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Project Finance – Case Synopsis

Section C | Group 7
Ameya (PGP25006) | Karthik (PGP25021) | Rajat (PGP25038)
Aashi (PGP25116) | Sunit (PGP25158)

Gangavaram Port Ltd

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Contents
Infrastructure Sector Overview.............................................................................................................3
Union Budget 2010 Impact................................................................................................................3
Project Overview...................................................................................................................................3
Introduction.......................................................................................................................................3
Three Phase Development................................................................................................................4
Facilities.............................................................................................................................................4
Project Cost and Financial Services........................................................................................................5
Lenders..............................................................................................................................................6
Project Timeframes   Status............................................................................................................6
Risk Sharing Contractual Structure........................................................................................................7
Methodology for Financial, Economic & Environmental Analysis..........................................................8
Economic:..........................................................................................................................................8
Environmental & Social:....................................................................................................................9
Financial:...........................................................................................................................................9
References and Bibliography.................................................................................................................9

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Infrastructure Sector Overview

With a growing economy and a two digit growth expected over the next four years. The
infrastructure sector would require a lot of growth and the right amount of incentives. As per
Union Minister for Finance, Mr Pranab Mukherjee, India would require to develop a rupee-
denominated long-term bond market for funding the infrastructure sector that requires an
investment of around US$ 459 to US$ 500 billion by 2012.

Further, investment in the infrastructure sector is expected to be around US$ 425.2 billion
during the Eleventh Five Year Plan (2007-12), as against US$ 191.3 billion during the Tenth
Plan. Meanwhile, private investment into the sector is also projected to increase to US$ 157.3
billion in the Eleventh Plan, as compared to US$ 47.84 billion in the Tenth Plan. This investment
is likely to be fulfilled through public-private-partnership (PPP) projects that are based on long-
term concessions.

Union Budget 2010 Impact

While talking about bridging the policy gaps in Infrastructure sector, the Finance Minister in his
Union budget 2010 speech proposed the sustain the driving force for improving infrastructure
in urban and rural districts. He allocated Rs.1, 73,552 crore for infrastructure growth in the
country in budget 2010.

Government has set the target of constructing 20km of national highways on daily basis and to
trigger these changes projects have been undertaken via public private partnerships (PPPs).
The FM increase the allotment of road transport to Rs.19, 894 crore against the previous Rs.17,
520 crore for 2010-11. In an attempt to revise and enlarge the railway network, he also
allocated Rs.16, 752 crore while presenting the union budget.

Restoration of Infrastructure Bonds after a period of 5 years was also in the Budget 2010
agenda. It is one of the best tax saving schemes and keeping this in consideration the FM has
proposed an extra limit of Rs.20, 000/- for investing in Infrastructure Bonds. In order to provide
long term monetary support to infrastructure projects, government has also set up the India
Infrastructure Finance Company Limited (IIFCL). The expenditures of IIFCL are likely to reach
Rs.9, 000 crore by the end of March 2010 and Rs.20, 000 crore in the corresponding period of
FY 2011.

Project Overview

Introduction

The Gangavaram Port Ltd (GPL) is being set up by D.V.S. Raju at Gangavaram, about 15
kilometres from the Visakhapatnam Port. The site for Gangavaram Port is the best location for
development of a modern all weather, deepwater, multipurpose and truly next generation port.
The coast here forms a bay between Yarada Hill at north and Mukkoma Hill at south. A creek in
between these two hills forms Balacheruvu Lagoon, where the natural port of Gangavaram is
being developed.

Gangavaram Port has been developed as all weather, multipurpose, deepest port in India with a
depth up to 21 meters capable of handling Super Cape size vessels of up to 200,000 DWT.

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Gangavaram Port with its deep draft berths will act as the gateway port to existing and
Greenfield projects planned in the hinterland. It ability to handle larger vessels efficiently will
result in substantial savings to trade and port users. It will be able to provide efficient cargo
handling services for a variety of bulk cargo groups including Coal, Iron Ore, Fertilizer,
Limestone, Food Grains, Steel products, Petrochemicals etc.

