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8/2/2019 Iifcl, Idfc, Sbi

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FINANCING INFRASTRUCTURE

ROLE OF IIFCLProf D. C. Pai


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India Growth Story continues

Indian economy has shifted to highgrowth trajectory GDP growth for 2007-08 was 9%

2008-09 growth was at 6.75% 2009-10 growth forecasted at above 8% Fundamentals remain strong despite global

uncertainties / melt downs.

Right policy mix can help sustain thegrowth momentum


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Infrastructure deficit is loomingRobust economic growth has resulted in overstretchedinfrastructure

Infrastructure constraint is threatening to becomebinding on growth

11 th Five Year Plan (2007-2012) has envisaged totalinvestment requirement of infrastructure sector at $515billion $150 billion is to come from private sector Large part of remaining is to come as debt component from

banks and other institutions

PPP model is being encouraged


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Constraints in promotion of PPP

Inadequate availability of long term finance(10 years plus tenor)Lack of capacity in public institutions tomanage PPP

Absence of shelf of bankable infrastructureprojectsNeed for greater acceptance of PPPs by

public - user charges


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Slew of measures by Government

Opening of infrastructure sectors forprivate and foreign investmentPromotion of levy of user charges

Evolving model concession agreements Viability Gap Funding (VGF) schemeSetting up of India Infrastructure Finance

Company Ltd (IIFCL)Establishment of India InfrastructureDevelopment Fund (IIPDF) with corpus of Rs100 crore


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India Infrastructure Finance Co Ltd

Following Budget announcement in 2005-06,IIFCL was set up in January 2006

IIFCL is a Special Purpose Vehicle to providelong term finance to eligible infrastructure

projects

Registered as a Wholly Owned Government of India Company under Companies Act 1956


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Objectives

IIFCL shall finance only commercially viableprojects implemented by: A Public sector company A Private sector company selected under PPP

initiative or Private sector company ( only throughrefinance mode)

Overriding priority to PPP projects implementedby private sector companies selected throughcompetitive bidding process


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Financing by IIFCLFinancing modes

Long term debt Refinance to banks and FIs for loans with tenor exceeding 10years, granted by them

IIFCL will rely upon credit appraisal of the lead bank and will notnormally carry out any independent appraisal of the project.

The risk exposure of IIFCL shall be less than that of the lead bank in aproject

Total lending by IIFCL to any project company shall not exceed 20%of the total project cost

Rate of interest charged by IIFCL shall cover all funding costsincluding administrative and guarantee fee


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Activities: Sectors which IIFCL can financeIIFCL provides financial assistance to

Roads and bridges, railways, seaports, airports, inlandwaterways, other transportation projects

Power

Urban transport, water supply, sewerage, watertreatment, solid waste management and other urbaninfrastructure

Gas pipelines

Infrastructure projects in Special Economic Zones(SEZs)

International Convention Centres & other tourismrelated infrastructure


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Activities: Resource MobilisationFund Raising Initiatives

Multilateral / bilateral sourcesWorld Bank

Asian Development Bank KfW, Germany

JBICExternal Commercial Borrowings

Domestic markets

All borrowings of IIFCL have backing of Sovereignguarantee

However, IIFCL does not enjoy any specialdispensation in mobilization of resources


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Sector No of Projects

ProjectCost

LoanSanctioned

Road 55 31712 5723

Port 5 3772 580

Power 23 93241 9913

Airport 2 14716 2150

Urban infrastructure 1 70 14

Total 86 1,43,511 18,380

Sector-wise Financial Assistance by IIFCL(Rs crore)


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No. of Projects

ProjectCost

Rs crore

LoanSanctioned

Rs crore

Road 45 24,292 4,465

Port 4 2,756 380Airport 2 14,716 2,150

Power 18 65,421 8,078

UrbanInfrastructure 1 70 14

Total 70 1,07,255 15,087

Sector-wise projects which have achieved financial closure


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STATE No. of Projects Project CostRs crore

