PROJECT ON PROJECT FINANCE
INTRODUCTION
“Project financing is a specialized form of financing that may offer some cost advantages when very large amounts of capital are involved,” Project finance can be defined as: financing of an industrial (or infrastructure) project with myriad capital needs, usually based on non-recourse or limited recourse structures, where project debt and equity (and potentially leases) used to finance the project are paid back from the cash flow generated by the project. The term "project finance" is now being used in almost every language in every part of the world. It is the solution to infrastructure, public and private venture capital needs. It has been successfully used in the past to raise trillions of dollars of capital and promises to continue to be one of the major financing techniques for capital projects in both developed and developing countries.
PROJECT FINANCE 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. Usually, a project financing structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks that provide loans to the operation. The loans are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors, a decision in part supported by financial modeling. The financing is typically secured by all of the project assets, including the revenueproducing contracts. Project lenders are given a lien on all of these assets, and are able to assume control of a project if the project company has difficulties complying with the loan terms.
Chapter 1.
1.1 : Project Finance as a Tool for Growth
Whether expanding manufacturing facilities, implementing new processing capabilities, or leveraging existing assets in new markets, innovative financing is often at the core of long-term projects to transform a company’s operations. Akin to the underlying corporate transformation, the challenge with innovative financial structures such as project finance is that the investment is made upfront while the anticipated benefits of the initiative are realized years later. Experts from GE Commercial Finance and the University of Pennsylvania’s Wharton School of Business note the importance of identifying a lender that can thoroughly understand the underlying changes being implemented by the borrower, and get comfortable with the future cash flows arising from the project.
with the project's assets, rights and interests held as collateral. In other words, it’s an incredibly flexible and comprehensive financing solution that demands a long-term lending approach not typical in today’s marketplace.
1.2 : Sources of Finance A company would choose from among various sources of finance depending on the amount of capital required and the term for which it is needed. When looking at the source of finance, it can usually be divided into three categories, namely traditional sources, ownership capital and non-ownership capital. Traditional Sources of Finance Internal resources have traditionally been the chief source of finance for a company. Internal resources could be a company¶s assets, personal savings and profits that have not been reinvested or distributed among shareholders. Working capital is a short term source of finance and is the money used for a company¶s day-to-day activities, including salaries, rent, payments for raw materials and electricity bills. Internal Sources Traditionally, the major sources of finance for a limited company were internal sources: Personal savings: Quite simply, personal savings are amounts of money that a business person, partner or shareholder has at their disposal to do with as they wish. If that person uses their savings to invest in their own or another business, then the source of finance comes under the heading of personal savings. Although we would generally discuss personal savings as a source of finance for small businesses, there are many examples where business people have used substantial sums of their own money to help to finance their businesses. A good and very public example here is Jamie Oliver, the television chef. Jamie financed his new restaurant, 'Fifteen', using fifteen raw recruits to the catering trade and a large amount (£500,000) of his own cash.
Retained Profit: This is often a very difficult idea to understand but, in reality, it is very simple. When a business makes a profit and it does not spend it, it keeps it - and accountants call profits that are kept and not spent retained profits. That's all.
The retained profit is then available to use within the business to help with buying new machinery, vehicles, and computers and so on or developing the business in any other way. Retained profits are also kept if the owners think that they may have difficulties in the future so they save them for a rainy day! Working Capital This is the short-term capital or finance that a business keeps. Working capital is the money used to pay for the everyday trading activities carried out by the business - stationery needs, staff salaries and wages, rent, energy bills, payments for supplies and so on. Working capital is defined as: Working capital = current assets - current liabilities Where: Current assets are short term sources of finance such as stocks, debtors and cash - the amount of cash and cash equivalents - the business has at any one time. Cash is cash in hand and deposits payable on demand (e.g. current accounts). Cash equivalents are short term and highly liquid investments which are easily and immediately convertible into cash. Current liabilities: They are short term requirements for cash including trade creditors, expense creditors, tax owing, dividends owing - the amount of money the business owes to other people/groups/businesses at any one time that needs to be repaid within the next month or so. Sale of Assets: Business balance sheets usually have several fixed assets on them. A fixed asset is anything that is not used up in the
production of the good or service concerned - land, buildings, fixtures and fittings, machinery, vehicles and so on. At times, one or more of these fixed assets may be surplus to requirements and can be sold. Alternatively, a business may desperately need to find some cash so it decides to stop offering certain products or services and because of that can sell some of its fixed assets. Hence, by selling fixed assets, business can use them as a source of finance. Selling its fixed assets, therefore, has an effect on the potential capacity of the business - the amount it can produce.
External Sources: 1.3 : Sources of Finance: Ownership Capital Ownership capital is the capital owned by the shareholders of a company. A company can raise substantial funds through an IPO (initial public offering). These funds are usually used for large expenses, such as new product development, expansion into a new market and setting up a new plant. The various types of shares are: Ordinary shares: These are also known as equity shares and give the owner the right to share the company¶s profits and vote at the firm¶s general meetings. Preference shares: The owners of these shares may be entitled to a fixed dividend, but usually do not have the right to vote. Companies that are already listed on a stock exchange can opt for a rights issue, which seeks additional investment from existing shareholders. They could also opt for deferred ordinary shares, wherein the issuing company is not required to pay dividends until a specified date or before the profits reach a certain level Unquoted companies (those not listed on stock exchanges) can also issue and trade their shares in over-the-counter (OTC) markets. 1.4 : Sources of Finance: Non-Ownership Capital Non-ownership capital includes funds raised from lenders, such as banks and creditors. Companies typically borrow a fixed amount from a bank, at a predetermined interest rate and with a fixed repayment schedule. Certain bank accounts offer overdraft facilities. This is used by companies to meet their short-term fund requirements, as they usually come at a very high interest rate. Factoring enables a company to raise funds using its outstanding invoices. The company typically receives about 85% of the value of the invoice from the factor. This method is more appropriate for overcoming short-term cash-flow issues.
Hire purchase allows a company to use an asset without immediately paying the complete purchasing price. Trade credit enables a company to obtain products and services from another firm and pay the bill later. 1.5: Sources of Finance: Venture Capital Firms in the early stages of development can opt for venture capital. This option gives the financing company some ownership as well as influence over the direction of the enterprise. 1.6: Sources of Finance: Duration Depending on the date of maturity, sources of finance can be clubbed into the following: Long-term sources of finance: Long-term financing can be raised from the following sources: Share capital or equity share. Preference shares. Retained earnings. Debentures/Bonds of different types. Loans from financial institutions. Loan from state financial corporation. Loans from commercial banks. Venture capital funding. Asset securitization. International. Medium-term sources of finance: Medium-term financing can be raised from the following sources: ? ?
?
Preference shares Debentures/bonds Public deposits/fixed deposits for duration of three Commercial banks Financial institutions
years ? ?
?
State financial corporations
? ?
?
?
Lease financing / hire purchase financing External commercial borrowings Euro-issues Foreign currency bonds
Short term sources of finance: Short-term financing can be raised from the following sources: Trade credit ? Commercial banks Fixed deposits for a period of 1 year or less ? Advances received from customers ? Various short-term provisions ?
NPV Example Let us examine finding Net Present Value or NPV with an example investment proposal. Let us say we were offered a series of cash inflows at the end of each of the next four years as $5000, $4000, $3000, and $1000. And the initial cash outlay for this proposal is $10,000 and weighted average cost of capital or WACC is 12%. NPV Calculation at 12% PVIF 12% 0.893 0.797 0.712 0.636 NPV $425 @ Present Value $4,465 $3,188 $2,136 $636 = $10,425-10,000
Year 1 2 3 4
Net Cash Flows 5000 4000 3000 1000
NPV Calculation at 15% PVIF 15% 0.870 0.756 0.658 0.572 @ Present Value $4,350 $3,024 $1,974 $572
Year 1 2 3 4
Net Cash Flows 5000 4000 3000 1000
NPV =-$80 $9,920-$10,000 NPV Acceptance criteria We usually accept a project if it has a positive NPV and one that is highest amongst the projects we are evaluating. This example project results in a NPV of $425 at the weighted average cost of capital of 12%, thus this is the amount in present value terms that we would gain if we were to invest in it. Yet if this company had a cost of capital of 15%, at this rate the project would yield no gains and we would discard the idea of putting our money in it.
IRR Example
Let us illustrate finding Internal Rate of return with an example investment proposal. Let us say you were offered a series of cash inflows at the end of each of the next five years as in amounts of $40,000. Say the initial cash outlay for this proposal is $100,000.
At first we find NPV at two different interest rates, at the lower rate the NPV will be positive and the upper rate the NPV will be negative. Present ValuePresent Value Year Cash Flow @ 26% @ 31% 0 1 2 3 4 5 -100000 40000 40000 40000 40000 40000 NPV -100000 31746.03 25195.26 19996.24 15870.03 12595.26 5402.82 -100000 30534.35 23308.66 17792.87 13582.35 10368.2 -4413.57
Linear Interpolation Since at 26% the NPV is 5402.82 and at 31% the NPV is -4413.57, thus the actual IRR lies somewhere between 26% and 31% at which the NPV is zero. We will use linear interpolation as shown below to find the actual IRR value. iL = 26% iU = 31% npvL = 5402.82 npvU = -4413.57 irr = iL + [(iU-iL)(npvL)] / [npvL-npvU] irr = 0.26 + [(0.31-0.26)(5402.82)] / [5402.82--4413.57] irr = 0.26 + [(0.05)(5402.82)] / [9816.39] irr = 0.26 + 270.141 / 9816.39 irr = 0.26 + 0.0275 irr = 0.2875 irr = 28.75% Thus we have approximated that the actual IRR value is in close proximity of 28.75%, however the actual IRR may just be slightly different from 28.75%. Using an IRR
calculator we will find that the actual IRR to be equal to 28.649282902479%.
Chapter 2. Contracts and Agreements Contractual Framework
The typical project finance documentation can be reconduct to four main types
? ? ? ?
Shareholder/sponsor documents Project documents Finance documents Other project documents
2.1 Engineering, Procurement Construction Contract - (EPC Contract)
and
The most common project finance construction contract is the EPC Contract. An EPC contract generally provides for the obligation of the contractor to build and deliver the project facilities on a turnkey basis, i.e. at a certain pre-determined fixed price, by a certain date, in accordance with certain specifications, and with certain performance warranties. EPC contract is quite complicated in terms of legal issue therefore the project company the EPC contractor shall have enough experiences and knowledge about the nature of project in order to avoid their faults and minimize the risks during the contract execution. Other alternative forms of construction contract are project management approach and alliance contracting. Basic contents of an EPC contract are:
? ? ? ? ? ?
Description of the project Price Payment Completion date Completion guarantee and Liquidated Damages Performance guarantee and LDs Cap under LDs
(LDs):
? ?
2.2 Operation and Maintenance Agreement (O&M Agreement)
An agreement between the project company and the operator. The project company delegates the operation, maintenance and often performance management of the project to a reputable operator with expertise in the industry under the terms of the Operations and Maintenance (O&M) agreement. The
operator could be one of the sponsors of the project company or third party operator. In other cases the project company may carry out by itself the operation and maintenance of the project and may eventually arrange for the technical assistance of an experienced company under a technical assistance agreement. Basic contents of a O&M contracts are:
? ? ? ? ? ?
Definition of the service Operator responsibility Provision regarding the services rendered Liquidated damages Fee provisions
2.3 Concession Deed
Agreement between the project company and a public-sector entity (the contracting authority). The concession agreement concedes the use of a government asset (such as a plot of land or river crossing) to the Project Company for a specified period of time. A concession deed would be found in most projects which involve Government such as in infrastructure projects. The concession agreement may be signed by a national / regional government, a municipality, or a special purpose entity set up by the state to grant the concession. Examples of concession agreements include contracts for the following: A toll-road or tunnel for which the concession agreement giving a right to collect tolls / fares from public or
?
where payments are made by the contracting authority based on usage by the public. ? A transportation system (e.g. a railway / metro) for which the public pays fares to a private company) ? Utility projects where payments are made by a municipality or by end-users. ? Ports and airports where payments are usually made by airlines or shipping companies. ? Other public sector projects such as schools, hospitals, government buildings, where payments are made by the contracting authority.
2.4 Shareholders Agreement)
Agreement
-
(SHA
The agreement between the project sponsors to form a special purpose company (“SPC”) in relation to the project development. This is the most basic of structure held by the sponsors in project finance transaction. This is an agreement between the sponsors and deals with:
? ? ? ? ? ? ?
Injection of share capital Voting requirements Resolution of disputes Dividend policy Management of the SPV Disposal and pre-emption rights
2.5 Off-Take Agreement
An agreement between the project company and the offtaker (the party who is buying the product / service the project produces / delivers). In a project financing the revenue is often contracted (rather to the sold on a merchant basis). The off-take
agreement governs mechanism of price and volume which make up revenue. The intention of this agreement is to provide the project company with stable and sufficient revenue to pay its project debt obligation, cover the operating costs and provide certain required return to the sponsors. The main off-take agreements are: Take-or-pay contract: under this contract the off-taker – on an agreed price basis – is obligated to pay for product on a regular basis whether or not the off-taker actually takes the product. ? Power purchase agreement: commonly used in power projects in emerging markets. The purchasing entity is usually a government entity. ? Take-and-pay contract: the off-taker only pays for the product taken on an agreed price basis. ? Long-term sales contract: the off-taker agrees to take agreed-upon quantities of the product from the project. The price is however paid based on market prices at the time of purchase or an agreed market index, subject to certain floor (minimum) price. Commonly used in mining, oil and gas, and petrochemical projects where the project company wants to ensure that its product can easily be sold in international markets, but off-takers not willing to take the price risk ? Hedging contract: found in the commodity markets such as in an oilfield project. ? Contract for Differences: the project company sells its product into the market and not to the off-taker or hedging counterpart. If however the market price is below an agreed level, the offtaker pays the difference to the project company, and vice versa if it is above an agreed level. ? Throughput contract: a user of the pipeline agrees to use it to carry not less than a certain volume of product and to pay a minimum price for this.
?
2.6
Supply Agreement
An agreement between the project company and the supplier of the required feedstock / fuel. If a project company has an off-take contract, the supply contract is usually structured to match the general terms of the off-take contract such as the length of the contract, force majeure provisions, etc. The volume of input supplies required by the project company is usually linked to the project’s output. Example under a PPA the power purchaser who does not require power can ask the project to shut down the power plant and continue to pay the capacity payment – in such case the project company needs to ensure its obligations to buy fuel can be reduced in parallel. The main supply agreemnts are: The degree of commitment by the supplier can vary. Fixed or variable supply: the supplier agrees to provide a fixed quantity of supplies to the project company on an agreed schedule, or a variable
?
supply between an agreed maximum and minimum. The supply may be under a take-or-pay or take-and-pay. Output / reserve dedication: the supplier dedicates the entire output from a specific source, e.g. a coal mine, its own plant. However the supplier may have no obligation to produce any output unless agreed otherwise. The supply can also be under a take-or-pay or take-and-pay ? Interruptible supply: some supplies such as gas are offered on a lower cost interruptible basis – often via a pipeline also supplying other users. ? Tolling contract: the supplier has no commitment to supply at all, and may choose not to do so if the supplies can be used more profitably elsewhere. However the availability charge must be paid to the project company.
