Post by Sapphire Capital on Jul 25, 2008 3:54:31 GMT 4
Guidelines for
Infrastructure Project Financing (IPF)
BANKING POLICY DEPARTMENT
STATE BANK OF PAKISTAN
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IPF Guidelines Team
Name Designation Telephone & Email
Mr. Muhammad Kamran Shehzad Director 021-9212512
kamran.shehzad@sbp.org.pk
Ms. Lubna Farooq Malik Senior Joint Director 021-9212964
lubna.farooq@sbp.org.pk
Mr. Inayat Hussain Senior Joint Director 021-9212511
inayat.hussain@sbp.org.pk
Website: www.sbp.org.pk
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C O N T E N T S
Part-A DEFINITIONS 1-8
Part B GUIDELINES 9-18
G.1 -- CREDIT APPRAISAL 9-13
G.1.1 -- Minimum Information Requirements 9
G.1.2 -- Assessment of Infrastructure Projects 9-12
G.1.2.1 -- Development Phase
G.1.2.2 -- Construction and Start-up Phase
a. Responsibility of Assuming Completion Risk
b. Physical and Financial Completion of Infrastructure Projects
i. Project Funds Agreement (PFA)
ii. Financial Completion Agreement (FCA)
iii. Project Insurance
G.1.2.3 Operation Phase
G.1.3 -- Monitoring of Infrastructure Projects 12-13
G.1.3.1-- Monitoring for Assignment of Project Receivables and
Payments for Damages
G.1.3.2 -- Monitoring for Ensuring Enforcement of Security
G.1.3.3 -- Escrow Accounts for Monitoring Repayment of Debt
G.2 -- COLLATERAL ARRANGEMENTS AND SECURITY PACKAGE 14-15
G.2.1 -- Acceptance of Concession/License as Collateral 14
G.2.2 -- Security Package 14-15
G.2.2.1 -- Primary Security/Collateral
G.2.2.2 -- Secondary Securities/Collateral
G.3 -- REGULATORY COMPLIANCE 16-18
G.3.1 -- Exposure Limit 16
G.3.1.1 -- Per Party Exposure Limit
G.3.1.2 -- Total Exposure to IPF
G.3.2 -- Debt-Equity 16-17
G.3.3 -- Funding of Infrastructure Projects 17-18
G.3.3.1 -- Maximum Duration of Loan
G.3.3.2 -- Asset Liability Management
G.3.3.3 -- Long Term Funding
G.3.4 -- Provisioning Requirements 18
Part-C ANNEXURES 19-21
Annex A -- IPF: Checklist for Minimum Information Requirements 19-20
Annex B -- IPF: Provisioning Requirements 21
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P R E F A C E
To facilitate banks/DFIs to undertake Infrastructure Projects Financing (IPF),
SBP has formulated guidelines in consultation with different stakeholders. It is important
to note that, while in conventional corporate finance, investors and creditors usually look
at the strength of the financial statements of the borrowing company and not just the net
realizable value of the project alone, the IPF ideally requires non recourse financing,
wherein the lender looks solely at the cash flows of the project for its debt service.
2. Infrastructure projects, by their very nature and design, require relatively large
investment, besides requiring longer gestation period for development, construction,
start up and operation. Keeping in view the distinctive features of infrastructure
projects, the guidelines have been formulated accordingly to help and facilitate the
stakeholders. It is hoped that these guidelines will help banks/DFIs to develop expertise
for financing of infrastructure projects, essentially by evaluating the intrinsic cash flow
generating ability of these projects.
3. Banks/DFIs are encouraged to prepare their own structured lending schemes for
the development of IPF. For this purpose, banks/DFIs may conduct/arrange their own
studies to determine the potential in specific infrastructure projects. SBP will also
monitor the position to make IPF a success for the development of the country. Any
impediment or hurdle in the development of IPF may immediately be pointed out for
removal, wherever possible, within the existing regulatory framework. Banks/DFIs are
also required to ensure observance of due prudence and necessary oversight in IPF to
safeguard the interest of their institution.
4. The IPF guidelines do not supercede other directives/instructions issued by SBP
from time to time in respect of areas not covered here. The IPF guidelines cover issues
relating to risk management of infrastructure financing. However, the relevant sections
covering categories viz corporate governance (G), anti money laundering (M), and
operations (O), as mentioned in Prudential Regulations for Corporate/Commercial
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Banking shall be applied, wherever applicable.
MUHAMMAD KAMRAN SHEHZAD
Director
Banking Policy Department
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PART- A
D E F I N I T I O N S
1. Asset Securitization means a process whereby any Special Purpose
Vehicle raises funds through the issue of Term Finance Certificates or any
other instruments with the approval of Securities and Exchange Commission
of Pakistan (SECP). The funds so received are used to make payment to the
Originator, for acquiring from the Originator the title, property or right in the
receivables or other assets in the form of actionable claims. Originator in this
context has the same meaning as explained in BPD Circular No. 31 of
November 14, 2002.
2. Asset Securitization through Special Purpose Vehicle (SPV) means asset
securitization through SPV as laid down in BPD Circular No. 31 of November
14, 2002.
3. Bank means a banking company as defined in Banking Companies
Ordinance, 1962.
4. Borrower means Concessionaire/Licensee/Project Company of an
Infrastructure Project, including a public sector entity, on whom the
bank(s)/DFI(s) has taken exposure during the course of business, including
their successor(s).
5. Concession Agreement means an agreement, usually with the government
authority, to operate the project or to provide the specified services for a
certain period of time on certain predetermined terms.
6. Concessionaire/Licensee means a legal entity, incorporated by sponsors of
an Infrastructure Project, to whom a Concession/License is awarded by a
government agency, including their successor(s) in the titles and
assignments.
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7. Contractor(s) means the entities which may be awarded the contract for
construction, supply of materials, operation, maintenance and other allied
works of an Infrastructure Project by the Concessionaire/Licensee/Project
Company.
8. DFI means a Development Financial Institution viz. Pakistan Industrial Credit
and Investment Corporation, Pak Kuwait Investment Company (Pvt.) Ltd.,
Pak Libya Holding Company Ltd., Pak Oman Investment Co. (Pvt.) Ltd.,
Saudi Pak Industrial & Agriculture Investment Ltd, or any other institution
designated by SBP.
9. Federal Government means the Government of the Islamic Republic of
Pakistan and its duly authorized representatives.
10. Financing Agreement(s) means the agreement(s) to be entered into
between the Concessionaire/Licensee/Project Company and the Lenders, for
the purpose of providing the fund-based and non-fund based facilities
necessary to carry out the Infrastructure Project, and will also include all other
agreements/documents providing security for such financing.
11. Financial Close means the stage at which the framework of the project is
complete and all parties are legally committed as per their contracts.
12. Financial Completion means fulfillment of any one or more of the conditions
listed below:
(a) The project’s ability to produce below a certain unit cost that is agreed
beforehand by the concerned parties.
(b) Produce minimum traffic volume above a certain level.
(c) Show compliance with any similar conditionality for a specified period
of time.
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(d) Have a minimum level of working capital and a certain current ratio.
(e) Achieve a minimum debt-service coverage ratio and debt-to-equity
ratio for a certain period, as per the Financial Agreement(s).
13. Government Agency means:
(a) A division, department, attached department, bureau, section,
commission, board, office or unit of the Federal Government or a
Provincial Government;
(b) A development or a local authority, company or corporation
established or controlled by the Federal Government or Provincial
Government.
