In public-private partnership (PPP) projects in India, financial
closure indicates the commencement of the concession period.
Financial closure is defined as a stage when all the conditions of
a financing agreement are fulfilled prior to the initial
availability of funds. Financial closure is attained when all the
tie-ups with banks and financial institutions for funds are made,
and all the conditions precedent under the financing agreements to
initial drawing of debt is satisfied.
The date on which the conditions precedent set out in the
concession agreement are met and financial closure is achieved is
the appointed date. The appointed date is deemed to be the start
date of the concession period, and the concessionaire is permitted
to begin construction of the project from that date. Typically,
concession agreements provide anywhere between 180 and 240 days
after signing the concession agreement to achieve financial
This important milestone in the project cycle is often delayed,
or not achieved in many successfully awarded PPP projects in India
for various reasons thus rendering these projects unviable or
resulting in their ultimate termination. The global financial
crisis, coupled with India's own mounting pressure on domestic
banks from non-performing loan assets, are having a major impact on
financial closure of PPP projects.
This is more particularly affecting mega infrastructure PPP
projects. Given the tighter debt finance market, combined with the
emergence of mega infrastructure PPP projects, it is time for the
government to revisit standard bidding practices and consider
alternative approaches that will Financing bidding process for big
PPPs needs review help achieve timely financial closure.
Banks and financial institutions typically fund 60-80% of the
total project cost of PPP projects by way of project finance. This
makes banks and financial institutions vital stakeholders in any
PPP project, particularly the mega infrastructure PPP projects,
where the total costs amount to billions of dollars.
It is normal to get these banks and financial institutions involved
in such a PPP project only after the bidding process has been
completed and the PPP project is awarded to the successful
At the stage when the banks and financial institutions get
involved in the project, they are often not allowed to make any
changes to the concession agreement and to related project
documents, which in turn has a direct and adverse impact on
financial closure of the project.
At times during the bidding process sponsors are asked to submit
to the government, along with their bids, letters of intent from
their banks and financial institutions confirming their willingness
to fund the project subject to full due diligence, credit approval,
appropriate documentation and fullfilment of conditions set out in
the finance documents. Such a letter also states that the letter is
not a legally binding commitment on part of the concerned banks and
Banks and financial institutions often take the letters
seriously to ensure their involvement in a project. However, these
letters should not be regarded as a real commitment, as most banks
and financial institutions issue these letters without going
through any internal credit approval. To avoid delays in financial
closure and to make PPP projects bankable, the government should
require financial commitment at the time of a bid. This is vital
for the timely financial closure of mega infrastructure projects.
This requirement will force banks and financial institutions to
complete their due diligence process, put together a detailed
financial package, obtain credit approvals, and in some cases, also
agree to the financing documentation with the bidders. This would
considerably extend the timeframe to complete the bidding process,
however, this would help sponsors/bidders to show that financing
can be provided and the PPP project can begin without delay.
Sponsors/bidders are often reluctant to agree and include this
requirement of commitment from banks and financial institutions in
the bid process, as this would involve fee payments and substantial
legal and other costs at a stage when there is no certainty that
they will win the bid. To address this issue the government may
agree to cover the costs of the losing bidders up to a pre-agreed
amount. The government should not require full commitment from
banks and financial institutions for all bids for PPP projects, but
rather only for mega infrastructure ones; projects that have
structured novel risk mitigating methods; and those where there is
a doubt about the bankability of such projects.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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