Amity International Business School
Credit Appraisal and Project Finance
Module No 4 & 5
By
Mr. Navneet Saxena
All The Best
From
Amity International Business School
Characteristics of Project Finance
Characteristics of
Project Finance
Amity International Business School
• Project costs include:
• Direct costs (including investment costs and
operating costs) associated with design and
implementation and monitoring and evaluation;
and
• Indirect costs, including:
– economic costs (e.g. loss of productivity due to more
stringent safety procedures);
– social costs (e.g., adverse health impacts); or
– environmental costs (e.g., deforestation, land-use
changes, greenhouse gas emissions, loss of
biodiversity, etc.).
Characteristics of
Project Finance
Amity International Business School
• A cost estimate is obtained through the following
steps:
• Identify Cost Categories: the risk management
scenarios is broken down into cost categories;
• Gather cost data: unit costs must be assessed
for each of the cost category identified. This unit
cost list can be drawn from various data sources
(market survey, statistical collection, etc.) or
from direct consultation with providers. Cost
studies conducted for similar projects can also
be used; and
Characteristics of
Project Finance
Amity International Business School
•
•
Adjust costs to local conditions: where
applicable, cost data must be adjusted to
take into account local conditions,
including timing (costs estimated in past
years must be escalated to account for
inflation), local market conditions, etc.
The quality of the estimate depends on
the availability and accuracy of
quantitative data at each of these steps.
Characteristics of
Project Finance
Amity International Business School
• Finance for a Project in India can be
raised by way of
(A)
Share Capital
(B)
Long-term borrowings
(C)
Short-term borrowings
Characteristics of
Project Finance
Amity International Business School
• The corporates are now allowed to raise resources for
expansion plans by issuing equity shares with differential
voting rights.
• The main advantages of such category of shares are :
1. Equity can be raised without diluting stake of the
promoters.
2. Companies can reduce gearing-ratios.
3. The risk of hostile-takeovers is reduced to a
considerable extent.
4. The passing of yield in the form of high dividends to the
investors can be ensured
Characteristics of
Project Finance
Amity International Business School
• Term finance is mainly provided by the various
All India Development Banks (IDBI, IFCI, SIDBI,
IIBI etc.), specialised financial institutions
(RCTC, TDICI, TFCI) and investment institutions
(LIC, UTI and GIC).
• In addition, term finance is also provided by the
State financial corporations, the State industrial
development corporations and commercial
banks.
• Debt instruments issued by companies are also
subscribed for by mutual funds and financing
activities are also done by finance companies.
Characteristics of
Project Finance
Amity International Business School
• The institutions like LIC & GIC may not be very
much associated with the project appraisal but
lend their funds in consortium with other all India
financial institutions.
• State level financial institutions consisting of :
• State Financial Corporations (SFCs).
• State Industrial Development Corporations
(SIDCs).
• Regional Rural Banks & Co-operative Banks.
Characteristics of
Project Finance
Amity International Business School
• Before implementing a new project or undertaking
expansion, diversification, modernisation or rehabilitation
scheme ascertaining the cost of project and the means
of finance is one of the most important considerations.
• For this purpose the Company has to prepare a
feasibility study covering various aspects of a project
including its cost and means of finance.
• It enables the Company to anticipate the problems likely
to be encountered in the execution of the project and
places it in a better position to respond to all the queries
that may be raised by the financial institutions and others
concerned with the project.
Characteristics of
Project Finance
Amity International Business School
• The cost of project will usually comprise of the following
items:
(i) Land and site development
(ii) Factory building
(iii) Plant and machinery.
(iv) Escalation and contingencies
(v) Other fixed assets or miscellaneous fixed assets.
(vi) Technical know-how
(vii) Interest during construction.
(viii) Preliminary and pre-operative expenses.
(ix) Margin money for working capital.
Characteristics of
Project Finance
Amity International Business School
• Having established the total cost of
project, promoters should work out the
means of finance which will-enable timely
implementation of the project.
• Finance will ' be available from several
sources and it is for the promoters to
select the most suitable sources after
taking into account all the relevant factors.
Characteristics of
Project Finance
Amity International Business School
• The financial structure refers to the sources from
which the funds for meeting the project cost can
be obtained, as also the quantum which each
source will contribute towards the project cost.
• For this purpose it would be advisable to keep in
view the following aspects.
(i) The structure should be simple to operate in
practice.
(ii) The plan should have a practical bias and
should serve as a working guideline for all
project forecasts.
Characteristics of
Project Finance
Amity International Business School
(iii) While deciding the structure, the environmental
constraints should be kept in view. For example,
the conditions prevailing in the capital market,
future prospects for earnings, term-lending
institutional rules and policies in operation,
government guidelines, etc.
(iv) The financial structure should have an in-built
flexibility which can take care of circumstances
not envisaged initially.
Characteristics of
Project Finance
Amity International Business School
• In order to work out the capital structure it is
necessary to prepare a financial plan.
• The methodology to be followed in working out a
financial plan requires consideration, of the
following important factors
(1) Debt Equity gearing
(2) Owned funds
(3) Cost of capital
(4) Availability of finance from various sources.
Characteristics of
Project Finance
Amity International Business School
• For every category, of capital there is a distinct
source of supply in the market.
• Therefore, it is necessary for the promoters to
identify these sources so that they can be
approached for finance at the appropriate time.
• A project will require two types of funds: - one, to
finance purchase of immovable assets such as
land, buildings, plant and machinery, etc., and
two, for carrying on day-do-day operations i.e
working capital funds.
Characteristics of
Project Finance
Amity International Business School
• The sources of working capital finance are
mainly the following:
• Bank Finance
• Commercial Paper
• Fixed Deposits
• Inter-corporate Deposits
Characteristics of
Project Finance
Amity International Business School
• In consonance with the Government policy which
encourages a new class of entrepreneurs and also
intends wider dispersal of ownership and control of
manufacturing units, a special scheme to supplement the
resource & of an entrepreneur has been introduced by
the Government.
• Assistance under this scheme is available in the nature
of seed capital which is normally given by way of
long term interest free loan.
• Seed capital assistance is provided to small as well as
medium scale units promoted by eligible entrepreneurs.
Characteristics of
Project Finance
Amity International Business School
• Subsidies extended by the Central as well as
State Government form a very important type of
funds available to a company for implementing
its project.
• Subsidies may be available in the nature of
outright cash grant or long-term interest free
loan.
• In fact, while finalising the mean of finance,
Government subsidy forms an important source
having a vital bearing on the implementation of
many a project.
