Infrastructure Projects & Management Dr. E. Sankara Rao

1. Infrastructure Projects & Management Dr. E. Sankara Rao Infrastructure Development Finance Company Ltd. August 27, 2009 Think Infrastructure Think IDFC

2. Contents • Indian Economy and Infrastructure Progress • Infrastructure Projects, Policies and Investments • Features of Infrastructure Projects • Infrastructure Projects & Management • Typical Project Participants • Typical Structuring • Types of Risks & Mitigation • Conclusions

3. Indian Economy – Scorching Growth • India’s GDP has witnessed high growth, and was the second fastest growing GDP after China in 2006-07 • Fastest GDP growth in 18 years - 9.4% (2006-07 ) • Consistently sound performance of various segments is leading to robust performance of the Indian economy India's GDP at Current Prices: 2002-07 1200 1000 800 USD Billion 600 1006 830 400 737 638 556 469 200 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (AE) Growth in sectors at Current Prices (2007-08): Industry: 10.7% Services: 8.9% Agriculture: 2.6% 561 453 398 USD Billion 237 270 191 231 204 125 103 176 145 135 105 105 1999-00 2002-03 2005-06 2006-07 2007-08 Agriculture Industry Services Significant infrastructure requirement needed to sustain this growth…

4. Present Status of Infrastructure in the Country • Telecom – Total Sub’s 479 Mn - Mobile 441Mn and Fixed 37.4Mn and going increase to 500Mn by 2010 • Electricity – 1,40,000 MW and going to add another 1,00,000MW by 2012 • Roads – 3.3 Mn Km road network ( 67% Freight and 87% Passenger Traffic) • Ports – 12 Major and 150 Minor on a coastline of 7560 Km • Airports -126 airports,100 are civilian including,11 International airports and 4 metros account for 65% India passenger traffic • SEZ’s – Notified more than 160 SEZ’s and 98 functional SEZ’s housing 2279 Units

5. Infrastructure Requirements - The Macro Picture Highways 40000 km to be developed by 2012 Ports Cargo handling capacity to be increased to 1500 MTPA by 2012 (Currently 737 MTPA) Railways Development of manufacturing plants for rolling stock Development of dedicated freight corridors & metro rail projects Airports Development of greenfield airports Development of 35 non-metro airports Power 60000 MW of new generation capacity to be added by 2012. Telecom - To increase the tele-density to 50 by 2010

6. Investment Requirements … • To sustain 9% GDP growth, investment in infrastructure will need to increase from 4.6% of GDP to around 8% of GDP over the period 2007-12 • Planning Commission estimates that of the required investment • 65 % will come from the Government • 23% from private sector and • 12% from multilateral/bilateral agencies. • Substantial increase in private investment envisaged. Public Private Partnerships (PPPs) essential for attracting private capital in Infrastructure

7. Investment Targets Source: Planning Commission Government of India Significant private sector participation needed to meet this target…

8. Telecom - Competitive Growth Story Power - Distribution reforms have started Roads - Success from Determination Ports - About to Consolidate Airports/ Civil Aviation - Taking off Tourism - looks positive Urban - Not off the ground SEZs - A few will happen The Story So Far. . . . . . . .

9. High Low Good Policies = Good Progress *Where applicable  Poised to take-off

10. Management UK Argentina US South Korea Spain Germany Asian Countries France StateControl Relative speed & direction of change India African Countries China Regulation Competition Reforms and Competition Leading To QoS

11. Liberalization Asian telecoms were virtually a closed industry in the early 1990s Malaysia Partially Liberalised -Basic Telephony -Mobile Hong Kong Partially Liberalised -Local -International Phillippines Fully Liberalised Japan Fully Liberalised China Partially Liberalised -Mobile (Limited) -VAS Hong Kong Partially Liberalised -Mobile (Limited) -VAS Taiwan Partially Liberalised -Mobile -VADSr Korea Partially Liberalised -Mobile (Limited) -VAS ChinaPartially Liberalised -Local (Limited) -Long Distance(Limited) Singapore Partially Liberalised -Mobile Korea Fully Liberalised ‘00 onwards ‘99 ‘98 ‘97 Taiwan Fully Liberalised HongKong Fully Liberalised Thailand Partially Liberalised -Mobile -Basic Telephony Singapore Partially Liberalised ‘96 ‘95 ‘93 ‘94 China/India Further Liberalised -Local -Long Distance -Mobile Korea Partially Liberralised -International Malaysia Fully Liberalised India Partially Liberalized

12. SEZ Philosophy Operating Environment Ease, self-certification, Efficiency & productivity Policy Framework Fiscal Incentives & regulatory benefits Infrastructure Self-contained, Integrated, connected & Self-managed

13. + Port & Duty Free Enclave EOU Trading Cluster of EOUs & Bonded Area FTZ Free Port EPZ Special Economic Zone Evolution of SEZ + Integrated Infrastructure +

