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INFRASTRUCTURE

Infrastructure investment in India is set to grow exponentially. Sudarshan Mohatta, Vice President, Project Advisory & Structured Finance, SBI Capital Markets, in an interview to Mehul Dani, focuses on the potential for growth in infrastructure finance and the new business opportunities for banks and the financial institutions:

Risks Call for Structured Approach


Mehul: What are the challenges the financial institutions and banks would typically face with regard to infrastructure projects? Sudarshan: Infrastructure projects are exposed to unique risks which call for a structured approach to address the hurdles of financing such projects. Typically characterized by large capital outlay and longer gestation periods vis--vis other asset classes, infrastructure projects limit the mode/nature of funding. Ergo, majority of the projects require long term capital funds with high leverage to be raised on the basis of limited recourse finance. This ramifies into the lenders relying on project assets and future cash receipts in lieu of recourse to the project sponsors. Debt finance representing 60-80% of the financing structure requires adequate insulation to risks related to force majeure, regulatory amendments, uncertain realization of user costs, time and cost overrun, impediments in contracts enforceability etc. By and large we can categorize the major challenges confronted by banks in course of infrastructure project financing into risk management, project execution and dispute resolution. Three key hurdles are encountered in tying up of debt for such projects. (i) Long tenor of loans: Infrastructure project debt tends to have door to door tenor ranging between 5 to 15 years. This reflects the need to match the long payback period of such projects and expose lenders to incremental commercial risks attributable to long tenor. (ii) Asset liability management: Increasing exposure to infrastructure projects renders asset liability maturity mismatch for banks which accrues from the maturity difference between the sourcing of funds and application of Sudarshan Mohatta funds. (iii) Exposure norms: Certain feels that there is a systemic constraints such as single/ need for structural group exposure limit as well as sector reforms coupled with development exposure limit act as impediments in of a more robust lending for banks. For example recently bond market we are witnessing certain constraints in financing of power plant projects due to breach in exposure limit of many banks to power sector. Completion of infrastructure project on schedule and without cost overrun is a challenge as infrastructure projects encounters delay in land acquisition and obtaining the requisite statutory approvals like environmental clearance. Also, infrastructure projects run the risks of commercial disputes at various stages during the life cycle of the project such as clarity in bidding, obligations of authorities, performance assessment, and subsequent commercial viability. For example the National Highway Authority of India currently has more than `80 billion worth of disputes outstanding. Efficient dispute resolution mechanism calls for the need of bifurcation between regulatory, monitoring and adjudicating authorities across all segments of infrastructure.

Infra Finance:

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What is the appetite of the Infra Investments to Double infrastructure sector at present? Sudarshan: The development The Planning Commission of India has projected that investment in infrastructure would almost double of infrastructure services in India at $1025 billion in the 12th Plan, compared to $514 billion in the 11th Plan. Of the $1025 billion, 50% is has been accorded as a key priority expected to come from private sector, whose investment has been 36% (around $186 billion) in the 11th and quite imperative for sustaining Plan. Infrastructure investment in India is set to grow dramatically. According to Union Finance Minister the momentum of the economy Pranab Mukherjee, India would require to develop a rupee denominated long term bond market for funding as well as strengthening its social the infrastructure sector that requires an investment of around $459 to $500 billion by 2012. fabric. The revised estimate Indian infra finance is attracting a whole range of structured financiers - both on the debt and equity side. Slow pace of infrastructure development can be a major deterrent for achieving a high GDP growth rate. by the Planning Commission Prime Minister Manmohan Singh has directed Planning Commission to aim at spending $1 trillion during the for infrastructure investments 12th Five Year Plan, roughly 50% of which will be private sector investment. under the Eleventh Plan stands Infrastructure finance companies (IFC) are being included in the category of non banking finance at $515 bn. It aims to more company (NBFC) by RBI. The IFCs would require a capital adequacy ratio of 15% and the similar criteria than double investments in core of NBFCs would be applied to IFCs as well. Further, RBI stated that at least 75% of the assets of these infrastructure sectors covering institutions should be used in infrastructure and their net owned funds should be $64.6 million or more. The power, telecom, transportation infrastructure sector seems to have emerged as a favorite for the private equity (PE) in 2010. According and irrigation to an estimated to Venture Intelligence data, till June 2, 2010, there have been 19 deals in this sector at an approximate $469 billion as compared to investment of $1.1 billion, as compared to 14 deals with an investment of $257.5 million during the same the actual investment of $198 period last year. The county is expected to require investments worth around $1 trillion in the sector billion in the tenth five year during 2010-2019, with roads needing $427 billion, power $288 billion and railways $281 billion, as per plan. Based on initial estimates Goldman Sachs. by Planning Commission for The government has announced various policies in core sectors providing a blueprint for the development the Twelfth Plan Period, total of the sector. While presenting the Union Budget this fiscal, the Finance Minister had announced the investment in infrastructure allocation of $37.7 billion, around 46% of the total plan outlay of $81 billion for 2010-11 to infrastructure is estimated at $1025 bn. This sectors. In the last fiscal, this proportion was about 30%. target is ambitious, and given the scale of the financing required, period. The factors which determine the lenders capacity increasingly dependent upon private sector participation via to lend for infrastructure projects are thus tenor of the loan, PPPs. The plan anticipates that the private sector will account exposure to the group as well as the sector, risk appetite of the for nearly 50% of infrastructure investment as against 36% in banks as infrastructure projects carry significant execution risk. the eleventh five year plan. That in turn implies that the private Further, banks also need to endeavor towards hone their skills sector will invest $512 bn over the five year period or about $100 in appraisal and risk management of projects. bn annually. Assuming that equity will fund 25-30% for this $100 bn annually, this means a $25-30 bn equity infusion each Are the government polices conducive for the growth of the year by the private sector. Currently it is being witnessed that infrastructure sector? the key hurdles in infrastructure development are not paucity Sudarshan: The government of Indias proactive endeavor of funds but lack of bankable projects with acceptable risks and to raise capital for infrastructure development and to usher in lack of vibrant and deep debt market to take out bank finance at reforms for private sector participation needs to be commended. longer end. A number of recent initiatives by RBI and the government Although the financial institutions and banks may have enough and several in the pipeline should render infrastructure funds, which factors would determine lenders capacity to lend growth story as an attractive proposition for investment. The for infrastructure projects? establishment of Cabinet Committee on Infrastructure (CCI), The fund infusion into infra projects is expected primarily PublicPrivate Partnership Appraisal Committee (PPPAC) & to be channelized through commercial banks. However banks Empowered Committee/ Institution (EC/EI) for streamlining are systemically constrained via adherence to exposure norms and simplifying the appraisal and approval process of PPP besides CRR and SLR stipulations. The exposure limits set by project along with the setting up of Viability Gap Funding the banks as well as statutory allocation of 40% of the lending (VGF) for enhancing the financial viability of competitively to priority sectors such as agriculture and small scale industries, bid infrastructure projects are some of the initiative that will renders a ceiling on the lending capacity/funds availability to catalyze infrastructure development. The government has also infrastructure projects. Further, infrastructure financing brings mandated specific financial institutions like India Infrastructure forth additional risks of asset liability maturity mismatch in Finance Company Limited (IIFCL) for refinancing existing loans terms of requiring long term financing to match the payback and providing further support to new projects. Certain other