Amity International Business School
Project Finance
Project Finance
Amity International Business School
• We will cover
– Parties to a Project Financing,
– Necessary Contracts, Environmental
Consideration,
– Political and Regulatory Background,
– Senior Debt – Banks, Insurance Companies,
Public Markets;
– Mezzanine Debt;
– Equity - Financial Equity, Strategic Equity
Parties
Amity International Business School
• 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 or other lending
institutions that provide loans to the operation.
Parties
Amity International Business School
• The loans are most commonly nonrecourse 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 modelling
Parties
Amity International Business School
• 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.
Parties
Amity International Business School
• Generally, a special purpose entity is
created for each project, thereby shielding
other assets owned by a project sponsor
from the detrimental effects of a project
failure.
• As a special purpose entity, the project
company has no assets other than the
project.
Parties
Amity International Business School
Parties
Amity International Business School
• A project is established as a separate
company
• A major proportion of the equity of the
project company is provided by the project
manager or sponsor, thereby tying the
provision of finance to the management of
the project
Parties
Amity International Business School
• The project company enters into
comprehensive contractual arrangements
with suppliers and customers
• The project company operates with a high
ratio of debt to equity, with lenders having
only limited recourse to the equity-holders
in the event of default
Parties
Amity International Business School
• Capital contribution commitments by the
owners of the project company are
sometimes necessary to ensure that the
project is financially sound, or to assure
the lenders of the sponsors' commitment.
• Project finance is often more complicated
than alternative financing methods.
Why Choose Project
Finance
Amity International Business School
• Insulation of sponsors
• Non-consolidation of project debt onto
sponsor’s balance sheets
• Sharing of risk with others
• Sponsor’s ability to borrow limited by
covenants – negative pledge
Why Choose Project
Finance
Amity International Business School
• Insulation of sponsors
• Non-consolidation of project debt onto
sponsor’s balance sheets
• Sharing of risk with others
• Sponsor’s ability to borrow limited by
covenants – negative pledge
Why Choose Project
Finance
Amity International Business School
• Sponsor engaging in multiple projects
compelling need for external financing
• Multiple sponsors make sharing of risks
extremely difficult, therefore SPV is an
attractive option
• Tax advantages in some jurisdictions
• Jurisdiction may compel use of locally
incorporated vehicle.
Parties
Amity International Business School
• Project Company not to (Negative
Covenants):
•
•
•
•
Incur further financial indebtedness
Create further security interests
enter agreements unconnected to project
lend money or make investments
Parties
•
•
•
•
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change accounting period
pay dividends
change its constitutional documents
create subsidiaries
Sponsors
Amity International Business School
• often involved in aspects of project,
including:
• Construction
• Operation/Maintenance
• Purchases of services or output
• Ownership of land
Sponsors
Amity International Business School
• Keep project on track
- Meet regularly with project manager (weekly or
bi-weekly) to review project timeline, key
milestones and outstanding issues
- Hold project manager accountable for meeting
objectives,
producing deliverables, conducing reviews, and
communicating changes to all impacted areas
- Share accountability for the project – when the
project has problems, it’s not only the project
manager who’s
Sponsors
Amity International Business School
• Be available
- Be readily available and accessible for
consultation with project manager
- Act as an umbrella when roadblocks occur
for project manager and team - prevent
scope and schedule creep
- Attend team meetings as needed to keep
project on track
Sponsors
Amity International Business School
• Strategic Fit
• Assure Project is in line with the
organization’s strategic goals
- Confirm project direction and advocate for
the project
- Monitor political environment to help
project adjust, if necessary
Sponsors
Amity International Business School
• Resources
• Provide or locate resources for the project
- Aid the project manager in lining up,
getting commitment from, and managing
cross-functional support resource needs
- Protect resources from getting pulled into
other projects
Sponsors
Amity International Business School
• Project Finance
• Provide or locate funding for the project
- Lead project budget creation and validation
- Lead efforts to secure external funding (eg
SGG)
- Ensure project is tracking to budget.
Review & approve monthly project finance
reports. Escalate as needed.
Sponsors
Amity International Business School
• Help the project manager navigate the
organization’s political environment
- Officially affirm project manager
- Provide official backing of the project
- Communicate project closure and results to
organization
- Act as an escalation route for the project
manager
- Arbitrate and resolve conflict and interface
problems that the project manager escalates
Sponsors
Amity International Business School
• Own the Final Product
• Be clear on what is expected in the end
- Help define the scope, schedule and
resource needs. Ensure project is
delivering on outcomes, not just outputs
- Validate all project phases with project
manager
- Sign off on charter and requirements
documents
Banks
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•
•
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•
Arranging banks
Syndication
Facility agent
Technical bank
Insurance bank
Account bank
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Banks
Amity International Business School
• Multilateral & Export Credit Agencies
• political risk insurance
• commercial risk insurance
• insurance again adverse currency
movements
• interest rate support
• direct lending
Construction
Company
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• Turnkey contract
• Engineering design, procurement and
construction
• Track record
• Project management
Experts
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• Consultants/Professional Firms
• Insurance
• Environment
• Technical/Engineering
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Necessary Contracts
Typical Documents
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• The typical project finance documentation
can be of four main types
– Shareholder/sponsor documents
– Project documents
– Finance documents
– Other project documents
Documents
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• Engineering, Procurement and
Construction Contract - (EPC Contract)
• Operation and Maintenance Agreement (O&M Agreement)
• Concession Deed
• Shareholders Agreement - (SHA
Agreement)
• Off-Take Agreement
Documents
Amity International Business School
•
•
•
•
•
•
Supply Agreement
Loan Agreement
Intercreditor Agreement
Tripartite Deed
Common Terms Agreement
Terms Sheet
Engineering, Procurement
and
Amity International
Business School
Construction Contract - (EPC Contract)
• 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.
Engineering, Procurement
and
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Business School
Construction Contract - (EPC Contract)
• 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.
Engineering, Procurement
and
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Business School
Construction Contract - (EPC Contract)
• Basic contents of an EPC contract are:
– Description of the project
– Price
– Payment
– Completion date
– Completion guarantee and Liquidated
Damages (LDs)
– Performance guarantee and LDs
– Cap under LDs
Operation and Maintenance
Agreement - (O&M Agreement)
Amity International Business School
• 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.
Operation and Maintenance
Agreement - (O&M Agreement)
Amity International Business School
• Basic contents of a O&M contracts are:
– Definition of the service
– Operator responsibility
– Provision regarding the services rendered
– Liquidated damages
– Fee provisions
Concession Deed
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• 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.
Concession Deed
Amity International Business School
• 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)
Concession Deed
Amity International Business School
– 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.
Shareholders Agreement
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- (SHA Agreement)
• 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.
