Understanding Project Finance: Methods, Advantages, and Disadvantages, Summaries of Computer Science

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LOVELY PROFESSIONAL UNIVERSITY DEPARTMENT OF MANAGEMENT Report on Summer Training Project Financing in Delhi Metro Rail Corporation (DMRC) Submitted to Lovely Professional University In partial fulfillment of the Requirements for the award of Degree of Master of Business Administration Submitted by: Name of the student: Anubhav Sharma University Roll No : 11301927(A14) DEPARTMENT OF MANAGEMENT LOVELY PROFESSIONAL UNIVERSITY JALANDHAR NEW DELHI GT ROAD PHAGWARA PUNJAB 2 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Table of Contents DECLARATION .......................................................................................................................................................... 6 ACKNOWLEDGEMENT .............................................................................................................................................. 7 PREFACE .................................................................................................................................................................. 8 EXECUTIVE SUMMARY ............................................................................................................................................. 9 REASEARCH METHODOLOGY ............................................................................................................................................................. 9 1) Introduction:- .................................................................................................................................................................................... 9 2) Objectives of Project Report:- ........................................................................................................................................................... 9 Sources of Data Collection: - ................................................................................................................................................................. 9 Primary Sources: - .................................................................................................................................................................................. 9 Secondary Sources:- ............................................................................................................................................................................ 10 Hypothesis:- ......................................................................................................................................................................................... 10 Scope of the project:- .......................................................................................................................................................................... 10 Limitation of the study:- ...................................................................................................................................................................... 10 LITERATURE REVIEW .............................................................................................................................................. 11 COMPANY PROFILE ................................................................................................................................................ 14 Background ..................................................................................................................................................................................... 15 Network .......................................................................................................................................................................................... 15 Current routes ................................................................................................................................................................................. 16 Red Line .......................................................................................................................................................................................... 16 Yellow Line ...................................................................................................................................................................................... 17 Blue Line .......................................................................................................................................................................................... 17 Green Line ....................................................................................................................................................................................... 18 Violet Line ....................................................................................................................................................................................... 18 Airport Express ................................................................................................................................................................................ 19 Planned extensions ......................................................................................................................................................................... 19 Phase III ........................................................................................................................................................................................... 19 Phase IV .......................................................................................................................................................................................... 21 Operations ...................................................................................................................................................................................... 23 5 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Option 1 ......................................................................................................................................................................................... 60 Option 2 ......................................................................................................................................................................................... 60 REFERENCES .......................................................................................................................................................... 61 CONCLUSION ......................................................................................................................................................... 62 6 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Declaration I, Anubhav Sharma, hereby declare that the work presented herein is authentic and true to the best of my knowledge and abilities and that any part has not been presented or published elsewhere for the requirement of degree program. Any works done by others or cited within this report have been given due acknowledgement and listed in the reference section of this dissertation. Anubhav Sharma 11301927 7 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Acknowledgement This report may not be able to fully express my gratitude and respect that I have towards the people of Delhi Metro Rail Corporation Limited. This formal dissertation would not have been successful without the help and support of management and employees with whom I have had the chance of interaction during the period of this internship. I am indebted to many of the good people of DMRC who always lent a helping hand. The knowledge and the experience gained during this internship from the credit worthy people will be the most rewarding phase of my career. I would like to thank Mr. Manish Jain (Assistant manager, Finance) and Mr. Pankaj Chand Thakur (Finance) for guiding and supporting me throughout this period of six weeks. Without their immaculate and intellectual guidance, sustained efforts and friendly approach, it would have been impossible to achieve result in a short span of time. Value the contribution of all other staff members of Finance department for sharing the wealth of knowledge, wisdom and experience. Anubhav Sharma 10 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Secondary Sources:- The secondary data relating to the procedures of assessment of project financing in MRTS, RBI guidelines etc. have been sourced from reference books and websites. Hypothesis:- Project finance is the one of the biggest source of borrowing the debts. Scope of the project:- Company has given various guidelines, advice and projection for obtaining the finance from the banking institutions and other financial services. And developing of the company keeping in the view economic of the country. It is necessary to under taken the impact of Delhi Metro & various services provide to their clients. Limitation of the study:-  The time limitation is the most important problem to collect the various information.  