?
2.7
Loan Agreement
An agreement between the project company (borrower) and the lenders. Loan agreement governs relationship between the lenders and the borrowers. It determines the basis on which the loan can be drawn and repaid, and contains the usual provisions found in a corporate loan agreement. It also contains the additional clauses to cover specific requirements of the project and project documents. Basic terms of a loan agreement include the following provisions. General conditions precedent ? Conditions precedent to each drawdown ? Availability period, during which the borrower is obliged to pay a commitment fee ? Drawdown mechanics ? An interest clause, charged at a margin over base rate ? A repayment clause ? Financial covenants - calculation of key project metrics / ratios and covenants ? Dividend restrictions ? Representations and warranties ? The illegality clause
?
2.8
Intercreditor Agreement
Intercreditor agreement is agreed between the main creditors of the project company. This is the agreement between the main creditors in connection with the project financing. The main creditors often enter into the Intercreditor Agreement to
govern the common terms and relationships among the lenders in respect of the borrower’s obligations. Intercreditor agreement will specify provisions including the following. Common terms ? Order of drawdown ? Cashflow waterfall ? Limitation on ability of creditors to vary their rights ? Voting rights ? Notification of defaults ? Order of applying the proceeds of debt recovery ? If there is a mezzanine funding component, the terms of subordination and other principles to apply as between the senior debt providers and the mezzanine debt providers.
?
2.9
Tripartite Deed
The financiers will usually require that a direct relationship between itself and the counterparty to that contract be established which is achieved through the use of a tripartite deed (sometimes called a consent deed, direct agreement or side agreement). The tripartite deed sets out the circumstances in which the financiers may “step in” under the project contracts in order to remedy any default. A tripartite deed would normally contain the following provision. Acknowledgement of security: confirmation by the contractor or relevant party that it consents to the financier taking security over the relevant
?
project contracts. Notice of default: obligation on the relevant project counterparty to notify the lenders directly of defaults by the project company under the
?
relevant contract. Step-in rights and extended periods: to ensure that the lenders will have sufficient notice /period to enable it to remedy any breach by the borrower. ? Receivership: acknowledgement by the relevant party regarding the appointment of a receiver by the lenders under the relevant contract and that the receiver may continue the borrower’s performance under the contract ? Sale of asset: terms and conditions upon which the lenders may transfer the borrower’s entitlements under the relevant contract.
?
Tripartite deed can give rise to difficult issues for negotiation but is a critical document in project financing.
2.10
Common Terms Agreement
Terms Sheet
Agreement between the borrower and the lender for the cost, provision and repayment of debt. The term sheet outlines the key terms and conditions of the financing. The term sheet provides the basis for the lead arrangers to complete the credit approval to underwrite the debt, usually by signing the agreed term sheet. Generally the final term sheet is attached to the mandate letter and is used by the lead arrangers to syndicate the debt. The commitment by the lenders is usually subject to further detailed due diligence and negotiation of project agreements and finance documents including the security documents. The next phase in the financing is the negotiation of finance documents and the term sheet will eventually be replaced by the definitive finance documents when the project reaches financial close.
Chapter 3 : Banks and Institutions related to Project Finance
Financial Institutions in Project Financing Financial sector plays an indispensable role in the overall development of a country. The most important constituent of this sector is the financial institutions, which act as a conduit for the transfer of resources from net savers to net borrowers, that is, from those who spend less than their earnings to those who spend more than their earnings. The financial institutions have traditionally been the major source of long-term funds for the economy. These institutions provide a variety of financial products and services to fulfil the varied needs of the commercial sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to the industries established in backward areas. Thus, they have helped in reducing regional disparities by inducing widespread industrial development. The Government of India, in order to provide adequate supply of credit to various sectors of the economy, has evolved a well developed structure of financial institutions in the country. These financial institutions can be broadly categorized into All India institutions and State level institutions, depending upon the geographical coverage of their operations. At the national level, they provide long and medium term loans at reasonable rates of interest. They subscribe to the debenture issues of companies, underwrite public issue of shares, guarantee loans and deferred payments, etc. Though, the State level institutions are mainly concerned with the development of medium and small scale enterprises, but they provide the same type of financial assistance as the national level institutions.
National Level Institutions A wide variety of financial institutions have been set up at the national level. They cater to the diverse financial requirements of the entrepreneurs. They include all India development banks like IDBI, SIDBI, IFCI Ltd, IIBI; specialized financial institutions like IVCF, ICICI Venture Funds Ltd, TFCI; investment institutions like LIC, GIC, UTI; etc.
3.1
All-India Development Banks (AIDBs):-
Includes those development banks which provide institutional credit to not only large and medium enterprises but also help in promotion and development of small scale industrial units. INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
IDBI is the apex institution in the area of long term industrial finance. It was established under the IDBI Act 1964 as a wholly owned subsidiary of RBI and started functioning on July 01, 1964. Under Public Financial Institutions Laws (Amendment) Act 1976, it was delinked from RBI. IDBI is engaged in direct financing of the industrial activities as well as in re-finance and rediscounting of bills against finance made available by commercial banks under their various schemes. The objectives of this institution are to create a principal institution for long term finance, to coordinate the institutions working in this field for planned development of industrial sector, to provide technical and administrative support to the industries and to conduct research and development activities for the benefit of industrial sector.
It raises funds by way of market borrowing by way of bonds and deposits, borrowing from Govt. and RBI, borrowing abroad in foreign currency and lines of credit. Its functions include: -direct loans (rupee as well as foreign currency) to industrial undertakings as defined in the Act to finance their new projects, expansion, modernization etc. -soft loans for various purposes including modernization and under equipment finance scheme -underwriting and direct subscription to shares/debentures of the industrial companies. -sanction of foreign currency loans for import of equipment or capital goods. -short term working capital loans to the corporate for meeting their working capital requirements. -refinance to banks and other institutions against loans granted by them. Of late, with the reforms in the financial sector, IDBI has taken steps to re-shape its role from a development finance institution to a commercial institution. It has floated its own bank IDBI Bank as also a Mutual Fund.
Some more examples of national level institutions as follows: 3.2 Industrial Finance Corporation of India Ltd (IFCI Ltd) :- IFCI offers a wide range of products to the target customer segments to satisfy their specific financial needs. The product range includes following credit products:
1. Short-term Loans (upto two years) for different short term requirements including bridge loan, Corporate Loan etc. 2. Medium-term Loans (more than two years to eight years) for business expansion, technology up-gradation, R&D expenditure, implementing early retirement scheme, Corporate Loan, supplementing working capital and repaying high cost debt 3. Long-term Loans (more than eight years to upto 15 years) - Project Finance for new industrial/infrastructure projects Takeout Finance, acquisition financing (as per extant RBI guidelines / Board approved policy), Corporate Loan, Securitisation of debt 4. Structured Products: acquisition finance, pre-IPO investment, IPO finance, promoter funding, etc. 5. Lease Financing 6. Takeover of accounts from Banks / Financial Institutions / NBFCs 7. Financing promoters contribution (private equity participation)/subscription to convertible warrants 8. Purchase of Standard Assets and NPAs
3.3 SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI) SIDBI was established under SIDBI Act 1988 and commenced its operations w.e.f April 02, 1990 with head quarters in Lucknow and branches all over the country, as a subsidiary of IDBI. It took over the IDBI business relating to small scale industries including National Equity Scheme
and Small Inds Development fund. The objective of establishment of SIDBI, in particular, is to strengthen and broad-base the existing institutional arrangement to meet the requirement of SSI and tiny industries. Its functions include: -administration of SIDF and NEF for development and equity support to small and tiny industry. -Providing working capital through single window scheme -providing refinance finance institutions. support to banks/development
-undertaking direct financing of SSI units. -coordination of functions of various institutions engaged in finance to SSI and tiny units.
INDUSTRIAL INVESTMENT BANK OF INDIA LTD. (IIBI LTD.) IIBI offers a variety of financial products such as project finance, short duration non-project asset- backed financing and working capital /other short-term loans to companies.
3.4 IRBI)
INDUSTRIAL INVESTMENT BANK OF INDIA (formerly
IIBI was initially set up as Industrial Reconstruction Corporation Limited during 1971 when it was renamed Industrial Reconstruction bank of India w.e.f Mar 20, 1985 under IRBI Act 1984 to take over the function of IRC. During 1997 the bank was converted to a joint stock company by naming it Industrial Investment Bank of India. Its earlier functions were to provide finance for industrial
rehabilitation and revival of sick industrial units by way of rationalization, expansion, diversification and modernisation and also to co-ordinate the work of other institutions for this purpose. agricultural and rural requirement.
3.5 INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LTD. IDFC Ltd, incorporated in 1997, was conceived as specialized institution to facilitate the flow of private finance to commercially viable infrastructure projects through innovative products and processes. Energy, telecommunications, transportation, urban infrastructure and food and agri-business Infrastructure constitute the current areas of operation of IDFC.
o
3.6
Specialized Financial Institutions (SFIs):
They are the institutions which have been set up to serve the increasing financial needs of commerce and trade in the area of venture capital, credit rating and leasing, etc
o
3.7
IFCI Venture Capital Funds Ltd (IVCF):-
They are formerly known as Risk Capital & Technology Finance Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was promoted with the objective of broadening entrepreneurial base in the country by facilitating funding to ventures involving innovative product/process/technology. Initially, it started providing financial assistance by way of soft loans to promoters under its 'Risk Capital Scheme. Since 1988, it also started providing finance under 'Technology Finance and Development Scheme' to projects for commercialization of indigenous technology for new processes,
products, market or services. Over the years, it has acquired great deal of experience in investing in technology-oriented projects.
o
3.8
ICICI Venture Funds Ltd: -
They are formerly known as Technology Development & Information Company of India Limited (TDICI), was founded in 1988 as a joint venture with the Unit Trust of India. Subsequently, it became a fully owned subsidiary of ICICI. It is a technology venture finance company, set up to sanction project finance for new technology ventures. The industrial units assisted by it are in the fields of computer, chemicals/polymers, drugs, diagnostics and vaccines, biotechnology, environmental engineering, etc.
Investment Institutions: They are the most popular form of financial intermediaries, which particularly catering to the needs of small savers and investors. They deploy their assets largely in marketable securities.
o
3.9
Life Insurance Corporation of India (LIC):-
It was established in 1956 as a wholly-owned corporation of the Government of India. It was formed by the Life Insurance Corporation Act, 1956, with the objective of spreading life insurance much more widely and in particular to the rural area. It also extends assistance for development of infrastructure facilities like housing, rural electrification, water supply, sewerage, etc. In addition, it extends resource support to other financial institutions through subscription to their shares and bonds, etc. The Life Insurance
Corporation of India also transacts business abroad and has offices in Fiji, Mauritius and United Kingdom. Besides the branch operations, the Corporation has established overseas subsidiaries jointly with reputed local partners in Bahrain, Nepal and Sri Lanka. Some more examples of Specialized Financial Institutions (SFIs) as follows:
o
o
Unit Trust of India (UTI) General Insurance Corporation of India (GIC)
State Level Institutions Several financial institutions have been set up at the State level which supplements the financial assistance provided by the all India institutions. They act as a catalyst for promotion of investment and industrial development in the respective States. They broadly consist of 'State financial corporations' and 'State industrial development corporations'.
•
3.10
State Financial Corporations (SFCs):-
They are the State-level financial institutions which play a crucial role in the development of small and medium enterprises in the concerned States. They provide financial assistance in the form of term loans, direct subscription to equity/debentures, guarantees, discounting of bills of exchange and seed/ special capital, etc. SFCs have been set up with the objective of catalyzing higher investment, generating greater employment and widening the ownership base of industries. They have also started providing assistance to newer types of business activities like floriculture, tissue culture, poultry farming, commercial complexes and services related to engineering, marketing, etc. There are 18 State Financial Corporations (SFCs) in the country:
o
Andhra
Pradesh
State
Financial
Corporation
(APSFC)
o o o
Himachal Pradesh Financial Corporation (HPFC) Madhya Pradesh Financial Corporation (MPFC) North Eastern Development Finance Corporation Rajasthan Finance Corporation (RFC) Tamil Nadu Industrial Investment Corporation Uttar Pradesh Financial Corporation (UPFC) Delhi Financial Corporation (DFC) Gujarat State Financial Corporation (GSFC)
(NEDFI)
o o
Limited
o o
o
o
The Economic Development Corporation of Goa Haryana Financial Corporation ( HFC ) Jammu & Kashmir State Financial Corporation Karnataka State Financial Corporation (KSFC) Kerala Financial Corporation ( KFC ) Maharashtra State Financial Corporation (MSFC ) Orissa State Financial Corporation (OSFC) Punjab Financial Corporation (PFC) West Bengal Financial Corporation (WBFC)
( EDC)
o o
( JKSFC)
o o o o o
o
3.11 State Corporations (SIDCs):•
Industrial
Development
They have been established under the Companies Act, 1956, as wholly-owned undertakings of State Governments. They have been set up with the aim of promoting industrial development in the respective States and providing financial assistance to small entrepreneurs. They are also involved in setting up of medium and large industrial projects in the joint sector/assisted sector in collaboration with private entrepreneurs or wholly-owned subsidiaries. They are undertaking a variety of promotional activities such as preparation of feasibility reports; conducting industrial potential surveys; entrepreneurship training and development programmes; as well as developing industrial areas/estates. The State Industrial Development Corporations in the country are: Assam Industrial Development Corporation Ltd (AIDC) Andaman & Nicobar Islands Integrated Development Corporation Ltd (ANIIDCO) o Andhra Pradesh Industrial Development Corporation Ltd (APIDC) o Bihar State Credit and Investment Corporation Ltd. (BICICO)
o o
Chhattisgarh State Industrial Development Corporation Limited (CSIDC) o Goa Industrial Development Corporation o Gujarat Industrial Development Corporation (GIDC)
o
Haryana State Industrial & Infrastructure Development Corporation Ltd. (HSIIDC) o Himachal Pradesh (HPSIDC) State Industrial Development Corporation Ltd. o Jammu and Kashmir State Industrial Development Corporation Ltd.
o
Guidelines for funding the projects by various Institutions as follows:IDBI BANK Project Finance: Under the Project Finance scheme IDBI Bank provides finance to the corporate for projects. The Bank provides project finance in both rupee and foreign currencies for Greenfield projects as also for expansion, diversification and modernization. IDBI Bank follows the Global Best Practices in project appraisal and monitoring and has a well-diversified industry portfolio. IDBI Bank has signed a Memorandum of Understanding (MoU) with LIC in December 2006 for undertaking joint and take-out financing of long-gestation projects, including infrastructure projects. Project Finance Scheme: Objective: - To provide long term finance for the establishment of new industrial, infrastructure, Agri-horticulture, fishery and animal husbandry projects as well as expansion, diversification and Modernization of existing ones. Types of Assistance: -Term loan, direct subscription/underwriting of equity and debt instruments, provide financial guarantee and participate in deferred payment guarantee. Eligibility: -Industrial concerns conforming to the definition in Section 2 (c) of the IDBI Act, Infrastructure, Agro-horticulture, Fishery and Animal Husbandry projects. Project Cost: -Minimum assistance: NEDFi ordinarily finances projects with loan component of Rs.25 lakh and above, However smaller projects in innovative fields and in the hill states are also considered.
