PROJECT APPRAISAL

Agenda

Projects, planning and development- the context ; the need for project appraisal, the techniques- Technical, financial, commercial and managerial

Appraisal of different types of projects- conventional projects and infrastructure/social sector projects- features, differences in evaluation and implications for policy

Economic appraisal of projects; objectives, differences with financial appraisal; new structures and concepts in project finance for infrastructure/social sector projects-related issues in infrastructure and social sector projects- the role of Government- privatisation- Public-private partnerships- implications for project appraisal.

The Context

Development planning and the role of the State (Chapter 11 –Economic Development)

Economic planning is defined as a governmental attempt to coordinate economic decision making and influence economic outcomes

The justification for developing a market plan includes the following points:

The need to correct for market failures. The need to ensure the most productive use of scarce

financial and skilled manpower resources. The value of a plan in overcoming sectional and

traditional attitudes. An increase in the ability to qualify for foreign aid

The Context

The three types of planning models described are: Applied macroeconomic growth models based on variants of the

Harrod-Domar model, with reference to the two-gap model introduced in Chapter 15.

Input-output models.

Project appraisal, with reference to including relevant objectives, shadow prices, social discount rates, and decision criteria.

References: Prasanna Chandra (1988), Projects, Preparation, Appraisal, Budgeting and

Implementation: Tata McGraw Hill. New Delhi. Project appraisal and Planning for Developing Countries: I.M.D. Little and

J.A.Mirrlees (1974) United Nations Industrial Development Organisation (UNIDO) (1972).

Guidelines for Project Evaluation, New York: United Nations.

Project Appraisal

What is a Project? In the context of economic development, a project can be defined as a set

of planned activities that involve an initial capital outlay , with a flow of benefits in the future

Why Project appraisal? Project evaluation is necessary because of multiple projects competing for

limited resources. What kind of appraisal methods exist? Who does PA? Appraisal techniques vary according to the type of project, but the broad

principles of project evaluation can be expressed in terms of cost-benefit analysis. i.e whether the benefits justify or outweigh the costs. The nature of costs, benefits again could vary depending on the type of project.

Conventional project evaluation comprises the following types of appraisal Market appraisal Technical appraisal Financial appraisal Economic appraisal

Project Appraisal

A project is a temporary endeavor with a defined beginning and end (usually time-constrained, and often constrained by funding or deliverables, undertaken to meet unique goals and objectives, typically to bring about beneficial change or added value.

Therefore, the key attributes are time bound, cost bound with specific value-addition objectives (benefits)

What is Appraisal? Refers to an evaluation ; we have seen 2 key attributes of a project i.e cost and benefits; appraisal is an evaluation of costs and benefits with two main objectives (i) relative measure-choosing amongst many projects competing for limited resources. (ii) absolute measure- ensuring that project adds value

Project Appraisal

The key steps in project appraisal are: Determining the capital cost outlay of the project Determining the financing pattern of the project (Debt and Equity) Projecting cash flows for the project for a length of period in future Evaluating various financial criteria for the project Checking sensitivity of the project to key variables Establishing risks and covering them suitably

Financial appraisal involves determining costs and benefits from the project. Here, the guiding principles are:

Cash flow principle (cash represents purchasing power) Incremental principle (i.e sunk costs are not considered) Long term funds perspective (i.e discounting rate chosen from long

term lenders/equity holders viewpoint) Exclusion of financing costs Post tax principle

Project Appraisal

PROJECT COSTQty Cost Total cost

1 Land and Buildings - Land acres - site development expenses acres - Buildings sq ft

2 Plant & Machinery - basic cost - imported - duties & taxes - transportation & inst.

3 Misc fixed assets -Office/admn buildings - generators - furniture etc

4 Pre-operative expenses - Interest during constrn - start up expenses - salaries/wages - royalties -working capital margin

TOTAL COST

Project Appraisal

MEANS OF FINANCING

Equity capital - by promoters - by others sub-total

Debt - from Fin. instns - from banks - from other sources sub-total

TOTAL

Project Appraisal

Year1 Year2 Year3 Year4 Year5Sales:Total productionSelling priceTotal sales A B C D E

Cost of production:Raw materialsPower and fuelWages and salariesAdmn expensesSelling & marketing Total CoP V W X Y Z

InterestDepreciation Total Op exp P Q R S T

Gross Profit (GP) A-V B-W C-X D-Y E-Z

Operating profit (OP) GP-P GP-Q GP-R GP-S GP-T

Income tax F G H I JProfit after tax (PAT) K L M N ODividends

Project Appraisal

The cash flow stream usually consists of 3 components: Initial investment (outflow) Operating cash flows (inflow) Terminal cash flow (inflow)

For the purpose of operating cash flows, we usually consider the following elements from the financial projections:

Profit after tax (PAT) Depreciation Other non cash expenditure ( as they are not outflows) Interest paid on long term debt

The terminal cash flow usually consists of sale value of capital assets and net working capital assets

Discounted Cash flow (DCF) criteria are the preferred methods in Project appraisal.

