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Final Project

Final Project

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Sections

  • 1. EXECUTIVE SUMMARY
  • 2. INFRASTRUCTURE
  • 3. TYPES OF INFRASTRUCTURE
  • 4. IMPORTANCE OF INFRASTRUCTURE
  • 5. POLICY FRAMEWORK
  • 6. PUBLIC PRIVATE PARTENRSHIP
  • 7. TYPES OF INFRASTRUCTURAL FINANCE AVAILABLE
  • 8. CHARACTERISTICS OF INFRASTRUCTURE FINANCE
  • 9. TYPES OF CONTRACTS IN INFRASTRUCTURE SECTOR
  • 10. DELHI METRO RAIL CORPORATION
  • 11. ECONOMIC BENEFIT AND COST OF METRO
  • 12. MEASUREMENT OF ECONOMIC BENEFIT AND COST OF METRO
  • 13. PROJECT FINANCE (INFRASTRUCTURE)
  • 14. CHALLENGES IN FINANCING LARGE SCALE PROJECT
  • 15. FINANCIAL COST AND BENEFIT OF METRO
  • 16. KEY CHARACTERISTIC OF PROJECT FINANCING STRUCTURES
  • 17. PARTIES INVOLVED IN PROJECT FINANCING
  • 18. SOURCES OF FINANCE
  • 19. RISKS INVOLVED IN PROJECT FINANCING
  • 20. Conclusion:
  • 21. BIBLIOGRAPHY

1.

EXECUTIVE SUMMARY

India has fast emerged as a land of opportunities in Infrastructure sector. The potential is enormous as many sectors are opening up for participation and private investment. In the last few years a number of Road Projects have been taken up under ambitiou s National Highway Development Programme costing about US$ 12 billion, in which large number of foreign construction companies are participating.

The telecom sector has moved forward at a brisk pace and power reforms have gained momentum while the disinv estments process has got underway in the Telecom and Oil and Gas sector. In order to have an integrated development of Transport system, National Rail Development Programme has also been launched in Dec. 2002 envisaging an investment of about US$3.5 billio n.

The project also gave an opportunity to understand the different infrastructure financing models prevalent and study the BOO model in detail with reference to Delhi Metro Rail Corporation . Also this project helped to understand things to be vetted critically for financing infrastructure project.

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2. INFRASTRUCTURE

According to World Bank ³Infrastructure is an important part of development providing and delivering basic services that people need for everyday life e.g. safe drinking water, electricity, roads, sanitation etc.´ RBI has provided a composite definition on Infrastructure lending not simply on infrastructure alone. As per RBI ³any credit facility in whatever form extended by lenders, banks, Financial Institutions or Non banking Finance Companies to an infrastructure facility as stated below falls within definition of Infrastructure lending. In other words, a credit facility provided to a borrower engaged in: 1. 2. 3. Developing, or Operating & Maintaining, or Developing, operating and mai ntaining any infrastructure facility that is a project in any of following sectors, or any infrastructure facility of similar nature a. b. c. d. e. A road, including toll road, a bridge or a rail system A highway project including other activities being an integral part of highway project A port, airport, inland waterway or inland port A water supply project, irrigation project, water treatment system, sanitation and sewerage system or solid waste management system Telecommunication services whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services f. g. h. i. An industrial park or SEZ Generation or generation or distribution of power Transmission or distribution of power by laying a network of new transmission or distribution lines Construction relating to projects involving agro -processing and supply of inputs to agriculture

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j.

Construction for preservation and storage of processed agro products, perishable goods such as fruits, vegetables and flowers incl uding testing facilities for quality

k. l.

Construction of educational institutions and hospitals Any other infrastructural facility of similar nature

INDIAN INFRASTRUCTURE MARKET

Infrastructure spend in India is estimated to be Rs. 20.3 tn (USD 430 bn) during the current 5 year plan. Power, roads, Telecom & railways to witness maximum spend.

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Legal and general administrative framework 4 . Irrigation facilities SEZ has a different characteristic in as much as it contains all the ingredients of a physical infrastructure while being otherwise considerably led by Real Estate Intervention. Sanitation and sewerage e. Port handling facilities e. Airways and water supply and transportation etc b. Education b. TYPES OF INFRASTRUCTURE Broadly infrastructure is classified as 1. Power generation. Medical d. transmission and distribution c. Solid waste collection and disposal facilities f. Railways. Primary Mass education facilities c. Physical Infrastructure which generally covers the following a. Transportation including urban mass transportation: Roadways. 2. Telecommunication d. Social Infrastructure generally covers following a.3.

coping with population conditions.4. Sanitation etc touch the population at all levels Up keeping of environment for safe living Poverty alleviation as a consequence of overall development of productive sectors Easy and cost efficient access to markets both for inputs and outputs is possible out of infrastructure developments. 3. Education. The availability of adequate infrastructure is imperative for the overall economic development of the country. Supply of clean drinking water. 5. reducing poverty and improving environmental 5 . Infrastructure adequacy helps determine success in diversifying production.g. health. 4. As a key driver for all round growth with enhancement in the efficiency level Most infrastructure utilities e. IMPORTANCE OF INFRASTRUCTURE World bank has observed that greater focus needs to be placed on QUALITY NOT QUANTITY of Infrastructure services. 2. growth. expanding trade. It is important from mainly following perspective 1.

1 lakh crore.5 lakh crore y Ports.1.3. Oil& Gas Pipelines. C. 7. Assuming Debt : equity ratio of 70:30.3 lakh crore B.2 lakh crore at inception y Investment of private sector currently envisaged is Rs. 6.7 lakh crore per annum and debt requirement of Rs.2. expected to be increased to ~10% in 12th Plan. Investment in Infrastructure sector constitutes about 5% of the GDP in 11th Plan. POLICY FRAMEWORK 11th Five Year Plan A. Airports. Private sector participation envisaged at Rs. 6. 0. 20 lakh crore in the infrastructure sector y Power Rs. y 30% investment envisaged through PPP. 7. y Roads Rs. etc. B. equity re quirement would be Rs.7 lakh crore 6 . 41 lakh crore in the 12th Five Year Plan 1. Investment targeted in 11 th five year plan: Rs. : Rs. Investment in Infrastructure sector targeted at Rs.5. y Telecom : Rs.6 lakh crore.4 la kh crore 12th Five Year Plan A.

etc: Rs.62 lakh crore (2% of outstanding bank credit).2. 2010).000 crore (53% of incremental sector lending).47.000 crore (32% of incremental sector lending). 0. y Ports.82 lakh crore 3 (2% of outstanding bank credit).0. Airports.300 crore (4% of incremental sector lending).4.0.Availability of Bank credit A.5 lakh crore for the 12 months ended November 2010 (a 45% growth in 1 year period). y Roads: Rs. Oil& Gas Pipelines. B. etc: Rs. Incremental funding availed during this period by: y Power: Rs.78. Airports.1.6. Oil& Gas Pipelines. y Roads: Rs. 7 . Bank¶s Infrastructure sector exposure at ~14% of the total outstanding bank credit of Rs. y Power: Rs.70 lakh crore (as on November 19.8 lakh crore C.000 crore2 (11% of incremental sector lending). 33.4 lakh crore (7% of outstanding bank credit). Growth in infrastructure sector lending by Rs. y Telecom: Rs.17. Exposure to infrastructure sector currently at Rs. y Telecom: Rs.98 lakh crore (3% of out standing bank credit). y Ports. D.

etc :USD 0. upto Sep 2010. Airports.6 bn (37% share of infrastructure investments) y Ports. etc :USD 0.Availability of Equity Capital A. Oil& Gas Pipelines.2 bn (3% share of infrastructure investments) B. In FY 2011.8 bn (40% share of infrastructure investments) y Telecom: USD 2. In FY 2010.5 bn (20% share of infrastructure investments) 8 . Oil& Gas Pipelines.7 bn (27% share of infrastructure investments) y Roads: USD 0.4 bn (15% share of infrastructure investments) y Telecom: USD 1 bn (38% share of infrastructure investments) y Ports. FDI (including PE deals) inflow is USD 2.4 bn (20% share of infrastructure investments) y Roads: USD 2.6 bn: y Power: USD 0. Airports. FDI inflows were USD 7 bn (~25% of overall inflows) into Infrastructure sector: y Power: USD 1.

which is generally higher in the range of 20 -40%. Banks have internal sectoral ceilings at 12 -15% of gross advances for each sector. Funding from Indian Banks: A. Perceived as a huge risk by stakeholders. y GoI may advise banks to increase the cap for specific sectors on a case to case basis within infrastructure sector.Issues and remedies in financing of Infrastructure Projects: Implementation hurdles: A. Land acquisition & Clearances: To develop a policy framework to handover land along with clearances to reduce delays. and give out a lower termination payments as compared to actual project cost. y Further incentivize deposit mobilization beyond 10 years through tax incentives . ALM mismatch: Banks have a typical liability profile of 3 -5 years whereas infrastructure financing is required for 10 -15 years and beyond. B. B. y Policy to classify ³infrastructure´ as a ³priority sector´ and stipulate a specific percentage of a bank¶s total lending to be in the infrastructure sector. Termination payments are based o n the authority¶s project cost estimates. y Spread reset and put call option being done to circumvent the mismatch issue 9 .interest income on FDs to be tax free. C.