Study is not related to the current market position  It requires lot of time & is more expensive 11 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a LITERATURE REVIEW  The growing demand for public transport in mega cities has serious effects on urban ecosystems, especially due to the increased atmospheric pollution and changes in land use patterns. An ecologically sustainable urban transport system could be obtained by an appropriate mix of alternative modes of transport resulting in the use of environmentally friendly fuels and land use patterns. The introduction of CNG in certain vehicles and switching of some portion of the transport demand to the metro rail have resulted in a significant reduction of atmospheric pollution in Delhi. The Delhi Metro provides multiple benefits: reduction in air pollution, time saving to passengers, reduction in accidents, reduction in traffic congestion and fuel savings. There are incremental benefits and costs to a number of economic agents: government, private transporters, passengers, general public and unskilled labor. The financial internal rate of return on investments in the Metro is estimated as 17 percent while the economic rate of return is 24 percent. Accounting for benefits from the reduction of urban air pollution due to the Metro has increased the economic rate of return by 1.4 percent. -M N Murty, Kishore Kumar Dhavala, Meenakshi Ghosh and Rashmi Singh (Institute of Economic growth)  The use of non-recourse project financing has grown steadily in emerging markets, especially in basic infrastructure, natural resources and energy sector. Because of its cost and complexity, project finance is aimed at large-scale investments. The key is in the precise estimation of cash flows and risk analysis and allocation, which enables a high leverage and in ensuring that the project can be easily separated from the sponsors involved. Project financing is difficult because there are unpredictable risks associated with unfavorably biased results. This imposes the need to introduce contractual financing and structural elements that yield the maximum possible expatriation of operating flows. -Henrique Ghersi Y and Jaime Sabal  Project finance is the process of financing a specific economic unit that the sponsors create, in which creditors share much of the venture’s business risk and funding is obtained strictly for the project itself. Project finance, often used for capital-intensive facilities and utilities, is commonly used to segregate the credit risk of the project from that of its sponsors so that lenders, investors, and other parties will appraise the project strictly on its own merits. Project finance creates value by reducing the costs of 12 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a funding, maintaining the sponsors financial flexibility, increasing the leverage ratios, avoiding contamination risk, reducing corporate taxes, improving risk management, and reducing the costs associated with market imperfections. -João Pinto  "Project finance" is not the same thing as "financing projects," because projects may be financed in many different ways. Traditionally, large scale public sector projects in developed countries were financed by public-sector debt; private-sector projects were financed by large companies raising corporate loans. In developing countries, projects were financed by the government borrowing from the international banking market, multilateral institutions such as the World Bank, through export credits. These approaches have begun to change, however, as privatization and deregulation have changed the approach to financing investment in major projects, transferring a significant share of the financing burden to the private sector. -E R Yescombe  Project finance techniques have enabled projects to be built in markets using private capital. These private finance techniques are a key element in scaling back government financing, a central pillar of The current ideological agenda whose goals are well articulated by Grover Norquist, a, a US Republican ideologue and lobbyist, who says ‘I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.’ On the basis of such ideological agendas and lobbyists’ machinations are the macroeconomic policies, upon which project finance feeds, Made, thus transferring the control of public services from the electorate to private, unaccountable And uncoordinated interests. Such agendas make project financing a key method of using private capital to achieve private ownership of public services such as energy, transportation and other infrastructure Development initiatives. The goal ultimately is to make government irrelevant and achieve a two-tier Society where government panders to the marginalized and infrastructure development and exploitation Are handed over to private capital, free from the encumbrances of electoral mandates. -Andrew Fight  Project financing is not a new financing technique. Venture-by-venture financing of finite-life projects has a long history; it was, in fact, the rule in commerce until the 17th century. For example, in 1299— nearly 700 years ago—the English Crown negotiated a loan from the Frescobaldi (a leading Italian merchant bank of that period) to develop the Devon silver mines. 15 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a The recently opened Rapid Metro Rail Gurgaon, whilst linked to it by the Yellow Line is a separate metro system, although tickets from the Delhi Metro can be used in its network. The voice overs for the Delhi Metro have been given by Rini Simon Khanna and Shammi Narang. Background The concept of a mass rapid transit for New Delhi first emerged from a traffic and travel characteristics study which was carried out in the city in 1969. Over the next several years, many official committees by a variety of government departments were commissioned to examine issues related to technology, route alignment, and governmental jurisdiction. In 1984, the Delhi Development Authority and the Urban Arts Commission came up with a proposal for developing a multi-modal transport system, which would consist of constructing three underground mass rapid transit corridors as well augmenting the city's existing suburban railway and road transport networks. While extensive technical studies and the raising of finance for the project were in progress, the city expanded significantly resulting in a twofold rise in population and a fivefold rise in the number of vehicles between 1981 and 1998. Consequently, traffic congestion and pollution soared, as an increasing number of commuters took to private vehicles with the existing bus system unable to bear the load. An attempt at privatizing the bus transport system in 1992 merely compounded the problem, with inexperienced operators plying poorly maintained, noisy and polluting buses on lengthy routes, resulting in long waiting times, unreliable service, extreme overcrowding, unqualified drivers, speeding and reckless driving. To rectify the situation, the Government of India and the Government of Delhi jointly set up a company called the Delhi Metro Rail Corporation (DMRC) on 3 May 1995, with E. Sreedharan as the managing director. Network The Delhi Metro is being built in phases. Phase I completed 58 stations and 65.0 km (40.4 mi) of route length, of which 13.0 km (8.1 mi) is underground and 52.1 km (32.4 mi) surface or elevated. The inauguration of the Dwarka–Barakhamba Road corridor of the Blue Line marked the completion of Phase I on October 2006. Phase II of the network comprises 124.6 km (77.4 mi) of route length and 85 stations, and is fully completed, with the first section opened in June 2008 and the last line opened in August 2011. Phase III (103 km, 69 stations) and Phase IV (113.2 km) are planned to be completed by 2016 and 2021 respectively, with the network spanning 413 km (257 mi) by then. 16 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Current routes As of September 2013, with the completion of Phase I, Phase II and the beginning of operations on Phase III, the Delhi Metro network comprises six lines (plus the Airport Express line), serving 135 metro stations (plus 6 Airport Express stations, for a total of 141), and operating on a total route length of 193.2 km (120.0 mi) (including the Airport Express line). Line Stations Length (km) Terminals Rolling stock Red Line 21 25.09 Dilshad Garden Rithala 26 trains Yellow Line 35 44.65 Jahangirpuri HUDA City Centre 60 trains Blue Line 43 49.93 Noida City Centre Dwarka Sector 21 70 trains 7 8.74 Yamuna Bank Vaishali Green Line 14 15.14 Inderlok Mundka 15 trains 1 3.32 Ashok Park Main Kirti Nagar Violet Line 15 23.24 Mandi House Badarpur 30 trains Airport Express 6 22.70 New Delhi Dwarka Sector 21 8 trains TOTAL 141 192.81 Red Line The Red Line was the first line of the Metro to be opened and connects Rithala in the west to Dilshad Garden in the east, covering a distance of 25.09 kilometers (15.59 mi). It is partly elevated and partly at grade, and crosses the Yamuna River between Kashmere Gate and Shastri Park stations. The inauguration of the first stretch between Shahdara and Tis Hazari on 24 December 2002 caused the ticketing system to collapse due to the line being crowded to four times its capacity by citizens eager to have a ride. Subsequent sections were inaugurated 17 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a from Tis Hazari – Trinagar (later renamed Inderlok) on 4 October 2003, Inderlok – Rithala on 31 March 2004, and Shahdara – Dilshad Garden on 4 June 2008. The red line has two interchange stations, the first being Kashmere Gate with the yellow line and the second Inderlok with the green line. Starting from 24 November 2013 six coach trains will be inducted in a phased manner in red line. Yellow Line The Yellow Line was the second line of the Metro and was the first underground line to be opened. It runs for 44.36 kilometers (27.56 mi) from north to south and connects Jahangirpuri with HUDA City Centre in Gurgaon. The northern and southern parts of the line are elevated, while the central section through some of the most congested parts of Delhi is underground. The first section between Vishwa Vidyalaya and Kashmere Gate opened on 20 December 2004, and the subsequent sections of Kashmere Gate – Central Secretariat opened on 3 July 