24-07-2012, 11:38 AM
Financing Infrastructure Projects
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Private Initiative
Traditionally, infrastructure projects in India were owned and
managed by the government or a government undertaking.
Given the massive investments required infrastructure, there is
now a broad consensus that private sector participation in this
activity must be encouraged
Private initiative in infrastructure projects can take many
forms, ranging from contracted operation of public utilities to
full ownership, operation and maintenance of these facilities
A typical example is an electricity generation project which
the private sector builds, owns, operates for a certain period of
time (called the “Concession Period”) and finally transfers
back to the government. This concept is called BOOT
For a road project,the private sector may be invited simply to
build the facility, operate it during Concession Period and finally,
at the end of the concession period, transfer the facility back to
the government (BOT) without actually ever owning the same.
Project Contracts
Through a comprehensive web of contracts, every major
risk inherent in the project is allocated to the party /
parties that is best able to assess and manage the risk
The project contracts are:
Shareholders Agreement
EPC Contract
Project Loan Agreements
O & M Contract
Financial Structure and Corporate Governance
Many argue that the essence of project finance is the
web of contracts meant to ensure that all parties work in
concert for the success of the project, to distribute risks
efficiently, and to prevent the abuse of monopoly power
This argument is valid but incomplete because it does
not explain why a project is handled as a separate
company, why project parties participate in the equity
of the company, and why the project company relies
heavily on debt in the form of non-recourse financing
and limited recourse financing
Separate SPVs ensure that multiple concessions with
different or conflicting terms are not imposed on the
same SPV. It also enhances the tradeability of these
SPVs.
Telecommunication Projects
Telecommunication projects are characterised by large project
costs, a virtually continuous project implementation (or roll –
out), long gestation periods, and a dispersed customer base that
exposes the project to commercial risks and requires
significant marketing and selling budgets.In telecom projects,
in practice there can be no single COD ( Commercial
Operations Date)
In general, telecom projects incur cash losses in initial years
and these need to be funded. Unlike a power project which
generates reasonably flat revenues and profitability over its life,
telecom projects, by virtue of their continued implementation
and increase in subscriber base demonstrate increases in
profitability over a period of time
Private telecom projects operate under a license from the
Department of Telecom and the projects framework is
determined by the conditions of the license