External Commercial Borrowings: Dearth of ECBs from offshore banks (except for telecom sector) A. In addition. which would allow foreign lenders to take out loans from Indian banks. foreign lenders might not be comfortable with an agreement which would subject them to Indian jurisdiction. In June 2010. y Allow refinancing of rupee loans for operational infrastructure projects (on an approval basis) y Strengthen the enforcement mechanism for Foreign Banks in line with Indian Banks (DRT and SARFEASI Act for Foreign Banks) B. Risk perception of infrastructure projects is high due to country rating and project rating issues. prime requisites being : y The corporate developing the infrastructure project should have a tripartite agreement with domestic banks and overseas recognized lenders for either a conditional or unconditional take -out of the loan within three years of the scheduled Commercial Operation Date (COD). RBI came out with guidelines on using takeout financing through ECBs. while Indian borrowers and banks would not want to fight cases in foreign courts. very few banks would be willing to offer the facility at that fee and Scheme is governed by the ECB cap of USD 500 mn per project. The scheduled date of occurrence of the take .out should be clearly mentioned in the agreement y This may not be possible at the time of financial closure in concession based projects since the time lines are limited to get in a foreign bank at the time of financial closure y It will be tough for lenders to take a call on interest rates and covenants in advance. 10 . y The guidelines stipulate the takeout financier cannot charge a fee of more than 100 basis points for the undisbursed loan amount.

for on lending to the infrastructure sector as defined under the ECB policy. condition may be relaxed on case to case basis 11 . Infrastructure Finance Companies (IFCs) i.However the condition of hedging of currency risk in full makes it less attractive. up to 50 per cent of their owned funds. including the outstanding ECBs.e.C. are permitted to avail of ECBs. NBFCs categorized as IFCs by the RBI.

Sovereign responsibilities Public accountability On the other hand. PPP covers following main aspects: 1. public sector capital contribution gives rise to 1. Private sector capital funding provides 1.6. Private sector higher order efficiency level Business incentives on a sustainable manner 12 . Designing c. Operating In short. PUBLIC PRIVATE PARTENRSHIP The government has decided as major policy stance that in order to effect desired cost saving and to facilitate access to expertise and proprietary technology and to provide supplementary source of financ e towards multifaceted infrastructure development at a faster rate. PPP model be adopted on case to case basis. As a matter of fact. 2. Private equity subscription is expected to be minimum 15% under this model as has recently been decided in case of 50000 kms road projects every next 10 years. 2. PPP may be defined as co-operative venture between public and private sectors. 2. Implementing d. It is long term contractual partnership (25 years+) between Government and Private sectors Such partnership to cover infrastructural sectors which are traditionally within the sole ambit of public sector The partnership usually covers a. 3. Financing b.

3. b.BENEFITS: TO PRIVATE SECTOR 1. Government`s optin ot legislate Such guarantees may also cover i. Scope for reasonable return on opportunities arising out of funding gap of investment which government may not be in a position to meet out of fiscal resources 2. Tax concessions Participation in market competition in areas which were monopolized by government Embedded Option With a view to ensuring smooth implementation and continuation of infrastructural projects involving Private sector participation a provision of Embedded Option in the contract is often made. Reducing risk for the public sector 4. Minimum revenue stream ii. Mobilizing financial resources 5. Such option includes: a. 4. Enhancing implementation capacity 3. Anti competition adventure iii. Freeing scarce public funds for other uses 13 . Increasing efficiency in execution of projects 2. Restriction of pricing of services for a specific period To Public Sector 1.

c. 2.7. TYPES OF INFRASTRUCTURAL FINANCE AVAILABLE In case of infrastructure projects the guidelines issued by RBI permit banks extending following types of financial assistance 1. b. d. b. c. Term loan Cash credit Unsecured overdraft Bills purchase/bills discounting facilities Non Fund Based a. d. Term bank guarantee Short term bank guarantee for procurement of raw materials Short term bank guarantee for obtaining unsecured loan from others Letter of credit facility 14 . Fund Based a.

A hydro -electric power project for example may take as long as 5 years to construct but once constructed could have a life of as long as 100 years.0 to US$ 250. Fixed and Low (but positive) Real Returns Given the importance of these investments and the cascading effect higher pricing here could have on the rest of the economy. Longer Maturity Infrastructure finance tends to have maturities between 5 years to 40 years. Larger Amounts While there could be several exceptions to this rule. 1. a meaningful sized infrastructure project could cost a great deal of money. 4. while real returns could be near zero they are unlikely to be negative for extended periods of time (which need not be the case for 15 obsolescence (in some indu stries such as telecommunications) and very importantly.12. technological uncertainties.0 mn (Rs. The risks arise from a variety of factors including demand uncertainty.00 bn) could be required per project. Higher Risk Since large amounts are typically invested for long periods of time it is not surprising that the underlying risks are also quite high.16 However. CHARACTERISTICS OF INFRASTRUCTURE FINANCE Infrastructure manufacturing projects projects differ and in some very and significant ways from expansion modernization projects undertaken by companies. This reflects both the length of the construction period and the life of the underlying asset that is created. 3. environmental surprises. 2. annual returns here are often near zero in real terms. political and policy related .00 bn to Rs.8. or longer. once again as in the case of demand.0 mn and consequently amounts of US$ 200. For example a kilometer of road or a mega-watt of power could cost as much as US$ 1.9.

manufactured goods). 16 . Returns here need to be measured in real terms because often the revenue streams of the project are a function of the underlying rate of returns.

There are two major approaches that could be thought of as equitable risk sharing arrangements i n the financing of infrastructure projects which are as follows: 1. the GOI has introduced a series of reforms to attract private sector participation and foreign direct investment. which vary in the distribution of risks and responsibility between the public and private sectors. According to the Expert Group on the Commercialization of Infrastructure Projects funds requirement of a staggering order will be required to finance the infrastructure sector in the years to come. Costs and returns will be recovered by the franchise from the operations of t he project. The GOI has made a significant commitment to infrastructure development and has been mandated by the World Bank to invest the bulk of proposed aid of US $3 billion in the infrastructure sector. the balance has to come through innovative approaches to financing of infrastructures projects. 2. the concessionaire who is thereafter granted a franchise to operate for a specified p eriod builds the project. Such innovative financing approaches depend on the length of the gestation periods. Consequently. apart from augmenting public sector investment into infrastructure.9. Although a major chunk of about 85 percent of the requirements will be met from domestic savings. 17 . TYPES OF CONTRACTS IN INFRASTRUCTURE SECTOR There are different contract models currently being adopted for public private partnership (PPP) in India¶s infrastructure sector. The Concession Approach The Structural Financing Option Concession Approach Under this approach. the magnitude of infrastructure projects and the relatively high risks associated with these projects.