Shareholders Agreement
Amity International Business School
- (SHA Agreement)
• 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
Off-Take Agreement
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• 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.
Off-Take Agreement
Amity International Business School
• The main off-take agreements are:
• Take-or-pay contract: under this contract the offtaker – 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.
Off-Take Agreement
Amity International Business School
• 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
Off-Take Agreement
Amity International Business School
• 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.
Supply Agreement
Amity International Business School
• 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.
Supply Agreement
Amity International Business School
• The main supply agreements 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 takeand-pay.
Supply Agreement
Amity International Business School
• 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.
Loan Agreement
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• 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
Loan Agreement
Amity International Business School
• 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
Loan Agreement
Amity International Business School
• Basic terms of a loan agreement include
the following provisions.
– A repayment clause
– Financial covenants - calculation of key
project metrics / ratios and covenants
– Dividend restrictions
– Representations and warranties
– The illegality clause
Intercreditor
Agreement
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• 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
Amity International Business School
• Intercreditor agreement will specify
provisions including the following.
– Common terms
– Order of drawdown
– Cashflow waterfall
– Limitation on ability of creditors to vary their
rights
Intercreditor
Agreement
Amity International Business School
• Intercreditor agreement will specify
provisions including the following.
– 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.
Tripartite Deed
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• 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.
Tripartite Deed
Amity International Business School
• 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.
Intercreditor
Agreement
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• 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
Intercreditor
Agreement
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• 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.
Common Terms
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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.
Common Terms
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Agreement
• 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.
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Environment Considerations
80
Environment
Considerations
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• The Ministry of Environment & Forests
(MoEF) is the nodal agency in the
administrative structure of the Central
Government for the planning, promotion,
co-ordination and overseeing the
implementation of India's environmental
and forestry policies and programmes.
Environment
Considerations
Amity International Business School
• The primary concerns of the Ministry are
implementation of policies and
programmes relating to conservation of
the country's natural resources including
its lakes and rivers, its biodiversity, forests
and wildlife, ensuring the welfare of
animals, and the prevention and
abatement of pollution.
Environment
Considerations
Amity International Business School
• While implementing these policies and
programmes, the Ministry is guided by the
principle of sustainable development and
enhancement of human well-being.
• The Ministry also serves as the nodal agency in
the country for the United Nations Environment
Programme (UNEP), South Asia Co-operative
Environment Programme (SACEP), International
Centre for Integrated Mountain Development
(ICIMOD) and for the follow-up of the United
Nations Conference on Environment and
Development (UNCED).
Environment
Considerations
Amity International Business School
• The Ministry is also entrusted with issues
relating to multilateral bodies such as the
Commission on Sustainable Development
(CSD), Global Environment Facility (GEF)
and of regional bodies like Economic and
Social Council for Asia and Pacific
(ESCAP) and South Asian Association for
Regional Co-operation (SAARC) on
matters pertaining to the environment.
Environment
Considerations
Amity International Business School
• The broad objectives of the Ministry are:
– Conservation and survey of flora, fauna,
forests and wildlife
– Prevention and control of pollution
– Afforestation and regeneration of degraded
areas
– Protection of the environment and
– Ensuring the welfare of animals
Environment
Considerations
Amity International Business School
• These objectives are well supported by a set of
legislative and regulatory measures, aimed at
the preservation, conservation and protection of
the environment.
• Besides the legislative measures, the National
Conservation Strategy and Policy Statement on
Environment and Development, 1992; National
Forest Policy, 1988; Policy Statement on
Abatement of Pollution, 1992; and the National
Environment Policy, 2006 also guide the
Ministry's work.
Environment
Considerations
Amity International Business School
• Look At USAID
• http://africastories.usaid.gov/search_detail
s.cfm?storyID=38&countryID=4&sectorID=
0&yearID=3
EnvironmentAmity International Business School
Considerations
• USAID
– USAID is an independent federal government agency
that receives overall foreign policy guidance from the
Secretary of State.
– Their work supports long-term and equitable
economic growth and advances U.S. foreign policy
objectives by supporting:
• economic growth, agriculture and trade;
• global health; and,
• democracy, conflict prevention and humanitarian assistance.
EnvironmentAmity International Business School
Considerations
• United Nations Environment Programme
– To provide leadership and encourage
partnership in caring for the environment by
inspiring, informing, and enabling nations and
peoples to improve their quality of life without
compromising that of future generations.
EnvironmentAmity International Business School
Considerations
• South Asia Co-operative Environment
Programme (SACEP) is an inter-governmental
organization, established in 1982 by the
governments of South Asia to promote and
support protection, management and
enhancement of the environment in the region
• SACEP member countries are Afghanistan ,
Bangladesh , Bhutan , India , Maldives , Nepal ,
Pakistan and Sri Lanka.
EnvironmentAmity International Business School
Considerations
• UNEPFI
– UNEP FI is a global partnership between
UNEP and the financial sector.
– Over 190 institutions, including banks,
insurers and fund managers, work with UNEP
to understand the impacts of environmental
and social considerations on financial
performance.
EnvironmentAmity International Business School
Considerations
• Environmental Finance is the use of
various financial instruments (most
notably land trusts) to protect biodiversity.
• The field is part of both environmental
economics and the conservation
movement.
EnvironmentAmity International Business School
Considerations
• Nordic Environmental Finance Corp
– NEFCO is an international financial
institution established by the five Nordic
countries.
– NEFCO finances investments and projects
primarily in Russia, Ukraine, Estonia, Latvia,
Lithuania and Belarus, in order to generate
positive environmental effects of interest to
the Nordic region.
EnvironmentAmity International Business School
Considerations
• OECD
– The Environmental Finance Programme
assists the EECCA and East Asian countries
in ensuring effective financing of
environmental public goods, which are corner
stones of sustainable development along with
social public goods (e.g. health care,
education) and eradicating poverty.
EnvironmentAmity International Business School
Considerations
• OECD
– Environmental Financing Strategy (EFS) is a
standardised methodological framework
supported by a computer model to prepare
realistic multi-year implementation
programmes for those environmental sectors
that require investment-heavy public
infrastructure.
EnvironmentAmity International Business School
Considerations
• Carbon finance is a new branch
of Environmental finance.
• Carbon finance explores the financial
implications of living in a carbonconstrained world, a world in which
emissions of carbon dioxide and
other greenhouse gases (GHGs) carry a
price.
EnvironmentAmity International Business School
Considerations
• Sustainability measurement is a term that
denotes the measurements used as the
quantitative basis for the informed management
of sustainability.
• The metrics used for the measurement of
sustainability (involving the sustainability of
environmental, social and economic domains,
both individually and in various combinations)
are still evolving: they include indicators,
benchmarks, audits, indexes and accounting, as
well as assessment, appraisal and other
reporting systems.