14. Infrastructure Project means one of the followings:
(a) A road, including toll road, fly over, bridge project;
(b) A mass transit, urban bus, urban rail project;
(c) A rail-bed, stations system, rail freight, passenger services project;
(d) A telecommunication local services, long distance and value added
project;
(e) A power generation project;
(f) A power transmission or distribution project by laying a network of new
transmission or distribution lines;
(g) A natural gas exploration and distribution project,
(h) An LPG extraction, distribution and marketing project;
(i) An LPG import terminal, distribution and marketing project;
(j) An LNG (Liquefied Natural Gas) terminal, distribution and marketing
project;
(k) A water supply, irrigation, water treatment system, sanitation and
sewerage system or solid waste management system project;
(l) A dam, barrage, canal project;
(m) A primary and secondary irrigation, tertiary (on-farm) irrigation project;
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(n) A port, channel dredging, shipping, inland waterway, container
terminals project;
(o) An airport;
(p) A petroleum extraction, refinery, pipeline project;
(q) Any other infrastructure project of similar nature, notified by SBP.
15. Infrastructure Project Financing (IPF) means financing for an Infrastructure
Project as mentioned in para 14 above, including both fund-based and non
fund-based facilities.
16. Lender means a bank/DFI providing or making available funds to the
Concessionaire/Licensee and their successors. The term ‘Lenders’ shall also
include a consortium of lenders, a trustee, or a security agent appointed by
the lenders.
17. License means a permission granted by a government agency to a company/
sponsor for undertaking an Infrastructure Project.
18. Limited-Recourse Financing means a form of project financing in which the
lenders base their credit decision primarily on the cash flows of the borrower,
but at the same time may have legal recourse, as agreed to by all parties to
the agreement, on the sponsor’s assets.
19. Liquid Assets means assets which are readily convertible into cash without
recourse to a court of law, and means encashment / realizable value of
government securities, bank deposits, certificates of deposit, shares of listed
companies which are actively traded on the stock exchange, NIT Units,
certificates of mutual funds, Certificates of Investment (COIs) issued by DFIs /
NBFCs rated at least ‘A’ by a credit rating agency on the approved panel of
State Bank of Pakistan, listed TFCs rated at least ‘A’ by a credit rating agency
on the approved panel of State Bank of Pakistan, and certificates of asset
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management companies for which there is a book maker quoting daily offer
and bid rates and there is active secondary market trading. These assets with
appropriate margins should be in possession of the banks / DFIs with
perfected lien.
Guarantees issued by domestic banks / DFIs, when received as collateral by
banks / DFIs, will be treated at par with liquid assets, provided that the issuing
bank/DFI is rated at least ‘A’ by an SBP approved credit rating agency. For
guarantees issued by foreign banks, the issuing banks’ rating, assigned either
by Standard & Poors, Moody’s or Fitch-Ibca, should be ‘A’ and above or
equivalent.
20. Local Authority means any agency set up or designated by the Federal
Government or a Provincial Government, by notification in the official Gazette,
to be a Local Authority.
21. Non-recourse Financing means a form of project financing in which the
lenders base their credit decisions solely on the cash flows of the project for
repayment of the project debt. Such recourse is opted where the project is
fully capable of generating sufficient cash flows to repay the project debt,
even under adverse conditions.
22. Physical Completion means the project’s ability to sustain production at a
certain capacity for a specified period of time, such as one month or one
quarter of the operating year. Before this, the project may also be certified as
technically complete, i.e., meeting all technical design specification.
23. Project Account(s) means one or more Project Accounts for the purpose of
depositing contributions towards the equity of the
Concessionaire/Licensee/Project Company and the disbursement of loans by
the Lenders under the Financing Agreement(s). The Project Account(s) can
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also be utilized for depositing surplus receipts after appropriations for debt
servicing, project maintenance and any other appropriations as per the
Financing Agreement(s) from the Project Collection Account. Moreover, all
expenditure made with respect to the due performance of its obligation by the
Concessionaire/Licensee/Project Company shall be through such Project
Account (s).
24. Project Capital Cost means the total construction/completion costs of a
project on an un-leveraged (all-equity) basis, which includes project
development cost, land, owners’ costs of construction, and initial working
capital.
25. Project Collection Account means an account opened for the exclusive
collection of all revenue receipt of an infrastructure project that shall be
operated by the Concessionaire/Licensee/Project Company in accordance
with financing agreements with the lenders. Any amounts standing to the
credit of the Project Collection Account, after appropriations for debt
servicing, maintenance and other appropriation(s) as per the Financing
Agreement(s), shall be remitted to the Project Account (s).
26. Project Company means the legal entity which owns and operates a project.
27. Project Debt Reserve Account means an account created for the period of
financing provided by the Lenders that shall be funded by the
Concessionaire/Licensee/Project Company as per the Financing
Agreement(s) from the Project Account and/or the Project Collection Account
to amortize debt.
28. Project Escrow Account means an account maintained by the
Concessionaire/Licensee/Project Company for the entire remaining tenure of
the Concession/License/Right of Way, wherein every month a portion from
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the total proceeds of revenue receipts of the Infrastructure Project shall be
deposited by way of remittance from the Project Collection Account. The
amounts standing to the credit of the Project Escrow Account shall be solely
utilized for the routine and periodic maintenance of the Infrastructure Project.
29. Project Finance means a form of ‘Non-recourse’ or ‘Limited Recourse’
financing, where the lenders base their credit decision solely or primarily on
the cash flows of the project, with respect to repayment of the project debts.
30. Project Cost means the total financing (debt and equity) required to complete
construction of a project. It includes capital costs, financing fees and interest
that accumulates during the construction period, and any amounts required to
be set aside to be available to pay debt service when a problem develops.
31. Project Funds Agreement (PFA) means an agreement, usually by sponsors,
to provide additional funds as needed until completion of the project, or at any
other agreed date. However, burden of additional funds may be shared
amongst sponsors, creditors and suppliers as per their mutual consent under
a PFA.
32. Project Sponsor(s) means the primary beneficiary(ies) and proponent(s) of a
project, or a party providing the major owner’s equity financing.
33. Provincial Government means the Government of Punjab, Sindh, NWFP
and Balochistan.
34. Public Utilities means water supply, electricity supply, telecommunication
system, sewerage system, petroleum, gas supply and other utilities and
amenities for the benefit of the public.
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35. Right of Way means the existing corridor already available with a
government agency and any additional land which may have to be acquired
by a government agency for the purpose of the Infrastructure Project.
36. Special Purpose Vehicle means a special purpose vehicle registered by the
SEC for the purpose of Securitization;
37. Structured Finance means a financial instrument tailored to the risk-return
and maturity needs of the investor, rather than a simple claim against an
entity or asset, where the financier does not look at the entity as a risk, but
tries to align the financing to specific cash flow of the borrower.
38. Subordinated Loan means an unsecured loan extended to the borrower,
generally by its sponsors, subordinate to the claim of the bank / DFI taking
exposure on the borrower, and documented by a formal sub-ordination
agreement between provider of the loan and the bank/DFI. The loan shall be
disclosed in the annual audited financial statements of the borrower as
subordinated loan.
39. Term Sheet means a document that outlines in general terms the key
agreements to be contained in a legal document. In lieu of the Term Sheet,
the letter of understanding (LOU) or a memorandum of understanding (MOU)
may also be used.
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PART - B
G U I D E L I N E S
G.1 -- CREDIT APPRAISAL
A thorough credit appraisal of an IPF by banks/DFIs is of utmost importance in
order to identify the project risks, and to ascertain the fact that the project will
function as per plans. Assessment of the financial and economic viability of the
project should also be carried out to determine adequacy of the project cash
flows with respect to repayment capacity of the project debts, as also ensuring a
satisfactory rate of return on the funds proposed to be lent. Banks/DFIs are,
therefore, encouraged to develop the requisite expertise to conduct a thorough
appraisal of the proposed project, and may constitute appropriate special
Divisions/Department for IPF.