BOT toll-based projects : In order to reduce the dependence on its own funds and to promote private sector involvement in developing projects. usually through the national highways authority of India (NHAI) in the case of highway projects. After the expiry of the concession period. that traffic. During the concession period. In the context of highway projects. the amount of income is not by direct reference to the number of vehicles using the highway. BOT projects can be annuity based or toll-based as defined below: BOT annuity-based projects : Under this form. Under this approach. may be lower than expected is borne by the NHAI alone. 18 . the concessionaire is responsible for constructing and maintaining project facility. the facility is transferred back to the public authority.Under this type of PPP contract. At the end of the concession period. the concessionaire is responsible for constructing and maintaining the project as well as being allowed to collect revenues through tolls during the concession period. The concession contract is awarded to the bidder. In this case. operate and maintain a facility for t he concession period. and consequently user fees. the government grants to a contractor a concession to finance. or annuity. among other criteria. Instead. the NHAI has awarded some highway projects on a toll basis. debt servicing and operations.. the project is transferred back to the NHAI. The GOI. pays the concessionaire a semi-annual payment. The most innovative option was the Rs 7 crores toll road revenue bonds issue. the amount of income collected by the concessionaire is not directly related to the usage level of the project. which. the first of its kind in India by Madhya Pradesh Tolls Ltd. quotes the lowest annuity amount. BOT is the most commonly used approach in relation to new highway projects in India. build. the operator collects user fees and applies these to cover the costs construction.

owns and operates some facility or structure with some degree of encouragement from the government. operate) is a public -private partnership (PPP) project model in which a private organization builds. Lease and Transfer¶ project. it may offer other financial incentives such as tax -exempt status. instead of only owning a concession to operate the assets. Build-own-operate-transfer (BOOT): Boot contracts are similar to BOT contracts. he Rs 4. For example. is a variant of BOLT under which a set of wagons purchased by private parties is leased to the Railways on a fixed rental. except that in this case the contractor owns the underlying asset. the contractor would own the asset during the underlying concession period and the asset would be transferred to the government at the end of that period pursuant to the terms of the concession agreement.800 crores Elevated Light Rail Transit System (ELRTS) in Bangalore is to be run on a BOOT basis over a 30 year concession period and the GHIAL project i. MPTL is jointly promoted by Infrastructure Leasing and Financial Services (IL&FS) and the Madhya Pradesh State Industrial Development Corporation (MPSIDC). Although the government doesn't provide direct funding in this model. Operate. in the case of hydroelectric power projects. Hyderabad airport is also to be run on a BOOT basis over a 30 year concession period . The ³Own Your Wagon´ scheme currently in operation in the Indian Railways. Build-Operate-Own (BOO): BOO (build. Paradip Port Trust has signed an agreement to construct Rs 1. Build-Operate-Lease-Transfer (BOLT) This is µBuild.e. own. Delhi Metro Rail Corporations project is classic example of BOO 19 . The developer owns and operates the facility independently.500 crores floating dry dock at Paradip in Orissa in collaboration with Standf ield of Scotland on a BOO basis.(MPTL) to fund India¶s first private sector road project.

In the event of default on the structured instrument. The NHAI would restrict itself to setting out the exact requirements in terms of quality and other structures of the road. the debt holders¶ recourse would be limited to t he underlying assets only and would not extend to general reserves and assets of the company. wherein the concessionaire does the detailed design work. The NHAI expects that the DBFO scheme will improve the design efficiency. Build-Own-Operate-Sell (BOOS): This is µBuild. in addition to giving the concessionaire greater flexibility in terms of determining the finer details of the project in the most efficient manner. Ministry of Surface Transport (MOST) and Maharashtra Government. both with regard to risk reduction as well as equitable distribution of risks. 20 . Structured Financing Option (SFO) Non-recourse financing Under this option. Design-build-finance-operate(DBFO): The NHAI is planning to award new highway project contracts under the DBFO scheme.basis in which Phase I & II already completed and made availabl e for public use. Operate and Sell¶ project. reduce the cost of construction and reduce time to commence operations. and the design of the roads will be at discretion of the concessionaire. Own. Panvel (Mumbai) By-pass is the first example of SFO in India involving IL & FS. These forms of private sponsor participation are often much better vis -à-vis traditional financing options. the cash flows generated by the project secure the debt instrument or the collateral value of the specified assets financed by the instrument. Hume industries (Malaysia).

This increase in road length is not at par with the phenomenal growth in the number of vehicles on these roads in Delhi. with auto mobiles contributing more than two thirds of the total atmospheric pollution. the main means of public transport. the decision of the Government of India to develop a mass transport system for Delhi providing alternative modes of transport to the passengers was most appropriate. of which 13. DELHI METRO RAIL CORPORATION Delhi. the average trip length of buses has gone up to 13 km and the increased congestion on roads has made the corresponding journey time of about one hour. is one of the fastest growing cities in the world with a population of 13 million as reported in the Census of India Report for the year 2000.10. Until recently.17 kms has 21 . The cumulative figure of registered private and government buses. The total length of the road network in Delhi has increased from a mere 652 km in 1981 to 1122 km in 2001 and it is expected to grow to 1340 km in the year 2021.4 lakhs in 1981 to 30 lakhs in 1998 and is projected to go up to 35 lakhs by 2011. 1995a. The number of personal motor vehicles has increased from 5. With gradual horizontal expansion of the city. In this context.603 by the year 2011.1 kms. The work of Phase I and part of Phase II is now complete while that of phase III is in progress. The Delhi Metro (DM) planned in four phases is part of the MRTS. 1995b). The first phase of DM consists of 3 corridors divided in to eight sections with a total route of 65. it was perhaps the only city of its size in the world depending almost entirely on roads as the sole mode of mass transport. The first concrete step in the launching of an Integrated Multi Mode Mass Rapid Transport System (MRTS) for Delhi was taken when a feasibility study for developing a multi-modal MRTS system was commissioned by the Government of the National Capital Territory of Delhi (GNCTD) at the instance of the Government of India in 1989 and completed by Rail India Technical and Economic Services Limited in 1995 (RITES. is 41. the capital city of India.872 in 1990 and it is expected to increase to 81. Delhi has now beco me the fourth most polluted city in the world.

80.Jahangirpuri (6. The construction of the first phase of DM was spread over 10 years during 1995-96 to 2004-05 while that of the second phase.07) 5) Yamuna Bank.5 kms as a grade rail corridor.060 and Rs.47) Rs 8026 crores (2004 prices) Phase IV 1) Jahangirpuri to Sagarpur West 2) Narela to Najafgarh 3) Andheria Mod to Gurgaon 22 .Dilshad Garden (3. number of accidents on the roads and the atmospheric pollution in Delhi.43 kms as elevated corridors and 4.02 km 1) Vishwa Vidhyalaya.Mundka (18. The total capital cost of DM at 2004 prices for Phase I and Phase II are estimated as Rs. Table 1: Overview of the MRTS Phase I (1995 .93 kilometers.8) 5) Extension into Dwarka Sub city (6.5) Investment Rs 6406 crores (2004 prices) Phase III Distance 62.2 km 1) Rangpuri to Shahabad Mohammadpur 2) Barwala to Bawana Corridors 3) Jahangirpuri to Okhla Industrial Area 4) Shahbad Mohammadpur to Najafgarh Phase II (2005 ±2011) 53.Anand Vihar ISBT (6. 1.260 million.02 kilometers of which the underground portion.Qutab Minar (10. It reduces the travel time of people using the road and metro. grade and elevated section are expected to be 8.85 kilometers and 42. The Delhi Metro provides a number of benefits.87) 3) Shahdra.24 kilometers respectively. respectively. Phases III and IV of DM will cover most of the remaining parts of Delhi and even extend its services to some areas such as Noida and Gurgaon belonging to t he neighbouring states of Delhi (Table 1 provides some of these details). 64.Barwala (22) 2)Vishwa Vidhyalaya-Central Secretariat 3) Barakhamba Road . The second phase covers 53. 47.been planned as an underground corridor.New Ashok Nagar (8.Dwarka (22.2005) Distance Corridor 65.09) 4) Indraprastha.8) 4) Barakhamba Road ± Indraprastha (2. which started in 2005-2006 is expected to be complete by 2010-11.36) 2) Central Secretariat.10 km 1) Shahdara .16) 6) Kirti Nagar.

23 .

DM contributes to the diversion of a very high proportion of current passenger traffic from road to Metro and serves part of the growing passenger tra ffic demand in Delhi. There will be health and other environmental benefits to the public due to reduced pollution from the transport sector of Delhi. there will be a reduction in the number of buses. passenger cars and other vehicles carrying passengers. The Delhi public will gain substantially with the introduction of the Metro service. accruing earlier to private and the government bus operators and hence constitutes a loss in income. There could be cost savings to passenger car owners in terms of capit al cost and operation and maintenance costs of cars if they switch over from road to Metro for travel in Delhi.11. ECONOMIC BENEFIT AND COST OF METRO Description of economic benefits and costs of the Delhi Metro requires the identification of the changes brought out by it in the transport sector of the economy. There will be savings in travel time for passengers still traveling on roads due to reduced congestion and obviously also for those traveling by Metro. There will also be a reduction in the number of accidents on the roads. Investment in the Metro could result in the reduction of government investments on road developments and buses as also in the private sector investment on buses. The Metro also brings about a reduction in air pollution in Delhi because of the substitution of electricity for petrol and diesel and reduced congestion on the roads. Most importantly. As a result. There will be reductions in motor vehicles¶ operation and maintenance charges to both the government and the private sector. It saves travel time due to a reduction of congestion on the roads and lower travel time of the Metro. passenger cars and other vehicles carrying passengers on Delhi roads with the introduction of the Metro. The Metro 24 . The fare box revenue collections by Metro will be at the cost of the revenue. Land and house property owners gain from the increased valuation of house property prices due to the Metro.

