Project Report

On
INFRASTRUCTURE FINANCE IN INDIA
Submitted to university of Mumbai in
Partial fulfilment
Of the requirement of the degree of
TY. BACHELOR OF FINANCIAL MARKETS
Under guidance of
PROF. MRUNMAYEE THATTE
VPMS
K.G. Joshi College of arts
N.G. Bedekar College of commerce
Thane (w)
Academic year: 2015-2016
By:Mahesh Mishra
Roll. No. 43

DECLARATION

I am Mahesh Mishra studying in TY. Financial Markets hereby declares that I

have done my project on Infrastrcture Finance In India. As required by the
university rules, I state that the work presented in this project is original and
genuine to the best of the knowledge.
Whenever references have been made to the work of other, it is clearly indicated
in the source of information in

Student
(Mahesh Mishra)
Place: Thane
Date:

ACKNOWLEDEGEMENT
It gives me an immense pleasure to declare that my project on INFRASTRUCTURE
FINANCE IN INDIA have been prepared purely from the point of view of a students
requirement.
I am indebted to our principal Dr. Mrs. Shakuntala Singh madam for giving such an awesome
opportunity. I am also thankful to our coordinator Mr. D.M. Murdeshwar sir and also Liberian
and my colleagues for their valuable support, cooperation and encouragement in completing
my project.
Special thanks to Prof. Mrunmayee Thatte miss my internal guide for this project for giving
me expert guidance, full support and encouragement in completing my project successfully.
I also take the opportunity to thank my parents for giving me guidance and for their patience
and understanding me while I am busy in my project work.
Lastly, I am thankful to God for giving me strength, spirit and also his blessings for completing
my project successfully.

TABLE OF CONTENTS
Executive
Summary
5

Introduction...6
Features
of
Finance.8

Infrastructure

Sources of Infrastructure Financing in India..10

Growth Potential ...14

Government
Initiatives14

Road
Ahead
..16

Risk profile of infrastructure project..17

Issues & challenges constraining infrastructure funding20
Infrastructure Financing in Other Countries 22
Infrastructure
Financing
Banks.24
Steps in Infrastructure Finance

by

29

Infrastructure finance by L&T infra Finance.32

L&T Infra Overview

commercial

Indias Wind Sector

Lenders Risk Assessment
O&M
Power Evacuation
FINAL OVERVIEW.....47

EXECUTIVE SUMMARY
The fast growth of the economy in recent years has placed increasing stress on
available infrastructure such as electricity, railways, roads, ports, airports, irrigation
and urban and rural water supply and sanitation, all of which already suffer from a
substantial deficit from the past in terms of capacities as well as efficiencies in the
delivery of critical infrastructure services. The economy can get a boost through
improved infrastructure. The implementation of infrastructure projects itself provides
jobs and supports economic development and it contributes to an improved quality of
life for mankind.
As these projects require huge capital investments and the returns are spread over
longer time horizons, financing the ever growing needs of infrastructure projects
remains an area of thrust / concern.
This report throws light on different sources of infrastructure financing available in
India and their exposure to infrastructure projects. The growth potential, government
initiatives and issues and challenges of infrastructure financing sector are discussed in
brief. Steps followed in issuing finance to infrastructure finance projects are discussed
along with different forms of funding available from commercial banks. Bank of
Barodas financing to renewable energy project is taken as sample project and has
been studied in details and major parameters which are considered for loan approval &
further debt servicing are outlined along with project execution details. Finally based
on findings of the study some recommendations are made.

INTRODUCTION

Infrastructure Financing 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. Usually, an Infrastructure project financing structure
involves a number of equity investors, known as sponsors, as well as a syndicate of
banks or other lending institutions that provide loans to the operation.
Large sections of planners and policy makers in the country have argued that there
exists no serious problem of infrastructural deficiency that can not be tackled through
management solutions. All that is needed is to restructure the system of governance,
legal and administrative framework in a manner that the standard reform measures can
be implemented. Reduction of public sector intervention, ensuring appropriate prices
for infrastructure and civic amenities through elimination or reduction of subsidies,
development of capital market for resource mobilisation, facilitating private and joint
sector projects, simplification of legislative system to bring about appropriate land use
changes and location of economic activities etc. are being advocated as the remedial
package (World Bank 1995, Expert Group on Commercialisation of Infrastructure
1996, World Bank 1998). The public sector and other para-statal agencies that had
been assigned the responsibility of producing and distributing infrastructural facilities
have come in for sharp criticism on grounds of inefficiency, lack of cost effectiveness,
resulting in continued dependence on grants for sustenance. Some kind of "financial
discipline" has already been imposed by the government and Reserve Bank of India,
forcing these agencies to generate resources internally and borrow from development
cum banking institutions, and, in a few cases, from capital market at a fairly high
interest rate. This has restricted their areas of functioning and, what is more important,
changed the thrust of activities. Solutions are being found also in terms of their
efficient, transparent and decentralised management of the facilities. With the passing
of the 74th Amendment to Indian Constitution (Ministry of Urban Development 1992)
and corresponding legislations, amendments, ordinances etc. at the state level,
decentralisation has become the keyword in governance. The vacuum created by the
limited withdrawal of the state in the provision of infrastructure is sought to be filled
up also through non-governmental organisations (NGOs) and community based
organisations (CBOs), besides the local authorities. The enthusiasm for the above
package of "management solutions", both among the international as also national
organisations, is responsible for the issues concerning their impact on settlement

structure and access of the poor to the infrastructural amenities not receiving adequate
attention among researchers. However, given the disparity in economic strength of the
towns and cities and their unequal access to capital market and public institutions, this
perspective would enable the larger cities to corner much of the advantage from the
system
Most of the infrastructure projects are to be undertaken through institutional finance
rather than budgetary support. The state level organisations responsible for providing
infrastructural services, metropolitan and other urban development agencies are
expected to make capital investments on their own, besides covering the operational
costs for their infrastructural services. The costs of borrowing have gone up
significantly for all these agencies over the years. This has come in their way of their
taking up schemes that are socially desirable schemes but are financially un
remunerative. Projects for the provision of water, sewerage and sanitation facilities
etc., that generally have a long gestation period and require a substantial component of
subsidy, have, thus, received a low priority in this changed policy perspective.
Housing and Urban Development Corporation (HUDCO), set up in the sixties by the
Government of India to support urban development schemes, had tried to give an
impetus to infrastructural projects by opening a special window in the late eighties.
Availability of loans from this window, generally at less than the market rate, was
expected to make state and city level agencies, including the municipalities, borrow
from HUDCO. This was more so for projects in cities and towns with less than a
million population since their capacity to draw upon internal resources was limited.
These were much cheaper than under similar schemes of the World Bank.
However, such loans are no longer available. Also, earlier the Corporation was
charging differential interest rates from local 3 bodies in towns and cities depending
upon their population size. For urban centres with less than half a million population,
the rate was 14.5 per cent; for cities with population between half to one million, it
was 17 per cent; and for million plus cities, it was 18 per cent. No special concessional
rate was, however, charged for the towns with less than a hundred or fifty thousand
population that are in dire need of infrastructural improvement, as discussed above
The most important development in the context of investment in infrastructure and
amenities is the emergence of credit rating institutions in the country. With the
financial markets becoming global and competitive and the borrowers' base
increasingly diversified, investors and regulators prefer to rely on the opinion of these
institutions for their decisions. The rating of the debt instruments of the corporate
bodies, financial agencies and banks are currently being done by the institutions like
Information and Credit Rating Agency of India (ICRA), Credit Analysis and Research
(CARE) and Credit Rating Information Services of India Limited (CRISIL) etc. The
rating of the urban local bodies has, however, been done so far by only CRISIL, that
too only since 1995-96. Given the controls of the state government on the borrowing
agencies, it is not easy for any institution to assess the "functioning and managerial
capabilities" of these agencies in any meaningful manner so as to give a precise rating.
Furthermore, the "present financial position" of an agency in no way reflects its
strength or managerial efficiency. There could be several reasons for the revenue
income, expenditure and budgetary surplus to be high other than its administrative

efficiency. Large sums being received as grants or as remuneration for providing

certain services could explain that. Political Decentralisation and Investment in
Infrastructure and Basic Services by Local Bodies Earlier, the role of central and state
governments in local affairs was not clearly defined. It consisted of ad-hoc and
fragmented efforts at programmatic level. Since mid eighties, however, a process of
shifting the responsibility to the local level has manifested clearly. Political
decentralisation through Constitutional Amendment Act has been hailed as a panacea
for the problems of infrastructural deficiency in urban centres. It is argued that the Act
enables the local bodies to undertake planning and development responsibility as also
mobilise resources for infrastructural investment. Transferring of responsibilities to
local bodies, without examining their economic base and resource raising capacity or
making provision of adequate transfer of funds, may, however, have serious
consequences. The tax and non-tax revenue together constituted 90 per cent of the
total revenue in case of the former while the figure for the latter was 70 per cent only.