Amity International Business School
Political and Regulatory Issues
98
Political andAmity International Business School
Regulatory Issues
• Non-payment and Currency Inconvertibility
• Confiscation, Expropriation and
Nationalisation
• War and Civil Disturbance
• Breach of Contract
Political andAmity International Business School
Regulatory Issues
• Non-payment and Currency Inconvertibility
– Inability to convert local currency into
foreign exchange as well as delays in
acquiring foreign exchange caused by
the host government's actions or failure
to act.
Political andAmity International Business School
Regulatory Issues
• Confiscation, Expropriation and
Nationalisation
– Elimination of ownership, control over, or
rights to the asset/investment.
– "Creeping expropriation," series of acts that
over time have an expropriatory effect.
Political andAmity International Business School
Regulatory Issues
• War and Civil Disturbance
– Loss due to the destruction, disappearance,
or physical damage to assets caused by
politically motivated acts of war or civil
disturbance, revolution, insurrection, and
coups d'etat.
– Terrorism and sabotage treated selectively.
Political andAmity International Business School
Regulatory Issues
• Breach of Contract
– Breach or repudiation of a contractual
agreement with the investor/lenders by host
government.
– Reliant upon a dispute resolution mechanism
(e.g., arbitration).
Political andAmity International Business School
Regulatory Issues
• Review of Common Practice – Usual
Mitigation
– World Bank Group Structures (IDA)
• IDA (poor developing countries)
• Always with the financial backing of host
government
Political andAmity International Business School
Regulatory Issues
• International Finance Corporation (IFC)
– Loans, equity and quasi equity
– Loans at market rates
– Commercial Lenders participate under BLoans
– IFC remains lender of record
Political andAmity International Business School
Regulatory Issues
• Multilateral Investment Guarantee Agency
(MIGA)
– Provider of political risk under contracts of
guarantee for debt or equity
– Cover provided without counter-guarantee
Political andAmity International Business School
Regulatory Issues
• Private Insurers
– Subject to availability (“on-cover”, tenor and
price)
– Events clearly defined
– Damages easily measured
Political andAmity International Business School
Regulatory Issues
• Development Financial Institutions (DFIs) /
European Compliance Agency (ECA)
– DFI participation assists in overall project
bankability
– ECA’s insure against payment risk under
Principles for Responsible Investments events
Potential Sources
Amity International Business School
of Political Risk
• The Obsolescing Bargain
– Host Governments view vs. Foreign Investors
view
– Visibility of Large Infrastructure Projects
• Debt or Equity Arrangement
– Tendency to utilise Loan arrangements
– Fix contractual performance irrespective of
domestic economic conditions
Potential Sources
Amity International Business School
of Political Risk
• Corruption and External Pressure
– Managing Large Infrastructure projects in
context of monopolistic environments
• Regulation
– Measure of market forces on a Large
Infrastructure project
• Decentralisation
– Impact of contracting with a local party
Response toAmity International Business School
Political Risk
• Information and Disclosure
– Lack of information can lead to the
acceptance of terms that are out-of-line
– Library of Agreements
• Report Debt-like Obligations
– Accessing the Full Picture
Response toAmity International Business School
Political Risk
• Appropriate Agreements
– Using innovative agreements to resolve
disputes
– Learning from other industries (oil & gas and
mining industries)
• Refuse One-sided Agreements
– Banks/Investors alike need to guard against
one-sided agreements
Response toAmity International Business School
Political Risk
• Rescheduling of Payments
– Creation of a new mechanism to structure
repayments under economic crisis
Large Infrastructure
Amity International Business School
Projects Require
• New Attitude
– Searching for new ways to reduce Political
Risk beyond conventional mitigants
– Looking beyond insurance, host government
guarantees
• Insurance
– World Bank/MIGA
– Private Insurers
Large Infrastructure
Amity International Business School
Projects Require
• Involving Other Parties
– Local participants, Joint venture partnerships
• Shifting Risk
– Managing contractual performance against
realistic challenges (i.e. socio-economic)
Amity International Business School
– Senior Debt
• Banks,
• Insurance Companies,
• Public Markets
Senior Debt
Amity International Business School
• Senior debt should be viewed as money
owed that has a higher priority than other
unsecured debt outstanding from the
issuer.
• Senior debt has greater importance in the
issuer's capital structure than subordinated
debt.
Senior Debt
Amity International Business School
• This form of debt will often be secured or backed
by collateral on which the lender has put in
place.
• Traditionally, this covers all the assets of a
corporation and is often used for revolving credit
lines.
• It is a class of corporate debt that has priority
with respect to interest and principal over other
classes of debt and over all classes of equity by
the same issuer.
Senior Debt
Amity International Business School
• And in the event the issuer goes bankrupt,
senior debt must be repaid before other
creditors receive any payment.
• Conversely, debts that are considered
'less important' and are not paid off first
are known as junior debts.
• These could be supplemental loans, credit
card debt or other types of funds from
different companies.
Senior Debt
Amity International Business School
• Because there remains a high chance that
senior debt will be repaid even in the event
that a company goes bankrupt, it can be
considered as relatively low risk.
• As a result, lenders and investors tend to
be more willing to part with their money to
finance senior debt.
Senior Debt
Amity International Business School
• It also tends to mean that it is available with
lower interest rates, making the loan easier for
the borrower to secure.
• Senior debt financing can be categorised in
several ways, including secured versus
unsecured and cash flow versus asset-based.
• With each option, there are differences in pricing
and in ongoing covenant requirements.
Senior Debt
Amity International Business School
• Senior debt financing is available to
anyone, although the guidelines to
obtaining it tend to be very strict.
• Primarily, it centres on a company or
individual having an asset that can be
used as collateral should they encounter
any problems.
Senior Debt
Amity International Business School
• Lenders will also typically study a
company's cash flow to ensure that it is
capable of keeping up with the necessary
financial repayments.
• Once all things have been considered,
lenders will determine the interest rate that
will be applied to the senior debt.
Senior Debt
Amity International Business School
• A borrower can get a high interest rate if
the lender perceives a high risk of not
being paid on time.
• However, interest rates can also be as low
as one point below prime if the borrower
can show a strong cash flow history.
• Different organisations adopt a number of
approaches to dealing with and managing
senior debt.
Senior Debt
Amity International Business School
• Some will set aside and allocate specific
resources in a senior debt fund essentially storing cash and other assets
which can be used to pay the debt in the
event of a financial or economic downturn.
• Alternatively, businesses take advantage
of a senior debt ratings system which will
automatically prioritise and pay all debts in
this class.
