Risk-http://www.cea.nic.in/reports/articles/thermal/risk.pdf

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

Power plant operation

http://www.youtube.com/watch?v=Ota2_LUuar0

Power projects nearing ops date to expand banks' restructured portfolio | Business Standard

Power projects nearing ops date to expand banks' restructured portfolio | Business Standard

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.

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.      

     

In case of  BOT (toll) model, the developer has to recover his investments through toll collection. Depending upon the viability of the project, he may ask for a viability gap funding (currently capped at 40% of the project cost) from the NHAI or may agree to share revenues with the NHAI, whereas in case of  BOT(annuity) model, no viability gap funding (VGF) is made available to the developer and he has to bear the entire project cost. The project investment cost is recouped by the developer through annuity payments made by NHAI after the construction is over while the toll collected goes to the NHAI.

India's Infrastructure Debt Fund

India's Infrastructure Debt Fund

The RBI has given its permission to banks and non-banking financial companies NBFCs for setting up infrastructure debt funds in the form of NBFCs or mutual funds on September 23, 2011. This comes at a time when the Planning Commission has projected a huge investment requirement of the order of about $1 trillion in the Twelfth Plan (2012-17) for infrastructure projects.

SEBI also recently formulated a draft chapter VI-B, which on insertion in the existing Mutual Fund Regulations shall permit setting up of IDFs on this route by registered MFs as a scheme. The Board of SEBI said that they will announce the scheme separately after due process.

An IDF may be set up either as a trust or as a company. A trust based IDF would be a mutual fund that would issue units while a company based IDF would be a non-banking finance company (NBFC) that would issue bonds.

The investors would primarily be domestic and off-shore institutional investors, especially Insurance and Pension Funds who have long term resources. Banks and FIs would only be allowed to invest as sponsors of an IDF.

IDF floated as MF

1.  Banks acting as sponsors to IDF-MFs would be subject to existing prudential limits including limits on investments in financial services companies and limits on CME.

2.  NBFC acting as sponsors to IDF-MF, they will be required to have minimum net owned funds (NOF) of Rs 300 crore, CRAR of 15 % ; and net NPA of less than 3.0% of net advances. Further, NBFCs should have been in existence for at least 5 years; earning profits for the last three years and their performance should be satisfactory.

IDF floated as NBFC 

Sponsors (Banks and NBFC-IFC) will have to contribute a minimum equity of 30.0 % and a maximum equity of 49.0% in IDF-NBFC.

1.      Banks acting as sponsor to IDF-NBFCs would be subject to existing prudential limits including limits on investments in financial services companies and limits on CME .

2.       NBFC acting as sponsor to IDF-NBFC Post investment in the IDF, the sponsor must maintain minimum CRAR and NOF prescribed for IFCs.

3.      Criteria for IDF-NBFC

i) The IDF must have NOF of Rs. 300 crore or above;

ii) The IDF should be assigned a minimum credit rating 'A' or equivalent of CRISIL, FITCH, CARE, ICRA or equivalent rating by any other accredited rating agencies;

iii) Tier II capital cannot exceed Tier I. Minimum CRAR should be 15% of risk weighted assets;

iv) The IDF shall invest only in PPP and post COD infrastructure projects which have completed at least one year of satisfactory commercial operation and are a party to a Tripartite Agreement with the concessionaire and the Project Authority for ensuring a compulsory buyout with termination payment;

v) For the purpose of computing capital adequacy of the IDF, bonds covering PPP and post COD projects in existence over a year of commercial operation shall be assigned a risk weight of 50%

The maximum exposure that an IDF can take to a borrower or a group of borrowers will be at 50% of its total capital funds. Additional exposure up to 10%would be allowed at the discretion of the Board of the IDF-NBFC.

Post-investment in the IDF-MF, the CRAR of the NBFC should not be less than that prescribed and it should continue to maintain the required level of NOF.

Positives and negatives of IDF NBFC

Positives:

1.  The NBFC structure may issue bonds in both Rupee and foreign currencies thus have less risk as compared to Mutual fund structure which can issue only Rupee denominated units

2.   This may help banks reduce dependence on takeout financing agencies and will take off the burden from the banks which are nearing their exposure limits to various sectors and companies

3.   The IDFs will also help accelerate the evolution of a secondary market for bonds which is presently lacking in sufficient depth. Thus the IDFs would enable sourcing of funds through alternate sources which would help in bridging the likely debt gap.

Negatives:

1.    IDF NBFC can invest only in PPP and post COD infrastructure projects which have completed at least one year of satisfactory commercial operation; this would make a large number of projects that are under moratorium and pure private projects ineligible for lending.

2.    Most power projects that take five years and more to complete may not be eligible for funding by IDFs.

IDF is surely an innovative way to bring new sources of both domestic and international investment into the marketplace and will help to close the growing funding gap