FEATURES OF INFRASTRUCTURE FINANCE

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 long.
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 kilometre of road or a mega-watt of power could cost as much as US$ 1.0 million
and consequently amounts of US$ 200.0 to US$ 250. Million (Rs.9.00 billion to
Rs.12.00 billion) 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. 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.

SOURCES OF INFRASTRUCTURE FINANCING IN INDIA

In first 3 years of eleventh plan, budgetary support constituted ~45 per cent of the
total infrastructure spending. The debt from Commercial banks, NBFCs, Insurance
Companies and the external sources constituted ~41 per cent of the funding while the
balance 14 per cent was funded through Equity and FDI.
Sources of Funds for infrastructure Investment

There has been a rapid growth in bank credit to infrastructure projects with banks
contributing to the tune of 21% of the total investment during first 3 years of 11th five

10

year plan.1 Most of this funding has been provided by Public Sector banks and in
some cases the sectoral prudential caps have almost been reached (especially for
power sector) thus constraining any further lending to these sectors. Banks have
prudential exposure caps for infrastructure sector lending as a whole as well as for
individual sectors
Banks lending towards infrastructure investment

Non banking financial companies (NBFCs)

Over the eleventh plan period, NBFCs lending increased sharply primarily due to
higher demand from power, telecom and roads sectors.

Growth registered by NBFCs towards infrastructure investment and NBFCs

lending
Life insurance Companies

11

Life insurance companies are required to invest at least 15% of their Life Fund in
infrastructure and housing. Investment by insurance companies in 2012 has only been
10% of insurance life fund AUM which indicates further potential to utilize insurance
companies to fund infrastructure development. Moreover insurance penetration is
estimated to continue to rise, with the insurance premium expected to grow from the
current approximate 4% of GDP to 6.4% of GDP by the end of the twelfth plan. This
will generate further potential for infrastructure funding however it will be subject to
management of prudential and regulatory constraints in the sector.
External commercial borrowings (ECB's)
The share of ECB in total infrastructure investments has been recording a decline.
This could be a reflection of the way regulatory environment is viewed by the
international investors. They are not keen on making long term investments in
environments which have regulatory idiosyncrasies. Under-developed financial
markets/products may have also contributed to this drop in ECB funding.

Share of ECBs in total infrastructure investment

Equity
A large part of equity investments relies on foreign investments with domestic
investment institutions not showing significant interest in taking equity in
Infrastructure projects. The equity investment for the twelfth plan period is estimated
to be Rs 4.56 lakh crores.

There are three principal forms of finance for infrastructure service delivery:

12

1. Public Finance: In industrialized countries public finance consists of government

providing equity financing (seed capital, in Chinas terms) through general budget
reserves, earmarked reserves, self-raised funds (e.g. licensing fee, and sale, rental or
leasing of government assets), and intergovernmental grants and fiscal transfers. Debt
financing in the public finance system is through policy loans at concessional rates,
supplier credits, and fixed income securities in the form of tax-secured bonds and
revenue bonds secured by project-related revenue streams. In some cases, public debt
financing is guaranteed by governments either explicitly or implicitly.
2. Corporate finance: Corporate finance consists of corporations providing equity
financing through retained earnings and shareholders equity. Debt financing takes the
form of commercial bank borrowing, subordinated debt (including convertible
debentures and preferred stocks), privately-placed borrowing, and issuance of fixed
income securities. These securities can be short-term in the form of commercial paper,
or of longer durations in the form of corporate bonds. Debt is secured through
collateralization of corporate assets and assignments of receivables.
3. Project Finance: Project finance consists of government, corporations and PPP
financing investments solely through the revenue stream of the infrastructure projects
without taking recourse to government guarantees. Most project finance is made
available by project-specific companies with equity held by sponsors. Equity takes the
form of sponsor investment in share capital of the project company. Debt is fully
secured through the revenue stream of the infrastructure project; this stream is
assigned to lenders through security agreements with trustees and does not appear on
sponsor companies balance sheets. Debt financing usually takes the form of a
combination of bank loans (usually syndicated for large projects), sponsor loans,
subordinated loans, suppliers credits, and bonds of the project company. Corporate
and project finance is clearly applicable only to private and club goods type of
infrastructure for which there is sufficient revenue stream that can be legally
collateralized to lenders.

13

GROWTH POTENTIAL
Planning commission is targeting an investment of 51 lakh crores over the duration
of the twelfth five year plan which is almost double the amount proposed under the
eleventh plan. While the share of public investment is projected to decrease from 62%
to a level of 53% in the twelfth plan, the share of private investment is projected to
increase from 38% (eleventh plan) to 47% (twelfth plan) of the total investment.
In comparison to eleventh plan, a very significant growth (>100%) in investments
(Budgetary & Private) has been projected for Non-Conventional Energy, MRTS, Ports
and Storage. All the other sectors are also projected to have an investment growth of
>50%. Planning commission is expecting private sector to play a key role in twelfth
plan with an overall investment growth of 131%. Private investment is projected to
grow in all the infrastructure sectors with Railways, Water Supply, Storage and Ports
projected to grow at >200% whereas investment in other sectors is projected to grow
at >100%. Overall private sector investment will be a key to success of infrastructure
development under twelfth five year plan.

GOVERNMENT INITIATIVES
In order to broaden the base, the government promoted Industrial Finance
Corporation of India (IFCI) to provide long term capital to industry. Reserve Bank of
India (RBI) promoted Industrial Development Bank of India (IDBI) for the same
purpose. Besides, Industrial Credit and Investment Corporation of India (ICICI) was
incorporated in the private sector. These three institutions were to lend money for
project finance, while banks would support the working capital needs of industry.
In the next phase of growth, specialised institutions were created, such as, Export
Credit & Guarantee Corporation (ECGC) for guaranteeing export receivables of
Indian industry, Shipping Credit and Investment Corporation of India (SCICI) for
addressing the financial needs of shipping industry and Export-Import Bank of India
(EXIM) for financing the international business of Indian companies. In order to
address the revival needs of industry, Industrial Re-construction Bank of India (IRBI)
was created.