Project Appraisal

The DCF measures commonly employed are 3 viz, IRR, NPV and Benefit-Cost ratio.

NPV: Calculated as the sum of the PV of all cash flows, discounted at a rate

equal to the cost of capital Straightforward; a positive NPV implies project is worthwhile as it earns

an excess return, entirely accruing to equity holders. Also, when NPV is maximised, the highest consumption frontier is reached

Limitations- sensitive to discount rate, it is an absolute measure, whereas investors and promoters like to think in terms of rates of returns

BENEFIT-COST RATIO: Calculated as the PV of all benefits (PVB)divided by initial Investment (I) Another calculation of BCR is a net measure that relates the net benefits

to the initial investment (I) i.e (PVB-I)/I or PVB/I -1 Rules are: BCR>1 or NBCR >0 = Accept BCR<1 or NBCR <0 = Reject

BCR =1 or NBCR=0 = Indifferent

Project Appraisal

IRR: The discount rate which makes the NPV of the project equal to zero IRR is more complex and has several interpretations. For e.g, (i)

represents the return on the unrecovered balance of investment (ii) is the rate earned on the initial investment in the project.

Yr Cash flow

0 -300,000 1 0 2 417,000 IRR -300000/(1+r)^0+0/(1+r)^1+417000/(1+r)^2+117000/(1+r)^3

3 117,000 = 30%

Interpreting IRR as the return on unrecovered investment balance,

Yr Unrecovered investment balance at year beginning

Interest for the year

Cash flow at end of Year

Unrecovered investment balance at end of year

1 -300,000 -90000 0 -390,000 2 -390,000 -117000 417000 -90,000 3 -90,000 -27000 117000 0

Project Appraisal IRR:

The other interpretation of IRR as the rate of return earned on the initial investment in the project can be illustrated as follows.

This interpretation of IRR is not very realistic and therefore we usually consider the first interpretation.

The IRR is compared with the cost of capital and investment decisions are made based on the same.

Non discounting criteria: Payback period: The number of years it takes for initial investment to

be recovered from cash flows. As a very approximate thumb rule, the inverse of the payback corresponds to the IRR and vice versa.

Accounting rates of return: such as PAT/ Assets, PAT/ Net worth etc. are all based on accounting numbers, not cash flows

Interpreting IRR as the return on initial investment, Yr Benefit (Cash flow) Compounded value at

end of year

1 0 -

2 417,000 542100 IRR 300000*(1+.30)^3

3 117,000 117000 = Rs. 659100

sum 659100

Project Appraisal A key element in cash flows is the perspective from which they are viewed;

there could be 3 points of view for a project: Equity point of view Long term funds view Total Funds point of view

The components of Cash flow vary according to the view:

The perspective (Equity, Long Term Funds and Total Funds) has a bearing on the discounted cash flow criteria such as IRR and NPV

The time horizon for the cash flow projection is usually the minimum of the following

Product market life of the plant Technological life of plant & machinery Investment planning horizon of the firm

Perspective/flow Initial investment Operating cash flow Terminal cash flow Equity Equity funds

committed PAT-preference dividend+depn+other non-cash exp

Net salvage value of (Fixed assets+ current assets)- repayment of (term loans+ pref capital+ WC loans- Sundry creditors)

Long term funds Fixed assets+ WC margin

PAT+Depn+Other non-cash exp+ Interest on long term loans*(1-Tax rate)

Net salvage value of fixed assets+ WC margin

Total funds Total outlay on project

PAT+Depn+Other non-cash exp+ Interest on all loans*(1-Tax rate)

Net salvage value of Fixed assets+ current assets.