Loan Sanctioned by IIFCLRs crore

1 ANDHRA PRADESH 9 4727.00 862.00

2 CHHATISHGARH 2 866.00 165.00

3 DELHI 1 8890.00 1000.00

4 GUJARAT 8 30290.00 3539.005 HARAYANA 2 2501.00 495.00

6 HIMACHAL PRADESH 2 999.00 183.00

7 KARNATAKA 5 6307.00 842.00

8 KERALA 1 565.00 100.00

9 MADHYA PRADESH 8 2374.00 1195.00

10 MAHARASHTRA 11 16477.00 2657.00

11 ORISSA 1 1350.00 250.00

12 PONDICHERRY 2 734.00 113.00

13 PUNJAB 2 883.00 140.00

14 RAJASTHAN 1 5000.00 500.00

15 SIKKIM 2 8900.00 940.0016 TAMIL NADU 14 8039.00 1475.00

17 UTTAR PRADESH 9 9994.00 1770.00

18 UTTARAKHAND 3 2681.00 514.00

19 WEST BENGAL 3 10568.00 1640.00

Grand Total 86 143511.00 18380.00


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Strategic PartnershipsIIFCL has entered intostrategic partnerships with 3iGroup PLC , one of worldleaders in private equity &

venture capital & MacquarieBank Ltd , Australia

MoU arrangements with 27banks/ financial institutionsfor deal flows, syndication& other financial services


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Off-shore SubsidiaryUnion Budget 2007-08 has set up wholly owned

subsidiary of IIFCL which will

Borrow foreign currency funds from Reserve Bank of India and

Lend to Indian companies implementing infrastructureprojects or co-finance their ECBs solely for theircapital expenditure outside India

IIFC (UK) Ltd has been set up at London To supplement role of IIFCL in financing

infrastructure


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IIFCLs experience in financing PPP

Delays in land acquisitionDifficulties in provision of State Support

Agreement

Lack of machinery and skill setsLack of risk capitalLimited number of sponsors

Inadequate skills for appraisal of infrastructure projects among banks


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Urban Infrastructure Finance:

New Financing Initiatives &

Problems Relating To OldMethods

Infrastructure development finance corporation


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Presentation Structure

Old methods of financing urbaninfrastructure projects

Common issues in infrastructure financing

New methods Challenges

Way forward


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Old Methods

Of financing urban infrastructure

projects


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Traditional FinancingMethods

By the GovernmentBy the Local AuthorityBy the Utility/ Agency

through budgetary allocation through own resources through loans taken by the State/ LA/

Agency


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Characteristics of Old

methods

Generally based on state/ sovereignguaranteesNot on a Project Recourse basis, withdemonstrated project viabilityGenerally short/ medium tenure


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Some concerns with oldmethods

Improper project selection, on grounds otherthan inherent sustainability

Creation of large capital assets, but with pooroperations, maintenance, management

AND - State/ agencies running out of financialresources and guarantee capacity


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Infrastructure Investment

As per the India Infrastructure Report,estimated infrastructure investment up to the11 th 5 year plan ending 2011 estimated isabout $575 billion. The estimated actual investment is of the

order of 30%, all said

Adding the backlog of investment, therequirement for further investment ininfrastructure is therefore gargantuan

This represents both an opportunity and a challenge


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Changing Mindsets

About half of the investment requirementfor infrastructure can be raised by the

Government/ Agencies

The balance funds have to be raised fromprivate sources There is rapidly growing awareness at all levels

that a partnership has to be forged with theprivate sector developers and/or investors


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Common Issues

In infrastructure financing


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Common Issues In Infra

Financing 1

Possible higher cost of services User willingness-to-pay

Or Willingness to Charge?Cost of Service should consider inefficiencies in existing players

ULBs, Water Boards, etcCross subsidy (existing and possible) tobe taken into account


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Financing 2

Need for proper demand estimation E.g., Water or Energy Demand

Consideration of Competition for services E.g: Alternate sources, cheaper power

Stable and clear Government Policyregime: Lack of clarity effects development and

investments


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Financing 3

Need for proper Regulatory Structures,generally on a common basis across

the country: Urban Services (including water),

Transport projects (roads, airports,pipelines), have no regulatory frameworksin place


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No Mantras and Magic Bullets! While there are many essential precepts to

establishing and improving urbaninfrastructure services, the need of the dayis a coherent and concerted attempt by allstakeholders working in a partnership

