1.

EXECUTIVE SUMMARY

India has fast emerged as a land of opportunities in Infrastructure sector.

The potential is enormous as many sectors are opening up for participation
and private investment. In the last few years a number of Road Projects
have been taken up under ambitious National Highway Development
Programme costing about US$ 12 billion, in which large number of foreign
construction companies are participating.

The telecom sector has moved forward at a brisk pace and power reforms
have gained momentum while the disinvestments process has got
underway in the Telecom and Oil and Gas sector. In order to have an
integrated development of Transport system, National Rail Development
Programme has also been launched in Dec. 2002 envisaging an investment
of about US$3.5 billion.

The project also gave an opportunity to understand the different

infrastructure financing models prevalent and study the BOO model in detail
with reference to Delhi Metro Rail Corporation. Also this project helped to
understand things to be vetted critically for financing infrastructure project.

1
2. INFRASTRUCTURE

According to World Bank “Infrastructure is an important part of development

providing and delivering basic services that people need for everyday life
e.g. safe drinking water, electricity, roads, sanitation etc.”
RBI has provided a composite definition on Infrastructure lending not simply
on infrastructure alone. As per RBI “any credit facility in whatever form
extended by lenders, banks, Financial Institutions or Non banking Finance
Companies to an infrastructure facility as stated below falls within definition
of Infrastructure lending. In other words, a credit facility provided to a
borrower engaged in:
1. Developing, or
2. Operating & Maintaining, or
3. Developing, operating and maintaining any infrastructure facility that is
a project in any of following sectors, or any infrastructure facility of
similar nature
a. A road, including toll road, a bridge or a rail system
b. A highway project including other activities being an integral part of
highway project
c. A port, airport, inland waterway or inland port
d. A water supply project, irrigation project, water treatment system,
sanitation and sewerage system or solid waste management system
e. Telecommunication services whether basic or cellular, including radio
paging, domestic satellite service, network of trunking, broadband
network and internet services
f. An industrial park or SEZ
g. Generation or generation or distribution of power
h. Transmission or distribution of power by laying a network of new
transmission or distribution lines
i. Construction relating to projects involving agro-processing and supply
of inputs to agriculture

2
j. Construction for preservation and storage of processed agro products,
perishable goods such as fruits, vegetables and flowers including
testing facilities for quality
k. Construction of educational institutions and hospitals
l. Any other infrastructural facility of similar nature

INDIAN INFRASTRUCTURE MARKET

Infrastructure spend in India is estimated to be Rs. 20.3 tn (USD 430 bn)

during the current 5 year plan. Power, roads, Telecom & railways to witness
maximum spend.

3
3. TYPES OF INFRASTRUCTURE
Broadly infrastructure is classified as
1. Physical Infrastructure which generally covers the following
a. Transportation including urban mass transportation: Roadways,
Railways, Airways and water supply and transportation etc
b. Power generation, transmission and distribution
c. Telecommunication
d. Port handling facilities
e. Solid waste collection and disposal facilities
f. Irrigation facilities

SEZ has a different characteristic in as much as it contains all the

ingredients of a physical infrastructure while being otherwise
considerably led by Real Estate Intervention.
2. Social Infrastructure generally covers following
a. Education
b. Primary Mass education facilities
c. Medical
d. Sanitation and sewerage
e. Legal and general administrative framework

4
4. IMPORTANCE OF INFRASTRUCTURE
World bank has observed that greater focus needs to be placed on
QUALITY NOT QUANTITY of Infrastructure services. It is important from
mainly following perspective
1. As a key driver for all round growth with enhancement in the efficiency
level
2. Most infrastructure utilities e.g. Education, Supply of clean drinking
water, health, Sanitation etc touch the population at all levels
3. Up keeping of environment for safe living
4. Poverty alleviation as a consequence of overall development of
productive sectors
5. Easy and cost efficient access to markets both for inputs and outputs
is possible out of infrastructure developments.

The availability of adequate infrastructure is imperative for the overall

economic development of the country. Infrastructure adequacy helps
determine success in diversifying production, expanding trade, coping with
population growth, reducing poverty and improving environmental
conditions.

5
5. POLICY FRAMEWORK

11th Five Year Plan

A. Investment targeted in 11 th five year plan: Rs. 20 lakh crore in the
infrastructure
sector
 Power Rs. 6.6 lakh crore,
 Roads Rs.3.1 lakh crore,
 Telecom : Rs.2.5 lakh crore
 Ports, Airports, Oil& Gas Pipelines, etc. : Rs. 7.3 lakh crore
B. Private sector participation envisaged at Rs. 6.2 lakh crore at inception
 Investment of private sector currently envisaged is Rs. 7.4 lakh crore

12th Five Year Plan

A. Investment in Infrastructure sector constitutes about 5% of the GDP in
11th Plan;
expected to be increased to ~10% in 12th Plan.
B. Investment in Infrastructure sector targeted at Rs. 41 lakh crore in the
12th Five
Year Plan 1.
 30% investment envisaged through PPP.
C. Assuming Debt : equity ratio of 70:30, equity requirement would be Rs.
0.7 lakh
crore per annum and debt requirement of Rs.1.7 lakh crore

6
Availability of Bank credit
A. Growth in infrastructure sector lending by Rs.1.5 lakh crore for the 12
months ended November 2010 (a 45% growth in 1 year period).
B. Exposure to infrastructure sector currently at Rs.4.8 lakh crore
C. Incremental funding availed during this period by:
 Power: Rs.78,000 crore (53% of incremental sector lending);
 Telecom: Rs.47,000 crore (32% of incremental sector lending);
 Roads: Rs.17,000 crore2 (11% of incremental sector lending);
 Ports, Airports, Oil& Gas Pipelines, etc: Rs.6,300 crore (4% of
incremental sector lending).
D. Bank’s Infrastructure sector exposure at ~14% of the total outstanding
bank credit of Rs. 33.70 lakh crore (as on November 19, 2010).
 Power: Rs.2.4 lakh crore (7% of outstanding bank credit);
 Telecom: Rs. 0.98 lakh crore (3% of outstanding bank credit);
 Roads: Rs.0.82 lakh crore 3 (2% of outstanding bank credit);
 Ports, Airports, Oil& Gas Pipelines, etc: Rs.0.62 lakh crore (2% of
outstanding bank credit).

7
Availability of Equity Capital
A. In FY 2010, FDI inflows were USD 7 bn (~25% of overall inflows) into
Infrastructure sector:
 Power: USD 1.4 bn (20% share of infrastructure investments)
 Roads: USD 2.8 bn (40% share of infrastructure investments)
 Telecom: USD 2.6 bn (37% share of infrastructure investments)
 Ports, Airports, Oil& Gas Pipelines, etc :USD 0.2 bn (3% share
of infrastructure investments)
B. In FY 2011, upto Sep 2010, FDI (including PE deals) inflow is USD 2.6
bn:
 Power: USD 0.7 bn (27% share of infrastructure investments)
 Roads: USD 0.4 bn (15% share of infrastructure investments)
 Telecom: USD 1 bn (38% share of infrastructure investments)
 Ports, Airports, Oil& Gas Pipelines, etc :USD 0.5 bn (20% share
of infrastructure investments)

8
Issues and remedies in financing of Infrastructure Projects:
Implementation hurdles:
A. Land acquisition & Clearances: To develop a policy framework to
handover land along with clearances to reduce delays.
B. Termination payments are based on the authority’s project cost
estimates, and give out a lower termination payments as compared to
actual project cost, which is generally higher in the range of 20-40%.
C. Perceived as a huge risk by stakeholders.

Funding from Indian Banks:

A. Banks have internal sectoral ceilings at 12-15% of gross advances for
each sector.
 GoI may advise banks to increase the cap for specific sectors on a
case to case basis within infrastructure sector;
 Policy to classify “infrastructure” as a “priority sector” and stipulate a
specific percentage of a bank’s total lending to be in the infrastructure
sector.
B. ALM mismatch: Banks have a typical liability profile of 3-5 years
whereas infrastructure financing is required for 10-15 years and
beyond.
 Further incentivize deposit mobilization beyond 10 years through tax
incentives - interest income on FDs to be tax free.
 Spread reset and put call option being done to circumvent the
mismatch issue

9
External Commercial Borrowings:
Dearth of ECBs from offshore banks (except for telecom sector)
A. Risk perception of infrastructure projects is high due to country rating
and project rating issues.
 Allow refinancing of rupee loans for operational infrastructure projects
(on an approval basis)
 Strengthen the enforcement mechanism for Foreign Banks in line with
Indian Banks (DRT and SARFEASI Act for Foreign Banks)

B. In June 2010, RBI came out with guidelines on using takeout financing
through ECBs, which would allow foreign lenders to take out loans from
Indian banks, prime requisites being :-
 The corporate developing the infrastructure project should have a
tripartite agreement with domestic banks and overseas recognized
lenders for either a conditional or unconditional take-out of the loan
within three years of the scheduled Commercial Operation Date
(COD). The scheduled date of occurrence of the take- out should be
clearly mentioned in the agreement
 This may not be possible at the time of financial closure in concession
based projects since the time lines are limited to get in a foreign bank
at the time of financial closure
 It will be tough for lenders to take a call on interest rates and
covenants in advance. In addition, foreign lenders might not be
comfortable with an agreement which would subject them to Indian
jurisdiction, while Indian borrowers and banks would not want to fight
cases in foreign courts.

