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Infrastructure finance
INFRASTRUCTURE
FINANCE
Presented by :

Prashant G Sarfare 48
 Infrastructure finance
1. Introduction
2. Indian Infrastructure Sector
3. Policy frame work
4. Source of Fund - Funding Agencies
5. Source of Fund - Type of Fund
6. Various Models for Financing Infrastructure
7. Challenges and Opportunity
8. Case Study : Noida toll bridge company Ltd
9. Conclusion
 Introduction
Definition of ‘infrastructure lending’
• Any credit facility in whatever form extended by lenders
(i.e. banks, FIs or NBFCs) to an infrastructure facility as
specified below falls within the definition of
“infrastructure lending”.
• In other words, a credit facility provided to a borrower
company engaged in:
· developing or
· operating and maintaining, or
· developing, operating and maintaining roads , ports,
airports etc.
Development of Infrastructure in India
Government Funding
• Entire investment, construction, operating, and maintenance by
government
– Direct budgetary devolution (tax-payer money)
– Debt raised against government guarantees, (and “letters of comfort”)
– Financing primarily by HUDCO and LIC
– Loans from International Funding Agencies like OECF(JBIC),
World Bank, ADB, KfW, USAID, etc

• Financial requirements are increasing way beyond direct

budgetary/ guarantee capacity
• State budget deficits and statutory guarantee limits constraining
State Gov. funding capacity
 Estimated investment flows to various sectors
(Source : Planning Commission)

Sectors Tenth Plan (2002-07) Eleventh Plan (2007-12)

Rs(Crore at 2006 – 07 Price)

Electricity, Roads & Bridges 436742 980677

Telecommunication 103365 258439

Railways, Irrigations, Water Supply &

295964 658839
Sanitation

Ports & Airports 20842 118963

Storage & Gas 14532 39233

Total 871445 2056150

 Necessity of private particiation
• The infrastructure requirements of india are very large and are increas­ing
rapidly because of strong economic growth.

• Countries throughout the region have recognized that the public sector is
unlikely to mobilize the required resources and that the private sector must
be brought in as a supplementary source of finance.

• Private sector participation in infrastructure is desirable not only to ensure

a larger flow of resources but also to introduce greater efficiency in the
supply of these services.

• The explosion of global capital markets and the associated expansion of

private capital flows to emerging market economies provide new
opportunities to finance infrastructure projects in these countries, if
projects can be made com­mercially viable.
Increased emphasis on Private Sector Participation
in Urban Infrastructure
The imperative need for
Private Sector Participation
for:
• EXTENDED RESOURCES

• STATE-OF-THE-ART
TECHNOLOGIES
• EFFICIENT PROJECT
MANAGEMENT /
MAINTENANCE
 Advantages
1. Cost Efficiency:
privately implemented and managed projects are likely to have a better record of delivering services
which are cheaper2 and of a higher quality.3 The India Infrastructure Report (2003) estimates that the
Indian economy’s growth rate would have been higher by about 2.5% if the delays and cost overruns
in public sector projects had been managed efficiently.4 The report goes on to state that the
predominant cause for such delays / overruns was not under-funding of the projects, but arose, “on
account of clearances, land acquisition problems, besides factors internal to the entity implementing
the project”.
 
2. Equity Considerations:
since it is hard to argue that every infrastructure project uniformly benefits the entire population of
the country, it may be more appropriate to impose user charges which recover the cost of providing
these services directly from the user rather than from the country as a whole (the latter is the effect if
the government builds the project from its own pool of resources). If users are to be charged a fair
price then the project acquires a purely commercial character with the government then needing to
play the role only of a facilitator.
 
3. Allocational Efficiency:
Since users are likely to pay for services that they need the most, private participation and risk-return
management has the added benefit that scarce resources are automatically directed towards those
areas where the need is the greatest.
 
4. Fiscal Prudence:
Both at the centre and state levels, for a variety of reasons, there is a growing concern that the
absolute and relative (to GDP and GSDP respectively) levels of fiscal deficit are high and that
incurring higher levels of deficit to finance infrastructure projects is infeasible.8 Given the strength of
these arguments, the government has made several attempts to create the preconditions for a
sustainable and scaleable involvement of the private sector in the development of infrastructure
within the country. These have included promotion of DFIs such as idbi ifci fc idfc uidf etc
 Possible option - variations

Multilateral Agencies Government

(World Bank / IFC / ADB)
Subsidies /
Grants

Guarantees / Risk
insurance / funding Equity
Project Project Sponsor

Syndicated
Export Credit Agencies funding

Guarantees / credit Commercial Banks

enhancement
 Characteristics of infrastructure finance
• 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.