Project Appraisal

We will also need to distinguish between conventional industrial projects and others such as infrastructure or social projects, to appreciate the differences in their appraisal techniques

Key features of both these types are summarised belowConventional industrial/commercial project: Product or service is a private good that is commercially well defined and

accepted Clear marketability , cost and revenue structure Risks well defined and established

Infrastructure or Social sector project : Product or service is a public good that suffers from ‘free-good’ pricing problem Not easily ‘productisable’ Multitude of risks with high levels of uncertainty regarding benefits and costs Large upfront investments with back-ended benefits

Project Appraisal

A conventional industrial project for manufacturing water filters targeted at both retail and institutional customers is taken up for evaluation. The project parameters are as under:

The project involves an initial investment cost of Rs. 1929 lakhs, which would be financed by Equity of Rs. 989 lakhs and Loans from Banks/FIs of Rs. 940 lakhs.

The project would commence commercial production after a year and profitability and cash flow projections are made for a period of 5 years (being the period for which the loans have been made)

The estimated annual production of water filters would be 2200 units in the 1st year going up to 48900 units in the 5th year of production

Project Appraisal Projected profitability, cash flows and balance sheet are made and based

on the same, the various appraisal criteria are calculated for the project, as shown below:

A sensitivity analysis is also carried out to asses the capability of the project to withstand risks (variations in key or sensitive parameters) and results are compared with the above base case scenario

The key risks here are: (i) Market: Sales (quantity or price) falling below break even levels (ii) decrease in margins due to higher operating costs (iii) non availability of adequate working capital leading to cash flow problems

Mitigation of risks (by lenders) is usually achieved through (i) suitability loan conditions for ensuring market tie-up, bringing in cash reserves to supplement deficits, reducing the loan exposure and so on.

Discounting criteria NPV (Rs.lakhs) 258 IRR 24.5% BCR 1.41 NBCR 0.15 Non discounting criteria Payback (years) 4.3 Accounting rate of return 17.9% (average return on investment)

Project Appraisal Appraisal of Infrastructure and Social sector projects: Infrastructure projects differ from conventional commercial projects as we

have already seen. The role of the State and central planning usually envisage projects of such nature .

The Government of India set out a definition of infrastructure projects in the year 2001 based on the Rangarajan Commission which indicated six characteristics of infrastructure sectors, viz

(a) Natural monopoly, (b) High-sunk costs, (c) Non-tradability of output

(d) Non-rivalness (up to congestion limits) in consumption, (e) Possibility of price exclusion, and (f) Bestowing externalities on society.

Dr. Rakesh Mohan Committee in its path breaking “The India Infrastructure Report” of 1996, included Electricity, gas, water supply, telecom, roads, industrial parks, railways, ports, airports, urban infrastructure, and storage as infrastructure. Except industrial parks and urban infrastructure, all these sub-sectors are treated by CSO also as infrastructure.

Similarly RBI and the Income Tax departments have their definitions of this sector

Project Appraisal Appraisal of Infrastructure and Social sector projects: There are a few important differences with conventional projects:

Huge upfront capital investment and long gestation period Identification of beneficiaries difficult (free rider problem, non excludability) Larger array of risks. There are stated to be 16 types of risks in project financing.

They are Technical Cost Management Participant Completion Supply Market Infrastructure Environmental Political Force majeure Foreign exchange Syndication Funding Legal

Given these features, such industries are therefore usually located in Government sector

Project Appraisal Allocation of Project risks : Distribution of the 16 risks by control

Distribution of risks by cash flow stage:

Within Company’s control

Outside Company’s control

Within Financier’s control

Technical Cost Management

Supply Syndication

Participant Market Funding Engineering Infrastructure Legal Completion Environmental

Political Force majeure Foreign exchange

Cash flow calculation Main Risk impact thereon Quantity produced Times : Price received Equals : Gross Revenue

Supply, force majeure Market, infrastructure

Less : Operating costs Royalties, fees Interest expenses Depreciation/amort. Overheads Taxes Equals : PAT

Cost, management, environment Political Funding, syndication Completion Participation Political, legal

Add back: Depreciation/non cash chgs

Completion

Less: Capex Loan repayment

Engineering Funding, foreign exchange

Equals : Net Cash flow

Project Appraisal Appraisal of Infrastructure and Social sector projects: Mitigation measures for the various risks are usually achieved as below:

Risk Absorbed by Mitigation Technical Financier Process warranty, tech

gtee, Tech insurance

Cost Financier Contracts-escalation provisions, cost gtees

Management Financier Key-man insurance, management agreements

Participant Financier JVA (direct agmnts with other parties, maint.of fin ratios)