G.1.1 -- Minimum Information Requirements
Banks/DFIs, before making the lending decision, shall obtain and evaluate
detailed Feasibility Report of the proposed Project. The Feasibility Report, which
shall be endorsed by an Auditing Firm on the approved panel of SBP, shall
contain information on the Project’s anticipated economic conditions, capital
investment, and financing needs. In addition to this, banks/DFIs may also get the
feasibility report independently reviewed by an engineering firm. Moreover,
banks/DFIs shall also obtain minimum information to their satisfaction regarding
the proposed Infrastructure Project in accordance with Annex-A (IPF: Checklist
for Minimum Information Requirements).
G.1.2 -- Assessment of Infrastructure Projects
Infrastructure Projects usually go through development, construction, start-up,
and operation stages. Banks/DFIs should, therefore, assess these stages
separately for risk mitigation. While some of the guidelines in this regard are
given as under, banks/DFIs may put in place additional safeguards appropriate to
their risk assessment:
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G.1.2.1 Development Phase: Keeping in view the higher risk in this
phase, the funding needs should be met primarily through capital from the
main sponsors only. However, if the lenders decide to provide funding
during this phase of the project, they should critically evaluate the
possibility of various risks, including those arising from unclear
government policies, if any, and their possible impact on the viability of the
project.
G.1.2.2 Construction and Start-up Phase: In this phase, the major risk
is that the construction may not be completed on time, or may have large
cost overruns. A project may fail to reach its completion for many reasons,
ranging from technical design flaws to mismanagement of the project,
financial problems, or changes in government regulations. Therefore, the
lending banks/DFIs are advised to adequately safeguard their interests
and stress upon the project companies to also hedge such risks by opting
for fixed-price, certain-date construction contracts (including turnkey
contracts), and built-in provisions for liquidated damages if the contractor
fails to perform, along with obtaining insurance cover for certain areas of
the project.
a. Responsibility of Assuming Completion Risk: As lenders cannot
control the construction process, therefore, banks/DFIs are advised to
negotiate that risks during completion phase of the project be the
responsibility of the project company, its sponsors, contractors,
equipment suppliers, and insurers.
b. Physical and Financial Completion of Infrastructure Projects: In
order to protect against the risk of physical and financial noncompletion
of the infrastructure project, banks/DFIs are advised to
closely observe following issues for risk mitigation:
i. Project Funds Agreement (PFA): The most common threat to
physical completion of the project is cost overruns, which affects
the project’s financial rate of return, and if these cost overruns are
not financed through additional financing, the same may even lead
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to abandonment of the project. Therefore, to ensure that
unexpected costs do not jeopardize the project’s completion,
creditors and minority investors may insist on a commitment for
standby financing as part of the initial financial package. This may
be provided by sponsors through a contractual agreement, i.e.
Project Funds Agreement (PFA), which is a standby subordinated
loan or equity, wherein sponsors may either provide or arrange the
requisite funds.
ii. Financial Completion Agreement (FCA): It is pertinent to
emphasize that a new project may reach physical completion but
may not become self-sustaining for a number of reasons, such as
supply problems or weak market demand. If financial completion is
not achieved, profitability will suffer, and the project is likely to
encounter debt-service difficulties. Project documentation,
therefore, may include a Financial Completion Agreement (FCA),
which specifies, in contract form, the initial financial projections of
the project against which creditors and investors are willing to
invest funds. Under a Financial Completion Agreement, the
sponsors typically commit to provide subordinated loans or
additional equity to the project until the agreed financial
performance is achieved. By requiring sponsors to ensure project
financial completion, lenders greatly reduce the default risk of the
project. The lenders may, at their own discretion, require the
sponsors to arrange suitable insurance cover, if available, for
covering such risk.
iii. Project Insurance: To ensure fulfillment of obligations by the
sponsors, their obligations under PFA/FCA shall be backed-up by a
letter of credit, bond or guarantee from a creditworthy third party.
However, for mitigating force majeure that cannot be contractually
allocated, banks/DFIs are advised to call for purchase of insurance,
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wherever possible, by the sponsors, so as to mitigate both direct
and indirect types of force majeure.
G.1.2.3 Operation Phase: In this phase, the risk is generally lower, and
the sponsors may opt for retiring the senior bank debts through arranging
cheaper sources of funds in the market. As most of the projects are to stay
in business for long-term periods, significant changes may occur that may
have adverse impact on the viability of the project. These changes may
include availability and cost of inputs, market demand for the project’s
products etc. Therefore, banks/DFIs may stress upon the sponsors to
undertake long-term purchase contracts (where applicable) for important
inputs, so that the impact of price volatility is minimized. The project
company may also ask its suppliers for performance guarantees on
technical components and other necessary inputs.
G.1.3 -- Monitoring of Infrastructure Projects:
Banks/DFIs shall establish a mechanism for continuous monitoring of
project implementation to ensure proper utilization of the credit disbursed to the
company. For this purpose, proper scrutiny/audit shall be undertaken of the
Project Account(s), Project Collection Account, Project Debt Reserve Account,
Project Escrow Account and any other accounts deemed necessary for the
operation of the Project.
G.1.3.1 Monitoring for Assignment of Project Receivables and
Payments for Damages: As the primary source of repayment is through
project cash flows, lenders need to secure the loan by obtaining an
assignment of project receivables. A project usually has many different
kinds of agreements, covering matters such as government concession,
management, and supply etc. Premature termination of any of these
agreements could adversely affect the project and in such cases the party
terminating an agreement prematurely usually pays for the damages
caused to the other parties. Keeping in view such an adverse eventuality,
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banks/DFIs may institute necessary monitoring measure so as to ensure
that the assignment of project receivables and payments on account of
damages are made in their favour.
G.1.3.2 Monitoring for Ensuring Enforcement of Security: In order to
ensure an effective charge in the fixed assets of the company, banks/DFIs
will register their charge with the Registrar of Companies, so that the
security is not mortgaged with any other lending institution for further
financing.
G.1.3.3 Project Escrow Accounts for Monitoring Repayment of Debt:
In ‘Limited Recourse Financing’, the importance of Escrow Account
increases due to the fact that the primary security is the project
receivables/cash-flows. A project may generate sufficient cash flows to
repay its debt; however, the sponsors could divert such funds to some
other area, to the detriment of the lenders. An Escrow Account not only
ensures that contract obligations are met, but also helps control project
expenditures. Therefore, banks/DFIs shall institute a mechanism for
repayment of project debts through an Escrow Account, which shall be
pledged in favor of the lenders.
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G.2 -- COLLATERAL ARRANGEMENTS AND SECURITY PACKAGE
G.2.1 -- Acceptance of Concession/License as Collateral
In order to promote ‘Limited Recourse Financing’, banks/DFIs are encouraged to
accept a ‘Concession Agreement/License’ issued by a Government Agency as a
collateral, as part of the overall collateral arrangements, subject to the following
stipulations:
i. The Concession Agreement/License is free of all encumbrances, is
irrevocable, and does not contain any terms or conditions which may be
detrimental to the interest of the lenders;
ii. The Concession Agreement/License should be assignable to lenders in
the event of default;
iii. The Government Agency that has issued the Concession
Agreement/License undertakes to facilitate lenders in the transfer of
Concession Agreement/License in case of default;
iv. Public utilities are shifted appropriately from the area by the
Government;
v. Banks/DFIs have satisfied themselves about the secured nature of
Concession Agreement/License, the expected source of repayment and
the overall collateral arrangements.
G.2.2 Security Package
In order to observe prudence, while undertaking ‘Limited Recourse
Financing’ for Infrastructure Projects, banks/DFIs shall secure their interest by
Primary Security/Collateral, besides either one or a combination of the
Secondary Securities/Collateral, the details of which are as under:
G.2.2.1 Primary Security/Collateral: First charge on all the receivables
and Project Account(s), Project Collection Account, Project Debt Reserve
Account, Project Escrow Account, Bank Accounts, including offshore
accounts maintained by the Project Company and accounts of the
contractors.
