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PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE AND ECONOMICS

CHAPTER:-1 INTRODUCTION
Infrastructure Financing is the long term financing of infrastructure and
industrial projects based upon the projected cash flows of the project
rather than the balance sheets of the project sponsors. Usually, an
Infrastructure project financing structure involves a number of equity
investors, known as sponsors, as well as a syndicate of banks or other
lending institutions that provide loans to the operation.
Large sections of planners and policy makers in the country have argued
that there exists no serious problem of infrastructural deficiency that can
not be tackled through management solutions. All that is needed is to
restructure the system of governance, legal and administrative framework
in a manner that the standard reform measures can be implemented.
Reduction of public sector intervention, ensuring appropriate prices for
infrastructure and civic amenities through elimination or reduction of
subsidies, development of capital market for resource mobilisation,
facilitating private and joint sector projects, simplification of legislative
system to bring about appropriate land use changes and location of
economic activities etc. are being advocated as the remedial package
(World Bank 1995, Expert Group on Commercialisation of Infrastructure
1996, World Bank 1998). The public sector and other para-statal agencies
that had been assigned the responsibility of producing and distributing
infrastructural facilities have come in for sharp criticism on grounds of
inefficiency, lack of cost effectiveness, resulting in continued dependence
on grants for sustenance. Some kind of "financial discipline" has already
been imposed by the government and Reserve Bank of India, forcing
these agencies to generate resources internally and borrow from

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development cum banking institutions, and, in a few cases, from capital


market at a fairly high interest rate. This has restricted their areas of
functioning and, what is more important, changed the thrust of activities.
Solutions are being found also in terms of their efficient, transparent and
decentralised management of the facilities. With the passing of the 74th
Amendment to Indian Constitution (Ministry of Urban Development
1992) and corresponding legislations, amendments, ordinances etc. at the
state level, decentralisation has become the keyword in governance. The
vacuum created by the limited withdrawal of the state in the provision of
infrastructure is sought to be filled up also through non-governmental
organisations (NGOs) and community based organisations (CBOs),
besides the local authorities. The enthusiasm for the above package of
"management solutions", both among the international as also national
organisations, is responsible for the issues concerning their impact on
settlement structure and access of the poor to the infrastructural amenities
not receiving adequate attention among researchers. However, given the
disparity in economic strength of the towns and cities and their unequal
access to capital market and public institutions, this perspective would
enable the larger cities to corner much of the advantage from the system
Most of the infrastructure projects are to be undertaken through
institutional finance rather than budgetary support. The state level
organisations responsible for providing infrastructural services,
metropolitan and other urban development agencies are expected to make
capital investments on their own, besides covering the operational costs
for their infrastructural services. The costs of borrowing have gone up
significantly for all these agencies over the years. This has come in their
way of their taking up schemes that are socially desirable schemes but are

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financially un remunerative. Projects for the provision of water, sewerage


and sanitation facilities etc., that generally have a long gestation period
and require a substantial component of subsidy, have, thus, received a low
priority in this changed policy perspective. Housing and Urban
Development Corporation (HUDCO), set up in the sixties by the
Government of India to support urban development schemes, had tried to
give an impetus to infrastructural projects by opening a special window in
the late eighties. Availability of loans from this window, generally at less
than the market rate, was expected to make state and city level agencies,
including the municipalities, borrow from HUDCO. This was more so for
projects in cities and towns with less than a million population since their
capacity to draw upon internal resources was limited. These were much
cheaper than under similar schemes of the World Bank.
However, such loans are no longer available. Also, earlier the
Corporation was charging differential interest rates from local 3 bodies in
towns and cities depending upon their population size. For urban centres
with less than half a million population, the rate was 14.5 per cent; for
cities with population between half to one million, it was 17 per cent; and
for million plus cities, it was 18 per cent. No special concessional rate
was, however, charged for the towns with less than a hundred or fifty
thousand population that are in dire need of infrastructural improvement,
as discussed above The most important development in the context of
investment in infrastructure and amenities is the emergence of credit
rating institutions in the country. With the financial markets becoming
global and competitive and the borrowers' base increasingly diversified,
investors and regulators prefer to rely on the opinion of these institutions
for their decisions. The rating of the debt instruments of the corporate

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bodies, financial agencies and banks are currently being done by the
institutions like Information and Credit Rating Agency of India (ICRA),
Credit Analysis and Research (CARE) and Credit Rating Information
Services of India Limited (CRISIL) etc. The rating of the urban local
bodies has, however, been done so far by only CRISIL, that too only since
1995-96. Given the controls of the state government on the borrowing
agencies, it is not easy for any institution to assess the "functioning and
managerial capabilities" of these agencies in any meaningful manner so as
to give a precise rating. Furthermore, the "present financial position" of an
agency in no way reflects its strength or managerial efficiency. There
could be several reasons for the revenue income, expenditure and
budgetary surplus to be high other than its administrative efficiency. Large
sums being received as grants or as remuneration for providing certain
services could explain that. Political Decentralisation and Investment in
Infrastructure and Basic Services by Local Bodies Earlier, the role of
central and state governments in local affairs was not clearly defined. It
consisted of ad-hoc and fragmented efforts at programmatic level. Since
mid eighties, however, a process of shifting the responsibility to the local
level has manifested clearly. Political decentralisation through
Constitutional Amendment Act has been hailed as a panacea for the
problems of infrastructural deficiency in urban centres. It is argued that
the Act enables the local bodies to undertake planning and development
responsibility as also mobilise resources for infrastructural investment.

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CHAPTER:-2 RESEARCH METHODOLOGY

Objectives:
To study the benefits of infrastructure finance

To study the purpose of infrastructure finance

To understand infrastructure finance

To study the procedure of infrastructure finance

To study the motive behind infrastructure finance

To study the risk involved in infrastructure finance

DATA COLLECTION

the analysis is purely based on the secondary data. Secondary research based
on

Internet source
Infrastructure finance & finance books

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CHAPTER:-3 HISTORY OF INFRASTRUCTURE


