Sunday, December 15, 2013
Wednesday, November 20, 2013
Sunday, November 3, 2013
Project IRR vs Equity IRR
The project IRR takes as its
inflows the full amount(s) of money that are needed in the project. The
outflows are the cash generated by the project. The IRR is the internal rate of
return of these cash flows. The calculation assumes that no debt is used for
the project.
Equity IRR assumes that you use debt for the
project, so the inflows are the cash flows required minus any debt that was
raised for the project. The outflows are cash flows from the project
minus any interest and debt repayments. Hence, equity IRR is essentially
the “leveraged” version of project IRR.
Generally Equity IRR is more than project IRR and
the equity IRR will be lower than the project IRR whenever the cost of debt
exceeds the project IRR.
 |
| Equity IRR and Project IRR |
Thursday, August 15, 2013
Friday, May 31, 2013
Sunday, April 28, 2013
CCI (Cabinet Committee on Investment): Game changer in infrastructure sector ?
CCI (Cabinet Committee on Investment): Game changer in infrastructure sector ?
There
are two much talks about infrastructure reforms these days. In the article
below I have tried to analyse the real situation of infrastructure projects in
India and what steps government and CCI (Cabinet Committee on Investment) have
taken to improve infrastructure investments (Figures quoted have been taken
from websites of various regulatory bodies and news reports)
Couple of day’s back Mr. Srikant Kumar
Jena (Minister of statistics and programme implementation) informed parlimelemt
that at January 1, 2013, of the total 566 projects, 276 were delayed and the
estimated cost of each of these projects is above Rs.1.50 bn. Among the 276
projects, delay in clearances relating to environment and forest were reported
by the project implementing agencies in 43 projects, of which 8 were in
railways sector, 10 were in coal sector, 15 were in road transport and
highways, 2 were in petroleum sector and 8 were in power sector .
Recently FICICI (Federation of Indian
Chambers of Commerce and Industry) has also submitted a list of 14
manufacturing projects holding up investment of Rs. 1,278 bn for want of
various clearances to the government. Of the stalled projects, steel sector
which involved investments of Rs. 1,050 bn. Others fall in cement,
petrochemical based products, paper, gems and jewellery, non-ferrous metal as
of April this year. FICCI also claimed that if these projects gets cleared
India's GDP growth could rise by one percentage point.
These stalled projects not only raise
non-performing assets of banks but also the incremental capital-output ratio
(ICOR1) in the country. In last two years India’s ICOR was close to 5 and this was
one of the reasons found for a decade-low growth of only 5%. Higher ICOR simply
means investment capital accumulated in projects is not yielding appropriate
production
There are over 100 projects, each
involving investment of Rs 10.00 bn or more, which are held up because of some
reason or the other. In last few months government has shown some intent of
clearing these stalled projects by setting up a CCI (Cabinet Committee on
Investment) to accord approval to mega projects worth over Rs 10.00
bn. CCI will seek to remove investment bottlenecks and drive growth, this
CCI panel is headed by the Prime Minister and have ministers in charge of
infrastructure sectors as its members. Of the total stalled projects in the
country worth Rs. 7,000 bn, the committee has taken steps to push the
evolvement of projects worth 1,500 bn
In oil and gas sector, the ministry of Defence imposed stringent conditions like asking companies not to locate any pipelines or structures on sea surface in the blocks cleared for exploration and production activities. Subsea/submerged permanent structures, if any, were to be located more than 100 metres below sea surface or outside the Defence Research and Development Organisation (DRDO)/Indian Air Force (IAF) danger zone area (on sea surface) or Naval exercise areas. The oil industry saw these conditions as impractical and after discussions with CCI, the conditions have been substantially relaxed .
In total, CCI had to consider clearances for 40 oil and natural gas blocks, worth Rs 500 billion. In March 2013 it cleared 5 blocks and in April 2013 it cleared 25 blocks for oil and gas activities (out of total 31 oil blocks which came for review in April) . Nine blocks were cleared without any conditions and 16 blocks were cleared with relaxed conditions. Reliance Industries-BP combine 13 blocks, Govt owned ONGC 15 blocks, Santos of Australia 2 blocks and 1 block of Cairn India-led consortium.
