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Report and Recommendation of the President to the Board of Directors Draft 25 June 2007Sri

Report and Recommendation of the President to the Board of Directors

Draft 25 June 2007Sri Lanka Project Number: 40655 November 2007

Proposed Multitranche Financing Facility India: India Infrastructure Project Financing Facility

40655 November 2007 Proposed Multitranche Financing Facility India: India Infrastructure Project Financing Facility

CURRENCY EQUIVALENTS (as of 15 October 2007)

Currency Unit

Indian rupee/s (Re/Rs)

 

Re1.00

=

$0.254

$1.00

=

Rs39.32

€1.0

=

$2.4178

$1.0

=

€0.705

¥1.0

=

$0.0085

$1.0

=

¥117.61

 

ABBREVIATIONS

ADB

Asian Development Bank

CAGR

compound annual growth rate

COBP

country operations and business plan

DEA

Department of Economic Affairs

DFI

development financial institution

EA

executing agency

EC

environment clearance

EIA

environment impact assessment

EIRR

economic internal rate of return

EMP

environmental management plan

EMS

environmental management system

ESS

environment and social standards

ESMU

environmental and social management unit

ESSF

environment and social safeguard framework

FFA

Framework Financing Agreement

FI

financial intermediary

FIRR

financial internal rate of return

FMA

financial management assessment

FRBM

fiscal responsibility and budget management

FY

fiscal year

FYP

five-year plan

GDP

gross domestic product

GOI

Government of India

IDFC

Infrastructure Development Finance Company

IL&FS

Infrastructure Leasing and Financial Services

IIFCL

India Infrastructure Finance Company Limited

IPPMS

investment program performance monitoring system

JBIC

Japan Bank for International Cooperation

KfW

Kreditanstalt für Wiederaufbau

LIBOR

London interbank offered rate

MCA

model concession agreement

MFF

Multitranche Financing Facility

MoEF

Ministry of Environment and Forest

MOF

Ministry of Finance

NGO

nongovernment organization

PFR

periodic financing request

PIM

project information memorandum

PMU

project management unit

PPP

public–private partnership

PSP

private sector participation

RBI

Reserve Bank of India

SEBI

Securities and Exchange Board of India

SPV

special purpose vehicle

SSF

Social Safeguards Framework

TA

technical assistance

 

WEIGHTS AND MEASURES

km

kilometer

MW

megawatt

NOTES

(i)

The fiscal years (FY) of the India Infrastructure Financing Company Limited (IIFCL) and the Government of India end on 31 March of the following year. FY before a calendar year denotes the year in which the fiscal year ends e.g., FY 2007 ends on 31 March 2008.

(ii)

In this report, "$" refers to US dollars.

Vice President Director General Director

Team leader Team members

L. Jin, Operations Group 1 K. Senga, South Asia Department (SARD) A. Sharma, Governance, Finance and Trade Division, SARD

C. Kim, Senior Finance Specialist, SARD

V. Rao, Finance Specialist (Public-Private Partnership), SARD R. Nagpal, Counsel, Office of the General Counsel

J.

Perera, Senior Safeguard Specialist, SARD

J.

Roop, Environmental Specialist, Regional and Sustainable

Development Department

J. Srinivasan, Senior Control Officer, SARD

CONTENTS

 

Page

INVESTMENT PROGRAM SUMMARY

i

I. THE PROPOSAL

1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

1

A. Sector Performance and Investment Requirements

1

B. Analysis of Key Problems and Opportunities

2

C. ADB Strategy, Sector Assistance, and Policy Dialogue

8

III. THE PROPOSED FACILITY

11

A. Impact and Outcome

11

B. Outputs

12

C. Special Features

12

D. IIFCL’s Investment Program and Financing Plan

13

E. Implementation Arrangements

14

IV. TECHNICAL ASSISTANCE

18

V. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

18

A. Benefits and Impacts

18

B. Assumptions, Potential Risks, and Mitigations

22

VI. ASSURANCES

23

VII. RECOMMENDATION

24

APPENDIXES

1. Design and Monitoring Framework

25

2. Infrastructure Sector Analysis

31

3. Scheme for Financing Viable Infrastructure Projects through the IIFCL

38

4. Market Analysis of the Role of the IIFCL

47

5. Corporate Governance Framework for the IIFCL

56

6. ADB Assistance to the Infrastructure Sector

62

7. External Assistance to the Infrastructure Sector

64

8. Illustrative List of Subprojects for Tranche 1

66

9. Implementation Schedule

68

10. Summary Environmental and Social Safeguards Framework

69

11. Summary of Poverty Reduction and Social Strategy

84

SUPPLEMENTARY APPENDIXES (available on request)

A. Matrix on Lessons Learned from Financial Intermediation Loans for Infrastructure Development

B. Financial Due Diligence Report

C. Technical Assistance: Capacity Development for IIFCL

D. List of Subprojects Sanctioned by IIFCL

E. Financial Management Assessment

F. Memorandum and Articles of Association of IIFCL

G. Environmental and Social Safeguards Framework of IIFCL

INVESTMENT PROGRAM SUMMARY

Borrower

India Infrastructure Finance Company Limited (IIFCL)

Guarantor

India

Classification

Targeting Classification: General intervention Sector: Multisector (energy, transport, and communications) Subsectors: Energy sector development, multimodal transport and sector development Themes: Sustainable economic growth, and private sector development, capacity development Subthemes: Public-private partnership, fostering physical infrastructure development, institutional development

Environmental

Category Financial Intermediary. IIFCL shall ensure that for each

Assessment

subproject, initial environmental examination, environmental impact assessment, and the environmental management plan, as applicable, are submitted to the Asian Development Bank (ADB) for review and approval before submission of a Periodic Financing Request (PFR). An environmental and social safeguards framework (ESSF) has been developed (Appendix 10) to guide the environmental and social safeguards assessment of subprojects during implementation of the Investment Program.

Investment Program Description

The Investment Program supports the “Scheme for Financing Viable Infrastructure Projects through the India Infrastructure Finance Company Limited” (the Scheme) for promoting infrastructure development through public-private partnerships (PPPs). Pursuant to its Scheme (Appendix 3), IIFCL will provide long-term debt financing at commercial rates for stand-alone non- recourse infrastructure subprojects. IIFCL will prioritize the financing of PPP subprojects selected through transparent and competitive bidding process and assessed for commercial viability. IIFCL will finance subprojects only as a member of lending consortium where its total lending to any subproject will not exceed 20% of the total capital cost for the subproject.

Multitranche Financing Facility

IIFCL, through the Government of India (the Government) has requested ADB for financing the Investment Program through a multitranche financing facility (MFF). The MFF, amounting to $500 million over 4 years (FY2007-FY2011), will finance eligible subprojects that are in accordance with the Scheme, and the agreed criteria. The Facility will consist multiple tranches. Each tranche will be for not less than $100 million.

Rationale Poor infrastructure is India’s “Achilles’ heel” which is estimated to cost India 3–4% of lost gross domestic product (GDP) a year. India needs to increase its spending on infrastructure from 4–5% to 9% of GDP to achieve the growth projection of 9% during the 11 th (FY2007–FY2012) Five-Year Plan (FYP). With higher growth

ii

targets and a rising population, even maintaining current levels of infrastructure will require a staggering increase in investment. The total investment required is estimated at about $475 billion during the 11 th FYP.

Public sector has been the main provider of infrastructure in India. However, public financing alone will not be able to generate the needed level of investment ($475 billion). Accordingly, the Government’s priorities for bridging the infrastructure deficit includes (i) revising policies and regulations for enhancing private sector participation (PSP) in infrastructure development including through PPPs, (ii) strengthening the capacity at all levels for promoting PPPs, and (iii) enabling arrangements for bridging the enormous deficit in infrastructure financing especially for long-term funds through all possible sources. Corresponding reform measures are underway.

Infrastructure sector reforms are enhancing the enabling environment and encouraging participation of PSP from domestic and international sources. In addition, significant efforts are ongoing for mainstreaming PPPs in the states and in central line ministries. While a paradigm shift from public financing to PPP modality requires time, these measures have already facilitated the application of PPP modality in sectors such as road and power.

India has also witnessed a visible shift in financial sector policies since the 1990s. The reform measures have led to increased allocative efficiency of the financial system brought about by a reduction in intermediation costs, enhanced competition, and increased diversity of products and services. Notwithstanding these, the infrastructure finance market in India is largely characterized with inadequate flow of long-term funds. In this context, the Government is pursuing reforms in contractual savings (pensions and insurance) and the corporate debt market.

Considering several interlocking factors including policy and regulatory inadequacies in infrastructure and financial sectors, the impact of the ongoing reforms will only be felt over the medium- to long-term and as a result, the already significant gap in infrastructure financing will further increase. These concerns were extensively discussed within the Government as well as with financial market experts and international institutions for framing innovative responses consistent with the PSP and PPP agenda.

Among the options, establishing IIFCL to provide the much needed long-term debt at commercial terms specifically for promoting PPPs was considered important in view of the limited availability of long- term debt for infrastructure financing. Central to the Government’s PPP development strategy, IIFCL’s operating paradigm is guided by the Scheme approved by the Government’s Committee on Infrastructure chaired by the prime minister.

iii

The Government has also designated IIFCL as the debt manager of a $3 billion debt fund of the $5 billion India Infrastructure Financing Initiative. IIFCL, in partnership with Blackstone Group, CitiGroup, and Infrastructure Development Finance Company are the initial investors in the $2 billion equity fund of the India Infrastructure Financing Initiative. Further, IIFCL and 3i Group plc. have entered into a strategic partnership for equity and long-term debt financing for projects in power, port, airport, and road sectors. IIFCL is also expected to be the lead agency for utilizing India’s foreign exchange reserves for infrastructure financing. For this purpose, IIFCL is likely to establish two offshore special purpose vehicles.

The proposed India Infrastructure Project Financing Facility (the Facility) will directly support the Government’s infrastructure development agenda by enhancing the availability of the much needed long-term funds for infrastructure financing. With ADB’s assistance through the Facility, IIFCL will provide funds at commercial terms with over 20-years maturity for infrastructure subprojects which is currently not being provided by the market.

The Facility is an integral part of the ADB’s sector strategy and complements ADB’s parallel initiatives in contractual savings, corporate bonds, PPPs, and infrastructure development, all of which contribute to creating an enabling environment for infrastructure development in India.

Impact and Outcome It is estimated that the $500 million Facility will help catalyze an investment of $2.5 billion–$3.5 billion from the private sector for financing PPP subprojects. The success of the Facility in establishing a framework for implementing the Scheme could trigger substantial investments considering the convergence that will emerge as a result of the (i) expected support from the World Bank, Japan Bank for International Cooperation, and Kreditanstalt für Wiederaufbau; (ii) commitments from international private equity sources including 3i Group plc., Blackstone Group, and CitiGroup; and (iii) the synergies envisaged from the proposed offshore special purpose vehicles for utilizing India’s foreign exchange reserves for infrastructure financing.

The Facility will result in infrastructure development through increased PSP, thereby promoting economic efficiency and growth and reducing poverty. This is expected to have a multiplier effect on the infrastructure sectors as well as on the broader economy. Enhanced PSP through PPPs will contribute to containing and eventually reducing fiscal deficit. The Facility is also expected to strengthen the institutional capacity of IIFCL in credit risk management and project risk appraisal.

Investment Program The Investment Program of IIFCL is estimated to cost $6.0 billion. Of which, IIFCL is expected to raise $3.0 billion (or 50%) from the domestic market including insurance, pension funds, and the

iv

National Savings Scheme, and the balance of $3 billion (or 50%) from international capital markets and bilateral and multilateral sources including the Facility.

Financing Plan

The proposed Facility of $500 million will capture 8.34% of the total financing plan.

India Infrastructure Finance Company Limited Financing Plan to FY2007–FY2011 ($ million)

Item

Amount

%

Asian Development Bank

500

8.34

Local Market Borrowing

3,000

50.00

Foreign Borrowing

2,500

41.66

Total

6,000

100.00

FY = fiscal year Source: Asian Development Bank estimates.

Facility Amount and Terms

A $500 million lending facility will be provided to IIFCL under a

MFF, with multiple tranches at an interest rate determined in accordance with ADB’s London Interbank Offered Rate (LIBOR)-

based lending facility, and such other terms and conditions set forth

in the loan and guarantee agreements. IIFCL has provided ADB

with (i) the reasons for its decision to borrow under ADB’s LIBOR- based lending facility on the basis of these terms and conditions; and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB.

India will provide a sovereign guarantee, in form and substance acceptable to ADB, for the term of each loan as a condition precedent to the effectiveness of each tranche requested by IIFCL and provided by ADB pursuant to the terms of each loan agreement.

