A Study of alternative ways of Financing Infrastructure Projects in India

Dr. Vinay Kandpal,

Assistant Professor,
Department of Accounting & Finance,
University of Petroleum & Energy Studies, Dehradun
Email: vinayaimca@gmail.com
Dr P C Kavidayal
Professor and Head, Department of Management Studies,
Bhimtal (Kumaun University, Nainital)
Email: pkavidayal@gmail.com

Dr Vikas Tyagi
Assistant Professor,
Faculty of Management Studies,
DIT University, Dehradun
Email: vikastyagidit@gmail.com

Abstract
Purpose: This research work examines the diverse alternatives for advancing funds for different
infrastructure projects like construction of metros, high speed Bullet Trains and smart cities to
name a few. It further puts emphasis on the importance of infrastructure investment which leads
to achieving development and border social objectives.
Design/methodology/approach: This reaserch is based on the review of secondary source of
information obtained through websites of Government of India, articles and research papers
written in Journals, Magazine and Newspapers.
Findings: Government of India has taken several steps for financing infrastructure projects
through cash and warrants. The World Bank along with other financial institutions and state
owned infrastructure banks could play a significant role in the financing of infrastructure projects
in India. There is a need to encourage private sector participation and ensure strict regulatory
measures to attract private capital, which cannot be understated considering the huge pressure on
capital requirement for investment projects. Pension funds, Municipal Bonds and Viability Gap
funding could also be used.
Practical Implications: It could be useful for academicians to pass on the information to the
future managers as well as for practitioners and policy makers as Financing of Infrastrucrure
projects is a major issue since Banks are facing problems of NPAs by corporate houses.
Originality/value: The literature review on the above topics are researched in Indian context
because it could be useful for Infrastructure development in India.
Keywords: Infrastructure finance, land acquisition, financial institution, investment projects.
Introduction:
High Indian population is setting the groundwork to become a knowledge based society. While
urban population is, currently, around 31% of the total population, it contributes more than 60%
of India’s GDP. It is projected that contribution will increase to nearly 75% of the national GDP
in the next 15 years. Smart cities are emerging fast and they put in new practices and services
which highly impact policy making and planning, while they co-exist with urban facilities. It is
now needed to understand the smart city’s contribution in the overall urban planning and vice
versa, to recognize urban planning offerings to a smarter city context. Urban planning
dimensions are pulled from the European Regional Cohesion Policy and they are linked with
smart city’s architecture layers. Smart is not just about technology-enabled, but also about
power, water, transportation, solid waste management and sewerage. While the smart city is an
area of opportunity for infrastructure companies and developers, it's a long-term project that will
need no less than 20 years. Many countries have shown interest already including Japan, which
is keen on developing Varanasi as a smart city, and Singapore, which has indicated Andhra
Pradesh's new capital as its choice. France, UK and the US are keen as well, it is learnt.
Infrastructure funding is characterized by non-recourse or limited recourse funding, large scale
investment, long gestation period, high initial capital, low operating cost, repayments from the
revenues generated from the project. Typically, government has been the sole financier of these
projects and has been responsible for implementation, operations and maintenance of these
projects. Nevertheless, government solely will not be able to satisfy the rising funding
requirements. Thus the government has taken various steps for attracting private participation in
funding capacity building by way of Public Private Partnerships (PPP), commercial banks’
lending, take out financing, infrastructure financing institutions, infrastructure debt funds,
external commercial borrowing, foreign direct investments etc. and has been extending tax
holidays to make funding feasible for lenders and borrowers. To stimulate public investment in
infrastructure, a special purpose vehicle – India Infrastructure Finance Company Limited
(IIFCL) was set up for providing long-term financial assistance to infrastructure projects.
Review of Literature:
S. No. Title Author Publication Conclusion
1 An Exploratory Swarupa International Journal of Science and Research
Study on Panigrahi and (IJSR) ISSN (Online): 2319-7064 1. Public private partnership model is the best
Infrastructure Dhananjay Beura model as infrastructure is concerned.
Financing in India (2015) 2. The effectiveness of this depends upon the
maturity of domestic bond markets &
infrastructure pricing policy.
3. This paper discovers inadequate allocation of
fuel to the power stations, delay in environment
clearances, issues in the land acquisition, the
absence of a credible dispute resolution
mechanism is the technical barriers of
investment in infrastructure.
4. This paper suggests setting up an
infrastructure development fund for those
infrastructure sectors in which private
participation is negligible. In addition, company
act 2013 should be amended for more
participation of corporate sector in infrastructure
development.

