financing infrastructure projects
- 2. Infrastructure projects Infrastructure includes the production of economic services from utilities(electricity, gas, telecommunications and water) and transport works(roads, bridges, urban transit system, seaports, and airports) and is central to promote economic activity. Internal facilities of a country that make business activity possible, such as communication, transportation, and distribution networks, financial institutions and markets, and energy supply systems counts to be infrastructure projects. Features of infrastructure projects: • Highly capital-intensive • Huge sunk cost • Long operating life
- 3. Key parties in an infrastructure project with responsibilities • Project sponsor: responsibilities of project sponsor in making an infrastructure project a real are responsible for converting a concept into a project and have a role in setting up a project vehicle Identifying and recruiting right managerial talent to implement and run the project Providing a clear mandate to management on their expectations Subscribing to a significant proportion of equity in the project vehicle
- 4. Cont.… • Project vehicle: the responsibilities of project vehicle in implementing a project are Delivering a bankable project during the financing phase Implementing the project Operating it in a manner that is financially viable Selecting and appointing all the project contractors Negotiate and execute the contracts Raise the financing Supervise construction and commissioning Operates the project either directly or through an Operation & Maintenance(O&M) Contractor
- 5. Cont.… • Project lenders: project lenders are responsible for Providing debt to finance the construction of the project. Typically a group of project lenders, led by a “lead Bank”, determines a bankable project cost and in consultation with the SPV and the project sponsor a “Means of Finance” to finance the same Disburses debt Performs a monitoring role during the construction phase, On commissioning monitors the performance and operation of the project till all debt is repaid
- 6. Cont.… • EPC contractor: responsibilities of EPC Contractor are Designs the project Procures all the engineering skills and equipment to construct the project Raises all the project facilities Ensures that test and trial-runs are completed Finally commission the project the key objective of this party is to deliver a project as per predefined specifications, within a certain cost and time frame. It also provides performance guarantee to the SPV’s. It may choose to subcontract certain portion of assignment
- 7. Cont.… • O&M Contractor: they are responsible for Operating and maintaining the plant in line with the industry best practices Performance parameters that need to be achieved during operations are defined in an O&M contract and they provide managerial skills and operations experience to achieve the possibly surpass the agreed parameters
- 8. Cont.. • Government: Government is the key project party. It provides a concession to the SPV to set up the project and ensures that a proper legislative and regulatory framework exists that allows the SPV to compete on a level playing field along with existing companies, in the same field.
- 9. Project configuration • Project sponsors have to follow the following arrangements while implementing infrastructure projects: Projects are implemented in a Special Purpose Vehicle which is distinct corporate entity incorporated with the objective of implementing and operating the project. Risk associated with the project are rising-fenced and do not flow back to the sponsor entities. Project sponsor take an equity stake in the SPV. The minimum stake could be in the range of 15-30% of the project cost and is referred to the sponsors’ contribution
- 10. Cont.… The SPV enters into contractual arrangements with the project contractors, off takers, operators, government, and project lenders(project parties). In non-recourse project financing project lenders would not have any fall back on the assets of the sponsors if the SPV fails to meet debt servicing obligations, but in the case of limited-recourse financing project sponsors would have certain contractual obligations towards project lenders. Other parties do not have re-course to the project sponsors Infrastructure projects can be financed at a relatively higher gearing
- 11. Public-Private Partnership (PPP) • Public-private partnership (PPP) is a funding model based on a contractual arrangement between a public agency (national, state or local government) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. • PPP arrangements are useful for large projects that require highly-skilled workers and a significant cash outlay to get started. They are also useful in countries that require the state to legally own any infrastructure that serves the public. • Key model in PPP: Design-Build (DB):The private-sector partner designs and builds the infrastructure to meet the public-sector partner's specifications, often for a fixed price and also assumes all the risk
- 12. Cont.… Operation & Maintenance Contract (O & M): the private sector partner operates a publicly owned assets for a specified period of time but public partner retains the owner Design-Build-Finance-Operate (DBFO):private-sector partner designs, finances and constructs a new infrastructure component and operates it under a long-term lease and transfer on completion to the public sector Build-Own-Operate (BOO):The private-sector partner finances, builds, owns and operates the infrastructure component in perpetuity(permanently). Build-Own-Operate-Transfer (BOOT): The private-sector partner is granted authorization to finance, design, build and operate an infrastructure component and transfer ownership after completion of specified time. Buy-Build-Operate (BBO): This publicly-owned asset is legally transferred to a private-sector partner for a designated period of time.
- 13. Cont.. Build-lease-operate-transfer (BLOT):The private-sector partner designs, finances and builds a facility on leased public land When the lease expires, assets are transferred to the public-sector partner. Operation License: The private-sector partner is granted a license or other expression of legal permission to operate a public service, usually for a specified term. Finance Only: The private-sector partner, usually a financial services company, funds the infrastructure component and charges the public-sector partner interest for use of the funds.