14

Unit Trust of India (UTI) was promoted, among other reasons, to mobilise money
from the public by issuing mutual fund units. Life Insurance Corporation (LIC) was
created to cover the lives of Indians. These two institutions had access to long term
money collected from Indians, which were made available for lending to Indian
industry. They largely invested in bonds and debentures issued by companies that
needed the money.
Companies were also permitted mobilise money from the public by accepting fixed
deposits of upto 3 years. A few large companies and financial institutions also
managed to issue bonds and debentures to the public. In the mid-1970s, when
government policy forced foreign companies to issue shares to Indian investors at low
prices, retail investors got interested in the equity market. Thus, money was available
from banks, financial institutions and retail investors, through a mix of debt and
equity.
Until the early 1990s, all interest rates in the India economy were determined by the
Government or RBI. Similarly, equity shares had to be issued at a price determined by
the Controller of Capital Issues (CCI). Several brokers and sub-brokers were active in
mobilising money from retail investors. Issues of securities to the public were handled
by Merchant Bankers. Gradually, as part of liberalisation, interest rates were freed.
Currently, RBI only controls a few short term interest rates. Besides, with the
creation of Securities and Exchange Board of India (SEBI), a regulatory framework
was created for companies to decide the premium at which they would issue shares. A
phase of consolidation followed, and the phenomenon of universal banking was
introduced. Some of the institutions mentioned above changed form or were merged
into other institutions. Universal banks started offering a range of retail and wholesale
banking services, including provision of working capital and long term finance.
Merchant banks have morphed into investment banks, that are prepared to invest in the
companies with whom they do business. There is a fairly active primary and
secondary market in equity. The sources of funds for industry have grown from
domestic to international. Over the last few years, Indian companies have also become
active in setting up projects outside the country. Another development since the turn of
the century is the willingness of Government to work with the private sector in the
infrastructure space. More and more sectors are being thrown up for Indian private
sector to set up and operate. Even foreign direct investment (FDI) upto 100% is
permitted in some sectors such as power, roads and highways.
The Government of India realizes the importance of accelerating the investments in
infrastructure to boost the countrys slowing economy. Therefore, it has set a massive
target for doubling investment in infrastructure from Rs. 27 lakh crores (eleventh plan
2011/12 prices) to Rs 51 lakh crores during the twelfth plan period, i.e., 2012
2017.The share of infrastructure investment in GDP is planned to be increased to more
than 10% by the end of the twelfth plan. This investment, if it materializes, can propel
Indias economic growth to a higher trajectory.

15

ROAD AHEAD
A coordinated effort is required from the government, Reserve Bank of India,
Securities and Exchange Board of India and Insurance Regulatory and Development
Authority (IRDA) to create a vibrant bond market. Introducing a suitable mechanism
for credit enhancement enables corporate with lower credit rating to access the bond
market.
Infrastructure development continues to be the focus area for the government and in
the recent past it has introduced various proposals to catalyze investments in the
infrastructure sector some of which will require significant infusion of funding
through private sector. In order to mobilize the private funding for infrastructure
development a multi-pronged reform process would need to be pursued. In addition to
significantly improved enabling environment focused systematic changes and
interventions will be required to be implemented.

16

RISK PROFILE OF VARIOUS INFRASTRUCTURE SECTORS

The various infrastructure sectors have unique operating environment and sectoral
characteristics. These result in different risk profiles of the infrastructure sectors. The different
profiles mean the various risks associated with projects which constitute the risk profile though
remain the same but the severity of the risks will vary from sector to another. The risk profiles
and operating environment of two of the infrastructure sectors, power and transportation sectors,
wherein private sectors have been actively involved are discussed below.
Power Sector: In power sector, governments have privatized this sector and discontinued the
monopoly of state utilities by inviting private sector in the form of Independent Power Producers
(IPPs) who build generating plants initially on BOO (Build/Own/Operate) basis and on BOT
basis, later on. The IPP then fed the electricity generated from their plants into state controlled
distribution and transmission networks. Then, an off-taker, usually the state or provincial utility
board purchases the electricity on a wholesale basis from the IPP via a Power Purchase
Agreement (PPA). This mechanism ensures a regular stream of incomes otherwise the IPP will
face a fluctuating demand and will not be able to meet the financial obligations. In spite of such
an arrangement possible loss of income may occur though illegal connection to the transmission
system, especially in developing countries but such an arrangement assign the demand risk to the
government, as private sector is reluctant to assume this risk.
The output from the power project is sold to a public entity unlike other sectors such as highway
where the infrastructural services is consumed by several users. However, the multiplicity of
IPPs in a country also creates the problem of volatility of power prices since keen completion
may lower tariffs. There may also be chances of refusal by the public entity to buy the power in
spite of entering into power purchase agreement if the power generated does not meeting the
agreed specification.
The power plants are often subjected to technical and environmental risk where careful
consideration is necessary. The construction process of power plant is often complex resulting in
completion risk. Besides the technical complexity, the project sponsor need to set up adequate

17

transportation facility from the point of production of raw material such as coal, and gas to
power plant to ensure uninterrupted supply for continuous generation of power in case of
fuel/gas fired and thermal power plants. In addition, other major risk that may be evident in case
of power sector is the fluctuation of the production due to variation in cost and availability of
fuel where IPP is committed to a take-or-pay fuel supply contract. In case of take or pay
contractual agreement, one party agrees to purchase a specific amount of another party's goods or
services or to pay the equivalent cost even if the goods or services are not needed.
Transport sector: Transport industry includes road transport (i.e. highways, tunnels, and
bridges), railed transport (i.e. railway subway, and light rail transit systems), airport and ports.
Even within the transportation sector, the risk profile varies with the mode of transportation. For
instance, highway construction is relatively less complex then tunnels and bridge, but they are
exposed to risks that come from competing facilities and issues like toll collection and user
pattern need to be taken into account while evaluating the viability. These may even hold true in
case of rail transport if not identical but are quite different when considered in the case of
airports and ports in terms of risk exposure in these parameters like toll collection.
Risks in Road Transport: In case of road projects, the investment made by the private investors
is recouped using the toll collection from users. As a result, the most critical risks in road
transport are mostly due to fluctuation of actual traffic from the forecasted traffic volume. In
general, the traffic volumes are forecasted with certain level of subjectivity and takes economic
growth, traffic induction, modal split (change of mode from say bus to monorail), individual
values of time, vehicle ownership and the behavior of people with respect to tolls i.e. their
acceptance levels into account. Any deviation of the forecasted traffic from the actual traffic or
inaccurate forecast due to poor workmanship may cause deficiency in cash flows which are
difficult to cover or cope up unless a certain level of guarantees are ensured by the host or the
government so that the investments of investors and debt of lenders are secured.
Cost overruns and delays are other major sources of the risk due to the constraints such as
geographical disadvantages while constructing in difficult terrains such as hilly terrains or may
be due to delay in the land acquisition, where especially for a road project it is both expensive
and can be slow. The right of way disputes also hamper the work progress leading to cost
overruns. The foreign exchange risk is one of the risks encountered in case of tunnel and bridge
projects which use sophisticated technology with important equipment.
Tunnel and bridge: Tunnels can be either land borne or water borne. Water borne tunnel can be
either immersed or submerged tunnels. Land borne tunnel and immersed tunnels are prone to
geological risks as they have to be excavated or drilled through uncertain rock mass and soil.
Safety at work and disturbance to surface traffic are major concerns especially in municipal
areas. Health risks are also encountered if the compressed air has to be used for stability and
ground water control. In case of submerged tunnel, the stability of the seabed is an issue at stake

