Project Financing in Social Infrastructure

November 2020
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DISCLAIMER
• This presentation (“Presentation”) has been prepared by Synergy Consulting Infrastructure and Financial Advisory
Services Inc. (“Synergy”) to provide helpful information on the subjects discussed and is for educational purposes only
• Synergy will not regard any person (whether a recipient of this Presentation or not) as a Client and will not be
responsible for providing any advice or protections to any such person
• No representation or warranty, express or implied, is or will be given by Synergy or their respective directors, affiliates,
partners, employees or advisors or any other person as to the accuracy, completeness or fairness of this Presentation
and no responsibility or liability whatsoever is accepted for the accuracy or sufficiency thereof or for any errors,
omissions or misstatements, negligent or otherwise, relating thereto
• Synergy does not undertake, and is under no obligation, to provide any additional information, to update this file, to
correct any inaccuracies or to remedy any errors or omissions in this Presentation
• The Presentation should not be regarded as constituting an opinion or advice on the situations discussed in the
Presentation, nor relied upon as a basis to proceed, or not to proceed, with any specific action or remedy

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 CONTENTS
1 INTRODUCTION 4 BANKABILITY CONSIDERATIONS
2 FINANCING STRUCTURES 5 CASE STUDIES
3 PPP MODEL OPTIONS

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1 INTRODUCTION

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INTRODUCTION
SOCIAL INFRASTRUCTURE

Hospitals Roads Railways Schools & Universities

Affordable Housing Parks/Recreational Spaces Bridges Student Housing

Libraries Street Lighting Bus shelters Old-age Homes

Prisons Walkways Museums Court Houses

Social infrastructure provides basic services and facilities to enhance the quality of life

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 FINANCING
2
STRUCTURES

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CORPORATE FINANCE
OVERVIEW

Key Features

• Multiple projects are developed under a single corporate entity (company)

• Debt sizing for any project is based on the strength of the corporate balance sheet

• Lenders can claim cashflows from other projects of the corporate entity and also have a recourse on any/all of the assets of the company

• Key Consideration: Lenders focus on the overall strength of corporate balance sheet (and cashflows)

Typical Corporate Finance Arrangement

Shareholders Lenders

Equity Debt All funding

at the Sponsor
Level (Balance
Corporate Entity Sheet Financing)

Project 1 (P1) Project 2 (P2) Project 3 (P3)

Lenders have recourse on the cashflows and all the assets of the company

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PROJECT FINANCE
OVERVIEW

Key Features

• Each project is developed by the individual SPV set up for the project (project company)
• Each project is ring-fenced from other projects i.e. there can be no claims from any other project – each project company has their
own assets/liabilities and there is no cross liabilities
• Non-recourse/limited recourse structures – Lenders primarily rely only on the future cashflows from the project for debt service
• High debt to equity ratio (can go up to 85% in certain projects) can be utilized; typically utilized for infrastructure projects
• Key Consideration: Lenders focus on feasibility of the project and cashflows generated by it; significant due diligence required by
the lenders as the only recourse is to cashflows/assets of the project company
Typical Project Finance Arrangement

Shareholders
Equity

Corporate Entity

Equity 1 Equity 2 Equity 3

All funding
SPV 1 SPV 2 SPV 3
at the SPV
Level (Project
Cash Flow Project 1 (P1) Project 2 (P2) Project 3 (P3)
Financing)

Debt 1 Debt 2 Debt 3

Lenders

Lenders have rights on only the SPV cashflows, with no recourse on the cashflows of any other projects

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COMPARISON: PROJECT FINANCE & CORPORATE FINANCE

Key Area Corporate Finance Project Finance

Financing vehicle Corporate entity Special purpose entity

Fixed time horizon (life of project/

Life of the company Indefinite concession term)

Lenders monitoring requirements Lenders typically have lower monitoring Fixed cash waterfall policies; lenders
requirements typically have detailed project oversight

Corporate loans; recourse to all company Limited/non-recourse loans; recourse

Financing type only to project assets and cashflows
assets on balance sheet

Lower transaction costs; simpler Higher costs due to stringent due diligence
Transaction costs documentation process; complex documentation

Turnaround time Shorter Longer

Standard, common form Structures can be tailored for the project

Financial structuring flexibility
documentation based on specific aspects

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 PPP MODEL
3
OPTIONS

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PPP MODEL OPTIONS
MODELS BASED ON PAYMENT MECHANISM

PPP models in infrastructure projects can be categorized based on the level of demand/market risk taken by the private sector