CCI also reviewed the status of 20 power
projects, each with investment of Rs. 10 bn or more, which were pending for
different types of approvals and clearances with a view to expediting decisions
on approvals and clearances. In the last meeting CCI cleared 13 power projects,
freeing up stalled investment of around Rs 330 bn. These 13 projects include 10
transmission, one hydro and two thermal projects.
Though measures taken by CCI are big step forward but more work needs to be done and government has to ensure that there is speedy execution of these projects if India has to grow with a GDP growth rate of 8.0%. We also need new initiatives including like rigorous project appraisal, e- monitoring system, fixing of responsibility for time and cost overruns and regular review of the infrastructure projects by the concerned administrative ministries. For CCI to be a true game changer - it has to cut red tape, renew investor confidence and ease availability of funds
1. ICOR is a metric that assesses the marginal amount of
investment capital necessary for an entity to generate the next unit of
production. Overall, a higher ICOR value is not preferred because it indicates
that the entity's production is inefficient. The measure is used predominantly
in determining a country's level of production efficiency.
K-
Capital stock,Y- output (GDP), I- net investment
ICOR= ((I/Y)/(delta Y/ Y)) or (delta
K/delta Y). According to this formula the incremental capital output ratio can
be computed by dividing the investment share in GDP by the rate of growth of
GDP.
Monday, April 8, 2013
RBI prudential norms on advances to infrastructure sector
RBI softens infrastructure financing norms
Till now, RBI classified loans to
infrastructure annuity project as secured loans but loans to BOT (toll), PPP
project as unsecured. The only 'security' that the bank had in case of
BOT ( Toll )1, PPP projects was the Model Concession Agreement ( MCA) and
other similar agreements that specified the rights and obligations of the
government and the developer. This kind of guarantee by project authority
was considered as secured by Rating agencies but not by RBI.
RBI vide notification dated March 18, 2012
allowed that in case of PPP projects, the debts due to the lenders may be
considered as secured to the extent assured by the project authority in terms
of the Concession Agreement, if they meet certain conditions
The conditions include that the user
charges, toll, or tariff payments are kept in an escrow account where senior
lenders have priority over withdrawals by the concessionaire and there is
sufficient risk mitigation, such as pre-determined increase in user charges or
increase in concession period, in case project revenues are lower than
anticipated. Among other conditions, the lenders are required to have
right of substitution in case of concessionaire default and also to trigger
termination in case of default in debt service; and upon termination, the
project authority has an obligation of compulsory buy-out and repayment of debt
due in a pre- determined manner.
Explaining the reason behind the move, RBI
also said, “It has been brought to our notice that most of the projects in
India are user-charge based for which the Planning Commission has published
Model Concession Agreements (MCAs). These have been adopted by various
Ministries and State Governments for their respective public-private partnership
(PPP) projects and they provide adequate comfort to the lenders regarding
security of their debt”.
Analysis of Impact
1. Classification
of loans to PPP project as secured may impact PPP projects worth Rs 10,000 bn
Total
Infrastructure
financing
for the 12th FYP
|
Rs billion
|
Total requirement
|
56,000
|
Expected private participation including PPP (48%)
|
27,000
|
Assuming 70:30 debt equity ratio scenario, the private
sector has to manage
|
18,900
|
Conservative estimate
|
10,000
|
2. Amount of capital written off for
'doubtful' assets is 100% for an unsecured loan and it's just 20% for a secured
loan to the infrastructure sector, so Banks will now have five times as much of
a capital cushion than they would otherwise have had. This will increase
liquidity and bank’s ability to finance more in the infrastructure
sector.
3. Classification of loans to
PPP projects as secured will also attract other players including insurance
companies to invest in such projects
4. As per Planning Commission
interest rates for PPP projects would likely come down by about 100 basis
points.
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