Mantras & Magic Bullets


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Some Key Precepts 1

Reform (of methods and practices) AccountingProcurementTechnical and process control

These are important and vital conditions, but notsufficient in themselves to address the problems onhand


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Some Key Precepts 2

Privatization of services

Private sector brings in certain efficiencies, skillsand investments

But in Urban Infrastructure, it is more essential toforge a strong partnership between the skills,efficiencies and risk appetites of the Governmentagencies and the Private Sector


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Some Key Precepts 3

User Pay

User charges have to be kept in line with the cost ofproviding services

But in Urban Infrastructure there are social issues,willingness -to-charge issues, and questions of affordability for essential services. A clear balancehas to be struck between user charges, subsidies,and risk allocation between the Government and

the Private Sector


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New Methods

Of financing urban infrastructure

projects


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Project Recourse Financing

Various attempts are being made to convertUrban Services (water, waste-water, Solid

waste, etc) into Bankable projects This is likely to open a new area for investments And a new breed of Operating companies to

provide these services

But projects have to be systematically identified,structured and developed


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Infrastructure Funds

Set up by a collaboration of governmentagencies, Financial Institutions (and insome cases, Developers) Dedicated funds Debt and/or equity

Diversified set of infrastructure projects


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Private Financing of PublicInfrastructure (PFPI)

In this format, the State purchases Servicesrather than assets

For instance, purchases pre-determined hospitalservices for the public, on a determinate paymentplan for a fixed (long) period

Rather than paying up-front for a hospitalconstruction

Would be a fresh approach to involve privatesector participation in India, especially in newareas


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New Financial Instruments

To address the typical asset-liabilitymismatch of long-gestationinfrastructure projectsTo facilitate participation of banks andother commercial institutions which

cannot lend long-term money IDFC s take -out structures are a step in this

direction


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Pool Finance Structures

Set of projects, with diversified risk-return profiles

Financial Institutions/ Investors

Credit Enhancing Structures(Guarantees, DSRA)

Pool Fund


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The Way Forward:

Convergence


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Clear Policy/ LegislativeFramework

Many projects are stalled because thepolicy and legislative framework has notbeen properly thought-through and/orput in place This includes the procurement strategy

And acceptable risk allocation frameworks


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Project Development

State and its agencies have to deployadequate resources to properly develop a

bankable shelf of projects Else difficult to attract private sector interest Leap into the dark process

State and private sector need to thinkseriously about setting aside adequate,dedicated project development funds


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Equity Funds

Need for adequate equity investments Strategic investors in infra projects may not

be in a position to raise a substantiveportion of the equity

GoI nominating IDFC as a Nodal

Agency for an Infrastructure EquityFund with participation of other financialinstitutions is a step in this direction


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State and Local Initiatives

More and more State Governments andeven Local Bodies are commencingPublic-Private-Partnership initiatives IDFC s own experience with iDECK

(Karnataka), Uttaranchal, TN, Kerala, and

many other States reflects the imperativeneed felt by the States to fast forwardinfrastructure development at a local level


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Suggested Approach

To fix the leaking buckets Before opting for large capex projects

Develop replicable frameworks Identify GDP drivers From successful pilot projects

Have a City Focus/ Strategy Instead of spreading too thin


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State Bank of IndiaProject Finance-SBU .

Infrastructure Financing andCommercial Banks


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State Bank of India

Project Finance- SBU

Infrastructure Financing andCommercial Banks

Infrastructure Development is certain to turn into agrowth Driver for future Development.With the concept of universal Banking taking roots inthe system and relaxations permitted by RBI from

time to time, Commercial Banks have shownenthusiasm in participating in this specialised field of financing. SBI has established a Project FinanceStrategic Business Unit. Specialised domainknowledge in power, roads, ports, telecom etc isavailable.

I f t t Fi i g d C i l


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State Bank of India


Infrastructure Financing and CommercialBanks- contd

There is a large potential for commercial banks tofurther develop this area of business.Commercial Banks face two major issues inparticipating in infrastructure projects:

a) Assets Liability Mismatch.b) Exposure to market risk.


