Sources of Funding in Infrastructure Sector

Introduction
A modern, well-organized and widespread infrastructure is essential
for a countrys economic growth. The Government of India has been
consistently increasing its spending on the development of
infrastructure capabilities to achieve sustainable economic growth
of the nation. The nations infrastructure spending is expected to
grow to 9.9% of GDP during the 12 th Five Year Plan from 7.5% during
the 11th.

Source: Planning Commission

The 12th plan gives stress on the need for expanding infrastructure
and increasing investments by the Government and Private Players
in the form of Public Private Partnerships (PPP). Active Participation
of the private sector is important to support countrys infrastructure
development. Total investment in infrastructure during the 12th Five
Year Plan is expected to be around $747b out of which at least 50%
would come from the private sector.

Infrastructure Spending Break-Up

Telecom, electricity and roads account for about 70 percent of the
total investments and are likely to rise at a CAGR of 26 percent, 14
percent and 12 percent respectively during the 12th Five Year Plan.

Infrastructure Spending in Different Sectors

(12th Plan)
Amount (in Rs. % of Total
Crore)
Investment
1389420
31%
537840
12%
1165320
26%
358560
8%
403380
9%

Sectors
Electricity
Roads and Bridges
Telecom
Railways
Irrigation
Water Supply and
Sanitation
179280
Ports
44820
Airports
89640
Storage
44820
Oil and Gas Pipelines
268920
Total
4482000
Source: Planning Commission

4%
1%
2%
1%
6%
100%

The Government of India is encouraging private sector participation

in infrastructure projects in many forms. They are being used
increasingly for construction and operation of infrastructure
projects. This model will improve efficiency, reduce time and cost
overruns and augment resource availability as compared to public
sector ventures.

Means of Infrastructure Funding

Forms
Debt

Domestic Sources

External Sources

Domestic Commercial
Banks

International Commercial
Banks

Domestic Term Lending

Institutions

Export Credit Agencies

Domestic Bond Markets

Equity

International Bond
Markets

Specialized
Infrastructure Financing
Institutions

Multilateral Agencies

Domestic Developers

International Developers

Public Utilities

Equipment Suppliers
Funds

Other Institutional
Investors

Other International
Equity Investors
Multilateral Agencies

The financial structure for a PPP project is usually 70-80% debt and
20-30% equity. The infrastructure sector has been witnessing rising
debt equity ratios in the recent years. Both commercial and public
sector banks contribute senior debt, while subordinate debt is
popular amongst road projects.
Some government grants are also devised to support economically
unviable but feasible projects.
Commercial Lending
Commercial lenders are the largest financers of Infrastructure
Projects in India. Infrastructure lending by commercial lenders rose
over 36% through 2006 to 2011 (Rs. 1128 Billion to Rs. 5266
Billion). During this period the share of bank finance in the
infrastructure sector as a percentage of gross bank credit increased
from 2.2% to 13.4%. A huge amount of these funds was invested in
the power sector (over 50%).
The banks are now however on the verge of their maximum limits
for lending towards the infrastructure sector. Another key problems
faced by banks is the asset-liability mismatch problem, which arises
due to the fact that longer duration loans required by the
infrastructure projects need to be financed by shorter durations
borrowings. The difference between liabilities and assets varies
according to their maturity profile buckets. As the maturity time
period increases, the liabilities surpass the assets and it results in
asset liability mismatch for banks.
As a solution to the asset liability mismatch, take-out financing has
been developed. Such financing schemes involve three parties Project Company, lending company and taking over institution
(bank/consortium of banks/FI). The taking-over institution enters an
agreement by which the lender transfers a part/whole of the
outstanding to it on a pre-determined basis.
Bonds
Bonds are issued in India by both Central and State governments,
public sector undertakings, other government bodies, financial
institutions, banks and corporates. Indian companies are allowed to
issue bonds in Indian currency for trading on the corporate bond
market in the country according to the existing regulations. Foreign
institutional investors are permitted to invest in these bonds up to
995 billion rupees collectively, with 234 billion rupees in the
infrastructure projects.
External Commercial Borrowings
External Commercial Borrowings (ECBs) are an important means of
funding debt requirements of the infrastructure project. The number
of ECBs extended depends on the interest rates in the country. They

have been becoming cheaper over the years and developers are
increasingly contemplating them as an alternate source.
Firms in India raised about $637 million in December 2014.
Companies such as L&T Finance are using the ECB route for its
expansion. L&T infrastructure Finance raised over 4.2 billion through
the ECB window last year.
Foreign Investment Funding
Foreign Direct Investment is permitted up to 100% in Greenfield
infrastructure projects under the automatic route. The Cabinet had
also cleared for FDI of 100% in Railways infrastructure and 49% in
the defense sector last year. India needs an investment of about
$1.7 trillion in infrastructure. Among the PPP projects, only he power
sector is on track, achieving 100% of planned capacity, the airport
sector is at 75% and road sector at 50%.
Foreign Institutional Investment
Indias immense growth potential is attracting a lot of investments
through the FII mode. FIIs invested nearly $24.7 billion in the Indian
debt market the last year out of which a substantial amount was in
the infrastructure sector.
Multilateral Agencies Lending
PPP projects in India are, sometimes funded by institutions such as
the World Bank and the Asian Development Bank. The Government
of India started a PPP initiative called Mainstreaming PPPs in India
in collaboration with ADB. It started in 2007 to enable PPPs by
focusing on activities relating to various parameters such as process
standardization, sector tools, development funds and projects
development. ADB provides support by providing public sector loans
to IIFCL, project companies, provision of guarantee to commercial
lenders and public sector loans to states and municipalities for
financing grants/equity support.
The World Bank provides long-term financing for infrastructure
projects in India. It helps IIFCL stimulate the development of a longterm local currency debt financing market infrastructure in India.
Insurance/pension funds
Pension funds are an alternate source of finance for infrastructure
projects as they provide long-term streams of income, predictable
cash flows, diversification of project and societal benefits. The
Government of India launched Infrastructure Debt Funds (IDFs) to
allow infrastructure companies to raise finances from both domestic
and foreign insurance and pension funds. IDFs can be set up as a
trust or a company whose income would be exempt from income
tax.

Grants
Infrastructure projects can tend to be commercially not viable. In
order to facilitate project sponsors to support such projects, the
Government of India (project awarding authority) provides them
with grants. Visibility Gap Fund was introduced to provide catalytic
assistance and support difficult PPP projects.
Visibility Gap Funding
Financing:
Providing 20% of project cost
Additional 20% can be allowed by the sponsoring authority, if
required
Eligible Sectors:
Transportation (rail, roadways, seaport, highways)
Power/Energy
Urban Infrastructure (water supply, sewage, solid waste
management)
Tourism (international convention centers)
Special Economic Zones

Private Sector Capabilities

The private sector is expected to finance 50% of the investments
(nearly $500 billion) in infrastructure projects in the country during
the twelfth five-year plan. The following areas can leverage Indias
private sector capabilities during the twelfth five-year plan.
Highway and Power Sector
Civil Aviation
Higher Education
Skill Development
Housing
Urban Infrastructure
Health Care Services
In India, project developers contribute majority of equity in
infrastructure projects, with the next-largest contributor being the
public sector. A private player in a PPP project can be a private
company, a consortium of private interests or a Non Government
Organization (NGO).
Private players have limited amount of capital, tied up for long-term
in infrastructure projects. They rely on private equity investors to
decrease promoters risk.
Prominent private players in Indian Infrastructure:

Source: Shodhganga