• Larger Amounts:

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.

• 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,14 environmental surprises,15 technological obsolescence (in some industries such
as telecommunications) and very importantly, political and policy related uncertainties.
 Characteristics of infrastructure finance
• 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
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 inflation

•  Non-recourse or limited recourse financing,

financing as the borrower has a limited liability. The security taken by the lenders is largely
confined to the project assets. lender can only be repaid from the revenues generated by the
projects requiring to the large scale of investment

• Credit appraisal
The lenders finance the project looking at the creditworthiness of the project, not the
creditworthiness of the borrowing party. The repayment of the loans is made from the earnings
of the project.
 Domestic sources
Equity
Domestic developers (independently or in
collaboration with international developers)
Public utilities (taking minority holdings)
Other institutional investors (likely to be very
limited)
Debt
Domestic commercial banks (3-5 years)
Domestic term lending institutions (7-10 years)
Domestic bond markets (7-10 years)
Specialized infrastructure financing institutions
External sources
International developers (independently or
in collaboration with domestic developers)
Equipment suppliers (in collaboration with
domestic or international developers)
Dedicated infrastructure funds
Other international equity investors
Multilateral agencies (International Finance
Corporation, Asian Development Bank)
International commercial banks (7-10 years)
Export credit agencies (7-10 years)
International bond markets (10-30 years)
Multilateral agencies (15-20 years)
Bilateral aid agencies
 Sources and methods of financing
• Equity financing
Project sponsors are an important source of equity, but they contribute only
part of the total equity in most cases. Although preconstruction, or
developmental, costs represent only a small fraction of total cost in
infrastructure projects, they can nevertheless run into several millions of
dollars, all of which must be financed by equity provided by project
sponsors
• External debt financing
• Export credit agencies.
have been the domi­nant source of international capital to finance
infrastructure projects. In recent years export credit agencies
have tended to guarantee bank loans. Traditionally, they funded
public sector projects backed by sovereign guarantees, with
some willingness in recent years to lend against guarantees of
commercial banks
• International commercial banks
• International bond markets.
• Multilateral institutions
 Domestic debt financing

• Development of domestic debt market

• Tax incentives for infrastructure financing.
• The role of specialized financial institutions
IDFC, IIFCL etc
• Take-out financing ,
• Liquidity support,
• Securitization
• Direct financing,
• The role of government guarantees
 Types of Financing by Banks
• banks may extend credit facility by way of working capital
finance, term loan, project loan, subscription to bonds and
debentures/ preference shares/ equity shares acquired as a part
of the project finance package which is treated as "deemed
advance” and any other form of funded or nonfunded
• Take-out Financing arrangement
• Mechanism to avoid asset-liability maturity mismatches / liquidity.
• Banks have arrangement with IDFC or any other FI. Transfer the
outstanding in Banks Books on a predetermined basis.
• IDFC/SBI devised different take out financing structure
• Inter-institutional Guarantees
• Financing promoter's equity
 FDI in Infrastructure
• Foreign Direct Investment(FDI) could be permitted through:
– Financial Collaborations
– Joint Ventures / Technical Collaborations
– Capital Markets via Global Depository Receipts (GDRs / Euro issues)
– Private Placements or Preferential Allotments
• In India, FDI upto 100% permitted in airports (beyond 74% with
approval) and Mass Rapid Transit Systems.
• FDI upto 100 % permitted in
– Integrated township development including housing, commercial
premises, hotels, resorts
– City and regional urban infrastructure facilities
– Manufacture of building materials
– Development of Land with allied infrastructure as part of
integrated township development
• Enabling guidelines required to prevent capital flight (lock in period)
and regulate repatriation of profits in FDI
 Financing Options Matrix
S. Characteristics of Issue(s) Options/ Alternatives
No Infrastructure
Projects
1 Capital intensive Scarcity of • Multilateral financing
Resources • Consortium/Syndication
• Federal Govt. Guarantee with
financial support
2 Long Gestation Asset Liability • Take out financing
period Mismatch • Long Term Borrowing
• Securitisation of receivables
3 Working Capital Overlapping of • Flexible financing delinking
requirements based project construction stage from
on Project Phasing implementn post-construction phase
schedules • Cash flow financing
4 Inadequate returns High cost of • Tax Incentives
and uncertainty on funds, • Priority Sector Lending
returns Defaults/NPA • Sub-ordinate debt finance
risk • Firm tariff policy
• Escrow Accounts
• Power Purchase Agreements
• Sinking funds
 Financing Infrastructure– Various
Models
• 1. Government Funded and Owned
–Mostly it funds socially and politically important projects,
project where user charges are not defined
–Implementing agencies - R&B Dept., DoT, PSUs, etc.
–Increasingly going for EPC route
–Example : Irrigation, rural roads and electrification.