Subloan Terms IIFCL will onlend funds received through the Facility (via subloans) to eligible subprojects on commercial terms based on an independent assessment of subproject risk. The eligibility of the subprojects will be assessed in terms of compliance with ESSF, the conditions of the Scheme, and additional criteria agreed with the Borrower. The onlending to an eligible subproject will be preceded by an upfront evaluation of subprojects to ensure compliance with the ESSF to ensure that all subprojects financed through the Facility comply with ADB safeguard requirements.

Period of Utilization The Facility will be available for a 4-year disbursement period (FY2007–FY2011). The last date on which any disbursement under any tranche will be 30 November 2011. The last PFR will have to be submitted no later than 1 November 2010.

v

Subproject and Subborrower Selection Criteria

Each subproject and subborrower shall satisfy at all times the subproject and subborrower selection criteria as set out in the Scheme which includes, inter alia, appraisal for technical, economic, and commercial viability. In addition, each subborrower shall (i) be selected in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time); (ii) have adequate resources and financial capability to raise resources to complete and operate the relevant qualified subproject successfully; (iii) not be in default on any prior loan to any participating members of the consortium including IIFCL; (iv) be able to provide security as required by the consortium of lenders; (v) maintain appropriate financial record of income and expenditure to the satisfaction of ADB and IIFCL; and (vi) comply with ADB’s and national and state policies, and laws and regulations relating to environment, resettlement, and indigenous peoples.

Implementation

IIFCL will be the Executing Agency of the proposed Facility, while

Arrangements

the Ministry of Finance (MOF)-Department of Economic Affairs (DEA) will be the Executing Agency for the technical assistance (TA) grant. IIFCL’s Board of Directors will provide policy direction and strategic oversight for the Facility. A project management unit (PMU) will be established by IIFCL to monitor, screen, and select subprojects in consultation with the consortium of lenders and oversee day-to-day implementation.

The PMU will be supported by specialists with expertise in risk management and project advisory work. A senior officer, reporting directly to IIFCL’s Chairman, will be appointed for ensuring compliance with the ESSF. The PMU will also have a dedicated finance and accounts officer to monitor project accounts and process claims. The PMU will report to ADB on implementation progress.

Procurement and Disbursement

Framework Financing Agreement

All goods and services financed by the Facility will be carried out in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). The individual loan proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). An imprest account will be established in a current account with a commercial bank acceptable to ADB. The initial amount to be deposited and to be maintained in the imprest account shall not exceed the lower of (i) the estimated expenditure for the first 6 months of implementation, or (ii) the equivalent of 10% of the tranche.

IIFCL and the India have entered into a framework financing agreement (FFA) with ADB. The FFA satisfies the requirements established in Appendix 4 of the ADB document Innovation and Efficiency Initiative: Pilot Financing Instruments and Modalities.

The

representations

FFA

records

on

the

full

set

crosscutting

of

assurances,

warranties

and

safeguards,

themes,

covering

vi

governance, anticorruption, financial management, procurement, and disbursement and subproject selection. Before ADB accepts the PFR, India and IIFCL will ensure full compliance with the terms and conditions of the FFA.

Periodic Financing Request

The MFF transaction is accompanied by a PFR (PFR1), received from the borrower, for the first tranche amounting to $300 million.

PFR 1 lists 24 potential subprojects, some of which will be earmarked for ADB financing. The subprojects are all in the road sector and are overwhelmingly under National Highway Authority of India. The total cost of the subprojects is about $3.32 billion, of which IIFCL's exposure will be about $500 million ($20 million–$30 million exposure per subproject on average).

Retroactive Financing Retroactive financing may be possible under individual loans for expenditures incurred up to 12 months before the signing of the corresponding loan agreement, with a ceiling of 20% of the loan amount. The Government and IIFCL have been informed that approval of advance procurement and retroactive financing does not commit ADB to financing any of the proposed subprojects. Each PFR will specify the nature of financing if retroactive financing is requested.

Technical Assistance A TA for an amount of $500,000 is attached to the Facility for (i) supporting capacity development within IIFCL for managing market and credit risks; and (ii) training IIFCL staff in subproject risk appraisal, management, and mitigation.

An ongoing TA is building in-house capacity to ensure that subprojects financed by IIFCL adhere to the ESSF. This TA also supported the rating of IIFCL by an international rating agency for facilitating IIFCL’s entry into the international markets.

Project Benefits At the macro level, the Facility will help catalyze private sector investments for infrastructure development which will help contain and reduce the fiscal deficit at all levels. Financial closure of 64 subprojects sanctioned by IIFCL as of end September 2007 is expected to catalyze nearly $25 billion in investments, of which the Facility will help catalyze nearly $2.5–$3.5 billion. The credit enhancing function of the Government’s guarantee for IIFCL borrowings will also help channel latent sources of funds such as insurance and pension funds for infrastructure development.

At the institutional level, IIFCL is designed to provide innovative financing options for supporting heterogeneous infrastructure delivery models by integrating a range of financing instruments (equity, debt, and guarantee) and financing sources (domestic markets, multilateral sources, international equity, domestic and international borrowings). In the process, IIFCL will also be able to leverage core competences of promoters and project development

vii

agencies (including newly created PPP Cells in selected states and central line ministries) for building a shelf of PPP subprojects. The Facility will have a direct impact on poverty reduction by increasing farm and non-farm productivity. Empirical evidence suggests that that poverty incidence falls by 0.33% for every 1% growth in provincial GDP. Investment in infrastructure as a whole and on roads and transportation in particular has a direct contribution to this linkage by (i) reducing transactions costs; (ii) enabling economic agents like individuals, firms, and governments respond efficiently to demand; (iii) lowering costs of inputs used in production; (iv) opening up new opportunities for entrepreneurs; (v) creating employment especially in public works both as social protection and as a counter-cyclical policy in times of recession; and (vi) enhancing human capital by improving access to health and education.

Risks and

The envisaged benefits depend on effective demand, IIFCL’s

Assumptions

institutional capacity, and the progress of the ongoing real and financial sector reforms.

While PPP is emerging as the preferred mode for infrastructure development, capacity constraints will have to be addressed for transforming the potential for PPPs into a stream of bankable subprojects. This risk is being dealt by intensive support from ADB and other development partners for mainstreaming PPPs. In addition, upfront identification of potential subprojects for the first PFR of the Facility has been made.

The ability of IIFCL to leverage government guarantee to generate low cost and longer tenor funds is critical for its catalytic role. This also depends on the market perception of the quality of IIFCL’s pipeline, credit appraisal and disbursement procedures, risk management and appraisal systems, environment and social safeguard compliance procedures, and operational efficiency. Factors that mitigate these risks include (i) intensive appraisal of the subprojects by IIFCL; (ii) the emphasis of the Scheme on commitment to operational autonomy, good governance, and commercial orientation; and (iii) ongoing ADB and World Bank support to IIFCL for enhancing systems and procedures and human resource development. IIFCL will maintain a lean organization of core specialists for reducing cost overheads. Further, international credit rating required for accessing international capital markets will require IIFCL to adopt and maintain international best practices in corporate governance and financial management.

Adverse impact of drop in the momentum of mainstreaming PPPs has been mitigated at the macro level through positive incentives by the Government for enhancing the bankability of infrastructure subprojects. In addition, state governments are proactively reducing constraints to infrastructure development for promoting economic growth.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed

multitranche financing facility (MFF) to India Infrastructure Finance Company Limited (IIFCL), to be guaranteed by India, for the India Infrastructure Project Financing Facility (the Facility). The report also describes proposed technical assistance (TA) for capacity development of IIFCL and, if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, will approve the TA. The design and monitoring framework is provided in Appendix 1.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A.

Sector Performance and Investment Requirements

2.

The Indian economy expanded significantly in fiscal year (FY)2006. According to

advance estimates released by the Central Statistical Organization on 7 February 2007, the economy recorded a gross domestic product (GDP) growth rate (at factor cost) of 9.2% at constant (FY1999) prices, compared with 9% in the previous year. The increase in growth rates

in recent years is reflected in the 11 th (FY2007–FY2012) Five-Year Plan (FYP) average annual growth target of 9% compared with the 10 th FYP target of 8%.

3. High quality infrastructure is essential to harness the growth impulses in the economy.

The Planning Commission has observed that poor infrastructure is India’s “Achilles’ heel” which is estimated to cost India 34% of lost GDP a year. The Planning Commission has estimated that India needs to increase its spending on infrastructure from 4–5% to 9% of GDP if it is to achieve its growth targets. 1 Table 1 provides a comparison of India’s infrastructure availability.

Table 1: Comparison of Infrastructure Availability in India

 

National

Electricity Production (billion of kWh)

 
 

Population

Expressways

Major

Port Shipments

Item

(million)

(‘000 miles)

Airports

(billion tons)

India

1,100

3.7

17

652

0.4

PRC

1,300

25.0

56

2,500

2.9

United States

300

47.0

189

4.000

1.4

kWh = kilowatt-hour, PRC = People’s Republic of China. Sources: International Monetary Fund, United States Energy Information Administration, Morgan Stanley, China National Development and Reform Commission, and National Council of Applied Economic Research (India).

4. With higher growth targets and a rising population, maintaining current levels of

infrastructure will require a staggering increase in investment. The total investment required is estimated at about Rs18,634 billion ($475 billion) during the 11 th FYP by the Committee on Infrastructure headed by the prime minister. The estimated financing needs for major

infrastructure subsectors during the 11 th FYP include $50 billion–$60 billion for roads, $15.5

billion for seaports, $200 billion for power (over the next 7 years), $10.9 billion for civil aviation, and $89.21 billion (over the next 7 years) for railways. A detailed sector analysis is in Appendix

2.

1 Chile, for example, is estimated to have spent about 7% of its GDP in 2006 on infrastructure while the estimated figure for the Peoples’ Republic of China is 9%.

2

B.

Analysis of Key Problems and Opportunities

5.

Public sector has been the main provider of basic infrastructure in India. However, public

financing—already limited by the deficit reduction provisions of the Fiscal Responsibility and Budget Management (FRBM) Act 2003 2 —will not alone be able to generate the needed levels of investments ($475 billion) to improve infrastructure facilities. According to the 11 th FYP, the targeted average GDP growth rate of 9% during FY2007–FY2012 requires an increase in private investment for infrastructure from the historical average of 6.5% per year to nearly 12.0% per year. Accordingly, the strategy of the Government for bridging the infrastructure deficit includes (i) revising policies and regulations across sectors for enhancing private sector participation (PSP) in infrastructure development including through public-private partnerships (PPPs); 3 (ii) enabling arrangements for bridging the enormous deficit in infrastructure financing especially for long-term funds through all possible sources; and (iii) strengthening the capacity at all levels for promoting PPPs for infrastructure development. The Government expects the shares of public and private investment through PSP including PPP in total infrastructure investment during the 11 th FYP to be 70% and 30% respectively, compared to 83% and 17% respectively during the 10 th FYP. Financing from multilateral and bilateral institutions during the 11 th FYP are expected at around $40 billion to supplement resources raised in domestic and international markets. While the Government has pursued reforms for establishing a framework conducive for infrastructure development and broadening the range of financing modalities, significant scaling up of infrastructure investments still faces formidable challenges in the real and financial sectors.

1. Public-Private Partnership

6. Recognizing the significance of the role of private sector in infrastructure development,

the Government has placed PSP and PPPs at the center of its infrastructure development strategy. The Government’s framework and measures for promoting PPPs draw on international experience with appropriate adaptations to the Indian context 4 include the following.

(i)

Establishing a PPP cell in the Department of Economic Affairs (DEA) in the Ministry of Finance for coordinating the mainstreaming of PPPs nationwide.

(ii)

Institutionalizing PPP Cells in selected states and central line ministries for identifying and developing potential PPP opportunities, developing PPP projects, and bringing them to market for financial closure.

(iii)

Establishing India Infrastructure Project Development Fund for financing PPP project preparation activities such as conduct of feasibility studies.

(iv)

Establishing the IIFCL, the executing agency (EA) for the proposed Facility, for facilitating access to long-term funds for infrastructure development.

(v)

Launching the Viability Gap Fund with a current annual allocation of about $340 million for encouraging PPPs. 5

2 The FRBM Act, 2003 requires the Government to reduce the fiscal deficit by a minimum of 0.3% of GDP and the revenue deficit by 0.5% of GDP each year so that the fiscal deficit is reduced to 3% of GDP by March 2009.

3 PPP projects are typically projects developed, implemented, and operated by bidders (stand-alone special purpose vehicles) where the private sector owns majority stake. Further, these projects have been selected on the basis of a competitive and transparent bidding arrangement and expected to build and operate infrastructure based on a concession with the Government.