14. Before Suzhou Industrial Park, China

15. After a decade Suzhou Industrial Park, China

16. Infrastructure Eco System Development Infrastructure Project Benefits Common Man Benefits the SME’s & Big Enterprises Lower Costs Enhanced Markets Growth Social Welfare Improvement

17. Infrastructure Types • Physical Infrastructure : • Transportation & Logistics : Roadways, Railways, Airways, water transportation, urban mass transportation , Ports & Logistics • Energy : Power generation, transmission, distribution, Gas Distribution • Telecommunications &IT: Mobile, Fixed, DTH, CTV & Broadband Services • Urban : Water supply & distribution, sewage disposal systems, urban industrial parks and irrigation. • Social Infrastructue: • Healthcare • Educational • Tourism

18. Infrastructure Project – Key Features • Large capital costs / bulky • Long gestation periods • Sector vulnerable to regulatory and policy changes. • Tariff sensitivity / public / Government • Highly Cash Flow Driven • User pay charges (willingness to pay) • Security of the Project • Mostly Non Recourse Finance • Prudential Norms • Many stakeholders • Contract driven • Concession / license

19. Project Appraisal • Sponsor/ Management • Technical • Financial • Market • Environment • Risk Analysis

20. Typical Infrastructure Project Structuring • Special Purpose Vehicle (SPV) • Contracts/ Concession/ License/ Caps • Project based funding • Non recourse or limited recourse financing • Equity from EPC contractors, vendors, public, strategic investors-conflicting interest • Debt - various sources

21. Advisers Sponsors Financial, Technical & Legal Advisers Invt. Bankers, Technical & Legal Equity Concession / Licence Agreement Financial Investors Insurance Companies Equity / Sub-Debt Insurance Policies Users Off-take Contracts O&M Contract O&M Operator TRA/Escrow Agreement TRA/Escrow Bank EPC Contract Debt Substitution Agreement EPC Contractor Lenders Infrastructure Project Finance Transaction Structure Government Project SPV

22. Contracts In Infrastructure Project Finance are very Important KEY CONTRACTS : • Concession / Licence Agreement • Shareholders / JV Agreement • EPC Contract • O&M Contract • Trust & Retention Agreement • Substitution Agreement / Direct Agreement • State Support Agreement EFFICIENT STRUCTURING OF CONTRACTS IS A MUST and should be tailored to suit the project’s expected profitability and cash flow. If the project performs better than anticipated, lenders will be repaid sooner and have better Equity returns.

23. Typical Infrastructure Project Contracts Power Infra : • Concession/ License Agreement • Shareholders’ Agreement • EPC Contract • O & M Contract • Fuel/ Water/ Transport Agreement • State Support Agreement • Power Purchase Agreement • State Guarantee Transport Infra : • Concession Agreement • Shareholders’ Agreement • EPC/ O & M Contract • Environment and Land Procurement • Toll Collection Agreement • State Support Agreement

24. Infrastructure Project Finance –Risk Stages • Development Stage • Construction Stage • Operations Stage

25. Output Results Input Data Market Data Capacity Size Design Project Structuring & Modeling Technology Assumptions Capital Investment Revenues Financial Statements Cost Data Policy & Regulation Rules Typical Infrastructure Project Financial Model Development

26. Typical Means of Finance PROJECT COST Rs. 1000 crore Means of finance • Equity Rs. 300 crore • Sponsors • EPC Contractors/ Vendors • Government Agencies • Strategic Investors/ Venture Funds • Financial Investors • Grants • Subordinated Debt • Debt (Rupee) Rs. 500 crore • Financial Institutions • Banks (domestic and Foreign) • Debt (Foreign Currency) Rs. 150 crore • Financial Institutions/ Banks • Multilateral Agencies • Export Credit Agencies • Lease Financing Rs. 50 crore

27. Typical Financing Norms Debt Norms redefined • Debt-Equity 70 : 30 or 80 : 20 • Asset Cover >1 + collaterals & credit enhancement • Cost Competitive • Pricing Linked to risk, cash flows • Tenor >12 years - linked to cash flow • Loan Structured • Repayment Equated, ballooned, step-up

28. Cash Flows Management Investors Equity Equity dividend Lenders Operation costs Loan Operator Project co. dividend Debt Service Equity Construction costs Payments Insurers Premium Fees/ Revenue dividend Contractor Payments Users

29. Infrastructure Projects & Financial Engineering • Cashflow projections based on technical, market and financial analysis & engineering • Risk allocation & mitigation through project contracts and financing agreements • Structured financing • Loan documentation and security creation • Project monitoring and compliance

30. Typical Structured Project Finance by Risk Leverage • Guarantee in case of a guarantee-cum-take-out Banks / FIs FI Life of the loan facility • Period of low risk-Operation • Low cost funds based on lower project risk • Period of high risk -Development & Construction • Low cost funds from banks / FIs based on IDFC Guarantee • IDFC takes over the asset from Banks at the end of 5 yrs. • Benefits • The project gets Lower cost funds • The project gets 10 year money (3 years with Banks & 7 years with IDFC) • Bank funds are channelised to infrastructure