FINANCE
Whereas the public side of infrastructure has a high profile, the fact is
that infrastructure has always had a high level of private sector
involvement. Just 100 years ago, the infrastructure business was strong in
the United States, railroad stocks were hot on Wall Street, the electric
utilityindustry was new, and the public demanded more roads for its new
Model T automobiles. Go back 100 years earlier, and you see that change
from a rural to an urban society gave birth to the technological age that
drove the need for infrastructure. This industrialization and urbanization
that led to infrastructure development started around 1800, when a private
banking venture led by Aaron Burr built a new water system for New
York City. At that time and for another century, bankers were important
players in financing infrastructure systems as well as other high-stakes
national issues, even wars. The steam engine had been invented, and it
powered the Industrial Revolution. The privately owned Erie Canal
created a boom for the Northeast, and people could see the close links
between transportation and economic development. The growing nation
required more and more politically charged internal improvements, and
infrastructure issues moved to center stage in politics as well as business.
Now we live in a different world, but the infrastructure business remains
important because the public still needs rail, electricity, roads, and many
other infrastructure-related public services. If you include the Internet as
part of infrastructure, then it rises even higher on the agenda. In any case,
we are reminded of infrastructure constantly by the media. Time
magazine, in its March 23, 2009, cover story, reported on 2 its top 10

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national trends as related to infrastructure (Lacayo, 2009). One was the


evolution of smart highways that serve to organize economic activity , and
the other was recycling the suburbs with updated land uses . Not only is
the role of infrastructure in the economy large, it is growing in
importance. This role was high on the agenda of many economists during
the 1980s and 1990s, and they explained how infrastructure is essential to
economic development, productivity, and employment (Gramlich, 2001).
They also showed that infrastructure investments encourage innovation,
competitiveness, and is the basis for a high standard of living
(Infrastructure Australia, 2008). During the recent financial crises,
infrastructure figured prominently in national stimulus packages and the
U.S. budget. Having learned from past recessions, cities have been
competing to show how many shovel-ready projects they have on their
books. Much of the response to the financial crisis has been about
housing, public projects, and transportation systems, all of which are
central to infrastructure policy. America is under criticism for how it
invests in infrastructure. Along with other policy questions, we as a
society face decisions about how much to invest in infrastructure, even
while we are confronted with tremendous needs estimates to rebuild
highways and fix aging sewers. Some say that if the nation does not invest
more, it risks having the infrastructure of a third-world country. Experts
look back at past nation building and grand projects like the Interstate
Highway System and ask, Where is that vision today? Investment
analystscompare Americas infrastructure investment of 2.4 percent of
gross domestic product (GDP) to Europes 5 percent and Chinas 9
percent and point to dysfunctional transportation, choked ports and
airports, road congestion, and inadequate rail track systems. One way to

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view this lack of investment is as a third deficit, to go along with our


national debt and social security deficit. On a more positive note, it is
apparent that we are entering a period of massive investment to rebuild
and reinvent our infrastructure, almost like the 1930s New Deal or 1950s
Interstate Highway eras. In any case, the overall view among experts
interviewed by the Economist (2008) was Its time to think big again.
As we explain in the book, an important dimension of infrastructure
finance is how it can be used to manage demand and raise efficiency of
critical public systems and services. This challenge is aimed directly at a
central question about infrastructure: Should it emphasize public or
private purposes? Public purposes focus on the core needs of society, such
as clean air andwater and access to education and healthcare. Private
purposes relate to more discretionary needs, such as housing choices and
entertainment. Infrastructure finance addresses the central questions of
public versus private purposes and is thus in the crossfire of political
debates about a fair society. discusses how decisions about infrastructure
finance align public and private purposes. It answers questions about the
roles of government and the private sector and how to meet basic human
needs, such as safe water, disposal of wastes, energy, and transportation to
work. Infrastructure is at the center of debates about the global problem of
poverty. When basic needs are not met, why are they not met? Whose job
is it to provide them? Should the poor pay the same for basic services as
affluent people? If basic services are not provided, who should intervene?
On a broader scale, what are societys obligations to provide infrastructure
for the many displaced and disenfranchisedople around the world?
Hundreds of millions of people displaced by war, climate change, or lack
of opportunity do not have the basic support systems provided by

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infrastructure. In more affluent societies, the more urgent problem is to


find ways to sustain current levels of infrastructure-related services in the
face of resource and environmental limits. Doing this requires more
attention to managing demand rather than constantly ratcheting up supply.
Closely related to demand management and efficiency of infrastructure is
the subtle but important issue of trade-offs. You will read over and over in
the book about how society and individuals can make choices about using
public services, and the closer we can align these choices with the
obligation to pay, the better our management will be. The other focus in
the book is on the attractiveness of infrastructure businesses, whether as
an investment, such as purchase of municipal bonds or stocks of listed
companies or direct equity stakes, or as a business line for entrepreneurs.
The controversy over privatization and use of public-private partnerships
is addressed with this topic. provides examples of investment
opportunities, including privatization. While people have a general idea
about infrastructure, measuring its financial performance is difficult
because it is hard to define and classify and it has broad public purposes
as well as well-defined private purposes. Infrastructure is not one unified
system but a composite of systems involving utilities, transportation
systems, and environmental services, among others. Also, reports about
infrastructure tend to confuse the condition of government-owned
physical assets and operating performance of the organizations that
provide public services. The definition of infrastructure can seem abstract
and apply to different types of systems. To avoid a fuzzy definition, the
book focuses on the constructed assets in six systems: the built
environment itself, transportation, communications, energy, water, and
waste management systems. This definition leaves out

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nonphysicalcategories, such as economic and social infrastructure


systems. It emphasizes that infrastructure services are required for people
and the economy, and they are not simply based on consumer choice. To
formalize this definition, we can say that infrastructure comprises the
structural assets of the built environment and its physical support
networks, and it includes a great deal of equipment, such as generators,
motors, and actuators. In most cases, when accounting for infrastructure,
we include both structures and equipment, which are the two types of
fixed assets tracked by the U.S. Bureau of Economic Affairs. Our
definition of infrastructure distinguishes between the structures of
infrastructure systems and the equipment of the organizations using the
infrastructure to deliver public services, such as private motor vehicles
and aircraft. In the case of rail companies, infrastructure includes
structures and railcars. In the case of airlines, equipment is not considered
part of infrastructure in our analysis but is part of the fixed assets ofivate
companies using public infrastructure. You could, of course, make a case
to include privately owned aircraft as infrastructure, but the definition of
it would require adjustment. The concept of public and private
infrastructure systems can be confusing. There are many possibilities, but
our main focus in the book is on infrastructure systems that provide public
services, as distinguished from those that meet only private needs, such as
the infrastructure that serves a manufacturing site. In some cases, the
infrastructure that provides public services also serves broad public
purposes that fall outside of the direct service.

