credit appraisal and project finance module no 4 & 5 by mr. navneet saxena all the best from

Amity International Business School

Credit Appraisal and Project Finance

Module No 4 & 5

By

Mr. Navneet Saxena

All The Best

From


Characteristics of Project Finance

Amity International Business SchoolCharacteristics of Project Finance

• Project costs include:• Direct costs (including investment costs and

operating costs) associated with design and implementation and monitoring and evaluation; and

• Indirect costs, including:– economic costs (e.g. loss of productivity due to more

stringent safety procedures);– social costs (e.g., adverse health impacts); or– environmental costs (e.g., deforestation, land-use

changes, greenhouse gas emissions, loss of biodiversity, etc.).


• A cost estimate is obtained through the following steps:

• Identify Cost Categories: the risk management scenarios is broken down into cost categories;

• Gather cost data: unit costs must be assessed for each of the cost category identified. This unit cost list can be drawn from various data sources (market survey, statistical collection, etc.) or from direct consultation with providers. Cost studies conducted for similar projects can also be used; and


• Adjust costs to local conditions: where applicable, cost data must be adjusted to take into account local conditions, including timing (costs estimated in past years must be escalated to account for inflation), local market conditions, etc.

• The quality of the estimate depends on the availability and accuracy of quantitative data at each of these steps.


• Finance for a Project in India can be raised by way of

(A) Share Capital(B) Long‑term borrowings(C) Short‑term borrowings


• The corporates are now allowed to raise resources for expansion plans by issuing equity shares with differential voting rights.

• The main advantages of such category of shares are :1. Equity can be raised without diluting stake of the

promoters.2. Companies can reduce gearing‑ratios.3. The risk of hostile‑takeovers is reduced to a considerable

extent.4. The passing of yield in the form of high dividends to the

investors can be ensured


• Term finance is mainly provided by the various All India Development Banks (IDBI, IFCI, SIDBI, IIBI etc.), specialised financial institutions (RCTC, TDICI, TFCI) and investment institutions (LIC, UTI and GIC).

• In addition, term finance is also provided by the State financial corporations, the State industrial development corporations and commercial banks.

• Debt instruments issued by companies are also subscribed for by mutual funds and financing activities are also done by finance companies.


• The institutions like LIC & GIC may not be very much associated with the project appraisal but lend their funds in consortium with other all India financial institutions.

• State level financial institutions consisting of :• State Financial Corporations (SFCs).• State Industrial Development Corporations

(SIDCs).• Regional Rural Banks & Co‑operative Banks.


• Before implementing a new project or undertaking expansion, diversification, modernisation or rehabilitation scheme ascertaining the cost of project and the means of finance is one of the most important considerations.

• For this purpose the Company has to prepare a feasibility study covering various aspects of a project including its cost and means of finance.

• It enables the Company to anticipate the problems likely to be encountered in the execution of the project and places it in a better position to respond to all the queries that may be raised by the financial institutions and others concerned with the project.


• The cost of project will usually comprise of the following items:

(i) Land and site development(ii) Factory building(iii) Plant and machinery.(iv) Escalation and contingencies(v) Other fixed assets or miscellaneous fixed assets.(vi) Technical know‑how(vii) Interest during construction.(viii) Preliminary and pre‑operative expenses.(ix) Margin money for working capital.


• Having established the total cost of project, promoters should work out the means of finance which will‑enable timely implementation of the project.

• Finance will ' be available from several sources and it is for the promoters to select the most suitable sources after taking into account all the relevant factors.


• The financial structure refers to the sources from which the funds for meeting the project cost can be obtained, as also the quantum which each source will contribute towards the project cost.

• For this purpose it would be advisable to keep in view the following aspects.

(i) The structure should be simple to operate in practice.

(ii) The plan should have a practical bias and should serve as a working guideline for all project forecasts.


(iii) While deciding the structure, the environmental constraints should be kept in view. For example, the conditions prevailing in the capital market, future prospects for earnings, term‑lending institutional rules and policies in operation, government guidelines, etc.

(iv) The financial structure should have an in‑built flexibility which can take care of circumstances not envisaged initially.


• In order to work out the capital structure it is necessary to prepare a financial plan.

• The methodology to be followed in working out a financial plan requires consideration, of the following important factors

(1) Debt Equity gearing(2) Owned funds(3) Cost of capital(4) Availability of finance from various sources.


• For every category, of capital there is a distinct source of supply in the market.

• Therefore, it is necessary for the promoters to identify these sources so that they can be approached for finance at the appropriate time.

• A project will require two types of funds: ‑ one, to finance purchase of immovable assets such as land, buildings, plant and machinery, etc., and two, for carrying on day‑do‑day operations i.e working capital funds.


• The sources of working capital finance are mainly the following:

• Bank Finance• Commercial Paper• Fixed Deposits• Inter‑corporate Deposits


• In consonance with the Government policy which encourages a new class of entrepreneurs and also intends wider dispersal of ownership and control of manufacturing units, a special scheme to supplement the resource & of an entrepreneur has been introduced by the Government.

• Assistance under this scheme is available in the nature of seed capital which is normally given by way of long term interest free loan.

• Seed capital assistance is provided to small as well as medium scale units promoted by eligible entrepreneurs.


• Subsidies extended by the Central as well as State Government form a very important type of funds available to a company for implementing its project.

• Subsidies may be available in the nature of outright cash grant or long‑term interest free loan.

• In fact, while finalising the mean of finance, Government subsidy forms an important source having a vital bearing on the implementation of many a project.


Project Finance

Amity International Business SchoolProject Finance

• We will cover– Parties to a Project Financing, – Necessary Contracts, Environmental

Consideration, – Political and Regulatory Background, – Senior Debt – Banks, Insurance Companies,

Public Markets; – Mezzanine Debt; – Equity - Financial Equity, Strategic Equity

Amity International Business SchoolParties

• Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors

• Usually, a project financing structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks or other lending institutions that provide loans to the operation.


• The loans are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors, a decision in part supported by financial modelling


• The financing is typically secured by all of the project assets, including the revenue-producing contracts.

• Project lenders are given a lien on all of these assets, and are able to assume control of a project if the project company has difficulties complying with the loan terms.


• Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure.

• As a special purpose entity, the project company has no assets other than the project.