18

during operation stage which could lead to traffic accidents and fire breakouts. This can be a
critical risk in case of long tunnels which demands the need for the prevention of it while
undertaking the physical design and management of the facilities. In case of bridges,
hydrological and weather conditions may impose severe constraints besides the restrictions due
to geological conditions. All these could pose technical and design challenges which ultimately
affect the completion of project on time and within budget.
Railed transport: Railway systems especially electrified mass transits; typically involve
expensive rolling stock and control system. These are normally procured with export and credit
financing which is sensitive to political risks.
Airports and ports : Business associated with aviation has to keep pace with ever increasing
demand for speed efficiency and new technology. The commercial success of airports also
depends heavily on regional or international trader prosperity. Integration with other connecting
facilities such as domestic airports and highways is important as delay in the completion of these
can affect the projected revenues.
Ports and container terminals need an integrated infrastructure to support its operation. Operation
may be adversely affected by the lack of adequate adjoin land for expansion. Throughput (an
amount of material or items passing though a system or process) capacity may be affected by the
breakdown of cranes forklifts and other equipment labor disputes and extreme weather condition
such as typhoons. Ports are prone to changes in tariff regulation and quotas, which affect the
shipment of goods for exports. Ports and airports often face political risk as it represents symbols
of national pride.
CLASSIFICATION OF RISK
Infrastructure projects are associated with various types of risks. These risks are common to most
of the projects under various infrastructure sectors. In order to facilitate management of these
risks, they are categorised into groups under various classification schemes. One of the most
common classification schemes is to categorize the risks into project risks, financial, and
political risks.
Project risks include various risks such as completion risks, performance risks, operation &
maintenance risks, financing risks, revenue risks, and input supply risks. Completion risks refer
to the risk that project will not be completed on time or within budget. The failure to complete
the project on time could be due to other risks such as delay in land acquisition risk or due to
permit risk. Permit risk is the risk that necessary permits, approvals, and licenses for
construction, investment and financing, and operating could not be obtained on time. Failure to
complete the project on time could be due to third party risks, the risks that the project's third

19

parties (i.e. public authority) fail to perform their obligations such as providing connection and
utilities for the project or relocation of utilities.
Performance risk is the risk that the project fails to perform as expected on completion. The
sources for performance risk could be due to poor design or adoption of inadequate technology.
O&M risks refer to the risks associated with the need for increased maintenance of assets or
machinery over the term of the project in order to meet performance requirements leading to cost
overruns and reduce the availability of the project.

ISSUES & CHALLENGES CONSTRAINING INFRASTRUCTURE FUNDING

On the debt side the major lenders are commercial banks. Going forward relying on
commercial banks as major lenders is precarious as banks are likely to be constrained
in their future lending due to the issue of asset liability mismatch. Also banks have not
been able to offer very long tenure loans and the reset period on these loans is very
short. Finally the exposure norms may prevent banks from lending to large developers
in India thereby stymieing the growth of PPP infrastructure in India.
On the equity side we find that promoters of PPP infrastructure projects have to put
in most of the equity requirement of an infrastructure project. There is an acute
shortage of equity with private developers and if the present trend continues then they
will not be able to attract the requisite amount of debt for the projects. Use of sub debt
has eased the equity requirement somewhat. However, restrictions on taking out of the
equity by developers remain a cause for concern. Involvement of financial investors in
bidding for infrastructure projects is also limited at present as is the involvement of
strategic investors and international companies.
There are a lot of other hindrances in achieving easy financing for infrastructure
projects in India which are as follows:
1.
Savings not channelized Although Indias saving rate may be as high as
37%, but almost one-third of savings are in physical assets. Also financial savings are
not properly channelized towards infrastructure due to lack of long term savings in
form of pension and insurance.

20

2.
Regulated Earnings Earnings from projects like power and toll (annuity)
may be regulated leading to limited lucrative options for private sector and difficulty
for lenders. Also any increase in input cost over the operational life is very difficult to
pass on to customers due to political pressures.
3.
Asset-Liability Mismatch Most of the banks face this issue due to long
term nature of infrastructure loans and short term nature of deposits.
4.
Limited Budgetary Resources With widening fiscal deficit and passing of
FRBM act, government has limited resources left to meet the gap in infra financing.
Rest of funds has to be met by equity / debt financing from private parties and PSUs.
5.
Underdeveloped Debt Markets - Indian debt market is largely comprised of
Government securities, short term and long term bank papers and corporate bonds.
The government securities are the largest market and it has expanded to a great
amount since 1991. However, the policymakers face many challenges in terms of
development of debt markets like:
Effective market mechanism
Robust trading platform
Simple listing norms of corporate bonds
Development of market for debt securitization
6.
Risk Concentration In India, many lenders have reached their exposure
limits for sector lending and lending to single borrower (15% of capital funds). This
mandates need for better risk diversification and distribution
7.
Regulatory Constraints There are lot of exposure norms on pension funds,
insurance funds and PF funds while investing in infrastructure sector in form of debt
or equity. Their traditional preference is to invest in public sector of government
securities.

Although the importance of infrastructure sectors in achieving economic growth and

poverty reduction is well established, raising debt and equity capital for infrastructure
development and service provision has been a challenge for developing countries.
Risk mitigation instruments facilitate the mobilization of commercial debt and equity
capital by transferring risks that private financiers would not be willing to take to
third-party official and private institutions that are capable of taking such risks. There
has been increasing interest and discussion on risk mitigation instruments in the
context of infrastructure financing among developing country governments, multi- and

21

bilateral donors, and the private sector. However, due to the complex and diverse
nature of risk mitigation instruments, what they can and cannot offer and how they can
best be utilized for infrastructure financing are not well understood. This book
summarizes existing risk mitigation instruments - primarily focusing on those offered
by multilateral and bilateral official agencies - and presents recent trends and
developments that make these guarantee and insurance products valuable in securing
financing for infrastructure projects in developing countries. Topics covered
include:Descriptions of different types of risk mitigation instruments characteristics of
multilateral, bilateral, and private providers of risk mitigation instruments and
compatability of instruments Recent developments and innovative applications of risk
mitigation instruments through case transactions areas that pose challenges to the use
of risk mitigation instruments as catalysts of infrastructure development projects and
finance.

INFRASTRUCTURE FINANCING IN OTHER COUNTRIES

With an understanding of what is happening in India it is important to compare it
with how infrastructure projects are financed in other countries. This will help to
highlight the gaps faced by the infrastructure financing market in India and will also
point to what can be done about them, based on the experiences in other countries.
India is not unique in having a substantial infrastructure creation requirement. In fact
as early as the ninth five year plan (over the period 1996-2000) China had projected an
infrastructure requirement of nearly USD 305 billion, close to the infrastructure
financing requirement being projected in India for the 11th five year plan. And like
India commercial banks have been the major source for financing this infrastructure
requirement. The role of other financial institutions and capital markets has not been
significant. It has also been seen that Chinese banks are also resorting to using the
corporate finance model as opposed to project finance model for some infrastructure
projects to bring in increased comfort.
As far as other Asian countries are concerned the infrastructure financing situation is
also not much different from India. Before the Asian economic crisis there was a
significant flow of foreign currency infrastructure financing, which was arranged by
international banks. International bank participation was high in a lot of countries as
banks followed international developers who participated significantly in developing
infrastructure in these countries. The long term relationship between international
banks and developers helped to give an additional sense of comfort in financing
projects. Comfort was also got from various guarantees given by Governments to

22

reduce the risk of the lenders. However, the experience of this first round of
infrastructure development was bitter after the East Asian economic crisis hit. Some
countries like Indonesia defaulted on the guarantees offered to project sponsors as they
were hit by devaluation of the local currency. It was also realized during the crisis that
many projects had been financed on the basis of questionable viability and under
pressure from the economic downturn a lot of the projects suffered. As infrastructure
projects floundered in the wake of the crisis the increased risk perception led to a
significant reduction in the flow of capital for infrastructure projects in these countries.
With international capital flows drying up there has been an increased reliance on
domestic markets and commercial banks in many countries to provide the financing
needed for infrastructure projects. Infrastructure sector in countries with high liquidity
in the banking system have been able to tide the crisis as local commercial banks in
these countries have started to take a lead in infrastructure financing. The major reason
for reliance on the banking system has been that other avenues for financing are not
significantly developed in these markets.
China has seen the consequences of excessive reliance on commercial banks to lend
to the infrastructure sector. Chinese banks are saddled with very high levels of NPAs
and as a consequence very low returns on average assets. The returns on average
assets for Chinese banks are in the below 0.20 as compared to Indian banks where
these returns range from just below 1 to significantly more than 1. Banks are surviving
only because of the high levels of liquidity in the market and because the Chinese
Government is strongly backing them.
Confidence of international lenders has also slowly been returning. However, in their
second coming international banks have often been beaten by highly liquid local banks
which have been able to out price international banks as well as shown willingness to
take higher levels of risk while giving out plain vanilla products.