The Port, its related facilities and material handling system have been planned to meet the
highest standards in terms of pollution prevention and safety.

Three Phase Development

GPL entered into a Memorandum of Understanding (MoU) in 2005 with Rashtriya Ispat Nigam
Limited (Visakhapatnam Steel Plant) handling a fixed amount of import and export cargo
thereby ensuring assured cargo handling right from the beginning. The port will be developed
in three phases over a period of 15 to 20 years from date of MoU. The projected cargo handling
capacity of the port is over 100 million tons per annum.

A consortium of 13 banks, led by the State Bank of India committed Rs 11.7 billion for the Phase
I development of the all-weather deep water multipurpose port. Phase I comprise five berths
and associated infrastructure. One of the berths will handle iron ore, one will deal with coal and
the rest will handle other bulk and general cargo. Phase II will consist of project structuring and
procurement, including execution of concession agreement, while technical and financial
closure of the project will be done in Phase III.

Gangavaram Port has the unique distinction of being one of the few Greenfield projects in India
which has been implemented on schedule. Construction at the site commenced in December
2005 and the Port commenced Trial commercial operations at the port in August 2008.

Facilities

GPL will be the deepest port in the country with a draught of 21 meters. It will be facilitated to
berth and handle super-cape size (300,000 DWT) bulk carriers with fully mechanized coal
handling system and iron ore loading system for handling vessels up to 3,00,000 DWT each. It
will also have modern harbor mobile cranes for other bulk and break bulk cargoes. This port
will enjoy logistics and freight advantage due to larger vessel sizes and its strategic position and
depth offers the fastest turnaround of the vessels.

Gangavaram port is well connected to the national and regional rail and road network. A 2.3-km
rail link is under development, which will connect the port to the main broad gauge national
network of Chennai, Visakhapatnam and Howrah rail corridor. This will allow the port's access
to whole of north and south India. The port is also connected to National Highway No. 5 running
from Chennai to Kolkata through an exclusive four-lane expressway, thereby connecting the
port to the entire national road network.

This port is aided by over 2800 acres of uninhabited backup area for transit storage and
blending. It also has vast open storage and covered transit sheds for bulk and break bulk
cargoes, and will provide round-the-clock cargo and marine operations. The biggest advantage
of the port is its proximity to major industrial and mineral belts of eastern and central India.

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The Salient Features of the development plan include

 Master Plan has provision for 29 berths with a capacity of 200 MTPA
 Plan for entire spectrum of cargos, with berths for handling dry bulk, other dry  bulk,
break bulk and container cargo with dedicated cargo centric zones
 Breakwaters to provide complete protection to berths from waves and swell to facilitate
all weather, round the year port operations
 Navigation channel and harbor area providing adequate maneuvering room for ships
 Total land area of 2800 acres for port facilities development
 Extensive ancillary facilities and state-of-the-art utilities/services
 Adequate backup area for developing stack yards, covered storage sheds, tankages,
container freight station, etc.
 Flexibility to quickly ramp up cargo handling facilities as per demand
 Rail and road access up to the stack yards, storage sheds and container yard
 Provision to provide value added services like Coal Blending
 Provision for Ship building and repair facilities
 Marine Oil Terminal consisting of Single Point Mooring system for handling VLCCs, sub-
sea pipeline and Tank farm

Advantages to port users

 Reduced per ton ocean-freight owing to larger parcel sizes at deep-draft berths
 Significantly reduced vessel waiting time owing to highly efficient port operations
 Faster turn-around of vessels owing to modern high-speed cargo handling equipment
 Cost-efficient logistic solution owing to high-speed cargo evacuation and proximity to
national/regional road/rail network
 Environment-friendly material handling system
 Competitive tariffs

Project Cost and Financial Services

The project cost for the port was set at Rs. 1700 Crore and the concession was based on a BOOT
agreement. Tenders were invited to the project based on international competitive bidding. The
bid criteria are specified below:

 The Minimum net worth shall be US$ 40 million (or equivalent) in any two of past three
years.
 Minimum annual turnover of US $ 200 million (or equivalent) in any two of past three
years.
 Minimum cash accruals of US $ 20 million (or equivalent) in any two of past three years.
 In case of a consortium, the above limits apply to the consortium as a whole.
 The lead member should satisfy at least one-third of the individual threshold limits
indicated above.