• A project is established as a separate company

• A major proportion of the equity of the project company is provided by the project manager or sponsor, thereby tying the provision of finance to the management of the project


• The project company enters into comprehensive contractual arrangements with suppliers and customers

• The project company operates with a high ratio of debt to equity, with lenders having only limited recourse to the equity-holders in the event of default


• Capital contribution commitments by the owners of the project company are sometimes necessary to ensure that the project is financially sound, or to assure the lenders of the sponsors' commitment.

• Project finance is often more complicated than alternative financing methods.

Amity International Business SchoolWhy Choose Project Finance

• Insulation of sponsors• Non-consolidation of project debt onto

sponsor’s balance sheets

• Sharing of risk with others

• Sponsor’s ability to borrow limited by covenants – negative pledge

Amity International Business SchoolWhy Choose Project Finance

• Sponsor engaging in multiple projects compelling need for external financing

• Multiple sponsors make sharing of risks extremely difficult, therefore SPV is an attractive option

• Tax advantages in some jurisdictions• Jurisdiction may compel use of locally

incorporated vehicle.


• Project Company not to (Negative Covenants):

• Incur further financial indebtedness• Create further security interests• enter agreements unconnected to project• lend money or make investments


• change accounting period• pay dividends• change its constitutional documents• create subsidiaries

Amity International Business SchoolSponsors

• often involved in aspects of project, including:• Construction• Operation/Maintenance• Purchases of services or output• Ownership of land


• Keep project on track - Meet regularly with project manager (weekly or

bi-weekly) to review project timeline, key milestones and outstanding issues

- Hold project manager accountable for meeting objectives,

producing deliverables, conducing reviews, and communicating changes to all impacted areas

- Share accountability for the project – when the project has problems, it’s not only the project manager who’s


• Be available - Be readily available and accessible for

consultation with project manager - Act as an umbrella when roadblocks occur

for project manager and team - prevent scope and schedule creep

- Attend team meetings as needed to keep project on track


• Strategic Fit• Assure Project is in line with the

organization’s strategic goals - Confirm project direction and advocate for

the project - Monitor political environment to help

project adjust, if necessary


• Resources• Provide or locate resources for the project - Aid the project manager in lining up,

getting commitment from, and managing cross-functional support resource needs

- Protect resources from getting pulled into other projects


• Project Finance• Provide or locate funding for the project - Lead project budget creation and validation- Lead efforts to secure external funding (eg

SGG)- Ensure project is tracking to budget.

Review & approve monthly project finance reports. Escalate as needed.


• Help the project manager navigate the organization’s political environment

- Officially affirm project manager - Provide official backing of the project - Communicate project closure and results to

organization - Act as an escalation route for the project

manager - Arbitrate and resolve conflict and interface

problems that the project manager escalates


• Own the Final Product• Be clear on what is expected in the end - Help define the scope, schedule and

resource needs. Ensure project is delivering on outcomes, not just outputs

- Validate all project phases with project manager

- Sign off on charter and requirements documents

Amity International Business SchoolBanks

• Arranging banks• Syndication• Facility agent• Technical bank• Insurance bank• Account bank

Amity International Business SchoolBanks

• Multilateral & Export Credit Agencies• political risk insurance• commercial risk insurance• insurance again adverse currency

movements• interest rate support• direct lending

Amity International Business SchoolConstruction Company

• Turnkey contract

• Engineering design, procurement and construction

• Track record

• Project management

Amity International Business SchoolExperts

• Consultants/Professional Firms• Insurance

• Environment

• Technical/Engineering


Necessary Contracts

Amity International Business SchoolTypical Documents

• The typical project finance documentation can be of four main types– Shareholder/sponsor documents– Project documents– Finance documents– Other project documents

Amity International Business SchoolDocuments

• Engineering, Procurement and Construction Contract - (EPC Contract)

• Operation and Maintenance Agreement - (O&M Agreement)

• Concession Deed• Shareholders Agreement - (SHA

Agreement)• Off-Take Agreement

Amity International Business SchoolDocuments

• Supply Agreement• Loan Agreement• Intercreditor Agreement• Tripartite Deed• Common Terms Agreement• Terms Sheet

Amity International Business SchoolEngineering, Procurement and Construction Contract - (EPC Contract)• The most common project finance

construction contract is the EPC Contract. • An EPC contract generally provides for the

obligation of the contractor to build and deliver the project facilities on a turnkey basis, i.e. at a certain pre-determined fixed price, by a certain date, in accordance with certain specifications, and with certain performance warranties.

Amity International Business SchoolEngineering, Procurement and Construction Contract - (EPC Contract)• EPC contract is quite complicated in terms of

legal issue therefore the project company the EPC contractor shall have enough experiences and knowledge about the nature of project in order to avoid their faults and minimize the risks during the contract execution.

• Other alternative forms of construction contract are project management approach and alliance contracting.

Amity International Business SchoolEngineering, Procurement and Construction Contract - (EPC Contract)• Basic contents of an EPC contract are:

– Description of the project– Price– Payment– Completion date– Completion guarantee and Liquidated

Damages (LDs)– Performance guarantee and LDs– Cap under LDs

Amity International Business SchoolOperation and Maintenance Agreement - (O&M Agreement)

• An agreement between the project company and the operator.

• The project company delegates the operation, maintenance and often performance management of the project to a reputable operator with expertise in the industry under the terms of the Operations and Maintenance (O&M) agreement.

• The operator could be one of the sponsors of the project company or third party operator.

Amity International Business SchoolOperation and Maintenance Agreement - (O&M Agreement)

• Basic contents of a O&M contracts are:– Definition of the service– Operator responsibility– Provision regarding the services rendered– Liquidated damages– Fee provisions

Amity International Business SchoolConcession Deed

• Agreement between the project company and a public-sector entity (the contracting authority).

• The concession agreement concedes the use of a government asset (such as a plot of land or river crossing) to the Project Company for a specified period of time.

• A concession deed would be found in most projects which involve Government such as in infrastructure projects.


• Examples of concession agreements include contracts for the following:– A toll-road or tunnel for which the concession

agreement giving a right to collect tolls / fares from public or where payments are made by the contracting authority based on usage by the public.

– A transportation system (e.g. a railway / metro) for which the public pays fares to a private company)


– Utility projects where payments are made by a municipality or by end-users.

– Ports and airports where payments are usually made by airlines or shipping companies.

