Saturday, November 16, 2013

Debt Vs Equity Financing

The appropriate ratio of debt to equity is vital in financial structuring of an infrastructure project.  Debt financing means borrowing for a particular project with provisions for repayment with interest. In equity financing, the capital is either invested by the stakeholders or by raising money via selling interests in the company (stocks/bonds).

Comparison

Equity need not be paid back while debt has to be. Additionally equity ownership adds credibility to a venture while high debt projects are considered to be risky. In debt financing, the lender has no claim on the profits generated as opposed to equity owners.  And the interest on loans is tax deductible thus providing a tax shield. Furthermore, actions taken by the company need not undergo clearance from the lender as opposed to voting from equity holders for approval (Thomson Reuters, 2013). On the other hand the advantages of equity financing cannot be over emphasized. It adds to the net worth of the venture providing financial strength and preserves the borrowing capacity for future needs ( Ebi Ofrey, 2011).

Figure 1: Growth: Debt Vs Equity Financing (Sweeney, 2013)
Both debt and equity have their pros and cons. It is up to the stakeholders in the business venture to analyze and arrive at the option that best suits their needs. Figure 1  (Sweeney, 2013) gives a graphical representation of expected growth via debt and equity financing. Hence, debt financing would be appropriate for business owners who do not want to dilute ownership, have limited ability to raise equity, or share future profits  (Sweeney, 2013).

Monday, October 28, 2013

Equator principles as a hindrance to developing economies

The equator principles defines the term "Designated countries" as "those countries deemed to have robust environmental and social governance, legislation systems and institutional capacity designed to protect their people and the natural environment." The list (which can be viewed at: http://www.equator-principles.com/index.php/ep3/324) of such countries comprises of almost exclusively developed countries. I find this quite one sided, it is obvious that developed countries will have far less pollution and energy usage emenating from construction when compared to developing countries. The latter have not reached their optimum yet, and as such they obviously need to keep their economic stability first.

To put things in perspective, there are just 6 out of the 70+ lending institutions from Asia and the Middle East, and just one from India (IDFC). IDFC only joined in the earlier half of this year, so it will be quite interesting to see how this move is received.

The equator principles, if applied to institutions financing projects in these countries, would definitely hinder their growth. This is probably why we see so few institutions from Asia and the Middle East.

It is not that these principles have not been violated. There have been cases such as the Baku-Tbilihi-Ceyhan pipeline, where the principles were tossed aside because the project had to go ahead. Selectively applying them in situations can lead to all sorts of irregularities in the future, all the way up to banks strong arming the client into doing things their way in the name of these principles. 

These factors have made lending institutions of developing countries very wary of the principles as they view them as something that will just slow them down and reduce their competitiveness.

Eminent Domain and its implication for project finance

This is an interesting article regarding eminent domain that was published very recently:
http://www.theatlanticcities.com/housing/2013/10/why-eminent-domain-cant-save-broke-cities-richmond/7358/

In most cases, we see it being used to seize land for an infrastructure or construction project. This is a case where the government of Richmond, California is attempting to seize the land from the project sponsors in order to save the numerous homeowners who have defaulted on their mortgages.

This has quite a few implications for the infrastructure market, as explained by this article.

While not illegal, this is a move that brings extremely bad faith.The main implication is that banks will have to stop lending to cities willing to resort to this form of eminent domain. These cities are then likely to fall behind due to a lack of funds to pursue projects. And if this is done by every city in America with similar issues, the effect on their economy would be crushing. Creditworthiness and trust would take a huge hit, similar to what happened to India after Dabhol.

Therefore, I am inclined to agree with the author when he says that this move is somewhat suicidal to the economy of Richmond or any other city that does it.

Monday, October 14, 2013

Findings on Tirupur Project

I came across a case study which was quite contradictory to the one which we had
discussed in class. The case study which was authored by Gaurav Dwivedi stated Tirupur as a
failure in meeting its customer needs leading to a lot of slum dwellers still depending on
water vendors and other water sources due to scarcity. A lot of facts regarding the
concession like operations, shareholding, debt, revenue, expenditure and profits, remains
unavailable to the public. Also there were confidential clauses incorporated in the
concession which were against the transparency concerns. In fact the author had to move
legally against the New Tirupur Area Development Corporation Limited (NTADCL) in order to
obtain real data regarding the project.