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FEATURES OF INFRASTRUCTURE FINANCE


1. Longer Maturity:
Infrastructure finance tends to have maturities between 5 years to
40 years. This reflects both the length of the construction period
and the life of the underlying asset that is created. A hydro-electric
power project for example may take as long as 5 years to construct
but once constructed could have a life of as long as 100 years
long.
2. Larger Amounts:
While there could be several exceptions to this rule, a meaningful
sized infrastructure project could cost a great deal of money. For
example a kilometre of road or a mega-watt of power could cost
as much as US$ 1.0 million and consequently amounts of US$
200.0 to US$ 250. Million (Rs.9.00 billion to Rs.12.00 billion)
could be required per project.
3. Higher Risk:
Since large amounts are typically invested for long periods of
time it is not surprising that the underlying risks are also quite
high. The risks arise from a variety of factors including demand
uncertainty, environmental surprises, technological obsolescence
(in some industries such as telecommunications) and very
importantly, political and policy related uncertainties.
4. Fixed and Low (but positive) Real Returns:
Given the importance of these investments and the cascading
effect higher pricing here could have on the rest of the economy,
annual returns here are often near zero in real terms. However,
once again as in the case of demand, while real returns could be
near zero they are unlikely to be negative for extended periods of

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time which need not be the case for manufactured goods. Returns
here need to be measured in real terms because often the revenue
streams of the project are a function of the underlying rate of
inflation.

SOURCES OF INFRASTRUCTURE FINANCING IN


INDIA

Sources of Funds for infrastructure Investment

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There has been a rapid growth in bank credit to infrastructure projects


with banks contributing to the tune of 21% of the total investment during
first 3 years of 11th five year plan.1 Most of this funding has been
provided by Public Sector banks and in some cases the sectoral prudential
caps have almost been reached (especially for power sector) thus
constraining any further lending to these sectors. Banks have prudential
exposure caps for infrastructure sector lending as a whole as well as for
individual sectors

Banks lending towards infrastructure investment

Non banking financial companies (NBFCs)


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

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Growth registered by NBFCs towards infrastructure


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

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term investments in environments which have regulatory idiosyncrasies.


Under-developed financial markets/products may have also contributed to
this drop in ECB funding.

Share of ECBs in total infrastructure investment

Equity

A large part of equity investments relies on foreign investments with


domestic investment institutions not showing significant interest in taking
equity in Infrastructure projects. The equity investment for the twelfth
plan period is estimated to be Rs 4.56 lakh crores.

There are three principal forms of finance for infrastructure


service delivery:

1. Public Finance: In industrialized countries public finance consists


of government providing equity financing (seed capital, in Chinas terms)

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through general budget reserves, earmarked reserves, self-raised funds


(e.g. licensing fee, and sale, rental or leasing of government assets), and
intergovernmental grants and fiscal transfers. Debt financing in the public
finance system is through policy loans at concessional rates, supplier
credits, and fixed income securities in the form of tax-secured bonds and
revenue bonds secured by project-related revenue streams. In some cases,
public debt financing is guaranteed by governments either explicitly or
implicitly.

2. Corporate finance: Corporate finance consists of corporations


providing equity financing through retained earnings and shareholders
equity. Debt financing takes the form of commercial bank borrowing,
subordinated debt (including convertible debentures and preferred stocks),
privately-placed borrowing, and issuance of fixed income securities.
These securities can be short-term in the form of commercial paper, or of
longer durations in the form of corporate bonds. Debt is secured through
collateralization of corporate assets and assignments of receivables.

3. Project Finance: Project finance consists of government,


corporations and PPP financing investments solely through the revenue
stream of the infrastructure projects without taking recourse to
government guarantees. Most project finance is made available by
project-specific companies with equity held by sponsors. Equity takes the
form of sponsor investment in share capital of the project company. Debt
is fully secured through the revenue stream of the infrastructure project;
this stream is assigned to lenders through security agreements with

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trustees and does not appear on sponsor companies balance sheets. Debt
financing usually takes the form of a combination of bank loans (usually
syndicated for large projects), sponsor loans, subordinated loans,
suppliers credits, and bonds of the project company. Corporate and
project finance is clearly applicable only to private and club goods type of
infrastructure for which there is sufficient revenue stream that can be
legally collateralized to lenders.

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

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sector investment will be a key to success of infrastructure development


under twelfth five year plan.

GOVERNMENT INITIATIVES
In order to broaden the base, the government promoted Industrial
Finance Corporation of India (IFCI) to provide long term capital to
industry. Reserve Bank of India (RBI) promoted Industrial Development
Bank of India (IDBI) for the same purpose. Besides, Industrial Credit and
Investment Corporation of India (ICICI) was incorporated in the private
sector. These three institutions were to lend money for project finance,
while banks would support the working capital needs of industry.

In the next phase of growth, specialised institutions were created, such


as, Export Credit & Guarantee Corporation (ECGC) for guaranteeing
export receivables of Indian industry, Shipping Credit and Investment
Corporation of India (SCICI) for addressing the financial needs of
shipping industry and Export-Import Bank of India (EXIM) for financing
the international business of Indian companies. In order to address the
revival needs of industry, Industrial Re-construction Bank of India (IRBI)
was created.

Unit Trust of India (UTI) was promoted, among other reasons, to


mobilise money from the public by issuing mutual fund units. Life
Insurance Corporation (LIC) was created to cover the lives of Indians.
These two institutions had access to long term money collected from
Indians, which were made available for lending to Indian industry. They

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largely invested in bonds and debentures issued by companies that needed


the money.

Companies were also permitted mobilise money from the public by


accepting fixed deposits of upto 3 years. A few large companies and
financial institutions also managed to issue bonds and debentures to the
public. In the mid-1970s, when government policy forced foreign
companies to issue shares to Indian investors at low prices, retail investors
got interested in the equity market. Thus, money was available from
banks, financial institutions and retail investors, through a mix of debt and
equity.

Until the early 1990s, all interest rates in the India economy were
determined by the Government or RBI. Similarly, equity shares had to be
issued at a price determined by the Controller of Capital Issues (CCI).
Several brokers and sub-brokers were active in mobilising money from
retail investors. Issues of securities to the public were handled by
Merchant Bankers. Gradually, as part of liberalisation, interest rates were
freed.