Maximum assistance: -Normally, NEDFi can consider up to maximum exposure of 10% of paid up capital & reserves. However, it can consider projects requiring higher investment in consortium with other financial institutions and banks. Nature of assistance: -Rupee Term Loan Promoters¶ contribution: -30-40% of the total project cost. However, in the case of consortium financing it will be at par with the norms of All India Financial Institutions. Debt Equity Ratio: -Ordinarily 1.5: 1
Interest Rate: -Based on Prime Lending Rate fixed from time to time. Actual rate within the prevailing rate band depends upon creditworthiness of borrower and risk perception. As on date, the prevailing interest rate is 15% per annum. There is provision for 1% rebate on interest rate for timely repayment on due dates. Up-front fee: -1% of the loan amount sanctioned Security: -First charge on movable and immovable fixed assets. Documentation: 1. Loan Agreement. 2. Deed of hypothecation. 3. Personal guarantee from main promoters, wherever required. 4. Undertaking from the promoters for o Meeting overrun/shortfall in the project cost/means of financing o Non-disposal of shareholdings by the promoters 5. Undertaking from MD for non-receipt of commission, if company is in default to NEDFi. 6. Resolution under Section 293 (1) (a) and 293(1) (d) of the Companys Act.
Ex-Im Bank Ex-Im Bank's Approach to Project Finance: Ex-Im Bank established the limited recourse project finance or "project finance" program as developing nations turned away from sovereign-guaranteed borrowing for large infrastructure projects. The program helps U.S. exporters compete in the development of private infrastructure and in the extraction of natural resources. Program Description The term "project finance" refers to the financing of projects that are dependent on project cash flows for repayment, as defined by the contractual relationships within each project. By their very nature, these types of projects rely on a large number of integrated contractual arrangements for successful completion and operation. The contractual relationships must be balanced with risks distributed to those parties best able to undertake them, and should reflect a fair allocation of risk and reward. All project contracts must fit together seamlessly to allocate risks in a manner which ensures the financial viability and success of the project. Appropriate project finance candidates include Green field projects and significant facility or production expansions. These projects do not rely on the typical export finance security package, which provide lenders recourse to a foreign government, financial institution or an established corporation. While Ex-Im Bank's analytical approach for project finance is different from the traditional export finance approach, many of Ex-Im Bank's requirements remain the same. Ex-Im Bank's project finance program has several financing options which project sponsors can utilize to develop an appropriate financing plan. During construction and operations, political only and comprehensive guarantees are available.
Ex-Im Bank has no dollar limits based on project size, sector or country. While there is no minimum transaction size, the applicant should carefully consider the costs associated with a limited recourse project financing approach. Generally, Ex-Im Bank utilizes financial, legal, and technical advisors for project finance transactions. However, for small project finance transactions, Ex-Im Bank may consider, on a case-by-case basis, not utilizing financial advisors, and relying instead upon internal due diligence as well as the due diligence of an arranging bank (or other major project lender). FLEXIBLE COVERAGE: Where appropriate, Ex-Im Bank offers the maximum support allowed under the rules of the OECD Arrangement, including: • Financing of interest accrued during construction related to the Ex-Im Bank financing. • Allowance of up to 30 percent eligible foreign content in the U.S. components. • Financing of host country local costs of up to 30 percent of the U.S. contract value. The rules outlined by the OECD Arrangement allow Ex-Im Bank to provide flexible loan repayment terms to match a project's revenue stream. Thus, project finance transactions can be structured with tailored repayment profiles, more flexible grace periods, and more flexibility on total repayment terms. Ex-Im Bank implements these flexibilities on a case-by-case basis for qualifying project finance transactions. Generally, extended grace periods or repayment terms must be justified by project cash flows or project considerations specific to certain industry sectors. For example, extended grace periods and backended repayment profiles may be justified for telecommunications projects but are likely not appropriate for power plants. The new rules allow for the following:
• Full flexibility for setting a project's grace period, repayment profile, and maximum repayment term, subject to a maximum average life of 5.25 years; or • The extension of a project's average life up to 7.25 years, subject to constraints for setting a maximum grace period of 2 years and a maximum repayment term of 14 years.
The new flexible terms are subject to the following additional constraints and/or considerations:
• If the project's repayment term extends beyond 12 years, 20 basis points are added to the CIRR Rate for direct loans. • Interest cannot be capitalized post-completion. • The flexible terms are offered in High-Income OECD markets only with additional constraints. • The average life allowed under the new flexible terms will be taken into consideration when meeting the Minimum Premium Benchmark fees required as of April 1, 1999.
Chapter 4. Common risks and methods of risk minimization
Risk minimisation process Financiers are concerned with minimising the dangers of any events which could have a negative impact on the financial performance of the project, in particular, events which could
result in: (1) the project not being completed on time, on budget, or at all; (2) the project not operating at its full capacity; (3) the project failing to generate sufficient revenue to service the debt; or (4) the project prematurely coming to an end. The minimisation of such risks involves a three step process. The first step requires the identification and analysis of all the risks that may bear upon the project. The second step is the allocation of those risks among the parties. The last step involves the creation of mechanisms to manage the risks. If a risk to the financiers cannot be minimised, the financiers will need to build it into the interest rate margin for the loan.
STEP 1 - Risk identification and analysis The project sponsors will usually prepare a feasibility study, e.g. as to the construction and operation of a mine or pipeline. The financiers will carefully review the study and may engage independent expert consultants to supplement it. The matters of particular focus will be whether the costs of the project have been properly assessed and whether the cash-flow streams from the project are properly calculated. Some risks are analysed using financial models to determine the project's cash-flow and hence the ability of the project to meet repayment schedules. Different scenarios will be examined by adjusting economic variables such as inflation, interest rates, exchange rates and prices for the inputs and output of the project. Various classes of risk that may be identified in a project financing will be discussed below. STEP 2 - Risk allocation Once the risks are identified and analysed, they are allocated by the parties through negotiation of the contractual framework. Ideally a risk should be allocated to the party who is the most
appropriate to bear it (i.e. who is in the best position to manage, control and insure against it) and who has the financial capacity to bear it. It has been observed that financiers attempt to allocate uncontrollable risks widely and to ensure that each party has an interest in fixing such risks. Generally, commercial risks are sought to be allocated to the private sector and political risks to the state sector. STEP 3 - Risk management Risks must be also managed in order to minimise the possibility of the risk event occurring and to minimise its consequences if it does occur. Financiers need to ensure that the greater the risks that they bear, the more informed they are and the greater their control over the project. Since they take security over the entire project and must be prepared to step in and take it over if the borrower defaults. This requires the financiers to be involved in and monitor the project closely. Such risk management is facilitated by imposing reporting obligations on the borrower and controls over project accounts. Such measures may lead to tension between the flexibility desired by borrower and risk management mechanisms required by the financier. Types of risks Of course, every project is different and it is not possible to compile an exhaustive list of risks or to rank them in order of priority. What is a major risk for one project may be quite minor for another. In a vacuum, one can just discuss the risks that are common to most projects and possible avenues for minimising them. However, it is helpful to categorise the risks according to the phases of the project within which they may arise: (1) the design and construction phase; (2) the operation phase; or (3) either phase. It is useful to divide the project in this way when looking at risks because the nature and the allocation of risks usually change between the construction phase and the operation phase.
1.
Construction phase risk - Completion risk Completion risk allocation is a vital part of the risk allocation of any project. This phase carries the greatest risk for the financier. Construction carries the danger that the project will not be completed on time, on budget or at all because of technical, labour, and other construction difficulties. Such delays or cost increases may delay loan repayments and cause interest and debt to accumulate. They may also jeopardise contracts for the sale of the project's output and supply contacts for raw materials.
Commonly employed mechanisms for minimising completion risk before lending takes place include: (a) obtaining completion guarantees requiring the sponsors to pay all debts and liquidated damages if completion does not occur by the required date; (b) ensuring that sponsors have a significant financial interest in the success of the project so that they remain committed to it by insisting that sponsors inject equity into the project; (c) requiring the project to be developed under fixed-price, fixed-time turnkey contracts by reputable and financially sound contractors whose performance is secured by performance bonds or guaranteed by third parties; and (d) obtaining independent experts' reports on the design and construction of the project. Completion risk is managed during the loan period by methods such as making precompletion phase drawdowns of further funds conditional on certificates being issued by independent experts to confirm that the construction is progressing as planned. 2. risk Operation phase risk - Resource / reserve
This is the risk that for a mining project, rail project, power station or toll road there are inadequate inputs that can be processed or serviced to produce an adequate return. For example, this is the risk that there are insufficient reserves for a mine, passengers
for a railway, fuel for a power station or vehicles for a toll road. Such resource risks are usually minimised by: (a) experts' reports as to the existence of the inputs (e.g. detailed reservoir and engineering reports which classify and quantify the reserves for a mining project) or estimates of public users of the project based on surveys and other empirical evidence (e.g. the number of passengers who will use a railway); (b) requiring long term supply contracts for inputs to be entered into as protection against shortages or price fluctuations (e.g. fuel supply agreements for a power station); (c) obtaining guarantees that there will be a minimum level of inputs (e.g. from a government that a certain number of vehicles will use a toll road); and (d) "take or pay" off-take contacts which require the purchaser to make minimum payments even if the product cannot be delivered. Operating risk These are general risks that may affect the cash-flow of the project by increasing the operating costs or affecting the project's capacity to continue to generate the quantity and quality of the planned output over the life of the project. Operating risks include, for example, the level of experience and resources of the operator, inefficiencies in operations or shortages in the supply of skilled labour. The usual way for minimising operating risks before lending takes place is to require the project to be operated by a reputable and financially sound operator whose performance is secured by performance bonds. Operating risks are managed during the loan period by requiring the provision of detailed reports on the operations of the project and by controlling cashflows by requiring the proceeds of the sale of product to be paid into a tightly regulated proceeds account to ensure that funds are used for approved operating costs only. Market / off-take risk
Obviously, the loan can only be repaid if the product that is generated can be turned into cash. Market risk is the risk that a buyer cannot be found for the product at a price sufficient to provide adequate cash-flow to service the debt. The best mechanism for minimising market risk before lending takes place is an acceptable forward sales contact entered into with a financially sound purchaser. 3. Risks common operational Participant / credit risk to both construction and phases
These are the risks associated with the sponsors or the borrowers themselves. 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. Of course, credit risk is also important for the sponsors' completion guarantees. To minimise these risks, 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 (e.g. so that they can inject funds into an ailing project to save it). Technical risk This is the risk of technical difficulties in the construction and operation of the project's plant and equipment, including latent defects. Financiers usually minimise this risk by preferring tried and tested technologies to new unproven technologies. Technical risk is also minimised before lending takes place by obtaining experts reports as to the proposed technology. 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.
Currency risk Currency risks include the risks that: (a) a depreciation in loan currencies may increase the costs of construction where significant construction items are sourced offshore; or (b) a depreciation in the revenue currencies may cause a cash-flow problem in the operating phase. Mechanisms for minimising resource include: (a) matching the currencies of the sales contracts with the currencies of supply contracts as far as possible; (b) denominating the loan in the most relevant foreign currency; and (c) requiring suitable foreign currency hedging contracts to be entered into. Regulatory / approvals 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, royalty payments, or rigid requirements as to local supply or distribution. 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. Political risk This is the danger of political or financial instability in the host country caused by events such as insurrections, strikes, suspension of foreign exchange, creeping expropriation and outright nationalisation. It also includes the risk that a government may be able to avoid its contractual obligations through sovereign immunity doctrines. Common mechanisms for minimising political risk include: (a) requiring host country agreements and assurances that project will not be interfered with; (b) obtaining legal opinions as to the applicable laws and the enforceability of contracts with government entities; (c) requiring political risk insurance to be obtained from bodies which provide
such insurance (traditionally government agencies); (d) involving financiers from a number of different countries, national export credit agencies and multilateral lending institutions such as a development bank; and (e) establishing accounts in stable countries for the receipt of sale proceeds from purchasers. Force majeure risk This is the risk of events which render the construction or operation of the project impossible, either temporarily (e.g. minor floods) or permanently (e.g. complete destruction by fire). Mechanisms for minimising such risks include: (a) conducting due diligence as to the possibility of the relevant risks; (b) allocating such risks to other parties as far as possible (e.g. to the builder under the construction contract); and (c) requiring adequate insurances which note the financiers' interests to be put in place
Chapter 5. Project Criteria And Application Process
5.1 APPLICATION PROCESS Business Development: An introductory meeting with a Project Finance Business Development Officer is strongly recommended. The meeting should focus on Ex-Im Bank's policies and procedures and include a thorough explanation of the application process and the requirements for Ex-Im Bank support. Project Finance Letter of Interest: A Project Finance Letter of Interest (LI) is an indication of Ex-Im Bank's willingness to consider financing a given export transaction. To apply, interested parties must complete the Ex-Im Bank LI application and clearly indicate Limited Recourse Project Finance. The non-refundable processing fee for an LI is $100. The applicant should attach an executive summary of the project which identifies the type of project, location of the project, parties to the transaction, status of the project, total project cost, U.S. cost and the anticipated project time frame. The Project Finance LI differs from Ex-Im Bank's traditional LI. The LI application is available on Ex-Im Bank's web page. Competitive Letter of Interest: On a case-by-case basis, Ex-Im Bank is willing to consider providing evidence of support during the early stage of the project development by performing a more in-depth project analysis and issuing a Competitive Letter of Interest (CLI). Each CLI issued will provide an indicative exposure fee range and a list of preliminary issues identified by Ex-Im Bank. Applicants responding to an international invitation to bid for a project, or applicants pursuing projects in difficult markets are eligible to apply. The cost for a CLI analysis is $1000. In addition to the information required for an LI, applicants should submit any other available information such as project agreements, proposed financing plan, risk mitigation proposals, etc. Please refer to the Competitive Letter of Interest Fact Sheet on the web page.
Final Commitment Application Submission: The final commitment application submitted to Ex-Im Bank must include: 1) The standard Ex-Im Bank Preliminary Commitment/Final Commitment Application Form, and 2) Five copies of the materials listed below under "Project Criteria and Application Information Requirements." Preliminary Review: The Project Finance Business Development staff will review the material submitted within five to ten business days from the date that the application is received to determine completeness. Incomplete Applications: If the application is incomplete, it will be returned to the applicant with an explanation of its deficiencies. If the application is not determined to be suitable for limited recourse project financing but could still be considered for another form of Ex-Im Bank financing, it will be forwarded to the appropriate division and the applicant will be notified. Choice of Financial Advisor: For applications proceeding to a Phase I evaluation, a financial advisor will be selected by Ex-Im Bank. Determination of the specific financial advisor will depend on several factors including geographic and sector expertise and availability to meet project deadlines. Evaluation Fee: Before the financial advisor begins his review (Phase I of evaluation), the applicant will be required to pay an evaluation fee and execute a contract with the financial advisor. In addition, the applicant will need to execute an indemnity agreement with the financial advisor. No evaluation by Ex-Im Bank and the financial advisor will commence without payment of the financial advisor evaluation fee, execution of the contract and the indemnity agreement. If Ex-Im Bank agrees to proceed with the
project after completion of the Phase I evaluation, the applicant will be required to pay additional related fees for the Phase II due diligence. The application will be returned to the applicant if the arrangements for the financial advisor are not completed within thirty days. Other Fees: For all projects Ex-Im Bank will require, either in conjunction with other lenders or for its own use, the advice of independent outside legal counsel, independent engineers, and insurance advisors. In addition, there may be other fees associated with conducting proper due diligence. Payment for these and any other fees will be the responsibility of the project sponsors or the applicant.
