BUSINESS AND CORPORATE FINANCE (BBAC602)

ASSIGNMENT
WRITTEN REPORT DUE: WEEK 5 SESSION 2
PRESENTATION AND ORAL EXAM: WEEK 6 SESSION 1
Learning Outcome Assessed: a - f
Group Size: 2 Members
Weighting: 25% (Report 15% + Oral Exam / Presentation 10%)
Written Report Case Study Analysis (2000 words)

Bidding for a large infrastructure project Understanding project evaluation

techniques, building a project evaluation model and determining the capital structure
You are the senior portfolio manager of a major infrastructure fund, APM Infrastructure, an
Australian based infrastructure fund based in Melbourne, that is invited to participate in a
Public Private Partnership transaction that involves building a major toll road in the Indian
State of Karnataka. The new toll road will provide an important link in the overall traffic
network. Your infrastructure fund has formed a bid consortium that includes a global road
building company, a road maintenance and services company, a major Indian Infrastructure
Company, a large Indian Bank and an Australian Consulting firm.
The Karnataka State Government will provide a concession agreement that allows the
winning bidder (i.e. concessionaire) to collect tolls at a regulated rate over the concession
period of 25 years from the date of completion of the project. The State Government has
agreed to provide the concessionaire with a credit wrap (or financial guarantee) of up a
total of 30% of the project value for project finance debt with a maturity up to 5 years
The concession agreement requires the bid group to contribute equity of a minimum of 30%.
For the purposes of this analysis we assume that the equity component of all project bids will
be fixed at 30% of the total project costs. The remaining will come from debt.
It is estimated that the construction will take around two years and for the purposes of our
analysis, we assume that all cash - flows during a period occur at the end of the period.
The Karnataka State Government is rated A Minus by global rating agency Standard & Poors
and your banking partner estimates that the residual project debt is rated BBB (flat) based on
S&P rating methodology.
For the purposes of this analysis you will assume a flat term structure of interest rates or
interest rate swap curve of 8%. Your banking partner has estimated the following credit
spreads over the inter-bank swap rate:

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1. A Minus rated debt = 0.50 %
2. BBB rated debt = 3.50 %
They have offered to provide an interest rate hedge to lock in the interest rates at this level if
deemed appropriate by the bid team. They would also be willing to offer credit facilities to
help the project lock in any foreign exchange or commodity price risks.
Key parameters of the project as determined by your consultants are outlined below:
INR: Indian Rupee
Project Costs:

Year 0 Bid Costs capitalised INR 1 billion

Year 1 INR 14 billion
Year 2 INR 20 billion

Hence the total project value is estimated at INR 35 billion

Approximately US$50 million of project costs is towards the purchase of bitumen or Asphalt
for road building. Bitumen is a sticky, black and highly viscous liquid or semi-solid form of
Petroleum. The price of bitumen often correlates with the price of Oil.
The Project costs also include an amount of around U$100 million towards of steel girders
that are to be imported from China.
Interest costs on the bank loan during the construction process are capitalised and included in
the total amount of INR 35 billion calculated above.
You are also provided with the following cost structures:
1. Annual Expenses other than Bank Interest costs Estimated at A$ 10 per annum
2. Bank Interest Costs As calculated by you based on debt structure employed
3. Annual Toll Receipts as outlined below:

Year 1 of the concession period INR 5.5 billion

Year 2 of the concession period INR 6 billion

Year 3 of the concession period INR 6.5 billion

Year 4 of the concession period INR 7 billion

Year 5 onwards to year 25 INR 8 billion

4. At the end of the concession period, ownership of the toll road will be handed over to
the State Government at no cost.
The bid group has agreed on an internal hurdle rate of 18 % for the purposes of evaluation of
this project.
In bidding for the project, you are required to provide the State Government with an estimate
of either how much you expect the State Government to pay you (upfront) as a subsidy or
How much you are willing to pay the State Government in consideration for taking up the
concession agreement.

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(Exchange Rate as at August 15 2015 - USD 1 = INR 65)

Important note to students:

1. This is a group assignment and the key focus is on ensuring you understand the
financial concepts You are required to discuss key issues among yourselves and
develop a detailed excel model for calculating the project NPV.
2. Aspects of the assignment will be discussed during tutorial sessions to assist you in
the learning process.
3. You can also avail the time allocated for student consultations to get a better
understanding of project related issues.
Assessment tasks:
Questions
1. In the context of this project discuss the difference between:

The Funding mechanism of this project

The Financing mechanism of this project

(5 Marks)

Develop a detailed NPV model in excel showing Cash Inflows, Cash Outflows and NPV
of the project. What is the amount that you either expect to receive or are willing to pay
the State Government to win this concession. (5 Marks)

Provide your arguments. (5 Marks)

Based on the information provided in the case study, you are required to make a
recommendation on the following:
a) The key risks in this project from the perspective of APM, in particular:

Interest Rate Risks

Foreign Exchange and Commodity Price Risks

Translation Risks

(5 Marks)
b) Innovative means of debt financing of the project, a rough debt maturity profile.
Discuss the merits and limitations of each form of financing proposed. In particular
from:

Specialist Infrastructure Lending Institutions

Domestic and International Banks

(5 Marks)

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Assignment Marking Guide:
The following assignment criteria are designed to give the student a guide as to what markers
are looking for in the assignment:
Written Report 5 Marks per Question Total 25 Marks
1. Quality of independent
research and analysis
undertaken and overall
presentation, formatting and
referencing of the report

(4 5 Marks) A very high level of achievement in all

three key assessment criteria

2. Evidence of understanding
of the various Project
evaluation and risk
management techniques.

(3 Marks) A high (or better) level of achievement in two

criteria and a good level of achievement in the third
criteria

3. Creativity and Innovation

(2.5 Marks) A good level of achievement in all three

criteria

(3.5Marks) A high level of achievement in all three key

assessment criteria

(2 Marks) A good level of achievement in two criteria

and a light level of achievement in the third criteria
(1.5 Marks) A light level of achievement in all three
criteria
(1 Mark) A light level of achievement in two criteria and
a very light level of achievement in the third criteria
(0.5 Mark) A very light level of understanding in all
three criteria
(0 Marks) No attempt was made to present & estimate.

Please familiarise yourself with the CIC Plagiarism Paraphrasing Reference document
available on Moodle before submitting this assignment on Moodle.

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