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G.2.2.2 Secondary Securities/Collateral:
a. First Charge over all the immovable and movable assets of the
project company and that of the contractors if deemed
necessary by the lender;
b. First assignment of all insurance policies to cover major and
minor risks, including political risk and force-majeure;
c. First pledge of sponsor’s share in the company, besides
ensuring that sponsor’s holding does not fall below 51% of
equity capital without prior approval of the lender(s);
d. First assignment by way of security of all government approvals
and agreements, the implementation agreement and the
government undertaking;
e. First assignment by way of security of the company’s rights
under project agreements, such as project funds agreements,
retention account agreement, and shareholder agreement;
f. First charge/assignment of corporate/bank guarantees furnished
by the contractors to the project company for claiming liquidated
damages.
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G.3 -- REGULATORY COMPLIANCE
In order to facilitate participation of the private sector in infrastructure projects,
which are capital intensive and require heavy capital outlay, banks/DFIs are
advised to adhere to the following regulatory measures. However, those
regulatory issues that are not covered in these guidelines will continue to be
governed by the Prudential Regulations for Corporate/Commercial Banking.
G.3.1 -- Exposure Limit
G.3.1.1 -- Per Party Exposure Limit
a. The exposure to a single borrower for IPF will not exceed 40 percent of
bank’s/DFI’s equity, with maximum limit on funded facilities up to 30
per cent of bank’s/DFI’s equity.
b. Exposure to any group in various infrastructure projects should not
exceed 60 percent of bank’s/DFI’s equity, with maximum limit on
funded facilities up to 40 per cent of bank’s/DFI’s capital.
G.3.1.2 -- Total Exposure to IPF
Banks/DFIs shall ensure that, at no point in time, their total exposure to
IPF exceeds their equity.
For the purpose of Regulation G.3.1, exposure shall be calculated in the manner
as described in Regulation R-1 of Prudential Regulations for
Corporate/Commercial Banking.
G.3.2 – Debt-Equity
Banks/DFIs while taking an exposure on an infrastructure project, shall ensure
that the total exposure (fund-based and non-fund based) availed by any borrower
from financial institutions does not exceed 10 times of borrower’s equity as
disclosed in its latest audited financial statements. However, banks/DFIs shall be
free to decide the respective share of fund based and non-fund based lending in
the total exposure limit to an infrastructure project. Moreover, subordinated loans
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shall be counted as equity of the borrower. In this connection, banks/DFIs should
specifically include the condition of subordinated loan in their Offer Letter. The
subordination agreement to be signed by the provider of the subordinated loan
should confirm that the repayment of subordinated loan will require prior approval
of bank(s)/ DFI(s).
However, banks/DFIs while making the exposure decision, are advised to ensure
substantial financial commitment by main sponsors, which can help in the
success of the project, in the following ways:
a. making it expensive for the sponsors to abandon the project, thus
encouraging them to take a strong and lasting interest in the project
and to seek to remedy difficulties that may arise;
b. expediting decision making, particularly where the sponsors holds a
majority share; and
c. increasing the confidence of other parties in the project.
G.3.3 -- Funding of Infrastructure Projects:
G.3.3.1 -- Maximum Duration of Loan: Banks/DFIs may extend loans for
IPF up to a maximum period of 20 years, excluding grace period, if any.
G.3.3.2 -- Asset Liability Management: Banks/DFIs are encouraged to
develop an in-house system for prudently managing interest rate risk and
liquidity risk due to adverse movement in interest rates and maturity
mismatches arising from locking their assets in long term IPF
undertakings. Banks/DFIs may either enter into a sell-down financing
arrangement with other banks/DFIs or arrange consortium/syndicate to
effectively match their assets and liabilities.
G.3.3.3 -- Long Term Funding: As a measure of Asset Liability
Management (ALM), banks/DFIs are also encouraged to float
Infrastructure Bonds to match the tenure of infrastructure loans, besides
churning their infrastructure loan portfolio through securitization/sell down.
Banks/DFIs have already been allowed to securitize their assets
pertaining to lease financing, mortgage financing and toll road financing
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vide BPD Circular No. 31 of November 14, 2002. However, for the
purpose of IPF, the scope of Assets Securitization through Special
Purpose Vehicle (SPV) laid down in the aforesaid BPD Circular has been
extended to all types of Infrastructure Projects as defined at Clause 13,
Part A, of these Guidelines. This would help banks/DFIs in originating IPF
and afterwards scrutinize their IPF portfolio through SPV.
G.3.4 -- Provisioning Requirements
The banks/DFIs shall classify and make provisioning for IPF as per provision
requirements illustrated at Annex B.
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ANNEX A
IPF: CHECKLIST FOR MINIMUM INFORMATION REQUIREMENTS
1. PROJECT DESCRIPTION
i. Proposed ownership structure and sponsor information
ii. Legal status of project and status of government approvals (including
government’s and/or local authorities’ attitude toward the Project,
exemptions/advantages to be enjoyed by the Project, licenses and
permissions required, and proposed measures/actions that could affect
the Project).
iii. Project’s anticipated economic contributions (e.g. in the generation of
foreign exchange, employment, technology transfer etc.)
2. CAPITAL INVESTMENT
i. Project site
a. Legal agreements for land use rights
ii. Civil works and buildings
iii. Major and auxiliary equipment
iv. Project Management
v. Pre-operating requirements and costs
vi. Contingencies (physical) and escalations (financial)
vii. Initial working capital requirements
viii. Contracting and purchasing procedures to be used
ix. Local/foreign manpower and technical expertise required at the
planning stage.
3. PROJECT SCHEDULES
i. Construction, startup, operations
ii. Expenditures
iii. Funding (including timing of funds needed during project
implementation)
iv. Regulatory compliance
4. ENVIRONMENT IMPACT
i. Description of environment impact
ii. Health and safety issues
5. FINANCING
i. Total cost of project (including details on major items of fixed assets
and working capital)
ii. Background statement on all sponsors and participants, showing their
financial or other interest in the project construction, operations, and
marketing
iii. Capital structure
a. Proposed debt/equity structure
20
b. Equity
o Shareholder structure
o Long term plans (stay private/go public)
o Quasi-equity (subordinated debt)
c. Debt
o Long-term debt/working capital
o Domestic/foreign
o Desired terms and conditions
o Funding sources already identified
d. Overrun/standby arrangements
iv. Financial Projections
a. Projected financial statements including cash flows
b. Clear statement of all assumptions
c. Sensitivity analyses under different scenarios like interest rate risk
etc
d. Net Present Value (NPV), Internal Rate of Return (IRR) and
payback period of the project.
6. LEGAL DOCUMENTATION
i. Joint venture agreements (if applicable)
ii. Articles of association
iii. Government approval documents/concession/business license
iv. Land certificate/red line map
v. Mortgages, if any
vi. Loan agreements
vii. Major contracts including
a. Off-take agreements
b. Supply agreements
c. Technical assistance agreement
d. Management agreement
21
ANNEX B
IPF: PROVISION REQUIREMENTS
Classification Determinant Treatment of Income Provisions to be made
OAEM Where the amount
recovered is less
than 75% of the
amount receivable
and it has become
overdue by more
than 180 days.
Unrealized mark-up /
interest to be put in
Suspense Account and
not to be credited to
Income Account except
when realized in cash
No provisioning is
required.
Substandard Where the amount
recovered is less
than 60% of the
amount receivable
and it has become
overdue by more
than one years.
As above Provision of 20% of the
difference resulting from
the outstanding balance of
principal less the
realizable value of liquid
assets
Doubtful Where the amount
recovered is less
than 40% of the
amount receivable
and it has become
overdue by more
than 2 years.
As above Provision of 50% of the
difference resulting from
the outstanding balance of
principal less the
realizable value of liquid
assets
Loss Where the amount
recovered is less
than 20% of the
amount receivable
and it has become
overdue by more
than 3 years.