• 2. Private Funded and Owned

–Govt. issues License, Allots Resources.
–Licensee develops provides service and charges open
market rates dictated by competition.
–Example: Telecom, Mineral Mining, Airline etc
Financing Infrastructure– Various Models
3. Public Private Partnership (PPP)

• BOOT
i) Annuity Based Model
ii) Toll based model
• BOO
–Viability GAP Funding
–Revenue Sharing Model
–Tariff based bidding

• OR A COMBINATION OF ABOVE MODEL IS

POSSIBLE
Financing Infrastructure– Various Models

BOOT:

• Concessionaire to Build, Own, Operate and Transfer the infrastructure

facility.
• Concessionaire to collect pre defined user charges (toll.fees, etc.)
• In case of annuity model the investor would be paid a composite payment
in 30 equal semi-annual installments over the operations period during
concession period to recover cost and profit.
• Demand risk largely transferred to concessionaire. Hence accurate demand
forecast is must.
• Concession period ranges from 20-30 years.
• Successfully implemented in roads and ports sector.
Financing Infrastructure– Various Models
Revenue Sharing Model

»Projects are awarded based on how much % of revenue will be shared by

the concessionaire. Highest bidder wins.

»Upfront payment is not required and govt. will be paid from

accruing revenue.

»More suitable for brown field expansion , where government

hand over existing facility to the winning bidder.

»Mumbai and Delhi airport modernization has been carried out on this
model
Financing Infrastructure– Various Models

Tariff based bidding

• Tariff based bids are invited by government to supply a

particular service or facility for fixed tenure and fixed
quantity.
• Lowest bidders is awarded the contact. Demand and purchase
is ensured in terms of PPAs (Pre Purchase Agreements)
• Bidders risk is limited to implementation and operation.
• There is no upper limit set for RoI or profit.
• Success fully implemented in Electricity generation and Water
treatment sector
Financing Infrastructure– Various Models

Viability GAP Funding (VGF) :

• This model is similar to BOOT Model, But here govt. agrees

to provide some fund to private bidders
• This is generally done for the projects which are otherwise not
feasible.
• Bidders asking for least VGF will win. Cases are there where
VGF projects went at (–Ve) negative grants. i.e. bidder agreed
to pay
• fixed sum for award of contarct
 Parties to Infrastructure Finance Process
• Sponsors :
responsible for converting a concept into a project and have a role in
setting up a project vehicle, identifying and recruitinmg right managerial
talent to implment and to run the project and finally subscribing to a
sifnificant proportion of equity in the project vehicle .
• Project vehicle (SPV):
The SPV is responsible for delivering a bankable project during the
financing phase, implementing the project and thereafter operating it in a
manner that is finacially viable.
• Project Lenders :

Project lenders provide debt to finance the construction of the project.

• Government:
The government is a keay party . it provides a Concession to the SPV to set
up the project and ensures that a proper legislative and regulatory
framework.
• EPC contractors and O & M:
 Infrastructure finance process

SPONSOR/S

SPV LENDERS

P
O
W EPC
E
R FUEL SUPPLY

P O & M
L
A OPERATIONS
N
T

S
A P
L O
E W
E
O R
F

SEB / GOVT.

PROCESS OF INFRASTRUCTURE FINANCE

3 Tier payment system
Direct payment
SPV presents invoice SEB
within specified

default by SEB

Presentation to bank under LC payment receival

tire I ( 1.5 months avg billing amt.) by SEB

LC non
operative

tier II Dedicated HT / circle

specified escrow

Escrow
non
operative

tier III
Govt guarantee

3 TIER PAYMENT SYSTEM

 Some Innovative ‘User pay’ Instruments
Infrastructure Innovative user pay Instruments
Type
Advance registration charges, Connection charges,
Enhancement of water tariff, Water benefit tax / water tax,
Water Supply Betterment charges,Development charges, Utilization
from other sources such as octroi, property tax.sale of
plots etc. and Charges from water Kiosks

