Programme PGP & PGPX Term IV Academic Year 2021-22

Course title Infrastructure Project Finance Area PGPX Area Credits 0.50

Prof. Satish Haladi Rao (VF)

Course Description & Objectives
Infrastructure is vital for sustained economic development and improving the living standards of the population. Yet, there is an “infrastructure deficit” in many developing countries in Asia that is holding back these countries from realizing their full economic potential. Why this deficit in infrastructure, whether it be in roads, transport, electricity, safe drinking water, proper sanitation or communication facilities? One reason for this is that infrastructure presents unique challenges: highly capital intensive, with large initial costs; often of public interest nature thereby requiring greater interface with regulators and government agencies; social returns often exceed private returns, thereby necessitating subsidies/government guarantees or viability gap funding to attract the private sector; and, significant environmental and social impacts that need to be taken care of. Also, construction periods are long, revenue build up is gradual and project economic life is long, thereby requiring long-term funding with loan repayment and equity returns to be spread over longer periods of time. These factors, and the limitations faced by financial markets in developing countries, have resulted in a market failure in infrastructure that has slowed infrastructure development.

To address this market failure in infrastructure, governments stepped in as the major providers of infrastructure in the early stages of economic development, often with assistance from Multilateral Development Banks (MDBs) that provide policy assistance and long-term funding on relatively concessional terms. However, with the growing infrastructure needs of a rapidly developing Asia, governments are finding it increasingly difficult to finance these needs. Hence, governments are reaching out to the private corporate sector to partner in infrastructure development through Public-Private-Partnerships (PPPs). To address the various challenges in infrastructure and also enable PPPs, “project finance” structure is being increasingly adopted. “Project finance” is largely based on non-recourse (or limited recourse) financing wherein debt service payments are secured mainly by project cash flows. A key feature of “Project Finance” is elaborate contractual arrangements to optimally allocate risks among the project parties. Another feature is creation of a “Special Purpose Vehicle” (SPV) ie., a legally independentproject entity that limits the liabilities of the sponsors and shifts operating risks and accounting liabilities to third parties (other parties in a vertical chain from input supplier to output purchaser) that are united through a series of legal contracts. “Project finance” is still in its early stages in emerging economies and its role in infrastructure development is expected to become progressively more important in the coming years.

The course will provide an understanding of the unique features and issues in infrastructure development, including the major one of market failure and the responses to it, including the setting up of MDBs. The focus will be on underlying concepts of “project finance” such as project structuring; project risks and addressing them through contractual arrangements; and, public-private-partnerships (PPP).