Senior Debt
Amity International Business School
• This method can help companies to
establish a schedule for making regular
payments.
• The exact processes used by a given
company will often depend on the
regulations and standards that hold sway
in the country where the business is
incorporated and primarily conducts its
business.
Senior Debt
Amity International Business School
• Secured parties may receive preference to
unsecured senior lenders
– Notwithstanding the senior status of a loan or
other debt instrument, another debt
instrument (whether senior or otherwise) may
benefit from security that effectively renders
that other instrument more likely to be repaid
in an insolvency than unsecured senior debt.
Senior Debt
Amity International Business School
• Lenders of a secured debt instrument
(regardless of ranking) receive the benefit of the
security for that instrument until they are repaid
in full, without having to share the benefit of that
security with any other lenders.
• If the value of the security is insufficient to repay
the secured debt, the residual unpaid claim will
rank according to its documentation (whether
senior or otherwise), and will receive pro
rata treatment with other unsecured debts of
such rank.
Senior Debt
Amity International Business School
• Super-senior status
– Senior lenders are theoretically (and usually)
in the best position because they have first
claim to unsecured assets.
– However, in various jurisdictions and
circumstances, nominally "senior" debt may
not rank pari passu with all other senior
obligations.
Senior Debt
Amity International Business School
• "Senior" debt at holding company is
structurally subordinated to all debt at the
subsidiary
• A senior lender to a holding company is in
fact subordinated to any lenders (senior or
otherwise) at a subsidiary with respect to
access to the subsidiary's assets in a
bankruptcy.
Senior Debt
Amity International Business School
• A secured loan is a loan in which the borrower
pledges some asset (e.g. a car or property)
as collateral for the loan, which then becomes
a secured debt owed to the creditor who gives
the loan.
• The debt is thus secured against the collateral
— in the event that the borrower defaults, the
creditor takes possession of the asset used as
collateral and may sell it to regain some or all of
the amount originally lent to the borrower, for
example, foreclosure of a home.
Senior Debt
Amity International Business School
• From the creditor's perspective this is a
category of debt in which a lender has
been granted a portion of the bundle of
rights to specified property.
• If the sale of the collateral does not raise
enough money to pay off the debt, the
creditor can often obtain a deficiency
judgment against the borrower for the
remaining amount.
Amity International Business School
Mezannine Debt
Mezannine Debt
Amity International Business School
• When a hybrid debt issue is subordinated
to another debt issue from the same
issuer.
• Mezzanine debt has embedded equity
instruments (usually warrants) attached,
which increase the value of the
subordinated debt and allow for greater
flexibility when dealing with bondholders.
Mezannine Debt
Amity International Business School
• Mezzanine debt is frequently associated
with acquisitions and buyouts, where it
may be used to prioritize new owners
ahead of existing owners in case of
bankruptcy.
Mezannine Debt
Amity International Business School
• Some examples of embedded options
include stock call options, rights and
warrants.
• In practice, mezzanine debt behaves more
like stock than debt because the
embedded options make the conversion of
the debt into stock very attractive.
Mezannine Debt
Amity International Business School
• Mezzanine capital, in finance, refers to
a subordinated debt or preferred
equity instrument that represents a claim
on a company's assets which is senior
only to that of the common shares.
• Mezzanine financings can be structured
either as debt (typically
an unsecured and subordinated note)
or preferred stock.
Mezannine Debt
Amity International Business School
• Mezzanine capital is often a more expensive
financing source for a company than secured
debt or senior debt.
• The higher cost of capital associated with
mezzanine financings is the result of its location
as an unsecured, subordinated (or junior)
obligation in a company's capital structure (i.e.,
in the event of default, the mezzanine financing
is less likely to be repaid in full after all senior
obligations have been satisfied).
Mezannine Debt
Amity International Business School
• Additionally, mezzanine financings, which are
usually private placements, are often used by
smaller companies and may involve greater
overall leverage levels than issuers in the highyield market; as such, they involve additional
risk.
• In compensation for the increased risk,
mezzanine debt holders require a higher return
for their investment than secured or other more
senior lenders.
Mezannine Practice
Amity International Business School
• ICICI Venture is in the process of closing
India Advantage Fund VII (Mezzanine
Fund 1), India’s first Mezzanine fund.
• The corpus of the fund is roughly USD 51
million.
Mezannine Debt
Amity International Business School
• Mezzanine finance typically is a structured
debt-like instrument, with a component of
cash income and benefits from enhanced
returns from equity-linked component.
• It often bridges the gap in corporate capital
structure between senior debt and equity.
Mezannine Debt
Amity International Business School
• Mezzanine offers flexibility to meet both the
investor’s and investee company’s requirements
and also provides medium to long term capital
without significant ownership dilution.
• The Mezzanine team seeks to provide funds for
financing various areas including:
– Buyouts, merger and acquisitions
– Growth for medium-sized businesses
– Asset backed businesses such as real estate or
financial markets
Mezannine Debt
Amity International Business School
• RBI Norms on Subordinated Debt
• http://www.financialexpress.com/news/rbiissues-norms-for-subordinateddebt/567046/0
Mezannine Debt
Amity International Business School
• Mezzanine financings can be completed
through a variety of different structures
based on the specific objectives of the
transaction and the existing capital
structure in place at the company.
• The basic forms used in most mezzanine
financings are subordinated
notes and preferred stock.
Mezannine Debt
Amity International Business School
• Mezzanine lenders, typically specialist
mezzanine investment funds, look for a
certain rate of return which can come from (each
individual security can be made up of any of the
following or a combination thereof):
• Cash interest — A periodic payment of cash
based on a percentage of the outstanding
balance of the mezzanine financing.
Mezannine Debt
Amity International Business School
• PIK interest — Payable in kind interest is a
periodic form of payment in which the interest
payment is not paid in cash but rather by
increasing the principal amount by the amount of
the interest
• Ownership — Along with the
typical interest payment associated with debt,
mezzanine capital will often include
an equity stake in the form of
attached warrants or a conversion feature,
similar to that of a convertible bond.
Mezannine Debt
Amity International Business School
• Mezzanine lenders will also often charge
an arrangement fee, payable upfront at the
closing of the transaction.
• Arrangement fees contribute the least
return and are aimed primarily to cover
administrative costs and as an incentive to
complete the transaction.
