Infrastructure Development Finance Company Limited

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1 Infrastructure Development Finance Company Limited Presentation on Road Sector Financing Our four sector focus: Energy. Telecom. Transport Industrial & Commercial Infrastructure

2 Agenda 1 Road Sector Overview 2 IDFC in Road Sector Financing 3 Typical Road Financing 4 Case Studies 2

3 Overview India has an extensive road network of 3.3 million km 2 nd largest in the world after USA Network classified into Expressways, National Highways, State Highways, District Roads and Rural Roads Highways/ Expressways constitute a small portion of all roads (65,569 km) Paved Roads account for 46% of all roads in India Roads carry~85% of passenger and 70% of freight traffic National highways carry ~40% of freight traffic Key drivers - GDP and population growth Multi layer responsibilites - central, state and local governments Land acquisition is a state subject Lack of independent economic regulators for the sector Road safety standards are generally low and a matter of concern 3

4 Policy initiatives Reforms initiated by Government of India (GoI) in NHAI operationalised in February 1995 Established sources of funding of highways though cess on fuel Set up the Central Road Fund mechanism Evolved policies and model concession frameworks for involving the private sector though approaches such as Direct Toll Annuity NHAI to provide grants/viability gap funding for marginal Projects 100% FDI allowed 100% income tax exemption for a period of 10 years 4

5 The Road So Far Last 8 years have seen the award and development of a number of road projects to the private sector on BOT basis Direct tolling projects Jaipur-Kishengarh, Tada Nellore, Vivekananda Bridge Narmada bridge, Coimbatore Bypass, Hubli-Dharwad State level projects in Gujarat, Maharashtra, MP Annuity projects Panagarh Palsit, Tambaram Tindivanum, Jhansi - Lalitpur Bangalore-Maddur project, Trivandrum City Roads Securitisation deals Mumbai entry points Mumbai-Pune expressway 5

6 NHDP A significant Opportunity National Highways Development Project (NHDP) is currently underway Phase I: 5,846 km on the Golden Quadrilateral linking the 4 main metros Maximum projects are through the conventional contract approach Almost 15% the projects are though a mix of BOT projects - toll roads, annuity, NHAI s SPVs 95% completion been achieved as of Mar 07 Phase II: 7,300 km on a North South and East West corridor Implementation has picked up momentum recently and contracts for 85% length have been awarded so far Phase III: 4,000 km linking state capitals and important commercial centres Project conceived and implementation has now commenced Target completion date for Phase I & II is Dec 08 and Phase IIIA is Dec 09 Significant number of BOT projects expected in Phase II and III Govt is already working on 6-laning of select NH stretches to cater to the expected growth in traffic Investment outlay of Rs 1,720 bn for NHDP planned till 2012 Estimated private capital investment of Rs 750 bn 6

7 Other Investment Opportunities OMT (Operate-Maintain-Transfer) Concessions 5000 km of completed GQ sections likely to be offered to private sector Securitization of toll income combined with comprehensive corridor management State level road capacity expansions State highways, select urban roads Key players would be Maharashtra, Gujarat, Madhya Pradesh, Punjab 7

8 Agenda 1 Road Sector Overview 2 IDFC in Road Sector Financing 3 Typical Road Financing 4 Case Studies 8

9 IDFC in Roads Sector IDFC is the market leader in financing of private sector road projects Biggest portfolio of roads assets in the country Road sector is one of the key business areas of IDFC 44 deals approved since inception 32 disbursed accounts Significant fee earner for IDFC Advisory, Syndication/Underwriting, Upfront, Agency IDFC provides end-to-end financing solutions for private road projects Equity, mezzanine and debt capital Debt underwriting and syndication Equity syndication Corporate advisory services, agency services Because of this, IDFC is in a unique position to take advantage of the emerging opportunities 9

10 IDFC in Road Sector Gross Approvals and Disbursements (Rs in million) Approvals Disbursements 9,576 16,330 18,880 35,060 47,560 3,038 5,747 5,660 19,860 24,