4 See www.infrastructure.gov.in and www.pppinindia.com.
5

The Viability Gap Fund can provide catalytic assistance of up to 20% of the capital costs, through which it expects several projects to become bankable, attract private capital, and mobilize private sector efficiencies. This support is especially important for regions and sectors where PPPs are difficult.

3

7. Gaps in technical and management capabilities and in identifying market opportunities

indicate that state governments and central line ministries have not yet fully grasped the potential of infrastructure development through PPPs. Accordingly, in catalyzing the PPP modality for infrastructure development, the DEA has emphasized awareness and capacity building for changing the values developed over decades of implementing public sector projects. While it will be some time before PPP modality is well anchored in the working of the state governments and central line ministries, it is encouraging to note that transport (road) and power (generation and transmission) sectors are already applying PPP modality and have generated a shelf of bankable PPP projects. PPP opportunities have been noted in the urban sector including urban mass transit. The Government is also emphasizing application of PPP

modality in the health and education sectors.

2. Infrastructure Sector Reforms

8. The Government recognizes its important and expanded role in the changing economic

and technological context for catalyzing PSP and PPPs in infrastructure development through (i)

developing legal and regulatory frameworks and arrangements, (ii) planning and coordination,

(iii)

reforming institutions and developing partnerships among complementary institutions, and

(iv)

ensuring quality of infrastructure. In pursuit of these, policy actions have been taken across

sectors to encourage PSP, both through direct PSP and PPPs. These reforms are designed to reduce risks by enhancing the enabling environment, provide stability to long-term cash flows and assist in project appraisal to facilitate financing. Table 2 below summarizes the major

infrastructure sector reforms (Appendix 2).

Table 2: Major Infrastructure Sector Reforms

Roads

Model concession agreement for toll highways has been published.

The National Highways Act, 1956, has been amended to attract private investment in road development, maintenance, and operation.

Seaports

A comprehensive national maritime policy is being formulated to establish the vision and strategy for the sector until FY2024.

Private sector participation including foreign direct investment in ports is being encouraged.

Establishment of tariff authority for major ports to regulate port tariffs.

Airports

Major airports are being built or upgraded through PPPs.

The process of building 35 smaller city airports using PPPs has been initiated.

100% equity ownership by non-resident Indians is permitted in airports.

The Airports Authority of India Act has been amended to provide a legal framework for airport privatization.

A new civil aviation policy has been tabled in the parliament proposing foreign direct investment of up to 74% in domestic carriers.

Urban

A model municipal law has been developed to help states and urban local bodies enact reform legislation and to facilitate the development and disposal of excess land.

Infrastructure

The Urban Land (Ceiling and Regulation) Act, 1976 has been repealed.

Railways

Innovative pricing structures are being adopted for attracting new customers.

PPP-type initiatives are being considered for increasing capacity through the proposed dedicated freight corridors.

Power

The Electricity Act, 2003 and the National Electricity Policy, 2005 have been designed to facilitate competition, reduce technical and commercial losses, and provide remunerative returns on investments.

The Central Electricity Regulatory Commission and 18 state electricity regulatory commissions have been established to regulate tariffs.

FY = fiscal year, PPP = public-private partnership. Sources: Planning Commission, National Highways Authority of India, and Ministry of Power.

4

9. The DEA’s lead role in mainstreaming PPPs (paras. 6–7) is facilitating coordination and

sequencing of reforms for realizing intersectoral synergies. Further initiatives underway include (i) setting up state-level policy frameworks for enhancing PSP in roads and developing a mechanism for sharing traffic risk through annuity models and guarantees; (ii) developing a model concession agreement (MCA) setting out terms for PPPs for freight terminals, logistics parks, warehouses, and inland container depots, in railway operations; (iii) setting up an Airport Economic Regulatory Authority to determine capital expenditure needs, check monopolies, prescribe standards, and to set up a dispute resolution mechanism; (iv) increasing the concession period in ports; and (v) unbundling and financial restructuring of power utilities, implementation of availability-based tariff, setting up state electricity regulatory commissions,

and issuing open access guidelines.

3. Infrastructure Financing

10. The infrastructure finance market in India is largely characterized with inadequate flow of

long-term funds despite a large and diversified financial sector. 6 The tenor of available funds from the domestic market is typically 10 years or less with a 2–3 year re-set clause, effectively making such funding short-term. This typically leads to front-loading of tariffs during the initial years of the project cycle which adversely affects affordability of the services for the low income end-users. Since user tariffs are required to provide for debt repayments, return on equity, and depreciation costs, tariff affordability depends on amortizing debt through smaller repayments over a longer period of time. In the absence of long-term fixed rate financing, stability of cash- flows are difficult to achieve. Table 3 summarizes the available financing sources in infrastructure.

Table 3: Financing Sources for Infrastructure Projects

Domestic Sources

External Sources

Equity

Domestic developers (independently or in collaboration with international developers)

Public utilities (taking minority holdings)

Other institutional investors (likely to be limited)

Debt

Domestic commercial banks (3–5 year tenor)

Domestic term lending institutions (7–10 year tenor)

Domestic bond markets (7–10 year tenor)

Specialized infrastructure financing institutions

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 commercial banks (7–10 year tenor)

Export credit agencies (7–10 year tenor)

International bond markets (10–30 year tenor)

Multilateral agencies (over 20 year tenor)

Source: Planning Commission, Government of India.

6 India’s financial sector is large and diversified. The banking system comprises the Reserve Bank of India, the central bank, and a network of 93 commercial banks with over 61,000 branches, 196 regional rural banks, and 389 cooperative banks. In addition to commercial banks, the financial sector also includes non-bank financial companies, development finance institutions, insurance companies, and venture capital firms. Aggregate bank deposits were estimated at about Rs24,928.54 billion ($635.44 billion) in FY2006, a 25% increase over the previous year (which was itself 17% higher than the year before that). Non-food credit increased by about 19% during FY2006 to Rs18,014.13 billion ($459.19 billion). The Insurance Regulatory and Development Authority estimates that pension funds are worth Rs1,166 billion ($29.72 billion) and are expected to grow to Rs4,065 billion ($103.61 billion) by FY2024.

5

11. Infrastructure finance market is further characterized by the absence of an active long-

term corporate debt market, asymmetric information on infrastructure projects, and inherent risks in financing infrastructure projects. 7 Adding to the problem of inadequate long-term funds is the conversion of development finance institutions (DFIs), which had been the major source of long-term finance, into commercial banks. Further, the commercial banks in general have

limited experience in infrastructure financing.

12. Development Finance Institutions. DFIs were originally established in the 1940s and

1950s to support industrial development through state intervention (directed lending). After financial liberalization in the early 1990s, subsidized funding to DFIs were discontinued. As intended, this led to the demise of most DFIs in view of their inability to compete in the market. DFIs that met prudential and regulatory requirements were allowed to convert into commercial

banks by the Reserve Bank of India (RBI), 8 the central bank. While the Industrial Credit and Investment Corporation of India merged with ICICI Bank Limited, the Industrial Development Bank of India became a commercial bank. Infrastructure Development Finance Corporation, promoted by the Government and government-owned financial institutions, undertook an initial public offering in January 2006 and became privately-owned and incorporated as Infrastructure Development Finance Company (IDFC). Infrastructure Leasing and Financial Services (IL&FS) incorporated in 1987, also broad-based its ownership. As compared to their equity, the loan books of IL&FS and IDFC are nearly full. 9 Not being in a position to significantly expand their asset size, both IL&FS and IDFC have diversified into fee based activities such as project advisory, asset management (equity and debt investment funds), and project development.

13. Corporate Debt. The withering away of DFIs, should have prompted corporations to

approach the market for resources, leading to a vibrant corporate debt market. However, domestic firms still rely more on banks and internal resources than on market borrowings, indicating weakness in debt markets especially secondary markets. 10 A weak secondary market leads to an absence of benchmarks and an illiquid market for interest rate derivatives and hedging mechanisms does not provide investors the opportunity to exit investments. In response to these constraints, the commercial banks generally charge floating rates 11 which

effectively makes a loan a short duration instrument and infrastructure providers pass on

7 Infrastructure projects are complex, capital intensive, and have long gestation periods that involve multiple and often unique risks to project financiers. Due to its non-recourse or limited recourse financing characteristic (i.e., lenders can only be repaid from the revenues generated by the project), and the scale and complexity, infrastructure financing requires a complex and varied mix of financial and contractual arrangements amongst multiple parties including the project sponsors, commercial banks, domestic and international financial institutions (FIs), and government agencies. The risk assessment for a project and its allocation will depend on the conditions including the type and location of the project, the sector, feedstock supply and off-take arrangement, and the proposed technology and so forth. Insufficient knowledge and appraisal skills related to infrastructure projects also add to the risk.

8 On 8 December 1997, RBI constituted a working group chaired by Mr. S.H. Khan to bring about greater clarity in the respective roles of banks and other financial institutions. The working group held the view that DFIs should be allowed to become commercial banks in order to facilitate efficient allocation of resources.

9 IDFC’s equity book is currently around $192 million with a loan book of $3.6 billion. Currently, the Infrastructure Leasing and Financial Services has a total equity of $27 million ($436 million net worth) with an asset base of $2.2 billion.

10 World Bank. 2005. India’s Financial Sector: Recent Reforms, Future Challenges. Washington, DC.

11 At present, except for raising funds for infrastructure projects, commercial banks are not allowed to issue bonds with long maturities. Thus, there are not enough issuers of bonds. Restrictions have also been imposed on the investment activity of contractual savings institutions. As a result, lack of growth in bond investment persists.

6

hedging costs to the end-users. In addition, commercial banks largely depend on short-term deposits for funding and do not undertake long-term market borrowings. 12

14. Reforms. Substantive and sustained institutional and market reforms in the financial

sector are required to channel resources from domestic and internationally available debt and equity sources to infrastructure. Without reforms, it will be difficult to significantly enhance the market-based flow of resources from commercial banks, DFIs, as well as pension and mutual funds to meet the demand for infrastructure financing.

(i)

Government securities. RBI, has accorded priority to the consolidation of government securities and has re-issued existing securities to increase the floating stocks in the market, helping to increase liquidity in key benchmark maturities (3–10 years maturities). In the process, the maturity structure of government bonds has lengthened and a credible yield curve for government securities has developed, which now stretches to over 20-years maturity. This has created a benchmark for pricing long-term corporate debt including infrastructure bonds. Closely related to these developments are initiatives to strengthen the market for interest rate derivatives after RBI permitted the banks to engage in forward contract or interest rate swaps. The introduction of exchange-traded interest rate derivatives and the design of a sound risk management framework by the Securities and Exchange Board of India (SEBI), the capital market regulator, are important steps in this regard. These initiatives have positive implications on the corporate debt market. Over the medium-term these could lead to improved liquidity in infrastructure related financial instruments.

(ii)

Corporate debt market. Systemic measures for strengthening the corporate bond markets are ongoing pursuant to the recommendations of a high-level committee of the Government, the Patil Committee. 13 The recommendations aim to (i) provide credit enhancements for instruments issued by financial institutions including special purpose vehicles (SPVs) for financing infrastructure projects. This measure would encourage long-term sources of debt especially from contractual savings institutions and foreign investors to invest in infrastructure; (ii) evolve a consensus on affordable levels of stamp duty on debt assignments; and (iii) implement a trading, clearing, and settlement system. 14 SEBI has been charged with the responsibility of providing a regulatory framework for the secondary bond market including establishing (i) a trade reporting system; (ii) clearing and settlement system; and (iii) an order matching system. In addition, RBI has drafted guidelines on the usage and offering of credit derivatives, specifically credit default swaps. 15

(iii)

Contractual savings. Going forward, the Government is expected to focus on reforming India’s contractual savings institutions namely, insurance, pension, and provident funds, which are the main sources of long-term funds. The Insurance Regulatory Development Bill, passed in December 1999, opened the insurance sector for PSP and allowed foreign equity up to 26% (increased to 49% in FY2005). A recent study estimated India’s unfunded pension liabilities at

12 Long-term government securities are usually absorbed by pension and insurance funds and held until maturity.
13

14 This measure is to give investors who have illiquid corporate bonds an opportunity to re-cycle them. 15 Source: RBI, DBOD. NO.BP.1409.157/2006-07, 16 May 2007.

High Level Committee on Corporate Bonds and Securitization (2005).