International banks with higher financing cost as well as currency risks have not
been able to offer the kind of products needed by the markets in these countries.
If we contrast the above with the situation prevailing in India it has been found that
there are many similarities. Commercial banks lead infrastructure financing in India
like elsewhere. Also like India most other developing countries lack alternative means
of financing infrastructure. There are some countries like Chile and Malaysia which
also have a strong corporate bond market which helps in raising infrastructure bonds.
But even in these countries the tenure of the bonds is not significantly more than the
tenure being offered by the banks to infrastructure projects in India.
As the Chinese example shows large involvement of the banks in financing
infrastructure can lead to deterioration in bank finances. Thus if the health of the
banking sector has to be maintained (or improved upon in light of Basel II guidelines)
then alternatives to bank lending in infrastructure projects will need to be found.

23

Also, going forward, a large proportion of the infrastructure financing will be local
currency based even though other countries have successfully implemented projects
with external commercial borrowing. This is because in India the RBI fears that a
significant rise in liquidity in the market will increase the inflation rate which it wants
to keep in check. Also RBI is quite stringent on exchange risk management.
While it is imperative that other sources of infrastructure financing will need to be
tapped in India there are very few successful templates that exist in the developing
world for developing markets for such means of financing. As a consequence India
will have to largely chart its own course on the matter taking cognizance of
developments elsewhere. The aim of the reforms will have to be to ease the constraints
that are faced in infrastructure financing.

INFRASTRUCTURE FINANCING BY COMMERCIAL BANKS

Banks have traditionally funded the working capital requirements of
medium and large industrial projects However, with the onset of financial
sector reforms, banks have expanded their role from mere providers of
working capital finance to cover rupee term loans, guarantees and to a
limited extent foreign exchange loans for large projects.
As part of banking sector reform, in India RBI has relaxed many of the
restrictions governing bank participation in project financing. Since
October 1994, individual banks are permitted to give long-term loans up
to Rs. 2 billion to a single project without prior RBI approval while the
aggregate limit for bank lending in the form of long-term loans to a single
project has been raised to Rs. 5 billion. This relaxation should result in
banks emerging as an important source of long-term funds for medium
sized infrastructure projects.

24

Types of Funding Options

TYPES OF FUNDING OPTIONS AVAILABLE FOR INFRASTRUCTURE
PROJECT
FINANCE
Fund Based

Non-fund Based

Term loan

Demand loan

Bank Guarantees

Buyers credit

Deferred Payment Guarantees

Working capital

Letter of Credit

FUND BASED LIMITS:

Term Loan:

25

As the name suggests, these loans are given for fixed period of time with the
provision that its repayment shall also come in regular pre-fixed periodical instalments
which may be equated or graduated. These loans are generally sanctioned for
acquiring fixed assets by the persons engaged in business and trade or in
manufacturing or servicing etc. This is a source of debt finance for long term purpose
as project implementation takes from 1 year to 3 years depending on the type of
project and the loan is repayable in 5 to 10years. Therefore, it is also known as Term
Finance. These loans are generally repayable on the basis of repayment agreement
made according to the generation of future cash flow.
Bank gives Rupee loans as well as Foreign Currency term loan.
a. Rupee currency loan These loans are provided for incurring expenditure for
land, building, plant & machinery, technical know-how, miscellaneous fix assets,
preliminary expenses pre-operative expenses and margin money for working capital.
b. Foreign currency loan These loans are provided for meeting the foreign
currency expenditure towards import of plant, machinery and equipment, and payment
of foreign technical know-how fees.
The periodical liability for interest and principal remains in the currency of the loan
and is translated into rupees at the prevailing rate of exchange for making payments to
the respective Bank/financial institutions. These term loans typically represent secured
borrowing. Assets which are financed with the proceeds of the term loan provide the
prime security. Other assets of the firm may serve as additional/collateral security. All
loans provided by banks, along with interest, liquidated damages, commitment
charges, expenses, etc., are secured by way of:
a.
First equitable mortgage of all immovable properties of the borrower, both
present and future. If the term loan is extended by more than one bank, then the charge
on the assets to the lenders is normally on pari passu basis.
b.
Second charge on hypothecation of all movable properties of the borrower,
both present and future, subject to prior charges in favour of commercial banks for
obtaining working capital advance in the normal course of business.
To the general category of borrowers, bank charges an interest rate that is determined
relating to the credit risk of the proposal, subject usually to a certain floor rate
generally Banks Prime Lending Rate (BPLR). Interest is charged on a monthly basis
and depending on the terms of the project, either capitalized or serviced during the
disbursement period.
The interest burden decline over time on account of repayment of the principal,
where as principal repayment may remain constant if based on equal installments.
Principal repayment may vary if the repayment is fixed on ballooning terms which
consequently depends on the cash flow from the project. Thus the total debt servicing
burden declines over time.

26

Demand Loan:
This is the fund demanded instantaneously by borrower due to uncertain changes in
the situation (e.g. economic downturn, inflation, price rise in manufacturing product
etc.). This is the loan (such as an overdraft) with or without a fixed maturity date, but
which can be recalled anytime by the lender and must be paid in full on the date of
demand. This is generally not used for project finance but its relevance with project
finance becomes more important in adverse situations if term loan is already financed
for the project. These loans are generally repayable on the basis of repayment
agreement governed under negotiable instruments (e.g. Promissory Notes, Bills of
Exchange, etc.). Duration of these loans is generally 1-3 years.

Buyers Credit:
According to FEMA guidelines on Trade Credits, Buyers Credit refers to loans for
payment of imports into India arranged by the importer from a bank or financial
institution outside India for maturity of less than three years.
Buyers credit for imports of raw material/non capital goods into India can be availed
for maximum period of one year and Buyers credit for capital goods can be availed
for maximum period of less than three years.
The credit can be raised irrespective of whether import takes place under an
arrangement of letter of credit issued by a bank in India or whether the supplier sends
the bills on collection basis.
Under the buyers credit arrangement, the exporter i.e. supplier of the goods receives
payment instantly in case of sight documents and on due date of the drafts/bills.
Buyers Credit is arranged for a maturity of less than three years. No roll
over/extension is permitted beyond the permissible period. Buyers credit for three
years and above comes under the purview of ECB, which are strictly governed by
ECB guidelines of RBI.
Working Capital Finance:
A firm's working capital is the money it has available to meet current obligations
(those due in less than a year) and to acquire earning assets. Banks offers corporations
Working Capital Finance to meet their operating expenses, purchasing inventory, and
receivables financing.

27

NON FUND BASED LIMITS:

Letter Of Credit:
A letter of credit is a commercial instrument of assured payment and widely used by
the business community for its various advantages. It is an instrument by which a bank
undertakes to make payment to a seller on production of documents stipulated in the
credit. The credit specifies as to when the documents are presented to the paying bank
or at some future date, depending upon the terms stipulated in the credit.
Bank Guarantee:
Guarantee is a contract to execute the promise, or discharge the liability of a third
person in case of his default. In the ordinary course of business, the bank often issues
guarantees on behalf of its customers in favour of third parties. When the bank issues
such a guarantee, it assumes a responsibility to pay the beneficiary, in the event of a
default made by the customer. A bank guarantee enables the customer (debtor) to
acquire goods, buy equipment, or draw down loans, and thereby expand business
activity.
Deferred Payment Guarantee:
A deferred payment guarantee is a contract under which a bank promises to pay the
supplier the price of machinery supplied by him on deferred terms, in agreed
installments with stipulated interest in the respective due dates, in case of default in
payment thereof by the buyer.