 The guidelines stipulate the takeout financier cannot charge a fee of

more than 100 basis points for the undisbursed loan amount,very few
banks would be willing to offer the facility at that fee and Scheme is
governed by the ECB cap of USD 500 mn per project.

10
C. Infrastructure Finance Companies (IFCs) i.e. NBFCs categorized as
IFCs by the RBI, are permitted to avail of ECBs, including the
outstanding ECBs, up to 50 per cent of their owned funds, for on-
lending to the infrastructure sector as defined under the ECB
policy.However the condition of hedging of currency risk in full makes it
less attractive, condition may be relaxed on case to case basis

11
6. PUBLIC PRIVATE PARTENRSHIP
The government has decided as major policy stance that in order to effect
desired cost saving and to facilitate access to expertise and proprietary
technology and to provide supplementary source of finance towards
multifaceted infrastructure development at a faster rate, PPP model be
adopted on case to case basis.
Private equity subscription is expected to be minimum 15% under this
model as has recently been decided in case of 50000 kms road projects
every next 10 years.
PPP may be defined as co-operative venture between public and private
sectors. As a matter of fact, PPP covers following main aspects:
1. It is long term contractual partnership (25 years+) between
Government and Private sectors
2. Such partnership to cover infrastructural sectors which are
traditionally within the sole ambit of public sector
3. The partnership usually covers
a. Financing
b. Designing
c. Implementing
d. Operating
In short, public sector capital contribution gives rise to
1. Sovereign responsibilities
2. Public accountability
On the other hand, Private sector capital funding provides
1. Private sector higher order efficiency level
2. Business incentives on a sustainable manner

12
BENEFITS:

TO PRIVATE SECTOR
1. Scope for reasonable return on opportunities arising out of funding
gap of investment which government may not be in a position to meet
out of fiscal resources
2. Tax concessions
3. Participation in market competition in areas which were monopolized
by government
4. Embedded Option
With a view to ensuring smooth implementation and continuation of
infrastructural projects involving Private sector participation a provision of
Embedded Option in the contract is often made. Such option includes:
a. Government`s optin ot legislate
b. Such guarantees may also cover
i. Minimum revenue stream
ii. Anti competition adventure
iii. Restriction of pricing of services for a specific period

To Public Sector
1. Increasing efficiency in execution of projects
2. Enhancing implementation capacity
3. Reducing risk for the public sector
4. Mobilizing financial resources
5. Freeing scarce public funds for other uses

13
7. TYPES OF INFRASTRUCTURAL FINANCE AVAILABLE

In case of infrastructure projects the guidelines issued by RBI permit banks

extending following types of financial assistance

1. Fund Based
a. Term loan
b. Cash credit
c. Unsecured overdraft
d. Bills purchase/bills discounting facilities

2. Non Fund Based

a. Term bank guarantee
b. Short term bank guarantee for procurement of raw materials
c. Short term bank guarantee for obtaining unsecured loan from
others
d. Letter of credit facility

14
8. CHARACTERISTICS OF INFRASTRUCTURE FINANCE
Infrastructure projects differ in some very significant ways from
manufacturing projects and expansion and modernization projects
undertaken by companies.

1. Longer Maturity
Infrastructure finance tends to have maturities between 5 years to 40 years.
This reflects both the length of the construction period and the life of the
underlying asset that is created. A hydro-electric power project for example
may take as long as 5 years to construct but once constructed could have a
life of as long as 100 years, or longer.

2. Larger Amounts
While there could be several exceptions to this rule, a meaningful sized
infrastructure project could cost a great deal of money. For example a
kilometer of road or a mega-watt of power could cost as much as US$ 1.0
mn and consequently amounts of US$ 200.0 to US$ 250.0 mn (Rs.9.00 bn
to Rs.12.00 bn) could be required per project.

3. Higher Risk
Since large amounts are typically invested for long periods of time it is not
surprising that the underlying risks are also quite high. The risks arise from
a variety of factors including demand uncertainty, environmental surprises,
technological obsolescence (in some industries such as
telecommunications) and very importantly, political and policy related
uncertainties.

4. Fixed and Low (but positive) Real Returns

Given the importance of these investments and the cascading effect higher
pricing here could have on the rest of the economy, annual returns here are
often near zero in real terms.16 However, once again as in the case of
demand, while real returns could be near zero they are unlikely to be
negative for extended periods of time (which need not be the case for

15
manufactured goods). Returns here need to be measured in real terms
because often the revenue streams of the project are a function of the
underlying rate of returns.

16
9. TYPES OF CONTRACTS IN INFRASTRUCTURE SECTOR
There are different contract models currently being adopted for public
private partnership (PPP) in India’s infrastructure sector, which vary in the
distribution of risks and responsibility between the public and private
sectors.

The GOI has made a significant commitment to infrastructure development

and has been mandated by the World Bank to invest the bulk of proposed
aid of US $3 billion in the infrastructure sector. Consequently, apart from
augmenting public sector investment into infrastructure, the GOI has
introduced a series of reforms to attract private sector participation and
foreign direct investment.

According to the Expert Group on the Commercialization of Infrastructure

Projects funds requirement of a staggering order will be required to finance
the infrastructure sector in the years to come.

Although a major chunk of about 85 percent of the requirements will be met

from domestic savings, the balance has to come through innovative
approaches to financing of infrastructures projects. Such innovative
financing approaches depend on the length of the gestation periods, the
magnitude of infrastructure projects and the relatively high risks associated
with these projects. There are two major approaches that could be thought
of as equitable risk sharing arrangements in the financing of infrastructure
projects which are as follows:
1. The Concession Approach
2. The Structural Financing Option

Concession Approach
Under this approach, the concessionaire who is thereafter granted a
franchise to operate for a specified period builds the project. Costs and
returns will be recovered by the franchise from the operations of the project.

17
Under this type of PPP contract, the government grants to a contractor a
concession to finance, build, operate and maintain a facility for the
concession period. During the concession period, the operator collects user
fees and applies these to cover the costs construction, debt servicing and
operations. At the end of the concession period, the facility is transferred
back to the public authority. BOT is the most commonly used approach in
relation to new highway projects in India. BOT projects can be annuity-
based or toll-based as defined below:

BOT annuity-based projects:

Under this form, the concessionaire is responsible for constructing and
maintaining project facility. The GOI, usually through the national highways
authority of India (NHAI) in the case of highway projects, pays the
concessionaire a semi-annual payment, or annuity. The concession
contract is awarded to the bidder, which, among other criteria, quotes the
lowest annuity amount. Under this approach, the amount of income
collected by the concessionaire is not directly related to the usage level of
the project. In the context of highway projects, the amount of income is not
by direct reference to the number of vehicles using the highway. Instead,
that traffic, and consequently user fees, may be lower than expected is
borne by the NHAI alone.

BOT toll-based projects:

In order to reduce the dependence on its own funds and to promote private
sector involvement in developing projects, the NHAI has awarded some
highway projects on a toll basis. In this case, the concessionaire is
responsible for constructing and maintaining the project as well as being
allowed to collect revenues through tolls during the concession period. After
the expiry of the concession period, the project is transferred back to the
NHAI. The most innovative option was the Rs 7 crores toll road revenue
bonds issue, the first of its kind in India by Madhya Pradesh Tolls Ltd.,

18
(MPTL) to fund India’s first private sector road project. MPTL is jointly
promoted by Infrastructure Leasing and Financial Services (IL&FS) and the
Madhya Pradesh State Industrial Development Corporation (MPSIDC).

Build-own-operate-transfer (BOOT):
Boot contracts are similar to BOT contracts, except that in this case the
contractor owns the underlying asset, instead of only owning a concession
to operate the assets. For example, in the case of hydroelectric power
projects, the contractor would own the asset during the underlying
concession period and the asset would be transferred to the government at
the end of that period pursuant to the terms of the concession agreement.
he Rs 4,800 crores Elevated Light Rail Transit System (ELRTS) in
Bangalore is to be run on a BOOT basis over a 30 year concession period
and the GHIAL project i.e. Hyderabad airport is also to be run on a BOOT
basis over a 30 year concession period.