Given that the per capita income of Delhi is far higher than the national per capita income. 25 . This labour is otherwise unemployed or under employed in the Indian economy. transporters. The Metro provides employment benefits to the unskilled labour especially during its construction period. Various economic agents relevant for Metro could be identified as the government. the redistribution of income in favour of Delhi may not be desirable from the point of view of income distribution in the Indian economy. general public and unskilled labour. Unskilled labour e mployed on the Metro gains to the extent of the difference between the project wage rate and the shadow wage rate. passengers. The social premium on investment and savings and foreign exchange accrue to the society represented by the General Public.has the effect of increasing the income o f the regional economy of Delhi vis a vis the rest of the Indian economy.

Million) 10 Foreign Year 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 Exchange 1390 5460 2193 2852 0 0 0 0 0 0 Capital Cost Unskilled Labour 257 1011 406 528 36 154 0 0 0 0 Domestic Material 695 2730 1097 1426 292 1250 0 0 0 0 Labour 0 0 156 391 478 606 825 1063 1548 2100 O&M Cost Unskilled Domestic Material 0 0 2671 6687 8180 10369 14106 18173 26469 35905 26 . Murty and Goldar (2006) have estimated the effective state VAT and MODVAT rates on durable commodities in India as 3. respectively.12. Since these taxes are levied on the same base. it implies an increase in the revenue of the government if there is an increase in a rupee worth of expenditure on that commodity. These taxes are also interpreted as shadow taxes. Table 10 provides estimates of the economic cost of DM for some select years during its lifetime Table 10: Components of Economic Capital and O&M Cost (Rs. MEASUREMENT OF ECONOMIC BENEFIT AND COST OF METRO The economic costs of the Metro are calculated after excluding the tax component from the financial costs. the total effective tax rate applicable for durable commodities in India is roughly 10 percent.8 percent and 6. In a recent study. If the taxes are ad valore m. Murty and Ray 1989).36 percent. No tax payments are considered on the expenditures incurred by the DM for the employment of unskilled labour. The effective tax could be interpreted as the revenue the Indian Government (central and states) gets if there is an increased demand for a commodity by one unit at margin (Ahmad and Stern 1984.

technical.13. Since all kinds of risks may arise-financial. Loans normally contain loan covenants or agreements between the lender and the borrower. such as providing regular reports and adequate insurance. while 60 -70% is funded through debt. completed project. these terms and others are outlined in a bond covenant. and then reselling them to institutional investors. It contains guidelines about what the borrower should or should not do. Project finance has a particular nature. PROJECT FINANCE (INFRASTRUCTURE) Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors. The deal cycle is typically very long. and can be different from the banks providing the debt. while debt finance can take two forms. investment banks underwrite project bonds by buying the newly issued bonds at a guaranteed price. Project loans are made by commercial banks. etc. and can involve many financiers. These loans are provided by a group of financial institution called a bank consortium or a syndicate. environmental. more risky projects often require syndicated loans. Projects can also be financed through project bonds. while the benefits can only be reaped in the longer term. Bonds can also be derived from project 27 . larger. with each lender agreeing that loans will be repaid only from the revenues generated by the successful. loans and bonds. political etc project finance has evolved to be a very complex financing method. project bonds rely solely on the success and revenues generated by the project for repayment. The bank coordinating the consortium and the syndicated loan is called the arranger. Like project loans. Project finance is comprised of a mix of equity and debt. typically 30 -40% of the project is funded through equity contribution. In this case. The initial costs of big projects are typically very high. Project sponsors typically contribute the equity and ³own´ the project.

to another party through a partnership. Maximize Leverage . permits a sponsor to finance the project without diluting its equity investment in the project and.loans through the process of securitization. Advantages of Project Finance 1. High leverage in a non -recourse project financing permits a sponsor to put less in funds a t risk. the project sponsor may not be required to report any of the project debt on its balance sheet because such debt is non recourse or of limited recourse to the sponsor. i. The typical project financing involves a loan to enable the sponsor to construct a project where the loan is completely "nonrecourse" to the sponsor. where the future income from the syndicated loan is used as collateral for the issue of new bonds. Depending upon the structure of a project financing. Project financings should be structured to maximize tax benefits and to assure that all available tax benefits are used by the sponsor or transferred. In a project financing. tax-deductible interest for higher -cost. in certain circumstances. 3. Off-Balance-Sheet Treatment . 28 . 2. to the extent permissible. Maximize Tax Benefits . lease or other vehicle. also may permit reductions in the cost of capital by substituting lower -cost.. taxable returns on equity. Frequently. the sponsor typically see ks to finance the costs of development and construction of the project on a highly leveraged basis. Off-balance-sheet treatment can have the added practical benefit of helping the sponsor comply with covenants and restrictions relating to borrowing funds contained in other indentures and credit agreements to which the sponsor is a party.e. the sponsor has no obligation to make payments on the project loan if revenues generated by the project are insufficient to cover the principal and interest payments on the loan. Non-recourse . 4. such costs are financed using 80 to 100 percent debt.

Disadvantages of Project Finance Project financings are extremely complex. negotiate and document a project financing than a traditional financing. Because the risks assumed by lenders may be greater. and the legal fees and related c osts associated with a project financing can be very high. 29 . It may take a much longer period of time to structure.

y First. In most industrial sectors where projects finance is used.14. projects usually undergo two main phases (construction and operation) characterized by quite different risks and cash flow patterns. among other factors. y Second. 30 . the success of large projects depends on the joint effort of several related parties (from the construction company to the input supplier. Most of the capital expenditures are concentrated in the initial construction phase. with revenues starting to accrue only after the project has become operational. conflicts of interest and free riding of any project participant can have significant costs. toll roads or airports share a number of characteristics that make their financing particularly challenging. from the host government to the off-taker) so that coordination failures. CHALLENGES IN FINANCING LARGE SCALE PROJECT Projects like power plants. y Third. Construction primarily involves technolog ical and environmental risks while the operations are exposed to market risk (fluctuations in the prices of inputs or outputs) and political risk. such as oil and gas and petrochemicals. they require large indivisible investments in a single -purpose asset. over 50% of the total value of projects consists of investment exceeding $ 1 billion.

material inputs for maintenance and payments made to skilled and unskilled labour. The financial evaluation of a project requires the analysis of its annual cash flows of revenue and costs considering it as a commercial organization operating with the objective of maximizing private profits. Table 2 provides the sources of funding investments of DM (phases I and II). The investment expenditures made by the project in one of the years during its life time constitutes the purchase of capital goods. FINANCIAL COST AND BENEFIT OF METRO It is important to examine the financial feasibility of DM before actually taking up its economic appraisal. cost of acquisition of land and payments made to skilled and unskilled labour and material inputs for project construction. given the definition of market price of a commodity as producer price plus commodity tax minus commodity subsidy. For example. The investment goods and material inputs used by the project are evaluated at market prices. The financial capital cost of DM represents the time stream of investment made by it during its li fetime. the annual cost of capital has to be calculated at the actual interest paid by it. If the government gives some commodity tax concessions to DM. Around 30 percent of total investments of DM are raised through equity capital with the Govern ment of India (GOI) and 31 . they are reflected in the prices paid by DM for such commodities. This could be done using information about the sources of funds for investment by DM and the actual interest paid by it to each source. More than 60 percent of the funds required for investment are raised as debt capital. If the financial capital cost of the project is worked out as the time flow of annualized capital cost. if part of the investment of DM is financed out of loans provided by the government at the subsidized interest rate. The operation and maintenance cost of the project constitutes the annual expenditure incurred on energy.15. the annual cost of this invest ment has to be calculated at the subsidized interest rate.