7

Rs17,355 billion ($441.38 billion) or 55.9% of GDP. 16 Given the high ratio of national public debt to GDP at 84.9%, the contingent liability related to the unfunded-defined benefit pension schemes compounds India’s public debt problem. To address these issues, the Government embarked wide-ranging reforms of its pension systems including (i) discontinuing unfunded defined benefit pension schemes, (ii) introduction of a new pension scheme with defined contributions and requiring the funds in this new pension scheme to be privately managed, and (iii) the establishment of an interim Pension Fund Regulation and Development Authority. Privately managed pension scheme will allow the fund managers to explore the possibility of channeling pension funds to long-term infrastructure bonds.

4. India Infrastructure Finance Company Limited

15. Infrastructure is a critical determinant of productivity, inclusive development, national

integration, and poverty reduction. Insufficient capacity across infrastructure sectors leads to a widening infrastructure gap, resulting in lower productivity, higher transport and logistics costs, reduced competitiveness, and slower growth. While these aspects are well recognized by the policy makers and corresponding reform initiatives are underway, several interlocking factors including policy and regulatory inadequacies in infrastructure sector persist. Despite initiatives by the Government for improving the availability of long-term funds, policy, institutional, and market gaps remain. The impact of the ongoing reforms in the real and financial sectors will only be felt over the medium- to long-term and as a result, the already significant gap in infrastructure financing will further increase. Innovative responses consistent with the PSP and PPP agenda are required for addressing the prevailing market inadequacies and at the same time keeping the infrastructure development agenda moving forward.

16. IIFCL was established on 5 January 2006 under the Companies Act, 1956 as a

Government-owned SPV specifically in the context of (i) the magnitude of infrastructure investments required and very limited supply of long-term resources and (ii) the need to catalyze financing for PPP projects. Central to Government’s PPP development strategy, IIFCL’s establishment has been extensively deliberated within the Government and with experts such as the Patil Committee and international and domestic financial institutions. Asian Development Bank (ADB) and the World Bank have extended support to ensure IIFCL’s autonomy and commercial orientation.

17. IIFCL has a lean capital and operating structure with paid-in capital of $76.3 million and

authorized capital of $225.3 million. IIFCL is expected to raise (i) rupee debt of 10-year maturity and beyond, (ii) debt from bilateral or multilateral institutions, and (iii) foreign currency market

borrowings. 17 IIFCL’s market borrowings are government-guaranteed 18 to encourage funds resident in long-term financiers such as insurance and pension funds to invest in infrastructure. IIFCL’s operating paradigm, the Scheme for Financing Viable Infrastructure Projects through IIFCL (or the Scheme) was approved by the Committee on Infrastructure chaired by the prime

16 This does not include liabilities related to defense employees, central and state civil pensioners, and the funding

gap in the Employees’ Provident Funds.

17 Currently, IIFCL is holding discussions with Kreditanstalt für Wiederaufbau (KfW) for €280 million ($395 million) loan. Japan Bank for International Cooperation (JBIC) is also considering a ¥70.5 billion ($600 million) loan under a JBIC-guaranteed United Loan Program. IIFCL has also approached the World Bank for a line of credit of $500 million. IIFCL plans to raise up to $1 billion through external commercial borrowing and has approached the Government and RBI for approval. 18 Currently, a guarantee limit of Rs100 billion ($2.54 billion) has been specified by the Government.

8

minister (Appendix 3). Pursuant to its Scheme, IIFCL will provide long-term debt financing at commercial rates for stand-alone non-recourse infrastructure projects or projects that are units of larger corporate entities. While IIFCL can fund both public and private sector projects, it prioritizes PPP projects selected through transparent and competitive bidding and assessed for commercial viability. The mechanism by which IIFCL performs its market enhancing role is analyzed in Appendix 4. The corporate governance framework of IIFCL is in Appendix 5.

18. IIFCL is expected to catalyze and promote PPPs by leveraging market-based project

development skills and providing much needed long-term debt for financing infrastructure projects. This includes (i) extending support to infrastructure projects in partnership with institutions like IL&FS, IDFC, and National Highway Authority of India; (ii) considering PPP projects at the state and municipal levels e.g., roads, urban development, ports, tourism related infrastructure; (iii) providing financial instruments for enhancing investments in infrastructure, e.g., such as guarantees, debt, and equity; and (iv) establishing market benchmarks. Accordingly, the Government has also designated IIFCL as the debt manager of a $3 billion debt fund of the $5 billion India Infrastructure Financing Initiative. IIFCL, in partnership with Blackstone Group, CitiGroup, and Infrastructure Development Finance Company are investors in the $2 billion equity fund of the India Infrastructure Financing Initiative. Further, IIFCL and 3i Group plc. have entered into a strategic partnership for equity and long-term debt financing for projects in power, port, airport, and road sectors.

19. IIFCL is also expected to be the lead agency in using India’s foreign exchange reserves

to finance infrastructure projects. Under this arrangement, IIFCL has been given in principle approval for setting up two offshore SPVs which will borrow funds from RBI and lend to Indian companies implementing infrastructure projects, or to co-finance their external commercial borrowings for such projects solely for incurring expenditure outside India.

C.

ADB Strategy, Sector Assistance, and Policy Dialogue

20.

ADB’s Sector Strategy. ADB’s Country Operations and Business Plan 2007–2009 19

recognizes that (i) the rapid growth envisaged in the 11 th FYP cannot be achieved or even sustained at the current rate without the support of high quality infrastructure and (ii) the challenges in raising the estimated $475 billion investment in infrastructure over the 11 th FYP period remain a major constraint in realizing the projected economic growth. The Government’s development strategy for the 11 th FYP emphasizes (i) continued focus on infrastructure development, i.e., road, rail, air, and water transport, power, telecommunication, water supply, irrigation, and storage; and (ii) measures to encourage PPPs for the financing, designing, implementing, and operating existing and new infrastructure subprojects.

21. ADB’s Sector Assistance. Since India began to borrow from ADB in 1986, ADB has

assisted public sector infrastructure projects especially in transport and power sectors. As of 31 March 2007, ADB’s infrastructure portfolio in India includes 50 projects (energy, power, transport, roads, railways, and communications) totaling over $9.86 billion (Appendix 6). ADB also provided 114 TA projects totaling over $56.3 million as of 31 March 2007.

19 ADB. 2006. India Country Operations and Business Plan 2007-2009. Manila.

9

22. ADB’s ongoing TAs 20 are providing crucial support for mainstreaming PPPs (paras. 6–7)

through the establishment of PPP cells in selected states and central line ministries and capacity building support for (i) PPP project preparation, appraisal, and evaluation skills; and (ii) operationalizing identified PPP opportunities. In addition, these TAs also support (i) refining the PPP policy and regulatory framework, (ii) improving bidding documents and procedures, (iii) compliance with public safety norms, (iv) building a PPP database, and (v) conducting value- added research. ADB has also provided sector specific TAs for promoting PPPs. 21 Through its

private sector operations, ADB invested in two infrastructure equity funds and in the equity capital of IDFC. More recently, ADB provided assistance to a private sector power transmission project and a private sector liquefied natural gas terminal.

23. ADB has also provided extensive support for developing India’s domestic capital market.

ADB-funded Financial Sector Program Loan 22 supported the development of a diversified, competitive, and market-based financial sector. Building on this, the Capital Market Development Program Loan 23 helped establish an integrated national capital market system. ADB has also been actively engaged in insurance and pension reforms. 24 These programs have increased operational and market efficiency and reduced costs and risks, improved market accessibility, strengthened investor protection, and enhanced the availability of long-term funds for infrastructure and industry. For promoting greater PSP, ADB also provided two financial intermediation loans for infrastructure development. 25

20 ADB. 2006. Technical Assistance to India for Mainstreaming Public-Private Partnerships at State Level. Manila (TA 4890-IND, approved on 11 December, for $3.0 million). ADB. 2007. Technical Assistance to India for Mainstreaming Public-Private Partnerships at Central Line Ministries

of the Government of India. Manila (TA 4993-IND, approved on 16 November, for $2 million).

21 ADB. 1998. Technical Assistance to India for Western Transport Corridor-Facilitating Private Participation. Manila (TA 2986-IND, for $1 million, approved on 9 February). ADB. 1999. Technical Assistance to India for Private Sector Participation in Electricity Transmission. Manila (TA 3380-IND, approved on 28 December, for $600,000). ADB. 2001. Technical Assistance to India for Preparing the National Highway Corridor Public-Private Partnership Project. Manila (TA 3752-IND, approved on 29 October, for $700,000). ADB. 2003. Technical Assistance to India for Development of High-Density Corridors Under the Public-Private

Partnership. Manila (TA 4271-IND, approved on 18 December, for $700,000).

22 ADB. 1992. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to India

for the Financial Sector Program. Manila (Loan 1208-IND, approved on 15 December).

23 ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan for Capital

Market Development Program in India. Manila (Loan 1408-IND, approved on 28 November).

24 ADB. 1999. Technical Assistance to India for Reform of the Private Pension and Provident Funds System and the Employee’s Provident Fund Organization. Manila (TA 3367-IND, approved on 26 December, for $1.0 million). ADB. 2000. Technical Assistance to India for Policy and Operational Support and Capacity Building for the Insurance Regulatory and Development Authority. Manila (TA 3460-IND, approved on 22 June, for $800,000). ADB. 2003. Technical Assistance to India for Pension Reforms for the Unorganized Sector. Manila (TA 4226-IND, approved on 25 November, for $1 million). ADB. 2003. Technical Assistance to India for State-Level Pension Reforms. Manila (TA 4548-IND, approved on 23 December, for $750,000). ADB. 2007. Technical Assistance to India for Implementing Pension Reforms. Manila (TA 4938-IND, approved on 8 June, for $1.0 million).

25 ADB. 1996. Report and Recommendation of the President to the Board of Directors on Three Proposed Loans for the Private Sector Infrastructure Facility. Manila (Loans 1480/1481-IND, approved in November). ADB. 2001. Report and Recommendation of the President to the Board of Directors on Proposed Loans to Infrastructure Leasing and Financial Services Limited and Industrial Development Bank of India and Proposed Technical Assistance Grant to India for the Private Sector Infrastructure Facility at State Level Project. Manila (Loan 1871-IND, approved in November).

10

24. Lessons Learned. While the overall assessment of the first financial intermediation loan

was successful, 26 the low utilization experienced in the second loan 27 suggest the need to (i) incorporate flexibility in financing arrangements, (ii) address environmental and social safeguards issues at the project design stage instead of at the implementation stage, (iii) support PPPs, and (iv) improve ADB’s capacity in subsovereign and non-sovereign public sector financing to respond to the changing environment and client needs. A matrix summarizing the lessons learned is presented in Supplementary Appendix A. In addition, the Country Assistance Program Evaluation for India 28 also emphasizes effective demand as pre- requisite for financial intermediary loans. It also underlines the need for addressing structural issues that affect mobilization of domestic resources as well as effective demand.

25. External Assistance. As of June 2006, the World Bank (including International

Development Assistance) had an infrastructure investment portfolio of 56 projects, amounting to $11.3 billion. 29 Official Development Assistance loans by the Government of Japan have steadily increased since FY1990. As of March 2006, a total of 185 projects had been committed by Japan Bank for International cooperation (JBIC) for a total of ¥2,252.5 billion ($19.15 billion). 30 The Government of Germany has made financial commitments to India amounting to €6.3 billion ($8.93 billion). In addition, Kreditanstalt für Wiederaufbau (KfW) has extended €774

million ($1.1 billion). 31 External assistance for infrastructure in India is summarized in Appendix

7.

26.

Policy Dialogue. ADB’s extensive support for the financial sector and infrastructure

(paras. 21–23) is in the context of sustained policy dialogue at various levels of the government. Substantive assessment 32 underpinned the mainstreaming of PPPs through ongoing TAs (para. 22), among others, for developing a pipeline of bankable projects to establish effective demand for infrastructure financing. The ongoing dialogue has also led to amendments to the Scheme for incorporating best practices such as risk-based pricing and in-house risk assessment capacity in IIFCL. ADB extended support to develop IIFCL’s business strategy in consultation with development partners and also enabled IIFCL to undertake international rating (para. 33). ADB also led the effort to establish a common environmental and social safeguards framework (ESSF) 33 of IIFCL which has since been endorsed by JBIC, KfW, and the World Bank (paras. 66-67). Policy dialogue also facilitated the adoption of international best practices in IIFCL with

26 ADB. 2003. Project Completion Report on the Private Sector Infrastructure Facility (Loans 1480/1481-IND) in India. Manila.

27 ADB. 2006. Project Performance Evaluation Report on Private Sector Infrastructure Facility. Manila.

28 ADB. 2007. Country Assistance Program Evaluation. Manila.

29 Available: http://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,content

MDK:20195738.

