Indian Infrastructure Financed

Ltd Co.

PPP Infrastructure in India

Sources & Trends

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Acknowledgement
I have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals and organizations. I would like to extend my sincere thanks to all of them. I am highly indebted to Mr. P.K Sinha and Ms. Shivani Mishra for their guidance and constant supervision as well as for providing necessary information regarding the project & also for their support in completing the project. I would like to express my gratitude towards my parents & member of IIFCL for their kind co-operation and encouragement which help me in completion of this project. I would like to express my special gratitude and thanks to industry persons for giving me such attention and time.

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Table of Contents
IIFCL
1.1 1.2 1.3 1.4 About IIFCL IIFCL: Catalyzing Development of Infrastructure Salient features of SIFTI Schemes of IIFCL Senior Debt Subordinate Debt Refinance Scheme Takeout Scheme

Asset Liability Mismatch Infrastructure 2.1 Definition of Infrastructure Importance of Infrastructure 3.1 Role of Infrastructure in Development Current Status of various Projects 4.1 Overview of Various Sectors Highways Railways Ports Airports Power
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PPP as defined by GoI PPP 5.1 Public Private Partnership- an Introduction 5.2 Roles and Responsibility 5.3 Salient Features of PPP 5.4 Key Considerations in PPP A Bit of Background of PPP PPP Models being Practiced in India 6.1 Types of PPP Models and their definitions Design-Build (DB) Build Own Operate (BOO) Build Operate Transfer (BOT) Build-Own-Operate-Transfer (BOOT) Buy Build Operate (BBO) Design Build-Operate (DBO) Design-Build-Maintain (DBM) Build-Develop-Operate (BDO) Build-Own-Lease-Transfer (BOLT) Contract Add and Operate (CAO) Develop Operate and Transfer (DOT) Rehabilitate Operate and Transfer (ROT)
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Fundamental Qualities of a PPP Project Why PPP? 7.1 Reasons for Growing Popularity of PPP Concept 7.2 PPP Strengths and Effectiveness7.3 Relevance of PPP in India Financing PPP Infrastructure 8.1 Sources of Finance for PPP Projects Grants, Positive and Negative Financing Sr. Debt Financing Sub Debt Where it stands? 9.1 Trends and Issues related to raising finance Debt Equity 9.2 Changes Required to Reduce Constraints Conclusion

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List of Graphs and Charts

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1.1 About IIFCL

The importance of infrastructure for sustained economic development and
improving the living standards of the population is well recognized. Yet, millions of people, across the world lack access to roads, transport, electricity, safe drinking water, and proper sanitation and communication facilities. Inadequate and inefficient infrastructure not only adds to transaction costs but also prevents the economies from realizing their full growth potential. With Indian economy moving on to a high growth trajectory facilitated by a consistent and steady growth of 8 - 9% in the recent years, there is a critical need to accelerate investments in the infrastructure sector. In fact, infrastructure has emerged as a key driver for sustaining the robust growth of the economy and the government has been focusing on development of infrastructure. Although there has been progress in attracting private investments into infrastructure, Gross Capital Formation (GCF) in infrastructure has hovered around 5 percent of Gross Domestic Product (GDP). The 11th Five Year Plan (2007-2012) has envisaged raising the level of GCF in infrastructure to 9 percent of GDP by 2012, thereby matching the levels obtaining in some of the Asian economies. The Finance Minister of India, while presenting the Union Budget for 2005-2006 acknowledged the need and significance of building adequate infrastructure in the country when he made the following announcement: The importance of infrastructure for rapid development cannot be overstated. The most glaring deficit in India is the infrastructure deficit. Investment in infrastructure will continue to be funded through the Budget. However, there are many infrastructure projects that are financially viable but, in the current situation, face difficulties in raising resources. I propose that such projects may be funded through a financial Special Purpose Vehicle .. The SPV will lend funds, especially debt of longer-term maturity, directly to the eligible projects to
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supplement other loans from banks and financial institutions. Government will communicate the borrowing limit to the SPV at the beginning of each fiscal year Government of India, accordingly approved a Scheme for Financing Viable Infrastructure Projects through a Special Purpose Vehicle called the India Infrastructure Finance Company Ltd, broadly referred to as SIFTI. Accordingly, India Infrastructure Finance Company Ltd (IIFCL) was established in January 2006 as a wholly owned Government of India company and commenced its operations from April 2006. Vision "Provide innovative financing solutions to promote and develop world class infrastructure in India" Mission "To adopt best practices in financing infrastructure and develop core competencies in facilitating infrastructure development. Develop a team of highly engaged employees to deliver services in a professional manner and to the satisfaction of all stakeholders"

1.2 IIFCL: Catalyzing Development of Infrastructure

India Infrastructure Finance Company Ltd (IIFCL) is providing long term financial assistance to various viable infrastructure projects in the country in terms of the SIFTI. The authorized capital of the company is Rs20 billion and the PaidUp capital is currently Rs10 billion. Apart from equity, IIFCL raises long term debt from the domestic market, debt from bilateral and multilateral institutions and in foreign currency through external commercial borrowings. The borrowings of the company are backed by sovereign guarantee.

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1.3 Salient features of SIFTI

IIFCL shall finance only commercially viable infrastructure projects. In order to be eligible for funding by IIFCL, the following will be the eligibility criteria:

1.3.1 Eligibility
The project shall be implemented by A Public Sector Company; A Private Sector Company selected under a Public-Private Partnership (PPP) initiative; A private sector company provided It has undertaken a project where the service to be provided is regulated or The project is being set up under an MoU arrangement with the Central, any State government or a Public Sector Undertaking. Total lending for such private projects shall not exceed 20% of the lending program of the company in any accounting year The tenor of IIFCL lending should be larger than that of the longest tenor commercial debt by at least two years. The project should be from one of the following sectors Roads and bridges, railways, seaports, airports, inland waterways, other transportation projects; Power; Urban transport, water supply, sewage, solid waste management and other physical infrastructure in urban areas; Gas pipelines Infrastructure projects in Special Economic Zones (SEZs) and International Convention Centers and other tourism infrastructure projects

Projects which are set up on non-recourse basis would only be eligible for financing by IIFCL.
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 Disbursement of loans by IIFCL is subject to the appraisal being done by reputed appraising institutions and the lead bank accepting and adopting the same. IIFCL shall disburse the loan only after getting the sanction from the Lead Bank. IIFCL would not normally carry out any independent appraisal of the project. Lead Bank shall be responsible for regular monitoring and periodic evaluation of compliance of the project with the agreed milestones.

1.3.2 Lending Terms

IIFCL may fund viable infrastructure projects through the following modes: Long term debt; Refinance to banks and financial institutions for loans with tenor of more than 10 years, granted by them. Any other mode approved by Government of India

Total lending to any project by IIFCL shall not exceed 20% of the total project cost subject to exposure of IIFCL being less than that of the lead bank.

1.3.3 Lending to PPP projects

A project awarded to private sector company through PPP shall be accorded priority for lending by IIFCL.A PPP project has been defined under the Scheme as a project based on a contract or concession agreement between a government or a statutory entity on the one side and a private sector company on the other side, delivering an infrastructure service on payment of user charges. In case of PPP projects, the private sector company shall be selected through a transparent and open competitive bidding process. PPP projects based on standardized/model documents duly approved by the respective government would be preferred.