The re maining 10 percent of the investments of DM will be covered out of the revenues it earns. equity till the senior debt is Table 2: Sources of Funding Cost Financed By 1) Equity (50% each by GOI & GNCTD) 2) Long Term Debt (OECF. 64. the DM had been provided with the following concessions by GOI to make the project viable. The risk associated with the exchange rate fluctuations is borne by government in case of foreign debt. The DM is exempted from payment of income tax. The cost of land equivalent to Rs.GNCTD having equal shares in it. 7720 million and the domestic material and labour cost of Rs. 2.060 million at 2004 prices for Phase I consists of the foreign exchange cost of Rs. 80.260 million at 2004 prices. 4.340 million. As reported in RITES (1995a). No dividend is paid on GOI share of repaid fully by the twentieth year. 5. The DM is permitted to generate resources through property development over a period of 6 -20 years. property tax and customs duty on imports. 2180 million has been provided as an interest free subordinate loan by GOI/GNCTD to be repaid by the DM within 5 years after the senior debt is repaid fully by the twentieth year of taking the loan. The corresponding figure for the Phase II of DM is Rs. capital gains tax. 3. Japan) @ 3% (with a 10 year moratorium period and 10 year repayment period) 3) Revenues From Property Development 4) Subordinate Debt Source : RITES (1995a) Phase I Phase II 30% 60% 30% 56% 7% 3% 5%+5% (internal) 4% Table 3 provides information about various components of capital cost for Phase I of DM. 56. 32 . The total project cost of Rs. 1.

Million)Items Foreign Exchange Local Cost Total Civil works Electrical works Signaling and telecommunication Rolling stock Land General establishment and consultancy charges Contingencies Source: RITES (1995a) 0 0 2574 31327 6970 1930 3132 7 6970 4504 4596 0 322 6403 3339 4779 1099 9 3339 5101 230 1593 1823 33 .Table 3: Cost Estimate of DM (Phase I) (Rs.

Million) Year I Year Capital Cost Year Capital Cost Capital Cost Year Capital Cost 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2574 3937 6036 8625 9498 10110 9069 7353 4917 1945 4061 12381 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20411 23331 17861 5281 1271 361 361 361 361 361 361 361 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 361 1543 18901 1183 1183 1183 0 0 0 0 0 0 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 43290 15150 0 0 0 0 0 0 0 0 58770 Source : Estimated as explained in the text. Million) Year O&M Year O&M 2005 3123 2017 10484 2006 3253 2018 10981 2007 3387 2019 11507 2008 3527 2020 12127 2009 3674 2021 13763 2010 7822 2022 14374 2011 8006 2023 15032 2012 8366 2024 15738 2013 8745 2025 16498 2014 9145 2026 17316 2015 9568 2027 18195 2016 10013 2028 19141 Source: Estimated as explained in the text. Year 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 O&M 20149 21255 24628 26042 27562 29198 30958 32852 34891 37086 39449 41993 34 . Table 5: Estimates of Financial Flo ws of Operation and Maintenance (O&M) Expenditures by DM (Phases I and II) During its Life Time (Rs.Table 4: Estimates of Financial Flows of Investment by DM (Phases and II) During its Life Time (Rs.

as reported by RITES. capacity to pay. comfort and ease of travel. Considering the estimates of financial flows of DM during the period 1995-2041. 4. the financial cost-benefit ratio is estimated as 2.5 per cent was considered opti mal by RITES. with higher fares. frequency and safety of service. 5. which is a product of the total passenger ridership on the MRTS as reported in Tables 6 and 7 and the fare charged. These estimates are made using information about the trends of the O&M cost of Calcutta Metro and the suburban sections of the Bombay Railway and the results of some optimization studies conducted. etc. Table 8 presents the estimates of revenue collected by DM during its lifetime. Revenue streams for Phases I and II. Full ridership is expected to materialize on the metro with a fare comparable to the DTC bus fare of Rs. 2005b) provide the estimates of operation and maintenance cost (O&M cost) of DM. However. 5 per passenger trip and an annual fare increase of 7.92 at 8 35 . 2005b) have been taken. as reported by RITES (1995b.30 and 1. The financial model consisting of Rs.Table 4 provides the estimated financial flows of capital cost of DM at 2004 prices during its lifetime. RITES (1995a. The revenue collected by DM every year during its life time consists of revenue from the passenger traffic diverted from the road to the Metro and the revenue from serving part of the growing passenger traffic demand in Delhi. RITES (1995b) considered four rates per trip: Rs 3. the ridership is expected to decline given that the willingness of passengers to travel by the metro depends on the value they place on ti me savings. The financial benefits from the Metro are the fare box revenues and the revenues from advertisement and property development. 6 at April 1995 prices and the fare sensitivity of ridership. Table 5 provides the estimates of O&M cost of DM at 2004 prices during the lifeti me of the project. The main source of revenue of the MRTS system is the fare box collection. 3 per passenger trip.

17 Passenger Source: RITES (1995b.58 46.01 40. respectively. 2005b) 36 .29 45.15 23.28 49.17 34.91 48.63 54.97 37.69 51. The financial internal rate of return of DM is estimated as 17 percent.55 35.81 43.46 39.85 33. Table 6: Fare Sensitivity of Ridership on the Metro Fare Rate (In Rs/Passenger trip) 3 4 5 6 Source: RITES (1995b) Percentage Ridership 100% 90% 75% 50% Table 7:Estimates of Daily Passenger Trips by Metro (in lakhs) Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Daily 12.86 31.14 52.63 20.03 44.percent and 10 percent discount rates.63 41.

Million) Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Revenue Year Revenue Year 15052 2018 67722 2031 17152 2019 74284 2032 19407 2020 82806 2033 21826 2021 92342 2034 24421 2022 99126 2035 33762 2023 106242 2036 37112 2024 115557 2037 41057 2025 116067 2038 44511 2026 119127 2039 50847 2027 119717 2040 49633 2028 123227 2041 5627 2029 123897 62209 2030 127927 Source: Estimated as explained in the text.Table 8: Estimates of Financial Flo ws of Revenue Earned by DM (Phases I and II) During its Lifetime (Rs. Revenue 128687 133307 134177 139477 140477 146547 147687 154657 155947 163947 165437 37 .

The use of non-recourse debt in project finance further contributes to limiting managerial discretion by tying project revenues to large debt repayment. and off-take and concession agreements. The project company operates at the centre of an extensive network of contractual relationship. to align incentives and deter opportunistic behavior. avoiding wasteful expenditures. Large-scale projects might be too big for any single company to finance on their own. On the other hand widely fra gmented equity or debt financing in the capital markets would help to diversify risks among a larger investor base but might make it difficult o control managerial discretion in the allocation of free cash flows.16. Moreover. Concentrated debt and equity ownership enhances project monitoring by capital providers and makes it easier to enforce project specific governance rules for the purpose of avoiding conflicts of interest or sub -optimal investments. which reduces the amount of free cash flows. along with a variety of joint -ownership structures. any party involved in the project uses several long-term contracts such as construction. at the same time. KEY CHARACTERISTIC OF PROJECT FINANCING STRUCTURES In project finance. the importance of effectively monitoring managerial actions and ensuring a coordinated effort by all project -related parties. the small number of ³sponsors´ holds a syndicate of a limited number of banks usually provides equity and debt. construction risk is borne by the contractor and the risk of insufficient demand for the project output by the off -taker Project finance aims to strike a balance between the need for sharing the risk of sizeable investments among multiple investors and. In project finance. nonrecourse debt and separate incorporation of the project company make it possible to achieve much higher leverage ratios than sponsors could 38 . supply. which attempt to allocate a variety of project risks to those parties best suited to allocate a variety of project risk to those parties best suited to appraise and control them: for example.

this would not jeopardize the financial integrity of the sponsors¶ core businesses. diesel. credit derivatives and new insurance products against macroeconomic risks such as currency devaluations. but the risks specific to individual projects are diversified away by financing a portfolio of assets as oppose to single ventures. is that is exposes lenders to project-specific risks that are difficult to diversify. Hybrid structures between project and corporate finance are being developed. even if the project were to fail. One drawback of non-recourse debt. non-recourse debt can also reduce the potential for risk contamination. In fact. Public -private partnerships are becoming more and more common as hybrid structures. Examples include: refineries changing the mix of outputs among heating oil. lenders are making increasing use of innovative risk-sharing structures. There is also increasing interest in various forms of credit protection these include explicit or implicit political risk guarantees. the use of µreal options¶ in project finance has been growing across various industries. Likewise.otherwise sustain on their own balance sheets. alternative sources of credit protection and new capital market instruments to broaden the investor base. From the perspective of the sponsors. where lenders do not have recourse to the sponsors. Non -recourse debt can generally be de-consolidated and therefore does not increase the sponsors on-balance sheet leverage or cost of funding. however. real estate developers focusing on multipurpose buildings that can be easily re configured to benefit from changes in real estate prices. with private financier taking on construction and operating risks while host governments cover market risks. 39 . unleaded gasoline and petrochemicals depending on their individual sale prices. In order to cope wi th the asset specificity of credit risk in project finance.

Collateralized debt obligations as well as open -ended funds have been launched to attract higher liquidity to project finance. banks have recently started to securitize project loans. in order to share the risk of project financing among a larger pool of participants. thereby creating a new asset class for institu tional investors.Finally. 40 .