Currently, RBI only controls a few short term interest rates. Besides,
with the creation of Securities and Exchange Board of India (SEBI), a
regulatory framework was created for companies to decide the premium at
which they would issue shares. A phase of consolidation followed, and the
phenomenon of universal banking was introduced. Some of the
institutions mentioned above changed form or were merged into other
institutions. Universal banks started offering a range of retail and

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wholesale banking services, including provision of working capital and


long term finance. Merchant banks have morphed into investment banks,
that are prepared to invest in the companies with whom they do business.
There is a fairly active primary and secondary market in equity. The
sources of funds for industry have grown from domestic to international.
Over the last few years, Indian companies have also become active in
setting up projects outside the country. Another development since the
turn of the century is the willingness of Government to work with the
private sector in the infrastructure space. More and more sectors are being
thrown up for Indian private sector to set up and operate. Even foreign
direct investment (FDI) upto 100% is permitted in some sectors such as
power, roads and highways.

The Government of India realizes the importance of accelerating the


investments in infrastructure to boost the countrys slowing economy.
Therefore, it has set a massive target for doubling investment in
infrastructure from Rs. 27 lakh crores (eleventh plan 2011/12 prices) to
Rs 51 lakh crores during the twelfth plan period, i.e., 20122017.The
share of infrastructure investment in GDP is planned to be increased to
more than 10% by the end of the twelfth plan. This investment, if it
materializes, can propel Indias economic growth to a higher trajectory.

ROAD AHEAD
A coordinated effort is required from the government, Reserve Bank of
India, Securities and Exchange Board of India and Insurance Regulatory
and Development Authority (IRDA) to create a vibrant bond market.

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Introducing a suitable mechanism for credit enhancement enables


corporate with lower credit rating to access the bond market.

Infrastructure development continues to be the focus area for the


government and in the recent past it has introduced various proposals to
catalyze investments in the infrastructure sector some of which will
require significant infusion of funding through private sector. In order to
mobilize the private funding for infrastructure development a multi-
pronged reform process would need to be pursued. In addition to
significantly improved enabling environment focused systematic changes
and interventions will be required to be implemented.
RISK PROFILE OF VARIOUS INFRASTRUCTURE
SECTORS

The various infrastructure sectors have unique operating environment and sectoral
characteristics. These result in different risk profiles of the infrastructure sectors.
The different profiles mean the various risks associated with projects which
constitute the risk profile though remain the same but the severity of the risks will
vary from sector to another. The risk profiles and operating environment of two of
the infrastructure sectors, power and transportation sectors, wherein private sectors
have been actively involved are discussed below.

Power Sector: In power sector, governments have privatized this sector and
discontinued the monopoly of state utilities by inviting private sector in the form of
Independent Power Producers (IPPs) who build generating plants initially on BOO
(Build/Own/Operate) basis and on BOT basis, later on. The IPP then fed the
electricity generated from their plants into state controlled distribution and

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transmission networks. Then, an off-taker, usually the state or provincial utility


board purchases the electricity on a wholesale basis from the IPP via a Power
Purchase Agreement (PPA). This mechanism ensures a regular stream of incomes
otherwise the IPP will face a fluctuating demand and will not be able to meet the
financial obligations. In spite of such an arrangement possible loss of income may
occur though illegal connection to the transmission system, especially in
developing countries but such an arrangement assign the demand risk to the
government, as private sector is reluctant to assume this risk.

The output from the power project is sold to a public entity unlike other sectors
such as highway where the infrastructural services is consumed by several users.
However, the multiplicity of IPPs in a country also creates the problem of volatility
of power prices since keen completion may lower tariffs. There may also be
chances of refusal by the public entity to buy the power in spite of entering into
power purchase agreement if the power generated does not meeting the agreed
specification.

The power plants are often subjected to technical and environmental risk where
careful consideration is necessary. The construction process of power plant is often
complex resulting in completion risk. Besides the technical complexity, the project
sponsor need to set up adequate transportation facility from the point of production
of raw material such as coal, and gas to power plant to ensure uninterrupted supply
for continuous generation of power in case of fuel/gas fired and thermal power
plants. In addition, other major risk that may be evident in case of power sector is
the fluctuation of the production due to variation in cost and availability of fuel
where IPP is committed to a take-or-pay fuel supply contract. In case of take or pay
contractual agreement, one party agrees to purchase a specific amount of another

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party's goods or services or to pay the equivalent cost even if the goods or services
are not needed.

Transport sector: Transport industry includes road transport (i.e. highways,


tunnels, and bridges), railed transport (i.e. railway subway, and light rail transit
systems), airport and ports. Even within the transportation sector, the risk profile
varies with the mode of transportation. For instance, highway construction is
relatively less complex then tunnels and bridge, but they are exposed to risks that
come from competing facilities and issues like toll collection and user pattern need
to be taken into account while evaluating the viability. These may even hold true in
case of rail transport if not identical but are quite different when considered in the
case of airports and ports in terms of risk exposure in these parameters like toll
collection.

Risks in Road Transport: In case of road projects, the investment made by


the private investors is recouped using the toll collection from users. As a result,
the most critical risks in road transport are mostly due to fluctuation of actual
traffic from the forecasted traffic volume. In general, the traffic volumes are
forecasted with certain level of subjectivity and takes economic growth, traffic
induction, modal split (change of mode from say bus to monorail), individual
values of time, vehicle ownership and the behavior of people with respect to tolls
i.e. their acceptance levels into account. Any deviation of the forecasted traffic
from the actual traffic or inaccurate forecast due to poor workmanship may cause
deficiency in cash flows which are difficult to cover or cope up unless a certain
level of guarantees are ensured by the host or the government so that the
investments of investors and debt of lenders are secured.

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Cost overruns and delays are other major sources of the risk due to the constraints
such as geographical disadvantages while constructing in difficult terrains such as
hilly terrains or may be due to delay in the land acquisition, where especially for a
road project it is both expensive and can be slow. The right of way disputes also
hamper the work progress leading to cost overruns. The foreign exchange risk is
one of the risks encountered in case of tunnel and bridge projects which use
sophisticated technology with important equipment.

Tunnel and bridge: Tunnels can be either land borne or water borne. Water
borne tunnel can be either immersed or submerged tunnels. Land borne tunnel and
immersed tunnels are prone to geological risks as they have to be excavated or
drilled through uncertain rock mass and soil. Safety at work and disturbance to
surface traffic are major concerns especially in municipal areas. Health risks are
also encountered if the compressed air has to be used for stability and ground water
control. In case of submerged tunnel, the stability of the seabed is an issue at stake
during operation stage which could lead to traffic accidents and fire breakouts.
This can be a critical risk in case of long tunnels which demands the need for the
prevention of it while undertaking the physical design and management of the
facilities. In case of bridges, hydrological and weather conditions may impose
severe constraints besides the restrictions due to geological conditions. All these
could pose technical and design challenges which ultimately affect the completion
of project on time and within budget.