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1.4 The Company renders financial assistance through: 1.4.1 Direct lending to eligible projects
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IIFCL provides financial assistance to commercially viable projects through long term debt. The project can be implemented by a Public Sector Co., a Private sector Co. through PPP, or a Private sector Co. if it satisfies the criteria lay down by SIFTI.

1.4.2 Subordinate Debt

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In finance, subordinated debt (also known as subordinated loan, subordinated bond, subordinated debenture or junior debt) is debt which ranks after other debts should a company fall into receivership or be closed. Such debt is referred to as subordinate, because the debt providers (the lenders) have subordinate status in relationship to the normal debt. A typical example for this would be when a promoter of a company invests money in the form of debt, rather than in the form of stock. In the case of liquidation (e.g. the company winds up its affairs and dissolves) the promoter would be paid just before stockholdersassuming there are assets to distribute after all other liabilities and debts have been paid. Subordinated debt has a lower priority than other bonds of the issuer in case of liquidation during bankruptcy, below the liquidator, government tax authorities and senior debt holders in the hierarchy of creditors. Because subordinated debt is repayable after other debts have been paid, they are more risky for the lender of the money. It is unsecured and has lesser priority than that of an additional debt claim on the same asset. It helps the project to raise the required equity to start with also to achieve faster financial closure.

1.4.3 Refinance to banks and FIs for loans with tenor of five years or more
IIFCL is to refinance upto 80% of the long term infrastructure loans disbursed by banks. The primary objective of IIFCLs refinance scheme is to facilitate the flow of funds in an increasing manner for the development of infrastructure in the country. Under the scheme IIFCL will provide refinance for term loans sanctioned by Banks and Public Financial Institutions for only new commercially viable
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projects in road, port, Railways Sectors, Competitively bid power projects, and UMPPs.

1.4.4 Takeout Financing Scheme

Infrastructure projects may need financing arrangements in which the project can be financed initially on the basis of shorter-term debt (such as credit from suppliers to finance equipment purchase) that is refinanced later by longer-term debt. A specialized institution could help guarantee such refinancing within a predetermined financing cost. This amounts to giving the project an assurance that if refinancing is not available on specified terms when needed, it will either be provided directly by the institution or the difference between the predetermined cost of financing and the cost at which funds can be raised will be reimbursed to the project. A commercial fee should, of course, be charged for this service.

Objectives of the Takeout Scheme:

1) To boost the availability of longer tenor debt finance for infrastructure projects
2)

To address sectoral / group / entity exposure issues and asset-liability mismatch concerns of Lenders who are providing debt financing to infrastructure projects

3)To expand sources of finance for infrastructure projects by facilitating participation of new entities i.e. medium / small sized banks, insurance companies and pension funds.

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Asset Liability Mismatch

In finance, an asset-liability mismatch occurs when the financial terms of an institution's assets and liabilities do not correspond. Several types of mismatches are possible. For example, a bank that chose to borrow entirely in U.S. dollars and lend in Russian rubles would have a significant currency mismatch: if the value of the ruble were to fall dramatically, the bank would lose money. In extreme cases, such movements in the value of the assets and liabilities could lead to bankruptcy, liquidity problems and wealth transfer. As another example, a bank could have substantial long-term assets (such as fixed rate mortgages) but short-term liabilities, such as deposits. This is sometimes called a maturity mismatch, which can be measured by the duration gap. Alternatively, a bank could have all of its liabilities as floating interest rate bonds, but assets in fixed rate instruments. Mismatches are handled by asset liability management.

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IIFCLs Loan Sanctions to different Sectors

After this brief introduction of the scope and functions of IIFCL, we will now focus on Infrastructure, and what we understand by it in India.

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2.1 What constitutes Infrastructure in India?

An understanding of what all is included in the word Infrastructure is necessary to start with. Also for policy formulation, setting of sectoral targets and monitoring projects, a clear understanding of what is covered under the rubric of infrastructure is necessary to ensure consistency and comparability in the data collected and reported by various agencies over time. There are several definitions given by various organizations allover the world, each based on different characteristics. Some of them are being given below.

2.1.1 Dr. C. Rangarajan Commissions Notion of Infrastructure (2001): The Rangarajan Commission indicated six characteristics of infrastructure Sectors, (a) Natural monopoly (b) High-sunk costs (c) Non-tradability of output (d)Non-rivalry (up to congestion limits) in consumption (e) Possibility of price exclusion, and

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(f) Bestowing externalities on society Based on these features the Commission recommended inclusion of following in infrastructure in the first stage: Railway tracks, signalling system, stations Roads, bridges, runways and other airport facilities T&D of electricity Telephone lines, telecommunications network Pipelines for water, crude oil, slurry, waterways, port facilities Canal networks for irrigation, sanitation or sewerage. Later including following five in the second stage, Rolling stock on railways Vehicles, aircrafts Power generating plants Production of crude oil, purification of water Ships and other vessels

2.1.2 Reserve Bank of India (RBI) circular on Definition of Infrastructure: For raising external commercial borrowings funds, the RBI has defined infrastructure to include, (i)Power,
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(ii)Telecommunication, iii)Railways, (iv)Road including bridges, (v) Sea port and airport, (vi)Industrial parks and (vii)Urban infrastructure (water supply, sanitation and sewage projects) vides their circular dated 2nd July, 2007.

2.1.3 World Bank: The World Bank treats power, water supply, sewerage, communication, roads & bridges, ports, airports, railways, housing, urban services, oil/gas production and mining sectors as infrastructure. 1.4.4 Empowered Sub-Committee of the Committee on Infrastructure on definition of infrastructure constituted by Planning Commission of India: The Empowered Sub-Committee of the Committee on Infrastructure in its meetings held on 11th January, 2008 and 2nd April 2008 under the chairmanship of Deputy Chairman, Planning Commission discussed the subject matter. There was consensus on including the following in the broad definition of infrastructure: Electricity (including generation, transmission and distribution) and R&M of power stations, Non-Conventional Energy (including wind energy and solar energy),
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Water supply and sanitation (including solid waste management, drainage and sewerage) and street lighting Telecommunications,

Roads & bridges, Ports, Inland waterways, Airports, Railways (including rolling stock and mass transit system), Irrigation (including watershed development), Storage, Oil and gas pipeline networks.

This report will be using the definition given by the Committee on Infrastructure for all purposes.

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3.1 Infrastructure: Role in Development

Infrastructure of a country is the foundation stone over which whole economy is built. In the lack of proper and adequate infrastructure no country can achieve the desired level of growth and development. The importance of infrastructure in support of economic growth has long been recognized. The provision of infrastructure services to meet the demands of businesses, households and other users is one of the major challenges of economic development.

3.1.1 Infrastructure and Poverty Reduction:

Infrastructure services contribute to poverty reduction and improvements in living standards in several ways. First, these services have strong and direct links to improved health outcomes. Water-related illnesses account for a very substantial burden of disease in the developing world, exacting high costs in terms of death, malnutrition, stunting, and reduced productivity. Improving water and sanitation facilities have been shown to reduce these costs substantially. Electricity permits improved health service delivery in several ways: electrification of health facilities permits safe storage of vaccines and medication and modern energy sources permit substantial reductions in morbidity and mortality. Second, access to infrastructure services is also often associated with improved educational outcomes. Electricity is strongly associated with improvement in adult literacy as well as primary school completion rates, as it permits reading and studying in the evening and early morning hours.
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Lack of improved water

facilities can work against educational outcomes, especially for girls who do not attend school for lack of adequate sanitary facilities or because of the demands of household chores like collecting water. Access to all-weather roads has been shown to be a strong factor in increasing primary school attendance, particularly in rural areas.