30 Available: http://www.jbic.go.jp/english/oec/project/yen_loan_list.php.

Available: http://www.kfw.de/EN_Home/index.jsp. 32 ADB. 2000. Technical Assistance to India for the Development of Secondary Debt Market. Manila (TA 3474-IND, approved on 28 July, for $600,000). ADB. 2001. Technical Assistance to India for Enhancing Private Sector Participation in Infrastructure Development at the State Level. Manila (TA 3791-IND, approved on 11 December). The recommendation of these TAs emphasized the establishment of PPP units at central and state government levels to assist in project development and achieving financial closure considering that corporate long-term debt market remained undeveloped and suffered from a number of impediments, including limited participation by long-term market participants such as provident and pension funds and insurance companies, a weak secondary market, absence of a benchmark yield curve, and inadequate support infrastructure.

ADB’s safeguards policies, namely, Involuntary Resettlement Policy (1995), Environment Policy (2002), and Policy on Indigenous Peoples (1998) require that the financial intermediary should have an adequate policy framework backed by institutional capacity to ensure that any subproject financed by the financial intermediary, using ADB funds, comply with ADB’s safeguards policy requirements.

33

31

11

regard to financial management and review mechanisms (paras. 68–69). As part of the ongoing policy dialogue, ADB plans to assess the progress in infrastructure financing and suggest evolution to the Scheme in view of the ongoing real and financial sector reforms.

III. THE PROPOSED FACILITY

27. The Facility involving a loan of $500 million to IIFCL (the Borrower) will directly support

the Government’s infrastructure development agenda through enhancing the availability of the much needed long-term funds for infrastructure financing. With ADB’s assistance through the Facility, IIFCL will be able to provide funds at commercial terms with over 20-years maturity for infrastructure subprojects, which is currently not being provided by the market.

28. The Facility is an integral part of ADB’s sector strategy and complements ADB’s parallel

initiatives in contractual savings, corporate bonds, PPPs, and infrastructure development, all of

which contribute to creating an enabling environment for long-term financing for infrastructure development.

29. Multitranche Financing Facility. The MFF is particularly well-suited for the Facility

because (i) the MFF structure allows the flexibility to IIFCL in its investment decisions based on the readiness of subprojects which will dictate disbursement projections as well as fund raising plan of IIFCL; and (ii) the performance of the subprojects financed can guide the financing of further subprojects, among others, through incentives such as introduction of free limit for facilitating implementation. Further, the Facility supports IIFCL’s institutional transformation in line with the evolving real and financial sector reforms, thus building a long-term partnership between ADB and IIFCL.

A.

Impact and Outcome

30.

A significant share of the estimated investment requirement of $475 billion during the

11 th FYP needs to originate from the private sector. In this context, the Facility, while small compared to the total needs, is the first international assistance to IIFCL. It is estimated that the $500 million Facility will help catalyze an investment of $2.5 billion–$3.5 billion from the private sector for financing of 30–40 PPP subprojects. 34 The success of the Facility in establishing a framework for implementing the Scheme could trigger substantial investments considering the convergence that will emerge as a result of the (i) expected support from the World Bank, JBIC, and KfW; (ii) firm commitments from the international private equity sources (Blackstone Group, CitiGroup and 3i Group plc); and (iii) the synergies envisaged from the proposed overseas subsidiaries of IIFCL (paras. 17–19).

31. The Facility will result in infrastructure development through increased PSP thereby

promoting economic efficiency and growth and reducing poverty. This is expected to have a multiplier effect on infrastructure sectors as well as on the broader economy. Enhanced PSP through PPPs will contribute to containing and eventually reducing the fiscal deficit.

32. The Facility is also expected to strengthen the institutional capacity of IIFCL in credit risk

management and project risk appraisal. International credit rating will enable IIFCL to source stable long-term funding from the international markets. This in turn will encourage IIFCL to adopt international best practices in corporate governance and financial management.

34 IIFCL will finance subprojects only as a member of consortium where its total lending to any subproject will not exceed 20% of the total capital cost for the subproject (Appendix 3).

12

B.

Outputs

33.

The ADB supported outputs through the Facility are grouped into two areas:

(i)

Creating high quality and viable infrastructure assets. 35 The Investment Program (para. 39) of IIFCL will create high quality and viable infrastructure assets across sectors including roads (37 subprojects), power (22 subprojects), seaports (2 subprojects), airports (2 subproject), and urban infrastructure (1 subproject) covering the states of Andhra Pradesh, Gujarat, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Orissa, Rajasthan, Sikkim, Tamil Nadu, and Uttar Pradesh.

(ii)

Creating institutional capacity: The Facility seeks (a) IIFCL to be rated by international credit rating agencies 36 for facilitating access to international markets, (b) to develop capacity of IIFCL for the implementation of the ESSF to screen and monitor subprojects and develop reporting formats (paras. 66-67), and (c) to provide capacity building and institutional development support to strengthen IIFCL’s resource management, project risk appraisal capability, and investment policies.

C.

Special Features

34.

Promoting PPP and PSP is a major paradigm shift in infrastructure financing in India.

Government’s request for ADB support in this process is in recognition of ADB’s extensive involvement in infrastructure sector and financial sector reforms. Consultations with the Government and other stakeholders including development partners enabled the design of the Facility as a second generation financial intermediation loan that is in the context of effective demand. Further, the Facility through the Scheme is well-anchored to the ongoing reforms in the infrastructure and financial sectors.

35. Transaction Costs. The Facility, the first MFF through a financial intermediary, is

designed to enable ADB to leverage its resources to finance a wide range of subprojects in a programmatic manner across subsectors rather than discretely finance individual subprojects. This is expected to reduce transaction costs for the Government as well as for ADB.

36. Public-Private Synergy. The Facility is part of the integrated PPP development strategy

in India and draws on the extensive ADB support for infrastructure development through PPPs. IIFCL is well-positioned to finance PPP subprojects emerging from the ongoing ADB support (para. 22) for mainstreaming PPPs. The development of PPP subprojects by professional project developers (such as IDFC and IL&FS) and consideration of such subprojects for financing by a consortium of investors and lenders including IIFCL, ensures deepening of project preparation and financing skills in the country. Among the development partners, ADB is uniquely placed to finance PPP subprojects by offering customized financing options through its public and private sector windows.

37. Lead Role. IIFCL has been designed to catalyze the flow of foreign institutional and

private equity funds in the emerging PPP space in India. This ushers in international best

35 Figures refer only to 64 approved subprojects. This list will be extended further as 70 more subprojects are expected to come into IIFCL’s pipeline over the next fiscal year (FY2008). 36 On 7 August 2007, Standard & Poor’s Ratings Services assigned its “BBB-/Stable” ratings to IIFCL at par with the sovereign rating of India.

13

practices in infrastructure financing including financial products and technology. The diligence of the policy makers in ensuring that IIFCL remains anchored to the market and evolves with real and financial sector reforms reinforces the catalytic role for IIFCL in infrastructure development.

38. Long-Term Benchmark Rate. By providing long-term lending on commercial terms,

IIFCL will facilitate pricing of risk for infrastructure. This will also help establish benchmark rates for infrastructure bonds. The presence of IIFCL as a long-term financier will also provide comfort

to equity investors who have exposures to subprojects for the length of the concession period.

D.

IIFCL’s Investment Program and Financing Plan

39.

As of end September 2007, IIFCL had a pipeline of 64 sanctioned subprojects 37 with a

total cost of Rs1,115.85 billion ($28.38 billion), of which IIFCL’s financing is estimated at $3.81 billion (about 15% of total subproject costs). Additional 70 subprojects are expected to come into its pipeline over the next fiscal year (FY2008). As a result of these asset additions, IIFCL’s balance sheet will grow to around $6 billion–$8 billion during FY2007-FY2011. Table 4 summarizes the indicative financing plan for FY2007–FY2011 under the assumption that IIFCL’s balance sheet will grow to $6 billion.

Table 4: Financing Plan FY2007–FY2011 ($ million)

Source

Total

%

Asian Development Bank Local Market Borrowings a Foreign Borrowings Total

b

500

8.34

3,000

50.00

2,500

41.66

6,000

100.00

a

Funds that the India Infrastructure Finance Company Limited will raise from the domestic market including insurance and pension funds, and the National Savings Scheme.

b Foreign borrowings include bilateral and multilateral sources and funds that the India Infrastructure Finance Company Limited will raise from the international capital markets. Source: Asian Development Bank estimates.

40. IIFCL, through the Government, has requested financing of $500,000,000 from ADB’s

ordinary capital resources (OCR) to help finance part of its Investment Program. Accordingly, the Facility was included in the India Country Operations Business Plan FY2007 (footnote 19). The Facility will have multiple tranches and will be in accordance with ADB policy. 38 The Facility

will have an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge and such other terms and conditions set forth in the draft loan and guarantee agreements. 39 IIFCL has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility, and (ii) an undertaking that these were its own independent decision and not made as a result of any communication or advice from ADB.

41. India will provide a sovereign guarantee in form and substance, acceptable to ADB, for

the term of each loan as a condition precedent to the effectiveness of each tranche requested by IIFCL and provided by ADB pursuant to the terms of each loan agreement.

37 The list of sanctioned subprojects is in Supplementary Appendix D.

38 ADB. 2005. Innovation and Efficiency Initiative: Pilot Financing Instruments and Modalities. Manila. 39 ADB rules on commitment charges, which are in effect when a tranche is provided, will apply with respect to such tranche.

14

42. Framework Financing Agreement. The Borrower and India have entered into a

framework financing agreement (FFA) with ADB. The FFA satisfies the requirements established in Appendix 4 of the ADB Innovation and Efficiency Initiative: Pilot Financing Instruments and Modalities. 40 The FFA records the full set of assurances, warranties and representations on crosscutting themes covering safeguards, governance, anticorruption, financial management, procurement, and disbursement and subproject selection. Before ADB accepts the periodic financing request (PFR), India and IIFCL will ensure full compliance with the terms and conditions of the FFA.

43. Periodic Financing Request. Multipurpose subloans will be extended under the Facility

to a range of subprojects subject to submission of the related PFR by IIFCL and execution of related loan and guarantee agreements. Each PFR will be accompanied by a list of subprojects identified for financing under the Facility including those subprojects which can be substituted for subprojects that are not in compliance with ADB requirements. Each individual tranche will be for not less than $100 million. The first tranche PFR (PFR1) for $300 million to finance infrastructure subprojects has been received. Appendix 8 lists 24 illustrative subprojects which have been submitted to ADB for consideration under PFR 1.

E.

Implementation Arrangements

44.

Project Management. IIFCL will be the EA of the proposed Facility. Policy direction and

strategic oversight will be provided by IIFCL’s Board of Directors. A project management unit (PMU) will be established by IIFCL to monitor the screening and selection of subprojects in consultation with the consortium of lenders. The PMU will also monitor day-to-day implementation of the Facility. The PMU will be staffed with existing IIFCL staff to the extent possible and consultants will fill residual capacity gaps. PMU staff will consist of specialists with expertise in risk and project management. A senior officer, reporting directly to the Chairperson of the IIFCL, will be appointed to ensure and certify project compliance with the ESSF. The PMU will have a dedicated finance and accounts officer to monitor accounts and processing claims. The PMU will be responsible for the identification, screening, selection, and monitoring of all subprojects ensuring compliance with state and national policies and the ESSF. In

addition, the PMU will be responsible for developing and implementing an investment program performance monitoring system (IPPMS). The Implementation Schedule is provided in Appendix

9.

45.

Subproject and Subborrower Selection Criteria. The Scheme defines the

subborrower and subproject selection criteria, appraisal and monitoring mechanisms and lending terms for projects (Appendix 3), which includes, inter alia, appraisal by the lead bank for technical, economic, and commercial viability. In addition, each subborrower funded under the Facility will

(i)

be selected in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time);

(ii)

have adequate resources and financial capability to raise resources to complete and operate the relevant subproject successfully;

(iii)

not be in default on any prior loan from the Borrower or from any of the participating members of the consortium of lenders;

(iv)

be able to provide security as required by the consortium of lenders;

40 ADB. 2005. Innovation and Efficiency Initiative: Pilot Financing Instruments and Modalities. Manila.

15

(v)

maintain appropriate financial records of income and expenditure to the satisfaction of the Borrower and ADB; and

(vi)

comply, and cause each subproject to comply, with ADB's and national and state policies, laws, and regulations relating to environment, resettlement and indigenous peoples.

46. Approval Procedure. Subprojects under the Facility will be processed as follows.

(i)

IIFCL will review the preliminary designs and cost estimates for all subprojects proposed under the respective tranches as approved by the lending consortium.

(ii)

Prior to the preparation of each PFR, the applicability and relevance of common ESSF for environmental assessment, involuntary resettlement, and indigenous peoples will be reviewed and updated to ensure their relevance and consistency with applicable country frameworks.