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State Bank of India


Asset Liability Mismatch

Banks usually carry short term liabilities. The infrastructure loansare long term in nature, usually 10-12 years.The present financing structure is usually 70% debt and 30%equity, the debt coming from FIs and Banks.To address Asset Liability Mismatch related issues, the worldwide

practice is to have bond financing either at initial stage or moreoften project finance being taken out by bond financing aftercommercial operation.

Advantages of bond financing:- rating required, better disclosure.- closer monitoring, better discipline in reserves

maintenance.- better discipline required by project company because

cost overrun, delays etc would lead to problems.- Exit option available to the Banks/FIs.


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State Bank of India


Exposure to Market Risk

Market Risk arises from:(a) Tariff fixation(b) Payment security mechanism

(c ) Offtake Risk (d) Toll Fixation(e) Lack of market intelligence

Banks have an expertise and appetite for appraising

and taking on credit risk. The market risk associatedwith Infrastructure would need to be addressed.


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State Bank of India


Exposure to Market Risk- contd

A mechanism needs to be put in place to facilitatebanks in mitigating market risk.Power Sector :

1. Payment mechanism.

2. Fallback mechanism.3. Dispute settlement mechanism.

Road Sector:1. Toll alone may not be adequate to make

projects viable.2. International practice of providing additionalrevenues from support structures such as realestate, restaurants, shopping, township etc.


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State Bank of India


Exposure to Market Risk- contd

Hydrocarbon Sector: 1. Level playing field for all players.2. Independent Regulatory body.

Telecom Sector:1. Level playing field for all players. 2. Issues relating to Inter-Connect Usage

charges (IUC).

Other Sectors:1. Revenue shortfall support mechanisms.


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State Bank of India


Suggestions

Establishing of Project Working Group: Projectsoften face problems which need to be resolvedquickly. A working group of high levelfunctionaries required for each sector to resolve

problems in a timely manner. In some ways akinto the erstwhile working group for project exports.Hedge Funds: Hedge Funds may be considered forproviding credit enhancement to the Lenders.Projects may contribute to the corpus to assist thefuture green field projects.


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R.Rengarajan, Consultant Trainer

Infrastructure Financing-An Introduction


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Agenda Meaning of infrastructure

Principles for reforms Recommendations of Rakesh Mohan Committee for

Financial Sectors

Issues in Infrastructure

Privatisation Unbundling Project appraisal, financing and implementation

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Meaning of Infrastructure

4/15/2012 58R.Rengarajan, Consultant Trainer


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Infrastructure

Natural monopoly Public goods characteristics which make

revenue collection difficult.

Spillovers / externalities both negative and+ve


P i i l f i t ti i ti i


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Principles of private participation ininfrastructure financing

Allocation of risks Manage infrastructure like a business and not a

bureaucracy

Introduce competition

Give users and other stakeholders a strong voiceand responsibilities

Public private partnerships in financing

Government will continue to have some role ininfrastructure


R d ti f R k h M h


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Recommendations of Rakesh MohanCommittee for Financial Sectors

Rebate in Income tax like then 80CC Introduction of competition in insurance sector Splitting up of EPF

Floating of new pension and provident fund Fiscal incentives for contribution to pension funds Introduction of forward and futures

Creation of IFDC as the apex authority

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Recommendations for Financial


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Recommendations for FinancialSectors

Debt Market Reforms Creation of bench mark and yield curve Widening and deepening of Debt Markets Regulatory Reforms Setting up of Primary Dealers

Reintroduction of Repo

Tax free bonds by private sector infrastructurecompanies

Development of Municipal bond market



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Aspects of infrastructure financing

Large capital costs withsub stantial sunk cost Upfront commitment of cost before project

becoming operational

Long gestation period with slowrevenuestreams

High cost of entry and exit



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Aspects-contd.

Services produced are non tradable-no

imports for excess demand and no exportsfor excess supply

Vulnerable to Regulatory and policychanges

Politically sensitive tariffs Investments are open to certain risks



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Aspects-Contd.

Projects are not homogenous, neither aresolutions-characteristics differ betweensectors and within sectors between different

phases of project Finance has to be disaggregated-by

origin(foreign or domestic),by sector(public,

private, joint)



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Aspects-Contd.

