FUNDAMENTALS OF INFRASTRUCTURE PROJECT FINANCING
Q1. Explain the concept of new infrastructure funds.
Private financing is needed to ease the burden on government finances; it will encourage better risk sharing, accountability, monitoring and management in infrastructure provision.
After decades of severe regulatory restriction, private enterpreneurship in infrastructure bounced back in two ways during the late 1980s-
Through the privatization of state owned utilities &
Through policy reforms that made possible the construction of new facilities in competition.
The principal new infrastructure entepeneurship are international firm seeking business in ...view middle of the document...
Interpret mitigating major infrastructure projects risks
The crucial elements in the financing of infrastructure investment is first assessing the severity of each risk and then identifying the party in the best position to manage a risk.
Three board stages in an infrastructure projects are: -
1. Development risk - The initially very high risk phase where only equity capital can be used for financing.
2. Construction risk - The next high risk phase where cost and time spill over tend to distort the future revenue generation of the project
3. Operating risk - The risk emerges due to under estimation of operating cost and over estimation of the output.
Besides above the other risks are:
Demand risk - This is result of an over estimation of the demand and willingness to pay for the proposed infrastructure facility.
Financial risk - These are of foreign exchange and interest rate risks.
Market risk - This is important when consume can choose alternative services such as with toll roads, railways and ports.
Political risk - Inadequate clarity in government policies and selection procedures has made political risk the fulcrum of infrastructure development.
Market risk is difficult to hedge unless there is a single buyer or small group of buyers for the output. Projects having single product whose price may vary need to hedge against product price risk.
The projects where success or failure rests on price of one raw material input need to hedge against material price.
Some ways of mitigating market risks are –
1. Off take agreements
2. Power purchase agreement
3. Call and put options
4. Forward sales and purchase contracts.
Q3. Write a note on fiscal benefits – the need for government support in the context of infrastructure project financing
Contract analysis focuses on terms & conditions of each agreement. It considers the adequacy and strength of each contract in the context of a project technology and other characters, it fall under two board categories as follows-
1. Commercial agreements includes following.
a) Power purchase agreements
b) Gas & coal supply agreements
c) BOOTS contracts
d) Steam sales agreements
e) Concession agreements
2. Collateral agreements, include following
a) Project completion guarantees
b) Credit facilities or lending agreements
c) Equity contribution agreement
e) Depository agreements
f) Liquidity support agreements, letter of credit
g) Surety bonds
h) Targeted insurance policies
Q4. Write Compare institutional options and country conditions with respect to Infrastructure financing framework
Adequate economic rationale is there for encouraging the sponsorship of infrastructure project and to facilitate investments.
The externality principle:
The commercialization of the infrastructure projects is typically...