Preliminary Project Letter (Phase I): Upon satisfactory completion of the phase I evaluation process, the Structured Finance Division will issue a Preliminary Project Letter within 45 days from the date evaluation begins by the financial advisor. The PPL will indicate if Ex-Im Bank is prepared to move forward on a financing offer and the corresponding general terms and conditions based upon the information available at the time of application. Evaluation Post-PPL (Phase II): After issuance of the PPL, Ex-Im Bank will work with the applicant to proceed to a Final Commitment. Please note that Ex-Im Bank does not issue Preliminary Commitments for project finance transactions. Ex-Im Bank will continue to utilize the financial advisor for Phase II of the due diligence process.
Attachments STRUCTURED FINANCE DIVISION 5.2 PROJECT CRITERIA Information Required: I. General Project: • In most cases the project should have long-term contracts from creditworthy entities for the purchase of the project's output and the purchase of the project's major project inputs such as fuel, raw materials, and operations and maintenance. Such contracts should extend beyond the term of the requested Ex-Im Bank financing. In sectors such as telecommunications and petrochemicals if long-term contracts are not available, Ex-Im Bank will evaluate the transactions on a case-by-case basis, looking for economically compelling business rationale. • The project should contain an appropriate allocation of risk to the parties best suited to manage those risks. Sensitivity analysis should result in a sufficient debt service coverage ratio to ensure uninterrupted debt servicing for the term of the debt. • Total project cost should be comparable to projects of similar type and size for a particular market • Product unit pricing and costs should reflect market based pricing. • Devaluation risk needs to be substantially mitigated through revenues denominated in hard currencies, revenue adjustment formulas based on changing currency relationships, or other structural mechanisms. Information Required:
1. Summary of all aspects of the project, as contained in an independently prepared feasibility study and/or a detailed information memorandum, prepared by a qualified party. The study or memorandum should include the project description, location, legal status, ownership, and background and status of key elements of the project structure, such as agreements, licenses, local partner participation and financing. 2. Agreements for key elements of the project. Ex-Im Bank considers key agreements to include all contracts necessary for the project to be built and operate. This includes contracts relating to infrastructure as well as supply and off take agreements. These agreements should be in substantially final form. Ex-Im Bank will not accept summaries or outlines of these agreements. 3. A breakdown of anticipated project costs through commissioning, including interest during construction and working capital requirements, by major cost category and country of origin. This information should also include a breakdown of any "soft costs" such as development costs, development fees, owner's contingencies and other similar items. A breakdown of the proposed coverage for interest during construction and the method of calculation should also be included. 4. A summary of the anticipated project financing plan and security package, including the proposed source, amount, currency and terms of the debt and equity investments; the sources of finance in the event of project cost overruns; and description of escrow accounts. Information on the terms, security requirements, and status of financing commitments of other lenders to the project, if applicable, should be provided. All other sources approached for financing (multinational development banks, other export credit agencies, commercial banks, capital markets and private investors) must be disclosed.
5. Projected annual financial statements covering the period from project development through final maturity of the proposed Ex-Im Bank financing, to include balance sheet, profit and loss, source and application of funds statements, and debt service ratios. Projections should include a sensitivity analysis for not only the expected scenario, but pessimistic and optimistic cases as well. This information should also be provided electronically in Lotus 123 or Excel. The structure of the financial model should be in a format that is user friendly. Ex-Im Bank must be able to review and adjust the assumptions in the model. 6. Assumptions for the financial projections, including but not limited to the basis for sales volume and prices; operating and administrative costs; depreciation, amortization and tax rates; and local government policy on price regulation. 7. Market information to include ten years of historical price and volume data; present and projected capacity of industry; product demand forecast with assumptions; description of competition and projected market share of the project as compared to the shares of the competition; identity and location of customers; and marketing and distribution strategy. 8. A description of the principal risks and benefits of the project to the sponsors, lenders, and host government. 9. A description of the types of insurance coverage to be purchased for both the pre and postcompletion phases of the project. 10. Information on infrastructure required for the project to operate, specifically information pertaining to the timing, status and developmental plans. 11. A clear articulation of the need for Ex-Im Bank coverage.
•
II. Participants
• Project sponsors, off take purchasers, contractors, operators, and suppliers must be able to demonstrate the technical, managerial and financial capabilities to perform their respective obligations within the project. Information Required: 1. Sponsors must provide in English a brief history and description of their operations, a description of their relevant experience in similar projects, and three years of audited financial statements. 2. If the sponsors are part of a joint venture or consortium, information should be provided for all the participants. A shareholders agreement should also be provided. All documents pertaining to this area (joint venture agreement, management and service agreements) should be in substantially final form. 3. Off take purchasers and suppliers should provide in English a history and description of operations, at least three years of audited financial statements, and a description of how the project fits in their long-term strategic plan. If the project utilizes raw materials (oil, gas, coal, ethane, etc.) copies of contracts that have been reviewed by legal counsel for appropriateness and in adherence with local law should be provided. 9. Contractors and operators must provide resumes of experience with similar projects and recent historical financial information. III. Technical Project technology must be proven and reliable, and licensing arrangements must be contractually secured
•
for a period extending beyond the term of the Ex-Im Bank financing. • A technical feasibility study or sufficient detailed engineering information needs to be provided to demonstrate technical feasibility of the project.
Information Required: 1. Technical description and a process flow diagram for each project facility. 2. Detailed estimate of operating costs. 3. Arrangement for supply of raw materials and utilities. 4. Draft turnkey construction contract and description of sources of possible cost increases and delays during construction, including detailed description of liquidated damage provisions and performance bond requirements.
5. Project implementation schedule, showing target dates for achieving essential project milestones. 10. A site-specific environmental assessment, highlighting concerns, requirements and solutions. These documents should demonstrate compliance with Ex-Im Bank's environmental guidelines. All applicants must submit a Preliminary Environmental Assessment report conducted by a third party expert prior to an application for final commitment. IV. Host Country Government Role Legal/Regulatory Framework &
• Host government commitment to proceeding with the project needs to be demonstrated. • Legal and regulatory analysis needs to demonstrate that the country conditions and the project structure are sufficient to support long-term debt exposure for the project through enforceable contractual relationships. • Ex-Im Bank's relationships with the host government will be addressed on a case-by-case basis. An Ex-Im Bank Project Incentive Agreement (PIA) with the host government may be required. The PIA addresses certain political risks and Ex-Im Bank's method of resolution of conflict with the host government pertaining to these issues. Only certain markets will require a PIA.
Information Required: 1. A description of the host government's role in the project, and progress made toward obtaining essential government commitments, including authorizations from appropriate government entities to proceed with the project. Copies of all permits, licenses, concession agreements and approvals are required in addition to a description of all permits necessary to
complete the project and their status. This information is critical for Ex-Im Bank application consideration. 2. A definition of the control, if any, that the government will have in the management and operation of the project, and status of any assurances that the government will not interfere in the project's operation. If the government is also a project sponsor, these issues will be of particular importance 3. Evidence of the government's current and historical commitment and policies for availability and convertibility of foreign currency. 4. Status and strategy for obtaining government undertakings to support any government parties involved in the project, to the extent that such undertakings are needed to provide adequate credit support for such entities.
ANNEXTURE
Lucknow:
2nd September The Uttar Pradesh Power Corporation Limited (UPPCL) signed a Memorandum of Understanding with Bajaj Hindustan Limited on Thursday to set up a 1,980-MW thermal power project in Lalitpur district of Bundelkhand region. The MoU was signed between UPPCL Chairman and Managing Director Navneet Sehgal and Bajaj Joint Managing Director Kushagra Bajaj in the presence of Energy Minister Ramveer Upadhyaya and Chief Secretary Atul Gupta. The proposed power project will be built on 1,500 acres at Mirchawar village, some 60 km from the Rajghat dam in Lalitpur. The state will get 90 per cent of the electricity generated by the plant. “Uttar Pradesh will start getting power generated by this plant from the year 2014,” Sehgal told mediapersons. The MoU is just a part of the state’s government’s commitment to increase the power generation in the state, he added. The state government had earlier decided to increase power generation in the state to 25,000 MW.
Infrastructure India Invests In Maheshwar Power Plant by Irfan Khan | September 07,2011 - 03:43 PM Topics : Private Industries : Energy / Utilities Equity
Infrastructure India Plc has invested Rs.122 Cr into Shree Maheshwar Hydel Corporation Limited. This is IIP's second investment in SMHCL, it made it's first investment in the project in 2008. It now holds 17.7% in SMHPCL. SMHPCL-promoted by Entegra Limited, is constructing a 400MW hydropower plant on the banks of Narmada river in MP. IIP has also entered into a return guarantee agreement with SMHPCL, which guarantees a 17% IRR for IIP. If the guaranteed IRR is not achieved on the Group's exit, certain shares in SMHPCL will be transferred to the Group.
GVK to acquire Siemens'14% stake in Bangalore international airport BS Reporter / Bangalore August 23, 2011, 0:30 IST Hyderabad-based GVK Power & Infrastructure is all set to become the single largest shareholder of Bangalore International Airport. The company today said it was paying Rs 114 for each equity share to Siemens Project Ventures to buy the latter’s 14 per cent stake in Bangalore International Airport Ltd (BIAL). The company, which also runs Mumbai International Airport, will pay close to Rs 614 crore, valuing the Bangalore project at almost Rs 4,440 crore. If this deal sails through, GVK Power, through its stepdown subsidiary, Bangalore Airport & Infrastructure Developers Private Ltd, will have a 43 per cent stake in BIAL, while Siemens will have 26 per cent, Zurich Airport five per cent, and the remaining 26 per cent will be held
equally by the Karnataka government and the Airports Authority of India
. GVK Power had been Price negotiating with Siemens for the past six months to buy out its 14 per cent stake and there had been serious differences on the valuations of the stake. According to industry analysts, GVK had offered Rs 60 a share but Siemens was looking at a higher price. “Changi Airport had offered Rs 114 per share and as part of the Right of First Refusal clause in the agreement, we matched that bid,” a senior GVK Power official told Business Standard. BS | NS E E Including the fresh deal to buy a part of Siemens’ stake, GVK would have paid almost Rs 1,800 crore to acquire a 43 per cent stake in the project. The said acquisition would be completed after obtaining the requisite approvals, if any. GVK Power, during November 2009, first bought into BIAL by picking up a 12 per cent stake from Zurich International Airport for Rs 484 crore. A month later, it
bought out the 17 per cent stake held by L&T Infrastructure Development Project for Rs 686 crore, pricing the acquisition at Rs 105 a share. BIAL, one the latest greenfield airport projects in the country, started operating in May 2008 and was built at a cost of Rs 2,470 crore. During mid-2011, GVK had announced that it was expanding its passenger terminal building which would take the capacity to handle 17 million passengers from the current 11 million, with the flexibility to expand it to 20 million.
Essar Power to terminate 800 mw PPA with Gujarat Mitul Thakkar, ET Bureau Aug 25, 2011, 10.35am IST AHMEDABAD: Gujarat's aggressive plans in power sector is facing troubles yet again. Essar Power Limited that agreed to supply 800 mw of power for next 25 years at Rs 2.80 per unit wants to terminate its agreement with the state utility Gujarat Urja Vikas Nigam Limited (GUVNL). The power purchase agreement (PPA) was signed in May 2010 and Essar Power issued one week notice for terminating PPA to GUVNL on August 14.
Essar Power statement read, "This (PPA termination) decision follows the failure by GUVNL to satisfy certain conditions under the PPA within the required timescale." However, industry sources reveal that increasing imported coal prices have made many power projects unviable. Essar Power is commissioning 1320 mw of imported coal based project at Salaya in Saurashtra region of Gujarat.
Earlier, Adani Power terminated its PPA for 1000 mw with GUVNL sighting non-allocation of coal mine by the government of Gujarat as a reason. GUVNL challenged Adani Power before the regulator and the matter is pending before the appellate.
Meanwhile, Essar Power stated that the company remains committed to the Salaya power project and will be reviewing its options with regard to power sales. Proposed project is currently scheduled to commission in Q1 2014. It may be mentioned here that Essar Group cancelled its plans to commission special economic zone in Gujarat last year.
Gujarat's one of the largest investors Essar Group is the oldest independent power producer in Gujarat with 500 MW of PPA. It has also signed one more PPA for 1000 mw with GUVNL and the project is expected to be commissioned anytime soon.
The latest development has created concerns among the state machinery, which has promptly approached the Gujarat Electricity Regulatory Commission to complete the formalities within a weeklong notice issued by Essar Power.
2 SEP, 2011, 09.30PM IST, PTI
Work on India's longest road tunnel starts in Udhampur
CHENANI (J&K): Work on India's longest road tunnel today started with engineers blasting a portion of a hill to clear way for construction of the 9-km long Chenani- Nashri Tunnel in Jammu and Kashmir's Udhampur district. Australian company Leighton Welston, renowned for tunnelling technology, began the project by triggering the blast this afternoon. "We have started the work today on this prestigious project. The twin tunnels which will come on Jammu-Srinagar national highway is one of the longest road tunnel in Asia and also in India," Managing Director of Leighton Welston, Russell Waug told reporters at the project site here. The twin tunnels will come up in a period of next five years at a cost of Rs 2,600 crore, he said, adding that it will also reduce the length of the highway as well as the travel time between Srinagar and Jammu. The two-lane main tunnel will have a diameter of 13.3 m, while a parallel escape route shall have a diameter of 5 m. Engineers will use the NATM technique of sequential excavation and support for executing the project, he
said. The completion of the first section of the tunnel comprising of all the portal sections represents the key milestones for the project, he said. A team of over 800 staff and 200 strong work force, armed with sophisticated drilling machines, will daily bore around 5 m of the main tunnel and 8 m of the escape route, he said. In reply to a question about the challenges of the project, Waug said that Jammu and Kashmir has young Himalayas which keeps shifting thereby posing great challenges for tunnel construction. He said that the tunnel would have a life span of more than 100 years and is expected to be completed before the expected deadline. The construction team will continue to tunnel through the mountain to construct an all weather road connecting Chenani with Nashri, slashing 30-km of the journey and reducing the time travel by one hour. "We are pleased to see this nationally important project underway. It is not only a landmark project in the history of India's transportation network but will bring increase safety and employment to local community," the MD said. "Our focus is to complete the project on schedule and to be an integral part of the Jammu's progress and development," he said.
doc_428241921.doc
INTRODUCTION
“Project financing is a specialized form of financing that may offer some cost advantages when very large amounts of capital are involved,” Project finance can be defined as: financing of an industrial (or infrastructure) project with myriad capital needs, usually based on non-recourse or limited recourse structures, where project debt and equity (and potentially leases) used to finance the project are paid back from the cash flow generated by the project. The term "project finance" is now being used in almost every language in every part of the world. It is the solution to infrastructure, public and private venture capital needs. It has been successfully used in the past to raise trillions of dollars of capital and promises to continue to be one of the major financing techniques for capital projects in both developed and developing countries.