As above Provision of 100% of the
difference resulting from
the outstanding balance of
principal less the
realizable value of liquid
assets
Infrastructure Project Financing (IPF)
BANKING POLICY DEPARTMENT
STATE BANK OF PAKISTAN
ii
IPF Guidelines Team
Name Designation Telephone & Email
Mr. Muhammad Kamran Shehzad Director 021-9212512
kamran.shehzad@sbp.org.pk
Ms. Lubna Farooq Malik Senior Joint Director 021-9212964
lubna.farooq@sbp.org.pk
Mr. Inayat Hussain Senior Joint Director 021-9212511
inayat.hussain@sbp.org.pk
Website: www.sbp.org.pk
iii
C O N T E N T S
Part-A DEFINITIONS 1-8
Part B GUIDELINES 9-18
G.1 -- CREDIT APPRAISAL 9-13
G.1.1 -- Minimum Information Requirements 9
G.1.2 -- Assessment of Infrastructure Projects 9-12
G.1.2.1 -- Development Phase
G.1.2.2 -- Construction and Start-up Phase
a. Responsibility of Assuming Completion Risk
b. Physical and Financial Completion of Infrastructure Projects
i. Project Funds Agreement (PFA)
ii. Financial Completion Agreement (FCA)
iii. Project Insurance
G.1.2.3 Operation Phase
G.1.3 -- Monitoring of Infrastructure Projects 12-13
G.1.3.1-- Monitoring for Assignment of Project Receivables and
Payments for Damages
G.1.3.2 -- Monitoring for Ensuring Enforcement of Security
G.1.3.3 -- Escrow Accounts for Monitoring Repayment of Debt
G.2 -- COLLATERAL ARRANGEMENTS AND SECURITY PACKAGE 14-15
G.2.1 -- Acceptance of Concession/License as Collateral 14
G.2.2 -- Security Package 14-15
G.2.2.1 -- Primary Security/Collateral
G.2.2.2 -- Secondary Securities/Collateral
G.3 -- REGULATORY COMPLIANCE 16-18
G.3.1 -- Exposure Limit 16
G.3.1.1 -- Per Party Exposure Limit
G.3.1.2 -- Total Exposure to IPF
G.3.2 -- Debt-Equity 16-17
G.3.3 -- Funding of Infrastructure Projects 17-18
G.3.3.1 -- Maximum Duration of Loan
G.3.3.2 -- Asset Liability Management
G.3.3.3 -- Long Term Funding
G.3.4 -- Provisioning Requirements 18
Part-C ANNEXURES 19-21
Annex A -- IPF: Checklist for Minimum Information Requirements 19-20
Annex B -- IPF: Provisioning Requirements 21
iv
P R E F A C E
To facilitate banks/DFIs to undertake Infrastructure Projects Financing (IPF),
SBP has formulated guidelines in consultation with different stakeholders. It is important
to note that, while in conventional corporate finance, investors and creditors usually look
at the strength of the financial statements of the borrowing company and not just the net
realizable value of the project alone, the IPF ideally requires non recourse financing,
wherein the lender looks solely at the cash flows of the project for its debt service.
2. Infrastructure projects, by their very nature and design, require relatively large
investment, besides requiring longer gestation period for development, construction,
start up and operation. Keeping in view the distinctive features of infrastructure
projects, the guidelines have been formulated accordingly to help and facilitate the
stakeholders. It is hoped that these guidelines will help banks/DFIs to develop expertise
for financing of infrastructure projects, essentially by evaluating the intrinsic cash flow
generating ability of these projects.
3. Banks/DFIs are encouraged to prepare their own structured lending schemes for
the development of IPF. For this purpose, banks/DFIs may conduct/arrange their own
studies to determine the potential in specific infrastructure projects. SBP will also
monitor the position to make IPF a success for the development of the country. Any
impediment or hurdle in the development of IPF may immediately be pointed out for
removal, wherever possible, within the existing regulatory framework. Banks/DFIs are
also required to ensure observance of due prudence and necessary oversight in IPF to
safeguard the interest of their institution.
4. The IPF guidelines do not supercede other directives/instructions issued by SBP
from time to time in respect of areas not covered here. The IPF guidelines cover issues
relating to risk management of infrastructure financing. However, the relevant sections
covering categories viz corporate governance (G), anti money laundering (M), and
operations (O), as mentioned in Prudential Regulations for Corporate/Commercial
v
Banking shall be applied, wherever applicable.
MUHAMMAD KAMRAN SHEHZAD
Director
Banking Policy Department
1
PART- A
D E F I N I T I O N S
1. Asset Securitization means a process whereby any Special Purpose
Vehicle raises funds through the issue of Term Finance Certificates or any
other instruments with the approval of Securities and Exchange Commission
of Pakistan (SECP). The funds so received are used to make payment to the
Originator, for acquiring from the Originator the title, property or right in the
receivables or other assets in the form of actionable claims. Originator in this
context has the same meaning as explained in BPD Circular No. 31 of
November 14, 2002.
2. Asset Securitization through Special Purpose Vehicle (SPV) means asset
securitization through SPV as laid down in BPD Circular No. 31 of November
14, 2002.
3. Bank means a banking company as defined in Banking Companies
Ordinance, 1962.
4. Borrower means Concessionaire/Licensee/Project Company of an
Infrastructure Project, including a public sector entity, on whom the
bank(s)/DFI(s) has taken exposure during the course of business, including
their successor(s).
5. Concession Agreement means an agreement, usually with the government
authority, to operate the project or to provide the specified services for a
certain period of time on certain predetermined terms.
6. Concessionaire/Licensee means a legal entity, incorporated by sponsors of
an Infrastructure Project, to whom a Concession/License is awarded by a
government agency, including their successor(s) in the titles and
assignments.
2
7. Contractor(s) means the entities which may be awarded the contract for
construction, supply of materials, operation, maintenance and other allied
works of an Infrastructure Project by the Concessionaire/Licensee/Project
Company.
8. DFI means a Development Financial Institution viz. Pakistan Industrial Credit
and Investment Corporation, Pak Kuwait Investment Company (Pvt.) Ltd.,
Pak Libya Holding Company Ltd., Pak Oman Investment Co. (Pvt.) Ltd.,
Saudi Pak Industrial & Agriculture Investment Ltd, or any other institution
designated by SBP.
9. Federal Government means the Government of the Islamic Republic of
Pakistan and its duly authorized representatives.
10. Financing Agreement(s) means the agreement(s) to be entered into
between the Concessionaire/Licensee/Project Company and the Lenders, for
the purpose of providing the fund-based and non-fund based facilities
necessary to carry out the Infrastructure Project, and will also include all other
agreements/documents providing security for such financing.
11. Financial Close means the stage at which the framework of the project is
complete and all parties are legally committed as per their contracts.
12. Financial Completion means fulfillment of any one or more of the conditions
listed below:
(a) The project’s ability to produce below a certain unit cost that is agreed
beforehand by the concerned parties.
(b) Produce minimum traffic volume above a certain level.
(c) Show compliance with any similar conditionality for a specified period
of time.
3
(d) Have a minimum level of working capital and a certain current ratio.
(e) Achieve a minimum debt-service coverage ratio and debt-to-equity
ratio for a certain period, as per the Financial Agreement(s).
13. Government Agency means:
(a) A division, department, attached department, bureau, section,
commission, board, office or unit of the Federal Government or a
Provincial Government;
(b) A development or a local authority, company or corporation
established or controlled by the Federal Government or Provincial
Government.
