The Hindu Business Line : It doesn't pay to keep financial closures indefinitely open-ended

Financial closure may not show dramatically, the way locked vaults or barred gates do. So much so, you may be pardoned for not knowing that financial closures have been happening too closely around us. For instance, the Jadcharla-Farukhnagar road project in Andhra Pradesh, awarded to the GMR consortium achieved financial closure on Friday. Financial closure of the Nagarjuna power project coming up at Yellur in Udupi district is expected next month.

Financial closure is a phrase that affects industry, as one learnt at a recent seminar on `Surface Transportation — emerging opportunities and technology' held in Chennai. Speakers from major construction firms appealed to the Government to complete land acquisition prior to financial closure of the projects. "Sometimes a land acquisition dispute over a 400-metre stretch could stall a 400 km highway project," said Ng Chin Meng, executive director of IJM India Ltd, speaking at the seminar. "This could lead to losses of several crore of rupees to the executing private company." Apt theme, therefore, for a zero base, is financial closure.

A fuzzy phrase

In our search for meaning of the phrase `financial closure', let us not be deterred by the fact that it finds no place in Oxford Dictionary of Business, where the entry after `financial appraisal' is `financial control.' For, `helpfully', what comes top in a Google search is http://isb.wa.gov, the site of Washington State Department of Information Services.

"Financial closure is the process of completing all project-related financial transactions, finalising and closing the project financial accounts, disposing of project assets and releasing the work site," it says in a page titled `Project management framework'. Why is financial closure important? Because a project cannot be closed until all financial transactions are complete, otherwise there may not be funds or authority to pay outstanding invoices and charges, explains the site.

Quite logical, but watch out! Because this is not what is appropriate in the context of infrastructure projects we'd started off with. Rather, the definition talks of what is archetypal `finalisation' that occupies accountants long after a year closes. Similar fuzziness is evident on www.cdc-crdb.gov.kh, the site of the Cambodian Rehabilitation and Development Board (CRDB), which speaks of two aspects of closure, operational and financial.

Operational closure or operational completion of a project happens when `all approved and budgeted inputs have been delivered and planned activities have been completed.' Financial closure of the project, which should be completed within 12 months from the date of operational closure, as the Board stipulates, involves the preparation of the final programme/project financial report, closing of the bank account, and refunding balance of funds to the development partner(s). "A final audit of programme/project accounts shall be carried out immediately after the closing of the programme/project accounts in accordance with international accounting and auditing standards," says CRDB.

These tasks may again well gel with the description of `financial account closure,' as on www.vita.virginia.gov, thus: "Financial closure includes both (external) contract closure and (internal) project account closure. All expenditures must be accounted for and reconciled with the project account. When financial closure is completed, all expenditures made during the project have been paid as agreed to in purchase orders, contracts, or inter-agency agreements."

In the PPP context

Keeping all the above definitions aside, let us look for a description of financial closure in the context of PPP (public private partnership). Our first stop is at the World Bank's glossary about PPI (private infrastructure projects) on http://ppi.worldbank.org. There, financial closure is described as closure that occurs when there is legally binding commitment of private sponsors to mobilise funding or provide services.

One learns from the World Bank's site that the definition of financial closure varies among types of private participation. For instance, financial closure, in the case of concessions and greenfield projects, is "the existence of a legally binding commitment of equity holders or debt financiers to provide or mobilise funding for the project." The funding must account for a significant part of the project cost, securing the construction of the facility, says the Bank. "For divestitures, the equity holders must have a legally binding commitment to acquire the assets of the facility." `Financial closure year' is the year in which private sponsors agreed to a legally binding agreement to invest funds or provide services.

For the avid, the Reserve Bank of India's `master circular' dated July 1 on prudential norms classifies projects under implementation into three, based on financial closure. Wonder if the Institute of Chartered Accountants of India has a standard for the purpose.

Financial closure is when all agreements, permits and loans are in place and is normally the event that triggers expenditure on construction and materials and equipment procurement, according to http://iis-db.stanford.edu. "Before financial closure, negotiation is still taking place. After financial closure, disbursement is simply the enactment of the agreements that came together at financial closure."

Since financial closure is not the same as disbursement, "the actual expenditure may be more or less than the amount recorded at financial closure because costs of engineering, procurement and construction are highly uncertain." On a realistic note, "not all projects that reach financial closure are completed."

Tombstone ads

One reason why financial closures are not much talked about is the general ignorance of what the deceptively innocuous phrase means. Also, to match and perpetrate widespread obscurity, advertisements announcing financial closure are usually of the tombstone variety. For starters, tombstone advertisement is "a starkly simple advertisement run by an underwriting syndicate or investment banker to claim credit for a role in the completion of a financial transaction," as http://riskinstitute.ch educates.

"Tombstone ads are typically unadorned text, black on white, often enclosed in a simple box, with a centred headline and a number of lines in the body of the ad, usually also centred," says Wikipedia. "The name originates from their similarity in appearance to the text on a tombstone (headstone) grave marker." Rationale for such an austere presentation is that the financial institution should not use the advertisement as a promotion of the `closure' involved.

Occasionally, however, financial closure may be a gala event. For instance, "On September 8, 2005 at 19:00 pm the Government of the Lao People's Democratic Republic hosted the grand ceremony for financial closure of the Nam Theun 2 Project," as www.poweringprogress.org informs. Financial closures do merit celebrations, though, because `the very staff-intensive work' to implement and bring each project to financial closure is `almost like a second project,' as www.adb.org frets.

"Once a project achieves 25 per cent of the proposed investment, has achieved financial closure and has commenced civil construction work, it would be eligible to be sanctioned mining lease of iron ore," is a snatch from Jharkhand's `mineral policy' cited in the media, as an example of carrots that come next after financial closure.

Many a hurdle

Financial closure may face many hurdles. A Johannesburg-dateline story, dated August 11, on www.eprop.co.za, speaks of how the Gautrain project is being delayed not merely because of court action and negotiations over `financial closure,' but owing to bids for explosives needed for blasting `the underground sections of the rail link.'

Another example of woe is on www.pdac.ca, the site of Prospectors & Developers Association of Canada. "The Indian government refused to issue the necessary licences and EnerNorth could not obtain financial closure," says a line in a document titled `The legal risks of doing business in foreign countries'.

To mitigate the worries of private investors in infrastructure, the Union Power Minister Mr Sushil Kumar Shinde recently said, "In a bid to make the power sector more investor friendly, the Ministry has constituted an Inter Institutional Group to facilitate financial closure of private sector projects." This group has facilitated financial closure of 13 power projects with an aggregate installed capacity of about 5000 MW, he said. "In addition, the group is presently facilitating financial closure of another 10 projects with a total installed capacity of 11,432 MW."

For PPP to succeed, we may need to deliver more such powerful messages, lest investors look at India as a place where financial closures face the karmic possibility of being eternally open.

ZeroBase@TheHindu.co.in

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