2 Long Term Sidharth Sinha W.P. No.2014-03-23 1. Life insurance and pension funds are the
Financing of March 2014-IIM-A major sources of long term finance.
Infrastructure 2. Banks can at best be expected to provide short
term financing during the construction period.
3. To the extent pension and insurance funds do
not have their own due diligence capabilities for
infrastructure projects, Infrastructure Finance
Companies (IFC) and Infrastructure Debt Funds
(IDF) can provide such services.
4. In addition, if the infrastructure projects do
not meet the minimum rating requirements, then
the Infrastructure Investment and Financing
Company Limited (IIFCL) can provide credit
enhancement for the bonds issued by such
 projects.
5. The success of these initiatives will now
depend upon the ability of the government to
generate a supply of PPP projects in an
environment of policy certainty.

1. There is a requirement of a well developed

3 Critical Success Lam Patrick T, Journal of Management in Engineering debt market for the issue of debt instruments by
Factors for Bond Chiang Y. H. and SPVs.
Financing of Chan Stephen H, 2. Raising funds by the issuance of bond has
construction (2011), become a difficult task
Projects in Asia
4 Identifying Main Ada Karina WORKING PAPER NO. 9, 2011- 1. Governments are increasingly relying on
Sources of Izaguirre and PPIAF-World Bank Private Participation in Infrastructure
Funding for Supriya Prakash arrangements to attract private investment and
Infrastructure Kulkarni financing to infrastructure sectors.
Projects with 2. This pilot study aims to fill that gap by
Private providing data on sources of funding in PPI
Participation in projects in developing countries to the extent
Developing that such information is available in public
Countries: A Pilot information sources.
Study
5. Smart India will be Karuna Gopal constructionopportunities.in 1. Global financing is one of the biggest
ushered in sooner (2014) challenges for development of smart cities.
than we believe is Funding of smart cities can be achieved by both
possible  public and private sector financing.
2. The development of smart cities is accepted
as an investment principally in the emerging
market.
3. For some projects the government may have
to provide the seed capital through direct public
financing or state-owned bank and then after the
completion of the initial development phase
capital can be attracted from private developers
and third parties.
6 Planning Smart Ryser et al http://www.corp.at/archive/CORP2014_115.pdf 1. The paper explores the belief of “smart city”
Cities -Sustainable, (2014) by contrasting and comparing a narrow with an
Healthy, Liveable, eclectic understanding of “smart cities” and by
Creative Cities or placing the concept of “smart city” into the
Just Planning context of certain city typologies engendered
Cities? over the last few decades.
2. It considers the research, debates, government
policies and declarations of the industry to
analyze the contributions of smart cities to the
existing urban policies and its planning.
7. Finance and Engel, Fischer, http://www.rba.gov.au/publications/confs/ Banks perform an observing role by exercising
Public-Private and Galetovic 2014/pdf/engel-fischer-galetovic.pdf tight control over changes to the project contract
Partnerships (2014) and by analyzing the behavior of the SPV and
its contractors.