Mezannine Debt
Amity International Business School
• The following are illustrative examples of
mezzanine financings:
• Rs.1,000 crore of senior subordinated notes with
warrants (10% cash interest, 3% PIK interest
and warrants representing 4% of the fully diluted
ownership of the company)
• Rs. 500 crore of redeemable preferred stock
with warrants (0% cash interest, 14% PIK
interest and warrants representing 6% of the
fully diluted ownership of the company)
Mezannine Practice
Amity International Business School
• Private equity major 3i Group is scripting a
debt funding story in India as it looks to
build a $1-billion business over the next
three to five years by lending to Indian tier
II and tier III corporates.
• 3i Debt Management, the debt arm, is
intending to launch an India-dedicated
fund "soon," a top official said.
• Date: Oct 8, 2010
Mezannine Debt
Amity International Business School
• The nature of mezzanine financing in India
has recently undergone some changes.
• Earlier, optionally convertible preference
shares and debentures were treated as
equity for the purposes of foreign
exchange laws, thus taking them out of the
purview of the ECB guidelines.
Mezannine Debt
Amity International Business School
• However, pursuant to certain clarifications
issued in the year 2007, optionally
convertible preference shares and
debentures are now recognised as ECB,
and accordingly, in cases where ECB is
not permitted, such instruments are being
avoided for providing mezzanine finance.
Mezannine Debt
Amity International Business School
• Compulsorily convertible instruments with
equity kickers, such as warrants,
preference shares, and debentures, have
become common for offshore mezzanine
financing.
• SHOW RBI Circular
Mezannine Debt
Amity International Business School
• Foreign exchange laws of India stipulate
certain restrictions in relation to the rate of
return that can be offered in relation to
preference shares- it cannot exceed 300
basis points above prime lending rate of
State Bank of India (a premier bank in
India).
Mezannine Debt
Amity International Business School
• Though, after the recent amendments to
law, it is unclear whether compulsorily
convertible debentures will also be subject
to the same interest rate restrictions, most
companies choose to observe such
restrictions in the fear of falling into RBI’s
penalties trap.
Amity International Business School
Equity
• Financial Equity
• Strategic Equity
Equity
Amity International Business School
• Industrial project finance (IPF) is usually
based on a non-recourse or limited
recourse financial structure.
• This means the debt and equity used to
finance the project are paid back from the
cash flow generated by the project.
• The project’s assets, rights and interests
are typically held as collateral as a second
“way out” for the lenders.
Equity
Amity International Business School
• From environmental to economic to
operational challenges -- project finance is
complex and involves various forms of
risk.
• As such, sponsors and advisors should be
prepared to address these risks.
• While each project is unique, lenders will
typically consider these ten factors when
assessing how creditworthy the project is.
Equity
Amity International Business School
1) Strategic Equity
• There is perhaps no greater validation for
a lender that a prospective greenfield IPF
might be viable, than when the equity
backing the project is strategic.
• A greenfield steel facility backed by an
equity investment from a company in the
steel sector, for example, is strategic
equity.
Equity
Amity International Business School
• While financial or private equity investors
can also play an important role in the
capital structure of a greenfield project
financing, it is the substantial investment
from strategic equity that gives lenders
comfort.
Equity
Amity International Business School
• Lenders consider strategic equity investors
to be more likely to defend and support
their equity if an unforeseen negative
event occurs.
• In addition to a financial fix, strategic
investors could possibly offer an
operational remedy--such as engineering.
Equity
Amity International Business School
• Lenders like to see most if not all of the
equity funded before any debt is drawn.
• In today’s volatile markets, lenders will
want to see a minimum of 40-50% junior
capital and mostly Strategic Equity in the
overall IPF construction budget.
• Unexpected things often happen during
construction and ramp-up, so a de-levered
capital structure is the prudent path.
Equity
Amity International Business School
2) Experienced Management Team.
• As a greenfield project is a start-up business, a
management team with a history of success with
similar projects is very important.
3) Proven Technology.
• IPF is not viewed as venture capital by project
finance lenders.
• Therefore, the underlying technology needs to
be current, and at the same time proven.
Equity
Amity International Business School
4) Does/Will Demand Exceed Supply?
• To help validate the need for the
construction of any greenfield project,
lenders will likely require an independent
market analysis as part of the due
diligence process.
• Lenders will want comfort that demand is
expected to exceed supply.
Equity
Amity International Business School
5) Lower-Cost Producer.
• Once convinced that demand will exceed
supply and there is a need for the
greenfield project, lenders will also want
independent validation that the project will
be a lower-cost producer.
• In the event demand declines, lenders will
want to know that the industrial project
they financed is not likely to shut down.
Equity
Amity International Business School
6) Merchant vs. Contract.
• “Off-take” contracts where buyers of the output
of the greenfield project are lined up ahead of
time can be a real positive compared to a
“merchant approach,” which is more speculative.
• Contracts can base load production at a project
and provide a known source of revenue to help
service the project finance debt.
Equity
Amity International Business School
• On the other hand, contracts are not
always iron clad.
• The credit quality of the off-taker can
deteriorate, and contracts can be subject
to litigation.
• As a low cost producer, the project should
remain competitive and generate attractive
cash flow even if the contract relationships
disappear.
Equity
Amity International Business School
7) Equipment, Procurement, Construction
(EPC).
• Think of the EPC as the contractor.
• Who will build the project? If a prospective
greenfield industrial project clears the
above hurdles, IPF lenders will want to
know who the EPC will be.
• Has this firm built similar projects on time
and on budget?
Equity
Amity International Business School
• Is the construction contract fixed price?
• Is the EPC a creditworthy entity and do they
stand behind their work?
• Larger industrial project financings might have
big name EPC firms while midsize greenfield
IPFs generally do not.
• Without a reputable EPC, lenders will generally
look to an independent engineer and will likely
require some contingent equity when structuring
the IPF.
Equity
Amity International Business School
• An independent engineer is usually selected and
engaged by lenders to monitor the construction
process and budget.
• Depending on the construction and ramp-up
risks involved, contingent equity in the form of
cash and/or letters of credit and a completion
guarantee will likely be required.
• Lenders and strategic equity providers will
typically negotiate milestones to permit
contingent equity amounts to be released over
time.
Equity
Amity International Business School
• Depending on the construction and rampup risks involved, Contingent Equity in the
form of cash and/or Letters of Credit and a
Completion Guaranty will likely be
required.
• Lenders and Strategic Equity providers will
typically negotiate milestones to permit
Contingent Equity amounts to be released
over time.
Equity
Amity International Business School
8) Pledge of Shares.
• IPF lenders generally like to see the
project operating company owned by a
holding company where the holding
company pledges the shares of the
operating company to the IPF lenders and
guaranties the obligations of the operating
company.
Equity
Amity International Business School
9) Debt Service Reserve.
• Lenders will generally look for a minimum
six months of principal and interest in a
funded debt service reserve.