– Other public sector projects such as schools, hospitals, government buildings, where payments are made by the contracting authority.

Amity International Business SchoolShareholders Agreement - (SHA Agreement)

• The agreement between the project sponsors to form a special purpose company (“SPC”) in relation to the project development.

• This is the most basic of structure held by the sponsors in project finance transaction.

Amity International Business SchoolShareholders Agreement - (SHA Agreement)

• This is an agreement between the sponsors and deals with:– Injection of share capital– Voting requirements– Resolution of disputes– Dividend policy– Management of the SPV– Disposal and pre-emption rights

Amity International Business SchoolOff-Take Agreement

• An agreement between the project company and the offtaker (the party who is buying the product / service the project produces / delivers).

• In a project financing the revenue is often contracted (rather to the sold on a merchant basis).

• The off-take agreement governs mechanism of price and volume which make up revenue.


• The main off-take agreements are:• Take-or-pay contract: under this contract the off-

taker – on an agreed price basis – is obligated to pay for product on a regular basis whether or not the off-taker actually takes the product.

• Power purchase agreement: commonly used in power projects in emerging markets. The purchasing entity is usually a government entity.


• Take-and-pay contract: the off-taker only pays for the product taken on an agreed price basis.

• Long-term sales contract: the off-taker agrees to take agreed-upon quantities of the product from the project. The price is however paid based on market prices at the time of purchase or an agreed market index, subject to certain floor (minimum) price. Commonly used in mining, oil and gas, and petrochemical projects


• Hedging contract: found in the commodity markets such as in an oilfield project.

• Contract for Differences: the project company sells its product into the market and not to the off-taker or hedging counterpart. If however the market price is below an agreed level, the offtaker pays the difference to the project company, and vice versa if it is above an agreed level.

• Throughput contract: a user of the pipeline agrees to use it to carry not less than a certain volume of product and to pay a minimum price for this.

Amity International Business SchoolSupply Agreement

• An agreement between the project company and the supplier of the required feedstock / fuel.

• If a project company has an off-take contract, the supply contract is usually structured to match the general terms of the off-take contract such as the length of the contract, force majeure provisions, etc.

• The volume of input supplies required by the project company is usually linked to the project’s output.


• The main supply agreements are: The degree of commitment by the supplier can vary.

• Fixed or variable supply: the supplier agrees to provide a fixed quantity of supplies to the project company on an agreed schedule, or a variable supply between an agreed maximum and minimum.

• The supply may be under a take-or-pay or take-and-pay.


• Output / reserve dedication: the supplier dedicates the entire output from a specific source, e.g. a coal mine, its own plant. However the supplier may have no obligation to produce any output unless agreed otherwise. The supply can also be under a take-or-pay or take-and-pay

• Interruptible supply: some supplies such as gas are offered on a lower cost interruptible basis – often via a pipeline also supplying other users.

• Tolling contract: the supplier has no commitment to supply at all, and may choose not to do so if the supplies can be used more profitably elsewhere. However the availability charge must be paid to the project company.

Amity International Business SchoolLoan Agreement

• An agreement between the project company (borrower) and the lenders.

• Loan agreement governs relationship between the lenders and the borrowers.

• It determines the basis on which the loan can be drawn and repaid, and contains the usual provisions found in a corporate loan agreement.

• It also contains the additional clauses to cover specific requirements of the project and project documents


• Basic terms of a loan agreement include the following provisions.– General conditions precedent– Conditions precedent to each drawdown– Availability period, during which the borrower

is obliged to pay a commitment fee– Drawdown mechanics– An interest clause, charged at a margin over

base rate


• Basic terms of a loan agreement include the following provisions.– A repayment clause– Financial covenants - calculation of key

project metrics / ratios and covenants– Dividend restrictions– Representations and warranties– The illegality clause

Amity International Business SchoolIntercreditor Agreement

• Intercreditor agreement is agreed between the main creditors of the project company.

• This is the agreement between the main creditors in connection with the project financing.

• The main creditors often enter into the Intercreditor Agreement to govern the common terms and relationships among the lenders in respect of the borrower’s obligations.


• Intercreditor agreement will specify provisions including the following.– Common terms– Order of drawdown– Cashflow waterfall– Limitation on ability of creditors to vary their

rights


• Intercreditor agreement will specify provisions including the following.– Voting rights– Notification of defaults– Order of applying the proceeds of debt

recovery– If there is a mezzanine funding component,

the terms of subordination and other principles to apply as between the senior debt providers and the mezzanine debt providers.

Amity International Business SchoolTripartite Deed

• The financiers will usually require that a direct relationship between itself and the counterparty to that contract be established which is achieved through the use of a tripartite deed (sometimes called a consent deed, direct agreement or side agreement).

• The tripartite deed sets out the circumstances in which the financiers may “step in” under the project contracts in order to remedy any default.

• A tripartite deed would normally contain the following provision.

Amity International Business SchoolTripartite Deed

• Acknowledgement of security: confirmation by the contractor or relevant party that it consents to the financier taking security over the relevant project contracts.

• Notice of default: obligation on the relevant project counterparty to notify the lenders directly of defaults by the project company under the relevant contract.


• Step-in rights and extended periods: to ensure that the lenders will have sufficient notice /period to enable it to remedy any breach by the borrower.

• Receivership: acknowledgement by the relevant party regarding the appointment of a receiver by the lenders under the relevant contract and that the receiver may continue the borrower’s performance under the contract


• Sale of asset: terms and conditions upon which the lenders may transfer the borrower’s entitlements under the relevant contract.

• Tripartite deed can give rise to difficult issues for negotiation but is a critical document in project financing.

Amity International Business SchoolCommon Terms Agreement

• Terms Sheet• Agreement between the borrower and the lender

for the cost, provision and repayment of debt. • The term sheet outlines the key terms and

conditions of the financing. • The term sheet provides the basis for the lead

arrangers to complete the credit approval to underwrite the debt, usually by signing the agreed term sheet.

Amity International Business SchoolCommon Terms Agreement

• Generally the final term sheet is attached to the mandate letter and is used by the lead arrangers to syndicate the debt.

• The commitment by the lenders is usually subject to further detailed due diligence and negotiation of project agreements and finance documents including the security documents.

• The next phase in the financing is the negotiation of finance documents and the term sheet will eventually be replaced by the definitive finance documents when the project reaches financial close.