Build-Operate-Lease-Transfer (BOLT)
This is ‘Build, Operate, Lease and Transfer’ project. The “Own Your Wagon”
scheme currently in operation in the Indian Railways, is a variant of BOLT
under which a set of wagons purchased by private parties is leased to the
Railways on a fixed rental.

Build-Operate-Own (BOO):
BOO (build, own, operate) is a public-private partnership (PPP) project
model in which a private organization builds, owns and operates some
facility or structure with some degree of encouragement from the
government. Although the government doesn't provide direct funding in this
model, it may offer other financial incentives such as tax-exempt status. The
developer owns and operates the facility independently. Paradip Port Trust
has signed an agreement to construct Rs 1,500 crores floating dry dock at
Paradip in Orissa in collaboration with Standfield of Scotland on a BOO
basis. Delhi Metro Rail Corporations project is classic example of BOO

19
basis in which Phase I & II already completed and made available for public
use.

Build-Own-Operate-Sell (BOOS):
This is ‘Build, Own, Operate and Sell’ project. These forms of private
sponsor participation are often much better vis-à-vis traditional financing
options, both with regard to risk reduction as well as equitable distribution of
risks.

Design-build-finance-operate(DBFO):
The NHAI is planning to award new highway project contracts under the
DBFO scheme, wherein the concessionaire does the detailed design work.
The NHAI would restrict itself to setting out the exact requirements in terms
of quality and other structures of the road, and the design of the roads will
be at discretion of the concessionaire. The NHAI expects that the DBFO
scheme will improve the design efficiency, reduce the cost of construction
and reduce time to commence operations, in addition to giving the
concessionaire greater flexibility in terms of determining the finer details of
the project in the most efficient manner.

Structured Financing Option (SFO)

Non-recourse financing
Under this option, the cash flows generated by the project secure the debt
instrument or the collateral value of the specified assets financed by the
instrument. In the event of default on the structured instrument, the debt
holders’ recourse would be limited to the underlying assets only and would
not extend to general reserves and assets of the company. Panvel
(Mumbai) By-pass is the first example of SFO in India involving IL & FS,
Hume industries (Malaysia), Ministry of Surface Transport (MOST) and
Maharashtra Government.

20
10. DELHI METRO RAIL CORPORATION
Delhi, the capital city of India, is one of the fastest growing cities in the
world with a population of 13 million as reported in the Census of India
Report for the year 2000. Until recently, it was perhaps the only city of its
size in the world depending almost entirely on roads as the sole mode of
mass transport. The total length of the road network in Delhi has
increased from a mere 652 km in 1981 to 1122 km in 2001 and it is
expected to grow to 1340 km in the year 2021. This increase in road length
is not at par with the phenomenal growth in the number of vehicles on these
roads in Delhi. The cumulative figure of registered private and government
buses, the main means of public transport, is 41,872 in 1990 and it is
expected to increase to 81,603 by the year 2011. The number of personal
motor vehicles has increased from 5.4 lakhs in 1981 to 30 lakhs in 1998
and is projected to go up to 35 lakhs by 2011. With gradual horizontal
expansion of the city, the average trip length of buses has gone up to 13
km and the increased congestion on roads has made the corresponding
journey time of about one hour. Delhi has now become the fourth most
polluted city in the world, with automobiles contributing more than two
thirds of the total atmospheric pollution. In this context, the decision of the
Government of India to develop a mass transport system for Delhi providing
alternative modes of transport to the passengers was most appropriate.

The first concrete step in the launching of an Integrated Multi Mode Mass
Rapid Transport System (MRTS) for Delhi was taken when a feasibility
study for developing a multi-modal MRTS system was commissioned by the
Government of the National Capital Territory of Delhi (GNCTD) at the
instance of the Government of India in 1989 and completed by Rail India
Technical and Economic Services Limited in 1995 (RITES, 1995a,
1995b). The Delhi Metro (DM) planned in four phases is part of the MRTS.
The work of Phase I and part of Phase II is now complete while that of
phase III is in progress. The first phase of DM consists of 3 corridors divided
in to eight sections with a total route of 65.1 kms, of which 13.17 kms has

21
 been planned as an underground corridor, 47.43 kms as elevated corridors
and 4.5 kms as a grade rail corridor. The second phase covers 53.02
kilometers of which the underground portion, grade and elevated section
are expected to be 8.93 kilometers, 1.85 kilometers and 42.24
kilometers respectively.

The construction of the first phase of DM was spread over 10 years

during 1995-96 to 2004-05 while that of the second phase, which started in
2005-2006 is expected to be complete by 2010-11. The total capital cost
of DM at 2004 prices for Phase I and Phase II are estimated as Rs. 64,060
and Rs. 80,260 million, respectively. Phases III and IV of DM will cover
most of the remaining parts of Delhi and even extend its services to some
areas such as Noida and Gurgaon belonging to the neighbouring states of
Delhi (Table 1 provides some of these details). The Delhi Metro provides a
number of benefits. It reduces the travel time of people using the road and
metro, number of accidents on the roads and the atmospheric pollution in
Delhi.
Table 1: Overview of the MRTS

Phase I (1995 - 2005) Phase II (2005 –2011)

Distance 65.10 km 53.02 km
1) Shahdara - Barwala (22) 1) Vishwa Vidhyalaya- Jahangirpuri (6.36)
Corridor 2)Vishwa Vidhyalaya-Central Secretariat 2) Central Secretariat- Qutab Minar (10.87)

3) Barakhamba Road - Dwarka (22.8) 3) Shahdra- Dilshad Garden (3.09)

4) Barakhamba Road – Indraprastha (2.8) 4) Indraprastha- New Ashok Nagar (8.07)
5) Extension into Dwarka Sub city (6.5) 5) Yamuna Bank- Anand Vihar ISBT (6.16)
6) Kirti Nagar- Mundka (18.47)
Investment Rs 6406 crores (2004 prices) Rs 8026 crores (2004 prices)

Phase III Phase IV

Distance 62.2 km
1) Rangpuri to Shahabad Mohammadpur 1) Jahangirpuri to Sagarpur West
2) Barwala to Bawana 2) Narela to Najafgarh
Corridors 3) Jahangirpuri to Okhla Industrial Area 3) Andheria Mod to Gurgaon
4) Shahbad Mohammadpur to Najafgarh

22
23
11. ECONOMIC BENEFIT AND COST OF METRO
Description of economic benefits and costs of the Delhi Metro
requires the identification of the changes brought out by it in the transport
sector of the economy. Most importantly, DM contributes to the diversion of
a very high proportion of current passenger traffic from road to Metro and
serves part of the growing passenger traffic demand in Delhi. As a result,
there will be a reduction in the number of buses, passenger cars and
other vehicles carrying passengers on Delhi roads with the introduction of
the Metro. There will be savings in travel time for passengers still traveling
on roads due to reduced congestion and obviously also for those traveling
by Metro. The Metro also brings about a reduction in air pollution in Delhi
because of the substitution of electricity for petrol and diesel and reduced
congestion on the roads. There will also be a reduction in the number of
accidents on the roads.

Investment in the Metro could result in the reduction of government

investments on road developments and buses as also in the private
sector investment on buses, passenger cars and other vehicles carrying
passengers. There will be reductions in motor vehicles’ operation and
maintenance charges to both the government and the private sector. There
could be cost savings to passenger car owners in terms of capital cost and
operation and maintenance costs of cars if they switch over from road to
Metro for travel in Delhi. The fare box revenue collections by Metro will be at
the cost of the revenue, accruing earlier to private and the government bus
operators and hence constitutes a loss in income.

The Delhi public will gain substantially with the introduction of the Metro
service. It saves travel time due to a reduction of congestion on the roads
and lower travel time of the Metro. There will be health and other
environmental benefits to the public due to reduced pollution from the
transport sector of Delhi. Land and house property owners gain from the
increased valuation of house property prices due to the Metro. The Metro

24
has the effect of increasing the income of the regional economy of Delhi vis
a vis the rest of the Indian economy. Given that the per capita income of
Delhi is far higher than the national per capita income, the redistribution of
income in favour of Delhi may not be desirable from the point of view of
income distribution in the Indian economy. The Metro provides
employment benefits to the unskilled labour especially during its
construction period. This labour is otherwise unemployed or under
employed in the Indian economy.

Various economic agents relevant for Metro could be identified as the

government, passengers, transporters, general public and unskilled
labour. Unskilled labour employed on the Metro gains to the extent of the
difference between the project wage rate and the shadow wage rate. The
social premium on investment and savings and foreign exchange accrue to
the society represented by the General Public.