Engineering Financier Insurance, independent certification

Completion Company Completion gtees/undertakings, over-run undertaking, insurance

Supply Financier Reserve warranty, supply undertaking,

Market Financier Long term contracts with escalation and floor prices

Infrastructure Financier Pooled infra agreements Environmental Financier Insurance, warranty Political Financier Insurance, co-financing Force majeure Financier Insurance, deferral of

principal Foreign exchange Financier, company Hedging Syndication Underwriting Bank Underwriting agreement Funding Financier Hedging, swaps, alternate

funding Legal Financier Title insurance,

independent legal opinion

Project Appraisal Appraisal of Infrastructure and Social sector projects: Cash flow projection and modeling for such projects involves more than

one scenario (as against a single base case in conventional projects). In project finance, we have at least 4 scenarios or benchmark cases as below:

Projects in the public sector would predominantly be infrastructure or social sector projects, as the private sector would not be expected to enter these areas. For e.g, roads, ports, telecommunication, power, water supply, sanitation etc.

However, with the progress of economic reforms, privatisation programs have been taken by most countries, with a two fold objective (a) to exit sectors which the private sector could take up and thus reduce fiscal deficits (b) to free up resources for social programs such as health, education, poverty eradication etc

a)Base case or expected case, from Financier’s review

Used for setting loan repayment schedule

b) Downside case, with some variables changed (e.g delay in completion)

Used for setting level of reserves

c)Breakeven case, focusing on a key cash flow line likely to vary e.g price

Used for specifying contract conditions that might need further sponsor support

d)Upside/best case where risks under control (called Sponsor’s case)

Used for indicating pre-payment and refinancing timetables

Project Appraisal

Appraisal of Infrastructure and Social sector projects: Besides these generic project financing risks, infrastructure projects also

have sector specific risks. Some of the top sectoral risks are described below POWER SECTOR:

High capital cost entailing a higher tariff to cover all costs; political risk of high power tariffs

Technical risk: Conversion efficiency into energy and wastages High transmission & distribution losses (in India) Regulatory risks, such as controls on distribution and transmission

ROADS , BRIDGES & HIGHWAYS:- Market risk: Estimation of traffic – no proven methods; highly unstable- Political risks: Tolls are politically visible and pose collection risks

WATER: Though low market risk due to natural monopoly, Supply risk due to poor hydrology

studies Tariffs again represent a Political risk, as they are sensitive

NATURAL RESOURCES (oil, gas, coal, metals etc) Similar to Water, Estimation risk is high Environment risks could be high

TELECOM: Political risk, due to tariffs and Government involvement Technology risk high (due to constant up gradation)

Project Appraisal Appraisal of Infrastructure and Social sector projects:

We have discussed 3 different infrastructure projects as also a consumer durable project earlier. The following table summarises some of the appraisal criteria that were evaluated for the 3 infrastructure projects and the consumer durable project :

The table throws up some interesting conclusions

CONS.DUR WATER SUPPLY POWER BRIDGE Investment outlay (Rs.mn) 193 11638 7647 1040 Project life (for projections) 5 15 12 15 Concession period (years) - 30 20 20 Cost of capital 19.9% 16.7% 17.0% 12.1% PV of benefits (Rs. mn) 243 113 84 1199 Income (sales) Rs. mn 616 5410 5230 378 ATO (Income/Investment) 3.2 0.5 0.7 0.4 Discounting criteria

NPV 25.8 0.6 5.6 99.7 IRR 24.5% 16.8% 19.6% 13.6% BCR 1.41 1.18 1.29 1.28 NBCR 0.15 0.01 0.08 0.11

Non discounting criteria

Payback (years) 4.3 6.5 4.8 7.7 Accounting rate of return 17.9% 10.8% 6.9% 6.1% (average PAT/Assets)

Project Appraisal Appraisal of Infrastructure and Social sector projects:

Infrastructure projects require a longer Project period for viability assessment costs. This in turn is due to the low Asset Turnover ratio which makes prices (margins) more crucial than Sales, in determining viability. Given the limitations on pricing (tariff, tolls), which in turn are due to ‘political’ nature of the prices, cash flows (benefits) tend to be low.

The combined effect of a longer project period and low cash flows tends to make NPV as a percentage of initial investment very low. This is evidenced by the low BCR and NBCR.

A further cause of low NPV and low BCR/NBCR is the higher cost of capital which makes the present value of the distant rupee negligible.