2005, and Vishwa Vidyalaya – Jahangirpuri on 4 February 2009. This line also possesses the country's deepest Metro station at Chawri Bazaar, situated 30 meters (98 ft.) below ground level. On 21 June 2010, an additional stretch from Qutub Minar to HUDA City Centre was opened, initially operating separately from the main line. However, Chhatarpur station on this line opened on 26 August 2010. Due to delay in acquiring the land for constructing the station, it was constructed using pre-fabricated structures in a record time of nine months and is the only station in the Delhi metro network to be made completely of steel. The connecting link between Central Secretariat and Qutub Minar opened on 3 September 2010. Interchanges are available with the Red Line and Kashmere Gate ISBT at Kashmere Gate station, Blue Line at Rajiv Chowk Station, Violet Line at Central Secretariat, Rapid MetroRail Gurgaon at Sikandarpur and with the Indian Railways network at Chandni chowk Delhi Junction Railway station and New Delhi railway stations. Yellow line is the first line of Delhi Metro which has phased out all four coach trains with six and eight coach configuration. The Metro Museum at Patel Chowk Metro station is a collection of display panels, historical photographs and exhibits, traces the genesis of the Delhi Metro. Blue Line The Blue Line was the third line of the Metro to be opened, and the first to connect areas outside Delhi. Mainly elevated and partly underground, it connects Dwarka Sub City in the west with the satellite city of Noida in the east, covering a distance of 47.4 kilometres (29.5 mi). The first section of this line between Dwarka and Barakhamba Road was inaugurated on 31 December 2005, and subsequent sections opened between Dwarka – Dwarka Sector 9 on 1 April 2006, Barakhamba Road – Indraprastha on 11 November 2006, 20 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a billion (US$5.9 billion). Construction has already begun on many of these. In April 2014 the Delhi governor gave approval for two further extensions. All the approved lines are: Line Stations Length (km) Terminals No. of interchanges planned Yellow Line extension 3 4.48 Jahangirpuri Badli 0 Violet Line 7 9.36 Central Secretariat Kashmere Gate 2 11 13.875 Badarpur Ballabgarh 0 Blue Line branch 4 5.5 Dwarka Najafgarh 1 5 6 Noida City Centre Noida Sector 62 0 Green Line 6 11.182 Mundka Bahadurgarh 0 Brown Line-Inner Ring Road Line (Line 7) 37 58.40 Mukundpur Shiv Vihar 10 Magenta Line-Outer Ring Road Line (Line 8) 26 37.25 Janakpuri West Botanical Garden 4 Red Line 6 9.6 Dilshad Garden New Bus Stand, Ghaziabad 0 Airport Express 5 11.63 Dwarka Sector 21 IFFCO Chowk 1 Total 104 167.277 18 21 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Other than these approved lines, there are several other proposed lines which are awaiting approval for inclusion in Phase III. These line extensions are: Line Stations Length (km) Terminals No. of interchanges planned Red Line 6 12 Rithala Bawana 0 Phase III will have 28 underground stations covering 41 km. More than 20 tunnel boring machines are expected to be simultaneously used during construction of Phase III. Delhi Metro is expecting a ridership of 4 million after completion of Phase III. DMRC has decided to use communication based train control (CBTC) for signaling which will allow trains to run at a short headway of 90 seconds. Keeping this in mind and other constraints, DMRC changed its decision to build 9 car long stations for new lines and instead opting for shorter stations which can accommodate 6 car trains. For the first time Delhi Metro will construct ring lines in Phase III. Till Phase II, Delhi Metro focused on expanding the reach of metro and thus built long radial lines. However, in Phase III, Delhi Metro is aiming to interconnect existing lines by ring lines to improve connectivity. This will not only help in reducing distances but will also relieve radial lines of some congestion. Phase IV Phase IV has a 2021 deadline, and tentatively includes further extensions to Sonia Vihar, Burari, Mukundpur, Reola Khanpur, Palam, Najafgarh, Narela, Ghazipur, Noida sector 62, extensions of Violet line, Green line, Line 8, having a total length of over 100 km. There might be some changes in plan before actual construction starts on these lines. 22 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Apart from these lines in Phases I to IV, plans have been mooted to construct a new line from Noida Sector 62 to Greater Noida which will intersect Indraprastha – Noida Sector 32 line. The Ghaziabad Development Authority 25 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a 295 km by 2016, making it one of the fastest expanding Metro networks in the world carrying about 40 lakh (4 million) passengers. Rolling stock The Metro uses rolling stock of two different gauges. Phase I lines use 1,676 mm (5.499 ft.) broad gauge rolling stock, while three Phase II lines use 1,435 mm (4.708 ft) standard gauge rolling stock. Trains are maintained at seven depots at Khyber Pass and Sultanpur for the Yellow Line, Mundka for the Green Line, Najafgarh and Yamuna Bank for the Blue Line, Shastri Park for the Red Line, and Sarita Vihar for the Violet Line. Maglev trains were initially considered for some lines of Phase 3, but DMRC decided to continue with conventional rail in August 2012. Broad gauge The broad gauge rolling stock is manufactured by two major suppliers. For the Phase I, the rolling stock was supplied by a consortium of companies comprising Hyundai Rotem, Mitsubishi Corporation, and MELCO.The coaches have a very similar look to MTR Rotem EMU,except with only 4 doors and use sliding doors. The coaches were initially built in South Korea by ROTEM, then in Bangalore by BEML through a technology transfer arrangement. These trains consist of four 3.2-metre (10 ft) wide stainless steel lightweight coaches with vestibules permitting movement throughout their length and can carry up to 1500 passengers, with 50 seated and 330 standing passengers per coach. The coaches are fully air conditioned, equipped with automatic doors, microprocessor-controlled brakes and secondary air suspension, and are capable of maintaining an average speed of 32 km/h (20 mph) over a distance of 1.1 km (0.68 mi). The system is extensible up to eight coaches, and platforms have been designed accordingly. The rolling stock for Phase II is being supplied by Bombardier Transportation, which has received an order for 614 cars worth approximately US$ 1100 million. While initial trains were made in Gorlitz, Germany and Sweden, the remainder will be built at Bombardier's factory in Savli, near Vadodara. These trains are a mix of four-car and six-car consists, capable of accommodating 1178 and 1792 commuters per train respectively. The coaches possess several improved features like Closed Circuit Television (CCTV) cameras with eight-hour backup for added security, charging points in all coaches for cell phones and laptops, improved air conditioning to provide a temperature of 25 degrees Celsius even in packed conditions and heaters for winter. 26 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Standard gauge The standard gauge rolling stock is manufactured by BEML at its factory in Bangalore. The trains are four-car consists with a capacity of 1506 commuters per train, accommodating 50 seated and 292 standing passengers in each coach. These trains will have CCTV cameras in and outside the coaches, power supply connections inside coaches to charge mobiles and laptops, better humidity control, microprocessor-controlled disc brakes, and will be capable of maintaining an average speed of 34 km/h (21 mph) over a distance of 1.1 km (0.68 mi). Airport Express Eight 6-car trains supplied by CAF Beasain were imported from Spain. CAF holds 5% equity in the DAME project, Reliance Infrastructure holds the remaining 95%. The trains on this line are of a premium standard compared to the existing metro trains and have in-built noise reduction and padded fabric seats. The coaches are equipped with LCD screens for entertainment of the passengers and also provide flight information for convenience of air travelers. The trains are fitted with an event recorder which can withstand high levels of temperature and impact and the wheels have flange lubrication system for less noise and better riding comfort. Signaling and telecommunication The Delhi Metro uses cab signaling along with a centralized automatic train control system consisting of operation, Automatic and automatic train signaling modules. A 380 MHz digital trunked TETRA radio communication system from Motorola is used on all lines to carry both voice and data information. For Blue Line Siemens Transportation Systems has supplied the electronic interlocking Sicas, the operation control system Vicos OC 500 and the automation control system LZB 700 M. An integrated system comprising optical fiber cable, on-train radio, CCTV, and a centralized clock and public address system is used for telecommunication during train operations as well as emergencies. For Red and Yellow lines ALSTOM has supplied signaling system and for line Green and Violet Bombardier Transportation has supplied CITYFLO 350 signaling system. The Airport Express line has introduced Wi-Fi services at all stations along the route on 13 January 2012. Connectivity inside metro trains travelling on the route is expected in the future. The Wi-Fi service is provided by YOU Broadband & Cable India Limited. The service makes Delhi Metro the second metro in India to provide Wi-Fi services to passengers after the Namma Metro in Bangalore. 