25
12. MEASUREMENT OF ECONOMIC BENEFIT AND COST OF METRO

The economic costs of the Metro are calculated after excluding the tax
component from the financial costs. In a recent study, Murty and Goldar
(2006) have estimated the effective state VAT and MODVAT rates on
durable commodities in India as 3.8 percent and 6.36 percent,
respectively. Since these taxes are levied on the same base, the total
effective tax rate applicable for durable commodities in India is roughly 10
percent. The effective tax could be interpreted as the revenue the Indian
Government (central and states) gets if there is an increased demand for a
commodity by one unit at margin (Ahmad and Stern 1984; Murty and Ray
1989). If the taxes are ad valorem, it implies an increase in the revenue of
the government if there is an increase in a rupee worth of expenditure on
that commodity. These taxes are also interpreted as shadow taxes. No tax
payments are considered on the expenditures incurred by the DM for the
employment of unskilled labour. Table 10 provides estimates of the
economic cost of DM for some select years during its lifetime
Table 10: Components of Economic Capital and O&M Cost
(Rs. Million)
10 Capital Cost O&M Cost
Foreign Unskilled Domestic Unskilled Domestic
Year Exchange Labour Material Labour Material
1995 1390 257 695 0 0
2000 5460 1011 2730 0 0
2005 2193 406 1097 156 2671
2010 2852 528 1426 391 6687
2015 0 36 292 478 8180
2020 0 154 1250 606 10369
2025 0 0 0 825 14106
2030 0 0 0 1063 18173
2035 0 0 0 1548 26469
2040 0 0 0 2100 35905

26
13. PROJECT FINANCE (INFRASTRUCTURE)
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. Project finance has a particular
nature. The deal cycle is typically very long, and can involve many
financiers. The initial costs of big projects are typically very high, while the
benefits can only be reaped in the longer term. Since all kinds of risks may
arise-financial, technical, environmental, political etc project finance has
evolved to be a very complex financing method.

Project finance is comprised of a mix of equity and debt; typically 30-40% of

the project is funded through equity contribution, while 60-70% is funded
through debt. Project sponsors typically contribute the equity and “own” the
project, while debt finance can take two forms; loans and bonds.

Project loans are made by commercial banks, with each lender agreeing
that loans will be repaid only from the revenues generated by the
successful, completed project. Loans normally contain loan covenants or
agreements between the lender and the borrower. It contains guidelines
about what the borrower should or should not do, such as providing regular
reports and adequate insurance, etc. larger, more risky projects often
require syndicated loans. These loans are provided by a group of financial
institution called a bank consortium or a syndicate. The bank coordinating
the consortium and the syndicated loan is called the arranger, and can be
different from the banks providing the debt.

Projects can also be financed through project bonds. In this case,

investment banks underwrite project bonds by buying the newly issued
bonds at a guaranteed price, and then reselling them to institutional
investors. Like project loans, project bonds rely solely on the success and
revenues generated by the project for repayment; these terms and others
are outlined in a bond covenant. Bonds can also be derived from project

27
loans through the process of securitization, where the future income from
the syndicated loan is used as collateral for the issue of new bonds.

Advantages of Project Finance

1. Non-recourse. The typical project financing involves a loan to enable

the sponsor to construct a project where the loan is completely "non-
recourse" to the sponsor, i.e., the sponsor has no obligation to make
payments on the project loan if revenues generated by the project are
insufficient to cover the principal and interest payments on the loan.

2. Maximize Leverage. In a project financing, the sponsor typically seeks

to finance the costs of development and construction of the project on a
highly leveraged basis. Frequently, such costs are financed using 80 to
100 percent debt. High leverage in a non-recourse project financing
permits a sponsor to put less in funds at risk, permits a sponsor to
finance the project without diluting its equity investment in the project
and, in certain circumstances, also may permit reductions in the cost of
capital by substituting lower-cost, tax-deductible interest for higher-cost,
taxable returns on equity.
3. Off-Balance-Sheet Treatment. Depending upon the structure of a
project financing, the project sponsor may not be required to report any
of the project debt on its balance sheet because such debt is non-
recourse or of limited recourse to the sponsor. Off-balance-sheet
treatment can have the added practical benefit of helping the sponsor
comply with covenants and restrictions relating to borrowing funds
contained in other indentures and credit agreements to which the
sponsor is a party.
4. Maximize Tax Benefits. Project financings should be structured to
maximize tax benefits and to assure that all available tax benefits are
used by the sponsor or transferred, to the extent permissible, to another
party through a partnership, lease or other vehicle.

28
Disadvantages of Project Finance
Project financings are extremely complex. It may take a much longer period
of time to structure, negotiate and document a project financing than a
traditional financing, and the legal fees and related costs associated with a
project financing can be very high. Because the risks assumed by lenders
may be greater.

29
14. CHALLENGES IN FINANCING LARGE SCALE PROJECT
Projects like power plants, toll roads or airports share a number of
characteristics that make their financing particularly challenging.
 First, they require large indivisible investments in a single-purpose asset.
In most industrial sectors where projects finance is used, such as oil and
gas and petrochemicals, over 50% of the total value of projects consists
of investment exceeding $ 1 billion.
 Second, projects usually undergo two main phases (construction and
operation) characterized by quite different risks and cash flow patterns.
Construction primarily involves technological and environmental risks
while the operations are exposed to market risk (fluctuations in the
prices of inputs or outputs) and political risk, among other factors. Most
of the capital expenditures are concentrated in the initial construction
phase; with revenues starting to accrue only after the project has
become operational.
 Third, the success of large projects depends on the joint effort of several
related parties (from the construction company to the input supplier, from
the host government to the off-taker) so that coordination failures,
conflicts of interest and free riding of any project participant can have
significant costs.

30
15. FINANCIAL COST AND BENEFIT OF METRO

It is important to examine the financial feasibility of DM before actually

taking up its economic appraisal. The financial evaluation of a project
requires the analysis of its annual cash flows of revenue and costs
considering it as a commercial organization operating with the objective of
maximizing private profits. The financial capital cost of DM represents the
time stream of investment made by it during its lifetime. The
investment expenditures made by the project in one of the years during its
life time constitutes the purchase of capital goods, cost of acquisition of
land and payments made to skilled and unskilled labour and material
inputs for project construction.

The operation and maintenance cost of the project constitutes the

annual expenditure incurred on energy, material inputs for maintenance
and payments made to skilled and unskilled labour. The investment goods
and material inputs used by the project are evaluated at market prices,
given the definition of market price of a commodity as producer price plus
commodity tax minus commodity subsidy. If the government gives some
commodity tax concessions to DM, they are reflected in the prices paid
by DM for such commodities. If the financial capital cost of the project is
worked out as the time flow of annualized capital cost, the annual cost of
capital has to be calculated at the actual interest paid by it. This could be
done using information about the sources of funds for investment by DM
and the actual interest paid by it to each source. For example, if part of the
investment of DM is financed out of loans provided by the government at
the subsidized interest rate, the annual cost of this investment has to be
calculated at the subsidized interest rate.
Table 2 provides the sources of funding investments of DM (phases I
and II). More than 60 percent of the funds required for investment are
raised as debt capital. Around 30 percent of total investments of DM are
raised through equity capital with the Government of India (GOI) and

31
 GNCTD having equal shares in it. The remaining 10 percent of the
investments of DM will be covered out of the revenues it earns. As reported
in RITES (1995a), the DM had been provided with the following
concessions by GOI to make the project viable,
1. The cost of land equivalent to Rs. 2180 million has been provided as an
interest free subordinate loan by GOI/GNCTD to be repaid by the DM
within 5 years after the senior debt is repaid fully by the twentieth year
of taking the loan.
2. The risk associated with the exchange rate fluctuations is borne by
government in case of foreign debt.
3. The DM is exempted from payment of income tax, capital gains tax,
property tax and customs duty on imports.
4. The DM is permitted to generate resources through property
development over a period of 6-20 years.
5. No dividend is paid on GOI share of equity till the senior debt is
repaid fully by the twentieth year.
Table 2: Sources of Funding

Cost Financed By Phase I Phase II

1) Equity (50% each by GOI & GNCTD) 30% 30%
2) Long Term Debt (OECF, Japan) @ 3% 60% 56%
(with a 10 year moratorium period and 10
year repayment period)
3) Revenues From Property Development 7% 5%+5% (internal)
4) Subordinate Debt 3% 4%
Source: RITES (1995a)

Table 3 provides information about various components of capital cost for

Phase I of DM. The total project cost of Rs. 64,060 million at 2004 prices for
Phase I consists of the foreign exchange cost of Rs. 7720 million and the
domestic material and labour cost of Rs. 56,340 million. The corresponding
figure for the Phase II of DM is Rs. 80,260 million at 2004 prices.