PROJECT FINANCE 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. Usually, a project financing structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks that provide loans to the operation. The loans are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors, a decision in part supported by financial modeling. The financing is typically secured by all of the project assets, including the revenueproducing contracts. Project lenders are given a lien on all of these assets, and are able to assume control of a project if the project company has difficulties complying with the loan terms.
Chapter 1.
1.1 : Project Finance as a Tool for Growth
Whether expanding manufacturing facilities, implementing new processing capabilities, or leveraging existing assets in new markets, innovative financing is often at the core of long-term projects to transform a company’s operations. Akin to the underlying corporate transformation, the challenge with innovative financial structures such as project finance is that the investment is made upfront while the anticipated benefits of the initiative are realized years later. Experts from GE Commercial Finance and the University of Pennsylvania’s Wharton School of Business note the importance of identifying a lender that can thoroughly understand the underlying changes being implemented by the borrower, and get comfortable with the future cash flows arising from the project.
with the project's assets, rights and interests held as collateral. In other words, it’s an incredibly flexible and comprehensive financing solution that demands a long-term lending approach not typical in today’s marketplace.
1.2 : Sources of Finance A company would choose from among various sources of finance depending on the amount of capital required and the term for which it is needed. When looking at the source of finance, it can usually be divided into three categories, namely traditional sources, ownership capital and non-ownership capital. Traditional Sources of Finance Internal resources have traditionally been the chief source of finance for a company. Internal resources could be a company¶s assets, personal savings and profits that have not been reinvested or distributed among shareholders. Working capital is a short term source of finance and is the money used for a company¶s day-to-day activities, including salaries, rent, payments for raw materials and electricity bills. Internal Sources Traditionally, the major sources of finance for a limited company were internal sources: Personal savings: Quite simply, personal savings are amounts of money that a business person, partner or shareholder has at their disposal to do with as they wish. If that person uses their savings to invest in their own or another business, then the source of finance comes under the heading of personal savings. Although we would generally discuss personal savings as a source of finance for small businesses, there are many examples where business people have used substantial sums of their own money to help to finance their businesses. A good and very public example here is Jamie Oliver, the television chef. Jamie financed his new restaurant, 'Fifteen', using fifteen raw recruits to the catering trade and a large amount (£500,000) of his own cash.
Retained Profit: This is often a very difficult idea to understand but, in reality, it is very simple. When a business makes a profit and it does not spend it, it keeps it - and accountants call profits that are kept and not spent retained profits. That's all.
The retained profit is then available to use within the business to help with buying new machinery, vehicles, and computers and so on or developing the business in any other way. Retained profits are also kept if the owners think that they may have difficulties in the future so they save them for a rainy day! Working Capital This is the short-term capital or finance that a business keeps. Working capital is the money used to pay for the everyday trading activities carried out by the business - stationery needs, staff salaries and wages, rent, energy bills, payments for supplies and so on. Working capital is defined as: Working capital = current assets - current liabilities Where: Current assets are short term sources of finance such as stocks, debtors and cash - the amount of cash and cash equivalents - the business has at any one time. Cash is cash in hand and deposits payable on demand (e.g. current accounts). Cash equivalents are short term and highly liquid investments which are easily and immediately convertible into cash. Current liabilities: They are short term requirements for cash including trade creditors, expense creditors, tax owing, dividends owing - the amount of money the business owes to other people/groups/businesses at any one time that needs to be repaid within the next month or so. Sale of Assets: Business balance sheets usually have several fixed assets on them. A fixed asset is anything that is not used up in the
production of the good or service concerned - land, buildings, fixtures and fittings, machinery, vehicles and so on. At times, one or more of these fixed assets may be surplus to requirements and can be sold. Alternatively, a business may desperately need to find some cash so it decides to stop offering certain products or services and because of that can sell some of its fixed assets. Hence, by selling fixed assets, business can use them as a source of finance. Selling its fixed assets, therefore, has an effect on the potential capacity of the business - the amount it can produce.
External Sources: 1.3 : Sources of Finance: Ownership Capital Ownership capital is the capital owned by the shareholders of a company. A company can raise substantial funds through an IPO (initial public offering). These funds are usually used for large expenses, such as new product development, expansion into a new market and setting up a new plant. The various types of shares are: Ordinary shares: These are also known as equity shares and give the owner the right to share the company¶s profits and vote at the firm¶s general meetings. Preference shares: The owners of these shares may be entitled to a fixed dividend, but usually do not have the right to vote. Companies that are already listed on a stock exchange can opt for a rights issue, which seeks additional investment from existing shareholders. They could also opt for deferred ordinary shares, wherein the issuing company is not required to pay dividends until a specified date or before the profits reach a certain level Unquoted companies (those not listed on stock exchanges) can also issue and trade their shares in over-the-counter (OTC) markets. 1.4 : Sources of Finance: Non-Ownership Capital Non-ownership capital includes funds raised from lenders, such as banks and creditors. Companies typically borrow a fixed amount from a bank, at a predetermined interest rate and with a fixed repayment schedule. Certain bank accounts offer overdraft facilities. This is used by companies to meet their short-term fund requirements, as they usually come at a very high interest rate. Factoring enables a company to raise funds using its outstanding invoices. The company typically receives about 85% of the value of the invoice from the factor. This method is more appropriate for overcoming short-term cash-flow issues.
Hire purchase allows a company to use an asset without immediately paying the complete purchasing price. Trade credit enables a company to obtain products and services from another firm and pay the bill later. 1.5: Sources of Finance: Venture Capital Firms in the early stages of development can opt for venture capital. This option gives the financing company some ownership as well as influence over the direction of the enterprise. 1.6: Sources of Finance: Duration Depending on the date of maturity, sources of finance can be clubbed into the following: Long-term sources of finance: Long-term financing can be raised from the following sources: Share capital or equity share. Preference shares. Retained earnings. Debentures/Bonds of different types. Loans from financial institutions. Loan from state financial corporation. Loans from commercial banks. Venture capital funding. Asset securitization. International. Medium-term sources of finance: Medium-term financing can be raised from the following sources: ? ?
?
Preference shares Debentures/bonds Public deposits/fixed deposits for duration of three Commercial banks Financial institutions
years ? ?
?
State financial corporations
? ?
?
?
Lease financing / hire purchase financing External commercial borrowings Euro-issues Foreign currency bonds
Short term sources of finance: Short-term financing can be raised from the following sources: Trade credit ? Commercial banks Fixed deposits for a period of 1 year or less ? Advances received from customers ? Various short-term provisions ?
NPV Example Let us examine finding Net Present Value or NPV with an example investment proposal. Let us say we were offered a series of cash inflows at the end of each of the next four years as $5000, $4000, $3000, and $1000. And the initial cash outlay for this proposal is $10,000 and weighted average cost of capital or WACC is 12%. NPV Calculation at 12% PVIF 12% 0.893 0.797 0.712 0.636 NPV $425 @ Present Value $4,465 $3,188 $2,136 $636 = $10,425-10,000
Year 1 2 3 4
Net Cash Flows 5000 4000 3000 1000
NPV Calculation at 15% PVIF 15% 0.870 0.756 0.658 0.572 @ Present Value $4,350 $3,024 $1,974 $572
Year 1 2 3 4
Net Cash Flows 5000 4000 3000 1000
NPV =-$80 $9,920-$10,000 NPV Acceptance criteria We usually accept a project if it has a positive NPV and one that is highest amongst the projects we are evaluating. This example project results in a NPV of $425 at the weighted average cost of capital of 12%, thus this is the amount in present value terms that we would gain if we were to invest in it. Yet if this company had a cost of capital of 15%, at this rate the project would yield no gains and we would discard the idea of putting our money in it.
IRR Example
Let us illustrate finding Internal Rate of return with an example investment proposal. Let us say you were offered a series of cash inflows at the end of each of the next five years as in amounts of $40,000. Say the initial cash outlay for this proposal is $100,000.
At first we find NPV at two different interest rates, at the lower rate the NPV will be positive and the upper rate the NPV will be negative. Present ValuePresent Value Year Cash Flow @ 26% @ 31% 0 1 2 3 4 5 -100000 40000 40000 40000 40000 40000 NPV -100000 31746.03 25195.26 19996.24 15870.03 12595.26 5402.82 -100000 30534.35 23308.66 17792.87 13582.35 10368.2 -4413.57
Linear Interpolation Since at 26% the NPV is 5402.82 and at 31% the NPV is -4413.57, thus the actual IRR lies somewhere between 26% and 31% at which the NPV is zero. We will use linear interpolation as shown below to find the actual IRR value. iL = 26% iU = 31% npvL = 5402.82 npvU = -4413.57 irr = iL + [(iU-iL)(npvL)] / [npvL-npvU] irr = 0.26 + [(0.31-0.26)(5402.82)] / [5402.82--4413.57] irr = 0.26 + [(0.05)(5402.82)] / [9816.39] irr = 0.26 + 270.141 / 9816.39 irr = 0.26 + 0.0275 irr = 0.2875 irr = 28.75% Thus we have approximated that the actual IRR value is in close proximity of 28.75%, however the actual IRR may just be slightly different from 28.75%. Using an IRR
calculator we will find that the actual IRR to be equal to 28.649282902479%.
Chapter 2. Contracts and Agreements Contractual Framework
The typical project finance documentation can be reconduct to four main types
? ? ? ?
Shareholder/sponsor documents Project documents Finance documents Other project documents
2.1 Engineering, Procurement Construction Contract - (EPC Contract)
and
The most common project finance construction contract is the EPC Contract. An EPC contract generally provides for the obligation of the contractor to build and deliver the project facilities on a turnkey basis, i.e. at a certain pre-determined fixed price, by a certain date, in accordance with certain specifications, and with certain performance warranties. EPC contract is quite complicated in terms of legal issue therefore the project company the EPC contractor shall have enough experiences and knowledge about the nature of project in order to avoid their faults and minimize the risks during the contract execution. Other alternative forms of construction contract are project management approach and alliance contracting. Basic contents of an EPC contract are:
? ? ? ? ? ?
Description of the project Price Payment Completion date Completion guarantee and Liquidated Damages Performance guarantee and LDs Cap under LDs
(LDs):
? ?
2.2 Operation and Maintenance Agreement (O&M Agreement)
An agreement between the project company and the operator. The project company delegates the operation, maintenance and often performance management of the project to a reputable operator with expertise in the industry under the terms of the Operations and Maintenance (O&M) agreement. The
operator could be one of the sponsors of the project company or third party operator. In other cases the project company may carry out by itself the operation and maintenance of the project and may eventually arrange for the technical assistance of an experienced company under a technical assistance agreement. Basic contents of a O&M contracts are:
? ? ? ? ? ?
Definition of the service Operator responsibility Provision regarding the services rendered Liquidated damages Fee provisions
2.3 Concession Deed
Agreement between the project company and a public-sector entity (the contracting authority). The concession agreement concedes the use of a government asset (such as a plot of land or river crossing) to the Project Company for a specified period of time. A concession deed would be found in most projects which involve Government such as in infrastructure projects. The concession agreement may be signed by a national / regional government, a municipality, or a special purpose entity set up by the state to grant the concession. Examples of concession agreements include contracts for the following: A toll-road or tunnel for which the concession agreement giving a right to collect tolls / fares from public or
?
where payments are made by the contracting authority based on usage by the public. ? A transportation system (e.g. a railway / metro) for which the public pays fares to a private company) ? Utility projects where payments are made by a municipality or by end-users. ? Ports and airports where payments are usually made by airlines or shipping companies. ? Other public sector projects such as schools, hospitals, government buildings, where payments are made by the contracting authority.
2.4 Shareholders Agreement)
Agreement
-
(SHA
The agreement between the project sponsors to form a special purpose company (“SPC”) in relation to the project development. This is the most basic of structure held by the sponsors in project finance transaction. This is an agreement between the sponsors and deals with:
? ? ? ? ? ? ?
Injection of share capital Voting requirements Resolution of disputes Dividend policy Management of the SPV Disposal and pre-emption rights
2.5 Off-Take Agreement
An agreement between the project company and the offtaker (the party who is buying the product / service the project produces / delivers). In a project financing the revenue is often contracted (rather to the sold on a merchant basis). The off-take
agreement governs mechanism of price and volume which make up revenue. The intention of this agreement is to provide the project company with stable and sufficient revenue to pay its project debt obligation, cover the operating costs and provide certain required return to the sponsors. The main off-take agreements are: Take-or-pay contract: under this contract the off-taker – on an agreed price basis – is obligated to pay for product on a regular basis whether or not the off-taker actually takes the product. ? Power purchase agreement: commonly used in power projects in emerging markets. The purchasing entity is usually a government entity. ? Take-and-pay contract: the off-taker only pays for the product taken on an agreed price basis. ? Long-term sales contract: the off-taker agrees to take agreed-upon quantities of the product from the project. The price is however paid based on market prices at the time of purchase or an agreed market index, subject to certain floor (minimum) price. Commonly used in mining, oil and gas, and petrochemical projects where the project company wants to ensure that its product can easily be sold in international markets, but off-takers not willing to take the price risk ? Hedging contract: found in the commodity markets such as in an oilfield project. ? Contract for Differences: the project company sells its product into the market and not to the off-taker or hedging counterpart. If however the market price is below an agreed level, the offtaker pays the difference to the project company, and vice versa if it is above an agreed level. ? Throughput contract: a user of the pipeline agrees to use it to carry not less than a certain volume of product and to pay a minimum price for this.
?
2.6
Supply Agreement
An agreement between the project company and the supplier of the required feedstock / fuel. If a project company has an off-take contract, the supply contract is usually structured to match the general terms of the off-take contract such as the length of the contract, force majeure provisions, etc. The volume of input supplies required by the project company is usually linked to the project’s output. Example under a PPA the power purchaser who does not require power can ask the project to shut down the power plant and continue to pay the capacity payment – in such case the project company needs to ensure its obligations to buy fuel can be reduced in parallel. The main supply agreemnts are: The degree of commitment by the supplier can vary. Fixed or variable supply: the supplier agrees to provide a fixed quantity of supplies to the project company on an agreed schedule, or a variable
?
supply between an agreed maximum and minimum. The supply may be under a take-or-pay or take-and-pay. Output / reserve dedication: the supplier dedicates the entire output from a specific source, e.g. a coal mine, its own plant. However the supplier may have no obligation to produce any output unless agreed otherwise. The supply can also be under a take-or-pay or take-and-pay ? Interruptible supply: some supplies such as gas are offered on a lower cost interruptible basis – often via a pipeline also supplying other users. ? Tolling contract: the supplier has no commitment to supply at all, and may choose not to do so if the supplies can be used more profitably elsewhere. However the availability charge must be paid to the project company.