Equity
Amity International Business School
• 10) Hedges for Significant Cost Items.
• Lenders might want the project to enter
into hedging agreements for components
of the project cost structure that are the
most significant.
• This might include energy costs, interest
rate, and other inputs.
Equity
Amity International Business School
• Other structural enhancements to the
financing help mitigate construction and
ramp-up risks, as well as production inputs
with significant cost.
• The bottom line is that even in volatile
capital markets, smart IPFs can get done
as long as they possess the right
characteristics.
Equity
Amity International Business School
• Types of Industrial Finance
– Short-Term Finance
•
•
•
•
Bank Credit
Trade Credit
Instalment Credit
Customer Advances
– Medium-Term Finance
– Long-Term Finance
Equity
Amity International Business School
• Types of Industrial Finance
– Medium-Term Finance
•
•
•
•
•
Issue of Shares
Issue of Debentures
Loans from banks and other financial institutions
Public deposits (for existing concerns)
Ploughing back of profits (for existing concerns)
Equity
Amity International Business School
• Types of Industrial Finance
– Long-Term Finance
•
•
•
•
Issue of Shares
Issue of Debentures
Loans from financial institutions
Ploughing back of profits (for existing concerns)
Financial Institutions
Amity International Business School
• Financial Institutions (FIs) have
traditionally been the major source of longterm funds for the economy
• FIs can be broadly categorised as all-India
or state level institutions depending on the
geographical coverage of their operation
• Over the years, financial institutions are
playing a key role in providing finance and
counselling to the entrepreneurs
FIs
Amity International Business School
• Development being the function of capital, as the
tempo of development grows, so does the
requirement for capital
• Capital is not only necessary for development
but capital is also generated by development
• In consonance with the development activities in
the country, the development banks activities
are on higher scale as well as diversified in
multi-directional way
FIs
Amity International Business School
• The area of operation of development almost
covers all key sectors of the economy
• Institutional agencies grant financial assistance
to small-scale industrial units for:
– Participation in equity capital
– Acquisition of fixed assets by way of term loans; and
– Working capital
FIs
Amity International Business School
• Schemes of assistance to Industry
– Technical Scheme
– Special Capital Scheme
– Seed Capital Scheme
– Composite Loan Scheme
– Disabled Entrepreneurs
– Modernisation
– Electro-Medical Equipment
FIs
Amity International Business School
• Schemes of assistance to Industry
– Nursing Homes/ Hospitals
– Equipment Finance
– Quality Control Equipment
– Assistance to Ex-servicemen
– Single Window Scheme
– Tourism Related Facilities
– Mahila Udyam Nidhi Scheme
IFCI
Amity International Business School
• Financial Assistance is provided in the
following forms:
– Rupee and foreign currency term loans
– Underwriting of share and debenture issues
– Direct subscription to equity
– Guarantees
– Soft Loans
– Equipment financing
IDBI
Amity International Business School
• Objective and Functions
– To serve as an apex institution for term
finance for industry, to co-ordinate the
working of institutions engaged in financing,
promoting or developing industries and to
assist in the development of these institutions
– To plan, promote and develop industries to fill
gaps in the industrial structure in the country
IDBI
Amity International Business School
• Direct Assistance
– Modernisation Assistance Scheme
– Textile Modernisation Scheme
– Technical Development Fund Scheme
– Venture Capital Fund Scheme
– Energy Audit Scheme
– Equipment Finance for Energy Conservation
Scheme
IDBI
Amity International Business School
• Indirect Assistance
– Refinance scheme for Industrial Loans for
Small and Medium Industries
– Refinance Schemes for Modernisation and
Rehabilitation of Small and Medium Industries
– Equipment Refinance Scheme
– Bills Discounting / Rediscounting Scheme
– Scheme for Investment Shares and Bonds of
Other FIs
NABARD
Amity International Business School
• The establishment of the National Bank for
Agriculture and Rural Development was
the outcome of the acceptance of the
recommendation in this behalf contained
in the Interim Report of the Committee to
Review Arrangements for Institutional
Credit for Agriculture and Rural
Development
NABARD
Amity International Business School
• For consultancy, research and development,
feasibility
• For the purchase of land, developing the area,
construction of factory premises, developing
other basic infrastructure, purchase or
machinery and in installation
• A small enterprise requires money to purchase
raw materials for its manufacturing process,
spares and a spare parts for its machinery
SIDBI
Amity International Business School
• Assistance to small scale sectors
– Indirect assistance to primary lending
institutions (PLIs)
– Direct assistance to small units
– Development and Support Services
– Development of markets for SSI products
– Factoring Services
– Development of infrastructure for SSIs
SIDBI
Amity International Business School
• Foreign currency assistance includes
– Foreign currency loans to import equipment
by existing export-oriented SSI units and new
units having definite plans for entering export
market
– Pre-shipment and post-shipment credit in
Rupees terms to exporting SSIs for greater
flexibility
– Export bill financing
SIDBI
Amity International Business School
• Venture capital assistance includes
– Assistance to Small Scale entrepreneurs
using innovative indigenous technology
– Contribution to corpus of other VCs
– Promotion of state level VC funds and a
National Venture Fund
– MoU with Small Enterprise Assistance Funds
of USA
SIDBI
Amity International Business School
• Development and Support Services
– Enterprise promotion with emphasis on rural
industrialisation
– Human Resource Development to suit SSI
sector needs
– Technology Upgradation
– Quality and Environment Management
– Marketing Promotion
– Information Dissemination
Amity International Business School
Module No 5
Economic Aspects of Project Development
Economic Aspects
Amity International Business School
• Economic development is a term that generally
refers to the sustained, concerted effort
of policymakers and community to promote
the standard of living and economic health in a
specific area.
• Such effort can involve multiple areas including
development
of
human
capital,
critical
infrastructure,
regional
competitiveness,
environmental
sustainability,
social
inclusion, health, safety, literacy, and other
initiatives.
Economic Aspects
Amity International Business School
• Economic development differs from economic
growth.
• Whereas economic development is a policy
intervention endeavour with aims of economic
and social well-being of people, economic
growth is a phenomenon
of market productivity and rise in GDP.
• Consequently, as economist Amartya Sen points
out: “economic growth is one aspect of the
process of economic development.”
Economic Aspects
Amity International Business School
• Development Economics is a branch
of economics which deals with economic
aspects of the development process in lowincome countries.
• Its focus is not only on methods of
promoting economic growth and structural
change but also on improving the potential for
the mass of the population, for example, through
health and education and workplace conditions,
whether through public or private channels.
Economic Aspects
Amity International Business School
• Development economics involves the creation of
theories and methods that aid in the
determination of policies and practices and can
be implemented at either the domestic or
international level.