11 Select Road Financing Deals Project Type Length Cost (Rs bn) Roles played by IDFC Jaipur-Kishangarh Toll Financial advisor, Underwriter, Arranger & Lead bank, Mezzanine investor Meerut Muzzafarnagar Toll Arranger, Lenders' Agent, Senior and Sub-debt lender Salem Kumarpalayam Toll Arranger & Lead Bank, Senior and Sub-debt lender MEP Toll Road Toll NA 4.30 Major lender Kumarpalayam Chengapalli Toll Arranger, Senior and Sub-debt lender Delhi Noida Bridge 1 Toll Take-out financier Jadcherla Kotakotta Toll Arranger, Senior and Sub-debt lender Bangalore Maddur Toll Underwriter, Arranger & Lead bank Salem Namakkal Toll Underwriter & Arranger, Senior and Sub-debt lender Indore - Edilabad Toll Lead bank, securitsation debt lender Narmada Bridge Toll Lead bank, take-out financier Moradabad bypass Toll Lead Bank Jhansi Lalitpur Annuity Co-developer, Arranger, Senior and Sub-debt lender Panagarh-Palsit Annuity Appraising institution, Lead Bank Durgapur Bypass Annuity Appraising institution, Lead bank 1 For the bond issue which was used to partly fund the construction cost 11

12 Agenda 1 Road Sector Overview 2 IDFC in Road Sector Financing 3 Typical Road Financing 4 Case Studies 12

13 Project Background Nodal agency for national highways NHAI Two principal modes of private sector participation Annuity based Toll based Annuity based projects NHAI pays a fixed amount (in bi-annual installments) for the duration of concession period in consideration of construction, operation and maintenance of the road Toll based projects The developer gets the right to collect toll for the duration of concession period in consideration of construction, operation and maintenance of the road International competitive bidding to select the developer Annuity projects awarded on least annuity amount quoted Toll based projects awarded on least grant (or highest negative grant) from NHAI Well defined qualification criteria consortium bidding for enabling qualification 13

14 Typical Financing Process The Developer appoints an Arranger to appraise the Project, suggest the appropriate capital structure and to syndicate the debt The Arranger appoints A Lenders Engineer (LE) for an independent technical review, and An Independent Traffic Consultant (ITC) for a traffic study - for toll roads only Based on the inputs received from the LE & ITC, the Arranger finalizes the capital structure in consultation with the Developer The Arranger prepares a Project Information Memorandum (PIM) which contains project details, projected profitability statements and cash flows and a draft term sheet. The Arranger invites participation from syndicate banks on the basis of the PIM Road financing is primarily through the bank loan market, in which the domestic private and public sector banks actively participate After receipt of debt approvals, the syndicate is finalized and debt shares allocated amongst the syndicate members A Legal Counsel is mandated to prepare and finalize the financing documents In case of large or complex projects, an Insurance Consultant may be appointed for advise on Project insurance matters Financial Closure (signing of Facility documents) is typically completed in months from the award of the Arranger mandate 14

15 Typical Documentation Project Documents Concession Agreement State Support Agreement Substitution Agreement EPC Contract O&M Contract Shareholders Agreement SPV s Constitutional Documents Financing Documents Loan Agreement Escrow Agreement Share Pledge Agreement Deed of Hypothecation Mortgage Deed Sponsor Support Agreement Reserves & Surplus Agreement 15

16 Typical Funding Sources Equity Capital Core capital provided by the sponsors (developers / contractors) Minority stakes may be taken by financial investors / funds Substantial potential exists for leveraging these sources for highway projects Preference Capital Sub-ordinated Debt Typically with far lesser rights Could be unsecured Senior Secured Debt Normally in the form of rupee term loan from Indian banks / institutions Capital market instruments Possible only after CoD. Yet to take off in the Indian context. Variant could be 2 nd charge secured debt with rights Need to continuously evaluate ways through which additional resources can be channelised into the sector Insurance funds, pension funds 16