27 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a A fully automated, operator less train system has been offered to Delhi Metro by the French defense and civilian technologies major Thales. Environment and aesthetics The Delhi Metro has won awards for environmentally friendly practices from organizations including the United Nations, RINA, and the International Organization for Standardization, becoming the second metro in the world, after the New York City Subway, to be ISO 14001 certified for environmentally friendly construction. Most of the Metro stations on the Blue Line conduct rainwater harvesting as an environmental protection measure. It is also the first railway project in the world to earn carbon credits after being registered with the United Nations under the Clean Development Mechanism, and has so far earned 400,000 carbon credits by saving energy through the use of regenerative braking systems on its trains. In order to reduce its dependence on non-renewable sources of energy, DMRC is looking forward to harness solar energy and install solar panels at the Karkardooma and Noida Sector-21 metro stations. The Metro has been promoted as an integral part of community infrastructure, and community artwork depicting the local way of life has been put on display at stations. Students of local art colleges have also designed decorative murals at Metro stations, while pillars of the viaduct on some elevated sections have been decorated with mosaic murals created by local schoolchildren. The Metro station at INA Colony has a gallery showcasing artwork and handicrafts from across India, while all stations on the Central Secretariat – Qutub Minar section of the Yellow Line have panels installed on the monumental architectural heritage of Delhi. The Nobel Memorial Wall at Rajiv Chowk has portraits of the seven Nobel Laureates from India: Rabindranath Tagore, CV Raman, Hargobind Khorana, Mother Teresa, Subrahmanyan Chandrasekhar,Amartya Sen and Venkatraman Ramakrishnan and provide details about their contribution to society and a panel each on Alfred Nobel and the Nobel Prizes. 30 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a (Telecommunications, broadcasting, air transport services, waste handling and treatment) through the general public within the specified geographical area. Capital intensive business expansion and diversification as well as replacement of equipment may also be covered under project finance. An understanding of the possible money streams into a particular project and the possible expenditure streams out of the same is essential to structure the finance. Such understanding would be based on an analysis of the legal framework governing the project, all of the project’s documentation including all government approvals with regard to the implementation and financing of the project and the finance documentations. Project finance is quite often channeled through a project company known as special purpose vehicle or project development vehicle. Internationally, in addition to a private limited company, a limited company, a partnership and an unincorporated entity structure are all recognized as suitable project development vehicle. However, in India, a private limited company is regarded to be an appropriate project development vehicle as it ensures limited liability for the developers of the project, enables the shareholders to incorporate the various terms and conditions agreed to between them in the articles of association of the project company, thereby binding not only the shareholders themselves but also the company to such agreed terms. Besides, a private limited company also has greater avenues open for equity and loan financing. Some Jargons: 1. Full Recourse Loan: A loan in which the lender can claim more than the collateral as repayment in the event that the loan is enforced. Thus a full recourse loan places the Sponsor’s assets at risk. 2. Non-Recourse Loan: A loan in which the lender cannot claim more than the collateral as repayment in the event that the loan is enforced. 3. Limited Recourse Loan: A loan in which the lender can claim more than the collateral, subject to some restrictions, as repayment in the event that the loan is enforced. Why Do Sponsors Use Project Finance? A sponsor can choose to finance a new project using two alternatives: 1. The new initiative is financed on balance sheet (corporate Financing). 2. The new project is incorporated into a newly created economic entity, the SPV, and Financed off balance sheet (project Financing). 31 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Alternative 1 means that sponsors use all the assets and cash Cows from the existing firm to guarantee the additional credit provided by lenders. If the project is not successful, all the remaining assets and cash Cows can serve as a source of repayment for all the creditors (old and new) of the combined entity (existing Firm plus new project). Alternative 2 means, instead, that the new project and the existing Firm live two separate lives. If the project is not successful, project creditors have no (or very limited) claim on the sponsoring Firms’ assets and cash Cows. The existing Firm’s shareholders can then benefit from the separate incorporation of the new project into an SPV. One major drawback of alternative 2 is that structuring and organizing such a deal is actually much more costly than the corporate Financing option. The small amount of evidence available on the subject shows an average incidence of transaction costs on the total investment of around 5–10%. There are several different reasons for these high costs. 1. The legal, technical, and insurance advisors of the sponsors and the loan arranger need a great deal of time to evaluate the project and negotiate the contract terms to be included in the documentation. 2. The cost of monitoring the project in process is very high. 3. Lenders are expected to pay significant costs in exchange for taking on greater risks. On the other hand, although project Finance does not offer a cost advantage, there are definitely other benefits as compared to corporate Financing. Project Finance allows for a high level of risk allocation among participants in the transaction. Therefore the deal can support a debt-to-equity ratio that could not otherwise be attained. This has a major impact on the return of the transaction for sponsors (the equity IRR). 2. From the accounting standpoint, contracts between sponsors and SPVs are essentially comparable to commercial guarantees. Nonetheless, with project Finance initiatives they do not always appear ‘‘off balance sheet’’ or in the notes of the directors. 3. Corporate-based Financing can always count on guarantees constituted by personal assets of the sponsor, which are different from those utilized for the investment project. In project Finance deals, the loans only collateral refers to assets that serve to carry out the initiative; the result is advantageous for sponsors since their assets can be used as collateral in case further recourse for funding is needed. 32 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a 4. Creating a project company makes it possible to isolate the sponsors almost completely from events involving the project if Financing is done on a nonrecourse (or more often a limited-recourse) basis. This is often a decisive point, since corporate Financing could instead have negative repercussions on riskiness (therefore cost of capital) for the investor Firm if the project does not make a profit or fails completely. Who Are the Sponsors of a Project Finance Deal? By participating in a project financing venture, each project sponsor pursues a clear objective, which differs depending on the type of sponsor. In brief, four types of sponsors are very often involved in such transactions:  Industrial sponsors, who see the initiative as upstream or downstream integrated or in some way as linked to their core business  Public sponsors (central or local government, municipalities, or municipalized companies), whose aims center on social welfare  Contractor/sponsors, who develop, build, or run plants and are interested in participating in the initiative by providing equity and/or subordinated debt  Purely Financial investors  Industrial Sponsors in Project Finance Initiatives Let’s use an example to illustrate the involvement of sponsors who see project Finance as an initiative linked to their core business. For instance, a major project involving IGCC (integrated gasification combined cycle) cogeneration includes outputs (energy and steam) generated by fuels derived from refinery by-products. The residue resulting from refining crude oil consists of heavy substances such as tar; the disposal of this toxic waste represents a cost for the producer. The sponsors of these project Finance deals are often oil companies that own refineries. In fact, an IGCC plant allows them to convert the tar residue into energy by means of eco-compatible technologies. The by- product is transformed into fuel for the plant (downstream integration). The sponsor, in turn, by supplying feedstock for the power plant, converts a cost component into revenue, hence a cash in inflow. Lenders in this kind of project carefully assess the position of the sponsor, since the SPV should face a low supply risk. The sponsor/supplier has every interest in selling the tar promptly to the SPV. If this does not happen, the supplier not only will forfeit related revenue but will be subject to penalties as well. Public Sponsors with Social Welfare Goals- Historically, project Finance was first used in the oil extraction and power production sectors .These were the more appropriate sectors for developing this structured Financing 35 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a and, as a