• This may involve restructuring market incentives
or using mathematical methods like intertemporal optimization for project analysis, or it
may involve a mixture of quantitative and
qualitative methods.
Economic Aspects
Amity International Business School
• Socio-economic impact assessment is
designed to assist communities in making
decisions that promote long-term sustainability, including economic prosperity, a
healthy community, and social well-being.
• Assessing socio-economic impacts
requires both quantitative and qualitative
measurements of the impact of a
proposed development.
Economic Aspects
Amity International Business School
• For example, a proposed development may increase
employment in the community and create demand for
more affordable housing.
• Both effects are easily quantifiable.
• Also of importance, however, are the perceptions of
community members about whether the proposed
development is consistent with a commitment to
preserving the rural character of the community.
• Assessing community perceptions about development
requires the use of methods capable of revealing often
complex and unpredictable community values.
Economic Aspects
Amity International Business School
• A socio-economic impact assessment examines how a
proposed development will change the lives of current
and future residents of a community.
• The indicators used to measure the potential socioeconomic impacts of a development include the
following:
• Changes in community demographics;
• Results of retail/service and housing market analyses;
• Demand for public services;
• Changes in employment and income levels; and
• Changes in the aesthetic quality of the community.
Economic Aspects
Amity International Business School
• Quantitative measurement of such factors is an
important component of the socio-economic
impact assessment.
• At the same time, the perceptions of community
members about how a proposed development
will affect their lives is a critical part of the
assessment and should contribute to any
decision to move ahead with a project.
• In fact, gaining an understanding of community
values and concerns is an important first step in
conducting a socio-economic impact
assessment.
Economic Aspects
Amity International Business School
• Because socio-economic impact assessment is
designed to estimate the effects of a proposed
development on a community’s social and economic
welfare, the process should rely heavily on involving
community members who may be affected by the
development.
• Others who should be involved in the process include
community leaders and others who represent diverse
interests in the community such as community service
organizations, development and real estate interests,
minority and low income groups, and local environmental
groups.
Economic Aspects
Amity International Business School
• Projects carefully prepared, within the framework
of broader development plans, both advance
and assess the larger development effort.
• The project format itself is an analytical tool.
• The advantage of casting proposed investment
decisions in the project format lies in
establishing the framework for analyzing
information from a wide range of sources.
• Because no plan can be better than the data
and assumptions about the future on which it is
based.
Economic Aspects
Amity International Business School
• There is growing concern about the potentially
negative consequences of macro-economic
policies for developing countries' natural
resources.
• The debt crisis demonstrated how efforts by
some countries to repay loans could lead to
unsustainable practices: for instance,
encouraging logging or land clearing for
agriculture in humid tropical lowlands, in order to
generate export earnings, may provide only a
short-term solution for debt repayments
Amity International Business School
Economic Aspects of Project Development
Economic Aspects
Amity International Business School
• Current indicators of economic performance
usually fail to account for the consumption or the
degradation of nonrenewable natural resources.
• Concurrently, the cost of their conservation and
maintenance is not adequately assessed. If the
price of food does not include the cost of
conserving the land on which it is produced, or
the replenishment of the nutrients it withdraws
from the soil, it then means that with the food we
eat we deplete the natural resource capital.
Economic Aspects
Amity International Business School
• Traditional accounting seldom considers natural
resources as economic - assets except for raw materials
resources such as logs or minerals which can be traded.
• For instance, deforestation is often encouraged by
underpricing logging licences.
• The low licence fee fails to take into account the true
opportunity cost of the vest and so discourages interest
in reforestation.
• The conversion of forests to other uses is generally
treated purely as a short-term income benefit with no offsetting of accounts for the costs of depleting the capital
asset which the resource represented.
Economic Aspects
Amity International Business School
• On the other hand, limitations of land use
on environmental grounds may threaten
the income of rural communities, for
example by restricting the use of inputs
through legislation or the elimination of
price supports.
• Both degradation and protection have a
price, not only monetary but also in terms
of socio-economic trade offs.
Economic Aspects
Amity International Business School
• It is increasingly recognized that 'environmental
accounting' must become an accepted tool in guiding
policies for the management and use of natural
resources.
There are two approaches to environmental accounting:
- a physical approach in which sources and uses of natural
resources are quantified and used to develop measures
of environmental change and ecological stress; and
- monetary approach aimed at adjusting national income
accounts in order to incorporate measures of depletion
or other environmental changes - such as pollution in the
natural resource base.
Economic Aspects
Amity International Business School
• The UN Statistical Office is attempting to define
a framework within which changes in the value
of nature assets as well as defensive
expenditures and the costs of residual pollution
can be taken into account.
• The framework involves the use of specific stock
accounts, defining opening and closing balances
of produced and environmental assets. These
stock accounts include:
- renewable biological assets, such as those
pertaining to agriculture, forestry and fisheries;
Economic Aspects
Amity International Business School
• - scarce renewable resources in the public
domain, such as marine resources,
tropical forests;
• - non-renewable resources, such as
mineral deposits, and
• - cyclical resources, such as air and water.
Economic Aspects
Amity International Business School
• Economic analysis provides the rationality
for taking action because it provides some
perspectives on the scale of impact and
feasibility.
• The expected benefits of the interventions
can be evaluated along with the possible
costs, to facilitate discussion in the
decision-making process.
Economic Aspects
Amity International Business School
• There are many arguments about the value of
ecosystems, how to evaluate the future value in
comparison with the current value, and whether
we can compare welfare on one hand with the
economic profit on the other.
• Methods are now available and used for
estimating the un-marketed environmental
values such as the benefits of improved river
water quality or the costs of losing an area of
wilderness to development
Economic Aspects
Amity International Business School
• Cost-benefit analysis can pave the way for
decision-making for selecting optimal
measures during the planning and
implementation process, but there are
several limitations in accounting all factors
and issues precisely monetarily.
• For example, policy issues, such as social
improvements to alleviate poverty, can not
be explained only in economic terms.
Economic Aspects
Amity International Business School
• In order to minimize subjectivity in
decision-making, environmentally sensitive
economic analysis plays a key role in
trade-offs and conflict situations.
• Multi-criteria analysis is useful in ranking
options, shortlisting a limited number of
options for subsequent detailed appraisal
Economic Aspects
Amity International Business School
• A decision maker who has to allocate limited and
scarce resources and is faced with a number of
competing goals needs to predict future physical
and related economic consequences of a policy
or plan and make calculated choices based on
the model of physical and economic processes
involved.
• Choices are difficult because they arise from
conflict, and are always about the future and so
are set in uncertainty.
Amity International Business School
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