17 Agenda 1 Road Sector Overview 2 IDFC in Road Sector Financing 3 Typical Road Financing 4 Case Studies 17

18 Agenda Case Study 1 Annuity based road project Project Structuring to optimise the risk-return equation 18

19 Annuity Case Study - 1 Project Finance Structure Project : 4-laning of 60 km Concession Period : 17.5 years (incl construction period) Project Cost: Rs 320 crore Financed in a Debt-Equity Ratio of 3:1 by way of: Equity + Quasi-equity: Rs 80 crore Debt: Rs 240 crore Initial Debt terms Tenor = 13 years door-to-door Interest rate = 12-13% approx To be reset after 3 years 19

20 Annuity Road Transaction Structure NHAI Financing Agreements Concession Agreement Annuity JV Partner Lenders Project SPV Equity Shhldr s Agmnt Debt O&M Agmnt EPC Agmnt Main Sponsor Lenders Engineer Contractor Independent Engineer 20

21 Annuity Road Risk Analysis Completion Risk Delay in acquiring & handing over land by NHAI NHAI to provide land before commencement of the concession period Time / Cost Overrun Fixed time, fixed price EPC Contract Limited promoter recourse Operating Risk O&M contract with penal provisions executed. Company s past experience also considered Revenue Risk Annuity to be paid by NHAI, a AAA rated statutory body L/C equivalent to one annuity provided by NHAI Force Majeure Risk For Political and Indirect-political Events, Debt would be protected For Non-political (insurable) Events, insurance proceeds would be the only compensation. NHAI would not pay any amount 21

22 Annuity Road Refinancing Post COD Sponsors have raised Rs crore through refinancing of project debt plus securitization of future receivables Possible due to strong support from NHAI and a tight CA Ongoing strong involvement / support from the sponsors Decline in interest rates Tenor years (approx) Interest Rate = % fixed Limited resets at end of every 5 years and hence some amount of rate risk Sponsors have provided recourse to protect lenders against certain risks No free ride for the sponsors 22

23 Annuity Road Key Learning Project received a highly competitive bid, which was considered unworkable in certain quarters but eventually seems to have worked out Sound homework regarding construction price Risk has been appropriately allocated Benefit from a declining interest rate regime No change or reverse movement of rates / increased inflation would have hurt the sponsors Innovation in financing has helped in improving returns Refinancing / securitization has helped in generation of cashflows for the sponsors Residual risks still being borne by the sponsors Well-calculated risks/ financial engineering by sponsors can improve project economics and deserve to be rewarded by way of improved returns, since the down-side risk is also borne by them 23

24 Agenda Case Study 2 Toll based road project End-to-end involvement of IDFC 24

25 Case Study 2 - Toll based project The bid stage Toll based project for 4-laning of existing national highway Project bid out by NHAI least grant (or highest positive grant) criteria for selection of developer IDFC tied up with a mid-sized construction company (Company) with strong project implementation skills to bid for the project Technical aspects of bid handled by Company Financial analysis led by IDFC IDFC also contributed to the financial capability of the consortium enabling qualification Firm EPC price committed by Company prior to bidding, IDFC committed the extent of leverage possible The consortium of IDFC and Company bid the least grant and won the project 25

26 Toll based project Deal Structure and financing Company JV Agreement IDFC Company EPC Contract Equity Debt SPV State Support Agrmnt Concession Capital grant State Govt. NHAI IDFC / Other lenders Substitution Agreement SPV established for implementing the project IDFC and Company being the initial shareholders EPC contract being executed between Company and the SPV IDFC in process of syndication of the entire debt requirement and placement of equity Part of the debt requirement from IDFC, balance being placed with Banks / Institutions Equity commitment by IDFC and a soon to be set up Project Equity fund to be managed by IDFC 26

27 Thank You 27

Experience of Implementing Transportation PPPs in India. Abhijit Bhaumik August 6, 2015

Experience of Implementing Transportation PPPs in India Abhijit Bhaumik August 6, 2015 Experience of Implementing PPPs in India India has witnessed successful PPPs across several infrastructure sectors