Ref: http://www.manthan-india.org/IMG/pdf/PPP-Tiruppur_Paper_IIMB_Conference_for_Website.pdf


Sunday, October 13, 2013

USD 1 trillion for Infrastructure development

According to 12th Five Year Plan in India, infrastructure sectors which includes power, roads, ports , civil aviation etc. has a projected investment of $ 1 trillion with an equal participation of private sector. In an annual plenary meeting of IMF and WB, finance minister P Chidambaram promoted PPP and included many sub-sectors like modern storage, education, health, irrigation, etc. for VGF scheme to achieve his target (reference).

Another upcoming example of PPP is 5MJC, a company that has a vision of building five major cities in the nation of Malawi. The government of 5Major Cities (Shekinah City, Heaven’s Gate City, Zion City, Zoe City and Zeal City) has planned to provide "strong" mayor-council system. The cities governments being responsible for public education, correctional institutions, libraries, public safety, recreational facilities and sanitation, water supply and welfare services which is in line with the Mercer’s Quality of Living  which for 2012 Infrastructure is based on electricity supply, water availability, telephone and mail services, public transportation, airports and traffic congestion.

Saturday, October 12, 2013

One sided nature of the MoU between the MSEB and Enron in the Dhabol Project

The World Bank commented on the MoU between Enron and the MSEB as that it was biased in favour Enron. After the WB’s comment on the MoU the GOI’s Central Electricity Authority (CEA) did their own analysis and found certain abnormalities in the MoU. The findings include:
i) no specific details of project costs were provided as per Indian Law
ii) the date of start of the contract and payments were not mentioned i.e when the electricity is available or when the contract was signed
iii) the payment structure was different from the usual norms
iv) high price of power higher than anywhere else in the country
v) no provision to scrutinize the project was made to make sure that the payment of MSEB was corresponding to the actual electricity cost
vi) while MSEB guaranteed to buy a minimum amount of fuel, the fuel supplier was not adhered to providing minimum fuel.
vii) no study of economical justification or verification of the price of fuel was done by MSEB

Even after all these findings the authoritative bodies of the GOI gave approval for the project which was immediately followed by MSEB signing the PPA with Enron. 

Still even more anomalies can be observed in the project which makes it obvious of the quantum of illegal movements which would have taken place in the project.




Tuesday, October 1, 2013

A new kind of infrastructure risk

We’ve spoken a bit about the factor of risk in infrastructure projects, and categorized them as well.

The article here (A New Type of Risk in Infrastructure Projects, by Maria Craciun), adds to that categorization, using a few different lines of thinking. It also talks about a kind of risk we haven't mentioned..

Please find below a paragraph from the paper of particular significance with respect to PPPs:

To the above three risks it seems appropriate to introduce a fourth one, manifested especially in the latest years: the risk of financing. The global financial crisis that affected, 2008-2010, a significant part of the world economy, including the U.S., EU or Japan, gave birth to a new type of risk, one that initiators of investment projects had not witnessed before. This risk is determined by events which can lead to loss of project funding opportunities. So far, usually, the inability to finance a project has been due for the most part, to the project itself. Either this did not meet the requirements of potential lenders or providers of capital, or was confronted with a number of risks whose costs and whose ownership was deemed too expensive.


Please note the final risk the author talks about is something that has become predominant relatively recently. This risk is the risk of a good project not being able to take off because of the lack of sufficient funds. That point really stresses on the importance of PPPs because the risk can be totally mitigated if governments really are willing to fund and support private projects and set up partnerships with them. 

Although, I am not sure how valid this kind of risk is for the Indian scenario at present.

Thursday, September 19, 2013

"PPP readiness" in Latin America- A gauge mechanism

Evaluating the environment for public-private partnerships in Latin America and the Caribbean is a good article with regard to the “PPP Readiness” in Latin America. Bolivia doesn’t seem to be on this list though, so we can’t really gauge how they’ve changed since Cochabamba. Perhaps if this sort of an analysis had been done beforehand, things might have turned out differently for the project (or the project may even have been scrapped).

One of the key observations I was able to pull from this was that countries that are more developed seem to score higher than ones that are less developed. Economic stability is a driving factor on this list.

It also mentions that centralized states score higher. But is a single government body taking all decisions from their side really the best thing? It probably would be the best thing for the PPP to succeed, but not necessarily the best thing for all the stakeholders involved if they are represented by a single entity. While the model seems to be having success, would the pros outweigh the cons?


(To access the article, go to http://www5.iadb.org/mif/en-us/home/knowledge.aspx and search for “PPP”)