?
2.7
Loan Agreement
An agreement between the project company (borrower) and the lenders. Loan agreement governs relationship between the lenders and the borrowers. It determines the basis on which the loan can be drawn and repaid, and contains the usual provisions found in a corporate loan agreement. It also contains the additional clauses to cover specific requirements of the project and project documents. Basic terms of a loan agreement include the following provisions. General conditions precedent ? Conditions precedent to each drawdown ? Availability period, during which the borrower is obliged to pay a commitment fee ? Drawdown mechanics ? An interest clause, charged at a margin over base rate ? A repayment clause ? Financial covenants - calculation of key project metrics / ratios and covenants ? Dividend restrictions ? Representations and warranties ? The illegality clause
?
2.8
Intercreditor Agreement
Intercreditor agreement is agreed between the main creditors of the project company. This is the agreement between the main creditors in connection with the project financing. The main creditors often enter into the Intercreditor Agreement to
govern the common terms and relationships among the lenders in respect of the borrower’s obligations. Intercreditor agreement will specify provisions including the following. Common terms ? Order of drawdown ? Cashflow waterfall ? Limitation on ability of creditors to vary their rights ? Voting rights ? Notification of defaults ? Order of applying the proceeds of debt recovery ? If there is a mezzanine funding component, the terms of subordination and other principles to apply as between the senior debt providers and the mezzanine debt providers.
?
2.9
Tripartite Deed
The financiers will usually require that a direct relationship between itself and the counterparty to that contract be established which is achieved through the use of a tripartite deed (sometimes called a consent deed, direct agreement or side agreement). The tripartite deed sets out the circumstances in which the financiers may “step in” under the project contracts in order to remedy any default. A tripartite deed would normally contain the following provision. Acknowledgement of security: confirmation by the contractor or relevant party that it consents to the financier taking security over the relevant
?
project contracts. Notice of default: obligation on the relevant project counterparty to notify the lenders directly of defaults by the project company under the
?
relevant contract. Step-in rights and extended periods: to ensure that the lenders will have sufficient notice /period to enable it to remedy any breach by the borrower. ? Receivership: acknowledgement by the relevant party regarding the appointment of a receiver by the lenders under the relevant contract and that the receiver may continue the borrower’s performance under the contract ? Sale of asset: terms and conditions upon which the lenders may transfer the borrower’s entitlements under the relevant contract.
?
Tripartite deed can give rise to difficult issues for negotiation but is a critical document in project financing.
2.10
Common Terms Agreement
Terms Sheet
Agreement between the borrower and the lender for the cost, provision and repayment of debt. The term sheet outlines the key terms and conditions of the financing. The term sheet provides the basis for the lead arrangers to complete the credit approval to underwrite the debt, usually by signing the agreed term sheet. Generally the final term sheet is attached to the mandate letter and is used by the lead arrangers to syndicate the debt. The commitment by the lenders is usually subject to further detailed due diligence and negotiation of project agreements and finance documents including the security documents. The next phase in the financing is the negotiation of finance documents and the term sheet will eventually be replaced by the definitive finance documents when the project reaches financial close.
Chapter 3 : Banks and Institutions related to Project Finance
Financial Institutions in Project Financing Financial sector plays an indispensable role in the overall development of a country. The most important constituent of this sector is the financial institutions, which act as a conduit for the transfer of resources from net savers to net borrowers, that is, from those who spend less than their earnings to those who spend more than their earnings. The financial institutions have traditionally been the major source of long-term funds for the economy. These institutions provide a variety of financial products and services to fulfil the varied needs of the commercial sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to the industries established in backward areas. Thus, they have helped in reducing regional disparities by inducing widespread industrial development. The Government of India, in order to provide adequate supply of credit to various sectors of the economy, has evolved a well developed structure of financial institutions in the country. These financial institutions can be broadly categorized into All India institutions and State level institutions, depending upon the geographical coverage of their operations. At the national level, they provide long and medium term loans at reasonable rates of interest. They subscribe to the debenture issues of companies, underwrite public issue of shares, guarantee loans and deferred payments, etc. Though, the State level institutions are mainly concerned with the development of medium and small scale enterprises, but they provide the same type of financial assistance as the national level institutions.
National Level Institutions A wide variety of financial institutions have been set up at the national level. They cater to the diverse financial requirements of the entrepreneurs. They include all India development banks like IDBI, SIDBI, IFCI Ltd, IIBI; specialized financial institutions like IVCF, ICICI Venture Funds Ltd, TFCI; investment institutions like LIC, GIC, UTI; etc.
3.1
All-India Development Banks (AIDBs):-
Includes those development banks which provide institutional credit to not only large and medium enterprises but also help in promotion and development of small scale industrial units. INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
IDBI is the apex institution in the area of long term industrial finance. It was established under the IDBI Act 1964 as a wholly owned subsidiary of RBI and started functioning on July 01, 1964. Under Public Financial Institutions Laws (Amendment) Act 1976, it was delinked from RBI. IDBI is engaged in direct financing of the industrial activities as well as in re-finance and rediscounting of bills against finance made available by commercial banks under their various schemes. The objectives of this institution are to create a principal institution for long term finance, to coordinate the institutions working in this field for planned development of industrial sector, to provide technical and administrative support to the industries and to conduct research and development activities for the benefit of industrial sector.
It raises funds by way of market borrowing by way of bonds and deposits, borrowing from Govt. and RBI, borrowing abroad in foreign currency and lines of credit. Its functions include: -direct loans (rupee as well as foreign currency) to industrial undertakings as defined in the Act to finance their new projects, expansion, modernization etc. -soft loans for various purposes including modernization and under equipment finance scheme -underwriting and direct subscription to shares/debentures of the industrial companies. -sanction of foreign currency loans for import of equipment or capital goods. -short term working capital loans to the corporate for meeting their working capital requirements. -refinance to banks and other institutions against loans granted by them. Of late, with the reforms in the financial sector, IDBI has taken steps to re-shape its role from a development finance institution to a commercial institution. It has floated its own bank IDBI Bank as also a Mutual Fund.
Some more examples of national level institutions as follows: 3.2 Industrial Finance Corporation of India Ltd (IFCI Ltd) :- IFCI offers a wide range of products to the target customer segments to satisfy their specific financial needs. The product range includes following credit products:
1. Short-term Loans (upto two years) for different short term requirements including bridge loan, Corporate Loan etc. 2. Medium-term Loans (more than two years to eight years) for business expansion, technology up-gradation, R&D expenditure, implementing early retirement scheme, Corporate Loan, supplementing working capital and repaying high cost debt 3. Long-term Loans (more than eight years to upto 15 years) - Project Finance for new industrial/infrastructure projects Takeout Finance, acquisition financing (as per extant RBI guidelines / Board approved policy), Corporate Loan, Securitisation of debt 4. Structured Products: acquisition finance, pre-IPO investment, IPO finance, promoter funding, etc. 5. Lease Financing 6. Takeover of accounts from Banks / Financial Institutions / NBFCs 7. Financing promoters contribution (private equity participation)/subscription to convertible warrants 8. Purchase of Standard Assets and NPAs
3.3 SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI) SIDBI was established under SIDBI Act 1988 and commenced its operations w.e.f April 02, 1990 with head quarters in Lucknow and branches all over the country, as a subsidiary of IDBI. It took over the IDBI business relating to small scale industries including National Equity Scheme
and Small Inds Development fund. The objective of establishment of SIDBI, in particular, is to strengthen and broad-base the existing institutional arrangement to meet the requirement of SSI and tiny industries. Its functions include: -administration of SIDF and NEF for development and equity support to small and tiny industry. -Providing working capital through single window scheme -providing refinance finance institutions. support to banks/development
-undertaking direct financing of SSI units. -coordination of functions of various institutions engaged in finance to SSI and tiny units.
INDUSTRIAL INVESTMENT BANK OF INDIA LTD. (IIBI LTD.) IIBI offers a variety of financial products such as project finance, short duration non-project asset- backed financing and working capital /other short-term loans to companies.
3.4 IRBI)
INDUSTRIAL INVESTMENT BANK OF INDIA (formerly
IIBI was initially set up as Industrial Reconstruction Corporation Limited during 1971 when it was renamed Industrial Reconstruction bank of India w.e.f Mar 20, 1985 under IRBI Act 1984 to take over the function of IRC. During 1997 the bank was converted to a joint stock company by naming it Industrial Investment Bank of India. Its earlier functions were to provide finance for industrial
rehabilitation and revival of sick industrial units by way of rationalization, expansion, diversification and modernisation and also to co-ordinate the work of other institutions for this purpose. agricultural and rural requirement.
3.5 INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LTD. IDFC Ltd, incorporated in 1997, was conceived as specialized institution to facilitate the flow of private finance to commercially viable infrastructure projects through innovative products and processes. Energy, telecommunications, transportation, urban infrastructure and food and agri-business Infrastructure constitute the current areas of operation of IDFC.
o
3.6
Specialized Financial Institutions (SFIs):
They are the institutions which have been set up to serve the increasing financial needs of commerce and trade in the area of venture capital, credit rating and leasing, etc
o
3.7
IFCI Venture Capital Funds Ltd (IVCF):-
They are formerly known as Risk Capital & Technology Finance Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was promoted with the objective of broadening entrepreneurial base in the country by facilitating funding to ventures involving innovative product/process/technology. Initially, it started providing financial assistance by way of soft loans to promoters under its 'Risk Capital Scheme. Since 1988, it also started providing finance under 'Technology Finance and Development Scheme' to projects for commercialization of indigenous technology for new processes,
products, market or services. Over the years, it has acquired great deal of experience in investing in technology-oriented projects.
o
3.8
ICICI Venture Funds Ltd: -
They are formerly known as Technology Development & Information Company of India Limited (TDICI), was founded in 1988 as a joint venture with the Unit Trust of India. Subsequently, it became a fully owned subsidiary of ICICI. It is a technology venture finance company, set up to sanction project finance for new technology ventures. The industrial units assisted by it are in the fields of computer, chemicals/polymers, drugs, diagnostics and vaccines, biotechnology, environmental engineering, etc.
Investment Institutions: They are the most popular form of financial intermediaries, which particularly catering to the needs of small savers and investors. They deploy their assets largely in marketable securities.
o
3.9
Life Insurance Corporation of India (LIC):-
It was established in 1956 as a wholly-owned corporation of the Government of India. It was formed by the Life Insurance Corporation Act, 1956, with the objective of spreading life insurance much more widely and in particular to the rural area. It also extends assistance for development of infrastructure facilities like housing, rural electrification, water supply, sewerage, etc. In addition, it extends resource support to other financial institutions through subscription to their shares and bonds, etc. The Life Insurance
Corporation of India also transacts business abroad and has offices in Fiji, Mauritius and United Kingdom. Besides the branch operations, the Corporation has established overseas subsidiaries jointly with reputed local partners in Bahrain, Nepal and Sri Lanka. Some more examples of Specialized Financial Institutions (SFIs) as follows:
o
o
Unit Trust of India (UTI) General Insurance Corporation of India (GIC)
State Level Institutions Several financial institutions have been set up at the State level which supplements the financial assistance provided by the all India institutions. They act as a catalyst for promotion of investment and industrial development in the respective States. They broadly consist of 'State financial corporations' and 'State industrial development corporations'.
•
3.10
State Financial Corporations (SFCs):-
They are the State-level financial institutions which play a crucial role in the development of small and medium enterprises in the concerned States. They provide financial assistance in the form of term loans, direct subscription to equity/debentures, guarantees, discounting of bills of exchange and seed/ special capital, etc. SFCs have been set up with the objective of catalyzing higher investment, generating greater employment and widening the ownership base of industries. They have also started providing assistance to newer types of business activities like floriculture, tissue culture, poultry farming, commercial complexes and services related to engineering, marketing, etc. There are 18 State Financial Corporations (SFCs) in the country:
o
Andhra
Pradesh
State
Financial
Corporation
(APSFC)
o o o
Himachal Pradesh Financial Corporation (HPFC) Madhya Pradesh Financial Corporation (MPFC) North Eastern Development Finance Corporation Rajasthan Finance Corporation (RFC) Tamil Nadu Industrial Investment Corporation Uttar Pradesh Financial Corporation (UPFC) Delhi Financial Corporation (DFC) Gujarat State Financial Corporation (GSFC)
(NEDFI)
o o
Limited
o o
o
o
The Economic Development Corporation of Goa Haryana Financial Corporation ( HFC ) Jammu & Kashmir State Financial Corporation Karnataka State Financial Corporation (KSFC) Kerala Financial Corporation ( KFC ) Maharashtra State Financial Corporation (MSFC ) Orissa State Financial Corporation (OSFC) Punjab Financial Corporation (PFC) West Bengal Financial Corporation (WBFC)
( EDC)
o o
( JKSFC)
o o o o o
o
3.11 State Corporations (SIDCs):•
Industrial
Development
They have been established under the Companies Act, 1956, as wholly-owned undertakings of State Governments. They have been set up with the aim of promoting industrial development in the respective States and providing financial assistance to small entrepreneurs. They are also involved in setting up of medium and large industrial projects in the joint sector/assisted sector in collaboration with private entrepreneurs or wholly-owned subsidiaries. They are undertaking a variety of promotional activities such as preparation of feasibility reports; conducting industrial potential surveys; entrepreneurship training and development programmes; as well as developing industrial areas/estates. The State Industrial Development Corporations in the country are: Assam Industrial Development Corporation Ltd (AIDC) Andaman & Nicobar Islands Integrated Development Corporation Ltd (ANIIDCO) o Andhra Pradesh Industrial Development Corporation Ltd (APIDC) o Bihar State Credit and Investment Corporation Ltd. (BICICO)
o o
Chhattisgarh State Industrial Development Corporation Limited (CSIDC) o Goa Industrial Development Corporation o Gujarat Industrial Development Corporation (GIDC)
o
Haryana State Industrial & Infrastructure Development Corporation Ltd. (HSIIDC) o Himachal Pradesh (HPSIDC) State Industrial Development Corporation Ltd. o Jammu and Kashmir State Industrial Development Corporation Ltd.
o
Guidelines for funding the projects by various Institutions as follows:IDBI BANK Project Finance: Under the Project Finance scheme IDBI Bank provides finance to the corporate for projects. The Bank provides project finance in both rupee and foreign currencies for Greenfield projects as also for expansion, diversification and modernization. IDBI Bank follows the Global Best Practices in project appraisal and monitoring and has a well-diversified industry portfolio. IDBI Bank has signed a Memorandum of Understanding (MoU) with LIC in December 2006 for undertaking joint and take-out financing of long-gestation projects, including infrastructure projects. Project Finance Scheme: Objective: - To provide long term finance for the establishment of new industrial, infrastructure, Agri-horticulture, fishery and animal husbandry projects as well as expansion, diversification and Modernization of existing ones. Types of Assistance: -Term loan, direct subscription/underwriting of equity and debt instruments, provide financial guarantee and participate in deferred payment guarantee. Eligibility: -Industrial concerns conforming to the definition in Section 2 (c) of the IDBI Act, Infrastructure, Agro-horticulture, Fishery and Animal Husbandry projects. Project Cost: -Minimum assistance: NEDFi ordinarily finances projects with loan component of Rs.25 lakh and above, However smaller projects in innovative fields and in the hill states are also considered.