shareholder in the SPV, the contractor will start earning dividends after having collected down payments for construction. Overview of the Features of Project Finance- It is quite common to find contractors who also offer to run the plant once it is operational. Plant managers have a clear interest in sponsoring a project Finance deal because they would benefit both from cash Cows deriving from the operation and maintenance (O&M) contract as well as from dividends paid out by the SPV during the operational phase. The ‘‘Purely’’ Financial Investor The purely Financial investor plays the part of sponsor of a project Finance initiative with a single goal in mind: to invest capital in high-profit deals. These players seek substantial returns on their investments and have a high propensity for risk; as such they are similar in many ways to venture capitalists. Their involvement in a structured Finance deal is seen (from the perspective of the banks providing Financial backing) as a private equity activity in which purely financial investors play a passive role. In other words, they have no say in the industrial policies of the SPV. In practice, cases in which purely financial investors are shareholders in the SPV are still few, but the number is growing. In addition to traditional loans, almost all multilateral development banks implement investment plans in the equity capital of the project companies. What is more, private banks are also developing private equity alternatives to granting loans for project Finance deals. In the UK, for instance, with various project Finance ventures in the health Weld, banks have opted to Finance projects with equity rather than loans, in particular in cases where project Finance could not sustain sufficient debt-to-equity ratios. Project Financing Participants and Agreements Sponsor/Developer: The sponsor(s) or developer(s) of a project financing is the party that organizes all of the other parties and typically controls, and makes an equity investment in, the company or other entity that owns the project. If there is more than one sponsor, the sponsors typically will form a corporation or enter into a partnership or other arrangement pursuant to which the sponsors will form a "project company" to own the project and establish their respective rights and responsibilities regarding the project. Additional Equity Investors: In addition to the sponsor(s), there frequently are additional equity investors in the project company. These additional investors may include one or more of the other project participants. 36 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Construction Contractor: The construction contractor enters into a contract with the project company for the design, engineering, and construction of the project. Operator: The project operator enters into a long-term agreement with the project company for the day-to-day operation and maintenance of the project. Feedstock Supplier: The feedstock supplier(s) enters into a long-term agreement with the project company for the supply of feedstock (i.e., energy, raw materials or other resources) to the project (e.g., for a power plant, the feedstock supplier will supply fuel; for a paper mill, the feedstock supplier will supply wood pulp). Product Off taker: The product off taker(s) enters into a long-term agreement with the project company for the purchase of all of the energy, goods or other product produced at the project. Lender: The lender in a project financing is a financial institution or group of financial institutions that provide a loan to the project company to develop and construct the project and that take a security interest in all of the project assets. Principle advantages and disadvantages of Project financing: Advantages: 1. Non-Recourse: The typical project financing involves a loan to enable the sponsor to construct a project where the loan is completely ‘non-recourse’ to the sponsor, i.e., the sponsor has no obligation to make payments on the project loan if revenues generated by the project is insufficient to cover the principal and interest payments on the loan. In order to minimize the risks associated with a non-recourse loan, a lender typically will require indirect credit supports in the form of guarantees, warranties and other covenants from the sponsor, its affiliates and third parties involved with the project. 2. Maximize Leverage: In a project financing, the sponsor typically seeks to finance the cost of development and construction of the project on a highly leveraged basis. Frequently, such costs are financed using 80 to 100 percent debt. High leverage in a non-recourse project financing permits a sponsor to put less in funds at risk, permits a sponsor to finance the project without diluting its equity investment in the project and, in certain circumstances, also may permit reductions in the cost of capital by substituting lower-cost, tax-deductible interest for higher- cost, taxable returns on equity. 3. Off-Balance-Sheet Treatment: Depending upon the structure of project financing, the project sponsor may not be required to report any of the project debt on its balance sheet because such debt is non-recourse to the 37 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a sponsor. Off-balance-sheet treatment can have the added practical benefit of helping the sponsor comply with covenants and restrictions relating to borrowing funds contained in other indentures and credit agreements to which the sponsor is a party. 4. Maximize tax benefit: Project financings should be structured to maximize tax benefits and to assure that all possible tax benefits are used by the sponsor or transferred, to the extent permissible, to another party through a partnership, lease or other vehicle. DISADVANTAGES. Project financings are extremely complex. It may take a much longer period of time to structure, negotiate and document a project financing than a traditional financing, and the legal fees and related costs associated with a project financing can be very high. Because the risks assumed by lenders may be greater in a non-recourse project financing than in a more traditional financing, the cost of capital may be greater than with a traditional financing. TYPICALCHARACTERISTICS OF PROJECT FINANCING Some of the typical characteristics are: - 1. Large capital costs 2. Long gestation periods 3. Assets are not easily transferable 4. Services provided are not tradable 5. Revenues only in local currency; 6. Borrowing may be in foreign currency 7. Tariffs are politically sensitive 8. Social aspects involved 9. Vulnerable to regulatory policies 10. Limited recourse financing needed 40 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a The reputation of the promoters group in the market is also very important factor which the banks/ financial institutions consider while lending to the companies. Also the bank/ financial institutions check the payment history of past loan raised by the companies in which the promoters are directors which shows their willingness of repayment of the loans. CIBIL is a very strong tool in the hand of banks/ financial institutions to verify the payment history and the number of loans raised by the companies from the date of existence. C. Commercial Viability Any project can be commercially viable only if it is able to sell its product at profit. For this purpose it would be necessary to study demand and supply pattern of that particular product to determine its marketability. Various methods such as trend method, regression method for estimation of demand are employed which is than to be matched with the available supply of a particular product. D. Financial Viability Factors need to consider for financial viability: 1. Cost of project: A realistic assessment of cost of project is necessary to determine the source for its availability and to properly evaluate the financial viability of the projects. For this purpose, the various items of cost may be sub-divided as many sub-heads as possible so that all factor are taken into consideration for arriving at the total cost. Cost includes the following: a. Land Cost- Acquisition of project land, registry charges, and charges for other clearance b. Site Development Cost- to make the project easily accessible it is necessary to build roads, water tank, boundary walls ,arranging electricity, levelling the site, demarcation of site, making available the basic amenities etc. c. Buildings Cost- it includes lay out and building plan along with the structure cost, building the site office, factory sheds, warehouse, residential flats for staff etc. d. Plant and Machinery- cost of plant and machinery, any foreign assistance for installation, salary of technical staff, transportation cost, foreign currency fluctuations (if any), bank commissions, L/C Charges etc. e. Miscellaneous Fixed Assets 41 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a f. Preliminary Expenses- license required to start commercial production from the local authorities along with other clearances etc. g. Contingencies- normally 5% extra cost is taken as contingency to avoid any kind of cost over-run at the end of implementation of project. h. Margin for Working Capital- for running a project it is necessary to fuel it with the working capital. It works like a lubricant for any kind of business. It is financed against receivables and stock. A proper assessment of the same should be done. Banks now generally require that 25% of the total current assets (working capital) shall be the margin to be provided from the long term resources and 75% shall be financed by them. 2. Means of Finance: After estimation of the cost of the project, the next step will be to find out the source of funds by means of which the project will be financed. The project will be financed by contribution of funds by the promoter himself and also by raising loans from others including term loans from banks and financial institutions. The means of financing will include: I. Issue of share capital including ordinary/preference shares. II. Issue of secured debentures. III. Secured long-term and medium-term loans (including the loans for which the application is being put up to term lending institutions). IV. Unsecured loans and deposits from promoters, directors etc. V. Deferred payments. VI. Capital subsidy from Central/State Government. 