Project Finance Structure 41 .

Project Company: The project company is the legal entity that will own. Financial consultants can also advise on how to arrange the 42 . In this case DMRC is borrower. for example the construction company.17. PARTIES INVOLVED IN PROJECT FINANCING (Note: Some parties do not come in picture of DMRC project as here SPV financing structure is described. operational. 2. Its equity owners will control the SPV. DMRC is the company which has came up with project. A project may in fact have several ³borrowers´. 4. This project is sponsored by GOI and GNCTD. This depends upon the structure of the financing and of the operation of the project. technical experience to the project. Delhi Metro Rail Corporation is joint venture of Government of India (GOI) and Government of National Capital Territory of Delhi (GNCTD). operate and maintain the project. suppliers of raw materials to the project and purchasers of the project¶s production. Both of them hold 50-50% equity in the company. develop. The financial advisor theoretically will be familiar with the project host country and be able to advice on local legal requirements and transaction structures to ensure that the loan documentation and f inancial structure are properly assembled. The sponsor may be required to provide guarantees to cover certain liabilities or risks of the pr oject. Financial advisor: The project sponsor may retain the services of a commercial or merchant bank to provide financial advisory services to the sponsor.) 1. Borrowers: The borrowing entity may or may not be the SPV. It is generally an SPV create d in the project host country and therefore subject to the laws of that country. 3. construct. Sponsor: The project sponsor is the entity that manages the project. The sponsor generally brings in management. The sponsor generally becomes equity owner of the SPV and will receive any profit either via equity ownership or management contracts/fees.

Nearly 60% of estimated project cost is fund by The Overseas Economic Cooperation Fund (OECF) through Japan Bank of International Cooperation (JBIC) . The arranger This is the bank that arranges the syndication. 43 . This bank may take a large portion of the loan and syndicate it. Lenders/Funders: Projects are usually of large size and require a huge amount of capital. A single lender cannot provide the required capital and hence syndication takes place. 2. This is beneficial in more ways than one. It is also called a lead bank. and the financial advisor can assist in the preparation of the information memorandum reg arding the proposed project. tax avoidance. The lenders are usually made up of: 1. taking into account streaming cash flows. thus assuming some of the underwriting risk.financing of the project. They also provide help with accounting issues relating to expected cost of the project. currency speculation. inflation rates. interest rates. It not only makes it possible to arrange for the huge capital requirement but also helps in spreading the risk and mitigating it for the lenders of the project. The managers The managing bank is typically a title meant to distinguish the bank from mere participants. The bank typically negotiates the term sheet with the borrower as well as the credit and security documentation. As project is initiated by Central Government and GNCTD so financial advisor for DMRC will be Finance Ministry for Centre and Delhi. desirable locales for the project and capital required. creation of shell offshore companies. Japan as senior debt. A syndicate of banks may be chosen from as wide range of countries as possible to discourage the host government from taking action to expropriate or otherwise interfere with the project and thus jeopardize its economic relations with those countries. 5.

Such as serving notices and disseminating information.Managers can therefore broaden the geographic scope of the syndication. 6. The facility agent The facility agent exists to administer the administrative details of the loan on behalf of the syndicate. The facility agent is not responsible for the credit decisions of the lenders in entering into the transaction. through which all project cash flows pass and monitored. cost-benefit reports. payments and communications between the parties to the finance documentation. Account bank The bank. 3. to ensure that the lender¶s position is fully covered in terms of project insurance. Insurance bank It undertakes negotiations in connection with project insurances. Such experts typically prepare reports such as feasibility reports. 4. They also monitor covenant compliance. the co-ordination of their interests will call for the appointment of an independent trust company as security trustee. They may also monitor the progress of the project and may also act as the arbiter in case of disagreements between sponsors and lenders. Security trustee Where there are different groups of lenders or other creditors interested in the security. 7. The agent bank is responsible for the mechanistic aspects of the loan such as coordinating drawdown. Technical advisor Technical experts advise the project sponsor and lenders have limited knowledge. 44 . 8. etc. collected and disbursed.

operation. organization of project entities. It is important that the construction company selected has a track record of successful project management and completion. Investors These may be lenders or project sponsors who do not expect to have an active management role as the project goes on stream. Construction can be either of the EPC. won the tender for building Metro Rail. Lawyers The international nature and complexity of project financing necessitates the retention of experienced and competent law firms. sale and contracts. There may be consortia of constructors who may be employed if the project is of a significant magnitude or if there is political interference. 45 . Publicly owned projects also will be subject to various procurement and public contract laws. including law and regulations.9. permits. they are putting equity alongside their debt as a way to obtain an enhanced return on their investment. Construction Company Since most project financings are infrastructural. of Delhi (DNCTD) Investor to DMRC is Government of India (GOI) and Government of National Capital Territory 11. ³Turnkey or BOT´ in nature. In the case of lenders. It is important to ensure that the project has received all the requisite permission and licenses before committing financial resources. These may include environmental. the contractor is typically one of the key players in the construction period. Project finance lawyers provide advice on all aspects of a project. zoning permits and taxes. Regulatory agencies Project naturally is subject to local laws and regulations. 10. negotiating and drafting of project construction. Gammon India Ltd. 12.

In some projects. 14. Host government The host government is the government of the country in which the project is located. 46 . Delhi Metro (DMRC) exempted from payment of income tax. Asian development bank. World Bank. property tax and customs duty on imports.13. They are generally nationalistic in purpose and nationalistic and political in operation funding bilateral agencies generally comes from organizing governments. They play an important role in infrastructure and other projects in emerging market by simulating international trade. Export credit agencies Export credit agencies (ECA) promote trade or other interests of an organizing country. the host government may be the owner of the project. Government supported export financing includes pre -export working capital. etc. This usually happens between companies situated in different countries. support through off-takes and tax concessions. which promote collaborations between companies on a global scale. capital gains tax. authorizations and concessions. It may also be involved as an off-take purchaser or as a supplier of raw materials or fuel. 15. The host government (GOI & GNCTD) is typically involved as an issuer of permits. subsidies. short term export receivables financing and long term financing. are examples of such agencies. These agencies also provide support and funding for socially uplifting infrastructure projects. It also might grant foreign exchange availabilit y. licenses. international finance corporation and regional development banks like African development banks. Multilateral agencies/development banks Multilateral agencies are the ones.

the project company will seek in advance to conclude long-term agreements to sell the goods or services being produced by the project. Any or all of these parties may be co ntractually part of the financing. If 47 . Purchasers In large infrastructure projects. project sponsors and lenders are concerned with the underlying economic feasibility of supply arrangements and the supplier¶s ability to perform the contracts. Leasing companies If capital allowances are available for the writing -down of plant and machinery or more financial leasing companies. In addition to the tax advantages are the financial ones of keeping the assets off the project company¶s balance sheet. since supply arrangements is a key to project success. Construction contractors These include engineers and contractors responsible for designing and building the project. 17. Insurers therefore play a crucial role in most projects. Gammon India Ltd. is construction contractor for DMRC. These agreements are known as off -take agreements. Their role will be to lease out assets to the project company in return for a rental stream. Supplier Suppliers provide raw materials or other inputs to the project. 20. Insurers The sheer scale of many projects and the potential for incurring all sorts of liabilities dictates the necessity of arranging appropriate insurance arrangements. The output purchasers provide a crucial element of credit support for the underlying financing by seeking to stabilize the acquisition of raw materials over time and protect itself from market volatility. Such support can be seen as a credit enhancement to make the project more attractive to the financing banks. 18.16. 19.

there is an adverse incident affecting the project then the sponsor and the lenders will look to insurers to cover them against unforeseen losses.

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18. SOURCES OF FINANCE

Just as financial instruments range from debt to equity and hybrids such as mezzanine finance, project finance can raise capital from a range of sources. Raising finance depends upon the nature and the structure of the project. Lender and investor interest will vary depending on the goals and risks related to the f inancing. In assembling project financing, all available financing sources should be evaluated. Following are some sources of capital used in project financing:

1. Equity

Equity is often raised in the stock markets and from specialized funds. Equity is generally more expensive than debt financing. Equity can be raised in the domestic capital markets as well as in the international capital markets. Delhi Metro Rail Corporation is form by the joint venture of Government of India (GOI) and Government of Na tional Capital Territory of Delhi (GNCTD).Both GOI and GNCTD holds 50-50% equity. This 50% each of GOI and GNCTD equity holds only 30% of the project cost.