By techniques and instruments of finance andby types of finance(newinvestment,maintenance and working capital)


Traditional Financing of


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Traditional Financing of Infrastructure

Tax revenues and Govt. Borrowing Govt.bore the investment risk Finance from bilateral/multilateral countries Govt. funding due to natural monopoly

features of many of these facilities Public good characteristic which make

revenue collection difficult



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Contd.

Large investments and long gestation periodswould be disincentive to private initiative

Capacity of Govts.to preempt resources at lowcost in view of their credibility



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Deficiencies of Traditional method

Lack of accountability Poor Management Cost over runs Neglect of operation and maintenance Backlog of unmet demands

Macro economic constraints on Govt.like BOPproblems and widening fiscal deficit



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Contd.

Vulnerability to cuts in Govt.Budget Inadequate cost recovery due to politically

sensitive tariff structure

These issues called for an altogether newapproach to Infrastructure Financing with afocus on Private Participation facilitated bytechnical/financial innovation.



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Issues in Infrastructure



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Issues

Privatisation Unbundling Project appraisal, financing and

implementation



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Issues - Privatisation

Efficiency Resources



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Contract ase - Un un ing-


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gmonopoly-public goods

BOO-Build Own Operate -Cellular phones and IPP BOT-Build Operate Transfer : Concessionaire build

and operate for certain time to recover his cost and

transfer assets to the government - Roads, Enronpower

BOLT-Built Operate Lease and Transfer- Railways


Issues - Project appraisa


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j ppProject financing V/s Infrastructure

financing Different from balance sheet financing

Future cash and not assets are collateral Creation of SPV Non / limited recourse financing



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Risks in Infrastructure financing

Cash flow

Revenue from salesLess variable costLess fixed cost

Earning Before Interest and Tax (EBIT)

+ Depreciation (EBIDT)Less InterestLess Tax

Net Income (EAT)4/15/2012 79R.Rengarajan, Consultant Trainer



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Operational risks Pre operation

Post operation Market risks

Interest rate risk Foreign exchange risk Price risk and inflation

Credit risks Guarantees Counter guarantees

Escrow mechanism4/15/2012 80R.Rengarajan, Consultant Trainer

Management o


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gRisks in Infrastructure financing

Sell out risks by way of contracts,guarantees, ownership and escrow.

Ownership by stakeholders Contracts , guarantees and counter

guarantees by the undertakings, State

government and Central Government Escrowing revenue of the undertaking and

tax collection


Management o


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gRisks in Infrastructure financing

Ownership by stakeholders

Contracts , guarantees and counterguarantees by the undertakings, stategovernment and Central Government

Escrowing revenue of the undertaking andtax collection


Management o


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Contract is king Concession EPC Equipment Purchase

Supply Operation and Maintenance Guarantees


Management ok f f


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Insurance

Financing Project finance Completion guarantee Equity Subscription Direct agreement Inter credit agreement Subordination agreement


f


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Financing of projects

Creation of SPV Concession Investment by stakeholders Financing by Consortium of banks / FI Tax concession




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SPVCONCESSIONSFROMGOVERNMENT

Investment by

Government bodyor department

Sponsor

Project supplierpublic, others

Financing by

Sponsors, Banks, FIs, Mutual fund , Pension fund,insurance .public


Financing of projects by


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g p j yintermediaries

ALM issues Refinancing

IDFC Securitisation



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PROJECT FINANCE-

An overview

What is Project Financing ?


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What is Project Financing ? A funding structure, that relies on future

cash flow from a specific development asthe primary source of repayment with thatdevelopments assets,rights,and interestslegally held as collateral security.

It is an option granted by the financierexercisable when the entity demonstratesthat it can generate cash flows inaccordance with the long term cash flowforecasts.

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Contd.


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It involves-

Financing of an economically separablecapital investment project The providers of funds look primarily to the

cash flow from the project as the source of funds to service their loans

Provide the return of and return on theirequity invested

The terms of debt & equity securities aretailored to the cash flow characteristics of the project.

