18092009-Dr Chakrapani (HCC) Risk-Return Analysis (2)

Risk-Return Analysis September 14

Risk Return Analysis of Risk Return Analysis of Infrastructure ProjectsInfrastructure Projects

Presentation by:Presentation by:

Mr. P. Mr. P. ChakrapaniChakrapaniHCC InfrastructureHCC Infrastructure


This presentation contains certain forward looking statements concerning future business prospects and profitability of HCC, which are subject to a

number of risks and uncertainties and actual results could materially differ from those in such forward looking statements, important developments

that could affect the company's operations include a downtrend in the infrastructure sector, significant changes in political and economic environment

in India, tax laws, labor relations, litigation etc. The company does not undertake to make any announcement in case any of these forward looking

statements become materially incorrect in future or update any forward looking statements made from time to time by or on behalf of the company.

DISCLAIMER

RiskRisk-- Return AnalysisReturn Analysis


IntroductionIntroduction

• Hindustan Constuction Company – A world class construction Company

• Also developing – BOT Infrastructure Projects– Real Estate – HillCity- Lavasa

• Turnover Rs 3500 crores•Order Book Rs 16000 Crores•BOT Asset Outlay Rs 2500 crores•Lavasa Development 12500 acres•One of the largest IT Park Development in Mumbai

the 247 Park


What is a RiskWhat is a Risk

““There are risks and costs to a program of action, but they are fThere are risks and costs to a program of action, but they are far less than ar less than

the longthe long--range risks and costs of comfortable inaction.range risks and costs of comfortable inaction.””

-- John F. KennedyJohn F. Kennedy (1917(1917--1963) Thirty1963) Thirty--fifth President of the USAfifth President of the USA

•• RiskRisk-- ““aa conceptconcept that denotes the precise probability of specific eventualitiesthat denotes the precise probability of specific eventualities””

•• RiskRisk-- ““The threat or probability that an action or event will adverselyThe threat or probability that an action or event will adversely or or

beneficially affect an organization's ability to achieve its objbeneficially affect an organization's ability to achieve its objectivesectives””

•• In simple terms risk is In simple terms risk is ‘‘Uncertainty of OutcomeUncertainty of Outcome’’, either from pursuing a future , either from pursuing a future

positive opportunity, or an existing negative threat in trying tpositive opportunity, or an existing negative threat in trying to achieve a o achieve a

current objective.current objective.


Risk vs Return


Types of Risks in Infrastructure ProjectsTypes of Risks in Infrastructure Projects


Capital Asset Management Model (CAPM)Capital Asset Management Model (CAPM)

••Introduced byIntroduced by Jack Jack TreynorTreynor (1961, 1962),(1961, 1962), William SharpeWilliam Sharpe (1964),(1964), John John

LintnerLintner (1965a,b) and(1965a,b) and Jan Jan MossinMossin (1966) independently (1966) independently

••Used to determine a theoretically appropriate requiredUsed to determine a theoretically appropriate required rate of returnrate of return (IRR) of (IRR) of

anan asset.asset.

••Studies how investorsStudies how investors’’ asset demand determines the relation between asset demand determines the relation between

AssetsAssets’’ risk and return in a market equilibrium (when demand equals suprisk and return in a market equilibrium (when demand equals supply).ply).

••The risk of an individual asset is characterized by its coThe risk of an individual asset is characterized by its co--variability with the variability with the

market portfolio.market portfolio.

••Provides a risk adjusted discount rate for evaluation of capitalProvides a risk adjusted discount rate for evaluation of capital investment investment

projectsprojects


CAPM PracticeCAPM Practice

RiskRisk ReturnReturn ExampleExample

LowLow LowLow Annuity, No Market RiskAnnuity, No Market Risk

MediumMedium MediumMedium Medium Market Risk, Toll Medium Market Risk, Toll RoadsRoads

HighHigh HighHigh High Market Risk, Ports, High Market Risk, Ports, Airports etc.,Airports etc.,


Road ProjectsRoad Projects


Road ProjectsRoad Projects-- EPC & BOTEPC & BOT


Power ProjectsPower Projects

Risks: Construction, Fuel & Finance


Airport/ Port ProjectsAirport/ Port Projects


Metro Rail projectsMetro Rail projects

Policy GapsPolicy Gaps


PPP Schemes and Modalities in IndiaPPP Schemes and Modalities in India

Schemes Modalities

Design- Build (DB)Build- Transfer (BT)Build- Transfer- Operate (BTO)Design- Build- Operate (DBO)Build- Operate- Transfer (BOT)Build- Own- Operate- Transfer (BOOT)

•The Private sector designs and builds an asset and then transfers it to the government. •The private sector may also operate it and then transfer it to the government when operating contract ends. •The private partner may subsequently rent or lease the asset from the government for a specific period.

