environment that is constrained by availability of economic resources. Water supply,
sanitation, waste management, road maintenance etc.
 Gadkari has big plans to push India's infrastructure
https://economictimes.indiatimes.com/news/economy/infrastructure/gadkari-has-big-plans-to-push-indias-
infrastructure/articleshow/69710797.cms
 According to Finnerty (1996), “….the raising of funds to finance an economically separable
capital investment project in which the providers of the funds look primarily to the cash flow
from the project as the source of funds to service their loans and provide the return on their
equity invested in the project.”
 According to Nevitt & Fabozzi (2000), “A financing of a particular economic unit in which a
lender is satisfied to look initially to the cash flow and earnings of that economic unit as the
source of funds from which a loan will be repaid and to the assets of the economic unit as
collateral for the loan.”
 According to Pacelle et al. (2001), “It is a term that typically refers to money lent to build
power plants or oil refineries.”
 According to Esty (2005), “It involves the creation of a legally independent project company
financed with equity and nonrecourse debt for the purpose of financing a single purpose
capital asset, usually with a limited life.”

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Basic Elements of Project Financing Common Feature of Project Finance

Lenders
 Capital Intensive
Loan Debt Service
Funds Repayment
 Highly leveraged
 Long term
Supplies Output
 Independent entity with a finite life
Suppliers Assets comprising the project Purchasers
 Non-recourse of limited recourse financing
Supply
Contracts Purchase  Controlled dividend policy
Equity Funds/ Agreements
Other forms of Returns  Many participant
credit support
 Allocated risk
Equity Investors/
Sponsors  Costly

Corporate Finance vs Project Finance Advantages of Project Finance

 Free Cash Flow

 It is the net amount available to equity sponsors
 FCFE = PAT + Non-Cash Charges – Investment Requirements (CapEx or WC)
 Off-balance sheet amount available for future investments
 Lower CoC
 High Leverage
 Contractual Agreements result in lower-cost debt

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Advantages of Project Finance Disadvantages

 Low Agency Cost  High Deadweight Costs

 Agency Conflict  Contractual Requirements
 Project-specific Organization Structure  Legal Costs
 Project-specific Employment Agreements
 Limited Financial Flexibility
 Highly Structured Financial Agreements
 Lower Cost of Financial Distress  Caveats for Protection
 Risk Sharing  Time-consuming Process
 Less Number of claimants  Complex Structures
 Large Number of Contracts

Project Finance

Dependence only on Project Cash Flow means:

 Lower Tolerance for risks
 Determine all risks and mitigate them
 Mitigation is by allocating the risk to the entity best placed to mitigate them.
P P P Projects
 Done through the process of contracting with the multiple agencies involved.

Can we bring down the cost of Financing?

Is our Standard Debt Equity Ratio all right?
How do we evaluate PPP projects
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Sources of Funds of PPP Funding Sources

Forms Domestic Sources External Sources

- Commercial Banks: Floating rates and genuine flexibility

Debt Domestic Commercial Banks
Domestic Term Lending Institutions
Domestic Bond Markets
Specialized IFI
Equity Domestic Developers
Public Utilities
Other Institutional Investors
International Commercial Banks
Export Credit Agencies
International Bond Markets
Multilateral Agencies
International Developers
Equipment Supplier funds
Other Equity Investors
Multilateral Agencies
- Bilateral Agencies: ECA’s promotes nation’s goods, services and investments. US Exim, EDC of
Canada, Coface, JBIC, Hermes( Germany), SACE of Italy
- Multilateral Agencies: World Bank/IBRD (Partial Risk and Partial Credit)
- IFC is the private sector arm of World Bank and financed projects in 70 countries.
- IDB not so active as IFC
- ADB mainly developmental role.
- EIB – Mainly Europe
- MIGA – Political Risk Insurance