5. Project Financial Structuring
The project financial structuring examines the sources and composition of funding for the project. For this section, the DPR needs to provide:
5.1 Overall Financial Structuring of the project In this regard, the DPR should include information as per the table given below:
Note:
(1) in case of SPV /separate project legal entity, equity share of each contributing entity including govt entities need to be specified
(3) Term loans and other private funding commitments: are required to be supported by sanction letter/agreement/in- principle letter of support containing the terms ( for example: loan/debt should include details such as moratorium grace, interest rate, payment schedule of principal and interest etc).
(4) Column no. 6 refers to percentage distribution as per JNNURM guidelines as applicable for the city
(5) State Government’s contribution commitment: are required to be supported by approval for sanction in the annual plan/state cabinet approval/ in principle letter of support from the state finance ministry
(6) Within 30 days of CSMC approval, a quarterly forecast of when state and ULB contributions will be received in the project bank account is to be specified and forwarded to MoUD in the format as provided in Annexure-3.
Project financial structuring can involve a combination of equity, grant, debt and finance from private participation (and in some cases, contribution from user communities)
5.2 Review of options for
• Institutional debt and/or
• Private sector participation.
The ULB, should ideally review the scope and options for possible debt and/or private sector financing while preparing the DPR. To provide a perspective in this regard, a brief overview of debt and private sector finance is given below:
The Debt Component Supporting the capital cost of the project entirely by Grant and ULB internal sources (surplus) might not necessarily reflect the best manner of financing urban infrastructure projects. A debt component would-
(a) provide gearing and hence support a larger number/scale of infrastructure projects by the ULB and
(b) provide (an additional) project appraisal by the funding agency and hence contributes to risk reduction and improved project structuring
(c) contribute to project management discipline for the ULB, specially in the context of O&M management, user charge levy etc.
The Debt Component can be from:
(a) general bank finance: however banks are unlikely to accord long tenure finance (these could typically be around eight years at a stretch)
(b) specially issued municipal bonds
(c) term loan from financial intermediary such as HUDCO, LIC, IL&FS, IDFC, SBI Caps ICICI bank; state level financial institutions (including those specific to development of urban infrastructure ) etc
The ideal debt component is dependent upon a number of factors including the nature and sector of the project, project cash-flows as well as the financial condition of the municipality and financial management practices of the municipality. However, several projects might be able to support at least a small debt component (such as 5-10% of the total project cost) and take advantage of the stated benefits.
Private Participation in financing construction of infrastructure project Private sector can be involved in financing (as well as managing the) construction of the infrastructure project and it can contribute towards the ULB or state share of
finance This could be through -
(a) a separate legal entity created specifically for this purpose ( SPV)
(b) a direct BOT/BOOT arrangement and its variant models with or without an SPV arrangement.(c) a simple management contract or lease based contract All variants involve payment to the private entity to enable them cost recovery of
construction (and also for O&M). This could be in the form of:
(a) Private party being allowed direct recovery of user charges for a specified long term duration ( say, for illustrative purposes only, 15-25 years)
(b) Private party being paid a fixed annuity (or on a fixed rate per unit quantity for service delivery undertaken) for its services over the specified term duration.
The ULB can directly recover user charges or retain the option of contracting out billing and collection to a different private entity.
Linking construction with a long term O&M performance contract could provide the advantage of operational cost efficiency as well as accountability (including quality) for creating the original infrastructure asset.
All the models of private entity involvement envisages ULB/parastatal monitoring/supervision of outcomes. Hence the ULB/parastatal continues to be actively involved in these activities though its role is modified.
Private sector financing and /or debt financing helps the ULB to leverage the grant support funds provided by JNNURM. The true spirit of JNNURM (in the project perspective) is to use funds to catalyse additional funds and ensure their efficient
management. The ULB will need to examine various options for project structuring in this regard on a case to case basis .Project proposals are hence no longer a simplistic case of detailing technical parameters supplemented by cost
estimations based on an administratively defined schedule of rates.
In summary, for the section concerning project financial structuring, the DPR needs
to provide:
5.1 Information as per the given tabular format
5.2 Confirmation that project planners have examined the scope and options for institutional debt (financing at the very least a small component of the total project cost) and/or private sector participation. Brief analysis and conclusions in this
regard may be presented.
