Monday, April 11, 2011

Indian Highways & Roads need a retrofitting ?





                     
             Though India has an extensive road network of 3.3 million kilometres & is the second largest in the world but the question is - Is it matching the demand ?

As per the Global Competitiveness Report 2008-09, inadequate infrastructure is the biggest
Impediment  in India’s economic growth.The report ranks the country at a dismal 87th position as far
as the quality of roads is concerned, way below neighbours .

Infrastructure: Quality of roads Side Bar chart
The index scores 133 economies from 0 to 7, with 7 being the best possible score. For the quality of roads index, survey respondents were asked "How would you assess roads in your country? (1 = extremely underdeveloped; 7 = extensive and efficient by international standards)"

 The percentage growth of road traffic from the year 1991 to 1995 has been about 42%, whereas the percentage growth of road length has been only 8.7%. This has also led to severe congestion on the roads. Indian roads carry about 61% of the freight and 85% of the passenger traffic. All the highways and expressways together constitute about 66,590 kilometers (only 2% of all roads), whereas they carry 40% of the road traffic.


         Indian Road Network
Class
Length (km)
Access Controlled Expressways
200 km
4-6 lane Divided Highways (with service rd in crowded areas)
10,000 km
National Highways
66,590 km
State Highways
131,899 km
Major district roads
467,763 km
Rural & other roads

2,650,000 km
Total (approx)
3,300,000 km


Source: http://en.wikipedia.org/wiki/Indian_road_network dated 12/04/2011  & http://www.iimcal.ac.in/community/finclub/dhan/dhan7/FINANCING%20INFRASTRUCTURE%20PROJECTS.pdf
Given the growing population, income levels and rapid urbanization, the need to develop the road network of the country to match heightened economic activity is of vital importance . In the last fiscal year  government decided to spend about Rs 1,20,000 crore per annum on building new highways and very recently fixed a staggering investment target of $60 billion to build 35,000km of roads in the next five years .This means that they want to build 7000 km road annually (20 km per day ) .most analyst think that it is over ambitious & I think that they are right because the  first five years of the UPA rule (from 2004) had seen construction at the pace of four km a day .

The graph below the difference between awarded and completed in the last 10 years





To bridge the gap we have to improve not just the pace of contracting but also push the pace of implementations. Govt must make sure that there is healthy private sector interest for upcoming projects by ensuring that projects remain attractive through various means available at its end like grant for projects, increase in concession period etc.

Moreover World Bank study has assessed that every rupee invested in the highways sector yields 7x returns in economic value. With this kind of multiplier effect, it is high time for India to increase its investment in improving its road network, both in terms of length and quality.

Important links of Project Finance & Infrastructure reports/Articles/sites etc

Saturday, April 9, 2011

Project Finance vs Corporate Finance

Project finance involves the creation of a legally independent project company financed with nonrecourse debt for the purpose of investing in a capital asset, usually with a single purpose and a limited life .

  • What is non recourse debt Non recourse debt - It is a type of loan that is secured by collateral, which is usually property. If the borrower defaults, the issuer can seize the collateral, but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount. This is one instance where the borrower does not have personal liability for the loan. These types of projects are characterized by high capital expenditures, long loan periods and uncertain revenue streams. Analyzing them requires a sound knowledge of the underlying technical domain as well as financial modeling skills.
The above definition highlights the following features of Project Finance:
  • First, Project Finance involves creating a legally independent project company to invest in the project; the assets and liabilities of the project company do not appear on the sponsors’ balance sheet. As a result, the project company does not have access to internally-generated cash flows of the sponsoring firm. Similarly, the sponsoring firm does not have access to the cash flows of the project company. In contrast, in Corporate Finance, the same investment is financed as part of the company’s existing balance sheet.
  • Second, the purpose for Project Finance is to invest in a single purpose capital asset, usually a long-term illiquid asset. In contrast to a company which may be investing in many projects simultaneously, a project financed company invests only in the particular project for which it is created. The project company is dissolved once the project gets completed.

  • Third, in Project Finance, the investment is financed with non-recourse debt. Since the project company is a standalone, legally independent company, the debt is structured without recourse to the sponsors. As a result, all the interest and loan repayments come from the cash flows generated from the project. This is in contrast to Corporate Finance where the lenders can rely on the cash flows and assets of the sponsor company apart from those of the project itself.
Project finance solves two financing problems:
  1. It reduces the cost of agency conflicts inside project companies-The creation of a project company provides an opportunity to create a new, asset-specific governance system to address the conflicts between ownership and control. Because project companies are new and independent firms, project sponsors have the opportunity to create asset-specific governance systems to address these agency conflicts in ways that cannot be replicated under corporate finance .

  2. It reduces the opportunity cost of underinvestment due to leverage and incremental distress costs in sponsoring firms.
How does Project Finance creates more value

The key to understanding why project finance creates value is to recognize that firms bear “deadweight costs” (DWC) when they invest in and finance new assets. Investment value = (Project value) - (Project DWC) - (Incremental Firm DWC)

In summary, this combination of structural features (extensive contracting, concentrated debt and equity ownership, separate legal incorporation, and high leverage) effectively controls managerial discretion at the project level. Relative to corporate governance systems, project governance systems are much more effective at eliminating wasteful expenditures, discouraging sub-optimal investment, and inducing coordinated, value increasing effort

The table below shows how Equity finance ,Project finance ,Corporate finance & Hybrid finance differ from each other .

Friday, April 8, 2011

Purpose of this blog

The purpose of this blog is to provide info & data about Project Financing We know development of proper infrastructure is vital for economic growth of any country. Infrastructure consists of many things such as Road, Railway, Port and harbour, airport, electricity, telecommunication, water supply etc. I will try to cover the following topics in this Blog :
  1. What is Project Financing ? How is Project Finance different from corporate & Hyrid finance . Types of Infrastructure project Greenfied vis a vie Brownfield
  2. What is SPV & when is it required ?
  3. Structural Attributes of Project Companies(Organizational ,capital & ownership structure )
  4. Various Kinds of Risks involved in Project Financing & mitigation approaches
  5. What is take out Financing ?Types of take out finance
  6. Types of privatization -BOOT,BOT,DBOT,BTLO,BOO models for privatization in infrastructure .
  7. Myer’s Pecking order theory & The Static Trade off theory
  8. Role of IFC
  9. International Projects - AJC Cable Mozal ,Iridium ,Calpine
  10. Indian Projects-Delhi Noida Toll Bridge,IIT J Solar Thermal Power Ltd, Delhi International Airport Ltd (DIAL) , Chennai Desalination Water Limited
  11. Financial Modelling in Excel (Tips & Tricks )
  12. Valuation -Free cash flow· Business valuation · Fairness opinion · Stock valuation · APV · DCF · Net present value (NPV) · Cost of capital(Weighted average) · Comparable company analysis · Accretion/dilution analysis · Enterprise value · Tax shield · Minority interest Associate company· EVA · MVA· Terminal value · Real options valuation
  13. Infrastructure : India vis a vie other major economies (China & US )
  14. PPP -Solution to infrastructure problems ?
  15. What is there in 2011 budget for infrastructure sector .