32
Table 3: Cost Estimate of DM (Phase I)

(Rs. Million)Items Foreign Local Total

Exchange Cost
Civil works 0 31327 3132
7
Electrical works 0 6970 6970

Signaling and 2574 1930 4504

telecommunication

Rolling stock 4596 6403 1099

9
Land 0 3339 3339

General establishment 322 4779 5101

and consultancy charges

Contingencies 230 1593 1823

Source: RITES (1995a)

33
Table 4: Estimates of Financial Flows of Investment by DM (Phases I
and II) During its Life Time
(Rs. Million)

Year Capital Year Capital Year Capital Year Capital

Cost Cost Cost Cost
1995 2574 2007 20411 2019 361 2031 43290
1996 3937 2008 23331 2020 1543 2032 15150
1997 6036 2009 17861 2021 18901 2033 0
1998 8625 2010 5281 2022 1183 2034 0
1999 9498 2011 1271 2023 1183 2035 0
2000 10110 2012 361 2024 1183 2036 0
2001 9069 2013 361 2025 0 2037 0
2002 7353 2014 361 2026 0 2038 0
2003 4917 2015 361 2027 0 2039 0
2004 1945 2016 361 2028 0 2040 0
2005 4061 2017 361 2029 0 2041 58770
2006 12381 2018 361 2030 0
Source: Estimated as explained in the text.

Table 5: Estimates of Financial Flows of Operation and Maintenance

(O&M) Expenditures by DM (Phases I and II) During its Life Time
(Rs. Million)

Year O&M Year O&M Year O&M

2005 3123 2017 10484 2029 20149
2006 3253 2018 10981 2030 21255
2007 3387 2019 11507 2031 24628
2008 3527 2020 12127 2032 26042
2009 3674 2021 13763 2033 27562
2010 7822 2022 14374 2034 29198
2011 8006 2023 15032 2035 30958
2012 8366 2024 15738 2036 32852
2013 8745 2025 16498 2037 34891
2014 9145 2026 17316 2038 37086
2015 9568 2027 18195 2039 39449
2016 10013 2028 19141 2040 41993
Source: Estimated as explained in the text.

34
Table 4 provides the estimated financial flows of capital cost of DM at 2004
prices during its lifetime. RITES (1995a, 2005b) provide the estimates of
operation and maintenance cost (O&M cost) of DM. These estimates are
made using information about the trends of the O&M cost of Calcutta
Metro and the suburban sections of the Bombay Railway and the results of
some optimization studies conducted. Table 5 provides the estimates of
O&M cost of DM at 2004 prices during the lifetime of the project.

The financial benefits from the Metro are the fare box revenues and the
revenues from advertisement and property development, as reported by
RITES. Revenue streams for Phases I and II, as reported by RITES
(1995b, 2005b) have been taken. The main source of revenue of the
MRTS system is the fare box collection, which is a product of the total
passenger ridership on the MRTS as reported in Tables 6 and 7 and the
fare charged. RITES (1995b) considered four rates per trip: Rs 3, 4, 5, 6 at
April 1995 prices and the fare sensitivity of ridership. Full ridership is
expected to materialize on the metro with a fare comparable to the DTC
bus fare of Rs. 3 per passenger trip. However, with higher fares, the
ridership is expected to decline given that the willingness of passengers to
travel by the metro depends on the value they place on time savings,
frequency and safety of service, comfort and ease of travel, capacity to pay,
etc.

The financial model consisting of Rs. 5 per passenger trip and an annual
fare increase of 7.5 per cent was considered optimal by RITES. The
revenue collected by DM every year during its life time consists of revenue
from the passenger traffic diverted from the road to the Metro and the
revenue from serving part of the growing passenger traffic demand in Delhi.
Table 8 presents the estimates of revenue collected by DM during its
lifetime. Considering the estimates of financial flows of DM during the period
1995-2041, the financial cost-benefit ratio is estimated as 2.30 and 1.92 at 8

35
percent and 10 percent discount rates, respectively. The financial internal
rate of return of DM is estimated as 17 percent.

Table 6: Fare Sensitivity of Ridership on the Metro

Fare Rate Percentage Ridership

(In Rs/Passenger trip)
3 100%
4 90%
5 75%
6 50%

Source: RITES (1995b)

Table 7:Estimates of Daily Passenger Trips by Metro
(in lakhs)

Year Daily Passenger

2002 12.63
Trips
2003 20.15
2004 23.86
2005 31.85
2006 33.17
2007 34.55
2008 35.97
2009 37.46
2010 39.01
2011 40.63
2012 41.81
2013 43.03
2014 44.29
2015 45.58
2016 46.91
2017 48.28
2018 49.69
2019 51.14
2020 52.63
2021 54.17

Source: RITES (1995b, 2005b)

36
Table 8: Estimates of Financial Flows of Revenue Earned by
DM (Phases I and II) During its Lifetime
( Rs. Million)

Year Revenue Year Revenue Year Revenue

2005 15052 2018 67722 2031 128687
2006 17152 2019 74284 2032 133307
2007 19407 2020 82806 2033 134177
2008 21826 2021 92342 2034 139477
2009 24421 2022 99126 2035 140477
2010 33762 2023 106242 2036 146547
2011 37112 2024 115557 2037 147687
2012 41057 2025 116067 2038 154657
2013 44511 2026 119127 2039 155947
2014 50847 2027 119717 2040 163947
2015 49633 2028 123227 2041 165437
2016 5627 2029 123897
2017 62209 2030 127927
Source: Estimated as explained in the text.

37
16. KEY CHARACTERISTIC OF PROJECT FINANCING STRUCTURES
In project finance, any party involved in the project uses several long-term
contracts such as construction, supply, and off-take and concession
agreements, along with a variety of joint-ownership structures, to align
incentives and deter opportunistic behavior. The project company operates
at the centre of an extensive network of contractual relationship, which
attempt to allocate a variety of project risks to those parties best suited to
allocate a variety of project risk to those parties best suited to appraise and
control them: for example, construction risk is borne by the contractor and
the risk of insufficient demand for the project output by the off-taker

Project finance aims to strike a balance between the need for sharing the
risk of sizeable investments among multiple investors and, at the same
time, the importance of effectively monitoring managerial actions and
ensuring a coordinated effort by all project-related parties.

Large-scale projects might be too big for any single company to finance on
their own. On the other hand widely fragmented equity or debt financing in
the capital markets would help to diversify risks among a larger investor
base but might make it difficult o control managerial discretion in the
allocation of free cash flows, avoiding wasteful expenditures. In project
finance, the small number of “sponsors” holds a syndicate of a limited
number of banks usually provides equity and debt. Concentrated debt and
equity ownership enhances project monitoring by capital providers and
makes it easier to enforce project specific governance rules for the purpose
of avoiding conflicts of interest or sub-optimal investments.

The use of non-recourse debt in project finance further contributes to

limiting managerial discretion by tying project revenues to large debt
repayment, which reduces the amount of free cash flows. Moreover, non-
recourse debt and separate incorporation of the project company make it
possible to achieve much higher leverage ratios than sponsors could

38
otherwise sustain on their own balance sheets. Non-recourse debt can
generally be de-consolidated and therefore does not increase the sponsors
on-balance sheet leverage or cost of funding. From the perspective of the
sponsors, non-recourse debt can also reduce the potential for risk
contamination. In fact, even if the project were to fail, this would not
jeopardize the financial integrity of the sponsors’ core businesses.
One drawback of non-recourse debt, however, is that is exposes lenders to
project-specific risks that are difficult to diversify. In order to cope with the
asset specificity of credit risk in project finance, lenders are making
increasing use of innovative risk-sharing structures, alternative sources of
credit protection and new capital market instruments to broaden the investor
base.

Hybrid structures between project and corporate finance are being

developed, where lenders do not have recourse to the sponsors, but the
risks specific to individual projects are diversified away by financing a
portfolio of assets as oppose to single ventures. Public-private partnerships
are becoming more and more common as hybrid structures, with private
financier taking on construction and operating risks while host governments
cover market risks.

There is also increasing interest in various forms of credit protection these

include explicit or implicit political risk guarantees, credit derivatives and
new insurance products against macroeconomic risks such as currency
devaluations.

Likewise, the use of ‘real options’ in project finance has been growing
across various industries. Examples include: refineries changing the mix of
outputs among heating oil, diesel, unleaded gasoline and petrochemicals
depending on their individual sale prices; real estate developers focusing on
multipurpose buildings that can be easily reconfigured to benefit from
changes in real estate prices.

39
Finally, in order to share the risk of project financing among a larger pool of
participants, banks have recently started to securitize project loans, thereby
creating a new asset class for institutional investors. Collateralized debt
obligations as well as open-ended funds have been launched to attract
higher liquidity to project finance.

