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Rutas De Lima Case Solution

Solution Id Length Case Author Case Publisher
2064 1693 Words (7 Pages) Ingo Walter, Alvin Chiang INSEAD : IN1228
This solution includes: A Word File A Word File

The Ruta De Lima is a large-scale infrastructure project which required a substantial amount of investment for its execution given the fact that it would be a public-sector infrastructure project. There are many ways in which the project financing for the proposed project can be achieved which include government grants, subsidies, and guarantees as well. However, one thing that needs to be kept in mind is that the project may suffer from political and regulatory risk. 

Following questions are answered in this case study solution

  1. From a Project Finance perspective, what were the risks associated with the project? Discuss mitigation arrangements for these risks and how the risks were allocated in the structuring of the project to the various parties?

  2. Critically examine the Project Finance markets particularly for financing public infrastructure projects. Use the case study to give examples.

Case Analysis for Rutas De Lima Case Solution

As the concession option was selected for the financing of the project instead of government debt or a joint venture, a major benefit that would be derived from it would be that it would allow gaining a large amount of finance required for financing the construction of the toll road. However, one risk is that it may delay the raising of finance as the contract that will be created will need to include multiple clauses that would address issues about the violation of the contract or its expiry. Hence, the development of a contract may take time and would delay the overall execution of the project. Also, too many clauses may result in disagreement which would take up even more time. As this will be a long term project, a change in the public party in power may influence the number of funds being allocated to the project and delay the project completion. 

Another approach that is being considered for financing the project is getting the rights to build and operate the facility for several years in return for a certain percentage of revenue which would be given to the project sponsor who would also act as a contractor to the project. Meanwhile, the initial capital that would be required would be raised from the international investors, whose interest payments and principal repayments would be made through the project cash flows over a certain period. A major risk associated with such form of an arrangement would be that if the project would not be able to generate the desired amount of revenue, the investors would get concerned. This is one reason why the Build Operate transfer projects are spread over longer time horizons (Wang, et al., 2000). Apart from this, there will be a need for stronger corporate governance because of the funds of private investors being involved (Abednego & Ogunlana, 2006). As both the public and private parties are involved, there is a possibility of a lack of communication between the two parties. This may further result in project delays and the project failing to meet the set project expectations. 

Apart from this, it should be known that the project is expected to generate benefits to the public as it will be a toll road aimed at facilitating the traffic flow in and around the Peruvian Capital. Hence, the involvement of the private sector can put the public sector at a disadvantage. Hence there would be a need for both parties to have an equal level of knowledge about complexity, competitiveness, and risks associated with the project (Sazonov, 2012). This is because the private sector has more knowledge, the government will have to suffer as it might fail to determine the project costs effectively and would rely on the private sector who may overstate the costs resulting in the wastage of public resources.

Furthermore, the project is a large scale and would require a large amount of finance to be raised. As more and more private investors from Peru will have to be taken on board, they would be demanding higher returns on their investment given the volatility in the exchange rates and the long term projects. Hence, with a relatively small group of private investors, there is a possibility that there would be less competition and the cost of the project would go up. Hence, it may not be a cost-effective partnering. 

One way the associated risks of having a public-private partnership can be mitigated is through having monitoring and evaluation mechanisms to ensure that none of the parties is marginalized and all of them are well informed about the latest updates on the project. This would align the goals of all the project sponsors and would help in the smooth execution of the project without much delays or spikes in the budgeted costs. Secondly, the risks can also be reduced by developing a mechanism that would allow for knowledge transfer and training of the project parties and allow for the development of a clear exit strategy for any of the project partner so that more and more people would be willing to invest in the project at the first place (Maktabi, 2014). 

These risks were allocated in the structuring of the project to the various parties by entering into a payment trust agreement to administer the receipts of the tolls. This would ensure a constant stream of revenue to the investors and the project sponsors. Also at the start of the project, the prospective investors were presented with an attractive portrayal of the Ruta De Lima Project so that the goals of all the stakeholders are aligned with each other. 

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