3.1.2 Infrastructure and Economic Growth

Infrastructure services also contribute to improved productivity of business, households and government services. The time spent obtaining water and fuel or traveling to markets and service centers is often significant. When household connections are available and transport and telecommunications services are accessible, household members, particularly women and children, can engage in more productive activities. The expansion in quantity and improvement in quality of infrastructure services also lowers costs and expands market opportunities for businesses. This contributes to increased investment and productivity which is essential for sustaining economic growth.

3.1.3 The Access Gap

Despite widespread recognition of the importance of infrastructure services for poverty reduction, a very large proportion of the population in low-income countries still lacks access to them. An estimated 1.1 billion people live without safe water, 1.6 billion people live without electricity, 2.4 billion people live without sanitation, and more than 1 billion people are without access to an allweather road or telephone services. Access to these services varies widely across regions and between urban and rural areas.
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A brief overview of all the sectors of infrastructure and its scope is being given further in the report.

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4.1 Overview of Various Sectors

4.1.1 Highways
Size of the Initiatives
With an extensive road network of 3.3 million kilometers, India is the second largest in the world. Indian roads carry about 61% of the freight and 85% of the passenger traffic. All the highways and expressways together constitute about 66,000 kilometers (only 2% of all roads), whereas they carry 40% of the road traffic. To further the existing infrastructure, Indian Government annually spends about Rs.18000 crores (USD 3.704 billion).

Target
Developing 1000 km of expressways Developing 8,737 km of roads, including 3,846 km of national highways, in the North East Four-laning 20, 000 km of national highways Four-laning 6,736 km on North-South and East-West corridors Six-laning 6,500 km of the Golden Quadrilateral and selected national highways Widening 20,000 km of national highways to two lanes

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Road development is a priority sector

India has the second largest road network in the world

Steps Taken
100 per cent FDI under the automatic route in all road development projects. 100 per cent income tax exemption for a period of 10 years Cabinet Committee on Economic Affairs (CCEA) has agreed upon the National Highways Fee (Determination of Rates and Collection) Rules, 2008 to establish uniformity in fee rate for public funded and private investments projects. An increment in the overseas borrowing amount of infrastructure sectors, to US$ 500 million from US$ 100 million.
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Offering cheaper loans for highway projects that will speed up the projects worth more than US$ 12. 70 billion under separate phases of the NHDP.

4.1.2 Railways

Indian Railways is the backbone of the socio-economic growth of India. World's fourth largest rail network and the second largest in Asia, Indian Railways has recently attracted immense global attention due to its successful turnaround to profitability. Indian Railways has been consistently recording impressive growth rates for the last few years. The cash surplus before dividend and net revenue are estimated at US$ 6.17 billion and US$ 4.53 billion, for 2007-08 respectively. This has placed Indian Railways in a much better position ahead of many of the Fortune 500 companies. India Railway has taken up one of the most ambitious annual plans for 2008-09 with huge investment of about USD 7.91 billion. The plan includes a total budgetary support of USD 1.66 billion that includes USD 163.33 million from the Central Road Fund. This much ambitious plan is eying a massive profits of more than USD 20.447 billion for the year2008-09 .

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Initiatives
The Indian Railways has initiated one of the most challenging growth targets for the coming year. This has been claimed on the basis of the most innovative plans and initiatives thought out by the ministry. Over past few years Indian Railways has remarkably transformed itself to set a bench mark in the global level.

Increase in income through advertising on all Rajdhanis, with the cost of advertising being around US$ 1.26 million per train.

Introduction of new generation trains that would be fuel-efficient, recyclable and have low-emission to generate certified emission reduction credits.

Construction of a dedicated freight corridor, with an investment of US$ 81.92 million in 2008-09 and US$ 614.40 million in 2009-10.

Renewal of 44.5 million of PSC sleepers has been set for open line works. Technological up gradation and modernization for higher operating efficiency Development of PPP envisaged in new routes, railway stations, logistics parks, cargo aggregation and warehouses etc. Development of 100 budget hotels with private participation in the vicinity of railway stations.

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 Installation of Wi-Fi for providing wireless access at 500 stations. Introduction of marketing rights for advertising on railway tickets and reservation charts. Establishment of integrated logistic parks on unused lands. Development of agri-retail hubs, cold storage houses, multi-purpose warehouses on surplus land with the Railways. Training of railway managers to meet future challenges, Indian Railways is planning to set an international management institute in New Delhi. Renewal over 2941 kilometres (kms), which will require 3,39,288 tonnes of rail steel, and sleeper renewal over 2382 kms. Implementation of Dynamic Pricing Policy, Tariff Rationalization, NonPeak Season Incremental Freight Discount Scheme, Empty flow Direction Freight Discount Scheme, Loyalty Discount Scheme and Long-term Freight Discount Scheme among others to boost its capacity utilization levels. The rapid rise in international trade and domestic cargo has placed a great strain on the Delhi-Mumbai and Delhi-Kolkata rail track. Government has, therefore, decided to build dedicated freight corridors in the Western and Eastern high-density routes. The investment is expected to be about Rs. 22,000 crore (USD 4.525 billion). Requisite surveys and project reports are in progress and work is expected to commence within a year
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4.1.3 Ports

Size of the Initiatives

With 12 major ports and 187 minor ports, 7,517 km long Indian coastline plays a pivotal role in the maritime transport helping in the international trade. Traffic handled at major ports during April 2008 to January 2009 is recorded to be 436686 units. The ports in India offer tremendous scope for international maritime transport both for passenger and cargo handling.

Target

The Government of India targets to increasing the cargo handling capacity of major ports by two folds to reach 1.5 billion metric tonnes (MT) by the year 2012. This will be achieved at an investment of around USD 25 billion through publicprivate partnerships. A Crisil research on Indian ports and maritime transport estimates that ports will grow by 160 per cent over the 2011-12 period. Cargo
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handling at the major ports is projected to grow at 7.7% per annum (CAGR) till 2011-12 and the cargo traffic is estimated to reach 877 million tonnes by 2011-12, whereas the containerized cargo is expected to grow at 15.5% (CAGR) over a period of 7 years. The New Foreign Trade Policy envisages doubling of Indias share in global exports in next five years to Rs.675000 crores (USD 150 billion). A large portion of the foreign trade to be through the maritime route: 95% by volume and 70% by value

Initiatives

Government Initiatives
The Government of India has undertaken the the expansion and modernization of ports on a priority basis as part of its initiatives in the up gradation of Indias infrastructure achieving the targeted growth rate. The government has initiated numerous plans, which includes; Formulation of a National Maritime Development Policy to facilitate private investment, improve service quality and promote competitiveness, and US$ 11.33 billion has been allocated for the same. An investment of more than US$ 9.07 billion will be made by 2015 for 111 Shipping Sector Projects.

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In 2008-09, the Ministry of Shipping launched 10 major expansion projects at an investment of US$ 1.06 billion, 60% of which was allocated for the Chennai mega container terminal.