2. Developmental loan

A developmental loan is debt financing provided during a project¶s developmental period to a sponsor with insufficient resources. Developmental lenders, who fund the project sponsor at very risky stage of the project, desire some equity rewards for the risk taken, hence, it is not unusual for developmental lender to secure r ights to provide permanent financing for the project as part of the development financing agreement.

3. Subordinated loan

Subordinated loans, also called mezzanine financing or quasi -equity, are senior to equity capital but junior to senior debt and s ecured debt. Subordinated debt usually has the advantage of being fixed rate, long

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term, unsecured and may be considered as equity by senior lenders for purposes of calculating debt to equity ratio. They are usually used to cover over-runs during the construction stage.

4. Senior debt

Commercial banks and institutional lenders are an obvious choice for financing needs of a project. Senior debt of project finance usually constitutes the largest portion of the financing. These loans usually form at least 50% of the capital needs. The prime reason is that it is cheaper than equity financing. They fall into two categories secured and unsecured loans. Secured loans are loans where the assets securing the loan have value as collateral. Such assets are marketab le and can readily be converted into cash. Unsecured loans basically depend on the borrower¶s general creditworthiness, as opposed to perfected security arrangement. Nearly 60% of total estimated cost of Delhi metro project is finance by JBIC (Japan Bank of International Cooperation).Recently operational planning for Phase III is going on. JBIC appraisal team has given clearance for their next tranche for the Phase III.

5. Syndicated loan

A syndicated loan is a loan that is provided to the borrower by two or more banks and is governed by a single loan agreement. The loan is arranged and structured by a µlead arranger¶ and is managed by an µagent bank¶. The best part about a syndicated loan is that the funding can be gathered from the international lendi ng market, which means such a lending can be used for projects which need enormous amounts of capital.

6. World Bank group financing sources

Multilateral institutions such as the World Bank provide finds to infrastructure development projects worldwide . The scope and extent of involvement of such institutions in financing project is very limited. World

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g. 51 . 8. investment management companies. venture capital provider and money market funds. asset funds or income funds. (b) guarantee program and (c) indirect support for projects. Bonds In recent years the use of the bond markets as a vehicle for obtaining debt funds has increased. pension plans. 10. Investment funds Investment funds mobilize private sector funds for investment in infrastructure projects. They provide indirect support through tax incentives.banks provide funding through its (a) loan program. Bond financing is similar to commercial loan structure. profit -sharing plans and charitable foundations. This is more evident in the emerging markets where the governments are usually eager to fund and support infrastructure projects. 9. 7. These entities can be a substantial source of funding. Host government The host government can also be a direct or indirect source of fina ncing. Institutional lenders These include life insurance companies. E. GOI and GNCTD has financed approximately 30% of project incurred c ost. except that the lenders are investors purchasing the borrower¶s bonds in a private placement or through the public debt market.

The completion risk may arise due to a number of factors like non -availability of critical inputs including supporting infrastructure like land. 52 .60 mn). permission to have right of way may be delayed due to litigation or non clearance by the permitting authori ties in time. This issue made DMRC to review their decision on Gammon India to continue on project. 3. Due to the collapse of bridge there was immediate loss of Rs. Project is not at risk of completion but yes it is exceeding all the timelines. These assumptions may go terribly wrong for a long gestation project. Construction Phase An infrastructure project has a long gestation period during which many risk events may occur leading to time and cost overrun and thereby impacting the project¶s initial estimate of cash flow patterns and its overall viability. Due to mishap at the Delhi Metro site in South Delhi that claimed six lives which put Delhi Metro project into scanner.6 crore(Rs. The main risks during this phase are - 2. the price of steel and cement may increase the cost of construction substantially. Completion risk Completion risk refers to the uncertainty related to timely completion of the project within the budgeted costs. Cost overrun risk A project¶s viability depends on the realization of projected costs of critical inputs. For a toll road project. for example. RISKS INVOLVED IN PROJECT FINANCING 1. For example. The construction company unwilling to bear the increased cost may refuse to complete the construction activities unless the project sponsor agrees to bear the burden to a mutually agreed extent. Due to this mishap already project got delayed and running behind the schedule.19. And lead to further time and cost delay.

Funding risk In a public-private participation project. In case of the Delhi Metro project controversy creep around Gammon India¶s ability to create a world class transportation facility after accident took place in South Delhi. an airport project may not be able to meet the turnaround time for aircrafts or number of passengers it can handle. Performance risk If a project does not meet the planned performance level. But Gammon was issued show cause notice for blacklisting for two years. 5. Collapse of metro bridge increased the worries for DMRC which in turn is concern for GOI and GNCTD too as 60% of estimated cost of project is finance by JBIC. the actual cash flows may be inadequate to service the debt and /or meet the expected return on equity capital deployed. A privately sponsored project may also face uncertainty if the sponsor is unable to raise f und in time or at the projected cost. The main risks during this phase of a project life cycle are 6. For example. Operating Phase: The risk profile of an infrastructu re project undergoes significant changes when a project comes to fruition and cash flows start. And from 2010 planning for Phase III was going to start so this could have created some sort of hesitation for JBIC to disbursed next tranche of money. 53 .4. These incident happened in July 2009 when already Phase I a nd many of Phase II lines where operational. Even though after the accident DMRC chose go with the Gammon India keeping in mind process of tendering to be done again and which will also lead to investment of time and cost in this tedious process. the ability of state to provide funding as per originally agreed schedule might be jeopardized due to unexpected shock to the state¶s budget.

Exchange rate risk becomes important for projects. non -payment cannot be considered as a reason for discontinuation of supply of the product /service. as in the case of water supply project for a municipality or a power project for a state monopoly distributor. Market or off-take risk The main market risk for an infrastructure project relat es to lower than projected demand or off-take of the project¶s product /services. 8. a minimum guaranteed off-take could mitigate this risk. 54 . The other types of market risks are fairly common for any investment project. Since infrastructure projects have high capital intensity.7. which are interest rate risk. exchange rate risk and price risk. which have substantial foreign currency loan component. When the entire demand comes from a monopoly purchaser. Because an infrastructure project is often considered as an essential utility. a state monopoly. Payment risk This risk arises when the purchaser of a project¶s output is a monopoly and more often than not. high leverage and long gestation period interest cost forms a significant component of the overall cost and proper measurement and mitigation of this risk is of paramount importance for a project¶s long-term viability. When private company is needs make a payment their risk of defaulting but in case of public sector government is shareholder or promoter so there less is chance of defaulting by there is high possibility of delay in payment disbursement. A toll road or bridge project may fail to attract the required number of users to make the project viable.

This kind of mistakes need to vetted to avoid the technical risk. the financiers need to satisfy themselves that the participants in the project have the necessary human resources experience in past projects of this nature and are financially strong. Technical risks are managed during the loan period by requiring a maintenance retention account to be maintained to receive a proportion of cash flows to cover future maintenance expenditure. To minimize those risks. including latent defects.Risk common in both construction and operational phases These are the risks associated with the sponsors or the borrowers themselves. Of course. credit risk is also important for the sponsor¶s completion guarantees. Technical risk This is the risk of technical difficulties in construction and operation of the project¶s plant and equipment. 55 . Experts opine that the accident was caused by "serious deficiency" in the design of the cantilever arm and that the concrete did not have "adequate strength probably due to lack of (its) adequate curing. The question is whether they have sufficient resources to manage the construction and operation of the project and to efficiently resolve any problems. which may arise. As in the case of Delhi Metro accident at South Delhi Gammon India got a nod from DMRC. So DMRC design consultants M/S Arch Consultancy Services to Gammon India was blacklisted for five years and the structural consultant M/S Tondon Consultants who did not give the correct advice to DMRC was debarred for two years. Technical risk is also minimized before lending takes place by obtaining experts reports as to the proposed technology. Financiers usually minimize this risk by preferring tried and tested techno logies to new unproven technologies. It was claimed that there was µserious deficiency' in design and inadequate concrete strength. 1. Gammon got blacklisted for two years. So in this case technically Gammon not committed a mistake but there was loophole in designing part.