3. Security Coverage and Promoters Contribution: In today scenario and being to play safe, the bankers wants that at least the promoters should contribute 40% of the total project cost. The long term sources of funds are utilized for acquisition of land, procuring the fixed assets and construction of building etc. But for day to day expenses, payment of staff salary, purchasing the stocks etc. the project require short term loan or working capital loans. Hence the financing for a project is the mix of both long term and short term loans. In project funding the bank has charge on the land, building, any super structure thereof and hypothecation of stocks & receivables and all the current assets relating to project. It is considered as primary security but the bankers may ask for collaterals also in addition to the primary security. 42 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a 4. Profitability Analysis: After determine the cost of the project and means of financing, the viability of the project will depend on its capacity to earn profits to service the debts and capital. To undertake the profitability analysis, it will be necessary to draw estimates of the cost of production and working results. These estimates are made for a period which should at least cover the moratorium and repayment periods. Generally in case of project loans repayment begins after 2-3 years, the time gap between the disbursement of loan and repayment of first installment is called moratorium period. Further repayment should start in that quarter or month when it is assured that the project will have sufficient cash profit to service the same in that particular quarter or month. Also, the moratorium and repayment period is decided while submitting the proposal to the banks hence while selecting these periods’ accurate calculations should be done. 5. Projected Balance Sheet, Profit and Loss Account and Projected Cash Flow: The projected financials of the project is prepared for the entire tenure as estimated above. 6. Break-Even Point: Estimations of working results pre-suppose a definite level of production and sales and all calculations are based on that level. The minimum level of production and sales at which the unit will run on “no profit no loss” is known as break-even point and the first goal of any project would be to reach that level. The break-even point can be expressed in terms of volume of production or as a percentage of plant capacity utilization. Break-even in terms of volume of production = Total Fixed Cost/ Contribution per unit 7. Debt Service Coverage Ratio (DSCR): Debt Service Coverage Ratio is calculated to find out the capacity of the project servicing its debt i.e. in repayment of the term loan borrowings and interest. The DSCR is worked out in the following manner: D.S.C.R = (PAT + Depreciation + Interest on Long Term Borrowings) / (Repayments of Term Borrowings during the year + Interest on long-term borrowings) The higher D.S.C.R. would impart intrinsic strength to the project to repay its term borrowings and interest as per the schedule even if some of the projections are not fully realized. Normally a minimum D.S.C.R. of 2:1 is insisted upon by the term lending institutions and repayment is fixed on that basis. 8. Sensitivity Analysis: While evaluating profitability projections, the sensitivity analysis may be carried in relation to changes in the sale price and raw material costs, i.e. sale price may reduce by 5% to 10% and raw material costs may be increased by 5% to 10% and the impact of these changes on DSCR shall be analyzed. If 45 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a (b) Foreign Currency term loan- Assistance in the nature of foreign currency loan is available for incurring foreign currency expenditure towards import of plant and machinery, for payment of remuneration and expenses in foreign currency to foreign technicians for obtaining technical knowhow. Foreign currency loans are sanctioned by term lending institutions and commercial banks under the various lines of credits already procured by them from the international markets. The liability of the borrower under the foreign currency loan remains in the foreign currency in which the borrowing has been made. The currency allocation is made by the lending financial institution on the basis of the available lines of credit and the time duration within which the entire line of credit has to be, fully utilized. 2. Deferred payment guarantee (DPG) - Assistance in the nature of Deferred Payment Guarantee is available for purchase of indigenous as well as imported plant and, machinery. Under this scheme guarantee is given by concerned bank/financial institutions about repayment of the principal along with interest and deferred instalments. This is a very important type of assistance particularly useful for existing profit making companies who can acquire additional plant and machinery without much loss of time. Even the banks and financial institutions grant assistance under Deferred Payment Guarantee more easily than term loan as there is no immediate outflow of cash. 3. Soft loan - This is available under special scheme operated through all India financial institutions. Under this scheme assistance is granted for modernization and rehabilitation of industrial units. The loans are extended at a lower rate of interest and assistance is also provided in respect of promoters’ contribution, debt equity ratio, repayment period as well as initial moratorium. 4. Supplier's line of credit - Under this scheme revolving line of credit is extended to the seller to be utilized within a stipulated period. Assistance is provided to manufacturers for promoting sale of their industrial equipment on deferred payment basis. While on the other hand this credit facility can be availed of by actual users for purchase of plant/equipment for replacement or modernization schemes only. 5. Buyer’s credit - Under a buyer's credit arrangement, a specific long-term loan is granted by a designated lending agency in the exporter's country to the buyer in the import, country against a guarantee by an acceptable bank or financial institution. The supplier receives payment for the exports on his delivering to the lending agency the requisite documents specified in the loan agreement and the relative commercial contract. The lending agency realizes the payment from the buy (importer) in instalments as and when they fall due. Ordinarily, the supplier of his obligation reckons the period credit as the duration from the date of completion. 46 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a 6. Debentures - Long - term funds can also be raised through debenture with the objective of financing new undertakings, expansion, and diversification and also for augmenting the longer term resources of the company or working capital requirements. Debenture holders are long term creditors of the company. As a secured instrument, it is a promise to pay interest and repay principal at stipulated times. In the contrast to equity capital which is a variable income (dividend/ security, the debenture / notes are fixed income (interest) security). 7. Leasing - Leasing is a general contract between the owner and user of the assets over a specified period of time. The asset is purchased initially by the lessor (leasing company) and thereafter leased to the user (Lessee Company) which pays a specified rent at periodical intervals. The ownership of the asset lies with the lessor while the lessee only acquires possession and right to use the assets subject to the agreement. Thus, leasing is an alternative to the purchase of an asset out of own or borrowed funds. Moreover, lease finance can be arranged much faster as compared to term loans from financial institutions. 8. Public deposits - Deposits from public is a valuable source of finance particularly for well-established large companies with a huge capital base. As the amount of deposits that can he accepted by a company is restricted to 25 per cent of the paid up share capital and free reserves, smaller companies find this source less attractive. Moreover, the period of deposits is restricted to a maximum of 3 years at a time. Consequently, this source can provide finance only for short to medium term, which could be more useful for meeting working capital requirements. In other words, public deposits as a source of finance cannot be utilized for project financing or for buying capital goods unless the payback period is very short or the company uses it as a means of bridge finance to be replaced by a regular term loan. Before accepting deposits a company has to comply with the requirements of section 58A of the Companies Act, 1956 and Companies (Acceptance of Deposits) Rules, 1975 that lay down the various conditions applicable in this regard. 