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 Permission for 100 per cent foreign direct investment (FDI) for port development projects under the automatic route. 100 per cent income tax exemption is provided for a period of 10 years for port developmental projects. Opened up of all the areas of port operation for private sector participation. Increase in the rail connectivity of ports with the domestic market. The experience of operating berths through PPPs at some of the major ports in India has been quite successful. It has, therefore, been decided to expand the programme and allocate new berths to be constructed through PPPs. A model concession agreement is being formulated for this purpose. The Government has also decided to empower and enable the 12 major ports to attain world-class standards. To this end, each port is preparing a perspective plan for 20 years and an action plan for seven years. A high level committee has finalized the plan for improving rail-road connectivity of major ports. The plan is to be implemented within a period of three years. Further, changes in customs procedures are being carried out with a view to reducing the dwell time and transaction costs. The government has also delegated powers to the respective Port Trusts for facilitating speedier decision-making and implementation. At the same time, several measures to simplify and streamline procedure related to security and customs are been initiated.

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The National Maritime Development Programme is expected to bring a total investment of over Rs.50,000 crore in the port infrastructure. Such improvement in the scale and quality of Indian port infrastructure will significantly improve Indias competitive advantage in an increasingly globalized world.

Private Participation
A leading private shipyard, ABG Shipyard has decided to set up a greenfield shipyard in south Gujarat with an investment of USD 255.58 million. The new shipyard will be set up over 300 acres. Gujarat-based Adani group is setting up a ship building and repair yard at about USD 212.98 million. Larsen and Toubro Ltd has chosen Kattupalli port, in Thiruvallur district, near Chennai, as the location to build the over USD 425.97 million megashipbuilding yard. Major shipping companies, such as Shipping Corporation of India (SCI), Great Eastern (GE) and Essar have placed orders worth USD 3.3 billion for 58 ships in Korea and China.

SCI has placed orders for 32 ships worth USD 1.87 billion and will be further welcoming bids for its USD 3 billion order of 40 ships. GE has placed an order worth US$ 780 million for 14 ships, while Essar has

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ordered 12 ships worth US$ 630 million. The ships are to be delivered during 2009-12.

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4.1.4

4.1.4 Airports

Size
Of a total number of 454 airports and airstrips in India, 16 are designated as international airports. The Airports Authority of India (AAI) owns and operates 97 airports. A recent report by Centre for Asia Pacific Aviation (CAPA), Over the next 12 years, India's Civil Aviation Ministry aims at 500 operational airports. The Government aims to attract private investment in aviation infrastructure. India has been witnessing a very strong phase of development in the past few months. Many domestic as well as international players are showing interest in the growth and development of the aviation sector with immense focus on the development of the airports. Indian private airlines : Jet, Sahara, Kingfisher, Deccan, Spicejet account for around 60% of the domestic passenger traffic. Some have now started international flights. For the next years to come India is poised with strong focus on the development of its airport to meet the international standards. The government is planning modernization of the airports to establish a standard. The newly developed airports will help releasing pressure on the existing airport in the country.

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Plans
A projected investment of USD 8.5 billion has been planned for thedevelopment of Indian airports during the 11th plan. Mumbai and Delhi airports have already been privatized. These two airport are being upgraded at an estimated investment of US$ 4 billion for the period 2006-16. Development of airport infrastructure is a focus area for the Government. There has been a significant uptrend in domestic and international air travel. AAI has planned a heavy investment of USD 3.07 billion over the next five years. Out of it 43 per cent will be for the three metro airports in Kolkata, Chennai and Trivandrum. The rest will be invested in upgrading other non-metro airports and in the modernization of the existing aeronautical facilities. Passenger traffic is projected to grow at a CAGR of over 15% in the next 5 years. It is estimated that the data will cross 100 million passengers per annum by 2010 Cargo traffic to grow at over 20% per annum. over the next five years, crossing 3.3 million tons by 2010 Major investments planned in new airports and up gradation of existing airports 100% FDI is permissible for existing airports; FIPB approval required for FDI beyond 74%. 100% FDI under automatic route is permissible for greenfield airports. 49% FDI is permissible in domestic airlines under the automatic route, but not by foreign airline companies. 100% equity ownership by Non Resident Indians (NRIs) is permitted. AAI Act amended to provide legal framework for airport privatization. 100% tax exemption for airport projects for a period of 10 years.
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Open Sky Policy of the Government and rapid air traffic growth have resulted in the entry of several new privately owned airlines and increased frequency/flights for international airlines.

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Initiatives

The Committee on Infrastructure has initiated several policy measures that would ensure time-bound creation of world-class airports in India. A comprehensive civil aviation policy is on the anvil. An independent Airports Economic Regulatory Authority Bill for economic regulation is also under consideration. The policy of open skies introduced some time ago has already provided a powerful spurt in traffic growth that has exceeded 20% per annum during the past two years. Major airports such as Chennai and Kolkata are also proposed to be taken up for modernization through the PPP route. To ensure balanced airport development around the country, a comprehensive plan for the development of other 35 non-metro airports is also under preparation. These measures are expected to bring a total investment of Rs. 40,000 crore (USD 8.312 billion) for modernization of the airport infrastructure. A Model Concession Agreement is also being developed for standardizing and simplifying the PPP transactions for airports, on the analogy of the highways sector. This would include upgrading of the ATC services at the airports. Issues relating to customs, immigration and security are also being resolved in a manner that enhances the efficiency of airport usage
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 A greenfield airport is already operational at Bangalore and the one at Hyderabad, built by private consortia at a total investment of over USD 800 million, will be operational soon. A second greenfield airport being planned at Navi Mumbai is planned to be developed using public-private partnership (PPP) mode at an estimated cost of USD 2.5 billion. 35 other city airports are proposed to be upgraded through PPP mode where an investment of USD 357 million is being considered over the next three y

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4.1.5 Power

Size
The total installed capacity in India is calculated to be 145,554.97 mega watt, out of which 75,837.93 mega watt (52.5%) is from State, 48,470.99 mega watt (34%) from Centre, and 21,246.05 mega watt (13.5%) is from Private sector initiative. Generation capacity of 122 GW; 590 billion units produced (1 unit = 1kwh) CAGR of 4.6% over the last four years India has the fifth largest electricity generation capacity in the world Low per capita consumption at 606 units; less than half of China

Transmission & Distribution network of 5.7 million circuit km, the 3rd largest in the world

Coal-fired plants constitute 57% of the installed generation capacity, followed by 25% from hydel power, 10% gas based, 3% from nuclear energy and 5% from renewable sources

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India requires an additional 100,000 MW of generation capacity by 2012

Initiatives
Allowing foreign equity participation up to 100 per cent in the power sector under the automatic route. Encouraging the private sector to set up coal, gas or liquid-based thermal projects, hydel projects and wind or solar projects of any size. Constitution of Independent State Electricity Regulatory Commissions in the states. Deregulation of the ancillary sectors such as coal. Introduction of the Electricity Act 2003 and the notification of the National Electricity and Tariff policies. Provision of income tax holiday for a block of 10 years in the first 15 years of operation and waiver of capital goods' import duties on mega power projects (above 1,000 MW generation capacity).
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Un-bundling of the State Electricity Boards (SEBs) into generation, transmission, and distribution companies for better transparency and accountability. Government of Indias Definition Public Private Partnership (PPP) Project means a project based on a contract or concession agreement, between a Government or statutory entity on the one side and a private sector company on the other side, for delivering an infrastructure service on payment of user charges. Private Sector Company means a company in which 51% or more of the subscribed and paid up equity is owned and controlled by a private entity.