28

STEPS IN INFRASTURUCTURE FINANCE

1. Submission of Application by borrower:
The borrower approaches the bank with the proposal to finance a project. Borrower
has to give a written application in favour of branch head containing the brief
information of applicant, company, industry, about Project, Project duration and fund
requirement from that bank.
2. Preliminary Information/ Information Memorandum:
The borrower has to provide the Bank with the preliminary information. The
borrower has to prepare a detailed project report, which is submitted to the bank and
on the basis of which the final report is prepared. In case of a syndication arrangement,
the lead arranger prepares an Information Memorandum in consultation with the
borrowing entity.
3. Project Appraisal:
A detailed and critical appraisal of the project is necessary, before taking a final
decision about financing any project, whether individually or jointly. The appraisal
methodology of the banks should keep pace with ever changing economic
environment and also addresses the various types of risks viz. industry, business,
financial, management etc.

29

Bank has to ensure that the people behind the project have the required knowledge
and expertise in the proposed line of activity, enough owned funds to meet the
promoters contribution. The projections submitted by the promoters should be realistic
and achievable and the project must have enough surplus generation to service debt in
a reasonable period of time after meeting the normal business expenditures.
While doing appraisal of any project, the following four fundamentals are carefully
studied and examined:
(i)

Technical Appraisal:

Technical Appraisal of a project is essential to ensure that necessary physical

facilities required for production will be available and the best possible alternative is
selected to procure them.

(ii)

Commercial Appraisal:

In order to have a proper appraisal of the demand forecast made by borrowers, the
term lending institutions would require information regarding demand, supply,
distribution, pricing and external forces.
(iii)

Management Appraisal

Banks gets information about the company, its brief history, business activities,
Business model, details of the promoters, Board of directors, shareholding pattern,
capital structure etc.
(iv)
Financial Appraisal
Financial appraisal is used to evaluate the viability of a proposed project by assessing
the value of net cash flows that result from its implementation. Financial appraisal
measures the direct effects on the cash flows of the organization of an investment
decision.
4. Risk Management and Credit Rating:
Credit risk is defined as the possibility of losses associated with the reduction of
credit quality of borrowers or counter-parties. In a banks portfolio, losses arise from
outright default due to inability or unwillingness of a customer or counter-party to
meet commitments in relation to lending, trading settlements, or any other financial
transaction. Alternatively, losses occur due to deterioration in credit quality.
Banks are permitted a choice between 2 broad methodologies for calculating their
capital requirements for credit risk. One method is to measure credit risk in a
standardized manner based on external credit rating. The other method, viz. Internal

30

Rating Based (IRB) approach, would allow the banks to use their internal rating
system for credit risk. This will be subject to the explicit approval of the banks
supervisor.
A credit rating estimates the credit worthiness of an individual, corporation, or even a
country. Credit ratings are calculated from financial history and current assets and
liabilities. Typically, a credit rating tells a lender or investor the probability of the
subject being able to pay back a loan. A poor credit rating indicates a high risk of
defaulting on a loan, and thus leads to high interest rates or the refusal of a loan by the
creditor.
5. Preparation of Final Proposal
Once the project is appraised, the final proposal is prepared by the credit officer. The
final proposal prepared at the bank contains the following details regarding the project
like; details about the borrower, Description about the management and names of the
people who constitute the board, the purpose for which the loan is taken, security
provided by the borrower, financial indicators, types of risk faced by the project etc.
6. Proposal Forwarded to the Sanctioning Authority
Once the credit officer prepares the final proposal, it is sent to the sanctioning
authority. It is then either approved or rejected by the sanctioning authority. If
sanctioned it gets approval with recommended Rate of Interest (ROI), concessionary
fees, securities to mortgage/pledge, etc. After recommendation it is sent back to
branch.
7. Sanction Letter Issued
As soon as financial assistance is sanctioned, a letter of intent is issued to the
applicant. In addition to usual terms and conditions, special conditions are
incorporated in the letter of intent to cover weak links, if any, noticed at the appraisal
stage.
8. Documentation and Disbursement:
Execution of loan agreement and other necessary legal documents is very necessary
for disbursing the amount. The term lending institutions should ensure that the amount
disbursed will be utilized for the purpose for which it has been sanctioned.
9. Supervision and Follow-up:
Project supervision and Follow-up of assisted projects during and after
implementation is indeed a crucial exercise to be performed periodically with

31

meticulous care, not only to safeguard the interests of the term- lending institutions
but also to ensure optimization of returns on the total investment in the project.

INFRASTRUCTURE FINANCE BY L&T INFRA FINANCE

L&T Infrastructure Finance Company Ltd.
L&T Infrastructure Development Projects Limited (L&T IDPL) is a pioneer of the PublicPrivate-Partnership (PPP) model of development in India, which involves the development of
infrastructure projects by private sector players in partnership with the Central and State
Governments.

L&T IDPL is a subsidiary of Larsen & Toubro, which is a major Indian multinational in
technology, engineering, construction, manufacturing and financial services, with global
operations.

L&T IDPL has acquired concessions through a competitive bidding process, for the development
of Roads, Bridges, Hyderabad Metro Rail, Ports and Power Transmission Line projects and is
also constantly exploring new opportunities across sectors for their viability.

Since it's inception in 1995, L&T IDPL has completed landmark infrastructure projects across
key sectors like Roads, Bridges, Ports, Airports,Water Supply, Hydel Energy and Urban
Infrastructure.

32

It is one of India's largest infrastructure developers with a proven track record across key sectors
and is also one of India's largest road developers as measured by lane kilometers under
concession agreements signed with the Central and State Government authorities.

Two decades of extensive experience in working with governments, multi-lateral agencies,

international and domestic financial institutions and corporate entities has helped L&T IDPL to
develop proven competencies in Viability Assessment, Financial Closure, Project Management,
Operations & Maintenance and Portfolio Management of Infrastructure Assets across various
sectors.

In addition to its project portfolio, L&T IDPL has installed Wind Energy Generators
(WEGs) with a capacity of 8.7 MW in Udumalpet and Tirunelveli districts of Tamil Nadu in
March 2010. The energy generated is utilized for captive consumption.The WEGs are eligible for
16,128 Carbon Emission Reduction (CER) certificates per year until 2022 as a result of the
carbon reduction by these wind generators.

Canada Pension Plan Investment Board (CPPIB) made a substantial financial investment in
L&T IDPL in December 2014. This is the first direct private investment by a Canadian pension
fund into an Indian Infrastructure Development company.

CPPIB is a professional investment management organization that invests the funds not needed
by the Canada Pension Plan (CPP) to pay current benefits on behalf of 18 million Canadian
contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB
invests in public equities, private equities, real estate, infrastructure and fixed income
instruments. Headquartered in Toronto, with offices in Hong Kong, London, New York City and
So Paulo, CPPIB is governed and managed independently of the Canada Pension Plan.

L&T has financed for various infrastructure projects as follows:

ROADS
PORTS
METRO RAIL
TRANSMISSION LINES
WIND ENERGY

33

L&T Infra-financing for Wind Sector

Content

L&T Infra Overview

Indias Wind Sector
Lenders Risk Assessment
O&M
Power Evacuation

L&T Infra Overview

Managed by a team of ~ 100 professionals under the guidance of an eminent Board, L&T
Infra has presence across the entire Inf.ra sector

Company Overview

Incorporated in 2007 and is a wholly owned subsidiary of L&T Finance Holdings

Provides financial products and services to clients in Infrastructure space
Granted Infrastructure Finance Company
(IFC) status by RBI in July 2010
Notified as a Public Financial Institution
(PFI) under Companies Act in June 2011
Total asset size of ~ Rs. 13,300 Crores (Dec12) across Power, Roads, Oil & Gas,
Telecom, Ports & Shipping and Urban Infrastructure

34

Emerging as a preferred partner in Infra financing

Why L&T Infra as a Partner?