Typical PPP Models – Based on the Demand Risk

Low High

Availability Payment Minimum Revenue Revenue Share

Model Guarantee Model

Hybrid Annuity Model Flexible Concession

Term Model

Typical PPP Models – Based on their Bankability1

High Low
1) There are various other factors that may potentially impact the bankability apart from the payment mechanism; credit enhancement
options exist to improve the bankability
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AVAILABILITY PAYMENT MODEL

Revenue from Concession Agreement

customers
End users Grantor Project Company (SPV)

Availability Payments

Payments Contract

 In availability payment model, the revenue (demand) risk is borne by the Grantor
 Grantor pays fixed amount to the Project Company; Project Company is obligated to adhere to a certain predefined performance KPIs
which are elaborated in the concession agreement
 Results in potential reduction in financing costs (due to lower risk premium), lower DSCR requirements and higher leverage
 Credit worthiness of Grantor would be key consideration for the lenders

Typical Allocation of Key Risks

Risks Grantor Project Company

Demand Risk  ×
Design & Development Risk × 
Operation & Maintenance Risk × 
Financing Risk × 
Land Risk1  ×
Regulatory Risks  

1 Typically, Land Acquisition Risk is the responsibility of the Grantor

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HYBRID ANNUITY MODEL (HAM)

Revenue from Concession Agreement

customers
End users Grantor Project Company (SPV)
Milestone payments
+ Availability Payment

Payments Contract

 Mix of availability payment and EPC models

 Project company receives a pre-agreed percentage of project cost on achieving milestones during construction period from the
Grantor
 The outstanding balance at the end of construction, together with O&M costs (and returns/interest) is paid during the operations
period in the form of availability payments, subject to satisfactory achievement of relevant KPIs/ standards
 Demand risk is completely assumed by Grantor
 Lenders are not exposed to market risk which results in reduced financing costs, DSCR requirements and higher leverage
Typical Allocation of Key Risks

Risks Grantor Project Company

Demand Risk  ×
Design & Development Risk × 
Operation & Maintenance Risk × 
Financing Risk × 
Land Risk1  ×
Regulatory Risks  

1 Typically, Land Acquisition Risk is the responsibility of the Grantor

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MINIMUM REVENUE GUARANTEE MODEL

Revenue from Concession Agreement

customers
End users Project Company (SPV) Grantor
Revenue share

Revenue shortfall
Payments Contract

 Grantor provides support to the Project Company to improve the commercial viability of the project
 Grantor provides support in the form of Minimum Revenue Guarantee to provide coverage for a portion of projected cashflows
 Demand risk is shared with the Grantor; in case of any upside, Grantor receives revenue share
 Lenders derive comfort as the risk of default is lowered due to minimum threshold of revenues
 Debt is typically sized based on the minimum revenue guarantee/ ongoing payment obligations from the Grantor

Typical Allocation of Key Risks

Risks Grantor Project Company

Demand Risk  
Design & Development Risk × 
Operation & Maintenance Risk × 
Financing Risk × 
Land Risk1  ×
Regulatory Risks  

1 Typically, Land Acquisition Risk is the responsibility of the Grantor

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FLEXIBLE TERM CONCESSION MODEL

Revenue from Concession Agreement

customers
End users Project Company (SPV) Grantor

Revenue share

Payments Contract

 In this model, the concession term is variable. When the cumulative value of the revenue / profit (in present value terms) reaches a
predetermined amount, the concession term ends
 The discounting mechanism (to arrive at the Present Value of Revenue) is defined upfront by the Grantor
 If the revenue/ profit turns out to be lower than projected, the concession term is extended so that the Project company collects the
predetermined revenue/ profit (in present value terms); Similarly, if the revenue turns out to be higher than projected, the concession
term is reduced
 Project company is exposed to potential short/ medium term liquidity issues (and hence difficulty in debt servicing) in case the volume is
lower than forecast, especially in the initial years of the operation or during seasonal variation
Typical Allocation of Key Risks

Risks Grantor Project Company

Demand Risk  
Design & Development Risk × 
Operation & Maintenance Risk × 
Financing Risk × 
Land Risk1  ×
Regulatory Risks  

1 Typically, Land Acquisition Risk is the responsibility of the Grantor

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REVENUE SHARE MODEL

Revenue from Concession Agreement

customers
End users Project Company (SPV) Grantor

Revenue share

Payments Contract

 Project Company assumes demand risk and is responsible for making the facilities available for end customers
 Revenue share across concession term can be in the form of:
o Fixed/ variable annual payment;
o Fixed/ variable percentage of revenues; or
o Combination of the above