5.1 What is meant by PPP?

While there is no single definition of PPPs, they broadly refer to long-term, contractual partnerships between the public and private sector agencies, specifically targeted towards financing, designing, implementing, and operating infrastructure facilities and services that were traditionally provided by the public sector. These collaborative ventures are built around the expertise and capacity of the project partners and are based on a contractual agreement, which ensures appropriate and mutually agreed allocation of resources, risks, and returns. This approach of developing and operating public utilities and infrastructure by the private sector under terms and conditions agreeable to both the government and the private sector is called PPP or P3 or private sector participation (PSP).
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5.2 Roles and responsibilities

PPPs do not mean reduced responsibility and accountability of the government. They still remain public infrastructure projects committed to meeting the critical service needs of citizens. The government remains accountable for service quality, price certainty, and cost-effectiveness (value for money) of the partnership. Government remains actively involved throughout the projects life cycle. Under the PPP format, the government role gets redefined as one of facilitator and enabler, while the private partner plays the role of financier, builder, and operator of the service or facility. PPPs aim to combine the skills, expertise, and experience of both the public and private sectors to deliver higher standard of services to customers or citizens. The public sector contributes assurance in terms of stable governance, citizens support, financing, and also assumes social, environmental, and political risks. The private sector brings along operational efficiencies, innovative technologies, and managerial effectiveness, access to additional finances, and construction and commercial risk sharing.

5.3 Salient features of a PPP

Not all projects with private sector participation are PPP projects. Essentially, PPPs are those ventures in which the resources required by the project in totality, along with the accompanying risks and rewards/returns, are shared on the basis of a predetermined, agreed formula, which is formalized through a contract. PPPs are different from privatization. While
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PPPs involve private management of public service through a long-term contract between an operator and a public authority, privatization involves outright sale of a public service or facility to the private sector. A typical

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PPP example would be a toll expressway project financed and constructed by a private developer. A PPP project is essentially based on a significant opportunity for the private sector to innovate in design, construction, service delivery, or use of an asset. To be viable, PPPs need to have clearly defined outputs, avenues for generating Non-governmental revenue, and sufficient capacity in the private sector to successfully deliver project objectives.

5.4 Key considerations in PPPs

PPPs often involve complex planning and sustained facilitation. Infrastructure projects such as roads and bridges, water supply, sewerage and drainage involve large investment, long gestation period, poor cost recovery, and construction, social, and environmental risks. When infrastructure is developed as PPPs, the process is often characterized by detailed risk and cost appraisal, complex and long bidding procedures, difficult stakeholder management, and long-drawn negotiations to financial closure. This means that PPPs are critically dependent on sustained and explicit support of the sponsoring government. To deal with these procedural complexities and potential pitfalls of PPPs, governments need to be clear, committed, and technically capable to handle the legal, regulatory, policy, and governance issues.

A Bit of Background: PPPs are not new

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PPPs have been around for a few centuries. In sixteenth- and seventeenthcentury France, roads and bridges were concessioned for tolls in return for maintaining the routes. Canals were built and water was collected and distributed under concessions. By the 1820s, there were six private water companies operating in London. At the beginning of the nineteenth century, nearly all of the waterworks in the USA were private. Electricity utilities in the nineteenth century in Brazil, Chile, Costa Rica, and Mexico were private entities. In Argentina, Brazil, and Uruguay, private developers from Britain, France, and the United States built and operated many of the early railways in the nineteenth and twentieth centuries.

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6.1 TYPES OF PPP MODELS

Design-Build (DB): Build Own Operate (BOO): Build Operate Transfer (BOT): Build-Own-Operate-Transfer (BOOT): Buy Build Operate (BBO): Design Build-Operate (DBO): Design-Build-Maintain (DBM): Build-Develop-Operate (BDO): Build-Own-Lease-Transfer (BOLT): Contract Add and Operate (CAO): Develop Operate and Transfer (DOT): Rehabilitate Operate and Transfer (ROT): Rehabilitate Own and Operate (ROO): Lease Renovate Operate and Transfer (LROT): Design-Build-Finance-Operate/Maintain (DBFO, DBFM)

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The PPP models vary from short-term simple management contracts (with or without investment requirements) to long-term and very complex BOT form, to divestiture. These models vary mainly by:

Ownership of capital assets Responsibility for investment Assumption of risks, and Duration of contract. 6.1.1 Build-Develop-Operate (BDO): The private business buys the public facility, refurbishes it with its own resources, and then operates it through a government contract.

6.1.2 Build-Own-Lease-Transfer (BOLT): The government grants the right to finance and build a project which is then leased back to the government for an agreed term and fee. The facility is operated by the government. At the end of the agreed tenure the project is transferred to the government.

6.1.3 Contract Add and Operate (CAO):

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CAO can be said to be a contractual agreement whereby the project developer adds to an existing infrastructure facility which it rents from the government and operates then expanded project over an agreed as a period franchise. There may or may not be a transfer arrangement with regard to then added facility provided by the project developer.

6.1.4 Develop Operate and Transfer (DOT): DOT can be said to be a contractual arrangement whereby favorable conditions external to the new infrastructure project which is to be built by a private developer are integrated into the arrangement by giving that entity the right to develop adjoining property, and thus, enjoy some of the benefits created by the investment such as higher property or rent values.

6.1.5 Rehabilitate Operate and Transfer (ROT): ROT can be said to be a contractual arrangement whereby an existing facility is turned over to a private entity to refurbish, operate and maintain for a specific period as a franchisee, on the expiry of which, the legal title to the facility is turned over to the government. It is also used to describe the purchase ofan existing facility from abroad, refurbishing, erecting and consuming it within the host country.

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6.1.6 Rehabilitate Own and Operate (ROO): ROO can be said to be a contractual arrangement whereby an existing facility is turned over to the private sector for refurbishing and operation with no time limit on ownership. As long as the operator has not violated the franchise, it can continue to operate the facility in perpetuity.

6.1.7 Lease Renovate Operate and Transfer (LROT): LROT can be said to be a contractual arrangement whereby an existing infrastructure facility is handed over to private, parties on lease, for a particular period of time for the specific purpose of renovating the facility and operating it for a specific period of time; on such terms and conditions as may be agreed to with the government for recovering the costs with an agreed return and thereafter, transferring the facility to the government. The MoP has adopted this route for the renovation of existing power plants.

6.1.8 Design-Build-Operate (DBO): Under this model, the private sector design and builds a facility on the turnkey basis. Once the facility is completed, the title for the new facility is transferred to the public sector, while the private sector operates the facility for a specified period. This model is also referred to as Build- TransferOperate (BTO).

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Fundamental qualities of a PPP project

High priority, government-planned project. The project must have emerged from a government-led planning and prioritization process. The project must be such that, regardless of the source of public or private capital, the government would still want the project to be implemented quickly. Genuine risk allocation. Shared risk allocation is a principal feature of a PPP project. The private sector must genuinely assume some risk. Mutually valuable. Value should be for both sides, which means government should also genuinely accept some risks and not transfer the entire risk to the private sector, and vice versa.