The government of AP provided the bidders with the following concession also:

 Road, Water and Power supply provided by GoAP up to the port boundary

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The project commenced its commercial operations from 12/07/2009.

IL&FS was involved in the activities mentioned below:

 Techno-Economic Feasibility Studies, Financial Structuring

 Government Approval and Clearance Processes : Steering Committee, Infrastructure
Authority
 Bid Documentation & Procurement Process for PSP: Marketing & Facilitation role
 The Andhra Pradesh Industrial Infrastructure Corporation (APIIC) has entered into a
Project Development and Promotion Partnership (PDPP) with IL&FS to develop the
project.

Lenders
SBI Capital Markets arranged Rs 1170 crore from a consortium of 13 Banks for the phase I
development of Greenfield all weather deep water multipurpose port at Gangavaram, near
Vishakhapatnam, Andhra Pradesh.

A Consortium of 13 Banks led by State Bank of India committed long term senior & subordinate
loans aggregating Rs11.7bn to Gangavaram Port Limited (GPL), a special purpose company
promoted by D.V.S. Raju for developing and operating Gangavaram Port.

The deal was structured by SBI Capital Markets Limited (SBICAP), as the Sole Financial Advisor
& Arranger to GPL for this transaction. The transaction was unique and the first of its kind in the
country, as it is the largest transaction yet in India of a merchant Greenfield port financing on
non-recourse basis at a leveraging of 69:31.

Gangavaram Port will be developed in 3 phases over the next 15-20 years with a cargo handling
capacity of over 100 MTPA. The Phase I development comprises 5 berths and associated
infrastructure for handling iron-ore, coal and other bulk and general cargo and will be
operational by the end of 2007.

SBICAP has effectively structured the transaction so as to enable the future receivables of port
usage to be used by GPL to repay the loans which have been raised at an attractive rate of under
9% p.a. for the 14 year facility.

Private equity firm Warburg Pincus Llc. invested around Rs150 crore as equity for a 30% stake
in the project. The equity of around Rs 500 crore has been contributed by Raju, the government
of Andhra Pradesh and Warburg Pincus.

Raju, who was also founder-chairman of Hyderabad-based IT services firm VisualSoft

Technologies Ltd, holds a 59% stake in the port company, while Andhra Pradesh government
has a shareholding of 11%. Warburg Pincus holds 30% of the equity stake in Gangavaram Port
Ltd.

Project Timeframes   Status   

Concession Agreement    Signed  

 All Statutory clearances for Project   execution    Obtained

 Project Appraisal and Financial Closure    Completed   

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 Commencement of Construction     December 2005

Phased Commissioning of the Port    Commissioned (August

2008)

Risk Sharing Contractual Structure

Ports interlink natural features with infrastructure and superstructures that are connected to
other distribution centers, each of which may be managed in different lands. Because ports are
complex operations, which involve interactions between national and international markets,
private and governmental operations and the natural and built environment, they are exposed
to a very wide range of risks. Port related risk includes cargo theft, crime and terrorism and
operational risks.

Various risks identified in Gangavaram Port Limited, are listed below:

Risk Risk Allocation as per contract

Pre- GoAP will transfer the land to DVS Raju and Integrax Berhad
Constructio GoAP will assist the Concessionaire on a best efforts basis to obtain all
n clearances. Technical Risk shall lies with the Concessionaire

Constructio borne by Concessionaire*

n

Operational borne by Concessionaire

Commercial borne by Concessionaire

Financial borne by Concessionaire

Political Change in law, other than any Tax laws and regulations for which no relief is
provided under the agreement
Expropriation or compulsory acquisition by an Indian Governmental Agency
of any material port assets or rights of the Concessionaire, for no fault of the
Concessionaire
Unlawful or unauthorized action on the part of GoAP occurring after
Financial Closure
Unlawful or unauthorized revocation of or refusal to renew or material delay
in granting by GoAP without valid cause any consent of approval required by
the concessionaire to perform its obligations under the project agreements.