Environment Considerations

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Amity International Business SchoolEnvironment Considerations

• The Ministry of Environment & Forests (MoEF) is the nodal agency in the administrative structure of the Central Government for the planning, promotion, co-ordination and overseeing the implementation of India's environmental and forestry policies and programmes.


• The primary concerns of the Ministry are implementation of policies and programmes relating to conservation of the country's natural resources including its lakes and rivers, its biodiversity, forests and wildlife, ensuring the welfare of animals, and the prevention and abatement of pollution.


• While implementing these policies and programmes, the Ministry is guided by the principle of sustainable development and enhancement of human well-being.

• The Ministry also serves as the nodal agency in the country for the United Nations Environment Programme (UNEP), South Asia Co-operative Environment Programme (SACEP), International Centre for Integrated Mountain Development (ICIMOD) and for the follow-up of the United Nations Conference on Environment and Development (UNCED).


• The Ministry is also entrusted with issues relating to multilateral bodies such as the Commission on Sustainable Development (CSD), Global Environment Facility (GEF) and of regional bodies like Economic and Social Council for Asia and Pacific (ESCAP) and South Asian Association for Regional Co-operation (SAARC) on matters pertaining to the environment.


• The broad objectives of the Ministry are:– Conservation and survey of flora, fauna,

forests and wildlife– Prevention and control of pollution– Afforestation and regeneration of degraded

areas– Protection of the environment and– Ensuring the welfare of animals


• These objectives are well supported by a set of legislative and regulatory measures, aimed at the preservation, conservation and protection of the environment.

• Besides the legislative measures, the National Conservation Strategy and Policy Statement on Environment and Development, 1992; National Forest Policy, 1988; Policy Statement on Abatement of Pollution, 1992; and the National Environment Policy, 2006 also guide the Ministry's work.


• Look At USAID• http://africastories.usaid.gov/search_detail

s.cfm?storyID=38&countryID=4&sectorID=0&yearID=3

http://africastories.usaid.gov/search_details.cfm?storyID=38&countryID=4&sectorID=0&yearID=3




• USAID– USAID is an independent federal government agency

that receives overall foreign policy guidance from the Secretary of State.

– Their work supports long-term and equitable economic growth and advances U.S. foreign policy objectives by supporting:

• economic growth, agriculture and trade;• global health; and,• democracy, conflict prevention and humanitarian assistance.


• United Nations Environment Programme– To provide leadership and encourage

partnership in caring for the environment by inspiring, informing, and enabling nations and peoples to improve their quality of life without compromising that of future generations.


• South Asia Co-operative Environment Programme (SACEP) is an inter-governmental organization, established in 1982 by the governments of South Asia to promote and support protection, management and enhancement of the environment in the region

• SACEP member countries are Afghanistan , Bangladesh , Bhutan , India , Maldives , Nepal , Pakistan and Sri Lanka.


• UNEPFI– UNEP FI is a global partnership between

UNEP and the financial sector. – Over 190 institutions, including banks,

insurers and fund managers, work with UNEP to understand the impacts of environmental and social considerations on financial performance.


• Environmental Finance is the use of various financial instruments (most notably land trusts) to protect biodiversity.

• The field is part of both environmental economics and the conservation movement.


• Nordic Environmental Finance Corp– NEFCO is an international financial

institution established by the five Nordic countries.

– NEFCO finances investments and projects primarily in Russia, Ukraine, Estonia, Latvia, Lithuania and Belarus, in order to generate positive environmental effects of interest to the Nordic region.


• OECD– The Environmental Finance Programme

assists the EECCA and East Asian countries in ensuring effective financing of environmental public goods, which are corner stones of sustainable development along with social public goods (e.g. health care, education) and eradicating poverty.


• OECD– Environmental Financing Strategy (EFS) is a

standardised methodological framework supported by a computer model to prepare realistic multi-year implementation programmes for those environmental sectors that require investment-heavy public infrastructure.


• Carbon finance is a new branch of Environmental finance.

• Carbon finance explores the financial implications of living in a carbon-constrained world, a world in which emissions of carbon dioxide and other greenhouse gases (GHGs) carry a price.


• Sustainability measurement is a term that denotes the measurements used as the quantitative basis for the informed management of sustainability.

• The metrics used for the measurement of sustainability (involving the sustainability of environmental, social and economic domains, both individually and in various combinations) are still evolving: they include indicators, benchmarks, audits, indexes and accounting, as well as assessment, appraisal and other reporting systems.


Political and Regulatory Issues

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Amity International Business SchoolPolitical and Regulatory Issues

• Non-payment and Currency Inconvertibility• Confiscation, Expropriation and

Nationalisation• War and Civil Disturbance• Breach of Contract


• Non-payment and Currency Inconvertibility– Inability to convert local currency into

foreign exchange as well as delays in acquiring foreign exchange caused by the host government's actions or failure to act.


• Confiscation, Expropriation and Nationalisation – Elimination of ownership, control over, or

rights to the asset/investment.– "Creeping expropriation," series of acts that

over time have an expropriatory effect.


• War and Civil Disturbance– Loss due to the destruction, disappearance,

or physical damage to assets caused by politically motivated acts of war or civil disturbance, revolution, insurrection, and coups d'etat.

– Terrorism and sabotage treated selectively.


• Breach of Contract– Breach or repudiation of a contractual

agreement with the investor/lenders by host government.

– Reliant upon a dispute resolution mechanism (e.g., arbitration).


• Review of Common Practice – Usual Mitigation– World Bank Group Structures (IDA)

• IDA (poor developing countries)• Always with the financial backing of host

government


• International Finance Corporation (IFC)– Loans, equity and quasi equity– Loans at market rates– Commercial Lenders participate under B-