14. Infrastructure Project means one of the followings:
(a) A road, including toll road, fly over, bridge project;
(b) A mass transit, urban bus, urban rail project;
(c) A rail-bed, stations system, rail freight, passenger services project;
(d) A telecommunication local services, long distance and value added
project;
(e) A power generation project;
(f) A power transmission or distribution project by laying a network of new
transmission or distribution lines;
(g) A natural gas exploration and distribution project,
(h) An LPG extraction, distribution and marketing project;
(i) An LPG import terminal, distribution and marketing project;
(j) An LNG (Liquefied Natural Gas) terminal, distribution and marketing
project;
(k) A water supply, irrigation, water treatment system, sanitation and
sewerage system or solid waste management system project;
(l) A dam, barrage, canal project;
(m) A primary and secondary irrigation, tertiary (on-farm) irrigation project;
4
(n) A port, channel dredging, shipping, inland waterway, container
terminals project;
(o) An airport;
(p) A petroleum extraction, refinery, pipeline project;
(q) Any other infrastructure project of similar nature, notified by SBP.
15. Infrastructure Project Financing (IPF) means financing for an Infrastructure
Project as mentioned in para 14 above, including both fund-based and non
fund-based facilities.
16. Lender means a bank/DFI providing or making available funds to the
Concessionaire/Licensee and their successors. The term ‘Lenders’ shall also
include a consortium of lenders, a trustee, or a security agent appointed by
the lenders.
17. License means a permission granted by a government agency to a company/
sponsor for undertaking an Infrastructure Project.
18. Limited-Recourse Financing means a form of project financing in which the
lenders base their credit decision primarily on the cash flows of the borrower,
but at the same time may have legal recourse, as agreed to by all parties to
the agreement, on the sponsor’s assets.
19. Liquid Assets means assets which are readily convertible into cash without
recourse to a court of law, and means encashment / realizable value of
government securities, bank deposits, certificates of deposit, shares of listed
companies which are actively traded on the stock exchange, NIT Units,
certificates of mutual funds, Certificates of Investment (COIs) issued by DFIs /
NBFCs rated at least ‘A’ by a credit rating agency on the approved panel of
State Bank of Pakistan, listed TFCs rated at least ‘A’ by a credit rating agency
on the approved panel of State Bank of Pakistan, and certificates of asset
5
management companies for which there is a book maker quoting daily offer
and bid rates and there is active secondary market trading. These assets with
appropriate margins should be in possession of the banks / DFIs with
perfected lien.
Guarantees issued by domestic banks / DFIs, when received as collateral by
banks / DFIs, will be treated at par with liquid assets, provided that the issuing
bank/DFI is rated at least ‘A’ by an SBP approved credit rating agency. For
guarantees issued by foreign banks, the issuing banks’ rating, assigned either
by Standard & Poors, Moody’s or Fitch-Ibca, should be ‘A’ and above or
equivalent.
20. Local Authority means any agency set up or designated by the Federal
Government or a Provincial Government, by notification in the official Gazette,
to be a Local Authority.
21. Non-recourse Financing means a form of project financing in which the
lenders base their credit decisions solely on the cash flows of the project for
repayment of the project debt. Such recourse is opted where the project is
fully capable of generating sufficient cash flows to repay the project debt,
even under adverse conditions.
22. Physical Completion means the project’s ability to sustain production at a
certain capacity for a specified period of time, such as one month or one
quarter of the operating year. Before this, the project may also be certified as
technically complete, i.e., meeting all technical design specification.
23. Project Account(s) means one or more Project Accounts for the purpose of
depositing contributions towards the equity of the
Concessionaire/Licensee/Project Company and the disbursement of loans by
the Lenders under the Financing Agreement(s). The Project Account(s) can
6
also be utilized for depositing surplus receipts after appropriations for debt
servicing, project maintenance and any other appropriations as per the
Financing Agreement(s) from the Project Collection Account. Moreover, all
expenditure made with respect to the due performance of its obligation by the
Concessionaire/Licensee/Project Company shall be through such Project
Account (s).
24. Project Capital Cost means the total construction/completion costs of a
project on an un-leveraged (all-equity) basis, which includes project
development cost, land, owners’ costs of construction, and initial working
capital.
25. Project Collection Account means an account opened for the exclusive
collection of all revenue receipt of an infrastructure project that shall be
operated by the Concessionaire/Licensee/Project Company in accordance
with financing agreements with the lenders. Any amounts standing to the
credit of the Project Collection Account, after appropriations for debt
servicing, maintenance and other appropriation(s) as per the Financing
Agreement(s), shall be remitted to the Project Account (s).
26. Project Company means the legal entity which owns and operates a project.
27. Project Debt Reserve Account means an account created for the period of
financing provided by the Lenders that shall be funded by the
Concessionaire/Licensee/Project Company as per the Financing
Agreement(s) from the Project Account and/or the Project Collection Account
to amortize debt.
28. Project Escrow Account means an account maintained by the
Concessionaire/Licensee/Project Company for the entire remaining tenure of
the Concession/License/Right of Way, wherein every month a portion from
7
the total proceeds of revenue receipts of the Infrastructure Project shall be
deposited by way of remittance from the Project Collection Account. The
amounts standing to the credit of the Project Escrow Account shall be solely
utilized for the routine and periodic maintenance of the Infrastructure Project.
29. Project Finance means a form of ‘Non-recourse’ or ‘Limited Recourse’
financing, where the lenders base their credit decision solely or primarily on
the cash flows of the project, with respect to repayment of the project debts.
30. Project Cost means the total financing (debt and equity) required to complete
construction of a project. It includes capital costs, financing fees and interest
that accumulates during the construction period, and any amounts required to
be set aside to be available to pay debt service when a problem develops.
31. Project Funds Agreement (PFA) means an agreement, usually by sponsors,
to provide additional funds as needed until completion of the project, or at any
other agreed date. However, burden of additional funds may be shared
amongst sponsors, creditors and suppliers as per their mutual consent under
a PFA.
32. Project Sponsor(s) means the primary beneficiary(ies) and proponent(s) of a
project, or a party providing the major owner’s equity financing.
33. Provincial Government means the Government of Punjab, Sindh, NWFP
and Balochistan.
34. Public Utilities means water supply, electricity supply, telecommunication
system, sewerage system, petroleum, gas supply and other utilities and
amenities for the benefit of the public.
8
35. Right of Way means the existing corridor already available with a
government agency and any additional land which may have to be acquired
by a government agency for the purpose of the Infrastructure Project.
36. Special Purpose Vehicle means a special purpose vehicle registered by the
SEC for the purpose of Securitization;
37. Structured Finance means a financial instrument tailored to the risk-return
and maturity needs of the investor, rather than a simple claim against an
entity or asset, where the financier does not look at the entity as a risk, but
tries to align the financing to specific cash flow of the borrower.
38. Subordinated Loan means an unsecured loan extended to the borrower,
generally by its sponsors, subordinate to the claim of the bank / DFI taking
exposure on the borrower, and documented by a formal sub-ordination
agreement between provider of the loan and the bank/DFI. The loan shall be
disclosed in the annual audited financial statements of the borrower as
subordinated loan.
39. Term Sheet means a document that outlines in general terms the key
agreements to be contained in a legal document. In lieu of the Term Sheet,
the letter of understanding (LOU) or a memorandum of understanding (MOU)
may also be used.
9
PART - B
G U I D E L I N E S
G.1 -- CREDIT APPRAISAL
A thorough credit appraisal of an IPF by banks/DFIs is of utmost importance in
order to identify the project risks, and to ascertain the fact that the project will
function as per plans. Assessment of the financial and economic viability of the
project should also be carried out to determine adequacy of the project cash
flows with respect to repayment capacity of the project debts, as also ensuring a
satisfactory rate of return on the funds proposed to be lent. Banks/DFIs are,
therefore, encouraged to develop the requisite expertise to conduct a thorough
appraisal of the proposed project, and may constitute appropriate special
Divisions/Department for IPF.
