The shape of the cash flow profile is influenced by the time taken in finalizing the various objectives and achieving the milestones of the projects as they affect the timing of the cash outflows related with the project. Issues such as time taken in obtaining the statutory approvals, design finalization, finalization of contracts, and finalization of financing arrangement will determine the duration of the appraisal phase. While, rate and amount of construction and operation speed will influence the duration of the other phases.

The amount of fund that can be raised to finance the infrastructure projects with private capital depends on the future cash flows of the projects. Proper packaging of the project cash flows in accordance with the needs of the project and taking into consideration of the perspectives of the private sector providing private finance is necessary to make the project attractive to them.

Financial Instruments for Funding Infrastructure Projects

A thorough knowledge of the financial instruments and financial markets is required while packaging the project cash flows. Financial instruments are the tools for rising financing to fund the infrastructure projects with private capital. The financial instruments also define the amount and the priority of claims on the future cash flows and assets of the infrastructure projects. Depending on the nature and seniority of claim on cash flows and assets, financial instruments can be classified into three major types: equity, debt, and subordinated debt. Equity gives ownership interest of the common stockholders in the project to the provider of equity capital and has the last claim on project cash flows and project assets. Debt instruments obligate the borrower to make a payment of specified amount at a particular time. The priority of claims on project cash flows and assets is senior to that of equity capital. Subordinated debt has an intermediate position between the debt and equity regarding the priority of claim on project assets and cash flows. Regarding the return, equity capital has a comparatively higher return than the debt. With respect to return, subordinated debt return is in between the returns of debt and equity.

There are various types of financial instruments, which are categorized as debt, used for funding infrastructure projects. Term loans, debentures, and export credit are some of the common financial instruments used to provide debt financing. Debt financing is the act of the firm raising capital by borrowing mostly from banks. Term loan, which is the most common form of debt financing to infrastructure projects, is provided mostly by banks and financial institutions (collectively known as lenders). Besides, charging interest, lenders also charge other fees such as management fee, commitment fee, underwriting fee, and success fee while extending term loans to infrastructure projects. The terms and conditions based on which the banks and financial institutions provide term loans to infrastructure projects include, inter alia, the interest rate, tenure of the loan, and repayment profile. The interest rate could be fixed for the entire tenure of the loan or linked to prime lending rates of the bank/index. The tenure of the loan could vary with the prevailing norms in the particular infrastructure sector. The repayment of the loan can be in the form of: (i) repayment of the loan amount in equal amount over the loan tenure; (ii) repayment of loan amount according to schedule of pre-determined proportion of loan amount over the loan tenure; (iii) repayment of entire amount at the end of the loan tenure. Debentures are loans which are divided into securities and sold through capital markets to investors. Debentures have a repayment undertaking on a specified date along with the periodic payments of interests between date of issue and date of maturity. Since debentures are traded in capital markets, it could be liquidated (sold off) easily resulting in high liquidity unlike the term loan. The security interest in case of debentures could be either fixed or floating. Security interest in the form of floating charge allows the investors to lay claim on the future assets of the infrastructure projects besides the charge on the assets existing at the time of securing the funding. As part of the strategy to promote exports, loans in the form of export credit are also provided by government agencies in exporting countries, exporter of equipment, or banks in exporting countries.