Loans– IFC remains lender of record


• Multilateral Investment Guarantee Agency (MIGA)– Provider of political risk under contracts of

guarantee for debt or equity– Cover provided without counter-guarantee


• Private Insurers– Subject to availability (“on-cover”, tenor and

price)– Events clearly defined– Damages easily measured


• Development Financial Institutions (DFIs) / European Compliance Agency (ECA)– DFI participation assists in overall project

bankability– ECA’s insure against payment risk under

Principles for Responsible Investments events

Amity International Business SchoolPotential Sources of Political Risk

• The Obsolescing Bargain– Host Governments view vs. Foreign Investors

view– Visibility of Large Infrastructure Projects

• Debt or Equity Arrangement– Tendency to utilise Loan arrangements– Fix contractual performance irrespective of

domestic economic conditions

Amity International Business SchoolPotential Sources of Political Risk

• Corruption and External Pressure– Managing Large Infrastructure projects in

context of monopolistic environments• Regulation

– Measure of market forces on a Large Infrastructure project

• Decentralisation– Impact of contracting with a local party

Amity International Business SchoolResponse to Political Risk

• Information and Disclosure– Lack of information can lead to the

acceptance of terms that are out-of-line– Library of Agreements

• Report Debt-like Obligations– Accessing the Full Picture


• Appropriate Agreements– Using innovative agreements to resolve

disputes– Learning from other industries (oil & gas and

mining industries)• Refuse One-sided Agreements

– Banks/Investors alike need to guard against one-sided agreements


• Rescheduling of Payments– Creation of a new mechanism to structure

repayments under economic crisis

Amity International Business SchoolLarge Infrastructure Projects Require

• New Attitude– Searching for new ways to reduce Political

Risk beyond conventional mitigants– Looking beyond insurance, host government

guarantees• Insurance

– World Bank/MIGA– Private Insurers

Amity International Business SchoolLarge Infrastructure Projects Require

• Involving Other Parties– Local participants, Joint venture partnerships

• Shifting Risk– Managing contractual performance against

realistic challenges (i.e. socio-economic)


– Senior Debt• Banks, • Insurance Companies, • Public Markets

Amity International Business SchoolSenior Debt

• Senior debt should be viewed as money owed that has a higher priority than other unsecured debt outstanding from the issuer.

• Senior debt has greater importance in the issuer's capital structure than subordinated debt.


• This form of debt will often be secured or backed by collateral on which the lender has put in place.

• Traditionally, this covers all the assets of a corporation and is often used for revolving credit lines.

• It is a class of corporate debt that has priority with respect to interest and principal over other classes of debt and over all classes of equity by the same issuer.


• And in the event the issuer goes bankrupt, senior debt must be repaid before other creditors receive any payment.

• Conversely, debts that are considered 'less important' and are not paid off first are known as junior debts.

• These could be supplemental loans, credit card debt or other types of funds from different companies.


• Because there remains a high chance that senior debt will be repaid even in the event that a company goes bankrupt, it can be considered as relatively low risk.

• As a result, lenders and investors tend to be more willing to part with their money to finance senior debt.


• It also tends to mean that it is available with lower interest rates, making the loan easier for the borrower to secure.

• Senior debt financing can be categorised in several ways, including secured versus unsecured and cash flow versus asset-based.

• With each option, there are differences in pricing and in ongoing covenant requirements.


• Senior debt financing is available to anyone, although the guidelines to obtaining it tend to be very strict.

• Primarily, it centres on a company or individual having an asset that can be used as collateral should they encounter any problems.


• Lenders will also typically study a company's cash flow to ensure that it is capable of keeping up with the necessary financial repayments.

• Once all things have been considered, lenders will determine the interest rate that will be applied to the senior debt.


• A borrower can get a high interest rate if the lender perceives a high risk of not being paid on time.

• However, interest rates can also be as low as one point below prime if the borrower can show a strong cash flow history.

• Different organisations adopt a number of approaches to dealing with and managing senior debt.


• Some will set aside and allocate specific resources in a senior debt fund - essentially storing cash and other assets which can be used to pay the debt in the event of a financial or economic downturn.

• Alternatively, businesses take advantage of a senior debt ratings system which will automatically prioritise and pay all debts in this class.


• This method can help companies to establish a schedule for making regular payments.

• The exact processes used by a given company will often depend on the regulations and standards that hold sway in the country where the business is incorporated and primarily conducts its business.


• Secured parties may receive preference to unsecured senior lenders– Notwithstanding the senior status of a loan or

other debt instrument, another debt instrument (whether senior or otherwise) may benefit from security that effectively renders that other instrument more likely to be repaid in an insolvency than unsecured senior debt.


• Lenders of a secured debt instrument (regardless of ranking) receive the benefit of the security for that instrument until they are repaid in full, without having to share the benefit of that security with any other lenders.

• If the value of the security is insufficient to repay the secured debt, the residual unpaid claim will rank according to its documentation (whether senior or otherwise), and will receive pro rata treatment with other unsecured debts of such rank.


• Super-senior status– Senior lenders are theoretically (and usually)

in the best position because they have first claim to unsecured assets.

– However, in various jurisdictions and circumstances, nominally "senior" debt may not rank pari passu with all other senior obligations.


• "Senior" debt at holding company is structurally subordinated to all debt at the subsidiary

• A senior lender to a holding company is in fact subordinated to any lenders (senior or otherwise) at a subsidiary with respect to access to the subsidiary's assets in a bankruptcy.


• A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan.

• The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower, for example, foreclosure of a home.


• From the creditor's perspective this is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property.

• If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a deficiency judgment against the borrower for the remaining amount.


Mezannine Debt

Amity International Business SchoolMezannine Debt

• When a hybrid debt issue is subordinated to another debt issue from the same issuer.

• Mezzanine debt has embedded equity instruments (usually warrants) attached, which increase the value of the subordinated debt and allow for greater flexibility when dealing with bondholders.


• Mezzanine debt is frequently associated with acquisitions and buyouts, where it may be used to prioritize new owners ahead of existing owners in case of bankruptcy.


• Some examples of embedded options include stock call options, rights and warrants.

• In practice, mezzanine debt behaves more like stock than debt because the embedded options make the conversion of the debt into stock very attractive.


• Mezzanine capital, in finance, refers to a subordinated debt or preferred equity instrument that represents a claim on a company's assets which is senior only to that of the common shares.

• Mezzanine financings can be structured either as debt (typically an unsecured and subordinated note) or preferred stock.


• Mezzanine capital is often a more expensive financing source for a company than secured debt or senior debt.

• The higher cost of capital associated with mezzanine financings is the result of its location as an unsecured, subordinated (or junior) obligation in a company's capital structure (i.e., in the event of default, the mezzanine financing is less likely to be repaid in full after all senior obligations have been satisfied).


• Additionally, mezzanine financings, which are usually private placements, are often used by smaller companies and may involve greater overall leverage levels than issuers in the high-yield market; as such, they involve additional risk.