(iii)

In formulating each new PFR, IIFCL will review potential ongoing subprojects to ascertain their compliance with ESSF. These review reports will be submitted to ADB together with other relevant safeguard documents for information and review. If any major non-compliance is found during such a review, ADB will request a corrective action plan which will be prepared by IIFCL and submitted to ADB for review and approval. In addition, any subproject which will be financed under the Facility will follow the approved common ESSF.

(iv)

IIFCL will submit the compliance certificate along with the PFR to ADB for approval.

47. A PFR will (i) state the required loan amount; (ii) list the subprojects to be financed under

the tranche; (iii) be accompanied by appraisal reports for the listed subprojects including the

environmental assessment report 41 and appropriate resettlement plan and indigenous peoples plan, if any; (iv) give cost estimates and detail the financing plan; (v) spell out the implementation arrangements; (vi) confirm the continuing validity and adherence to the provisions of the FFA; (vii) confirm compliance with the provisions under previous loan agreements; and (viii) provide other information required under the facility administration memorandum to be prepared and agreed upon by ADB, the Government, and IIFCL to facilitate the implementation and processing of the Facility.

48. Maximum Subloan Size and Free Limit. As IIFCL is limited by its Scheme to financing

up to 20% of subproject cost, ADB will not stipulate any additional limitation on the size of the subloans. However, all subloans under the first tranche will be subject to prior review and approval of ADB. For subsequent tranches, a suitable free limit pursuant to the provisions of

ADB’s Operations Manual 42 may be determined for IIFCL based on ADB's assessment of IIFCL’s performance, appraisal standards, portfolio quality, management, average loan size, and the subproject pipeline. ADB will, however, reserve the right to review subprojects even below the free limit to ensure safeguard compliance.

49. Period of Utilization. The Facility will be available for 4 years (FY2007–FY2011). To

ensure timely implementation in line with the Government’s emphasis on the disbursement readiness of approved loans, the Borrower will prepare a detailed disbursement plan for the

41 For subprojects categorized as environment category B–sensitive or category A, ADB’s 120-day rule for the submission of the periodic financing request will apply. 42 ADB. 2003. Operations Manual. Section D6/OP: Financial Intermediation Loans. Manila (15 December), para. 7.

16

PFR of the tranches. The last date on which any disbursement under any tranche may be made will be 30 November 2011. The final PFR should be submitted no later than 1 November 2010.

50. Procurement. In accordance with ADB’s Procurement Guidelines (2007, as amended

from time to time), 43 ADB will encourage the Borrower to require its subborrowers to adopt internationally competitive bidding procedures to the extent possible when the amount of the investment is unusually large and economy and efficiency can be gained by following such procedures. For procurement of goods and services to be financed by subloans out of ADB loan proceeds, the Borrower will ensure that the price paid is reasonable, and that account is taken of factors such as time of delivery, efficiency, and the reliability of goods. For build-operate- transfer projects and their variants, if the subproject sponsor or engineering, procurement, and construction contractor is selected through competitive bidding among international entities in accordance with procedures acceptable to ADB, such subproject sponsor or contractor may apply its own procedures for procurement, provided that such procurement is for goods, services, and works supplied from, or produced in ADB member countries.

51. Disbursement Arrangements. The EA shall ensure that the individual loan proceeds

under the Facility will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). While making disbursements, IIFCL will review the utilization report for each subproject verified by a chartered accountant and lead bank. The utilization report shall also be accompanied by an engineer’s certificate. The borrower will establish an imprest account in a current account, with a commercial bank acceptable with ADB. The imprest amount at any time will not exceed (i) 10% of each loan tranche, or (ii) estimated expenditures for the first 6 months of project implementation, whichever is lower.

52. Governance and Anticorruption Policy. ADB’s Anticorruption Policy (1998, as

amended to date) was explained to and discussed with IIFCL. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to review and examine, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the subprojects under the Facility. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the loan regulations and the bidding documents for the projects under the Facility. In particular, all subprojects financed by ADB in connection with the Facility shall include provisions specifying the right of ADB to review and examine the records and accounts of the Borrower, subborrowers, suppliers, contractors, and other service providers as they relate to the subprojects.

53. IIFCL will, under its comprehensive business plan, disclose to its Board of Directors all

financial relationships and transactions of the non-executive directors in its Annual Report. Compensation levels of all Board of Directors will also be disclosed. IIFCL management will be required to disclose to the Board of Directors all the material, financial, and commercial transactions where members of management have a personal interest and transactions that have a potential conflict of interest with the interests of the IIFCL. The management of IIFCL will also provide clear description of contingent liabilities and associated risks.

54. IIFCL will constitute an audit committee with non-executive directors as members and

50% representation by independent directors. In addition, IIFCL will have a “whistle blower” policy which will help to maintain the ethical standards of IIFCL and enhance its image with stakeholders. Under this policy, staff members who notice unethical or improper practices will be able to approach the audit committee without informing their supervisors. Employment and

17

other personnel polices will contain provisions protecting “whistle blowers” from unfair termination and other unfair employment practices. IIFCL will present its corporate governance framework in a separate section in its Annual Report along with a compliance report.

55. Accounting, Auditing, and Reporting. IIFCL, through the PMU, will establish and

maintain separate records for works, goods, and services financed out of loan proceeds. IIFCL will maintain separate project accounts according to generally-accepted accounting principles

for all expenditures incurred under the Facility and the subprojects, whether out of loan proceeds or from other sources, and record, in a transparent manner, all funds received from the Government, ADB, and other sources.

56. Detailed consolidated annual project accounts will be maintained by IIFCL through the

PMU and will be audited by independent auditors whose qualifications, experience, and terms of reference are acceptable to ADB. The accounts will be submitted to ADB within 6 months of the end of the fiscal year. The annual audit report will include a separate audit opinion on the use of loan proceeds, free limit (para. 48), and compliance with financial loan covenants. IIFCL has been made aware of ADB’s policy regarding delayed submission of audits and its requirements for a satisfactory and acceptable audit of accounts.

57. Advance Contracting and Retroactive Financing. In cases where IIFCL’s

management has approved advance contracting for consultant recruitment and procurement of goods and civil works, retroactive financing may be requested for the first PFR under the MFF. For subsequent loans as well, ADB may agree to a request for advance contracting and retroactive financing of civil works, equipment and materials, and recruitment of consulting services, subject to these being requested under following PFRs and subject to the request being in accordance with the agreed procedures and guidelines. All such requests will be assessed on a subproject-by-subproject basis. These arrangements will facilitate the readiness of subprojects under the Facility and will be considered for subsequent subprojects during the processing of individual PFRs. The total eligible expenditure under retroactive financing will not exceed an amount equivalent to 20% of the individual loan and must have been incurred not more than 12 months before the signing of the related legal agreements. However, approval of advance action and retroactive financing does not commit ADB to finance the subprojects being developed under the facility. Before being accepted for retroactive financing, such subprojects will be reviewed and certified by IIFCL for their compliance with ESSF.

58. Subproject Performance Monitoring and Evaluation. IIFCL will be responsible for

establishing an IPPMS acceptable to ADB within 3 months from the signing of the FFA and the first PFR. For the IPPMS, IIFCL will first select a set of clearly measurable performance monitoring indicators relating to implementation, improvements, institutional development, and capacity building milestones including those in the design and monitoring framework. IIFCL will establish a baseline data for each of the selected indicators within 6 months of the date that the first loan under the Facility takes effect. Subsequently, IIFCL will conduct annual surveys and will update ADB on progress against each indicator. IIFCL will submit quarterly progress reports attached to the facility administration memorandum. IIFCL will also submit to ADB a completion report within 3 months of the completion of all ADB-supported activities and subprojects.

59. Subproject Review. ADB will, at its discretion, conduct reviews of the management,

financial, and operational performance of the Borrower and subprojects financed under the Facility after the closing of withdrawals. Such reviews will include safeguard implementation and procurement procedures used by the subprojects.

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60. The performance of the Facility will be reviewed periodically at three levels: (i) by IIFCL

through the PMU (quarterly), (ii) by IIFCL’s Board of Directors (semi-annually), and (iii) by ADB

(annually). The quarterly review by the PMU will be completed by the 10th day following the quarterly review. IIFCL’s Board of Directors will review the performance semiannually and will forward the semi-annual progress reports to ADB by the 10th day of the month following the semi-annual review. ADB will review the quarterly progress reports and semi-annual reports during the annual review missions and during the tripartite reviews chaired by the Government. In addition, a midterm review of the investment program will be conducted in FY2008. The review will cover disbursements, implementation progress, including progress of capacity building initiatives, ESSF implementation, and status of the IPPMS. The review will identify weaknesses and suggest changes in scope, outputs, and due diligence, and agree on suggested changes.

IV. TECHNICAL ASSISTANCE

61. The TA for an amount of $500,000 is attached to the Facility. The TA is expected to be

implemented over a 12-month period from July 2008 to June 2009, and aims to (i) support capacity development within IIFCL to manage market and credit risks; and (ii) to train IIFCL staff in risk assessment, management, and mitigation. The TA consists of the following components.

(i)

Enhancement of resource management function. The TA will assist IIFCL to strengthen the capacity of its resource management function to manage risks arising from its funding and financing activities.

(ii)

Risk assessment. The TA will assist the development of (i) risk appraisal procedures, (ii) pricing tools, and (iii) credit risk management processes to enable IIFCL to acquire in-house project risk assessment capability.

(iii)

Enhancement of resource management systems. The TA will identify software and hardware for upgrading IIFCL’s resource management systems and processes.

(iv)

Training of staff. The TA will provide training on resource management and risk assessment.

62. IIFCL will be the EA for the TA. The TA outcomes will be monitored by DEA, ADB, and

IIFCL through consultant reports, periodic consultations, and review missions. ADB will engage TA consultants through a firm, in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). The quality- and cost-based selection and biodata technical proposal methods will be used. The terms of reference, cost estimates, and

implementation arrangements are described in Supplementary Appendix C.

V. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A.

Benefits and Impacts

63.

Glaring infrastructure deficits in all sectors can be felt in all locations in India. The huge

cost on the society of this deficit from lower productivity to reduced competitiveness has prompted concerted efforts for infrastructure development. In this context, the Facility is designed as part of the policy, regulation, and institutional mechanisms being established for

19

mainstreaming PSP and PPPs for enhancing the role of private sector funds, technology, and management in infrastructure development.

1. Integrated Framework

64. As a financial institution, IIFCL can respond to infrastructure financing opportunities only

when it operates in a conducive policy environment, is commercially oriented, and appropriately funded. The Scheme provides this framework.

(i)

IIFCL’s Scheme is designed for enabling innovative financing options for supporting heterogeneous infrastructure delivery models by integrating a range of financing instruments (equity, debt, and guarantee) and financing sources (domestic markets, multilateral sources, international equity, domestic and international borrowings).

(ii)

IIFCL will be able to leverage the core competences of promoters and project developers for building a shelf of PPP subprojects. As a result, IIFCL will be able to intermediate and provide innovative solutions for designing, packaging, and financing PPP subprojects for sectors and locations in need for such support.

(iii)

By limiting IIFCL’s financing to 20% of subproject costs and long-tenor funds (20 years and above), the Scheme seeks to catalyze investments. Financial closure of subprojects sanctioned by IIFCL as of end September 2007 is expected to catalyze nearly $25 billion in investments, 44 of which the Facility will help catalyze nearly $2.5 billion–$3.5 billion.

(iv)

Catalyzing private sector investments for infrastructure development will help contain and reduce the fiscal deficit at all levels.

(v)

IIFCL will keep itself aligned to best practices for ensuring international ratings at investment grade and above. The commercial orientation of IIFCL is further reinforced by the requirement of the Scheme to finance only viable subprojects.

(vi)

The credit enhancing function of the Government guarantee for IIFCL borrowings will help channel latent sources of funds, such as insurance and pension funds, for infrastructure development. The pricing of long-term loans by IIFCL in line with the risk characteristics of subprojects will also facilitate the creation of pricing benchmarks for infrastructure related financial instruments.

2.

Financial Analysis

65. While the subprojects sanctioned by IIFCL are spread across all subsectors, the majority

of subprojects tentatively identified for first PFR of the Facility are for roads. The economic efficiency of road projects is typically high with Economic Internal Rate of Return (EIRR) in the 25–30% range and Financial Internal Rate of Return (FIRR) in the 10–15% range. The estimates are also robust from a sensitivity point of view with the EIRRs and FIRRs not

44 The total cost of the subprojects sanctioned by IIFCL at the end of September 2007 (Supplementary Appendix D) is ($28.38 billion), of which IIFCL’s financing is estimated at $3.81 billion. As a result, financial closure of these subprojects would imply catalyzing nearly $25 billion worth of investments. With the projected growth in balance sheet of IIFCL during the next 5 years, the catalytic role could be significant. Additional resources would also be catalyzed through equity from various sources as a result of IIFCL’s long-term debt financing.