G.1.1 -- Minimum Information Requirements
Banks/DFIs, before making the lending decision, shall obtain and evaluate
detailed Feasibility Report of the proposed Project. The Feasibility Report, which
shall be endorsed by an Auditing Firm on the approved panel of SBP, shall
contain information on the Project’s anticipated economic conditions, capital
investment, and financing needs. In addition to this, banks/DFIs may also get the
feasibility report independently reviewed by an engineering firm. Moreover,
banks/DFIs shall also obtain minimum information to their satisfaction regarding
the proposed Infrastructure Project in accordance with Annex-A (IPF: Checklist
for Minimum Information Requirements).
G.1.2 -- Assessment of Infrastructure Projects
Infrastructure Projects usually go through development, construction, start-up,
and operation stages. Banks/DFIs should, therefore, assess these stages
separately for risk mitigation. While some of the guidelines in this regard are
given as under, banks/DFIs may put in place additional safeguards appropriate to
their risk assessment:
10
G.1.2.1 Development Phase: Keeping in view the higher risk in this
phase, the funding needs should be met primarily through capital from the
main sponsors only. However, if the lenders decide to provide funding
during this phase of the project, they should critically evaluate the
possibility of various risks, including those arising from unclear
government policies, if any, and their possible impact on the viability of the
project.
G.1.2.2 Construction and Start-up Phase: In this phase, the major risk
is that the construction may not be completed on time, or may have large
cost overruns. A project may fail to reach its completion for many reasons,
ranging from technical design flaws to mismanagement of the project,
financial problems, or changes in government regulations. Therefore, the
lending banks/DFIs are advised to adequately safeguard their interests
and stress upon the project companies to also hedge such risks by opting
for fixed-price, certain-date construction contracts (including turnkey
contracts), and built-in provisions for liquidated damages if the contractor
fails to perform, along with obtaining insurance cover for certain areas of
the project.
a. Responsibility of Assuming Completion Risk: As lenders cannot
control the construction process, therefore, banks/DFIs are advised to
negotiate that risks during completion phase of the project be the
responsibility of the project company, its sponsors, contractors,
equipment suppliers, and insurers.
b. Physical and Financial Completion of Infrastructure Projects: In
order to protect against the risk of physical and financial noncompletion
of the infrastructure project, banks/DFIs are advised to
closely observe following issues for risk mitigation:
i. Project Funds Agreement (PFA): The most common threat to
physical completion of the project is cost overruns, which affects
the project’s financial rate of return, and if these cost overruns are
not financed through additional financing, the same may even lead
11
to abandonment of the project. Therefore, to ensure that
unexpected costs do not jeopardize the project’s completion,
creditors and minority investors may insist on a commitment for
standby financing as part of the initial financial package. This may
be provided by sponsors through a contractual agreement, i.e.
Project Funds Agreement (PFA), which is a standby subordinated
loan or equity, wherein sponsors may either provide or arrange the
requisite funds.
ii. Financial Completion Agreement (FCA): It is pertinent to
emphasize that a new project may reach physical completion but
may not become self-sustaining for a number of reasons, such as
supply problems or weak market demand. If financial completion is
not achieved, profitability will suffer, and the project is likely to
encounter debt-service difficulties. Project documentation,
therefore, may include a Financial Completion Agreement (FCA),
which specifies, in contract form, the initial financial projections of
the project against which creditors and investors are willing to
invest funds. Under a Financial Completion Agreement, the
sponsors typically commit to provide subordinated loans or
additional equity to the project until the agreed financial
performance is achieved. By requiring sponsors to ensure project
financial completion, lenders greatly reduce the default risk of the
project. The lenders may, at their own discretion, require the
sponsors to arrange suitable insurance cover, if available, for
covering such risk.
iii. Project Insurance: To ensure fulfillment of obligations by the
sponsors, their obligations under PFA/FCA shall be backed-up by a
letter of credit, bond or guarantee from a creditworthy third party.
However, for mitigating force majeure that cannot be contractually
allocated, banks/DFIs are advised to call for purchase of insurance,
12
wherever possible, by the sponsors, so as to mitigate both direct
and indirect types of force majeure.
G.1.2.3 Operation Phase: In this phase, the risk is generally lower, and
the sponsors may opt for retiring the senior bank debts through arranging
cheaper sources of funds in the market. As most of the projects are to stay
in business for long-term periods, significant changes may occur that may
have adverse impact on the viability of the project. These changes may
include availability and cost of inputs, market demand for the project’s
products etc. Therefore, banks/DFIs may stress upon the sponsors to
undertake long-term purchase contracts (where applicable) for important
inputs, so that the impact of price volatility is minimized. The project
company may also ask its suppliers for performance guarantees on
technical components and other necessary inputs.
G.1.3 -- Monitoring of Infrastructure Projects:
Banks/DFIs shall establish a mechanism for continuous monitoring of
project implementation to ensure proper utilization of the credit disbursed to the
company. For this purpose, proper scrutiny/audit shall be undertaken of the
Project Account(s), Project Collection Account, Project Debt Reserve Account,
Project Escrow Account and any other accounts deemed necessary for the
operation of the Project.
G.1.3.1 Monitoring for Assignment of Project Receivables and
Payments for Damages: As the primary source of repayment is through
project cash flows, lenders need to secure the loan by obtaining an
assignment of project receivables. A project usually has many different
kinds of agreements, covering matters such as government concession,
management, and supply etc. Premature termination of any of these
agreements could adversely affect the project and in such cases the party
terminating an agreement prematurely usually pays for the damages
caused to the other parties. Keeping in view such an adverse eventuality,
13
banks/DFIs may institute necessary monitoring measure so as to ensure
that the assignment of project receivables and payments on account of
damages are made in their favour.
G.1.3.2 Monitoring for Ensuring Enforcement of Security: In order to
ensure an effective charge in the fixed assets of the company, banks/DFIs
will register their charge with the Registrar of Companies, so that the
security is not mortgaged with any other lending institution for further
financing.
G.1.3.3 Project Escrow Accounts for Monitoring Repayment of Debt:
In ‘Limited Recourse Financing’, the importance of Escrow Account
increases due to the fact that the primary security is the project
receivables/cash-flows. A project may generate sufficient cash flows to
repay its debt; however, the sponsors could divert such funds to some
other area, to the detriment of the lenders. An Escrow Account not only
ensures that contract obligations are met, but also helps control project
expenditures. Therefore, banks/DFIs shall institute a mechanism for
repayment of project debts through an Escrow Account, which shall be
pledged in favor of the lenders.
14
G.2 -- COLLATERAL ARRANGEMENTS AND SECURITY PACKAGE
G.2.1 -- Acceptance of Concession/License as Collateral
In order to promote ‘Limited Recourse Financing’, banks/DFIs are encouraged to
accept a ‘Concession Agreement/License’ issued by a Government Agency as a
collateral, as part of the overall collateral arrangements, subject to the following
stipulations:
i. The Concession Agreement/License is free of all encumbrances, is
irrevocable, and does not contain any terms or conditions which may be
detrimental to the interest of the lenders;
ii. The Concession Agreement/License should be assignable to lenders in
the event of default;
iii. The Government Agency that has issued the Concession
Agreement/License undertakes to facilitate lenders in the transfer of
Concession Agreement/License in case of default;
iv. Public utilities are shifted appropriately from the area by the
Government;
v. Banks/DFIs have satisfied themselves about the secured nature of
Concession Agreement/License, the expected source of repayment and
the overall collateral arrangements.
G.2.2 Security Package
In order to observe prudence, while undertaking ‘Limited Recourse
Financing’ for Infrastructure Projects, banks/DFIs shall secure their interest by
Primary Security/Collateral, besides either one or a combination of the
Secondary Securities/Collateral, the details of which are as under:
G.2.2.1 Primary Security/Collateral: First charge on all the receivables
and Project Account(s), Project Collection Account, Project Debt Reserve
Account, Project Escrow Account, Bank Accounts, including offshore
accounts maintained by the Project Company and accounts of the
contractors.
