Financial Structure of Infrastructure Projects

Infrastructure in developing countries – Financial pattern
20 / 30 % Equity AND 80 / 70 % Debt – Debt equity Ratio - DER
DER – overall 60:40
DER in Power Projects 68:32 Low risk
DER in Telecom 50:50
The debt component is usually provided by ….
Commercial Banks Export credit agencies Japan EXIM bank
International financial Institutions US EXIM bank
Domestic financial institutions
The main problem with commercial bank lending is the limited number of
banks worldwide which provide project financing.
Share & bond issues, especially in the international capital markets, are
rare.
Enron, a US Power producer – issued bonds through private placement –
for the Subic Power Station in the Philippines
Enron’s planned project in India – Dabhoi power project – was scrapped
In many cases, the construction company & the equipment supplier also
control the management and the equity of the project company.
 Appropriate Return to Equity & Financial Structure
The appropriate return to equity & financial structure are both functions of
the risk of cash flows from a project.
 Return on Equity
ROE is given by Profit after Tax (PAT) as a percentage of average book
value of equity for a specified period of time.
ROE does not take into account the construction period and the timing of
investors’ cash flows.
In contrast, IRR is based on all cash inflows and outflows over the entire
life of the project.
Cash few to equity is profit after tax (PAT) adjusted for depreciation,
capital expenditure and changes in current assets.

Linkage between Infrastructure & Economic Development
The quality & extent of infrastructure are primary determinants of the
efficiency of business activities.
Many researchers have reviewed the evidence for catalytic infrastructure
investment, concluding…
1. The economic returns on many forms of infrastructure investment are
relatively high.
2. Selective additional investment in core infrastructure, with appropriate
evaluation processes in place & with due regard for the
interdependence of different forms of investment, can yield very good
external economic spin offs.
The most conducive to economic development is new infrastructure that
facilitates…
1. The development of clusters.
2. Work related travel within and among clusters.
‘Smart ‘infrastructure – mechanisms for enhancing technology diffusion
and innovation, business angel networks, venture capital pools and
training and R&D facilities.

Cross National Experience
Integrated economic development involves coordinating the efforts of a
numbers of independent nation states to coordinate in same ways their
economic activities.
This may involve coordination of just a few sectors or a limited number of
economic instruments such as tariffs.

Impact on Growth & Development
The availability of adequate infrastructure facilities as imperative for the
overall economic development of a country.
Infrastructure adequacy helps determine success in diversifying
production, expanding trade, coping the population growth, reducing
poverty and improving environment conditions.
The link between infrastructure & productivity growth remains
controversial.
It is estimated that raising the rate of infrastructure investment would have
had a negligible impact on annual productivity growth.
There has been resurgence in the debate about the productivity effects of
infrastructure. This debate is reviewed in the World Bank’s World
Development Report (1994).
Studies find a positive effect of investment n transport and communication
on economic growth.
World Bank’s world development report (1994)
o Using cross country data, studies find a positive effect of investment in
transport & communication on economic growth.
o Few researchers find a positive effect of telephones on economic
growth.
o As per the research….
1.0 % increment in per capita GDP
0.3 % increase in household access to safe water
0.8 % increase in Paved Roads
1.5 % increase in Power
Increase of total
infrastructure stock by
1 %
1.7 % increase in Telecommunications
Infrastructure productivity will determine how India will cope with the
increasing pace of urbanization, globalization & technological innovations in
manufacturing & logistics.
Environment issues & Poverty reduction – depend heavily on – the
productivity of the infrastructure sector
As income rise – the composition of infrastructure changes significantly
For Low income Countries
More basic infrastructure is important
Water Irrigation
Transpor For Mature economyCountries
Most of the basic consumption demands for water are met
The share of agriculture in the economy shrinks
More transport infrastructure is
provided For High IncomeCountries
The share of power & telecommunication is greater