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declining significantly even in worst case scenarios. Further, the EIRRs and FIRRs are significantly above the opportunity cost of capital. The Facility is also expected to finance power transmission projects. The EIRR estimates in this case also meet the benchmark requirements.

3. Environmental and Social Safeguards

66. ADB took the lead 45 in developing a common ESSF 46 (Supplementary Appendix G) in

consultation with World Bank, KfW, and JBIC for harmonizing the safeguards policy framework for involuntary resettlement, the environment, and indigenous peoples (paras. 26, 33, 66–67). Showing remarkable awareness of the need for environmental and social safeguards in all aspects of infrastructure development, IIFCL participated in the development of ESSF and adopted the same. As part of the subproject selection process, IIFCL will screen subprojects to determine whether they trigger the compliance requirements of ADB’s involuntary resettlement, environment, and indigenous peoples policies. If they do, IIFCL will ensure that each subproject has appropriate instruments to adequately address these requirements and will submit the required documents either to ADB or a third party acceptable to ADB for review. IIFCL will not finance subprojects, using the funds from the Facility which do not adequately address safeguard requirements.

67. In-house capacity to implement the ESSF is being established with ADB support and

IIFCL is setting up a unit for ensuring that all subproject proposals to be financed under the Facility comply with the requirements of the ESSF. The capacity building initiatives at IIFCL include appointing qualified specialists in environment and social safeguards issues to staff the

unit 47 who will train IIFCL staff in reviewing and approving subprojects. Appendix 10 provides the Summary ESSF.

4. Financial Management

68. A financial management assessment (FMA) to examine IIFCL's financial and fiduciary

management capacity for implementing the Facility was undertaken (Supplementary Appendix E). 48 IIFCL has adopted an accrual system of accounting reflecting double entry accounting principles and supported by standardized software. IIFCL undertakes three levels of audit: (i) a concurrent internal audit by a firm of chartered accountants, (ii) a statutory audit by an independent firm of chartered accountants appointed by the Comptroller and Auditor General of India, and (iii) a supplementary audit by the Comptroller and Auditor General of India. As part of the Facility, IIFCL will closely monitor the physical and financial progress of subprojects based

45 The process of preparing the environmental and social safeguards framework was guided by ADB’s Environment and Social Safeguards Division. The first meeting of development partners took place on 9 February 2007 and the second meeting on 13 August 2007. The draft social safeguards framework was uploaded to the ADB website on 17 August 2007. Available: http://www.adb.org/Documents/Resettlement_Plans/IND/40655/default.asp.

46 The common safeguards frameworks include (i) the anticipated impacts of the components or subprojects likely to be financed under the multitranche financing facility on the environment, involuntary resettlement, and indigenous peoples; (ii) safeguards criteria to be used in selecting subprojects; (iii) requirements and procedures to be followed to screen and categorize them, conduct impact assessments, develop management plans, hold public consultations, and disclose public information (including the 120-day disclosure rule, if required), and monitor and report the progress of such subprojects or project components; (iv) the institutional arrangements (including budget and capacity requirements); and (v) IIFCL’s and ADB’s responsibilities and authorities for the preparation, review,

and clearance of safeguards documents.

47 As an interim measure, two national consultants (one environmental and one social safeguards specialist) were hired in July 2007 and have commenced the work.
48

The FMA was based on discussions with various officials of IIFCL, Indian Credit Rating Agency Limited, and the World Bank. The World Bank conducted its own FMA and the ADB and World Bank teams shared the findings of their respective FMA reports.

21

on the utilization certificates provided by the firm of chartered accountants and lead banks prior to disbursements in line with Government norms. ADB will reserve the right to verify the financial accounts of IIFCL and related parties.

5. Enhanced Governance Framework

69. IIFCL is governed by the Companies Act, 1956, (Appendix 5) which prescribes

disclosure norms. IIFCL intends to self-regulate and has incorporated best practices of non- banking finance companies in its comprehensive business plan. 49 The regulatory regime will be based on (i) nonperforming asset norms, (ii) asset classification, (iii) provisioning norms, (iv) income recognition, (v) credit concentration, (vi) special reserve maintenance (capital requirements) liquidity requirements, and (vii) resource-raising norms. Adherence to this regime will be reviewed annually and reported to the Board of Directors of IIFCL. Further, in addition to Standard & Poor’s, IIFCL also plans to be rated by Fitch and Moody’s for strengthening its compliance with best international practices. 50 As part of the Facility, the best practices adopted

by IIFCL are summarized below.

Table 5: Internal Governance Impact on India Infrastructure Finance Company Limited

Area

Key Internal Reform Elements

Financial

Review and audit by ADB of IIFCL and eligible subborrowers,

Management

Regular review of ’s accounts by ADB, and

and Audit

Adoption of measurable financial management indicators.

Resource

Improving resource management operations through enhanced

Management

Financial Policies,

Investment Policies,

Asset-Liability Management Procedures and Systems, and

Functional Support for Efficient Resource Management.

Improved staff capability.

Anticorruption

Review and examination of the subborrowers by ADB and

Reporting of observed malpractices to the authorities.

ADB = Asian Development Bank, IIFCL = India Infrastructure Finance Company Limited. Sources: India Infrastructure Company Limited’s Comprehensive Business Plan and ADB analysis.

6. Poverty Impact

70. Infrastructure investments lead to higher farm and nonfarm productivity, employment

and income opportunities, and increased availability of wage goods, thereby reducing poverty by raising mean income and consumption. If higher agricultural and nonagricultural productivity and increased employment directly benefit the poor more than the non-poor, these investments can both reduce poverty and improve income distribution. Investment in infrastructure as a whole and on roads and transportation in particular contributes to poverty reduction by (i) reducing transactions costs; (ii) enabling economic agents like individuals, firms, and governments to respond efficiently to demand; (iii) lowering costs of inputs used in production of

49 ICRA Management Consulting Services Limited was mandated by IIFCL to formulate a comprehensive business plan in November 2006 under World Bank TA grant. The final report was submitted on 17 May 2007 to IIFCL. ADB was given an opportunity to comment on the draft final report. 50 International credit rating agencies closely monitor all aspects of operational performance and failure to comply with best practice is likely to lead to a rating downgrade and an increase in financing costs.

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almost all goods and services; (iv) opening up new opportunities for entrepreneurs; (v) creating employment especially in public works both as social protection and as a counter-cyclical policy in times of recession; (vi) enhancing human capital by improving access to health and education; and (vii) improving environmental conditions which have an impact on improved livelihoods, better health, and vulnerability of the poor The Summary Poverty Reduction and Social Strategy is in Appendix 11.

B.

Assumptions, Potential Risks, and Mitigations

71.

While the growing recognition of the significance of infrastructure development and the

ongoing reforms in the infrastructure and financial sectors provide the context for the Facility, the envisaged benefits and impact depends on several assumptions that are subject to varying degrees of risk. Mitigating measures have been put in place where feasible and appropriate.

72. Effective Demand. The identification and development of bankable PPP subprojects

provides the effective demand for the Facility. While PPP is emerging as the preferred mode for infrastructure development, capacity constraints will have to be addressed for transforming the potential for PPPs into a stream of bankable subprojects. This risk is being dealt by intensive support from ADB and other development partners for mainstreaming PPPs. Upfront identification of subprojects for the first PFR of the Facility has been made.

73. Institutional Capacity. The ability of IIFCL to leverage government guarantee to

generate low-cost and longer tenor funds is critical for its catalytic role. This also depends on the market perception of the quality of IIFCL’s pipeline, credit appraisal, and disbursement

procedures, risk management and appraisal systems, environmental and social safeguards compliance procedures, and operational efficiency. Factors that mitigate these risks include (i) intensive appraisal of the subprojects by IIFCL; (ii) the emphasis of IIFCL’s mandate and Scheme on commitment to operational autonomy, good governance, and commercial orientation; and (iii) ongoing ADB and World Bank support to IIFCL for developing systems and procedures and human resource development. IIFCL will maintain a lean organization of core specialists for reducing cost overheads.

74. Regional Distribution. Variations in the preparedness for PPPs across states pose the

risk of regional concentration of subprojects supported by the Facility. While relative merits of the viable subprojects should guide IIFCL’s financing decisions, a reasonable geographical spread is also desirable. In consultation with the IIFCL, the identified subprojects to be financed by the Facility are spread over a number of states (para. 33). The ongoing efforts for mainstreaming PPPs will also help generate viable subprojects in all parts of the country.

75. Reform Commitment. Despite the recent success in reducing constraints to

infrastructure development, the shift from public financing of infrastructure to PPPs could take

more time than expected. In addition, the reforms involve a range and hierarchy of stakeholders that could also slow the momentum of reforms. This risk is being mitigated through positive incentives by the Government for enhancing the bankability of infrastructure projects (para. 6(v)). In addition, for promoting economic growth, state governments are proactively reducing constraints to infrastructure development.

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VI.

ASSURANCES

76. In addition to the standard assurances, the Government and IIFCL have given the

following assurances. These will be incorporated into the individual loan agreement(s) as applicable and mutually agreed by the Government and ADB for each tranche under the MFF.

77. The Government and IIFCL will ensure the following:

(i)

The Government remains committed to the implementation of the Scheme for Financing Viable Infrastructure Projects through IIFCL. In the event of any change in the Scheme, the Government, IIFCL, and ADB will assess the potential impact on the Facility and evaluate any change in scope, amendment, or continuation, as appropriate, of the Facility;

(ii)

IIFCL complies, at all times, with the prudential norms, as made applicable to it by the Government, including capital adequacy, income recognition, classification, and provisioning of nonperforming assets;

(iii)

IIFCL maintains a debt service coverage ratio of at least 1.0 and ensure that it has no arrears in repayment of its current debt obligations;

(iv)

The subprojects and subborrowers meet the eligibility criteria agreed with ADB, including financial and economic viability and positive developmental impact;

(v)

All subprojects are submitted to ADB for prior review, unless otherwise agreed between ADB and IIFCL;

(vi)

The on-lending rates to subborrowers are market-based and adequate to cover all costs and risks associated with on-lending including any foreign exchange risk;

(vii)

The subborrowers adopt and implement appropriate procurement procedures that are based on competitive bidding and foster economy, efficiency, and transparency;

(viii)

A subloan to a subborrower is made for only such subproject that involves procurement of goods, works, and consulting services from member countries of ADB, and the amount of which is at least equal to the size of the subloan for such subproject;

(ix)

The ESSF formulated with other development partners and satisfactory to ADB is implemented and that all subprojects financed with ADB funds comply with the ESSF;

(x)

The environmental management system framework as set out in the ESSF is implemented in accordance with its terms and acceptable to ADB to ensure that each subproject is undertaken in compliance with applicable environmental laws of India, relevant State of India, and ADB’s Environment Policy (2002). Further, that for each subproject, initial environmental examination (IEE), environmental impact assessment (EIA), and the environment management plan, as applicable, are submitted to ADB for review and approval before IIFCL submits the PFR, and that for any category A or environmentally sensitive B subproject, the IEE or the summary EIA is made available to the public 120 days before a PFR is submitted to ADB;

(xi)

The social safeguards framework (SSF) as set out in the ESSF is implemented in accordance with its terms and satisfactory to ADB, and that each subproject, which involves land acquisition and has resettlement impacts, is undertaken in compliance with all the applicable laws of India, the relevant State of India, and ADB’s Involuntary Resettlement Policy (1995). Further, that the resettlement plans are submitted to ADB for approval, before IIFCL approves the subproject.

24

Furthermore, each subborrower is required by IIFCL to ensure that (a) all land and rights-of-way required for subprojects are obtained in a timely manner; (b) the provisions of the resettlement plans are implemented in accordance with its terms; (c) all compensation and resettlement assistance is given to the affected persons prior to their dispossession and displacement and commencement of civil works; (d) resettlement plans are updated upon completion of the detailed design and submitted to ADB for approval prior to commencement of civil works; (e) adequate staff and resources are committed to supervising and monitoring implementation of the resettlement plans; and (f) an independent agency acceptable to ADB and IIFCL is engaged by the subborrower to monitor and evaluate results of implementation of resettlement plans and forward reports to ADB and IIFCL as required;

(xii)

Subprojects do not adversely affect vulnerable groups, such as indigenous peoples, and in the event of any impact or their involvement, IIFCL will implement the SSF as set out in the ESSF in accordance with its terms to ensure compliance with ADB’s Policy on Indigenous Peoples (1998);

(xiii)

Adequate number of staff are trained and deployed to fully implement and comply with the ESSF;

(xiv)

Accountability and transparency in IIFCL are maintained in its operations through the stakeholder meetings and publication of progress reports through the duration of the Facility. Internal procedures and controls are instituted, maintained, and complied with to prevent any corrupt, fraudulent, collusive, or coercive practices. All contracts financed by ADB in connection with the subprojects specify the right of ADB to review and examine the records and accounts of the subborrowers, suppliers, and contractors, as they relate to the subprojects. An appropriate corporate governance framework is formulated reflecting international best practices and reported annually to IIFCL’s Board of Directors and ADB; and

(xv)

All IIFCL subloan agreements appropriately reflect the obligations assumed by IIFCL and the respective subborrowers under the Facility including those in respect of any existing subprojects that IIFCL has already approved but which receive ADB financing under the Facility.