• In compensation for the increased risk, mezzanine debt holders require a higher return for their investment than secured or other more senior lenders.

Amity International Business SchoolMezannine Practice

• ICICI Venture is in the process of closing India Advantage Fund VII (Mezzanine Fund 1), India’s first Mezzanine fund.

• The corpus of the fund is roughly USD 51 million.


• Mezzanine finance typically is a structured debt-like instrument, with a component of cash income and benefits from enhanced returns from equity-linked component.

• It often bridges the gap in corporate capital structure between senior debt and equity.


• Mezzanine offers flexibility to meet both the investor’s and investee company’s requirements and also provides medium to long term capital without significant ownership dilution.

• The Mezzanine team seeks to provide funds for financing various areas including:– Buyouts, merger and acquisitions– Growth for medium-sized businesses– Asset backed businesses such as real estate or

financial markets


• RBI Norms on Subordinated Debt• http://www.financialexpress.com/news/rbi-i

ssues-norms-for-subordinated-debt/567046/0

http://www.financialexpress.com/news/rbi-issues-norms-for-subordinated-debt/567046/0




• Mezzanine financings can be completed through a variety of different structures based on the specific objectives of the transaction and the existing capital structure in place at the company.

• The basic forms used in most mezzanine financings are subordinated notes and preferred stock.


• Mezzanine lenders, typically specialist mezzanine investment funds, look for a certain rate of return which can come from (each individual security can be made up of any of the following or a combination thereof):

• Cash interest — A periodic payment of cash based on a percentage of the outstanding balance of the mezzanine financing.


• PIK interest — Payable in kind interest is a periodic form of payment in which the interest payment is not paid in cash but rather by increasing the principal amount by the amount of the interest

• Ownership — Along with the typical interest payment associated with debt, mezzanine capital will often include an equity stake in the form of attached warrants or a conversion feature, similar to that of a convertible bond.


• Mezzanine lenders will also often charge an arrangement fee, payable upfront at the closing of the transaction.

• Arrangement fees contribute the least return and are aimed primarily to cover administrative costs and as an incentive to complete the transaction.


• The following are illustrative examples of mezzanine financings:

• Rs.1,000 crore of senior subordinated notes with warrants (10% cash interest, 3% PIK interest and warrants representing 4% of the fully diluted ownership of the company)

• Rs. 500 crore of redeemable preferred stock with warrants (0% cash interest, 14% PIK interest and warrants representing 6% of the fully diluted ownership of the company)

Amity International Business SchoolMezannine Practice

• Private equity major 3i Group is scripting a debt funding story in India as it looks to build a $1-billion business over the next three to five years by lending to Indian tier II and tier III corporates.

• 3i Debt Management, the debt arm, is intending to launch an India-dedicated fund "soon," a top official said.

• Date: Oct 8, 2010


• The nature of mezzanine financing in India has recently undergone some changes.

• Earlier, optionally convertible preference shares and debentures were treated as equity for the purposes of foreign exchange laws, thus taking them out of the purview of the ECB guidelines.


• However, pursuant to certain clarifications issued in the year 2007, optionally convertible preference shares and debentures are now recognised as ECB, and accordingly, in cases where ECB is not permitted, such instruments are being avoided for providing mezzanine finance.


• Compulsorily convertible instruments with equity kickers, such as warrants, preference shares, and debentures, have become common for offshore mezzanine financing.

• SHOW RBI Circular


• Foreign exchange laws of India stipulate certain restrictions in relation to the rate of return that can be offered in relation to preference shares- it cannot exceed 300 basis points above prime lending rate of State Bank of India (a premier bank in India).


• Though, after the recent amendments to law, it is unclear whether compulsorily convertible debentures will also be subject to the same interest rate restrictions, most companies choose to observe such restrictions in the fear of falling into RBI’s penalties trap.


Equity• Financial Equity• Strategic Equity

Amity International Business SchoolEquity

• Industrial project finance (IPF) is usually based on a non-recourse or limited recourse financial structure.

• This means the debt and equity used to finance the project are paid back from the cash flow generated by the project.

• The project’s assets, rights and interests are typically held as collateral as a second “way out” for the lenders.


• From environmental to economic to operational challenges -- project finance is complex and involves various forms of risk.

• As such, sponsors and advisors should be prepared to address these risks.

• While each project is unique, lenders will typically consider these ten factors when assessing how creditworthy the project is.


1) Strategic Equity • There is perhaps no greater validation for

a lender that a prospective greenfield IPF might be viable, than when the equity backing the project is strategic.

• A greenfield steel facility backed by an equity investment from a company in the steel sector, for example, is strategic equity.


• While financial or private equity investors can also play an important role in the capital structure of a greenfield project financing, it is the substantial investment from strategic equity that gives lenders comfort.


• Lenders consider strategic equity investors to be more likely to defend and support their equity if an unforeseen negative event occurs.

• In addition to a financial fix, strategic investors could possibly offer an operational remedy--such as engineering.


• Lenders like to see most if not all of the equity funded before any debt is drawn.

• In today’s volatile markets, lenders will want to see a minimum of 40-50% junior capital and mostly Strategic Equity in the overall IPF construction budget.

• Unexpected things often happen during construction and ramp-up, so a de-levered capital structure is the prudent path.


2) Experienced Management Team. • As a greenfield project is a start-up business, a

management team with a history of success with similar projects is very important.

3) Proven Technology. • IPF is not viewed as venture capital by project

finance lenders. • Therefore, the underlying technology needs to

be current, and at the same time proven.


4) Does/Will Demand Exceed Supply?• To help validate the need for the

construction of any greenfield project, lenders will likely require an independent market analysis as part of the due diligence process.

• Lenders will want comfort that demand is expected to exceed supply.


5) Lower-Cost Producer. • Once convinced that demand will exceed

supply and there is a need for the greenfield project, lenders will also want independent validation that the project will be a lower-cost producer.

• In the event demand declines, lenders will want to know that the industrial project they financed is not likely to shut down.


6) Merchant vs. Contract. • “Off-take” contracts where buyers of the output

of the greenfield project are lined up ahead of time can be a real positive compared to a “merchant approach,” which is more speculative.

• Contracts can base load production at a project and provide a known source of revenue to help service the project finance debt.


• On the other hand, contracts are not always iron clad.

• The credit quality of the off-taker can deteriorate, and contracts can be subject to litigation.