Design- Build- Finance- Operate- Transfer (DBFOT)Design- Build- Finance- Maintain- Transfer (DBFMT)Design- Construct- Manage- Finance (DCMF)

•There are variants of Design- Build-Finance- Operate- Transfer (DBFOT) schemes. •The private sector designs, builds, finance, owns, develops, operates and manages as asset with no obligation to the government.


Policy Approach for PPP in IndiaPolicy Approach for PPP in India

• Various PPP Models have been tried in India including public contracting;

passive public investment (equity, debt, guarantee, grants); joint ventures

and long term contractual agreements (BOT, BOOT, BOLT)

• Transparent Bidding Process

• Central/ State Schemes

• Participation of Private Players

• Projects out of Bilateral arrangements

• Financing and Project Development under different frameworks


Procurement OptionsProcurement Options


Roles in PPPRoles in PPP


Political/ InterPolitical/ Inter--Ministerial IssuesMinisterial Issues

• Finance Ministry and Planning Ministry

• Difference in identification of need

• Restriction in authority

• Co-ordination issues

• Long Documentation process

• Communication delays

• Sovereign Risks

• Political Instability Risk


Major Lacunae in Policy Major Lacunae in Policy Policy/ Clause Risk

Clause-34.9.1: If termination is on account of Non political Force Majeure Default event.Compensation provisions in Concession Agreement is 90% of debt due less insurance cover

Full equity at risk. Only 90% of Debt due is paid by NHAI.

Definitions : Total Project Cost“Total Project Cost”means the lowest of:

(a) the capital cost of the Project, {less Equity Support} as set forth in the Financial Package;

(b) the actual capital cost of the Project upon completion of Six -Laning of the Project Highway {less Equity Support}; and

(c) a sum of Rs----- crores (Rupees ------), less Equity Support; (estimated by NHAI as TPC)

It does not cover the actual spending on the project by the concessionaire. The capital cost estimated by NHAI is always the lowest and in many cases much lower than the actual costs. This brings in a substantially uncovered risk on termination for both debt & equity participants.

Clause 2.2.1.CConflict of Interest: an Applicant or Associate

thereof, having SPV/JV partnership with another Applicant or Associate thereof in the past, have had access to each other’s information (particularly the classified information with respect to the bidding process) can not bid separately in future process.

These clauses might disqualify a majority of the bidders and might also attract prolonged legal interventions.


Road Sector Policy Bidding ProcessRoad Sector Policy Bidding Process


Road Sector Policy Salient Features (NHAI/ MORTH)Road Sector Policy Salient Features (NHAI/ MORTH)

•• Request For Qualification (RFQ)Request For Qualification (RFQ)–– Bidding ProcessBidding Process–– Technical and Financial CapacityTechnical and Financial Capacity–– Estimated Project Cost and GrantEstimated Project Cost and Grant–– Standard forms of LOA, POAStandard forms of LOA, POA

•• Request For Proposal (RFP)Request For Proposal (RFP)––Instructions to Bidders ,conditions of contract ,special conditiInstructions to Bidders ,conditions of contract ,special conditionsons––Technical SpecificationsTechnical Specifications––Form of BID, bill of quantities, schedules, model formsForm of BID, bill of quantities, schedules, model forms––DrawingsDrawings

•• Concession Agreement (CA)Concession Agreement (CA)–– The ConcessionThe Concession–– Development and OperationsDevelopment and Operations–– Financial CovenantsFinancial Covenants–– Force Force MajeureMajeure and Terminationand Termination–– Other Provisions and DefinitionsOther Provisions and Definitions


Conclusions

• Last Decade’s Experience in PPP projects -Encouraging• Fairly good Learning Curve• Increasing involvement of the Private Sector• Imperfections in the system being ironed out by the Government• United Decision making among various constituents of the Government• Development of long term funding – Need of the hour

Thank YouThank You

18092009-Dr Chakrapani (HCC) Risk-Return Analysis (2)

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