Connection Charges, Sewerage Cess Tax, Conservancy

Sewerage Tax, Sale of Renewable waste, Sale of Sludge and Sale
of Nutrient rich wastewater.
Collection Charges, Cess, Sale of Renewable waste, and
Solid waste
Fines for dumping waste.
Roads / Fly-overs Toll Tax, Land as a Resource and Advertising Bridges
Airports / Rly. Surcharge on tickets,using land as a resource, Bus Toll
Stations / Tax, User, Charges for transportation terminals and
Terminals advertising rights
Measures taken by the Reserve Bank of India /govt
Several new initiatives have been initiated by the central government and the
Reserve Bank in the recent years. RBI initiated a number of regulatory concessions
for infrastructure finance, such as

a) allowing banks to enter into take out financingarrangement,

b) freedom to issue long term bonds by banks for financing infrastructure,
c) relaxation of single and group borrower limit for additional credit exposure in
the infrastructure sector,
d) flexibility to invest in unrated bonds of companies engaged in infrastructure
activities within the overall ceiling of 10 percent,
e) excluding the promoters’ shares in the SPV of an infrastructure project to be
pledged to the lending bank from the banks’ capital market exposure and
f) permitting banks to extend finance for funding
promoter’s equity where the proposal involves acquisition of share in an existing
company engaged in implementing or operating an infrastructure project in India.
Let me make some additional remarks on two of these areas.
 Privatisation experience in Transportation
• Pali Bye-pass, Rajasthan - TCI
Infrastructure Ltd
• Coimbatore Bye-pass (L & T)
• Karur Bridge on BOT basis by East
Coast Constns & Infrastructure Pvt. Ltd.
• Kemptee-Kalamana Toll Road in Nagpur
• Karur Bridge on BOT basis
• Faridabad Byepass

• NOIDA Toll Bridge Company

• Cochin International Airport
in Joint Sector by CIAL
• Bangalore Airport
• Ports – Pipavav, Positra, Adani,
Kakinada, Ennore, Cochin, Mumbai
 Case Study : Noida Toll Bridge
• Project : Noida Toll Bridge
The bridge was among the first few projects to have been developed as a
Public Private Partnership (PPP) in India
• Purpose : To save the time , distance and fuel consumption for travellers .
• Project Cost : 408 Crores
• Structure : BOOT
• Concession : 30 Yrs.
• Profit : concessionaire (NTBCL) the right to collect user fees to recover
(a) the total cost of the project,
(b) returns on the total cost of the project at a rate of 20% per annum,
over the concession period starting from the effective date.
 Financial analysis
• Project cost : Rs 408 crores. (US$ 100m)
• Equity : Rs 122.4 crore (US$ 30m)
• debt : Rs. 285.8 crore (US$ 70m)
term loans : Rs. 235.8 crore (US$ 58m)
deep discount bonds Rs. 50 crore (US$ 12m)

• The Delhi Noida bridge project is often presented as a path-

breaking project which showed that private capital could
indeed be attracted to provide public infrastructure services in
India
 Conclusion
• Currently, there is adequate liquidity in the system that can
• support financial requirements in the next two to three year for any bankable infrastructure
• project. From a medium term perspective, while finance is surely a pertinent issue, it cannot
• be addressed independently. Addressing other concerns in infrastructure industries like
• defining user cost and a mechanism for their recovery, strengthening the contractual
• framework to speedup project implementations, plugging the loopholes behind the current
• PPP designs, a simplified project clearance mechanism by a centralized authority, etc. are
• perhaps of more importance than financial issues. In the long term, participation of pension
• funds, insurance companies and other long term finance institutions would be essential.
• Progress in these directions could activate infrastructure provisions at a much faster pace
• than is seen now. I hope this convention will deliberate on some of these key issues. As
• growth takes place with the improvement in infrastructure provisions, a number of funding
• issues could be self-correcting. High growth will generate resources for infrastructure
• investment besides pushing for the necessary reforms at the longer end of the financial
• market and products. On the contrary, relying heavily on the banking system without
• BIS Review 14/2010 8
• commensurate reforms in the real economy may not facilitate finance, while running the risks
• from prudential viewpoint.
Thank You
 Case Study : Noida Toll Bridge
• Build-Own-Operate-Transfer (BOOT) basis.

• Sponsors IL&FS, NOIDA and the Delhi Administration (DA)

• SPV NTBCL
• EP C
• O&M Contractor: Intertoll Management Services BV,
Netherlands, a 100% subsidiary of M/s IntertollHoldings (Pty)
Ltd., South Africa