• As a low cost producer, the project should remain competitive and generate attractive cash flow even if the contract relationships disappear.


7) Equipment, Procurement, Construction (EPC).

• Think of the EPC as the contractor. • Who will build the project? If a prospective

greenfield industrial project clears the above hurdles, IPF lenders will want to know who the EPC will be.

• Has this firm built similar projects on time and on budget?


• Is the construction contract fixed price? • Is the EPC a creditworthy entity and do they

stand behind their work? • Larger industrial project financings might have

big name EPC firms while midsize greenfield IPFs generally do not.

• Without a reputable EPC, lenders will generally look to an independent engineer and will likely require some contingent equity when structuring the IPF.


• An independent engineer is usually selected and engaged by lenders to monitor the construction process and budget.

• Depending on the construction and ramp-up risks involved, contingent equity in the form of cash and/or letters of credit and a completion guarantee will likely be required.

• Lenders and strategic equity providers will typically negotiate milestones to permit contingent equity amounts to be released over time.


• Depending on the construction and ramp-up risks involved, Contingent Equity in the form of cash and/or Letters of Credit and a Completion Guaranty will likely be required.

• Lenders and Strategic Equity providers will typically negotiate milestones to permit Contingent Equity amounts to be released over time.


8) Pledge of Shares. • IPF lenders generally like to see the

project operating company owned by a holding company where the holding company pledges the shares of the operating company to the IPF lenders and guaranties the obligations of the operating company.


9) Debt Service Reserve. • Lenders will generally look for a minimum

six months of principal and interest in a funded debt service reserve.


• 10) Hedges for Significant Cost Items. • Lenders might want the project to enter

into hedging agreements for components of the project cost structure that are the most significant.

• This might include energy costs, interest rate, and other inputs.


• Other structural enhancements to the financing help mitigate construction and ramp-up risks, as well as production inputs with significant cost.

• The bottom line is that even in volatile capital markets, smart IPFs can get done as long as they possess the right characteristics.


• Types of Industrial Finance– Short-Term Finance

• Bank Credit• Trade Credit• Instalment Credit• Customer Advances

– Medium-Term Finance– Long-Term Finance


• Types of Industrial Finance– Medium-Term Finance

• Issue of Shares• Issue of Debentures• Loans from banks and other financial institutions• Public deposits (for existing concerns)• Ploughing back of profits (for existing concerns)


• Types of Industrial Finance– Long-Term Finance

• Issue of Shares• Issue of Debentures• Loans from financial institutions• Ploughing back of profits (for existing concerns)

Amity International Business SchoolFinancial Institutions

• Financial Institutions (FIs) have traditionally been the major source of long-term funds for the economy

• FIs can be broadly categorised as all-India or state level institutions depending on the geographical coverage of their operation

• Over the years, financial institutions are playing a key role in providing finance and counselling to the entrepreneurs

Amity International Business SchoolFIs

• Development being the function of capital, as the tempo of development grows, so does the requirement for capital

• Capital is not only necessary for development but capital is also generated by development

• In consonance with the development activities in the country, the development banks activities are on higher scale as well as diversified in multi-directional way


• The area of operation of development almost covers all key sectors of the economy

• Institutional agencies grant financial assistance to small-scale industrial units for:– Participation in equity capital– Acquisition of fixed assets by way of term loans; and– Working capital


• Schemes of assistance to Industry– Technical Scheme– Special Capital Scheme– Seed Capital Scheme– Composite Loan Scheme– Disabled Entrepreneurs– Modernisation– Electro-Medical Equipment


• Schemes of assistance to Industry– Nursing Homes/ Hospitals– Equipment Finance– Quality Control Equipment– Assistance to Ex-servicemen– Single Window Scheme– Tourism Related Facilities– Mahila Udyam Nidhi Scheme

Amity International Business SchoolIFCI

• Financial Assistance is provided in the following forms:– Rupee and foreign currency term loans– Underwriting of share and debenture issues– Direct subscription to equity– Guarantees– Soft Loans– Equipment financing

Amity International Business SchoolIDBI

• Objective and Functions– To serve as an apex institution for term

finance for industry, to co-ordinate the working of institutions engaged in financing, promoting or developing industries and to assist in the development of these institutions

– To plan, promote and develop industries to fill gaps in the industrial structure in the country


• Direct Assistance– Modernisation Assistance Scheme– Textile Modernisation Scheme– Technical Development Fund Scheme– Venture Capital Fund Scheme– Energy Audit Scheme– Equipment Finance for Energy Conservation

Scheme


• Indirect Assistance– Refinance scheme for Industrial Loans for

Small and Medium Industries– Refinance Schemes for Modernisation and

Rehabilitation of Small and Medium Industries– Equipment Refinance Scheme– Bills Discounting / Rediscounting Scheme– Scheme for Investment Shares and Bonds of

Other FIs

Amity International Business SchoolNABARD

• The establishment of the National Bank for Agriculture and Rural Development was the outcome of the acceptance of the recommendation in this behalf contained in the Interim Report of the Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development

Amity International Business SchoolNABARD

• For consultancy, research and development, feasibility

• For the purchase of land, developing the area, construction of factory premises, developing other basic infrastructure, purchase or machinery and in installation

• A small enterprise requires money to purchase raw materials for its manufacturing process, spares and a spare parts for its machinery

Amity International Business SchoolSIDBI

• Assistance to small scale sectors– Indirect assistance to primary lending

institutions (PLIs)– Direct assistance to small units– Development and Support Services– Development of markets for SSI products– Factoring Services– Development of infrastructure for SSIs


• Foreign currency assistance includes– Foreign currency loans to import equipment

by existing export-oriented SSI units and new units having definite plans for entering export market

– Pre-shipment and post-shipment credit in Rupees terms to exporting SSIs for greater flexibility

– Export bill financing


• Venture capital assistance includes– Assistance to Small Scale entrepreneurs

using innovative indigenous technology– Contribution to corpus of other VCs– Promotion of state level VC funds and a

National Venture Fund– MoU with Small Enterprise Assistance Funds

of USA


• Development and Support Services– Enterprise promotion with emphasis on rural

industrialisation– Human Resource Development to suit SSI

sector needs– Technology Upgradation– Quality and Environment Management– Marketing Promotion– Information Dissemination


Economic Aspects of Project Development

Module No 5

Amity International Business SchoolEconomic Aspects

• Economic development is a term that generally refers to the sustained, concerted effort of policymakers and community to promote the standard of living and economic health in a specific area.

