Course Title: Infrastructure and Project Finance - IIM Bangalore
No. of Sessions: 10
Instructor: Halady Satish Rao [Former Director General, Asian Development Bank, Manila, Philippines;
IIT Kharagpur (1970) and IIM Calcutta (1976)]. Presently, Consultant to the African Development Bank, Tunis,
Tunisia.
Introduction
Infrastructure is vital for sustained economic development and improving the living standards of the population.
Yet, there is an “infrastructure deficit” in many developing countries in Asia that is holding back these countries
from realizing their full economic potential. Why this deficit in infrastructure, whether it be in roads, transport,
electricity, safe drinking water, proper sanitation or communication facilities? One reason for this is that
infrastructure presents unique challenges: highly capital intensive, with large initial costs; often of public interest
nature thereby requiring greater interface with regulators and government agencies; social returns often exceed
private returns, thereby necessitating subsidies/government guarantees or viability gap funding to attract the
private sector; and, significant environmental and social impacts that need to be taken care of. Also, construction
periods are long, revenue build up is gradual and project economic life is long, thereby requiring long-term funding
with loan repayment and equity returns to be spread over longer periods of time.
In the early stages of economic development in Asia, governments were the sole providers of infrastructure, often
with assistance from Multilateral Development Banks (MDBs) that provide policy assistance and long-term funding
on relatively concessional terms. Such development assistance, however, came with requirements that go beyond
mere “commercial” considerations, namely economic viability, environmental sustainability and social
acceptability and these have become integral part of project design and evaluation. With the growing
infrastructure needs of a rapidly developing Asia, governments are finding it increasingly difficult to finance these
needs. Hence, governments are reaching out to also the private corporate sector to partner in infrastructure
development. Thus, “project finance” based on non-recourse (or limited recourse) lending is being increasingly
applied in Asia (and elsewhere), namely lending that relies on debt service payments from the project cash flows
and has only the project assets as collateral for the loan. Such project finance structure also enables promoters of
a project to address the afore noted challenges in infrastructure projects by creating legally independent project
entities and shifting debt burden, operating risks and accounting liabilities to third parties (debt holders and other
parties in a vertical chain from input supplier to output purchaser) that are united through a series of legal
contracts. Project finance is still in its early stages in developing Asia and its role in infrastructure development is
expected to become progressively more important in the coming years.
Learning Objectives
The course will provide an understanding of the unique features and issues in infrastructure development and how
project finance is applied to infrastructure development. The focus will be on underlying concepts (the why) and
the operationalization (the how) of these concepts, supported by “hands-on” exercises for project evaluation in all
its aspects (technical, market, financial, economic and social). The last session of the course will take the student
through a typical PPP structure for an infrastructure project.
Evaluation
Evaluation will be as follows:
Mid-term Examination
Group Presentations (based on class exercise/home assignments)
End-term Examination
Class Participation
: 20%
: 30%
: 30%
: 20%
Course Content
Session
Session Theme
Topics
1
Introduction
to
Infrastructure and
Project Finance
Unique
features
of
infrastructure
Why project finance for
infrastructure
What is Project Finance
Project Finance vs. Corporate
Finance
Advantages & Disadvantages
of Project Finance
Finnerty-Chap.1, 2
Yescombe-Chap.2
Reading
2
Infrastructure in
Asia
Overview of infrastructure in
developing Asia and the role
of Multilateral Development
Banks (MDBs).
“Developing Physical Infrastructure: A comparative
perspective on the experience of China and India” by
Rajiv Lall, Ritu Anand and Anupam Rastogi
Infrastructure development
in India, its Financing and
Issues therein.
Credit appraisal for financing
of
a
public
sector
hydropower project with
government as the single
owner/borrower
Class Exercise for a hydro
power project (Kali Gandaki)
Typical financial instruments
used
–
Senior
Debt,
Subordinated Debt, Equity,
Mezzanine
Debt,
Asset
Backed Securities
Structured
finance
(Infrastructure Funds &
Securitization)
Cash flow metrics and
financial ratios used in
project finance
Concession
agreements,
supply agreements, purchase
agreements, EPC contracts,
O&M contracts
Model Inputs & Outputs,
Macroeconomic
Assumptions, Project Costs
and Funding, Loan Drawings
and Debt Service, Cash Flow
Projections,
Projected
Financial Statements, Rates
of Return and Sensitivity
Analysis
“Infrastructure in India” by Ritu Anand
&
“Financing Infrastructure” Rajiv Lall and Ritu Anand
145 MW Kali Gandaki Hydro Electric Project in Nepal
funded by the Asian Development Bank (ADB)
[Case Study-cum-exercise]
and
India
3
“Conventional”
infrastructure
financing (1)public
sector
infrastructure
project
4
Project Finance(1)
-Project Financing
Plan and Financial
Instruments
5
Project Finance(2)
–
Project Contracts
6
Project
Finance(3)–
Financial
Modeling
Evaluation
and
Finnerty – Ch 8
Yescombe-Ch. 3
Finnerty- Chap.6
Yescombe-Chap.6 & 7
Finnerty-Chap.9-10
Yescombe- Chap.12
7
Project Economic
Analysis
Class Exercise for a Sugar
Project in Viet Nam
(1) Guidelines for the Economic Analysis of Projects.
Asian Development Bank.
http://beta.adb.org/documents/guidelineseconomic-analysis-projects Pages 1-51.
(2) Lyn Squire and Herman G. van der Tak, Economic
Analysis of Projects . Published for the World Bank
by The Johns Hopkins University Press, Baltimore
and London. Pages 15-46.
8
Project
Environmental
and
Social
Safeguard
Compliance
International
compliance
requirements,
Environmental
Impact
Assessment
(EIA)
and
Resettlement Plan (RP)
Case: EIA and RP for an
Infrastructure Project
Safeguard Policy Statement. Asian Development
Bank. http://beta.adb.org/documents/safeguardpolicy-statement Pages 14-22.
9
Project
Analysis
Mitigation
Finnerty- Chap. 13
Yescombe-Chap. 8-11
10
Public
Private
Partnerships
Commercial, Macroeconomic
and Political Risks
Guarantees and Insurance
for Risk Mitigation
Roles of government and
private
sector
in
infrastructure development
Public-Private-Partnership
(PPP) in infrastructure
Advantages & disadvantages
of PPP projects
Types of PPP – BOT, BOO,
BOOT, ROT, etc.
Who are the different
participants (Government,
Project Sponsor, Lenders,
EPC & O&M Contractors,
Suppliers, Off-takers, Public,
Environmental
Agencies,
Insurers, etc.)?
Case: PPP Structure for an
Infrastructure Project
Risk
and
Public-Private Partnership Handbook. Asian
Development Bank.
http://beta.adb.org/documents/public-privatepartnership-ppp-handbook Pages 1-5.
Reference Text Books:
(1) Project Financing: Asset-Based Financial Engineering, John D. Finnerty, Wiley Finance, 2nd Ed, May 2007
(2) Principles of Project Finance, E R Yescombe, Academic Press, 2002
Readings:
As above.