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policy support from RBI such as take out financing of rupee loans through external commercial borrowings, allowing infrastructure finance companies (IFCs) to raise funds through ECBs without prior approval and introduction of infrastructure NBFCs would not only ease any liquidity pressures faced by commercial lending institutions but also help in quicker financial closures at cheaper costs. How would the asset liability mismatch factor impact the financial institutions and banks lending to infrastructure projects? Currently almost 85% of the infrastructure projects are being financed through commercial banks. In addition to limitations in terms of overall exposure for a sector / corporate group, banks also carry significant ALM risk while funding infrastructure projects. This stems from the fact that banks deposits usually have a 2-5 years maturity vis--vis long term funds requirement of around 14-15 years for financing infrastructure projects. However certain recent initiatives directed towards take out financing and setting up of infrastructure debt fund going forward will ease off the situation for banks. How the Indian financial institutions and banks are positioned at present compared to the banks in US, UK and other similar countries to finance infrastructure projects? India is still evolving in terms of infrastructure development to be at par with the developed economies of US and UK which bespeaks the potential scale and scope of development embedded in our economy going forward. The Indian banking sector in the past has been well insulated against the financial crisis still lurking over other economies and notwithstanding certain systemic constraints is currently well poised to catalyze the growth story. However to bridge the chasm between us and the developed economies, in addition to a fortified banking domain there is also need for structural reforms coupled with development of a more robust bond market. We should learn to leverage on the valuable experiences of other developed markets. For example in USA project finance bonds, mostly issued as municipal bond have been a large source of infrastructure capital and further penetration of bond insurance as a credit enhancer have led to increased off-take of such bonds. Similarly in Malaysia development of a vibrant bond market has contributed more than 30% of the total infrastructure investment since 1991. The availability period for infrastructure project funding covers around 80% of the concession period in developed nations, while it correspond to around 50% in the Indian context. It clearly demonstrates the necessity for establishing a more matured and vibrant debt market, developing credit enhancement measures for infrastructure loan/paper and ability to provide longer tenor loan as a key constituent for sustaining the growth in infrastructure segment.
mehul@bankingfrontiers.com

NEWS

CAPEX

3 Jayaswal Neco plans major expansion


JNI announced its full debt tie up for expansion of `3300 cr in steel, mining and captive power projects. The company has commenced planning and implementation of its expansion of 100,000 tonne coke oven plant, steel melt shop by 450,000 tonne, rolling mill by 350,000 tonne, setting up of 300,000 tonne sponge iron plant and 62MW captive power plants, development of its non coking coal mines along with 3 mn tonne coal washery and iron ore mines in Chhattisgarh and coking coal mines with 1 million tonne coal washery in Jharkhand.

3 Coca Colas capex plans on despite sales dip


Coca Cola India, having grown in the last 17 consecutive quarters, is going ahead with its capacity expansion plan, despite a dip in demand due to heavy monsoon followed by an intense winter season. The company is investing $250 mn in India for the next three years. Coca Colas largest bottler in India, Hindustan Coca-Cola Beverages, has announced to set up a new plant in Karnataka making an investment of $50 mn. Coca Cola India is also planning to tie-up with Jain Irrigation Systems to source orange pulp in India. It plans to foray into the 100% market under its existing Minute Maid brand by 2011.

3 Eicher plans brand sales and outlets


Eicher Motors plans to start its own branded sales and service outlets in India. The company has formed an equal commercial vehicle joint venture with Volvo of Sweden called VE Commercial Vehicle Ltd (VEVC). VEVC plans to take its dealership network to 225 in 2011 from the current 200 distribution outlets and conceptualize new dealerships to offer a new experience to its customer. VECV is gearing up for expanding its capacity by 25% to 60,000 units a year with a cumulative investment of 500 cr in 2011-12.

3 GVS Pharma plans `35 cr capex


Mumbai-based Bliss GVS Pharma, a 26-year old fast growing export-oriented company, has been ramping up its manufacturing capacities to cater to the increasing demand for suppositories. Its new plant in Thane, meant for production of suppositories, will be fully commercialised by September 2011. The company has planned a capex of `35-40 cr in FY11 and FY12, respectively. It is also considering newer opportunities in manufacturing steroidal suppositories, ointments and tablets in the next fiscal year.

3 Capex for current year at `4008cr: NHPC


NHPC has achieved in generating around 16,000 mn units in the first nine months, which is around 10% higher than the previous year. In 2011, it has targeted to complete six projects of 1,212 MW. The capex plan for the current year has been revised to `4,008 crore, because the company was expecting the government approval of one or two projects which have been slightly delayed. The annual financial target for the year is 17,000 mn units.

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