Railed transport: Railway systems especially electrified mass transits;


typically involve expensive rolling stock and control system. These are normally
procured with export and credit financing which is sensitive to political risks.

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Airports and ports : Business associated with aviation has to keep pace with
ever increasing demand for speed efficiency and new technology. The commercial
success of airports also depends heavily on regional or international trader
prosperity. Integration with other connecting facilities such as domestic airports
and highways is important as delay in the completion of these can affect the
projected revenues.

Ports and container terminals need an integrated infrastructure to support its


operation. Operation may be adversely affected by the lack of adequate adjoin land
for expansion. Throughput (an amount of material or items passing though a
system or process) capacity may be affected by the breakdown of cranes forklifts
and other equipment labor disputes and extreme weather condition such as
typhoons. Ports are prone to changes in tariff regulation and quotas, which affect
the shipment of goods for exports. Ports and airports often face political risk as it
represents symbols of national pride.

CLASSIFICATION OF RISK

Infrastructure projects are associated with various types of risks. These risks are
common to most of the projects under various infrastructure sectors. In order to
facilitate management of these risks, they are categorised into groups under various
classification schemes. One of the most common classification schemes is to
categorize the risks into project risks, financial, and political risks.

Project risks include various risks such as completion risks, performance risks,
operation & maintenance risks, financing risks, revenue risks, and input supply
risks. Completion risks refer to the risk that project will not be completed on time
or within budget. The failure to complete the project on time could be due to other

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risks such as delay in land acquisition risk or due to permit risk. Permit risk is the
risk that necessary permits, approvals, and licenses for construction, investment
and financing, and operating could not be obtained on time. Failure to complete the
project on time could be due to third party risks, the risks that the project's third
parties (i.e. public authority) fail to perform their obligations such as providing
connection and utilities for the project or relocation of utilities.

Performance risk is the risk that the project fails to perform as expected on
completion. The sources for performance risk could be due to poor design or
adoption of inadequate technology.

O&M risks refer to the risks associated with the need for increased maintenance of
assets or machinery over the term of the project in order to meet performance
requirements leading to cost overruns and reduce the availability of the project.

ISSUES & CHALLENGES CONSTRAINING


INFRASTRUCTURE FUNDING

On the debt side the major lenders are commercial banks. Going forward
relying on commercial banks as major lenders is precarious as banks are
likely to be constrained in their future lending due to the issue of asset
liability mismatch. Also banks have not been able to offer very long
tenure loans and the reset period on these loans is very short. Finally the
exposure norms may prevent banks from lending to large developers in
India thereby stymieing the growth of PPP infrastructure in India.

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On the equity side we find that promoters of PPP infrastructure projects


have to put in most of the equity requirement of an infrastructure project.
There is an acute shortage of equity with private developers and if the
present trend continues then they will not be able to attract the requisite
amount of debt for the projects. Use of sub debt has eased the equity
requirement somewhat. However, restrictions on taking out of the equity
by developers remain a cause for concern. Involvement of financial
investors in bidding for infrastructure projects is also limited at present as
is the involvement of strategic investors and international companies.

There are a lot of other hindrances in achieving easy financing for


infrastructure projects in India which are as follows:

1. Savings not channelized Although Indias saving rate may


be as high as 37%, but almost one-third of savings are in physical assets.
Also financial savings are not properly channelized towards infrastructure
due to lack of long term savings in form of pension and insurance.

2. Regulated Earnings Earnings from projects like power and


toll (annuity) may be regulated leading to limited lucrative options for
private sector and difficulty for lenders. Also any increase in input cost
over the operational life is very difficult to pass on to customers due to
political pressures.

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3. Asset-Liability Mismatch Most of the banks face this issue


due to long term nature of infrastructure loans and short term nature of
deposits.

4. Limited Budgetary Resources With widening fiscal deficit


and passing of FRBM act, government has limited resources left to meet
the gap in infra financing. Rest of funds has to be met by equity / debt
financing from private parties and PSUs.

5. Underdeveloped Debt Markets - Indian debt market is


largely comprised of Government securities, short term and long term
bank papers and corporate bonds. The government securities are the
largest market and it has expanded to a great amount since 1991.
However, the policymakers face many challenges in terms of
development of debt markets like:

Effective market mechanism

Robust trading platform

Simple listing norms of corporate bonds

Development of market for debt securitization

6. Risk Concentration In India, many lenders have reached


their exposure limits for sector lending and lending to single borrower

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(15% of capital funds). This mandates need for better risk diversification
and distribution

7. Regulatory Constraints There are lot of exposure norms on


pension funds, insurance funds and PF funds while investing in
infrastructure sector in form of debt or equity. Their traditional preference
is to invest in public sector of government securities.

CHAPTER:-4 Infrastructure Finance in India.


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

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Finance is one of the most basic requirements for carrying out


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

% Contribution in projected investment in 11th 5-Yr Plan

Challenges in Infra Financing

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


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

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Simple listing norms of corporate bonds


Development of market for debt securitization
6. Risk Concentration In India, many lenders have
reached their exposure limits for sector lending and lending to single
borrower (15% of capital funds) . This mandates need for better risk
diversification and distribution
7. Regulatory Constraints There are lot of exposure
norms on pension funds, insurance funds and PF funds while investing in
infrastructure sector in form of debt or equity. Their traditional preference
is to invest in public sector of government securities.

Exploring Alternatives
To overcome these challenges and find a way for easy availability of
funds for infra finance, we can explore following alternatives:
1. Developing domestic bond market, Credit Default
Swaps & derivatives
India receives substantial amount of FII investment in debt instruments.
But most of this investment is concentrated in government securities and
corporate bonds

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FII investment limit in infrastructure bonds has been increased from


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

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finance these projects for a medium term by sharing some of the risks
with institutions like IDFC. This reduced risk exposure will allow banks
to increase their financing of infrastructure projects.

4. Rationalizing the cap on institutional investors


Rationalizing the cap on investment in infra bonds by institutional
investors like pension funds, PF funds and life insurance companies will
lead to more investment in this sector. Currently insurance companies face
a cap of 10% of their investible funds for infra sector .
5. Tax free infrastructure bonds by banks
Currently only NBFCs can float tax free infrastructure bonds. If banks
are also allowed to float these bonds, they can raise long-term resources
for infrastructure projects, thus reducing the asset liability mismatch.
6. Fiscal Recommendations
The following fiscal policy medications can allow more funding of
infrastructure projects.
1. Reducing withholding tax
Currently foreign investors pay withholding tax as high as 20%
depending on the kind of tax treaty . It increases borrowing cost as the

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current market practice is to gross up the withholding tax. So this


recommendation would reduce the borrowing cost.
2. Tax treatment on unlisted equity shares
Unlisted equity shares attract larger capital gains tax than listed ones.
Currently capital gains on unlisted equity shares are taxed at 20% instead
of 10% for listed equity shares. Most private players in the infrastructure
sector are not able to raise capital through public issues. Therefore for
these players unlisted equity will be their dominant source of equity
capital. Therefore they are adversely affected because of the tax treatment
meted out to unlisted equity shares. Hence special consideration should be
given to private players in the infrastructure sector to encourage
investments.