Regulatory Change in law includes :

a. the enactment of any new Indian law
b. the repeal, modification or re-enactment of any existing Indian law
c. a change in the interpretation or application of any Indian law by a court of
record
d. directive or notification by any Governmental agency which has a force of
law or statutory effect

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 Provided that Change in Law shall not include
a. coming into effect, after the commencement date, of any provision of a
statute which is already in place as of the commencement date or any new
law or any change in the existing law under the active consideration of or in
contemplation of any government as of the commencement date which is a
matter of public knowledge.
Concessionaire is not entitled to any compensation for any increase in
indirect and/or direct tax, which the Concessionaire is liable to pay in
respect of Port Project

Force Events not Constituting Force Majeure

Majeure a. Any act or event at the works of any vendor or sub-contractor of any of the
Concessionaires contractors affecting the implementation of the Port Project
whether or not beyond the reasonable control of such vendor or sub-
contractor or the Concessionaires Contractor
b. Late delivery of any equipment or materials not attributable to Force
Measure Events in the agreement
c. Economic hardship e.g insufficiency of funds
d. Failure of the Concessionaire to obtain finances or to achieve technical
closure for the port project
e. General Economic Slow down
* Concessionaire refers to DVS Raju and Integrax Berhad

Risk allocation done above as per contract could not mitigate all the risks associated with the
project . Some of the issues faced because of improper handling of risks are mentioned below :

1. Regulatory Risk : As per the order of High Court , Gangavaram Port was asked to
employ 300 local persons from the villages of Gangavaram, Jallaripallepalem,
Pallepalam, Chinapallepalem, Pedapallepalem in 2006 .Port could not fulfill this promise
by 2010 and on October 7 , 2010 it faced huge protests from the displaced fishermen .
The management said the cases filed by some fishermen and the subsequent orders
delayed the issuance of orders in some cases.
2. Environmental Risk: The pollution because of the port was frequently protested
against by the political parties in the area. In order to assert its initiatives for a cleaner
environment, Gangavaram Port launched a special drive to plant some 7,000 saplings
within the port premises on World Environment Day this year.

Methodology for Financial, Economic & Environmental Analysis

Economic:
What is the expected level of net economic benefits the project is estimated to provide? This is
key in any decision on public support which must not exceed the net economic benefits.

Key areas to look for:

 Were the locals taken into confidence before project

 Was the rehabilitation work done properly
 What level of prosperity the project brings to the local area

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Environmental & Social:
What are the estimated environmental impacts & social cost from the project? Can they be
reasonably mitigated?

Key areas to look for

 Were environmental norms compromised for development

 How does the building of such port affects the fishing activity in the area
 What impact does the project has on ecology of sea water around it
 Were the fishermen taken into confidence before the project
 Were the fishermen properly compensated

Financial:
Based on the estimation of construction and operating cost and reasonable private sector
returns, what does the tariff need to be? Can the government contracting authority still afford
it?

Key areas to look for

 What would have been the cost had government taken this project on its own
 What is the average cost and revenue sharing mechanism of such projects worldwide
and in India
 What were the assumptions taken into consideration while coming at a particular tariff
and revenue sharing model
 Were the assumptions correct

References and Bibliography

 http://www.ibef.org/economy/infrastructure.aspx
 http://business.mapsofindia.com/india-budget/2010/impact-infrastructure-
sector.html
 http://www.gangavaram.com/
 http://www.ppp.ap.gov.in/ProjectDesc.aspx?Recordkey=%2739%27
 http://business.gov.in/infrastructure/state_level.php
 www.icra.in/Files/ticker/Ports-201008.pdf

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