Expertise

Experienced in Infra domain

Access to L&Ts knowledge base

Investment Ability

Ability to provide debt upto Rs.500 crore to an Infra Project

Active syndication debt can arrange large long term financing
Services

Strong relationship with

Banks/ FIs/ Investors

Quick turnaround time for proposals

Track Record

~ Rs. 13,300 crore Portfolio in a span of just 5+ years

35

> 20 deals Advisory mandates completed

Offers Tailor-made solutions through financial innovation in the sector

Repayments stitched to match cash flows
Top up & securitization transactions post completion

LT Infras presence in renewable sector

Strong focus in financing of renewable power projects

~20% of portfolio in renewable sector

Largest financier of Solar projects on non-recourse basis

Extensive experience in financing mini-hydro and wind projects across diverse
geographies
Financed around 700 MW of projects across renewable sector
Financed ~130 MW of operational wind power projects & ~ 120 MW of under
construction wind power projects
Exposure of ~ Rs.1,300 Cr to Wind Sector

Indias Wind Potential

36

Most of the potential assessed sites have an annual mean wind power density above
200-250 Watt per square meter (W/m2) at 50 meter height.

The Wind Atlas has projected Indian wind power installable potential (name plate
rating) as 1,02,788 MW @ 80m hub height by Centre for Wind Energy Technology
(C-WET).

Reasonably good wind resource has been identified in seven major states i.e.
Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Rajasthan and
Tamil Nadu

37

Wind Power vs. other Renewable Sources

n

Cost of generation across various sources

(Rs/kWh)
8.5

4.8

4.5

2.7*

2.7
1.7

Coal

Hydro

Wind

Bagasse cogen

Cost of Generation
* Domestic coal

Wind Power Key Differentiating Factors

Cost/MW

5.5 cr.

D/E

70:30

38

Biomass

Solar

Interest

12% p.a

Tenure

15 years

Depreciati
on
PLF

20 years
25%

Low cost of generation compared to other renewable sources such as biomass &
solar
Higher scalability than biomass & bagasse-cogeneration
No fuel requirement, low operational expenses
Short Gestation Period (6-12 months)
Mature technology, well developed supplier market

Preferential Tariff

13 SERCs have declared preferential tariffs for purchase of wind power

SERCs have adopted a cost + plus methodology to fix tariff, which varies across
states

Renewable
Purchase Obligation

26 states have specified targets for the uptake of renewable electricity

RECs have been launched to facilitate the achievement of RPO obligations

Others

39

Discontinued Benefits: Generation based Incentive and Accelerated Depreciation

Business Models
Offtaker

No
Preferential
PPAs

SEBs/Disco
ms
- Long term
PPA (10 to 20
years) -

Business

Guidelines
and tariff from

-Short/
Medium term
PPA with
third parties
via
Open
Access

Model

CERC/SERC
are established

(3-7) or at
APPC

Max
Revenue

APPC
+REC+CDM
Tariff
Negotiated
with 3rd
party
customer or
APPC
REC - 1.50
to
3.90
Rs/kwh ?
CDM

unreliable;
May not

FIT+CDM
FIT - CERC/
SERC
guidelines
(3.20
to
6.14
Rs/kWh)
CDM
unreliable,
prices
have
fallen
to ~30 cents
(appx
0.015
Rs./kWh);

accrue due
to
inherent
higher

transition to
EU ETS
returns

40

Group
Captive
PPA
with
multiple third
party
consumers
in
Group
Captive mode.
26 percent
minimum
equity, 51
percent
consumption
Captive
tariff + REC
+ CDM
Tariff
Negotiated
with 3rd party
customer
REC - 1.50
to
3.90
Rs/kwh ?
CDM

unreliable;
May
not
accrue
due
to
inherent
higher returns

Advantage

Challenges

Other
Fiscal
Incentive
s

Higher
Tariff
Higher
Project IRRs

Long
term
visibility

-RPO
enforceabilit
y
-REC not to
accrue
if
Banking

- Low project
IRRs
Credit
worthiness of
DISCOMs
CDM
sharing (10to
50 percent)

facility
is
used
-3rd
Party
credit risk
- Benefit of
80 IA
-Excise
exemption for
certain
components
of
wind
turbine

-Benefit of
80 IA
-Excise
exemption for
certain
components
of
wind
turbine

FIT: Feed in Tariff, APPC:

Average power pooled cost,

Higher Tariff
commercial
&
industrial
consumers (47 Rs/unit)
-REC may
not accrue if
Banking
facility
is
used
( essential)
-RPO
enforceabilit
y
-3rd
Party
credit risk
-Benefit of
80 IA
-Excise
exemption for
certain
components
of
wind
turbine

REC: Renewable Energy Certificate,

CDM: Clean Development Mechanism

41

LendersRisk Asse
Wind Resource Assessment (WRA)

Wind resource can vary considerably over space and time (and particularly with
season with the monsoon-driven wind regime in India) => Variance in Energy
Production
Understanding Wind resource Variability
High YoY variability will impact project viability making higher D/E ratios difficult
to sustain
Independent wind studies are necessary with high confidence to ensure that debt
could be serviced in the face of wind fluctuations
At least 3 year data analysis is required for producing reasonable estimate
Monthly variability is also required to be considered for structuring
Thorough understanding of the
generation profile P50, 75, 90 required

Wind data is available for at most 1 year for a single mast. It

have 3-5 years of data with minimum 3

Challenges

PLFs may be considerably affected due

Structurwaked effectsProduc
Limited assessment of

Construction - EPC

42

Construction risk for onshore wind farms is significantly lower than for thermal
power plants
If Turbine supply agreements are in place, the risk of material cost overruns is
generally low
However, a number of projects have incurred significant construction delays,
primarily as a result of bottlenecks in the turbines supply chain/logistics
Wind farms are generally erected under a single fixed-price and fixed-time turnkey
contract
Turbine manufacturers are key counterparties, as the cost of the turbines and their
setting up represent the most significant portion of the projects construction cost

Challenges

Stretched financials of OEM / EPC contractor

Land acquisition issues / Right of way for transmissi

Project Execution Land Issues

Delays in land acquisition, clearance issues slow project execution if done

independent vs. OEM integrated model (OEM have secured Land Banks)
Wind speed and percentage of wind availability are higher at higher altitudes
Such hilly sites usually fall under the forest zone often resulting in delays in
obtaining the forest clearance for such land
Land conversion

43

Conversion of land for non-agriculture purposes and obtaining clearances from

various Government departments lead to several other problems
There is no single-window clearance system for such projects

TN ,Madhya Pradesh, Rajasthan Favorable land policies

Maharashtra, Karnataka Land conversion to non-agriculture purposes is a

Our
View
major challenge

Operation & Maintenance

Extremely important because it is linked to electricity generation and cash flow the
sole source of loan repayment revenue
In most cases, O&M services are provided by turbine manufacturers because the
contracts they offer dovetail with manufacturing warranties
O&M contracts for wind projects usually warrant machine availability, stipulating
that the turbines be operational for a percentage of time in a given year (usually 95%
- 97%)
Projects should have maintenance reserves to cover for unexpected maintenance
costs

44

challenges

Long term O&M contract with an OEM / related party

High Entry Barrier for independent O&M contractor

No technology transfer limits IPP development

Power Evacuation

Grid connections for large wind projects are predominantly done at 220kV
Grid Outages are increasingly becoming roadblocks in continued growth of wind
generation
Key concerns
Grid Interconnections
Transmission planning
Grid Integration

45

46

Final overview of Infrastructure Finance in India.

Infrastructure It is the backbone of economic activity in any country, but
unfortunately, here India suffers from Osteoporosis. Time and again various policy
measures have been taken to boost infrastructure, but no major progress has taken
place barring on telecom infrastructure front. To fuel Indias ambitious growth rate and
meet distant targets, a major restructuring is required on governance, legal,
administrative and financial front. According to Global Competitiveness Report
(GCR) 2009-10, India ranks very low at 76 in infrastructure domain. Also India
spends only about 6-7% of its GDP on infrastructure.