VII.

RECOMMENDATION

78. I am satisfied that the proposed multitranche financing facility would comply with the

Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the provision of loans under the mutitranche financing facility in an aggregate principal amount not exceeding $500,000,000 to India Infrastructure Finance Company Limited, to be guaranteed by India, for the India Infrastructure Project Financing Facility from ADB’s ordinary

capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, and such other terms and conditions as are substantially in accordance with those set forth in the Framework Financing Agreement presented to the Board.

23 November 2007

Haruhiko Kuroda President

Appendix 1

25

25 June 2007Sri LankaDESIGN AND MONITORING FRAMEWORK

Design

Performance

Data Sources/Reporting Mechanisms

 

Assumptions

Summary

Targets/Indicators

and Risks

Impact

   

Assumptions

1. Improved per capita infrastructure availability in India

2. Mainstreaming PPP modality for infrastructure development

Reduction in peak and average energy deficit during 11 FYP

th

Achieving target seaport capacity of 1,300 MTPA during 11 th FYP

International and domestic business climate surveys

Continued priority

Annual reports on infrastructure availability including Planning Commission studies

accorded to infrastructure sector

Continued priority accorded to financial sector development

ADB review and evaluation missions

Increased efficiency of infrastructure investment

 

Widening of national

highways in line with National Highways Development Project

th

Economic Survey of India, industry reports, and relevant government publications

Strong government commitment to IIFCL

during 11

FYP

   

Risks

Achievement of national urban transport policy goals during 11 th FYP

Government commitment to infrastructure and financial sector reforms diluted

Private investment in infrastructure to reach 30% of overall infrastructure investment during 11 th FYP

Subprojects are not commissioned in time

Outcome

   

Assumption

1. Increased private sector participation in infrastructure development through PPPs

Contribution in achieving the targeted 9% GDP growth during 11 th FYP

Planning Commission reports

Government policy of encouraging PPPs continues

Economic Survey of India

 

Risk

   

Relevant government publications

Lack of Government commitment and capability to carry forward reform agenda

     

Assumption

2. Containing and

Contribution in

 

Annual budget announcements of the Government

Continued commitment of the Government for fiscal discipline

reducing fiscal

achieving fiscal deficit target of 3% GDP in line with FRBM Act, 2003, by 31 March

deficit through

private sector

 

participation in

RBI reports

 

infrastructure

2009

Risks

ADB–India Economic Quarterly Bulletin

Unforeseen fiscal stress

IMF India reports

 

26 Appendix 1

Design

Performance

Data Sources/Reporting Mechanisms

 

Assumptions

Summary

Targets/Indicators

and Risks

     

Decline in Government commitment to FRBM Act, 2003

     

Assumptions

3. Improved lending terms of IIFCL for infrastructure subprojects

Reduction in average borrowing costs for IIFCL and improvement in availability of finance for infrastructure during FY2007–

Progress reports of PMU

Government’s financial sector and infrastructure sector reforms continue

Rating agencies’ reports

Lead banks’ reports

 

IIFCL annual reports

Government guarantee for IIFCL’s borrowings continues

FY2011

IPPMS data and reports

 

Increased duration of financing provided by IIFCL for subprojects over time during

IIFCL maintains and/or improves its current credit ratings

FY2007–FY2011

Risks

Financial sector and infrastructure sector reforms curtailed

Government guarantee to IIFCL diluted and/or curtailed

Sovereign and IIFCL’s credit ratings deteriorate

     

Assumptions

4. Improved capacity in IIFCL to ensure that ADB funds are used for subprojects that conform to ESSF through relevant TA support

IIFCL staff are able to (i) understand the ESSF, and (ii) use ESSF to assess proposed subprojects during FY2007–

ADB review missions

Quarterly, semiannual, and annual reports of IIFCL

Deployment of adequate and suitable staff resources

Trained staff will continue to work for IIFCL

FY2008

World Bank review missions

 

Year-on-year improvement in number of subprojects assessed for compliance under ESSF during

FY2007–FY2011

IPPMS data and PMU progress reports

IIFCL absorbs capacity with regard to ESSF compliance through TA

IIFCL ensures availability of suitable staff

Risks

 

Trained staff may leave

Appendix 1

27

Design

Performance

Data Sources/Reporting Mechanisms

 

Assumptions

Summary

Targets/Indicators

and Risks

     

Delays in procuring relevant subproject documents from subborrowers, lead banks, and lead syndicators

     

Assumptions

5.

Improved resource management and project risk assessment capabilities in IIFCL

Reduction in duration gap between asset and liability portfolio of IIFCL during

FY2007–FY2011

Quarterly, semiannual, and annual reports of IIFCL

Deployment of suitable staff

Investment bank reports of IIFCL bond issuances

Trained staff will be retained by IIFCL

 

Enhanced processes, systems, and staff capacity for subproject risk assessment during

Rating agencies’ reports

IIFCL absorbs resource and risk management capacity through TA

IPPMS data and PMU progress reports

FY2007–FY2011

Risks

Improvements in (i) asset profile, (ii) liquidity indicators, and (iii) value at risk indicators during

Inability of IIFCL to deploy suitable staff in a timely manner

Trained staff may leave IIFCL

FY2007–FY2011

Staff capability may decline in the absence of continuous training

Outputs

   

Assumptions

1.

High quality infrastructure assets created in various subsectors across the country

Average subloan size of $20 million–$30 million

Quarterly, semiannual, and annual reports of IIFCL

IIFCL’s long-term lending mandate continues

30-40 subprojects

ADB review mission reports

IIFCL undertakes structured borrowing program based on risk- return considerations and subproject financing requirements

 

financed during

FY2007–FY2011

 

Full utilization of the first tranche of $300 million by November

2009

Risks

Full utilization of the second or subsequent tranches by November 2011

The Government de- emphasizes IIFCL’s long-term lending mandate

28 Appendix 1

Design

Performance

Data Sources/Reporting Mechanisms

 

Assumptions

Summary

Targets/Indicators

and Risks

     

IIFCL’s portfolio quality deteriorates which results in shortening of its lending terms

Regulatory and policy risks leading to above

2. Availability of long- term funding to IIFCL and improved ability of IIFCL to provide long-term financing to subprojects

Reduction in duration gap between asset and liability portfolio of IIFCL during

FY2007–FY2011

Rating agencies’ reports

IIFCL annual reports, IPPMS data, and PMU progress reports

     

Assumption

3. International credit rating attained by IIFCL and periodically updated

Internationally acceptable credit rating accorded to IIFCL for accessing international markets in August 2007

Rating agencies’ updates.

Rating assessments and reviews are rigorous and conducted on time

Investment bank reports of IIFCL bond issuances

Risk

 

Annual credit rating by internationally accredited rating agencies by end September each year

Counterpart staff from IIFCL and line ministries not made available on time to rating agencies

     

Assumptions

4. Improved (i) financial policies, (ii) staff capacity, and (iii) risk management systems of IIFCL

Improved financial policies, ALM policy and tools, investment policies, deal documentation formats, pricing tools, and risk appraisal templates developed for IIFCL by end December 2008

IIFCL ALM data

High quality consultant reports prepared on time

ADB and World Bank review missions

Rating agencies’ updates

IIFCL staff are able to adapt to the new risk management and pricing systems

 

IPPMS data and PMU progress reports

Risks

 

Trained staff may leave IIFCL

Staff capability may decline in the absence of continuous training

     

Assumptions

5. Development and

Adoption and

ADB reviews

Rigorous and timely reviews conducted

implementation of

implementation of

Appendix 1

29

Design

Performance

Data Sources/Reporting Mechanisms

 

Assumptions

Summary

Targets/Indicators

and Risks

ESSF

ESSF in August 2007

Consultant reports

Timely availability of required documents from subborrowers

ESSF implementation commence in October 2007

World Bank review reports

IIFCL compliance certificates for subprojects

Risks

Counterpart staff from IIFCL and subborrowers are not made available on time for ESSF

High quality due diligence ESSF reports during October 2007– November 2011.

PMU progress reports

Delay in obtaining the required documents from subborrowers

Non-availability of qualified staff and resources

Activities with Milestones

 

Inputs ADB

Part A: Preparatory capacity building (up to second quarter 2008)

$500 million

1.1 Identifying subproject pipeline to be financed through ADB funds.

 

First tranche of $300 million

1.2 Developing common ESSF (August 2007).

 

1.3 Ensuring international credit rating for IIFCL (August 2007).

Second and/or subsequent tranches of $200 million

1.4 Determining adequate monitoring arrangements for ADB (September

2007).

1.5 Developing capacity in PMU in IIFCL (by December 2007).

TA funds of $500,000 for enhancing resource management function and risk management function

1.6 Commencing due diligence of potential subprojects (October 2007).

Part B: Additional capacity development (continues to second quarter

2009)

2.1 Determining capacity building requirements for resource management and project risk management functions (by July 2008).

National consultants (24 person-months)

2.1.1

Developing guidelines, manuals, and specifications for IIFCL resource management and project risk assessment (by December 2008) including

Financial policies,

Review missions

Participation in tripartite meetings

ALM policy,

 

Government/IIFCL

Pricing tools and risk appraisal templates,

Counterpart staff

Deal documentation formats,

Back-office requirements, and

 

Resources management system requirements.

2.2 Providing capacity development support and training (January 2009– June 2009) for resource management to

enhance the risk management capacity,

use risk assessment models and develop options for appropriate risk-sharing schemes such as guarantees,

effectively use tools for assessing value for money,

Office accommodation and transport

Administrative services

Facilitation for meetings

Obtaining necessary information from

usage of resource management systems and documentation, understand the structure and regulatory implications of concession contracts, and

subborrowers/lead syndicators

Participation in tripartite meetings

30 Appendix 1

Activities with Milestones

 

address issues relating to competition and regulation in infrastructure.

2.3

Assessing the impact of training to feed into redesign of training program during the midterm review.

Part C: Tranche release progress and reporting (continues to third quarter 2011)

3.1 Periodic Financing Request (PFR1) for the first tranche of $300 million has been signed and submitted on 16 November 2007.

3.2 First tranche disbursement requirements indicated (first quarter 2008).

3.3 Full utilization of the first tranche of $300 million by 30 November 2009.

3.4 Periodic Financing Request for the second tranche and/or subsequent tranches submitted for tranche release no later than 1 November 2010.

3.5 Full utilization of the second and/or subsequent tranches of $200 million no later than 30 November 2011.

3.6 Supporting documentation submitted regarding compliance with ADB requirements (quarterly, semiannual, and annual reports).

ADB = Asian Development Bank, ALM = asset-liability management, ESS = environmental and social safeguards, ESSF = Environmental and Social Safeguards Framework, FRBM = Fiscal Responsibility and Budget Management, FYP = five-year plan, IIFCL = India Infrastructure Finance Company Limited, IMF = International Monetary Fund, IPPMS = investment program performance management system, MIS = management information system, MTPA = million tons per annum, PFR = Periodic Financing Request, PMU = project management unit, RBI = Reserve Bank of India, TA = technical assistance.

Appendix 2

31

INFRASTRUCTURE SECTOR ANALYSIS

A.

Introduction

1.

In recent years, India has been one of the fastest growing economies in the world with

growth rates averaging around 7–9% per annum during the 10 th Five-Year Plan (FYP) period (fiscal year [FY]2001–FY2006). This is partly due to the 15 years of economic reform. The Government of India (the Government) would like to push growth rates even higher to match the performance of countries like the People’s Republic of China (PRC), but to do so will require high quality infrastructure. There is a significant infrastructure deficit in the economy requiring large scale investment in almost all infrastructure subsectors including transportation (roads, ports, rail, and airports), energy (generation and transmission), and communications. Table A2.1 provides a comparison of infrastructure indicators for India and the PRC.

Table A2.1: Comparative Infrastructure Availability

Item

India

PRC

Year