Typical Allocation of Key Risks

Risks Grantor Project Company

Demand Risk × 
Design & Development Risk × 
Operation & Maintenance Risk × 
Financing Risk × 
Land Risk1  ×
Regulatory Risks  

1 Typically, Land Acquisition Risk is the responsibility of the Grantor

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 BANKABILITY
4
CONSIDERATIONS

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 KEY BANKABILITY CONSIDERATIONS

• Availability based payment structure

• Off-taker to cover for certain macro-
• Alternatively, comprehensive demand study
economic risks including change in
ensuring certainty of projected cashflows
law, inflation, exchange rate, etc.
• Ensuring debt serviceability
Macro-
Certainty of
economic Risk
cashflows
Protection

• Lien/Pledge over the assets and

shares of SPV • Creditworthy off-taker with proven
Robust track-record
• Assignment of project documents Off-taker Credit-
Security • Credit enhancement mechanisms
• Direct agreements worthiness
Package as required to ensure bankability
• Assignment of project accounts and
relevant insurances

Water-tight
Termination
Contractual
Protection
Structure
• Contractual framework to ensure debt • Risk allocation to parties best suited to
protection in all cases of termination manage them

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5 CASE STUDIES

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CASE STUDY 1: HOUSING PPP PROJECT
PROJECT OVERVIEW

Development, financing and O&M of multiple residential

buildings on a Build, Own, Operate and Transfer (“BOOT”)
basis to provide accommodation for employees of procurer

BANKABILITY ISSUES

Key Challenges Proposed Mitigation

• Partial change in law protection covering specific and

• No change in law protection offered by procurer discriminatory events – meeting both lenders
requirements and procurer objectives

• Lenders provided comfort considering the strategic

• For termination due to project co. EoD, procurer has the
nature of location and assets; usage of such
right but not an obligation to purchase assets resulting
accommodation critical for procurer to carry out its
in potential non-repayment of debt
project functions in a smooth manner.

• Cross default provisions resulting in termination of

• Suitable termination payments from procurer for
entire project due to default of project co. with respect
functioning and non-defaulting assets
to a particular building

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CASE STUDY 2: SCHOOLS PPP PROJECT
PROJECT OVERVIEW

Development, financing and O&M of multiple schools and

associated facilities at various locations across the city on
BOOT basis

BANKABILITY ISSUES

Key Challenges Proposed Mitigation

• Lack of credit support – procuring authority relies on • Letter of comfort from MoF providing undertaking to
govt./ MoF support to meet its payment obligations, support the procurer in meeting its payments
however no MoF guarantee provided obligations

• Potentially lower leverage; further lenders provided

• For termination due to project co. event of default – fair
comfort by way of step-in rights and checks/ control to
value of the assets to be paid, which may not be
ensure that project’s fair value is materialized under
sufficient to cover the debt outstanding
such termination scenarios

• Debt sizing for additional revenues that project co. can • Higher DSCR requirements for cashflows related to
generate during non-school hours such additional revenues

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CASE STUDY 3: AIRPORT PPP PROJECT
PROJECT OVERVIEW

Development, financing and O&M of a new terminal at an

international airport on Build, Transfer and Operate
(“BTO”) basis.

BANKABILITY ISSUES

Key Challenges Proposed Mitigation

• Comprehensive traffic forecast study undertaken to

provide comfort to the lenders on project cashflows
• Demand risk – no guarantees on air traffic or certainty
• Exclusivity for provision of airport services within a
of revenues provided by the procurer
particular radius
• Limited appetite for high (>60%) leverage and long
• Scenario and sensitivity analysis performed to
(>15 years) debt tenor
demonstrate debt serviceability under various traffic
scenarios, thereby alleviating lenders concerns

• Skewed traffic ramp-up during initial years impacting • Shareholders and cashflows from existing operations
debt serviceability supported during initial periods

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CONTACT INFORMATION

VISHNU KHANDELWAL SAHIL TANEJA

Associate Director, Synergy Consulting Senior Associate, Synergy Consulting

PHONE PHONE
Mob: +91 99100 97519 Mob: +91 9599 704 201

EMAIL EMAIL
vishnu.khandelwal@synergyconsultingifa.com sahil.taneja@synergyconsultingifa.com

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