Maximum assistance: -Normally, NEDFi can consider up to maximum exposure of 10% of paid up capital & reserves. However, it can consider projects requiring higher investment in consortium with other financial institutions and banks. Nature of assistance: -Rupee Term Loan Promoters¶ contribution: -30-40% of the total project cost. However, in the case of consortium financing it will be at par with the norms of All India Financial Institutions. Debt Equity Ratio: -Ordinarily 1.5: 1
Interest Rate: -Based on Prime Lending Rate fixed from time to time. Actual rate within the prevailing rate band depends upon creditworthiness of borrower and risk perception. As on date, the prevailing interest rate is 15% per annum. There is provision for 1% rebate on interest rate for timely repayment on due dates. Up-front fee: -1% of the loan amount sanctioned Security: -First charge on movable and immovable fixed assets. Documentation: 1. Loan Agreement. 2. Deed of hypothecation. 3. Personal guarantee from main promoters, wherever required. 4. Undertaking from the promoters for o Meeting overrun/shortfall in the project cost/means of financing o Non-disposal of shareholdings by the promoters 5. Undertaking from MD for non-receipt of commission, if company is in default to NEDFi. 6. Resolution under Section 293 (1) (a) and 293(1) (d) of the Companys Act.
Ex-Im Bank Ex-Im Bank's Approach to Project Finance: Ex-Im Bank established the limited recourse project finance or "project finance" program as developing nations turned away from sovereign-guaranteed borrowing for large infrastructure projects. The program helps U.S. exporters compete in the development of private infrastructure and in the extraction of natural resources. Program Description The term "project finance" refers to the financing of projects that are dependent on project cash flows for repayment, as defined by the contractual relationships within each project. By their very nature, these types of projects rely on a large number of integrated contractual arrangements for successful completion and operation. The contractual relationships must be balanced with risks distributed to those parties best able to undertake them, and should reflect a fair allocation of risk and reward. All project contracts must fit together seamlessly to allocate risks in a manner which ensures the financial viability and success of the project. Appropriate project finance candidates include Green field projects and significant facility or production expansions. These projects do not rely on the typical export finance security package, which provide lenders recourse to a foreign government, financial institution or an established corporation. While Ex-Im Bank's analytical approach for project finance is different from the traditional export finance approach, many of Ex-Im Bank's requirements remain the same. Ex-Im Bank's project finance program has several financing options which project sponsors can utilize to develop an appropriate financing plan. During construction and operations, political only and comprehensive guarantees are available.
Ex-Im Bank has no dollar limits based on project size, sector or country. While there is no minimum transaction size, the applicant should carefully consider the costs associated with a limited recourse project financing approach. Generally, Ex-Im Bank utilizes financial, legal, and technical advisors for project finance transactions. However, for small project finance transactions, Ex-Im Bank may consider, on a case-by-case basis, not utilizing financial advisors, and relying instead upon internal due diligence as well as the due diligence of an arranging bank (or other major project lender). FLEXIBLE COVERAGE: Where appropriate, Ex-Im Bank offers the maximum support allowed under the rules of the OECD Arrangement, including: • Financing of interest accrued during construction related to the Ex-Im Bank financing. • Allowance of up to 30 percent eligible foreign content in the U.S. components. • Financing of host country local costs of up to 30 percent of the U.S. contract value. The rules outlined by the OECD Arrangement allow Ex-Im Bank to provide flexible loan repayment terms to match a project's revenue stream. Thus, project finance transactions can be structured with tailored repayment profiles, more flexible grace periods, and more flexibility on total repayment terms. Ex-Im Bank implements these flexibilities on a case-by-case basis for qualifying project finance transactions. Generally, extended grace periods or repayment terms must be justified by project cash flows or project considerations specific to certain industry sectors. For example, extended grace periods and backended repayment profiles may be justified for telecommunications projects but are likely not appropriate for power plants. The new rules allow for the following:
• Full flexibility for setting a project's grace period, repayment profile, and maximum repayment term, subject to a maximum average life of 5.25 years; or • The extension of a project's average life up to 7.25 years, subject to constraints for setting a maximum grace period of 2 years and a maximum repayment term of 14 years.
The new flexible terms are subject to the following additional constraints and/or considerations:
• If the project's repayment term extends beyond 12 years, 20 basis points are added to the CIRR Rate for direct loans. • Interest cannot be capitalized post-completion. • The flexible terms are offered in High-Income OECD markets only with additional constraints. • The average life allowed under the new flexible terms will be taken into consideration when meeting the Minimum Premium Benchmark fees required as of April 1, 1999.
Chapter 4. Common risks and methods of risk minimization
Risk minimisation process Financiers are concerned with minimising the dangers of any events which could have a negative impact on the financial performance of the project, in particular, events which could
result in: (1) the project not being completed on time, on budget, or at all; (2) the project not operating at its full capacity; (3) the project failing to generate sufficient revenue to service the debt; or (4) the project prematurely coming to an end. The minimisation of such risks involves a three step process. The first step requires the identification and analysis of all the risks that may bear upon the project. The second step is the allocation of those risks among the parties. The last step involves the creation of mechanisms to manage the risks. If a risk to the financiers cannot be minimised, the financiers will need to build it into the interest rate margin for the loan.
STEP 1 - Risk identification and analysis The project sponsors will usually prepare a feasibility study, e.g. as to the construction and operation of a mine or pipeline. The financiers will carefully review the study and may engage independent expert consultants to supplement it. The matters of particular focus will be whether the costs of the project have been properly assessed and whether the cash-flow streams from the project are properly calculated. Some risks are analysed using financial models to determine the project's cash-flow and hence the ability of the project to meet repayment schedules. Different scenarios will be examined by adjusting economic variables such as inflation, interest rates, exchange rates and prices for the inputs and output of the project. Various classes of risk that may be identified in a project financing will be discussed below. STEP 2 - Risk allocation Once the risks are identified and analysed, they are allocated by the parties through negotiation of the contractual framework. Ideally a risk should be allocated to the party who is the most
appropriate to bear it (i.e. who is in the best position to manage, control and insure against it) and who has the financial capacity to bear it. It has been observed that financiers attempt to allocate uncontrollable risks widely and to ensure that each party has an interest in fixing such risks. Generally, commercial risks are sought to be allocated to the private sector and political risks to the state sector. STEP 3 - Risk management Risks must be also managed in order to minimise the possibility of the risk event occurring and to minimise its consequences if it does occur. Financiers need to ensure that the greater the risks that they bear, the more informed they are and the greater their control over the project. Since they take security over the entire project and must be prepared to step in and take it over if the borrower defaults. This requires the financiers to be involved in and monitor the project closely. Such risk management is facilitated by imposing reporting obligations on the borrower and controls over project accounts. Such measures may lead to tension between the flexibility desired by borrower and risk management mechanisms required by the financier. Types of risks Of course, every project is different and it is not possible to compile an exhaustive list of risks or to rank them in order of priority. What is a major risk for one project may be quite minor for another. In a vacuum, one can just discuss the risks that are common to most projects and possible avenues for minimising them. However, it is helpful to categorise the risks according to the phases of the project within which they may arise: (1) the design and construction phase; (2) the operation phase; or (3) either phase. It is useful to divide the project in this way when looking at risks because the nature and the allocation of risks usually change between the construction phase and the operation phase.
1.
Construction phase risk - Completion risk Completion risk allocation is a vital part of the risk allocation of any project. This phase carries the greatest risk for the financier. Construction carries the danger that the project will not be completed on time, on budget or at all because of technical, labour, and other construction difficulties. Such delays or cost increases may delay loan repayments and cause interest and debt to accumulate. They may also jeopardise contracts for the sale of the project's output and supply contacts for raw materials.
Commonly employed mechanisms for minimising completion risk before lending takes place include: (a) obtaining completion guarantees requiring the sponsors to pay all debts and liquidated damages if completion does not occur by the required date; (b) ensuring that sponsors have a significant financial interest in the success of the project so that they remain committed to it by insisting that sponsors inject equity into the project; (c) requiring the project to be developed under fixed-price, fixed-time turnkey contracts by reputable and financially sound contractors whose performance is secured by performance bonds or guaranteed by third parties; and (d) obtaining independent experts' reports on the design and construction of the project. Completion risk is managed during the loan period by methods such as making precompletion phase drawdowns of further funds conditional on certificates being issued by independent experts to confirm that the construction is progressing as planned. 2. risk Operation phase risk - Resource / reserve
This is the risk that for a mining project, rail project, power station or toll road there are inadequate inputs that can be processed or serviced to produce an adequate return. For example, this is the risk that there are insufficient reserves for a mine, passengers
for a railway, fuel for a power station or vehicles for a toll road. Such resource risks are usually minimised by: (a) experts' reports as to the existence of the inputs (e.g. detailed reservoir and engineering reports which classify and quantify the reserves for a mining project) or estimates of public users of the project based on surveys and other empirical evidence (e.g. the number of passengers who will use a railway); (b) requiring long term supply contracts for inputs to be entered into as protection against shortages or price fluctuations (e.g. fuel supply agreements for a power station); (c) obtaining guarantees that there will be a minimum level of inputs (e.g. from a government that a certain number of vehicles will use a toll road); and (d) "take or pay" off-take contacts which require the purchaser to make minimum payments even if the product cannot be delivered. Operating risk These are general risks that may affect the cash-flow of the project by increasing the operating costs or affecting the project's capacity to continue to generate the quantity and quality of the planned output over the life of the project. Operating risks include, for example, the level of experience and resources of the operator, inefficiencies in operations or shortages in the supply of skilled labour. The usual way for minimising operating risks before lending takes place is to require the project to be operated by a reputable and financially sound operator whose performance is secured by performance bonds. Operating risks are managed during the loan period by requiring the provision of detailed reports on the operations of the project and by controlling cashflows by requiring the proceeds of the sale of product to be paid into a tightly regulated proceeds account to ensure that funds are used for approved operating costs only. Market / off-take risk
Obviously, the loan can only be repaid if the product that is generated can be turned into cash. Market risk is the risk that a buyer cannot be found for the product at a price sufficient to provide adequate cash-flow to service the debt. The best mechanism for minimising market risk before lending takes place is an acceptable forward sales contact entered into with a financially sound purchaser. 3. Risks common operational Participant / credit risk to both construction and phases
These are the risks associated with the sponsors or the borrowers themselves. 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. Of course, credit risk is also important for the sponsors' completion guarantees. To minimise these risks, 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 (e.g. so that they can inject funds into an ailing project to save it). Technical risk This is the risk of technical difficulties in the construction and operation of the project's plant and equipment, including latent defects. Financiers usually minimise this risk by preferring tried and tested technologies to new unproven technologies. Technical risk is also minimised before lending takes place by obtaining experts reports as to the proposed technology. 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.
Currency risk Currency risks include the risks that: (a) a depreciation in loan currencies may increase the costs of construction where significant construction items are sourced offshore; or (b) a depreciation in the revenue currencies may cause a cash-flow problem in the operating phase. Mechanisms for minimising resource include: (a) matching the currencies of the sales contracts with the currencies of supply contracts as far as possible; (b) denominating the loan in the most relevant foreign currency; and (c) requiring suitable foreign currency hedging contracts to be entered into. Regulatory / approvals 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, royalty payments, or rigid requirements as to local supply or distribution. 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. Political risk This is the danger of political or financial instability in the host country caused by events such as insurrections, strikes, suspension of foreign exchange, creeping expropriation and outright nationalisation. It also includes the risk that a government may be able to avoid its contractual obligations through sovereign immunity doctrines. Common mechanisms for minimising political risk include: (a) requiring host country agreements and assurances that project will not be interfered with; (b) obtaining legal opinions as to the applicable laws and the enforceability of contracts with government entities; (c) requiring political risk insurance to be obtained from bodies which provide
such insurance (traditionally government agencies); (d) involving financiers from a number of different countries, national export credit agencies and multilateral lending institutions such as a development bank; and (e) establishing accounts in stable countries for the receipt of sale proceeds from purchasers. Force majeure risk This is the risk of events which render the construction or operation of the project impossible, either temporarily (e.g. minor floods) or permanently (e.g. complete destruction by fire). Mechanisms for minimising such risks include: (a) conducting due diligence as to the possibility of the relevant risks; (b) allocating such risks to other parties as far as possible (e.g. to the builder under the construction contract); and (c) requiring adequate insurances which note the financiers' interests to be put in place
Chapter 5. Project Criteria And Application Process
5.1 APPLICATION PROCESS Business Development: An introductory meeting with a Project Finance Business Development Officer is strongly recommended. The meeting should focus on Ex-Im Bank's policies and procedures and include a thorough explanation of the application process and the requirements for Ex-Im Bank support. Project Finance Letter of Interest: A Project Finance Letter of Interest (LI) is an indication of Ex-Im Bank's willingness to consider financing a given export transaction. To apply, interested parties must complete the Ex-Im Bank LI application and clearly indicate Limited Recourse Project Finance. The non-refundable processing fee for an LI is $100. The applicant should attach an executive summary of the project which identifies the type of project, location of the project, parties to the transaction, status of the project, total project cost, U.S. cost and the anticipated project time frame. The Project Finance LI differs from Ex-Im Bank's traditional LI. The LI application is available on Ex-Im Bank's web page. Competitive Letter of Interest: On a case-by-case basis, Ex-Im Bank is willing to consider providing evidence of support during the early stage of the project development by performing a more in-depth project analysis and issuing a Competitive Letter of Interest (CLI). Each CLI issued will provide an indicative exposure fee range and a list of preliminary issues identified by Ex-Im Bank. Applicants responding to an international invitation to bid for a project, or applicants pursuing projects in difficult markets are eligible to apply. The cost for a CLI analysis is $1000. In addition to the information required for an LI, applicants should submit any other available information such as project agreements, proposed financing plan, risk mitigation proposals, etc. Please refer to the Competitive Letter of Interest Fact Sheet on the web page.
Final Commitment Application Submission: The final commitment application submitted to Ex-Im Bank must include: 1) The standard Ex-Im Bank Preliminary Commitment/Final Commitment Application Form, and 2) Five copies of the materials listed below under "Project Criteria and Application Information Requirements." Preliminary Review: The Project Finance Business Development staff will review the material submitted within five to ten business days from the date that the application is received to determine completeness. Incomplete Applications: If the application is incomplete, it will be returned to the applicant with an explanation of its deficiencies. If the application is not determined to be suitable for limited recourse project financing but could still be considered for another form of Ex-Im Bank financing, it will be forwarded to the appropriate division and the applicant will be notified. Choice of Financial Advisor: For applications proceeding to a Phase I evaluation, a financial advisor will be selected by Ex-Im Bank. Determination of the specific financial advisor will depend on several factors including geographic and sector expertise and availability to meet project deadlines. Evaluation Fee: Before the financial advisor begins his review (Phase I of evaluation), the applicant will be required to pay an evaluation fee and execute a contract with the financial advisor. In addition, the applicant will need to execute an indemnity agreement with the financial advisor. No evaluation by Ex-Im Bank and the financial advisor will commence without payment of the financial advisor evaluation fee, execution of the contract and the indemnity agreement. If Ex-Im Bank agrees to proceed with the
project after completion of the Phase I evaluation, the applicant will be required to pay additional related fees for the Phase II due diligence. The application will be returned to the applicant if the arrangements for the financial advisor are not completed within thirty days. Other Fees: For all projects Ex-Im Bank will require, either in conjunction with other lenders or for its own use, the advice of independent outside legal counsel, independent engineers, and insurance advisors. In addition, there may be other fees associated with conducting proper due diligence. Payment for these and any other fees will be the responsibility of the project sponsors or the applicant.