40
Project Finance Structure

41
17. PARTIES INVOLVED IN PROJECT FINANCING

(Note: Some parties do not come in picture of DMRC project as here

SPV financing structure is described.)
1. Project Company:
The project company is the legal entity that will own, develop, construct,
operate and maintain the project. It is generally an SPV created in the
project host country and therefore subject to the laws of that country. Its
equity owners will control the SPV. Delhi Metro Rail Corporation is joint
venture of Government of India (GOI) and Government of National
Capital Territory of Delhi (GNCTD). Both of them hold 50-50% equity in
the company. DMRC is the company which has came up with project.
2. Sponsor:
The project sponsor is the entity that manages the project. The sponsor
generally becomes equity owner of the SPV and will receive any profit
either via equity ownership or management contracts/fees. The sponsor
generally brings in management, operational, technical experience to the
project. The sponsor may be required to provide guarantees to cover
certain liabilities or risks of the project. This project is sponsored by GOI
and GNCTD.
3. Borrowers:
The borrowing entity may or may not be the SPV. This depends upon the
structure of the financing and of the operation of the project. A project
may in fact have several “borrowers”, for example the construction
company, suppliers of raw materials to the project and purchasers of the
project’s production. In this case DMRC is borrower.
4. Financial advisor:
The project sponsor may retain the services of a commercial or merchant
bank to provide financial advisory services to the sponsor. The financial
advisor theoretically will be familiar with the project host country and be
able to advice on local legal requirements and transaction structures to
ensure that the loan documentation and financial structure are properly
assembled. Financial consultants can also advise on how to arrange the

42
 financing of the project, taking into account streaming cash flows,
creation of shell offshore companies, tax avoidance, currency
speculation, desirable locales for the project and capital required. They
also provide help with accounting issues relating to expected cost of the
project, interest rates, inflation rates, and the financial advisor can assist
in the preparation of the information memorandum regarding the
proposed project. As project is initiated by Central Government and
GNCTD so financial advisor for DMRC will be Finance Ministry for
Centre and Delhi.

5. Lenders/Funders:
Projects are usually of large size and require a huge amount of capital.
A single lender cannot provide the required capital and hence
syndication takes place. This is beneficial in more ways than one. It not
only makes it possible to arrange for the huge capital requirement but
also helps in spreading the risk and mitigating it for the lenders of the
project. A syndicate of banks may be chosen from as wide range of
countries as possible to discourage the host government from taking
action to expropriate or otherwise interfere with the project and thus
jeopardize its economic relations with those countries. Nearly 60% of
estimated project cost is fund by The Overseas Economic Cooperation
Fund (OECF) through Japan Bank of International Cooperation (JBIC),
Japan as senior debt. The lenders are usually made up of: -
1. The arranger
This is the bank that arranges the syndication. It is also called a lead
bank. The bank typically negotiates the term sheet with the borrower
as well as the credit and security documentation.
2. The managers
The managing bank is typically a title meant to distinguish the bank
from mere participants. This bank may take a large portion of the loan
and syndicate it, thus assuming some of the underwriting risk.

43
 Managers can therefore broaden the geographic scope of the
syndication.
3. The facility agent
The facility agent exists to administer the administrative details of the
loan on behalf of the syndicate. The facility agent is not responsible
for the credit decisions of the lenders in entering into the transaction.
The agent bank is responsible for the mechanistic aspects of the loan
such as coordinating drawdown, payments and communications
between the parties to the finance documentation. Such as serving
notices and disseminating information. They also monitor covenant
compliance.
4. Account bank
The bank, through which all project cash flows pass and monitored,
collected and disbursed.

6. Insurance bank
It undertakes negotiations in connection with project insurances, to
ensure that the lender’s position is fully covered in terms of project
insurance.

7. Security trustee
Where there are different groups of lenders or other creditors interested
in the security, the co-ordination of their interests will call for the
appointment of an independent trust company as security trustee.

8. Technical advisor
Technical experts advise the project sponsor and lenders have limited
knowledge. Such experts typically prepare reports such as feasibility
reports, cost-benefit reports, etc. They may also monitor the progress of
the project and may also act as the arbiter in case of disagreements
between sponsors and lenders.

44
9. Lawyers
The international nature and complexity of project financing necessitates
the retention of experienced and competent law firms. Project finance
lawyers provide advice on all aspects of a project, including law and
regulations, permits, organization of project entities, negotiating and
drafting of project construction, operation, sale and contracts.

10. Investors
These may be lenders or project sponsors who do not expect to have an
active management role as the project goes on stream. In the case of
lenders, they are putting equity alongside their debt as a way to obtain
an enhanced return on their investment. Investor to DMRC is
Government of India (GOI) and Government of National Capital Territory
of Delhi (DNCTD)

11. Construction Company

Since most project financings are infrastructural, the contractor is
typically one of the key players in the construction period. Construction
can be either of the EPC, “Turnkey or BOT” in nature. It is important that
the construction company selected has a track record of successful
project management and completion. There may be consortia of
constructors who may be employed if the project is of a significant
magnitude or if there is political interference. Gammon India Ltd. won the
tender for building Metro Rail.

12. Regulatory agencies

Project naturally is subject to local laws and regulations. These may
include environmental, zoning permits and taxes. Publicly owned
projects also will be subject to various procurement and public contract
laws. It is important to ensure that the project has received all the
requisite permission and licenses before committing financial resources.

45
13. Export credit agencies
Export credit agencies (ECA) promote trade or other interests of an
organizing country. They are generally nationalistic in purpose and
nationalistic and political in operation funding bilateral agencies
generally comes from organizing governments. Government supported
export financing includes pre-export working capital, short term export
receivables financing and long term financing. They play an important
role in infrastructure and other projects in emerging market by simulating
international trade.

14. Multilateral agencies/development banks

Multilateral agencies are the ones, which promote collaborations
between companies on a global scale. This usually happens between
companies situated in different countries. These agencies also provide
support and funding for socially uplifting infrastructure projects. World
Bank, international finance corporation and regional development banks
like African development banks; Asian development bank, etc. are
examples of such agencies.

15. Host government

The host government is the government of the country in which the
project is located. The host government (GOI & GNCTD) is typically
involved as an issuer of permits, licenses, authorizations and
concessions. It also might grant foreign exchange availability, subsidies,
support through off-takes and tax concessions. In some projects, the
host government may be the owner of the project. Delhi Metro (DMRC)
exempted from payment of income tax, capital gains tax, property tax
and customs duty on imports. It may also be involved as an off-take
purchaser or as a supplier of raw materials or fuel.

46
16. Construction contractors
These include engineers and contractors responsible for designing and
building the project. Any or all of these parties may be contractually part
of the financing. Gammon India Ltd. is construction contractor for DMRC.

17. Supplier
Suppliers provide raw materials or other inputs to the project, since
supply arrangements is a key to project success, project sponsors and
lenders are concerned with the underlying economic feasibility of supply
arrangements and the supplier’s ability to perform the contracts.

18. Purchasers
In large infrastructure projects, the project company will seek in advance
to conclude long-term agreements to sell the goods or services being
produced by the project. These agreements are known as off-take
agreements. The output purchasers provide a crucial element of credit
support for the underlying financing by seeking to stabilize the
acquisition of raw materials over time and protect itself from market
volatility. Such support can be seen as a credit enhancement to make
the project more attractive to the financing banks.

19. Leasing companies

If capital allowances are available for the writing-down of plant and
machinery or more financial leasing companies. Their role will be to
lease out assets to the project company in return for a rental stream. In
addition to the tax advantages are the financial ones of keeping the
assets off the project company’s balance sheet.

20. Insurers
The sheer scale of many projects and the potential for incurring all sorts
of liabilities dictates the necessity of arranging appropriate insurance
arrangements. Insurers therefore play a crucial role in most projects. If

47
there is an adverse incident affecting the project then the sponsor and
the lenders will look to insurers to cover them against unforeseen losses.

48
18. SOURCES OF FINANCE
Just as financial instruments range from debt to equity and hybrids such as
mezzanine finance, project finance can raise capital from a range of
sources. Raising finance depends upon the nature and the structure of the
project. Lender and investor interest will vary depending on the goals and
risks related to the financing. In assembling project financing, all available
financing sources should be evaluated. Following are some sources of
capital used in project financing:

1. Equity
Equity is often raised in the stock markets and from specialized funds.
Equity is generally more expensive than debt financing. Equity can be
raised in the domestic capital markets as well as in the international
capital markets. Delhi Metro Rail Corporation is form by the joint venture
of Government of India (GOI) and Government of National Capital
Territory of Delhi (GNCTD).Both GOI and GNCTD holds 50-50% equity.
This 50% each of GOI and GNCTD equity holds only 30% of the project
cost.

2. Developmental loan
A developmental loan is debt financing provided during a project’s
developmental period to a sponsor with insufficient resources.
Developmental lenders, who fund the project sponsor at very risky stage
of the project, desire some equity rewards for the risk taken, hence, it is
not unusual for developmental lender to secure rights to provide
permanent financing for the project as part of the development financing
agreement.