To keep cost of capital low( to make projects viable), we need (a) cheaper long term loans (b) lower returns for equity holders who have to wait longer

The irrelevance of non-discounted criteria for assessing Infrastructure projects; for e.g Payback ratio- all of them appear to recover their investment in about the same time, but the NPVs tell a different story.

Project Appraisal

Project Appraisal Social Cost benefit analysis: Conventional Project appraisal makes use of accounting cash flows to

evaluate the worthiness or otherwise of projects (financial appraisal) Whereas SCBA seeks to evaluate the project’s broader impact on society (economic appraisal).

Costs and benefits considered by SCBA are not easily measurable and often relate to ‘individual utility’ and ‘social welfare’ though frequently we express them in money-metric terms

There are usually 4 sources of deviation between private profitability and social profitability, giving rise to the need for SCBA; these are: Market distortions such as monopolies, price cartels Externalities emitted Imperfect market information among participants leading to inefficient outcomes Government policies such as taxes, subsidies and regulations distort market

mechanics While it is possible to do an economic appraisal of a conventional project,

financial institutions usually undertake a SCBA only in the cases of (a) large projects with a significant foreign trade component (import or export) (b) significant environmental impact (c ) significant externalities

Financial institutions calculate 3 measures under economic appraisal: Economic rate of return (ERR) Domestic Resources Cost (DRC) Effective rate of protection (ERP)

Project Appraisal Social Cost benefit analysis: Some concepts in SCBA

Measurement: in terms of impact on aggregate consumption Unit of account: in monetary unit of the country (accounting not market) Social profitability vs. Private profitability:

Market price not always reflective of true costs Value placed on current consumption vs future investment Distributional considerations of consumption Taxes, subsidies: transfers rather than costs Merit wants and desirable consumption:

Shadow prices are an important concept in SCBA. A key issue is the ‘Tradeability’ of the good; general rule is if an increase in consumption leads to increase in import or decrease in export, the good is fully Traded. Likewise for production changes.

Goods & services: Willingness to pay , understatement due to controls, rationing etc Labour: Costless labour (surplus situation); private cost usually higher than social cost Foreign exchange: Official exchange rates understated due to controls Investments: Upward adjustment required to due to time preference in SCBA Social rate of discount: Judgmental, but needs to be different from private views of the

future

Criticisms of SCBA: Judgmental in nature, especially political True shadow prices difficult to determine ; circularity (only after optimal

planning mix determined) Markets are better arbitrators of social costs and benefits

Project Appraisal Social Cost benefit analysis: ERR:

Economic rate of return is similar to the IRR and represents the rate of discount that equates the real economic cost of the project to its real economic benefits. i.e it is an attempt to find the rate of return to society rather than a private promoter

As we have seen, the need for ERR arises because of market distortions , necessitating the use of ‘shadow prices’ as opposed to market prices. A key issue in shadow pricing is the concept of tradability of a good- if an increase in production results in a corresponding increase in export or decrease in import, it is fully tradable. For fully traded goods, shadow price is the ‘border’ price translated in domestic currency at current exchange rates

Non tradable goods are items like land & buildings, services, transportation, electricity etc. Their social cost & benefits are difficult to evaluate. Little and Mirrlees (L &M) suggested breaking them down into Tradable, Labor and Residual components, to be revalued using the International price, shadow wage rate and conversion factors respectively.

FI s in India use the partial L-M approach, wherein the above components are converted into social costs and benefits applying conversion factors

An example of the calculation of ERR for a typical project is given in the next slide

DRC measures the cost of manufacturing a product as against importing/exporting it while ERP measures the net protection provided to manufacturing (through tariffs and quantitative controls)

Project Appraisal

Shadow pricing and Conversion factors- key concepts

o Consumption: Key goal of economic activity;o Unit of account: UNIDO emphasizes current consumption in constant, domestic currencyo Tradeability: A good that is possible to substitute domestic production through import & vice versao Sources of shadow prices: three sources: i.e

(a) increase/decrease in domestic consumption:

(b) increase/decrease in domestic production:

(c ) increase/decrease in imports/exports:o Based on the above the applicable shadow prices should be :o (a) Impact on consumption- consumer willingness to payo (b) Impact on production - cost of productiono (c ) Impact on international trade – foreign exchange value

Fully traded good:

Increase in consumption leads to increase in import or decrease in export or

Increase in production leads to decrease in import or increase in export

Shadow price is the border price translated in domestic currency

Non-traded goods:

If impact on consumption, then shadow price is willingness to pay

If impact on production, then saving in cost of production is the shadow price

Project Appraisal Defining Social Costs and Benefits- Bridge project by the Government

The features of the project: Presently a private ferry service exists to transport people across a river. The private

operator charges Rs 3 per person and it costs him Rs.2 per person 50000 persons use the ferry service annually. After the bridge is built, 250,000

persons expected to use it. No toll is expected to be charged for using the bridge Government is proposing a bridge over the river that can enable 250,000 persons to

cross over. No tolls are proposed for using the bridge The initial cost of construction is Rs. 3 mn and annual operating (maintenance) costs

are Rs.10000 After the bridge is constructed, the private ferry service is expected to close down.