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PPP Projects Statistics

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7.1 Reasons for Growing popularity

Since the 1990s, there has been a rapid rise of PPPs across the world. Governments in developing as well as developed countries are using PPP arrangements for improved delivery of infrastructure services. Governments are building transport (roads, railways, toll bridges), education (schools and universities), healthcare (hospitals and clinics), waste management (collection, waste-to-energy plants), and water (collection, treatment, and distribution) infrastructure through PPP. PPP is becoming the preferred method for public procurement of infrastructure and infrastructure services projects throughout the world.

7.1.1 Limitations of government resources and capacity to meet the infrastructure Gap Globally, governments are increasingly constrained in mobilizing the required financial and technical resources and the executive capacity to cope with the rising demand for water supply, sewerage, drainage, electricity supply, and solid waste management. Rapid economic growth, growing urban population, increasing ruralurban migration, and all-round social and economic development have compounded the pressure on the existing infrastructure, and increased the demand supply gap in most of the developing world. Countries and governments, especially in the developing world, are experiencing increasing pressure from their citizens,
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civil society organizations, and the media to provide accessible and affordable infrastructure and basic services. While the infrastructure gap is rising, government budgetary resources are increasingly constrained in financing this deficit. The pressure has also come from the international compact on Millennium Development Goals (MDGs), under which country progress in terms of access to safe drinking water, sanitation, health, etc. is being monitored. Rising costs of maintaining and operating existing assets, inability to increase revenue and cut costs and waste, and rising constraints on budgets and borrowing, do not allow governments to make the required investments in upgrading or rehabilitating the existing infrastructure or creating new infrastructure. 7.1.2 Need for new financing and institutional mechanisms The political economy of infrastructure shortages, constrained public resources, and rising pressure from citizens and civil society have combined to push governments and policymakers to explore new ways of financing and managing these services. Governments have been pushed to exploring new and innovative financing methods in which private sector investment can be attracted through a mutually beneficial arrangement. Since neither the public sector nor the private sector can meet the financial requirements for infrastructure in isolation, the PPP model has come to represent a logical, viable, and necessary option for them to work together. 7.1.3 Benefits and strengths The emergence of PPPs is seen as a sustainable financing and institutional mechanism with the potential of bridging the infrastructure gap. PPPs
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primarily represent value for money in public procurement and efficient operation. Apart from enabling private investment flows, PPPs also deliver efficiency gains and enhanced impact of the investments. The efficient use of resources, availability of modern technology, better project design and implementation, and improved operations combine to deliver efficiency and effectiveness gains which are not readily produced in a public sector project. PPP projects also lead to faster implementation, reduced lifecycle costs, and optimal risk allocation. Private management also increases accountability and incentivizes performance and maintenance of required service standards. Finally, PPPs result in improved delivery of public services and promote public sector reforms. 7.1.4 Access to project finance The foremost benefit of adopting the PPP route is the ability to access capital funding from the private sector, considering that funding is getting increasingly limited from public sector budgets. Thus, PPPs allow governments to overcome their budgetary and borrowing constraints and raise finance for high-priority public infrastructure projects. Essentially, governments are able to use private finance through PPPs to build infrastructure projects that would previously have been built by the public sector using public sector finance. PPP projects also leverage available public capital by converting capital expenditure into flow-of-service payments. 7.1.5 Rigorous risk appraisal and optimum allocation

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The high degree of economic externality of public infrastructure, and the commercial and socio economic risks involved in developing and operating them,n have made it difficult to appropriate returns from infrastructure investments. The long gestation period of infrastructure projects also requires sustainable financial and operational capacity. Therefore, there is increasing reluctance in both the public and private sectors to absorb all the costs and assume all the risks of building and operating these assets alone. Since the private sector assumes the risk of nonperformance of assets and realizes its returns if the assets perform, the PPP process involves a fullscale risk appraisal. This results in better cost estimation and better investment decisions. 7.1.6 PPPs are not an unqualified success Despite the growing interest in and adoption of PPPs, they have been facing criticism from civil society organizations, public interest groups, media, and other stakeholders. Wide publicity of some of the problematic PPPs has raised concerns about the role of the private sector in public services. Lacks of trust in the private sector with public service, tariff increases, layoffs, and poor stakeholder management have contributed to these concerns. The detractors also accuse PPPs of high procurement costs, which deter small companies and curtail competition. However, many PPP experts attribute the failure of some of these projects to faulty, rushed, noncompetitive, and nontransparent application of the PPP principles. The PPP approach is growing and evolving globally, as more countries move from state-owned and operated services to the private provision of infrastructure. It is estimated that the private sector invested $750 billion in infrastructure in
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developing countries in 19902001. Of the 2500 projects awarded during this period, only 45 were cancelled, though many more were renegotiated.

7.2 PPP strengths and effectiveness

Robust and dynamic structure; Government in an enabler role; Government ownership is high; Governance structure ensures consumer and public interests are safeguarded; Commercial interest protected; domicile risks to parties that are well equipped to deal with them; Transparent and well-conceived contracts; Documentation recognizes rights and responsibilities of all project-related parties; Concerns of all stakeholders addressed;

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 Involves participation of a large number of institutions: government, politicians, banks, financial institutions, investors, contractors, consumers, NGOs, etc.

7.3 Relevance of PPPs for India

7.3.1 Massive deficit in infrastructure services Despite becoming the second fastest growing and the fourth largest1 economy of the world, India continues to face large gaps in the demand and supply of essential social and economic infrastructure and services. Rapidly growing economy, increased industrial activity, burgeoning population pressure, and all-round economic and social development have led to greater demand for better quality and coverage of water and sanitation services, sewerage and drainage systems, solid-waste management, roads and seaports, and power supply. Increased demand has put the existing infrastructure under tremendous pressure and far outstripped its supply.

Water:
While 90% of the urban population has access to potable water supply, the actual availability of water in the cities is only 56 hours a day. Less than
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60% of the households have sanitation and less than half have tap water on their premises. About 40 million people are estimated to be living in slums. Poor urban development is not only undermining the quality of life for Indias urban citizens but also constraining local and national growth. As much as 70% of irrigation and 80% of domestic water requirement is met from groundwater, which has meant haphazard and unsustainable use of aquifers and depleting water table.

Power:
Over 40% of Indias population, mostly rural, does not have access to electricity. Despite the increase in installed generation capacity, shortages in normal and peak energy demand have been around 8% and 12% on an average between 2000 and 2004. Indias average electricity consumption of 359 kWh in 19962000 was far behind other countries such as China (717 kWh) and Malaysia (2378 kWh). Less than 20% of Indias enormous hydroelectric potential has been tapped. Transmission and distribution losses in India remain very high, at around 2830%, as compared to other developing countries, where they are less than 10%.

Roads and ports:

Indias road network continues to suffer from low capacity, low coverage, and low quality. 40% of villages do not have access to all-weather roads. Only 12% of the national highways are four-lane. The traffic situation in the cities has worsened due to a massive increase in personal vehicles, inadequate city roads, and poor quality of public transport. Airport and
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seaport infrastructure and train corridors are strained under capacity constraints.