3. Subordinated loan
Subordinated loans, also called mezzanine financing or quasi-equity,
are senior to equity capital but junior to senior debt and secured debt.
Subordinated debt usually has the advantage of being fixed rate, long

49
 term, unsecured and may be considered as equity by senior lenders for
purposes of calculating debt to equity ratio. They are usually used to
cover over-runs during the construction stage.

4. Senior debt
Commercial banks and institutional lenders are an obvious choice for
financing needs of a project. Senior debt of project finance usually
constitutes the largest portion of the financing. These loans usually form
at least 50% of the capital needs. The prime reason is that it is cheaper
than equity financing. They fall into two categories secured and
unsecured loans. Secured loans are loans where the assets securing
the loan have value as collateral. Such assets are marketable and can
readily be converted into cash. Unsecured loans basically depend on the
borrower’s general creditworthiness, as opposed to perfected security
arrangement. Nearly 60% of total estimated cost of Delhi metro project is
finance by JBIC (Japan Bank of International Cooperation).Recently
operational planning for Phase III is going on. JBIC appraisal team has
given clearance for their next tranche for the Phase III.

5. Syndicated loan
A syndicated loan is a loan that is provided to the borrower by two or
more banks and is governed by a single loan agreement. The loan is
arranged and structured by a ‘lead arranger’ and is managed by an
‘agent bank’. The best part about a syndicated loan is that the funding
can be gathered from the international lending market, which means
such a lending can be used for projects which need enormous amounts
of capital.

6. World Bank group financing sources

Multilateral institutions such as the World Bank provide finds to
infrastructure development projects worldwide. The scope and extent of
involvement of such institutions in financing project is very limited. World

50
 banks provide funding through its (a) loan program; (b) guarantee
program and (c) indirect support for projects.

7. Bonds
In recent years the use of the bond markets as a vehicle for obtaining
debt funds has increased. Bond financing is similar to commercial loan
structure, except that the lenders are investors purchasing the
borrower’s bonds in a private placement or through the public debt
market.

8. Investment funds
Investment funds mobilize private sector funds for investment in
infrastructure projects. E.g. asset funds or income funds, investment
management companies, venture capital provider and money market
funds.

9. Institutional lenders
These include life insurance companies, pension plans, profit-sharing
plans and charitable foundations. These entities can be a substantial
source of funding.

10. Host government

The host government can also be a direct or indirect source of
financing. This is more evident in the emerging markets where the
governments are usually eager to fund and support infrastructure
projects. They provide indirect support through tax incentives.GOI and
GNCTD has financed approximately 30% of project incurred cost.

51
19. RISKS INVOLVED IN PROJECT FINANCING
1. Construction Phase
An infrastructure project has a long gestation period during which many
risk events may occur leading to time and cost overrun and thereby
impacting the project’s initial estimate of cash flow patterns and its
overall viability. The main risks during this phase are-

2. Completion risk
Completion risk refers to the uncertainty related to timely completion of
the project within the budgeted costs. The completion risk may arise due
to a number of factors like non-availability of critical inputs including
supporting infrastructure like land. For a toll road project, for example,
permission to have right of way may be delayed due to litigation or non-
clearance by the permitting authorities in time. Due to mishap at the
Delhi Metro site in South Delhi that claimed six lives which put Delhi
Metro project into scanner. This issue made DMRC to review their
decision on Gammon India to continue on project. Due to this mishap
already project got delayed and running behind the schedule. Project is
not at risk of completion but yes it is exceeding all the timelines.

3. Cost overrun risk

A project’s viability depends on the realization of projected costs of
critical inputs. These assumptions may go terribly wrong for a long
gestation project. For example, the price of steel and cement may
increase the cost of construction substantially. The construction
company unwilling to bear the increased cost may refuse to complete
the construction activities unless the project sponsor agrees to bear the
burden to a mutually agreed extent. Due to the collapse of bridge there
was immediate loss of Rs.6 crore(Rs.60 mn). And lead to further time
and cost delay.

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4. Funding risk
In a public-private participation project, the ability of state to provide
funding as per originally agreed schedule might be jeopardized due to
unexpected shock to the state’s budget. A privately sponsored project
may also face uncertainty if the sponsor is unable to raise fund in time or
at the projected cost. Collapse of metro bridge increased the worries for
DMRC which in turn is concern for GOI and GNCTD too as 60% of
estimated cost of project is finance by JBIC. These incident happened in
July 2009 when already Phase I and many of Phase II lines where
operational. And from 2010 planning for Phase III was going to start so
this could have created some sort of hesitation for JBIC to disbursed
next tranche of money.

5. Operating Phase:
The risk profile of an infrastructure project undergoes significant changes
when a project comes to fruition and cash flows start. The main risks
during this phase of a project life cycle are

6. Performance risk
If a project does not meet the planned performance level, the actual
cash flows may be inadequate to service the debt and /or meet the
expected return on equity capital deployed. For example, an airport
project may not be able to meet the turnaround time for aircrafts or
number of passengers it can handle. In case of the Delhi Metro project
controversy creep around Gammon India’s ability to create a world class
transportation facility after accident took place in South Delhi. Even
though after the accident DMRC chose go with the Gammon India
keeping in mind process of tendering to be done again and which will
also lead to investment of time and cost in this tedious process. But
Gammon was issued show cause notice for blacklisting for two years.

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7. Market or off-take risk
The main market risk for an infrastructure project relates to lower than
projected demand or off-take of the project’s product /services. A toll
road or bridge project may fail to attract the required number of users to
make the project viable. When the entire demand comes from a
monopoly purchaser, as in the case of water supply project for a
municipality or a power project for a state monopoly distributor, a
minimum guaranteed off-take could mitigate this risk. The other types of
market risks are fairly common for any investment project, which are
interest rate risk, exchange rate risk and price risk. Since infrastructure
projects have high capital intensity, high leverage and long gestation
period interest cost forms a significant component of the overall cost and
proper measurement and mitigation of this risk is of paramount
importance for a project’s long-term viability. Exchange rate risk
becomes important for projects, which have substantial foreign currency
loan component.

8. Payment risk
This risk arises when the purchaser of a project’s output is a monopoly
and more often than not, a state monopoly. Because an infrastructure
project is often considered as an essential utility, non-payment cannot be
considered as a reason for discontinuation of supply of the product
/service. When private company is needs make a payment their risk of
defaulting but in case of public sector government is shareholder or
promoter so there less is chance of defaulting by there is high possibility
of delay in payment disbursement.

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Risk common in both construction and operational phases
These are the risks associated with the sponsors or the borrowers
themselves. The question is whether they have sufficient resources to
manage the construction and operation of the project and to efficiently
resolve any problems, which may arise. Of course, credit risk is also
important for the sponsor’s completion guarantees. To minimize those risks,
the financiers need to satisfy themselves that the participants in the project
have the necessary human resources experience in past projects of this
nature and are financially strong.

1. Technical risk
This is the risk of technical difficulties in construction and operation of
the project’s plant and equipment, including latent defects. Financiers
usually minimize this risk by preferring tried and tested technologies to
new unproven technologies. Technical risk is also minimized before
lending takes place by obtaining experts reports as to the proposed
technology. Technical risks are managed during the loan period by
requiring a maintenance retention account to be maintained to receive a
proportion of cash flows to cover future maintenance expenditure. As in
the case of Delhi Metro accident at South Delhi Gammon India got a nod
from DMRC. Gammon got blacklisted for two years. It was claimed that
there was ‘serious deficiency' in design and inadequate concrete
strength. Experts opine that the accident was caused by "serious
deficiency" in the design of the cantilever arm and that the concrete did
not have "adequate strength probably due to lack of (its) adequate
curing. So DMRC design consultants M/S Arch Consultancy Services to
Gammon India was blacklisted for five years and the structural
consultant M/S Tondon Consultants who did not give the correct advice
to DMRC was debarred for two years. So in this case technically
Gammon not committed a mistake but there was loophole in designing
part. This kind of mistakes need to vetted to avoid the technical risk.

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2. Currency risk
Currency risks include the risks that: (a) depreciation in loan currencies
may increase the costs of construction where significant construction
items are sourced offshore; or (b) depreciation in the revenue currencies
may cause a cash-flow problem in the operating phase. Mechanisms for
minimizing resource include: (a) matching the currencies of the sales
contracts with the currencies of supply contracts as far as possible; (b)
denominating the loan in the most relevant foreign currency; and (c)
requiring suitable foreign currency hedging contracts to be entered into.

3. Regulatory / approval risk

These are risks that government licenses and approvals required to
construct or operate the project will not be issued (or will only be issued
subject to onerous conditions), or that the project will be subject to
excessive taxation, royalty payments, or rigid requirements as to local
supply or distribution. Such risks may be reduced by obtaining legal
opinions confirming compliance with applicable laws and ensuring that
any necessary approvals are a condition precedent to the drawdown of
funds.