8. Smart cities Achaerandio, R., http://www.lacatedralonline.es/innova/system/ 1. The paper emphasizes on the need of vision,
analysis in Spain Bigliani, R., Document/attachments/12501/original/ adequate financial planning, stake holder’s
Maldonado, G. Smart_Cities.pdf participation and influential and strong
G. and Curto, J. leadership for the development of smart cities.
(2011). 2. The critical areas identified for the successful
development of smart cities are 1) establishment
of public –private partnership 2) development of
viable funding strategy 3) improving the
efficiency of internal processes 4) enhancement
of innovation in the city and 5) inclusion of
stakeholders.
3. The paper suggests the financing mechanisms
for smart cities which consist of structural funds
for development up to 43.2%, 36.4% of the total
requirement through public private partnership
and the rest 27.2% through city budgets and
private investments. Generating the correct
ecosystem of partnerships and alliance is a
crucial success aspect, and after being proposed
in the plan phase, this requires to be concretized
and properly established during the design
phase.
9 Introduction: A. Akintoye and Blacwell Publishing Ltd., 1. Implementation of projects under the
perspectives on M. Beck (2009) conditions of Public–Private Partnership (PPP)
PPP policy, is a promising mechanism for attracting private
finance and funds.
management 2. PPP is a legally executed mutually beneficial
cooperation of public bodies and authorities
with business entities in respect of projects that
are in the field of direct state interest and control
for a certain period of time.
3. PPPs have become an increasingly popular
means for procuring public services and
infrastructure
10. Arrangement of Vialeta Khmel IATSS Research 1. The purpose of the financial strategy is the
financing for and Shengchuan provision of capital for the objectives of each
highway Zhao (2015) stage of the project implementation from the
infrastructure most appropriate sources with the most
projects under the appropriate financial instruments.
conditions of 2. The capital from different sources should be
Public–Private applied with suitable financial instruments at the
Partnership most appropriate time during the life cycle of
the project.
3. The strategy creates a positive credit history
and a balance of the benefits and costs
associated with debt financing.
3. For adjustment of the financial strategy it was
suggested that using the algorithm of the funds'
source selection helps to make a choice in favor
of a source on the basis of several criteria and is
aimed at the minimization of costs for debt
service.
11. Local Sources of Jacqueline Irving Policy Research Working Paper 4878 1. External financing can offer an alternative
Financing for Astrid Manroth The World Bank Africa Region African source of financing of the infrastructural
Infrastructure in Sustainable Development Front Office March projects, access to which becomes particularly
Africa: A Cross- 2009 critical for countries that have poor
Country Analysis infrastructure and underdeveloped local
financial markets.
 2. These countries tend to have lower
macroeconomic performance and overall
macroeconomic stability, rendering access to
private sources of external finance prohibitively
costly or impossible.
3. In such cases, official development assistance
(ODA) is often the only available source of
external financing for infrastructure
development.