9. Own Fund: a. Equity: Promoters of a project have to involve themselves in the financing of the project by providing adequate equity base. From the bankers/financial institutions' point of view the level of equity proposed by the promoters is an important indicator about the seriousness and capacity of the promoters. Moreover, the amount of equity that ought to be subscribed by the promoters will also depend upon the debt: equity norms, stock exchange regulations and the level of investment, which will be adequate to ensure control of the company. 47 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a The total equity amount may be either contributed by the promoters themselves or they may partly raise the equity from the public. So far as the promoters’ stake in the equity is concerned, it may be raised from the directors, their relatives and friends. Equity may also be raised from associate companies in the group who have surplus funds available with them. Besides, equity participation may be obtained from State financial corporation/industrial development corporations. Another important source for equity could be the foreign collaborations. Of course, the participation of foreign collaborators will depend upon the terms of collaboration agreement and the investment would be subject to approval from Government and Reserve Bank of India. Normally, the Government has been granting approvals for equity investment by foreign collaborators as per the prevailing policy. The equity participation by foreign collaborators may be by way of direct payment in foreign currency or supply of technical know-how/ plant and machinery. Amongst the various participants in the equity, the most important group would be the general investing public. The existence of giant corporations would impossible but for the investment by small shareholders. In fact, it would be no exaggeration to say that the real foundation of the corporate sector are the small shareholders who contribute the bulk of equity funds. The equity capital raised from the public will depend upon several factors viz. prevailing market conditions, investors' psychology, promoters track record, nature of industry, government policy, listing requirements, etc. The promoters will have to undertake an exercise to ascertain the maximum amount that may have to be raised by way of equity from the public after asking into account the investment in equity by the promoters, their associates and from various sources mentioned earlier. Besides, some equity may also be possible through private placement. Hence, only the remaining gap will have to be filled by making an issue to the public. b. Preference share: Though preference shares constitute an independent source of finance, unfortunately, over the years preference shares have lost the ground to equity and as a result today preference shares enjoy limited patronage. Due to fixed dividend, no voting rights except under certain circumstances and lack of participation in the profitability of the company, fewer shareholders are interested to invest moneys in preference shares. However, section of the investors who prefer low risks fixed income securities do invest in preference shares. Nevertheless, as a source of finance it is of limited import and much reliance cannot be placed on it. 50 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a RESEARCH METHODOLOGY Research methodology is a systematic approach in management research to achieve pre-defined objectives. It helps a researcher to guide during the course of research work. Rules and techniques stated in research methodology save time and labor of the researcher as researcher know how to proceed to conduct the study as per the objective. SELECTION OF TOPIC The selection of topic is a crucial factor in any research study. There should be newness and it should give maximum scope to explore the ideas from different angles. Due to increase in competition, finding suitable and capable sources of Project finance is becoming vital for the organization. Funding a project appropriately is necessary to undertake day by day expenditure of the business organization. Whatever may be the organization, the mix of project finance sources play an important role, as the company needs money for its day to day expenditure. Thousands of companies fail each year due to poor finance management practices. Entrepreneurs often don't account for short term disruptions and are forced to close their operations. Now in a cut throat competitive era where each firm competes with each other to increase their production and sales, holding of sufficient funds for the smooth operation of the project plays a crucial role for smooth operations of the firm. If the funds are not appropriately allocated and tapped, then the firm may have to pay more interest and tax rather than what it can if these funds sources are taken care of in a suitable mix. Here creeps the importance and need of efficient project financing. After due to consultation with the external guide /internal guide, the topic was finalized and titled as-“Project financing in Delhi Metro” RESEARCH DESIGN “A Research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure” The research design followed to study the project financing techniques in Delhi Metro Rail Corporation Pvt Ltd is Descriptive Research Design. SOURCES OF DATA COLLECTION  Primary Sources (which includes excerpts from the interviews of AGM’s and GM).  Secondary data collection 51 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a The secondary data are those which have already collected and stored. Secondary data easily get those secondary data from records, journals, annual reports of the company etc. It will save the time, money and efforts to collect the data. Secondary data also made available through trade magazines, annual reports, books etc. This project is based on secondary data collected through annual reports of the organization. The data collection was aimed at study of project financing techniques of the company. Project is based on  Annual report of Delhi Metro Rail Corporation  Schedule of Powers  Schedule of Rates  General Conditions of contract  Detailed Project Report (DPR) for different phases  Interviews conducted of senior managers. The overall sources of funds of DMRC is studied and analyzed Suggestions are given on the basis of findings for better understanding of Project financing techniques. LIMITATIONS OF THE STUDY The sources of funds keep on changing due to time variability of the commuters i.e. the exact amount may not be provided accurately for each of the projects undertaken due to government policies that are updated from time to time. Investment of funds are also made by corporate office, so it becomes difficult to know that how much investment is made in different ways for continuous availability of funds. 52 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Data Analysis and Interpretation: Metro rail projects are always capital intensive long gestation period. Given the tariff constraints, they are not commercially attractive for investment. However, DMRTS phase –III project is estimated to give a high economic rate of return to the tune of 20%, which means investment on this project will be recovered by the city within 5- 6 years of time. Only a few metros in the world make operational profits and Delhi metro is one of them. Thus, the government involvement in the funding of metro system is a foregone conclusion. Experience all over the world reveals that both construction and operations of a metro are highly subsidized and funded by the government. Singapore had a 100% capital contribution by the government. Hong Kong had 78% for three times and then 66% for the next 2 times. Others run on government support and subsidies. Some of the metros which have metro system on self-sustainable basis, it is necessary to keep down the capital cost as much as possible by exempting taxes for the project and also required funding is made available from the government sources. Delhi metro was incorporated in the year 1995 to construct metro rail system in the Indian capital city of Delhi. The company was formed as a joint venture between GOI and GNCTD with equal equity contribution by these two governments. The first phase covering 65.1 Kms route length was commissioned in phased manner. The last section was commissioned in Nov 2006. About 60% of the project was funded by Japanese ODA loan through JICA. The balance cot was contributed by GOI and GNCTD as equity and subordinate debt apart from raising funds from property development. The second phase of DMRTS project covering a distance of 82.11Kms within Delhi Area has also been funded by both the governments in the same pattern with JICA funding of 46% and raising of part funding from PD and internal accruals. In addition to the expansion of metro network in the city of Delhi, extension to NCR viz Noida, Gurgaon and Vaishali has also been undertaken by DMRC as a deposit work with the entire cost other than rolling stock being contributed by these states. Funding for Phase I and Phase II The capital cost of Phases I and II has been estimated to be 144.30 billion (US$2.4 billion) at 2004 prices. However, more recent estimates have placed the cost of construction at 2 billion (US$34 million) per kilometer. Thirty percent of the total investment for Phases I and II has been raised through equity capital with the Government of India (GOI) and Government of Delhi contributing equal shares, and approximately another 60 percent has been raised as either long-term or subordinate debt, through soft loans from the Japan Bank for International Cooperation. The rest of the investment is proposed to be recovered from internal revenues through 55 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a the benefit of independent management under the aegis of Indian Companies Act, 1956. DMRC, BMRC, CMRC and KMRC are some of the examples of success of such an SPV. For the balance 60% funding requirement, options available are as follows: 1.Subordinate debt: For existing phase-I and phase-II projects of DMRC, land and rehabilitation and resettlement cost have been borne by GOI and GNCTD equally as interest free subordinate debt. Similarly, the cost of land has to be contributed equally as interest free subordinate debt by GOI and GNCTD.This mezzanine financing is of extreme help in quickening the pace of land acquisition. The loan is of longer duration and becomes repayable only after other loans raised for the project are repaid. 