4. Political risk
This is danger of political or financial instability in the host country
caused by events such as insurrections, strikes, suspension of foreign
exchange, creeping expropriation and outright nationalization. It also
includes the risk that a government may be able to avoid it contractual
obligations through sovereign immunity doctrines. Common mechanisms
to minimizing political risk include: (a) requiring host country agreements
and assurances that project will not be interfered with; (b) obtaining legal
opinions as to the applicable laws and the enforceability of contracts
with government entities; (c) requiring political risk insurance to be
obtained from bodies which provide such insurance (traditionally
government agencies); (d) involving financiers from a number of

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 different countries, national export credit agencies and multilateral
lending institutions such as a development bank; and (e) establishing
accounts in stable countries for the receipt of sale proceeds from
purchasers. Political

5. Inflation risk
This risk represents the possibility that the actual inflation rate will
exceed the risk projected during the development of the feasibility study.
Inflation risk may be mitigated by including an actual index, based on
inflation, in the contract’s pricing formula, or by entering into long-term
supply contracts with predetermined prices (these contracts increase the
counterparty credit risk). To the extent that the risk cannot be controlled
by the private sector, the public sector may decide to retain the risk,
reducing the cost of the project. From 2008’s global economic meltdown
inflation rose to double digits last month (i.e. March 2011) it came down
to single figures.

6. Input and throughput risk

For non-extractive projects in which the viability of the project depends
on the supply of sufficient natural resources (e.g. water, power
generation and gas pipeline), the input and throughput risk is critical.

7. Force Majeure
Force Majeure (FM) shall mean occurrence in India of any or all of Non-
Political Event, Indirect Political Event and Political Event, as defined
below:

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Non - Political Event
 Act of God, epidemic, extremely adverse weather conditions, lightning,
earthquake, landslide, cyclone, flood, volcanic eruption, chemical or
radioactive contamination or ionizing radiation, fire or explosion;
 Strikes or boycotts (other than those involving the Concessionaire,
Contractors or their respective employees/representatives, or attributable
to any act or omission of any of them) interrupting supplies and services
to the Project Highway for a continuous period of 24 (twenty four) hours
and an aggregate period exceeding 7 (seven) days in an Accounting Year
 Any failure or delay of a Contractor but only to the extent caused by
another Non-Political Event and which does not result in any offsetting
compensation being payable to the Concessionaire by or on behalf of
such Contractor;
 Any judgment or order of any court of competent jurisdiction or statutory
authority made against the Concessionaire in any proceedings for
reasons other than (i) failure of the Concessionaire to comply with any
Applicable Law or Applicable Permit, or (ii) on account of breach of any
Applicable Law or Applicable Permit or of any contract, or (iii) enforcement
of this Agreement, or (iv) exercise of any of its rights under this
Agreement by the Authority;
 The discovery of geological conditions, toxic contamination or
archaeological remains on the Site that could not reasonably have been
expected to be discovered through a site inspection; or
 Any event or circumstances of a nature analogous to any of the foregoing.

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Indirect Political Event
 An act of war (whether declared or undeclared), invasion, armed conflict
or act of foreign enemy, blockade, embargo, riot, insurrection, terrorist or
military action, civil commotion or politically motivated sabotage;
 Industry-wide or State-wide strikes or industrial action for a continuous
period of 24 (twenty four) hours and exceeding an aggregate period of 7
(seven) days in an Accounting Year;
 Any civil commotion, boycott or political agitation which prevents collection
of Fee by the Concessionaire for an aggregate period exceeding 7
(seven) days in an Accounting Year;
 Any failure or delay of a Contractor to the extent caused by any Indirect
Political Event and which does not result in any offsetting compensation
being payable to the Concessionaire by or on behalf of such Contractor;
 Any Indirect Political Event that causes a Non-Political Event; or
 Any event or circumstances of a nature analogous to any of the foregoing

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Political Event
 Change in Law, only if consequences thereof cannot be dealt with under
and in accordance with the provisions of Article 41 and its effect, in
financial terms, exceeds the sum specified in Clause 41.1;
 Compulsory acquisition in national interest or expropriation of any Project
Assets or rights of the Concessionaire or of the Contractors;
 Unlawful or unauthorized or without jurisdiction revocation of, or refusal to
renew or grant without valid cause, any clearance, license, permit,
authorization, no objection certificate, consent, approval or exemption
required by the Concessionaire or any of the Contractors to perform their
respective obligations
 Under this Agreement and the Project Agreements; provided that such
delay, modification, denial, refusal or revocation did not result from the
Concessionaire’s or any Contractor’s inability or failure to comply with any
condition relating to grant, maintenance or renewal of such clearance,
license, authorization, no objection certificate, exemption, consent,
approval or permit;
 Any failure or delay of a Contractor but only to the extent caused by
another Political Event and which does not result in any offsetting
compensation being payable to the Concessionaire by or on behalf of
such Contractor; or any event of a nature analogous to any of the
foregoing.

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20. Conclusion:
The Kolkata Metro or Calcutta Metro is the Underground Mass Rapid
Transit Urban Railway network in Kolkata (formerly, Calcutta), India. It was
the first underground railway to be built in India, with the first operations
commencing in October, 1984 and the full stretch that was initially planned
being operational by February, 1995. On 28 December 2010, it became the
17th zone of the Indian Railways. The New Delhi Metro, which opened in
2002, is the second such urban metro rail network in India. However, being
the country’s first, and a completely indigenous process, the construction of
the Kolkata Metro was more of a trial-and-error affair, in contrast to the
Delhi Metro, which has seen the involvement of numerous international
consultants. As a result, it took nearly 23 years to completely construct a 17
km underground railway.

Before independence, there was a plan by the British to construct an

underground railway in Kolkata. After independence, the burgeoning
transport problem of Kolkata drew the attention of the city planners, the
State Government and also the Government of India. It was soon realized
that something had to be done and done quickly to cope with the situation.
At that time the Chief Minister of West Bengal, conceived the idea in 1949
of building an underground railway for Kolkata to solve the problems to
some extent. A survey was done by a team of French experts without any
concrete results. Efforts to solve the problem by augmenting the existing
fleet of public transport vehicles barely touched the fringe of the problem as
the roads account for only 4.2% of the surface area in Calcutta, compared
to 25% in Delhi and even 30% in other cities.

With a view to finding an alternative solution, the Metropolitan Transport

Project was set up in 1973. After detailed studies, the MTP came to the
conclusion that there was no other alternative but to construct a Mass Rapid
Transit System. The MTP had prepared a Master Plan in 1971 envisaging

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construction of five rapid-transit lines for the city of Kolkata, totaling a route
length of 97.5 km. Of these, the highest priority was given to the busy North-
South axis between Dum Dum and Tollygunge over a length of 16.45 km,
and the work on this project was sanctioned on June 1, 1972. The
foundation stone of the project was laid by Smt. Indira Gandhi, the then
Prime Minister of India, on December 29, 1972, and the construction work
started in 1973.Today Metro Rail is operational in Kolkata and Delhi while in
Bangalore, Chennai, Mumbai and Hyderabad will be operational soon.

Now infrastructure growth is a critical necessity to meet the growth

requirements of the country. Government led infrastructure financing and
execution cannot meet these needs in an optimal manner and there is a
need to engage more investors for meeting these needs. Even though the
Indian financial system has adequate liquidity, the risk aversion of Indian
retail investors, the relatively small capitalization (compared to the large
quantum and long duration funding needs of infrastructure finance) of
various financial intermediaries requires adoption of innovative financial
structures and revisiting some of the regulations governing the Indian
financial system. The risk capital required in the infrastructure sector can be
understood as the Explicit Capital brought in as equity by the project
sponsors and the Implicit Risk Capital provided by the project lenders.
Implicit Capital providers seek to manage their risk-return reward by
ensuring availability of adequate Explicit Capital and diversification across
various projects. Given this profile of the Explicit Capital, greater flow of this
risk capital can be ensured by removing the effects of controllable
uncertainties in the policy environment and making available the benefits of
diversification through alternate mechanisms. New sources of this risk
capital can be sourced by providing partial risk guarantees (in form of First
Loss Deficiency Guarantees), formation of highly capitalized financial
intermediaries and encouraging securitization transactions. In addition to
above, various regulatory initiatives and market reforms are required to

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enable the commercial banking system to participate more vigorously in
providing infrastructure financing.
21. BIBLIOGRAPHY

1. www.pppindiadatabase.com
2. www.rites.com
3. www.delhimetrorail.com
4. INFRASTRUCTURE FINANCINE BY S.K.BAGCHI (2010)

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