7.3.2 Deficient infrastructure is a binding constraint ..

The infrastructure shortages are proving to be the leading binding constraint in sustaining, deepening, and expanding Indias economic growth and competitiveness.2 This has also been emphasized in the mid-term appraisal of the Tenth Five Year Plan. It is widely believed that lack of good quality infrastructure is costing India 12% growth in gross domestic product (GDP) every year. Good quality infrastructure has been the main enabler of higher level of economic growth in developed as well as developing countries like USA, Russia, Malaysia, and China. The Expert Group on Commercialization of Infrastructure estimated the loss due to poor roads and congestion at around Rs 200 billion per annum. The Economic Survey of India, 2005-06, estimates that power shortages of 12% at peak levels and 8% at nonpeak levels are equivalent to around $3.4 billion of forgone generation capacity or an approximate GDP loss of around $68 billion. The annual cost of environmental degradation, on account of lack of sewerage and solid-waste management systems and surface water harvesting is 4.5% of GDP. Water pollution accounts for 6% of the economic cost of environmental degradation.

7.3.3 this undermines global competitiveness.

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Indias global competitiveness remains constrained and is adversely affected by lack of infrastructure, which is critical for improved productivity across all sectors of the economy. Poor infrastructure is also a major barrier to foreign direct investment (FDI). Recent surveys have shown that Indias poor infrastructure (road network, ports, distribution networks, and in particular power supply) is a cause for concern and a major barrier to investment. Up gradation of transport (roads, railways, airports, and ports), power, and urban infrastructure is therefore seen as critical for sustaining Indias economic growth, along with improved quality of life, increase in employment opportunities, and progress towards the elimination of poverty.

7.3.4 and impedes inclusive growth and poverty reduction.

Lack of infrastructure is preventing the sectoral, regional, and socioeconomic broadening of the economy and its benefits, and is affecting inclusive growth in India. The benefits of accelerated growth of the last decade have not been shared by large sections of the population which are labor dependent, low skilled, rural based, and working in agriculture and manufacturing sectors. Infrastructure shortages have slowed the growth of manufacturing industries and agriculture, which are the labor-absorbing markets for the low skilled. Poverty levels remain significant, with about one-fourth of the population living in poverty.

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8.1 Sources of Finance for PPP Infrastructure Projects

Any Infrastructure Project can be financed through following sources: 1) 2) 3) 4) Debt Equity Grants from government Sub Debt

Grants: To develop Infrastructure in India and to attract Private Sectors investment GoI provides grants to PPP projects to fund the viability gap. Grant cannot exceed 20% of the total Project Cost. Negative Grant: It is the opposite of grant given by the government. Under negative viability gap funding, a constructor pays the government to get a contract because the returns from it are so good. A company would offer to pay the government instead of receiving the grant is because the company estimates huge profits.

8.1.1 Financing Sr. Debt:

If we look at the financing of these projects we find that PPP projects in India have been largely financed by plain vanilla debt. On an average across all projects 68 percent of the project cost is usually financed by debt, 26 percent by promoters equity while only 2 percent comes from sub-debt. The remaining 4 percent of the project cost comes from Government grants of different kinds. The grants are mainly in the form of monetary support given by both the State and the Central Government to make the projects viable.
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The institutions which dominate infrastructure financing in India are commercial banks. Out of a total debt financing done for PPP projects nearly 72 percent can be attributed to term loans from banks while other institutional lenders provide the rest. This is slightly higher than what is prevalent in the financing of infrastructure in developing countries overall, where World Bank estimates suggest that nearly 62 percent of the financing comes from this source. Out of the debt financing of USD7.72 billion, 72% can be attributed to term loans from commercial banks. USD1.93 billion, which forms 28% of the total debt funding, is from sources other than banks. Players like IIFCL (34.4%), IDFC (22%) and IDBI7 (17.3%) dominate in the funding from other sources.

Banks and other institutional lenders provide debt on a syndicated basis, especially for large projects. There are nearly 30 lenders which are active in the infrastructure financing market and participate in the lending syndications. However, only 6-7 of these play the role of lead banks in the syndicate and have the capacity to appraise projects. Others rely on the appraisal carried out by the lead bank for lending to projects.

Within commercial banks we find that a majority of the senior debt funding is done through public sector banks in India. Public sector banks dominate with a share of 82 percent, while share of private sector banks and foreign banks are only 13% and 5% respectively.

8.1.2 Financing Sub-Debt:

Equity contribution in projects, the next highest means of financing a project comes mostly in the form of promoters equity. In the past year a number of private equity players have been showing keen interest in financing a portion of
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the equity. However, the difficulty in being able to take out equity from the project SPV has slowed down the extent of private equity deals in the sector The only financial innovation of any sort that has taken place is the issuing of subdebt to cover a portion of the equity. A unique aspect of the sub debt issue in India is that as much as 86 percent of the sub debt is lent from institutions which syndicate the issue of senior debt. If we look at the financial structuring of infrastructure projects over the years we find that the level of or senior debt has been increasing over the years while the level of equity has been going down9. What the trend demonstrates is that bankers seem to be getting more confident on the infrastructure projects. From 2004 we find an increased optimism for infrastructure projects with a drop in equity required below the commonly accepted 30 percent. In some projects, especially in the road sector, promoter equity even went below 10 percent. However, to compensate for the lower levels of equity banks often insist on sub debt to be taken by the promoter, with the level of sub debt going to as much as 25 percent in some cases.

9.1 Trends and Issues Related to:

9.1.1 Debt Financing
Commercial banks are now the predominant source of long term debt. However, this has not always been so. Historically requirements of long term debt by industry were predominantly met from development finance institutions (DFIs) promoted by the GoI. The financial sector reforms started in the 1990s allowed the private sector to raise long term finance from banks and international capital markets. At the same time it made DFIs unable to raise long-term resources at reasonable cost. Since then banks have become the largest source of financing for long term debt, with some erstwhile DFIs like ICICI and IDBI have also converted themselves into banks. This raises questions on the future role of DFIs in financing of infrastructure projects.

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Infrastructure projects require long term loan. Significant proportion of the credit demand for the long term exists in other sectors like real estate. This demand for long term loan from multiple sectors will eventually hamper the lending by commercial banks due to the issue of Asset Liability Mismatch. This issue is explored next.

Asset Liability Mismatch (ALM): Long term financing by banks exposes them to the risk of asset liability mismatch. The major source of fund for Indian banks is saving bank deposits and term deposits, the maturity profile of which ranges from less than 6 months to 5 years. Such deposits account for over 80 percent of the liabilities of Public Sector banks and around 73 percent for Private Sector banks. Lending long term with such a short term asset base exposes the banks to ALM risks. One manifestation of ALM is in terms of liquidity risk. This is the risk that excessive long term lending growing faster than the growth in credit will result in banks failing to repay its short term depositors. As long as there is surplus liquidity in the banking system there is very little liquidity risk. This situation prevailed in the Indian banking system for a long time when the deposit growth was much higher than the credit off-take. However, in the past 2-3 years the situation has reversed, with credit off-take (including long term credit off-take) far exceeding deposit growth. This has resulted in banks liquidating their statutory reserves with the RBI to fund the credit demand. Though this is unlikely to lead to failure of Banks in India, it is creating problems. Firstly there is a rapid reduction in excess Statutory Liquidity Ratio12 (SLR) in the banking system. Also, to service liabilities and to meet credit demand banks need deposits. The scarcity of deposits in such a situation leads them to pay ever higher premium for them. In India this has been seen in the form of high interest rate time deposits being issued by banks to improve their liquidity situation.

