Trends & Outlook for

Infrastructure Finance

Introduction
Investment target of $1 trillion in the
infrastructure sector for the twelfth plan period
However, achieving the target could be a
challenge in the current scenario of slow
economic growth
Further, these sector face specific issues,
which are compounded by the current policy
paralysis in the country.

A look at the recent developments in

infrastructure finance
infrastructure investment in India as a % of
GDP increased from 5.1 % to 7.2 % in the
eleventh plan
India achieved about 90% target of the
infrastructure investment target of $ 500
million in the eleventh plan, through a
combination of private investment in the
energy and telecom sector, and PPP in
transport sector.

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The share of private investments in
infrastructure increased from 25 % in
the tenth plan to 36% in eleventh plan
The governments expects this share
to increase to 50%, implying private
investments of 32.5 trillion
Remaining 50 % will be met through
budgetary sources.

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Infrastructure projects in India are usually
funded in a debt- equity ratio of 70: 30
Most of the debt financing comes from banks,
NBFC, ECB, followed by insurance and
pension funds
The average tenure o loans is 13-14 years,
including construction period of above 5 years
Interest rates are normally linked to PLR of
lenders

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Debt financing of infrastructure
projects is mainly undertaken on a
non-recourse basis
The current environment for debt
funding in India is marked by high
interest rates which are 13-14 percent
for senior debt
Commercial banks meet more than
half of the total debt requirements for

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Acc to RBI, the gross outstanding bank credit
to the infrastructure projects witnessed a
compound annual growth rate of 32 percent
between 2007-08 to 2011-12
Most banks have almost reached the
prudential caps for sector such as power and
roads. Further banks are faced with problem
of ALM

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In order to address the ALM issue, IIFCL has
launched a modified takeout financing scheme in
December 2011
As on March 31, 2012, IIFCL has sanctioned a
total of 403.73 billion for 229 infrastructure projects
The cumulative disbursements at the end of March
2012 stood at 203.77 billion, including the
refinancing of 41.68 billion and take out financing
of 6.35 billion

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NBFC such as PFC, REC, IDFC Limited,
Srei Infrastructure Finance Limited, Indian
Railway Finance Corporation, L& T
infrastructure finance company Limited
have increased
their lending to
infrastructure projects, driven mainly by
focused business , models
Between 2007-08 and 2010-11, disbursal
by these NBFC recorded a CAGR of 30 %

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Rising domestic interest rates had led
developers to tap foreign markets
ECB and FCCB witnessed a CAGR of
5.6% between 2007-08 and 2011-12,
and more than doubled to $ 21.66
billion in 2011-12 from $ 10.48 billion
in 2010-11
However in wake of Eurozone crisis,
accessing capital through ECB

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Further, ECB borrower has to hedge against
foreign exchange risks
. The situation is further aggravated by
depreciation in rupee value
The pension and insurance funds which can
be source of long term debt are still inactive.
The bond market in India is no developed. It
account for 2% of GDP as compared to 8% in
China and 15% in Malaysia

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Equity for these projects comes generally from
promoters, through private equity and IPO
And offering have also gained ground in in the
past three to four years. Between 2007-08 and
2011-12, 650 million was raised by 50
infrastructure companies in the primary
market. However, weak market sentiment and
limited liquidity in the market have resulted in
poor capital market conditions

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Key challenges in securing funds for
developers at reasonable rates are
high cost of borrowings , weak market
sentiment and sector specific issues
Aggressive bidding in the road sector
has put the financial viability at stake
Inadequate coal linkage in the power
sector has resulted in uncertain
situation

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In case of port and airport, there has
been delays in award of projects
Factor such as inability of the
developers to achieve financial
closure , delays in project execution
and inadequate revenues have
affected project developers

Solutions
There is urgent expedite the process related
to land acquisition and obtaining approvals
and clearances
The land acquisition, Rehabilitation and
resettlement bill, 2011, which is approved in
Sept, 2012, makes land acquisition more
expensive by fixing the compensation for rural
areas at four times the market rates and for
urban it is kept two times the market rates

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There is a need to have single
window approval mechanism
There is need to have strongest bond
market
Further liberalize the pension and
insurance funds
Set up IDF