Realization of sale of ferry boats estimated Rs. 100,000 Assuming the given monetary values of costs and benefits above represent economic

values, we can calculate the social costs and benefits of the Bridge project as under:

Project Appraisal

Social Cost benefit analysis: the Financial Institutions approach

o Project to manufacture 2000 tpa of ascorbic acid ; total project cost- Rs. 1582 million; financed by Equity of Rs. 1032 million and Loans from FIs of Rs. 550 million Steps in the SCBA process:

The Capital cost of project and the operating Costs are split into Tradeable, Non- Tradeable and Labour components

These are then revalued using International prices, Conversion factors and Shadow wage rates respectively.

The revenue stream is also revalued at international prices The net cash flows are derived (revenues-costs) and the internal rate of return

calculated is the ERR for the project Other economic appraisal measures:

Domestic Resource Cost: the formula for calculation is: Value added at domestic prices/Value added at world prices * Exchange rate

Effective rate of protection: Value added at domestic prices- value added at international prices

------------------------------------------------------------------------------- Value added at international prices

Project Appraisal Social Cost benefit analysis: calculation of ERR

CAPITAL COST OF PROJECT

Re cost FC cost

Land and site development 66.7 Buildings and civil works 56.3 Plant & machinery

- Imported

160 -Duties on imported P &M 60

-Clearing & forwarding expenses 4

-Indigenous plant & machinery 123 -local duties on indig. P & M 16.3 - Spares

102.7

Foundation and plant erection exp 46.6 Technical know how fees

- foreign

308.9 - indigenous

66

- supervision

25.3 - fees payable

78.5

Miscellaneous fixed assets - imported

7.9

- indigenous

109.1 - duties on indig. P & M 19.2 Preliminary expenses 63.5 Pre-operative expenses 24.3 Interest during implem. 79.7 Contingencies

138.2

Margin money for working capital 26.3

1105.7 476.8

TOTAL PROJECT COST 1582.5

Project Appraisal

Project Appraisal

Project Appraisal

The results:ERR:

We can also calculate IRR as usual, only to compare it with ERR

IRR:

The project has a positive social return (ERR > IRR) because both capital costs and operating costs are scaled down to reflect social costs , resulting in lower initial outflow and larger inflow of benefits.

Scaling down of costs on both fronts implies that the costs may be overstated in financial terms, due to several factors , such as duties/taxes, price protection and quantitative controls. Therefore, for the purpose of economic appraisal, we need to scale these down to reflect the true ‘social’ costs

Another example, overleaf that describes how social costs and benefits are distinguished in a social sector or infrastructure project

Project Appraisal The results for DRC and ERP:

An ERP of 0.2 0r 20% implies that the project enjoys 20% protection from international competition , thru tariffs, trade quotas etc. ERP of zero implies no protection and 1 represents 100% protection

A DRC of Rs 53 above indicates that it costs Rs.53 to generate a $1 saving, clearly not a feasible proposition at the current exchange rate of Rs.44

Project Appraisal Reforms and innovations in Infrastructure and Social

sector

The momentum for economic reforms has usually come from rising budgetary deficits. Many of the developing economies have a large public sector , usually resulting from central planning models. Over the years this has contributed to deficits.

Therefore, one key reform , world over, has been privatization. Privatization has assumed different forms in different countries- ranging from simple divestment of ownership (sale of equity to public), to PPP models, wherein models such as BOT, BOOT, DBOT etc have been implemented.

BOT/BOOT models have posed further challenges to project financing and appraisal, given the larger number of players involved in projects, the complexity of their interdependence and greater risks posed.

Innovations in project financing have been driven to meet these challenges ; these have ranged from complex security structures (escrows, revenue intercepts, credit enhancements, complex legal contracts) as also innovative financing products (such as take-out financing, securitization, pooled finance etc)