Finance is one of the most basic requirements for carrying out infrastructure projects,
which are capital intensive and are in risky domains. The low levels of public
investment have made Indias physical infrastructure incompatible with large increases
in growth. Any further growth will be moderate without adequate investment in social,
urban and physical infrastructure.
In 11th 5 Yr plan, 30% of total infra investment is expected to be from private sector
& 48.1% of total infra investment is expected to be from Debt sources . This
emphasises the need for availability of cheap and easy finance options for private
sector.
% Contribution in projected investment in 11th 5-Yr Plan

Challenges in Infra Financing

There a lot of hindrances in achieving easy financing for infra projects in India

47

1.
Savings not channelized Although Indias saving rate may be as high as
37%, but almost one-third of savings are in physical assets . Also financial savings are
not properly channelized towards infra due to lack of long term savings in form of
pension and insurance.
2.
Regulated Earnings Earnings from projects like power and toll (annuity)
may be regulated leading to limited lucrative options for private sector and difficulty
for lenders. Also any increase in input cost over the operational life is very difficult to
pass on to customers due to political pressures.
3.
Asset-Liability Mismatch Most of the banks face this issue due to long
term nature of infra loans and short term nature of deposits.
4.
Limited Budgetary Resources With widening fiscal deficit and passing
of FRBM act, government has limited resources left to meet the gap in infra financing.
Rest of funds have to be met by equity / debt financing from private parties and PSUs.
5.
Underdeveloped Debt Markets - Indian debt market is largely comprised
of Government securities, short term and long term bank papers and corporate bonds.
The government securities are the largest market and it has expanded to a great
amount since 1991. However, the policymakers face many challenges in terms of
development of debt markets like

Effective market mechanism

Robust trading platform

Simple listing norms of corporate bonds

Development of market for debt securitization

6.
Risk Concentration In India, many lenders have reached their exposure
limits for sector lending and lending to single borrower (15% of capital funds) . This
mandates need for better risk diversification and distribution
7.
Regulatory Constraints There are lot of exposure norms on pension
funds, insurance funds and PF funds while investing in infrastructure sector in form of
debt or equity. Their traditional preference is to invest in public sector of government
securities.
Exploring Alternatives
To overcome these challenges and find a way for easy availability of funds for infra
finance, we can explore following alternatives:
1.
Developing domestic bond market, Credit Default Swaps & derivatives
India receives substantial amount of FII investment in debt instruments. But most of
this investment is concentrated in government securities and corporate bonds

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FII investment limit in infrastructure bonds has been increased from USD 5 billion to
USD 25 billion. However investments of only USD 109 million materialized till
August, 2011 . This deficit in target investment levels need to be reduced.
Just like a well developed equity market, India needs efficient bond market so that
long term debt instruments are available for infrastructure. Currently FIIs can trade
Infra bonds only among themselves. Also if credit derivatives are allowed, then FIIs
will be encouraged to invest more in these infrastructure bonds due to the presence of
credit insurance and better management of credit risk. RBI is in the process of
introducing CDS on corporate bonds and unlisted rated infrastructure bonds by Oct 24
2011 . However much progress is sought is this domain like minimizing multiplicity of
regulators, removing TDS on corporate bonds, stamp duty uniformity, etc.
2.
Priority sector status to Infra
Hitherto, infrastructure financing doesnt come under the ambit of priority sector like
agriculture, small scale industries, education etc. For every Rs 100 lent to non priority
sectors, banks have to lend Rs 140 to priority sectors . Giving priority status will help
banks to lend more to this sector.
3.
Take out financing and loan buyouts
One major problem faced by banks while disbursing loans to infrastructure projects
is the asset liability mismatch inherent with these projects. Therefore many such
projects are denied financing by banks.
One way out from this predicament will be the taking over of loans by institutions
like IDFC after the medium term. This will allow banks to finance these projects for a
medium term by sharing some of the risks with institutions like IDFC. This reduced
risk exposure will allow banks to increase their financing of infrastructure projects.

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4.
Rationalizing the cap on institutional investors
Rationalizing the cap on investment in infra bonds by institutional investors like
pension funds, PF funds and life insurance companies will lead to more investment in
this sector. Currently insurance companies face a cap of 10% of their investible funds
for infra sector .
5.
Tax free infrastructure bonds by banks
Currently only NBFCs can float tax free infrastructure bonds. If banks are also
allowed to float these bonds, they can raise long-term resources for infrastructure
projects, thus reducing the asset liability mismatch.
6.
Fiscal Recommendations
The following fiscal policy medications can allow more funding of infrastructure
projects.
1.
Reducing withholding tax
Currently foreign investors pay withholding tax as high as 20% depending on the
kind of tax treaty . It increases borrowing cost as the current market practice is to gross
up the withholding tax. So this recommendation would reduce the borrowing cost.
2.
Tax treatment on unlisted equity shares
Unlisted equity shares attract larger capital gains tax than listed ones. Currently
capital gains on unlisted equity shares are taxed at 20% instead of 10% for listed
equity shares. Most private players in the infrastructure sector are not able to raise
capital through public issues. Therefore for these players unlisted equity will be their
dominant source of equity capital. Therefore they are adversely affected because of the
tax treatment meted out to unlisted equity shares. Hence special consideration should
be given to private players in the infrastructure sector to encourage investments.
7.
Foreign borrowings
With respect to foreign borrowings, several options are there like increasing the cap
rate for longer tenure loans, relaxing refinancing criteria for existing ECBs/FCCBs;
allow Indian banks for credit enhance ECBs (which is currently allowed only for
foreign banks), etc.

8.
Utilising foreign exchange reserves
Indias foreign exchange reserves stand at USD 311.5 bn (Sep 2011) .

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These reserves are primarily meant to provide a buffer against adverse external
developments. But they do not add value to any real sector as they are invested in
foreign currency assets such as government bonds. So, the returns on these reserves
are quite small.
The Deepak Parekh committee on infra financing is also in favour of allocating a
small fraction of total reserves for infra purpose. This method of funding is already
being used in some Asian countries like Singapore. After accounting for liquidity
purposes, external shocks, high rate of domestic monetary expansion & real risks of
disruptive reversals of capital flows; some of funds can be used for infra.
9.
Future cash flows as tangible security
The loans given to infrastructure project consortiums by banks are not secured & fall
under the unsecured loans asset class for banks. Currently RBI mandates that
provisioning of such unsecured loans is kept at 15% (additional 10% for sub standard
unsecured loans) . Therefore total amount of loans to infrastructure projects are
constrained because of the sub standard unsecured nature of these loans.
The primary source of repayment of these loans is the future cash flows accrued
from the project once they are completed and ready for public use. These cash flows
can act as a security under certain conditions and debt covenants. For instance in case
of road/highway development projects, RBI passed an order that a) annuities under
build-operate-transfer (BOT) model and b) toll collection rights where there are
provisions to compensate the project sponsor if a certain level of traffic is not
achieved, be treated as tangible securities.

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RECOMMENDATIONS
To successfully tap the available revenue pools, bank should develop a
strong understanding of each sector to assess products needs, timing and
investment merit.
Bank will also need to build deep expertise to undertake accurate risk
assessment, for this bank should make different teams to work on projects of
different sectors, this will help them to specialize in one sector and also will
lead to
better understanding of risks and opportunities in those sectors.
Banks should also have a team focusing entirely on the study of the risks
aspects
of the projects
To move up the value chain or acquire relationships and scale in India, banks
should consider partnerships. Domestic incumbent banks with a strong
funding
base and existing corporate relationships can use global or domestic
alliances to
build specific sector expertise, go beyond participating in syndications to
active
origination and participation from the equity side of the project capital
structure

BIBLIOGRAPHY

52

WIKIPEDIA
ECONOMIC TIMES
L & T INFRA-FINANCE .COM
INVESTOPEDIA
//www.infrastructure.gov.in/

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