4/15/2012 90

Project Finance-Basic Elements


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j

Assets comprising the project

LoanFunds

Debtrepayments Purchase

Contracts

Purchasers

output

Investors/

Sponsors

Return

to Investors

EquityInvestors

Cash deficiencyagreement/ othercredit support

EquityFunds

Suppliers

Supplycontracts

Raw Materials

Lenders

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Basic Features


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Basic Features An agreement by financially responsible

parties to complete the project and makeavailable all funds necessary to achievecompletion

An agreement (in the form of purchasecontract of out put) that on projectcompletion & commencement of operationthe project will have available sufficient

cash to meet all its operating expenses anddebt service requirements, even if theproject fails to perform for any reasons

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Contd. Project financing is not a means of raising funds


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Project financing is not a means of raising fundsto finance a project that is so weak economically,that it may not be able to service the debt orprovide an acceptable rate of return to equityinvestors.

Project financing requires careful financialengineering to allocate the risks and rewards

among involved parties in a manner that ismutually acceptable. The key to successful project financing is

structuring the financing part with as littlerecourse as possible to the sponsor while at thesame time providing sufficient credit supportthrough guarantees or undertakings of sponsor sothat lenders will be satisfied with credit risk.

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Requirements of Project Financing


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Requirements of Project Financing A project has no operating history at the

time of initial debt financing Its credit worthiness depends on the

indirect credit support provided by third

parties through contractual arrangements Lenders require assurance that once the

project is set up and operations begin it will

constitute an economically viableundertaking.This calls for a detailedproject analysis

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Facets of project Analysis


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Market analysis

What would be the aggregate demand of theproposed product/service in future ?

What would be the market share of the project underconsideration?

Technical analysisWhether the pre-requisites for successfulcommissioning of the project have been considered?

Whether reasonably good choices have been made in

regard to location,size, process etc.

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Project Analysis- contd.


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j y Financial Analysis

whether the project will be financially viable to meetthe debt service burden and the return expectation of providers of capital.It involves:

Investment outlay and cost of project, Means of Financing,

Cost of Capital Projected profitability, Break-even point, Cash flow of the project, Investment worth while ness judged in terms of various criteria of

merit, Projected financial position, Level of risk.




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Economic Analysis

Focus on social cost and benefits of project whichmay be different from its monetary costs andbenefits. It involves finding out;

What are the direct economic benefits and costs of the projectmeasured in terms of shadow(efficiency) prices and not in terms of market prices?

What would be the impact of the project on the distribution of income in the society?

What would be the impact of the project on the level of savings andinvestment in the society?

What would be the contribution of the project towards fulfillment of certain merit wants like self sufficiency,employment etc?

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Ecological Analysis

What would be the likely damage theproject may cause to the environment?

What is the cost of the restoration

measures required to ensure that thedamage to the environment is containedwithin acceptable limits?

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Feasibility study-A schematic Diagram


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Plan Feasibility study

Generation of Ideas

Initial screening

Is the idea promising

Conduct market Analysis

Terminateyes

No

Conduct Tech. Analysis

Conduct Fin. Analysis

Conduct Econ./Ecological Analysis

Is the proj. worth while ?

yes

Prepare Funding Proposal Terminate

No


What is a viable project financing?


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The project must be backed by strong creditbacking,

Financial viability must be provable Supply contract for product and/or energy must

be ensured at a cost consistent with fin.

Projections Market for the product or service must be

assured at a price consistent with fin. Projections

Transportation of product into or out of projectmust be assured at a cost consistent withprojections

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Contd.


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Expertise of contractor to construct theproject facility must be established

Financial capability and technical expertisemust be available to cover cost over runs

Reliability of the process and equipment tobe used must be well established

The sponsor or the beneficiary of thesponsorship must have available expertise

to operate such a facility. Dependence onoutside expertise should be discouraged

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Contd.


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In addition to operating expertise ,

management personnel must be available,otherwise the project is a suspect.

Properties and facilities being financed

must have value as collateral Political environment for location of project

and type of project must be reasonably

friendly and stable

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Causes for Project Failures


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j Delays in completion with consequent delay in the

contemplated revenue flow, Capital cost over run Technical failure Financial failure of contractor

Govt. interference Uninsured casualty losses Increased price or shortage of raw materials Technical obsolescence of the plant Loss of competitive position in market place Expropriation

Documents

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