31. Financial Analysis • Model building • Project Cost Phasing • Capital Structuring • Profitability Projections • DCF Analysis • NPV • IRR • Financial Ratios • DSCR • Breakeven

32. Risk and Uncertainty The origins of modern risk management: Renaissance Italy, where seafarers used the term ‘rischiare’ to describe the challenge of a voyage. Primary source:random acts of nature Secondary source:behavioral uncertainty, business transactions Rembrandt, Storm on the Sea of Galilee

33. Type of Risks

34. Risk Analysis & Mitigation • Risk Sharing : Is advantageous when economic, technical, environmental, or regulatory risks are of such magnitude that it would be impractical or imprudent for a single party to undertake them. • Risk Identification • Completion Risk • Operating Risk • Revenue Risk • Financial Risk • Sponsor Risk • Force Majeure Risk • Political Risk • Environmental & Social Risk • Risks Mitigation • mitigated by financial, contractual or legal means • some risks may be sufficiently well studied and accepted

35. General Approach to Risk Analysis • The institutions adopt both qualitative and quantitative approaches to risk analysis • The qualitative approach is adopted for subjective factors such as management, environment, etc • The quantitative approach is adopted for objective parameters such as market, costs, etc • Qualitative risk factors are sought to be addressed by suitable covenants • Sensitivity analysis is done to study the impact of quantitative parameters on the project return and cost of capital • Structuring is done in a way as would ensure project viability under various possible scenarios

36. Techniques of project risk analysis • Sensitivity Analysis • Scenario Analysis • Computer Simulation • Monte-carlo Simulation • Decision Tree Analysis

37. “What-if” Analysis • Scenarios & Sensitivities • Capital Cost • Base Year Traffic/Throughout • Growth Rates • Base Tariff Levels • Escalation Rates; and • O&M Costs

38. Variability of Profitability Projections Max Max Min Min Max US$ Millions Min

39. Sensitivity and Probability Analysis

40. Risk Mitigation Contracts for Project INSURANCE AND CONTRACTUAL PERFORMANCE GUARANTEES TURNKEY CONTRACTOR LONG TERM OFFTAKE CONTRACTS/ OTHER REVENUE CONTRACTS PERFORMANCE RISK DELAY/ TECHNICAL RISKS MARKET/ REVENUE RISK PROJECT COMPANY RESIDUAL RISKS POLITICAL RISKS LEGAL/REGULATORY FINANCIAL RISKS INSURANCE/MULTILATERAL FINANCING/HOST GOVERNMENT ASSURANCES DUE DILIGENCE HEDGING/INSURANCE/ CREDIT ENHANCEMENT

41. Risk Groups Banks Suppliers Offtakers Credit Agreements Security Documents Sponsors Supply Agreements Offtake Agreements Shareholder Agreements Market Risks Financial Risk Project Vehicle Operating & Maintenance Agreement Company Permit Construction Agreement Construction Agreement Local Laws Operator Contractor HostGovernment Legal & Regulatory Risk Construction & Operation Risks

42. Typical Risk Allocation Management Operations Development Construction schedule cost performance design changes interest rate escalation consequential damages Force Majeure / country risk currency changes availability offoreign exchange market changes capacity / production shortfalls fuel / materials supply interruption and cost escalation operations and maintenance cost escalation interest rateescalation currency depreciation statutory change / civil unrest / strikes act of God third party liability plant residual value technical feasibility commercial / financial feasibility project economics permits / authorizations third-party intervention political change 1 sponsor risk contractor risk lender risk host government / offtaker risk

43. Risk Factors - Cover

44. Insurance Against Risk • Special Purpose Vehicle (SPV) • Appointment of a good management team • Appointment Of good Auditors & Independent Engineers • Capital Structuring to minimize Financial Leverage and various Risks • Collaborator’s Participation In Equity • Good relations with Lenders and Investors • Good Governance with proper Systems and Procedures

45. Well Managed and Transformed Project • Good Asset Formation • Lower Tax Liability • Lower Financial Distress Costs • Lower Risk Incentive Costs • Better Measurement of Performance • Lower Managerial Agency Costs • Higher Debt Capacity and Networth

46. Conclusion • In general there is a good consensus among all political parties for reforms • Private sector has done reasonably well in areas where they are operating viz., Energy, Telecom, Transport and Airlines • PPP Infra based model is one of the solution where one can create a win-win situation to all the STAKE HOLDERS • A Comprehensive MANAGEMENT SYSTEM will lead to a good Infrastructure Service

47. Thank You Dr E.Sankara Rao I D F C Ltd. www.idfc.com Think Infrastructure Think IDFC