7. Foreign borrowings
With respect to foreign borrowings, several options are there like
increasing the cap rate for longer tenure loans, relaxing refinancing
criteria for existing ECBs/FCCBs; allow Indian banks for credit enhance
ECBs (which is currently allowed only for foreign banks), etc.

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8. Utilising foreign exchange reserves


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

These reserves are primarily meant to provide a buffer against adverse


external developments. But they do not add value to any real sector as
they are invested in foreign currency assets such as government bonds.
So, the returns on these reserves are quite small.
The Deepak Parekh committee on infra financing is also in favour of
allocating a small fraction of total reserves for infra purpose. This method
of funding is already being used in some Asian countries like Singapore.
After accounting for liquidity purposes, external shocks, high rate of
domestic monetary expansion & real risks of disruptive reversals of
capital flows; some of funds can be used for infra.
9. Future cash flows as tangible security
The loans given to infrastructure project consortiums by banks are not
secured & fall under the unsecured loans asset class for banks. Currently
RBI mandates that provisioning of such unsecured loans is kept at 15%
(additional 10% for sub standard unsecured loans) . Therefore total
amount of loans to infrastructure projects are constrained because of the
sub standard unsecured nature of these loans.

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The primary source of repayment of these loans is the future cash flows
accrued from the project once they are completed and ready for public
use. These cash flows can act as a security under certain conditions and
debt covenants. For instance in case of road/highway development
projects, RBI passed an order that a) annuities under build-operate-
transfer (BOT) model and b) toll collection rights where there are
provisions to compensate the project sponsor if a certain level of traffic is
not achieved, be treated as tangible securities.

CHAPTER:-5 INFRASTRUCTURE FINANCING


IN OTHER COUNTRIES

With an understanding of what is happening in India it is important to


compare it with how infrastructure projects are financed in other
countries. This will help to highlight the gaps faced by the infrastructure
financing market in India and will also point to what can be done about
them, based on the experiences in other countries.

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India is not unique in having a substantial infrastructure creation


requirement. In fact as early as the ninth five year plan (over the period
1996-2000) China had projected an infrastructure requirement of nearly
USD 305 billion, close to the infrastructure financing requirement being
projected in India for the 11th five year plan. And like India commercial
banks have been the major source for financing this infrastructure
requirement. The role of other financial institutions and capital markets
has not been significant. It has also been seen that Chinese banks are also
resorting to using the corporate finance model as opposed to project
finance model for some infrastructure projects to bring in increased
comfort.

As far as other Asian countries are concerned the infrastructure financing


situation is also not much different from India. Before the Asian economic
crisis there was a significant flow of foreign currency infrastructure
financing, which was arranged by international banks. International bank
participation was high in a lot of countries as banks followed international
developers who participated significantly in developing infrastructure in
these countries. The long term relationship between international banks
and developers helped to give an additional sense of comfort in financing
projects. Comfort was also got from various guarantees given by
Governments to reduce the risk of the lenders. However, the experience of
this first round of infrastructure development was bitter after the East
Asian economic crisis hit. Some countries like Indonesia defaulted on the
guarantees offered to project sponsors as they were hit by devaluation of
the local currency. It was also realized during the crisis that many projects
had been financed on the basis of questionable viability and under

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pressure from the economic downturn a lot of the projects suffered. As


infrastructure projects floundered in the wake of the crisis the increased
risk perception led to a significant reduction in the flow of capital for
infrastructure projects in these countries. With international capital flows
drying up there has been an increased reliance on domestic markets and
commercial banks in many countries to provide the financing needed for
infrastructure projects. Infrastructure sector in countries with high
liquidity in the banking system have been able to tide the crisis as local
commercial banks in these countries have started to take a lead in
infrastructure financing. The major reason for reliance on the banking
system has been that other avenues for financing are not significantly
developed in these markets.

China has seen the consequences of excessive reliance on commercial


banks to lend to the infrastructure sector. Chinese banks are saddled with
very high levels of NPAs and as a consequence very low returns on
average assets. The returns on average assets for Chinese banks are in the
below 0.20 as compared to Indian banks where these returns range from
just below 1 to significantly more than 1. Banks are surviving only
because of the high levels of liquidity in the market and because the
Chinese Government is strongly backing them.

Confidence of international lenders has also slowly been returning.


However, in their second coming international banks have often been
beaten by highly liquid local banks which have been able to out price
international banks as well as shown willingness to take higher levels of
risk while giving out plain vanilla products.

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International banks with higher financing cost as well as currency risks


have not been able to offer the kind of products needed by the markets in
these countries.

If we contrast the above with the situation prevailing in India it has been
found that there are many similarities. Commercial banks lead
infrastructure financing in India like elsewhere. Also like India most other
developing countries lack alternative means of financing infrastructure.
There are some countries like Chile and Malaysia which also have a
strong corporate bond market which helps in raising infrastructure bonds.
But even in these countries the tenure of the bonds is not significantly
more than the tenure being offered by the banks to infrastructure projects
in India.

CHAPTER:-6 Steps in Infrastructure Finance

TYPES OF FUNDING OPTIONS AVAILABLE FOR


INFRASTRUCTURE PROJECT

FINANCE

Fund Based

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Term loan
Demand loan
Bank guarantees
Deffered Payment Guarantees

Non Fund Based

Letter of Credit
Buyers credit
Working capital

FUND BASED LIMITS:


Term Loan:
As the name suggests, these loans are given for fixed period of time with
the provision that its repayment shall also come in regular pre-fixed
periodical instalments which may be equated or graduated. These loans
are generally sanctioned for acquiring fixed assets by the persons engaged
in business and trade or in manufacturing or servicing etc. This is a source
of debt finance for long term purpose as project implementation takes
from 1 year to 3 years depending on the type of project and the loan is
repayable in 5 to 10years. Therefore, it is also known as Term Finance.

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These loans are generally repayable on the basis of repayment agreement


made according to the generation of future cash flow.