12 Infrastructure Daniel Platz DESA, 1. Build the case for more research into sub
finance in Working Paper No. 76 ST/ESA/2009/DWP/76 sovereign bond issuances
developing July 2009 2. Fill an important research gap in providing
countries— the some global systematic data on sub-sovereign
potential of sub- bond issuances,
sovereign bonds. 3. Develop a supply and demand side
framework for analysis of the market for sub-
sovereign bonded debt in developing countries
and
4. Apply this framework to Mexico, India and
South Africa. Finally, it intended to draw
lessons for countries seeking to promote
markets for sub-sovereign bonds.
13. Infrastructure Stephany G-24-Global Green Growth Institute & 1.MDBs play a positive role in co-financing
Finance in the Griffith-Jones The Intergovernmental Group of Twenty Four infrastructure.
Developing World and Matthias on Monetary Affairs and Development 2. Utilizing a certain share of emerging
WORKING Kollatz WORKING PAPER SERIES countries’ existing foreign currency reserves in a
PAPER SERIES new MDB can be a strongly positive means to
Multilateral channel resources for the benefit of global
Lending growth prospects.
Instruments for
Infrastructure
Financing
14. Understanding the Torsten Ehlers BIS Working paper, Monetary and Economic 1. The supply of properly structured projects
challenges for Department August 2014 seems to be a major hurdle in channeling
infrastructure available finance into infrastructure.
finance Overcoming this requires substantial expertise.
2. Countries and local governments which have
established, proven mechanisms for
infrastructure projects, for instance by
introducing binding legal frameworks for public
private partnerships or by setting up specialized
government agencies, tend to be more
successful in closing infrastructure projects.
3. The promotion of private sector infrastructure
finance hinges above all on a sensible transfer of
risks and returns.
Result and Discussion:
Commercial bank financing supplemented with government financial back up in the form
of viability gap funding, soft loans, revenue shortfall loans and funding from multilateral
financial institutions, funds from Institutions such as  EXIM Bank, SFC, IDBI, IRFC, IIFCL
provides significant liquidity to the infrastructure financing market. However, these financing
options have not been able to bridge the gap. In many situations PPP infrastructure projects have
not been able to come off the ground and attain financial closure because they have not been
deemed bankable.
It has often been felt that robust financing is key to more robust infrastructure. The
investment have been already made by big corporate houses in Real Estate and Infrastructure
projects, thus an equity portion of the fund has been utilized and most of them are blocked due to
various issues like land Acquisition, environmental clearances etc. Now Infrastructure
Companies are highly leveraged as major equity is exhausted in ongoing projects. The important
factors affecting project completion are time overrun and cost overrun. There is a lack of long
term financing instruments.
The majority of the financial institutions is facing the problem of Non-Performing Assets
and it is acting as a constraint in attracting loan or finance. Non-Performing Assets have shown
an increasing trend recently and is a cause of concern. Banks are not looking to finance long term
funds and thus stopping further fund allocation. The public private partnership is facing problem
of construction and operational risk.
About 75% of the investment in Infrastructure projects comes from Debt financing. For
financing infrastructure projects there is a need to go for Viability Gap Funding or Equity
support. There is a need to develop a vibrant bond market, which includes corporate and
municipal bond. Municipal bonds issued by urban local bodies could be explored as an important
source of financing the requirement of urban infrastructure development. The municipal bond
market needs to be developed by providing a robust regulatory framework and possible, tax-free
status. The infrastructure debt fund is also an option for financing infrastructure projects. A lot of
players from foreign capital markets are looking for investment options due to slowdown of
other economies and these sources need to be tapped. Make in India campaign started by the
Government of India could be an attractive investment option for FIIs. The maturity and the
viability of projects should be taken care of while approving loan.
 Power sector companies are facing problems of foreign exchange risk and fuel cost risk.
Conclusion:
India’s smart city program hopes to revolutionize city life and improve the quality of life
for India’s urban population. Smart City would require smart economy, bright people, smart
organization, smart communication, smart engineering, smart transit, fresh environment and
bright living. Nevertheless, with mass migration leading to basic publications, like water
shortages and overcrowding, the rate at which these cities will be developed will be the key.
Several initiatives are being led by the Government of India to convert 100 Cities into Smart
Cities. Government to Actively Use PPP Route and Encourage FDI for Effective Implementation
of Smart Cities Project in India. The government is concentrating on encouraging Public Private
Partnership (PPP) for successful implementation of the smart city project in India. Financial and
IT services sectors are on the priority list of the government to garner investments from leading
companies such as Cisco, EMC, GE, IBM, Bajaj, etc. in coming years. Few of the major
companies that are currently involved in project planning of these cities include Halcrow,
Synoate, Knight Frank and AECOM India. The real challenge before the Government is to build
inclusive smart cities for all its residents, regardless of whether they are rich or poor. Creating a
smart city isn’t just about creating the physical infrastructure — roads, clean water, power, and
transport. It is desired that public private partnerships (PPP) will deliver, but the mechanism
appears to require a lot of plucking in order for it to work, a fact recognized in the recent Budget.
The big challenge will be to create self-sustaining cities, which create jobs, use resources wisely
and also train people. The idea should be to make cities work for the masses. India has to now
take an important decision in the context of creating smart cities. It has to determine if it desires
to opt for making new cities or upgrade existing ones.
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