15
G.2.2.2 Secondary Securities/Collateral:
a. First Charge over all the immovable and movable assets of the
project company and that of the contractors if deemed
necessary by the lender;
b. First assignment of all insurance policies to cover major and
minor risks, including political risk and force-majeure;
c. First pledge of sponsor’s share in the company, besides
ensuring that sponsor’s holding does not fall below 51% of
equity capital without prior approval of the lender(s);
d. First assignment by way of security of all government approvals
and agreements, the implementation agreement and the
government undertaking;
e. First assignment by way of security of the company’s rights
under project agreements, such as project funds agreements,
retention account agreement, and shareholder agreement;
f. First charge/assignment of corporate/bank guarantees furnished
by the contractors to the project company for claiming liquidated
damages.
16
G.3 -- REGULATORY COMPLIANCE
In order to facilitate participation of the private sector in infrastructure projects,
which are capital intensive and require heavy capital outlay, banks/DFIs are
advised to adhere to the following regulatory measures. However, those
regulatory issues that are not covered in these guidelines will continue to be
governed by the Prudential Regulations for Corporate/Commercial Banking.
G.3.1 -- Exposure Limit
G.3.1.1 -- Per Party Exposure Limit
a. The exposure to a single borrower for IPF will not exceed 40 percent of
bank’s/DFI’s equity, with maximum limit on funded facilities up to 30
per cent of bank’s/DFI’s equity.
b. Exposure to any group in various infrastructure projects should not
exceed 60 percent of bank’s/DFI’s equity, with maximum limit on
funded facilities up to 40 per cent of bank’s/DFI’s capital.
G.3.1.2 -- Total Exposure to IPF
Banks/DFIs shall ensure that, at no point in time, their total exposure to
IPF exceeds their equity.
For the purpose of Regulation G.3.1, exposure shall be calculated in the manner
as described in Regulation R-1 of Prudential Regulations for
Corporate/Commercial Banking.
G.3.2 – Debt-Equity
Banks/DFIs while taking an exposure on an infrastructure project, shall ensure
that the total exposure (fund-based and non-fund based) availed by any borrower
from financial institutions does not exceed 10 times of borrower’s equity as
disclosed in its latest audited financial statements. However, banks/DFIs shall be
free to decide the respective share of fund based and non-fund based lending in
the total exposure limit to an infrastructure project. Moreover, subordinated loans
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shall be counted as equity of the borrower. In this connection, banks/DFIs should
specifically include the condition of subordinated loan in their Offer Letter. The
subordination agreement to be signed by the provider of the subordinated loan
should confirm that the repayment of subordinated loan will require prior approval
of bank(s)/ DFI(s).
However, banks/DFIs while making the exposure decision, are advised to ensure
substantial financial commitment by main sponsors, which can help in the
success of the project, in the following ways:
a. making it expensive for the sponsors to abandon the project, thus
encouraging them to take a strong and lasting interest in the project
and to seek to remedy difficulties that may arise;
b. expediting decision making, particularly where the sponsors holds a
majority share; and
c. increasing the confidence of other parties in the project.
G.3.3 -- Funding of Infrastructure Projects:
G.3.3.1 -- Maximum Duration of Loan: Banks/DFIs may extend loans for
IPF up to a maximum period of 20 years, excluding grace period, if any.
G.3.3.2 -- Asset Liability Management: Banks/DFIs are encouraged to
develop an in-house system for prudently managing interest rate risk and
liquidity risk due to adverse movement in interest rates and maturity
mismatches arising from locking their assets in long term IPF
undertakings. Banks/DFIs may either enter into a sell-down financing
arrangement with other banks/DFIs or arrange consortium/syndicate to
effectively match their assets and liabilities.
G.3.3.3 -- Long Term Funding: As a measure of Asset Liability
Management (ALM), banks/DFIs are also encouraged to float
Infrastructure Bonds to match the tenure of infrastructure loans, besides
churning their infrastructure loan portfolio through securitization/sell down.
Banks/DFIs have already been allowed to securitize their assets
pertaining to lease financing, mortgage financing and toll road financing
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vide BPD Circular No. 31 of November 14, 2002. However, for the
purpose of IPF, the scope of Assets Securitization through Special
Purpose Vehicle (SPV) laid down in the aforesaid BPD Circular has been
extended to all types of Infrastructure Projects as defined at Clause 13,
Part A, of these Guidelines. This would help banks/DFIs in originating IPF
and afterwards scrutinize their IPF portfolio through SPV.
G.3.4 -- Provisioning Requirements
The banks/DFIs shall classify and make provisioning for IPF as per provision
requirements illustrated at Annex B.
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ANNEX A
IPF: CHECKLIST FOR MINIMUM INFORMATION REQUIREMENTS
1. PROJECT DESCRIPTION
i. Proposed ownership structure and sponsor information
ii. Legal status of project and status of government approvals (including
government’s and/or local authorities’ attitude toward the Project,
exemptions/advantages to be enjoyed by the Project, licenses and
permissions required, and proposed measures/actions that could affect
the Project).
iii. Project’s anticipated economic contributions (e.g. in the generation of
foreign exchange, employment, technology transfer etc.)
2. CAPITAL INVESTMENT
i. Project site
a. Legal agreements for land use rights
ii. Civil works and buildings
iii. Major and auxiliary equipment
iv. Project Management
v. Pre-operating requirements and costs
vi. Contingencies (physical) and escalations (financial)
vii. Initial working capital requirements
viii. Contracting and purchasing procedures to be used
ix. Local/foreign manpower and technical expertise required at the
planning stage.
3. PROJECT SCHEDULES
i. Construction, startup, operations
ii. Expenditures
iii. Funding (including timing of funds needed during project
implementation)
iv. Regulatory compliance
4. ENVIRONMENT IMPACT
i. Description of environment impact
ii. Health and safety issues
5. FINANCING
i. Total cost of project (including details on major items of fixed assets
and working capital)
ii. Background statement on all sponsors and participants, showing their
financial or other interest in the project construction, operations, and
marketing
iii. Capital structure
a. Proposed debt/equity structure
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b. Equity
o Shareholder structure
o Long term plans (stay private/go public)
o Quasi-equity (subordinated debt)
c. Debt
o Long-term debt/working capital
o Domestic/foreign
o Desired terms and conditions
o Funding sources already identified
d. Overrun/standby arrangements
iv. Financial Projections
a. Projected financial statements including cash flows
b. Clear statement of all assumptions
c. Sensitivity analyses under different scenarios like interest rate risk
etc
d. Net Present Value (NPV), Internal Rate of Return (IRR) and
payback period of the project.
6. LEGAL DOCUMENTATION
i. Joint venture agreements (if applicable)
ii. Articles of association
iii. Government approval documents/concession/business license
iv. Land certificate/red line map
v. Mortgages, if any
vi. Loan agreements
vii. Major contracts including
a. Off-take agreements
b. Supply agreements
c. Technical assistance agreement
d. Management agreement
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ANNEX B
IPF: PROVISION REQUIREMENTS
Classification Determinant Treatment of Income Provisions to be made
OAEM Where the amount
recovered is less
than 75% of the
amount receivable
and it has become
overdue by more
than 180 days.
Unrealized mark-up /
interest to be put in
Suspense Account and
not to be credited to
Income Account except
when realized in cash
No provisioning is
required.
Substandard Where the amount
recovered is less
than 60% of the
amount receivable
and it has become
overdue by more
than one years.
As above Provision of 20% of the
difference resulting from
the outstanding balance of
principal less the
realizable value of liquid
assets
Doubtful Where the amount
recovered is less
than 40% of the
amount receivable
and it has become
overdue by more
than 2 years.
As above Provision of 50% of the
difference resulting from
the outstanding balance of
principal less the
realizable value of liquid
assets
Loss Where the amount
recovered is less
than 20% of the
amount receivable
and it has become
overdue by more
than 3 years.
As above Provision of 100% of the
difference resulting from
the outstanding balance of
principal less the
realizable value of liquid
assets