Preliminary Project Letter (Phase I): Upon satisfactory completion of the phase I evaluation process, the Structured Finance Division will issue a Preliminary Project Letter within 45 days from the date evaluation begins by the financial advisor. The PPL will indicate if Ex-Im Bank is prepared to move forward on a financing offer and the corresponding general terms and conditions based upon the information available at the time of application. Evaluation Post-PPL (Phase II): After issuance of the PPL, Ex-Im Bank will work with the applicant to proceed to a Final Commitment. Please note that Ex-Im Bank does not issue Preliminary Commitments for project finance transactions. Ex-Im Bank will continue to utilize the financial advisor for Phase II of the due diligence process.
Attachments STRUCTURED FINANCE DIVISION 5.2 PROJECT CRITERIA Information Required: I. General Project: • In most cases the project should have long-term contracts from creditworthy entities for the purchase of the project's output and the purchase of the project's major project inputs such as fuel, raw materials, and operations and maintenance. Such contracts should extend beyond the term of the requested Ex-Im Bank financing. In sectors such as telecommunications and petrochemicals if long-term contracts are not available, Ex-Im Bank will evaluate the transactions on a case-by-case basis, looking for economically compelling business rationale. • The project should contain an appropriate allocation of risk to the parties best suited to manage those risks. Sensitivity analysis should result in a sufficient debt service coverage ratio to ensure uninterrupted debt servicing for the term of the debt. • Total project cost should be comparable to projects of similar type and size for a particular market • Product unit pricing and costs should reflect market based pricing. • Devaluation risk needs to be substantially mitigated through revenues denominated in hard currencies, revenue adjustment formulas based on changing currency relationships, or other structural mechanisms. Information Required:
1. Summary of all aspects of the project, as contained in an independently prepared feasibility study and/or a detailed information memorandum, prepared by a qualified party. The study or memorandum should include the project description, location, legal status, ownership, and background and status of key elements of the project structure, such as agreements, licenses, local partner participation and financing. 2. Agreements for key elements of the project. Ex-Im Bank considers key agreements to include all contracts necessary for the project to be built and operate. This includes contracts relating to infrastructure as well as supply and off take agreements. These agreements should be in substantially final form. Ex-Im Bank will not accept summaries or outlines of these agreements. 3. A breakdown of anticipated project costs through commissioning, including interest during construction and working capital requirements, by major cost category and country of origin. This information should also include a breakdown of any "soft costs" such as development costs, development fees, owner's contingencies and other similar items. A breakdown of the proposed coverage for interest during construction and the method of calculation should also be included. 4. A summary of the anticipated project financing plan and security package, including the proposed source, amount, currency and terms of the debt and equity investments; the sources of finance in the event of project cost overruns; and description of escrow accounts. Information on the terms, security requirements, and status of financing commitments of other lenders to the project, if applicable, should be provided. All other sources approached for financing (multinational development banks, other export credit agencies, commercial banks, capital markets and private investors) must be disclosed.
5. Projected annual financial statements covering the period from project development through final maturity of the proposed Ex-Im Bank financing, to include balance sheet, profit and loss, source and application of funds statements, and debt service ratios. Projections should include a sensitivity analysis for not only the expected scenario, but pessimistic and optimistic cases as well. This information should also be provided electronically in Lotus 123 or Excel. The structure of the financial model should be in a format that is user friendly. Ex-Im Bank must be able to review and adjust the assumptions in the model. 6. Assumptions for the financial projections, including but not limited to the basis for sales volume and prices; operating and administrative costs; depreciation, amortization and tax rates; and local government policy on price regulation. 7. Market information to include ten years of historical price and volume data; present and projected capacity of industry; product demand forecast with assumptions; description of competition and projected market share of the project as compared to the shares of the competition; identity and location of customers; and marketing and distribution strategy. 8. A description of the principal risks and benefits of the project to the sponsors, lenders, and host government. 9. A description of the types of insurance coverage to be purchased for both the pre and postcompletion phases of the project. 10. Information on infrastructure required for the project to operate, specifically information pertaining to the timing, status and developmental plans. 11. A clear articulation of the need for Ex-Im Bank coverage.
•
II. Participants
• Project sponsors, off take purchasers, contractors, operators, and suppliers must be able to demonstrate the technical, managerial and financial capabilities to perform their respective obligations within the project. Information Required: 1. Sponsors must provide in English a brief history and description of their operations, a description of their relevant experience in similar projects, and three years of audited financial statements. 2. If the sponsors are part of a joint venture or consortium, information should be provided for all the participants. A shareholders agreement should also be provided. All documents pertaining to this area (joint venture agreement, management and service agreements) should be in substantially final form. 3. Off take purchasers and suppliers should provide in English a history and description of operations, at least three years of audited financial statements, and a description of how the project fits in their long-term strategic plan. If the project utilizes raw materials (oil, gas, coal, ethane, etc.) copies of contracts that have been reviewed by legal counsel for appropriateness and in adherence with local law should be provided. 9. Contractors and operators must provide resumes of experience with similar projects and recent historical financial information. III. Technical Project technology must be proven and reliable, and licensing arrangements must be contractually secured
•
for a period extending beyond the term of the Ex-Im Bank financing. • A technical feasibility study or sufficient detailed engineering information needs to be provided to demonstrate technical feasibility of the project.
Information Required: 1. Technical description and a process flow diagram for each project facility. 2. Detailed estimate of operating costs. 3. Arrangement for supply of raw materials and utilities. 4. Draft turnkey construction contract and description of sources of possible cost increases and delays during construction, including detailed description of liquidated damage provisions and performance bond requirements.
5. Project implementation schedule, showing target dates for achieving essential project milestones. 10. A site-specific environmental assessment, highlighting concerns, requirements and solutions. These documents should demonstrate compliance with Ex-Im Bank's environmental guidelines. All applicants must submit a Preliminary Environmental Assessment report conducted by a third party expert prior to an application for final commitment. IV. Host Country Government Role Legal/Regulatory Framework &
• Host government commitment to proceeding with the project needs to be demonstrated. • Legal and regulatory analysis needs to demonstrate that the country conditions and the project structure are sufficient to support long-term debt exposure for the project through enforceable contractual relationships. • Ex-Im Bank's relationships with the host government will be addressed on a case-by-case basis. An Ex-Im Bank Project Incentive Agreement (PIA) with the host government may be required. The PIA addresses certain political risks and Ex-Im Bank's method of resolution of conflict with the host government pertaining to these issues. Only certain markets will require a PIA.
Information Required: 1. A description of the host government's role in the project, and progress made toward obtaining essential government commitments, including authorizations from appropriate government entities to proceed with the project. Copies of all permits, licenses, concession agreements and approvals are required in addition to a description of all permits necessary to
complete the project and their status. This information is critical for Ex-Im Bank application consideration. 2. A definition of the control, if any, that the government will have in the management and operation of the project, and status of any assurances that the government will not interfere in the project's operation. If the government is also a project sponsor, these issues will be of particular importance 3. Evidence of the government's current and historical commitment and policies for availability and convertibility of foreign currency. 4. Status and strategy for obtaining government undertakings to support any government parties involved in the project, to the extent that such undertakings are needed to provide adequate credit support for such entities.
ANNEXTURE
Lucknow:
2nd September The Uttar Pradesh Power Corporation Limited (UPPCL) signed a Memorandum of Understanding with Bajaj Hindustan Limited on Thursday to set up a 1,980-MW thermal power project in Lalitpur district of Bundelkhand region. The MoU was signed between UPPCL Chairman and Managing Director Navneet Sehgal and Bajaj Joint Managing Director Kushagra Bajaj in the presence of Energy Minister Ramveer Upadhyaya and Chief Secretary Atul Gupta. The proposed power project will be built on 1,500 acres at Mirchawar village, some 60 km from the Rajghat dam in Lalitpur. The state will get 90 per cent of the electricity generated by the plant. “Uttar Pradesh will start getting power generated by this plant from the year 2014,” Sehgal told mediapersons. The MoU is just a part of the state’s government’s commitment to increase the power generation in the state, he added. The state government had earlier decided to increase power generation in the state to 25,000 MW.
Infrastructure India Invests In Maheshwar Power Plant by Irfan Khan | September 07,2011 - 03:43 PM Topics : Private Industries : Energy / Utilities Equity
Infrastructure India Plc has invested Rs.122 Cr into Shree Maheshwar Hydel Corporation Limited. This is IIP's second investment in SMHCL, it made it's first investment in the project in 2008. It now holds 17.7% in SMHPCL. SMHPCL-promoted by Entegra Limited, is constructing a 400MW hydropower plant on the banks of Narmada river in MP. IIP has also entered into a return guarantee agreement with SMHPCL, which guarantees a 17% IRR for IIP. If the guaranteed IRR is not achieved on the Group's exit, certain shares in SMHPCL will be transferred to the Group.
GVK to acquire Siemens'14% stake in Bangalore international airport BS Reporter / Bangalore August 23, 2011, 0:30 IST Hyderabad-based GVK Power & Infrastructure is all set to become the single largest shareholder of Bangalore International Airport. The company today said it was paying Rs 114 for each equity share to Siemens Project Ventures to buy the latter’s 14 per cent stake in Bangalore International Airport Ltd (BIAL). The company, which also runs Mumbai International Airport, will pay close to Rs 614 crore, valuing the Bangalore project at almost Rs 4,440 crore. If this deal sails through, GVK Power, through its stepdown subsidiary, Bangalore Airport & Infrastructure Developers Private Ltd, will have a 43 per cent stake in BIAL, while Siemens will have 26 per cent, Zurich Airport five per cent, and the remaining 26 per cent will be held
equally by the Karnataka government and the Airports Authority of India
. GVK Power had been Price negotiating with Siemens for the past six months to buy out its 14 per cent stake and there had been serious differences on the valuations of the stake. According to industry analysts, GVK had offered Rs 60 a share but Siemens was looking at a higher price. “Changi Airport had offered Rs 114 per share and as part of the Right of First Refusal clause in the agreement, we matched that bid,” a senior GVK Power official told Business Standard. BS | NS E E Including the fresh deal to buy a part of Siemens’ stake, GVK would have paid almost Rs 1,800 crore to acquire a 43 per cent stake in the project. The said acquisition would be completed after obtaining the requisite approvals, if any. GVK Power, during November 2009, first bought into BIAL by picking up a 12 per cent stake from Zurich International Airport for Rs 484 crore. A month later, it
bought out the 17 per cent stake held by L&T Infrastructure Development Project for Rs 686 crore, pricing the acquisition at Rs 105 a share. BIAL, one the latest greenfield airport projects in the country, started operating in May 2008 and was built at a cost of Rs 2,470 crore. During mid-2011, GVK had announced that it was expanding its passenger terminal building which would take the capacity to handle 17 million passengers from the current 11 million, with the flexibility to expand it to 20 million.
Essar Power to terminate 800 mw PPA with Gujarat Mitul Thakkar, ET Bureau Aug 25, 2011, 10.35am IST AHMEDABAD: Gujarat's aggressive plans in power sector is facing troubles yet again. Essar Power Limited that agreed to supply 800 mw of power for next 25 years at Rs 2.80 per unit wants to terminate its agreement with the state utility Gujarat Urja Vikas Nigam Limited (GUVNL). The power purchase agreement (PPA) was signed in May 2010 and Essar Power issued one week notice for terminating PPA to GUVNL on August 14.
Essar Power statement read, "This (PPA termination) decision follows the failure by GUVNL to satisfy certain conditions under the PPA within the required timescale." However, industry sources reveal that increasing imported coal prices have made many power projects unviable. Essar Power is commissioning 1320 mw of imported coal based project at Salaya in Saurashtra region of Gujarat.
Earlier, Adani Power terminated its PPA for 1000 mw with GUVNL sighting non-allocation of coal mine by the government of Gujarat as a reason. GUVNL challenged Adani Power before the regulator and the matter is pending before the appellate.
Meanwhile, Essar Power stated that the company remains committed to the Salaya power project and will be reviewing its options with regard to power sales. Proposed project is currently scheduled to commission in Q1 2014. It may be mentioned here that Essar Group cancelled its plans to commission special economic zone in Gujarat last year.
Gujarat's one of the largest investors Essar Group is the oldest independent power producer in Gujarat with 500 MW of PPA. It has also signed one more PPA for 1000 mw with GUVNL and the project is expected to be commissioned anytime soon.
The latest development has created concerns among the state machinery, which has promptly approached the Gujarat Electricity Regulatory Commission to complete the formalities within a weeklong notice issued by Essar Power.
2 SEP, 2011, 09.30PM IST, PTI
Work on India's longest road tunnel starts in Udhampur
CHENANI (J&K): Work on India's longest road tunnel today started with engineers blasting a portion of a hill to clear way for construction of the 9-km long Chenani- Nashri Tunnel in Jammu and Kashmir's Udhampur district. Australian company Leighton Welston, renowned for tunnelling technology, began the project by triggering the blast this afternoon. "We have started the work today on this prestigious project. The twin tunnels which will come on Jammu-Srinagar national highway is one of the longest road tunnel in Asia and also in India," Managing Director of Leighton Welston, Russell Waug told reporters at the project site here. The twin tunnels will come up in a period of next five years at a cost of Rs 2,600 crore, he said, adding that it will also reduce the length of the highway as well as the travel time between Srinagar and Jammu. The two-lane main tunnel will have a diameter of 13.3 m, while a parallel escape route shall have a diameter of 5 m. Engineers will use the NATM technique of sequential excavation and support for executing the project, he
said. The completion of the first section of the tunnel comprising of all the portal sections represents the key milestones for the project, he said. A team of over 800 staff and 200 strong work force, armed with sophisticated drilling machines, will daily bore around 5 m of the main tunnel and 8 m of the escape route, he said. In reply to a question about the challenges of the project, Waug said that Jammu and Kashmir has young Himalayas which keeps shifting thereby posing great challenges for tunnel construction. He said that the tunnel would have a life span of more than 100 years and is expected to be completed before the expected deadline. The construction team will continue to tunnel through the mountain to construct an all weather road connecting Chenani with Nashri, slashing 30-km of the journey and reducing the time travel by one hour. "We are pleased to see this nationally important project underway. It is not only a landmark project in the history of India's transportation network but will bring increase safety and employment to local community," the MD said. "Our focus is to complete the project on schedule and to be an integral part of the Jammu's progress and development," he said.
doc_428241921.doc