2. 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.
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.
3. Typical Project Configuration
The project is implemented by a Special Purpose Vehicle,
which is a distinct corporate entity.
Project sponsors take an equity stake in the SPV.
The SPV enters into contractual arrangements with project
contractors, operators, off takers, government, and project
lenders.
The dependence on debt is usually high and lenders
generally lend on a non-recourse basis. This means that
project lenders would not have any fall-back on the
resources/assets of the sponsors if the SPV fails to meet
debt servicing obligations.
4. Key Project Parties
Project Sponsors
Project sponsors are responsible for converting a concept
into a project and having a role in setting up a project vehicle,
identifying and recruiting right managerial talent to implement
and run the project, providing a clear mandate to such
management on their expectations, and finally subscribing to a
signinficant proporation of equity in the project.
Project Vehicle
It is responsible for delivering a bankable project during the
financing phase, implementing the project and thereafter
operating in a manner that is financially viable.
Project lenders
They provide debt to finance the construction of the project.
They are secured by project assests and nomally do not
interfere in the day to day operations of the SPV.
EPC Contractors
EPC
contractor designs the project, procures all the
engineering skills and equipment to construct the project,
erects all the project facilities, ensyre that test and trial run are
completed, and finaaly commissions the project, all on the turn
key basis.
5. Key Project Parties
O&M Contractor:
They are responsible for operating and maintaining
the plant in the line with industry best pracitices.
Government
The Government is the key project party. It provides
a Concession to the SPV to set up the project and
ensures that ta proper legislative and regulatory
framework exists that allows the concerned SPV to
compete on a “level playing field” along with
exisiting, possibly government owned entities.
7. Parties in a Power Project
EPC
Contractor
Sponsors/Other
Shareholders
Project Company (SPV)
O and M
Contractor
Project Lenders
Fuel
Supplier
State Electricity
Board (Off taker)
State Government
8. Features of the Power Purchase
Agreement
The PPA establishes the conditions under which the SPV
would sell power to the SEB.
The SEB guarantees a minimum off take from the SPV or,
if it fails to do, a minimum payment
A payment mechanism and and a security mechanism that
ensures availability of payments on time is established. In
India, several large projects have been financed on the
basis of a 3 tier security mechanism.
Level 1 : Letter of Credit
Level 2 : Escrow Account
Level 3 : Irrevocable guarantee of the State Government
PPA also lays down the formula for computing tariffs.
Termination under conditions of sustained default by either
the SPV or the SEB.
9. Telecommunication Projects
Telecommunication projects are characterized 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 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.
10. Factors considered by Project Financiers
in a Telecommunication Project
Equipment Supply Contract
Financial strength of the project sponsors
Business Plan Assumption
Competitive Environment
11. Financing Telecommunication Projects
In general, telecom
projects incur cash losses in initial
years and these need to be funded. In determining a
telecom project’s cost, lenders follow the concept of “ peak
Negative Cash Flow Period,” which determines the
maximum period over which the project requires external
cash infusion and the total external financing requirements
during the period.
Given the long gestation periods and the commercial risks,
project lenders in India have funded telecom projects on a
lower debt-equity ratio (DER) such as around 1:1
13. What is a PPP?
Broadly a PPP refers to a contractual partnership between the
public and private sector agencies in which the private sector is
entrusted with the task of providing infrastructure facilities and
services that were traditionally provided by the public sector.
An example of a PPP is a toll expressway project financed,
constructed, and operated by a private developer.
According to the Government of India, a PPP project is a
project based on a contract or concession agreement between a
government or statutory entity and a private sector company for
delivering an infrastructure service on payment of user charges.
A private sector company is a company in which 51 percent or
more of equity is owned and controlled by a private entity.