3. (c) requiring political risk insurance to be obtained from bodies which provide such insurance (traditionally government agencies). creeping expropriation and outright nationalization. Mechanisms for minimizing resource include: (a) matching the currencies of the sales contracts with the currencies of supply contracts as far as possible. 56 . or rigid requirements as to local supply or distribution. suspension of foreign exchange. (b) obtaining lega l opinions as to the applicable laws and the enforceability of contracts with government entities. (d) involving financiers from a number of different countries. Such risks may be reduced by obtaining legal opinions confirming compliance with applicable laws and ensuring that any necessary approvals are a condition precedent to the drawdown of funds. Common mechanisms to minimizing political risk include: (a) requiring host country agreements and assurances that project will not be interfered with. (b) denominating the loan in the most relevant foreign currency. 4. Currency risk Currency risks include the risks that: (a) depreciation in loan currencies may increase the costs of construction where significant construction items are sourced offshore. and (c) requiring suitable foreign currency hedging contracts to be entered into. Regulatory / approval risk These are risks that government licenses and approvals required to construct or operate the project will not be issued (or will only be issued subject to onerous conditions). or that the project will be subject to excessive taxation. Political risk This is danger of political or financial instability in the host country caused by events such as insurrections. strikes. It also includes the risk that a government may be able to avoid it contractual obligations through sovereign immunity doctrines.2. or (b) depreciation in the revenue currencies may cause a cash-flow problem in the operating phase. royalty payments.

7. the input and throughput risk is critical.e. or by entering into long -term supply contracts with predetermined prices (these contracts increase the counterparty credit risk). as defined below: 57 . Inflation risk This risk represents the possibility that the actual inflation rate will exceed the risk projected during the development of the feasibility study. based on inflation. 6. in the contract¶s pricing formula. the public sector may decide to retain the risk. Political 5.g. March 2011) it came down to single figures. Indirect Political Event and Political Event. Input and throughput risk For non-extractive projects in which the viability of the project depends on the supply of sufficient natural resources (e. To the extent that the risk cannot be controlled by the private sector. Force Majeure Force Majeure (FM) shall mean occurrence in India of any or all of NonPolitical Event. reducing the cost of the project.national export credit agencies and multilateral lending institutions such as a development bank. water. power generation and gas pipeline). Inflation risk may be mitigated by including an actual index. and (e) establishing accounts in stable countries for the receipt of sale proceeds from purchasers. From 2008¶s global economic meltdown inflation rose to double digits last month (i.

lightning. earthquake. Contractors or their respective employees/representatives. fire or explosion. or attributable to any act or omission of any of them) interrupting supplies and services to the Project Highway for a continuous period of 24 (twenty four) hours and an aggregate period exceeding 7 (seven) days in an Accounting Year y Any failure or delay of a Contractor but only to the extent caused by another Non-Political Event and which does not result in any offsetting compensation being payable to the Concessionaire by or on behalf of such Contractor. y The discovery of geological conditions. or (iii) enforcement of this Agreement. y Any judgment or order of any court of competent jurisdiction or statutory authority made against the Concessionaire in any proceedings for reasons other than (i) failure of the Concessionaire to comply with any Applicable Law or Applicable Permit. cyclone. extremely adverse weather conditions. 58 . toxic contamination or archaeological remains on the Site that could not reasonably have been expected to be discovered through a site inspection. y Strikes or boycotts (other than those involving the Concessionaire. volcanic eruption. chemical or radioactive contamination or ionizing radiation.Political Event y Act of God. or (iv) exercise of any of its rights under this Agreement by the Authority. landslide. or y Any event or circumstances of a nature analogous to any of the foregoing.Non . or (ii) on account of breach of any Applicable Law or Applicable Permit or of any contract. flood. epidemic.

insurrection. y Any failure or delay of a Contractor to the extent cause d by any Indirect Political Event and which does not result in any offsetting compensation being payable to the Concessionaire by or on behalf of such Contractor. or y Any event or circumstances of a nature analogous to any of the foregoing 59 . armed conflict or act of foreign enemy. boycott or political agitation which prevents collection of Fee by the Concessionaire for an aggregate period exceeding 7 (seven) days in an Accounting Year. invasion.Indirect Political Event y An act of war (whether declared or undeclared). blockade. terrorist or military action. embargo. y Any Indirect Political Event that causes a Non -Political Event. y Any civil commotion. y Industry-wide or State-wide strikes or industrial action for a continuous period of 24 (twenty four) hours and exceeding an aggregate period of 7 (seven) days in an Accounting Year. civil commotion or politically motivated sabotage. riot.

permit. no objection certificate. consent. approval or exemption required by the Concessionaire or any of the Contractors to perform their respective obligations y Under this Agreement and the Project Agreements. no objection certificate.1. exemption. maintenance or renewal of such clearanc e. exceeds the sum specified in Clause 41. provided that such delay. in financial terms. y Compulsory acquisition in national interest or expropriation of any Project Assets or rights of the Concessionaire or of the Contractors. authorization. consent. or refusal to renew or grant without valid cause. license. 60 . refusal or revocation did not result from the Concessionaire¶s or any Contractor¶s inability or failure to comply with any condition relating to grant. authorization. modification.Political Event y Change in Law. y Unlawful or unauthorized or without jurisdiction revocation of. or any event of a nature analogous to any of the foregoing. any clearance. denial. y Any failure or delay of a Contractor but only to the extent caused by another Political Event and which does not result in any offsetting compensation being payable to the Concessionaire by or on behalf of such Contractor. only if consequences thereof cannot be dealt with under and in accordance with the provisions of Article 41 and its effect. approval or permit. license.

the Metropolitan Transport Project was set up in 1973. Efforts to solve the problem by augmenting the existing fleet of public transport vehicles barely touched the fringe of the problem as the roads account for only 4. is the second such urban metro rail network in India. After independence. the State Government and also the Government of India. the construction of the Kolkata Metro was more of a trial-and-error affair. being the country¶s first. compared to 25% in Delhi and even 30% in other cities. It was the first underground railway to be built in India. The New Delhi Metro. it becam e the 17th zone of the Indian Railways. 1984 and the full stretch that was initially planned being operational by February. It was soon realized that something had to be done and done quickly to cope with the situation. Conclusion: The Kolkata Metro or Calcutta Metro is the Underground Mass Rapid Transit Urban Railway network in Kolkata (formerly. which has seen the involvement of numerous international consultants.2% of the surface area in Calcutta. Calcutta). India. The MTP had prepared a Master Plan in 1971 envisaging construction of five rapid-transit lines for the city of Kolkata. the MTP came to the conclusion that there was no other alternative but to constru ct a Mass Rapid Transit System. On 28 December 2010. As a result. the burgeoning transport problem of Kolkata drew the attention of the city planners. After detailed studies. with the first operations commencing in October. With a view to finding an alternative solution. Before independence.20. it took nearly 23 years to completely construct a 17 km underground railway. which opened in 2002. A survey was done by a team of French experts without any concrete results. and a completely indigenous process. 1995. conceived the idea in 1949 of building an underground railway for Kolkata to solve the problems to some extent. in contrast to the Delhi Metro. However. At that time the Chief Minister of West Bengal. totaling a route 61 . there was a plan by the British to construct an underground railway in Kolkata.

Chennai. New sources of this risk capital can be sourced by providing partial risk gu arantees (in form of First Loss Deficiency Guarantees).5 km. the relatively small capitalization (compared to the large quantum and long duration funding needs of infrastructure finance) of various financial intermediaries requires adoption of innovative financial structures and revisiting some of the regulations governing the Indian financial system. In addition to above.length of 97. Given this profile of the Explicit Capital. Now infrastructure growth is a critical necessity to meet the growth requirements of the country. and the work on this project was sanctioned on June 1. Indira Gandhi. Implicit Capital providers seek to manage their risk -return reward by ensuring availability of adequate Explicit Capital and diversification across various projects. formation of highly capitalized financial intermediaries and encouraging securitization transactions. and the con struction work started in 1973. on December 29. Government led infrastructure financing and execution cannot meet these needs in an optimal manner and there is a need to engage more investors for meeting these needs. the then Prime Minister of India. the highest priority was given to the busy North South axis between Dum Dum and Tollygunge over a length of 16. Of these. 1972. various regulatory initiatives and market reforms are required to enable the commercial banking system to participate more vigorously in providing infrastructure financing. Mumbai and Hyderabad will be operational soon. Even though the Indian financial system has adequate liquidity.45 km.Today Metro Rail is operational in Kolkata and Delhi while in Bangalore. The foundation stone of the project was laid by Smt. 62 . greater flow of this risk capital can be ensured by removing the effects of controllable uncertainties in the policy environment and making available the benefits of diversification through alternate mechanisms. The risk capital required in the infrastructure sector can be understood as the Explicit Capital brought in as equity by the project sponsors and the Implicit Risk Capital provided by the pro ject lenders. the risk aversion of Indian retail investors. 1972.

com www.com www.com INFRASTRUCTURE FINANCINE BY S. 2.BAGCHI (2010) 63 .pppindiadatabase. 3.rites.K.delhimetrorail.21. 4. www. BIBLIOGRAPHY 1.

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