Bank gives Rupee loans as well as Foreign Currency term loan.

a. Rupee currency loan These loans are provided for incurring


expenditure for land, building, plant & machinery, technical know-how,
miscellaneous fix assets, preliminary expenses pre-operative expenses and
margin money for working capital.

b. Foreign currency loan These loans are provided for meeting


the foreign currency expenditure towards import of plant, machinery and
equipment, and payment of foreign technical know-how fees.

The periodical liability for interest and principal remains in the currency
of the loan and is translated into rupees at the prevailing rate of exchange
for making payments to the respective Bank/financial institutions. These
term loans typically represent secured borrowing. Assets which are
financed with the proceeds of the term loan provide the prime security.
Other assets of the firm may serve as additional/collateral security. All
loans provided by banks, along with interest, liquidated damages,
commitment charges, expenses, etc., are secured by way of:
a. First equitable mortgage of all immovable properties of the
borrower, both present and future. If the term loan is extended by more
than one bank, then the charge on the assets to the lenders is normally on
pari passu basis.

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b. Second charge on hypothecation of all movable properties of the


borrower, both present and future, subject to prior charges in favour of
commercial banks for obtaining working capital advance in the normal
course of business.

To the general category of borrowers, bank charges an interest rate that


is determined relating to the credit risk of the proposal, subject usually to
a certain floor rate generally Banks Prime Lending Rate (BPLR).
Interest is charged on a monthly basis and depending on the terms of the
project, either capitalized or serviced during the disbursement period.
The interest burden decline over time on account of repayment of the
principal, where as principal repayment may remain constant if based on
equal installments. Principal repayment may vary if the repayment is
fixed on ballooning terms which consequently depends on the cash flow
from the project. Thus the total debt servicing burden declines over time.

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

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agreement governed under negotiable instruments (e.g. Promissory Notes,


Bills of Exchange, etc.). Duration of these loans is generally 1-3 years.

Buyers Credit:
According to FEMA guidelines on Trade Credits, Buyers Credit refers
to loans for payment of imports into India arranged by the importer from a
bank or financial institution outside India for maturity of less than three
years.

Buyers credit for imports of raw material/non capital goods into India
can be availed for maximum period of one year and Buyers credit for
capital goods can be availed for maximum period of less than three years.

The credit can be raised irrespective of whether import takes place under
an arrangement of letter of credit issued by a bank in India or whether the
supplier sends the bills on collection basis.

Under the buyers credit arrangement, the exporter i.e. supplier of the
goods receives payment instantly in case of sight documents and on due
date of the drafts/bills.

Buyers Credit is arranged for a maturity of less than three years. No roll
over/extension is permitted beyond the permissible period. Buyers credit
for three years and above comes under the purview of ECB, which are
strictly governed by ECB guidelines of RBI.

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Working Capital Finance:


A firm's working capital is the money it has available to meet current
obligations (those due in less than a year) and to acquire earning assets.
Banks offers corporations Working Capital Finance to meet their
operating expenses, purchasing inventory, and receivables financing.

NON FUND BASED LIMITS:


Letter Of Credit:
A letter of credit is a commercial instrument of assured payment and
widely used by the business community for its various advantages. It is an
instrument by which a bank undertakes to make payment to a seller on
production of documents stipulated in the credit. The credit specifies as to
when the documents are presented to the paying bank or at some future
date, depending upon the terms stipulated in the credit.

Bank Guarantee:
Guarantee is a contract to execute the promise, or discharge the liability
of a third person in case of his default. In the ordinary course of business,
the bank often issues guarantees on behalf of its customers in favour of
third parties. When the bank issues such a guarantee, it assumes a
responsibility to pay the beneficiary, in the event of a default made by the
customer. A bank guarantee enables the customer (debtor) to acquire
goods, buy equipment, or draw down loans, and thereby expand business
activity.

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Deferred Payment Guarantee:


A deferred payment guarantee is a contract under which a bank promises
to pay the supplier the price of machinery supplied by him on deferred
terms, in agreed installments with stipulated interest in the respective due
dates, in case of default in payment thereof by the buyer.

STEPS IN INFRASTURUCTURE FINANCE

1. Submission of Application by borrower:


The borrower approaches the bank with the proposal to finance a project.
Borrower has to give a written application in favour of branch head
containing the brief information of applicant, company, industry, about
Project, Project duration and fund requirement from that bank.

2. Preliminary Information/ Information Memorandum:

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The borrower has to provide the Bank with the preliminary information.
The borrower has to prepare a detailed project report, which is submitted
to the bank and on the basis of which the final report is prepared. In case
of a syndication arrangement, the lead arranger prepares an Information
Memorandum in consultation with the borrowing entity.

3. Project Appraisal:
A detailed and critical appraisal of the project is necessary, before taking
a final decision about financing any project, whether individually or
jointly. The appraisal methodology of the banks should keep pace with
ever changing economic environment and also addresses the various types
of risks viz. industry, business, financial, management etc.

Bank has to ensure that the people behind the project have the required
knowledge and expertise in the proposed line of activity, enough owned
funds to meet the promoters contribution. The projections submitted by
the promoters should be realistic and achievable and the project must have
enough surplus generation to service debt in a reasonable period of time
after meeting the normal business expenditures.

While doing appraisal of any project, the following four fundamentals


are carefully studied and examined:

(i) Technical Appraisal:

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Technical Appraisal of a project is essential to ensure that necessary


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

(ii) Commercial Appraisal:

In order to have a proper appraisal of the demand forecast made by


borrowers, the term lending institutions would require information
regarding demand, supply, distribution, pricing and external forces.

(iii) Management Appraisal

Banks gets information about the company, its brief history, business
activities, Business model, details of the promoters, Board of directors,
shareholding pattern, capital structure etc.

(iv) Financial Appraisal

Financial appraisal is used to evaluate the viability of a proposed project


by assessing the value of net cash flows that result from its
implementation. Financial appraisal measures the direct effects on the
cash flows of the organization of an investment decision.

4. Risk Management and Credit Rating:

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Credit risk is defined as the possibility of losses associated with the


reduction of credit quality of borrowers or counter-parties. In a banks
portfolio, losses arise from outright default due to inability or
unwillingness of a customer or counter-party to meet commitments in
relation to lending, trading settlements, or any other financial transaction.
Alternatively, losses occur due to deterioration in credit quality.