2. Debt: The balance cost is to be met through loans from various institutions, namely JICA, local borrowings, loans from ADB/World bank and suppliers credit. -JICA loan- overseas development loan (ODL) from Japan bank for international co-operation JICA can be availed of for Metro rail projects. The prevailing interest rate is 1.40% pa. The loan is repayable in 30 years including moratorium period of 10 years. The loan is to be provided to central government which in turn releases the same to SPV under a pass through assistance (PTA) mechanism. Normally, JICA agrees to fund for underground civil works, electrical, signaling and telecom and rolling stock only. Since the loan will be in Japanese Yen, any fluctuation in exchange rate at the time of repayment shall be borne by the central government and GNCTD in proportion to their shareholding. The loan in equivalent INR shall be repaid by SPV from the income streams of metro operations. -Loan from ADB-The loan shall be available from ADB, but as per the experience, it’s processing and approval normally takes 8-12 months. This may delay the implementation of projects resulting in avoidable increase in completion cost. -Domestic loan from banks and financial institutions- Funds can be arranged from Indian financial institutions like IIFCL, IDFC, LIC, SBI, IDBI bank, ICICI bank etc. These institutions are increasingly engaged to fund infrastructure projects subject to their commercial viability. There are many models available under which the funds can be arranged by the FI’s with or without syndicating with other commercial banks.IIFCL example fund 20% of the project cost and arrange the balance through the syndication of commercial banks with the lead banker in the consortium of bankers. The loan can be given for a period of 20-30 years with interest rate ranging from 9.50% to 12% per annum. The funding arrangement may require submission of central government guarantee as 56 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a well. Since the rate of Interest of these FI’s is much higher than the interest rates of soft loan provided by JICA , central government and GNCTD shall have to bear the interest difference and provide subsidy to SPV. Government contribution-The contribution from both the governments viz GOI and GNCTD should be as equity due to the following reasons.  For continued support of two governments  For not diluting the debt-equity proportions ad infrastructure projects cannot be highly leveraged. Whether the money comes as equity or grant, it has the same cost to the government as per the extant arrangement. As per extant arrangement, equity is to be serviced (dividend) by the company after all the debts have been repaid which shall not be payable if the same is given as grant. Public private partnership- The phase –II corridors should be taken up in the same mode as phase-I and phase- II of Delhi metro due to operational impossibility of a multi-operator network. The private operator would expect minimum 12% return on its equity (Equity IRR). To sustain this level of return, the viability gap funding VGF would be very huge. Tax free bonds to be serviced against dedicated mass transit funds-Because of the requirement of lumpy upfront investment in case of a metro rail, it is imperative to raise money through government guaranteed tax free bonds to get the upfront finances, to accelerate the project. And to service the bonds as a combination of interest payments and initial repayments of principal to bond holders on maturity, a. Dedicated Mass Transit Fund (DMTF) needs to be created. The amount of principal repaid by DMTF to bondholder on behalf of DMRC shall be repaid by DMRC to DMTF in turn once its senior debt (JICA Loan) is paid back or from its internal accruals whichever is earlier, however, the interest liability shall be paid from the accrual to the DMTF. The tax free bonds shall be issued )y DMRC and the repayment to the bond holders shall be linked to DMTF accruals, a Government guarantee to make good any shortfall in the fund is considered essential to increase the maturity profile of the bonds and to keep the interest rate minimal. DMRC should also bear the annual cost of guarantee charges to the Government. Bilateral Loan - As approved for Phase-I and Phase-II project the JICA loan should be targeted even for Phase III to the maximum possible amount and under any circumstances to the extent of at least 40% to 50% of the completion cost. The loan should be made available to DMRC in the same pattern as it was in Phase I & Phase II, as rupee loan where foreign exchange fluctuation risk was the responsibility of the Government. 57 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Value Capture from Real Estate - Value from real estate should .be captured after completion of the project along its alignment. Further there is always an issue of timing mismatch in the requirement of funds and availability of money from value capture during the construction stage. It is prudent to have a conservative approach towards value capture during construction’ period, it is more ideally suited for supplementing the fare- box revenues during the operating stage. Dedicated Mass Transit Fund: As financing of Phase-III is one of the most intractable issue to be resolved, DMRC had commissioned a study for looking at financing options and to arrive at the most optimal financial strategy for development of' Phase-III. The consultant's recommendations have been deliberated upon at length and implementation of the same can truly herald in a new era of sustainable financing of all the capital requirement of providing complementary transport solutions. In this regard, it may be mentioned that the proposal for setting up of a Dedicated Muss Rapid Transit Fund (DMTF) is central to the sustainability of the financing proposition. a) To reduce personalized motorized transport. b) Non users and polluters to pay for ,provisioning of public transport and eventually become a user in the long run. c) Let ultimate beneficiaries-Employers bear a part of the burden d) Intergenerational sustainability & equity e) Decelerate and eventually reduce ‘in absolute terms, the dependence on petroleum products for urban mobility. The various possible alternatives for setting up and managing DMTF have been examined along with the required statutory framework and the governance structure for the same. This has been needed because of the necessity to ensure that the accruals in the fund can be used on for specified purpose i.e. fund is non-fungible and its balance of one year are usable in subsequent years i.e. is non lapsable and its usage and disbursement patterns are pre-determined and its free reserves are properly invested and managed. The report has made a study of some of the well-established precedents and based on the same the DMTF is proposed with the following feature: Structure: The DMTF should be setup as a company and unlike the IRFC, which is incorporated as a company under the Companies Act (1956), the DMTF should be incorporated as statutory company. Statute: The statute shall be a GNCTD Act because of the source of the fund. 60 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Recommendations- The recommended financing strategy for funding the Phase III project is with the following two Options: - Option 1 JICA loan to the extent of 51% is available and GOI & GNCTD agree to contribute equity of 20% each on the total cost Option 2 JICA loan to the extent of 41 % is available and GOI & GNCTD agree to contribute equity of 20% each on the total cost. In that case, the balance 10% of the project completion cost has been assumed to be sourced from Tax Free Bonds repayable from DMTF accruals. Sources Option 1 Option 2 Equity from GOI 20% 20% Equity from GNCTD 20% 20% JICA funding 51% 41% Tax free bonds repayable from DMTF sources 0% 10% Value capture from real estate and internal accruals 5% 5% Interest free loan available from government from land 4% 4% Total 100% 100% 61 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a References 62 | P a g e 1 1 3 0 1 9 2 7 a n u a t o m i x @ g m a i l . c o m Q 1 3 0 2 - A 1 4 A n u b h a v S h a r m a Conclusion The key to any project finance is to use a right mix of debt and equity. Further, there should be a right mix of foreign currency and rupee loans. It is also essential that there should be flexibility in respect of switching from foreign currency to rupee loan and vice versa. There are a number of issues highlighted herein above which need to be considered for the purpose of financing of the project. Besides, it is important that due care is taken in drafting the documents concerning the financing of the project. The companies should adopt the project financing structures so that the objective of shareholder’s wealth maximization can be achieved. As the world is heading towards a global integrated market and the failure of governments as well as the demand for private capital in infrastructure assets is increasing, project finance will continue to play an important role in both developed and developing markets.