• Such effort can involve multiple areas including development of human capital, critical infrastructure, regional competitiveness, environmental sustainability, social inclusion, health, safety, literacy, and other initiatives.


• Economic development differs from economic growth.

• Whereas economic development is a policy intervention endeavour with aims of economic and social well-being of people, economic growth is a phenomenon of market productivity and rise in GDP.

• Consequently, as economist Amartya Sen points out: “economic growth is one aspect of the process of economic development.”


• Development Economics is a branch of economics which deals with economic aspects of the development process in low-income countries.

• Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population, for example, through health and education and workplace conditions, whether through public or private channels.


• Development economics involves the creation of theories and methods that aid in the determination of policies and practices and can be implemented at either the domestic or international level.

• This may involve restructuring market incentives or using mathematical methods like inter-temporal optimization for project analysis, or it may involve a mixture of quantitative and qualitative methods.


• Socio-economic impact assessment is designed to assist communities in making decisions that promote long-term sustain-ability, including economic prosperity, a healthy community, and social well-being.

• Assessing socio-economic impacts requires both quantitative and qualitative measurements of the impact of a proposed development.


• For example, a proposed development may increase employment in the community and create demand for more affordable housing.

• Both effects are easily quantifiable. • Also of importance, however, are the perceptions of

community members about whether the proposed development is consistent with a commitment to preserving the rural character of the community.

• Assessing community perceptions about development requires the use of methods capable of revealing often complex and unpredictable community values.


• A socio-economic impact assessment examines how a proposed development will change the lives of current and future residents of a community.

• The indicators used to measure the potential socio-economic impacts of a development include the following:

• Changes in community demographics; • Results of retail/service and housing market analyses; • Demand for public services; • Changes in employment and income levels; and • Changes in the aesthetic quality of the community.


• Quantitative measurement of such factors is an important component of the socio-economic impact assessment.

• At the same time, the perceptions of community members about how a proposed development will affect their lives is a critical part of the assessment and should contribute to any decision to move ahead with a project.

• In fact, gaining an understanding of community values and concerns is an important first step in conducting a socio-economic impact assessment.


• Because socio-economic impact assessment is designed to estimate the effects of a proposed development on a community’s social and economic welfare, the process should rely heavily on involving community members who may be affected by the development.

• Others who should be involved in the process include community leaders and others who represent diverse interests in the community such as community service organizations, development and real estate interests, minority and low income groups, and local environmental groups.


• Projects carefully prepared, within the framework of broader development plans, both advance and assess the larger development effort.

• The project format itself is an analytical tool. • The advantage of casting proposed investment

decisions in the project format lies in establishing the framework for analyzing information from a wide range of sources.

• Because no plan can be better than the data and assumptions about the future on which it is based.


• There is growing concern about the potentially negative consequences of macro-economic policies for developing countries' natural resources.

• The debt crisis demonstrated how efforts by some countries to repay loans could lead to unsustainable practices: for instance, encouraging logging or land clearing for agriculture in humid tropical lowlands, in order to generate export earnings, may provide only a short-term solution for debt repayments


Economic Aspects of Project Development


• Current indicators of economic performance usually fail to account for the consumption or the degradation of nonrenewable natural resources.

• Concurrently, the cost of their conservation and maintenance is not adequately assessed. If the price of food does not include the cost of conserving the land on which it is produced, or the replenishment of the nutrients it withdraws from the soil, it then means that with the food we eat we deplete the natural resource capital.


• Traditional accounting seldom considers natural resources as economic - assets except for raw materials resources such as logs or minerals which can be traded.

• For instance, deforestation is often encouraged by underpricing logging licences.

• The low licence fee fails to take into account the true opportunity cost of the vest and so discourages interest in reforestation.

• The conversion of forests to other uses is generally treated purely as a short-term income benefit with no off-setting of accounts for the costs of depleting the capital asset which the resource represented.


• On the other hand, limitations of land use on environmental grounds may threaten the income of rural communities, for example by restricting the use of inputs through legislation or the elimination of price supports.

• Both degradation and protection have a price, not only monetary but also in terms of socio-economic trade offs.


• It is increasingly recognized that 'environmental accounting' must become an accepted tool in guiding policies for the management and use of natural resources.

There are two approaches to environmental accounting:- a physical approach in which sources and uses of natural

resources are quantified and used to develop measures of environmental change and ecological stress; and

- monetary approach aimed at adjusting national income accounts in order to incorporate measures of depletion or other environmental changes - such as pollution in the natural resource base.


• The UN Statistical Office is attempting to define a framework within which changes in the value of nature assets as well as defensive expenditures and the costs of residual pollution can be taken into account.

• The framework involves the use of specific stock accounts, defining opening and closing balances of produced and environmental assets. These stock accounts include:

- renewable biological assets, such as those pertaining to agriculture, forestry and fisheries;


• - scarce renewable resources in the public domain, such as marine resources, tropical forests;

• - non-renewable resources, such as mineral deposits, and

• - cyclical resources, such as air and water.


• Economic analysis provides the rationality for taking action because it provides some perspectives on the scale of impact and feasibility.

• The expected benefits of the interventions can be evaluated along with the possible costs, to facilitate discussion in the decision-making process.


• There are many arguments about the value of ecosystems, how to evaluate the future value in comparison with the current value, and whether we can compare welfare on one hand with the economic profit on the other.

• Methods are now available and used for estimating the un-marketed environmental values such as the benefits of improved river water quality or the costs of losing an area of wilderness to development


• Cost-benefit analysis can pave the way for decision-making for selecting optimal measures during the planning and implementation process, but there are several limitations in accounting all factors and issues precisely monetarily.

• For example, policy issues, such as social improvements to alleviate poverty, can not be explained only in economic terms.


• In order to minimize subjectivity in decision-making, environmentally sensitive economic analysis plays a key role in trade-offs and conflict situations.

• Multi-criteria analysis is useful in ranking options, shortlisting a limited number of options for subsequent detailed appraisal


• A decision maker who has to allocate limited and scarce resources and is faced with a number of competing goals needs to predict future physical and related economic consequences of a policy or plan and make calculated choices based on the model of physical and economic processes involved.

• Choices are difficult because they arise from conflict, and are always about the future and so are set in uncertainty.


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