Banks are permitted a choice between 2 broad methodologies for


calculating their capital requirements for credit risk. One method is to
measure credit risk in a standardized manner based on external credit
rating. The other method, viz. Internal Rating Based (IRB) approach,
would allow the banks to use their internal rating system for credit risk.
This will be subject to the explicit approval of the banks supervisor.

A credit rating estimates the credit worthiness of an individual,


corporation, or even a country. Credit ratings are calculated from financial
history and current assets and liabilities. Typically, a credit rating tells a
lender or investor the probability of the subject being able to pay back a
loan. A poor credit rating indicates a high risk of defaulting on a loan, and
thus leads to high interest rates or the refusal of a loan by the creditor.

5. Preparation of Final Proposal


Once the project is appraised, the final proposal is prepared by the credit
officer. The final proposal prepared at the bank contains the following
details regarding the project like; details about the borrower, Description
about the management and names of the people who constitute the board,
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the purpose for which the loan is taken, security provided by the
borrower, financial indicators, types of risk faced by the project etc.

6. Proposal Forwarded to the Sanctioning Authority


Once the credit officer prepares the final proposal, it is sent to the
sanctioning authority. It is then either approved or rejected by the
sanctioning authority. If sanctioned it gets approval with recommended
Rate of Interest (ROI), concessionary fees, securities to mortgage/pledge,
etc. After recommendation it is sent back to branch.

7. Sanction Letter Issued


As soon as financial assistance is sanctioned, a letter of intent is issued
to the applicant. In addition to usual terms and conditions, special
conditions are incorporated in the letter of intent to cover weak links, if
any, noticed at the appraisal stage.

8. Documentation and Disbursement:


Execution of loan agreement and other necessary legal documents is
very necessary for disbursing the amount. The term lending institutions
should ensure that the amount disbursed will be utilized for the purpose
for which it has been sanctioned.

9. Supervision and Follow-up:

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Project supervision and Follow-up of assisted projects during and after


implementation is indeed a crucial exercise to be performed periodically
with

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

CHAPTER:-7 INFRASTRUCTURE FINANCE BY L&T


INFRA FINANCE

L&T Infrastructure Finance Company Ltd.

L&T Infrastructure Development Projects Limited (L&T IDPL) is a pioneer of


the Public-Private-Partnership (PPP) model of development in India, which

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involves the development of infrastructure projects by private sector players in


partnership with the Central and State Governments.

L&T IDPL is a subsidiary of Larsen & Toubro, which is a major Indian


multinational in technology, engineering, construction, manufacturing and
financial services, with global operations.

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

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

It is one of India's largest infrastructure developers with a proven track record


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

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


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

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

Canada Pension Plan Investment Board (CPPIB) made a substantial financial


investment in L&T IDPL in December 2014. This is the first direct private
investment by a Canadian pension fund into an Indian Infrastructure Development
company.

CPPIB is a professional investment management organization that invests the


funds not needed by the Canada Pension Plan (CPP) to pay current benefits on
behalf of 18 million Canadian contributors and beneficiaries. In order to build a
diversified portfolio of CPP assets, CPPIB invests in public equities, private
equities, real estate, infrastructure and fixed income instruments. Headquartered in

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Toronto, with offices in Hong Kong, London, New York City and So Paulo,
CPPIB is governed and managed independently of the Canada Pension Plan.

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


ROADS
PORTS
METRO RAIL
TRANSMISSION LINES
WIND ENERGY

L&T Infra-financing for Wind Sector

Content
L&T Infra Overview
Indias Wind Sector
Lenders Risk Assessment
O&M
Power Evacuation

L&T Infra Overview

Managed by a team of ~ 100 professionals under the guidance of an eminent

Board, L&T Infra has presence across the entire Inf.ra sector

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PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE AND ECONOMICS

Company Overview


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

Provides financial products and services to clients in Infrastructure space

Granted Infrastructure Finance Company
(IFC) status by RBI in July 2010

Notified as a Public Financial Institution
(PFI) under Companies Act in June 2011

Total asset size of ~ Rs. 13,300 Crores (Dec12) across Power, Roads, Oil
& Gas, Telecom, Ports & Shipping and Urban Infrastructure

Emerging as a preferred partner in Infra financing

Why L&T Infra as a Partner?

Expertise


Experienced in Infra domain


Access to L&Ts knowledge base

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PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE AND ECONOMICS

Investment Ability


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

Active syndication debt can arrange large long term financing

Services

Strong relationship with

Banks/ FIs/ Investors


Quick turnaround time for proposals

Track Record


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

> 20 deals Advisory mandates completed


Offers Tailor-made solutions through financial innovation
in the sector

Repayments stitched to match cash flows

Top up & securitization transactions post completion

LT Infras presence in renewable sector


Strong focus in financing of renewable power projects

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PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE AND ECONOMICS


~20% of portfolio in renewable sector


Largest financier of Solar projects on non-recourse basis

Extensive experience in financing mini-hydro and wind projects
across diverse geographies

Financed around 700 MW of projects across renewable sector

Financed ~130 MW of operational wind power projects & ~ 120 MW
of under construction wind power projects

Exposure of ~ Rs.1,300 Cr to Wind Sector

Indias Wind Potential

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

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

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Reasonably good wind resource has been identified in seven major


states i.e. Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh,
Maharashtra, Rajasthan and Tamil Nadu

Preferential Tariff

13 SERCs have declared preferential tariffs for purchase of wind power

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


varies across states

Renewable
Purchase Obligation

26 states have specified targets for the uptake of renewable electricity

RECs have been launched to facilitate the achievement of RPO


obligations

Others

Discontinued Benefits: Generation based Incentive and Accelerated


Depreciation

RECOMMENDATIONS
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To successfully tap the available revenue pools, bank should develop a

strong understanding of each sector to assess products needs, timing and


investment merit.
Bank will also need to build deep expertise to undertake accurate risk

assessment, for this bank should make different teams to work on projects of
different sectors, this will help them to specialize in one sector and also will
lead to
better understanding of risks and opportunities in those sectors.
Banks should also have a team focusing entirely on the study of the risks
aspects

of the projects
To move up the value chain or acquire relationships and scale in India, banks

should consider partnerships. Domestic incumbent banks with a strong


funding
base and existing corporate relationships can use global or domestic
alliances to
build specific sector expertise, go beyond participating in syndications to
active
origination and participation from the equity side of the project capital
structure

CHAPTER:-8 BIBLIOGRAPHY &


WEBLIOHGRAPHY

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ECONOMIC TIMES
L & T INFRA-FINANCE .COM
INVESTOPEDIA
www.infrastructure.com
http://nptel.ac.in/courses/110106043/

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