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In addition, to ALM issues another issue with the present financing of the debt component of infrastructure projects relates to the short tenure of loans and the reset periods on offer.

Tenure and Reset Period of Infrastructure Loans:

Presently the tenure of infrastructure loans is nearly half of the concession period. The short tenure is possibly given by the banks to give them enough time for restructuring the infrastructure asset in the event that something goes wrong with the project. While in International Market it is around 80%. The significant issue with debt financing in India is that in addition to short tenure banks also ask for short resets and high Average Debt Service Cover Ratio (DSCR) from promoters.

The reset period for some of the recent projects have become yearly. Yearly reset periods are a way of passing the entire interest rate risk to the project. However, surprisingly many developers actually preferred shorter resets. This is because the experience in India has been one of falling interest rates and projects being refinanced at a lower rate. Having said this only seldom one can see there an increase in interest rates because of the reset clause. The possible reason for this phenomenon is that in general the interest rates have been falling over the years of the survey and also that banks generally perceive a lower risk when the project construction period is over. Post construction, when the majority of the risks have been covered, the developers frequently renegotiate the loan terms with the commercial banks to more favorable terms. However, in the present system renegotiations have to be carried out for individual projects which can be both time consuming and expensive. There is no availability of institutions which actively seek projects to take up on their own once the construction risk is over.
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A bigger cause of worry for lending by banks is that RBI exposure norms may constraint the lending to some developers by banks. RBI classifies infrastructure financing to SPVs in India as forming part of the group exposure of the parent company. Beyond a certain point banks are not allowed to take further exposure to these companies. In the current situation large companies with varied interests are likely to hit the group exposure norms in the next 2-3 years preventing banks from lending to them. Institutions such as the IIFCL have been actively lobbying the RBI and Finance Ministry to do away with the group exposure norms for infrastructure. However, till now the RBI has stuck to not making any changes to the group exposure norms. But if no changes are made then companies will be forced to look at additional means of financing the debt component of the projects. This situation might become a driver for change in the project finance market as existing commercial banks will be forced slow down the growth in lending to the infrastructure sector. Next section will deal with trends and issues with Equity financing in India.

9.1.2 Equity

Financing

One key issue- the amount of equity required to attract large volume of debt in the infrastructure sector is not available. The lack of adequate amounts of risk capital is leading promoters of large infrastructure projects to push for ever higher leverage from commercial banks. The commercial banks on their part have largely acquiesced to their demands realizing that reaching financial closure would be difficult otherwise. If we look at the numbers we find that Senior Debt to Pure Equity Ratio (DER) over the years for all sectors has increased.

The maximum equity has been brought in Roads & Bridges which is due to the large number of projects being awarded on PPP basis in the last 3-4 years. As can
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also be seen from the accompanying graphic nearly 80 percent of this equity at the SPV level is infused by the promoters themselves. This is because due to the lack of exit options at the SPV level, lock-in etc. very few equity providers are willing to participate at SPV level.

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One major reason for the predominance of equity infusion by developers is that currently there are several restrictions on equity investments. The way rules are structured in India makes taking out of the equity by the developers very expensive. This issue is discussed in detail later in the report. The ability of a developer to reduce their equity in the project is important so that it can recycle the equity into other projects. Equity can be shared at the beginning of the project or it can be sold off later in the project. However, in India many concession agreements do not allow the developer to sell off their equity in the project. Internationally it is common for financial investors to take over the project once the construction phase is over. This is because once the construction risk is over financial institutions are more adept at increasing the returns on the project equity as compared to a developer. The financial investor in turn hires a contractor/s to provide for O&M. In the Indian situation this can especially work as no developer really has the experience to claim that they adept at operating the assets in comparison to some one else. While some movement has been seen in this direction, with the new NHAI agreements allowing for more selling down of the equity, many concession agreements still do not even provide for such a possibility. We have not seen financial investors become a part of the bidding consortium. However, the situation is slowly changing with IDFC, SREI and Macquarie showing some interest in infrastructure projects in India in recent times. Despite these restrictions data clearly shows that developers have been able to reduce the level of own equity invested in projects.

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A sector wise analysis shows that equity funding by developers has been supplemented by Government equity as well as sub debt in Airports & Railways projects while developers equity has been supplemented primarily by sub debt in the Roads & Bridges projects. As can be seen, sub debt has emerged as the primary means by which developers reduce their equity infusion.

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It may also be noted that there has been an increasing trend in sub-debt since the Year 2004. Also, it is important to mention that majority of sub-debt (86%) has come in Road & Bridges PPP projects which is a matured and more active sector now in terms of PPP initiative. Also against the popular perception, sub-debt is not limited to annuity projects in Roads & Bridges sector and only about 7% of projects having sub-debt are annuity projects. Analysis of the data shows that most of the sub-debt has been provided by the senior lenders themselves. This clearly means that sub debt is not really considered as quasi equity, providing the lenders with the requisite amount of risk capital, but more as a way to assist developers in putting less equity in the projects. In return for conserving the equity of the developers banks charge a higher rate of interest on the sub debt thereby improving the overall yield on the project debt.

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9.1.3 Summary of Major Issues on the Debt and Equity Side

We find that 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. 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,

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9.2 Changes Required to Reduce and Ease the Identified Constraints

As discussed in the previous section, from a financing point of view there are several changes required to help ease the requirements of the infrastructure sector in the long run. Many of these issues are already recognized by the GoI and in particular the Ministry of Finance. It is important to understand that these changes, even if forthcoming, will not yield dramatic results. It is highly unlikely that the requirement of USD 320 billion will be financed if the constraints are removed as results of many of these changes will only be seen in their full force in the long run. That is why the changes required should be viewed at as forward looking activities which need to be rolled out to streamline the financing requirement in the future. Changes are required both on the debt side and the equity side. On the debt side new sources of funds need to be developed to reduce the reliance of infrastructure financing on commercial bank lending. Also to continue the momentum of bank financing of infrastructure changes need to take place so that banks do not concentrate risks from long term lending. On the equity side as well new sources of equity need to be explored to ease the scarcity being faced by excessive reliance on promoters equity. It is important to keep in mind that changes required should not be such that they compromise on risk assessment of projects or give out bad loans. India already has had experience with such lending by development finance institutions to the corporate sector. These institutions where saddled with large amounts of bad loans and fiscal imperatives post the reform in 90s led to a fading away of many such institutions. Thus while infrastructure development is critical we assume that the Government will not take it up at the cost of prudence.

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New Areas to Focus on the New Areas to Focus on the Debt Side Equity Side
Use Bonds as a Source of Fund Funding from Insurance, Pension and Provident Funds Improving Bank capacity to lend to Infrastructure Sector External Commercial Borrowing as a Source of Infrastructure Financing Holding Company Structure Creates Issue in Raising Equity Private Equity Investment to Shore up Promoter Equity Use Equities Market as a Source Increased Role for International Developers

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10.1 Framework Developed by GoI to Boost Private Participation

the actions taken by Indian Govt. to tackle them.

Increased private sector (PS) participation in infrastructure development has been constraint by several factors. Let us take a brief look at them and

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Impediments

Measures Taken by GoI

The private sector (PS) investors are Introduction of the PPP Scheme to not interested in high risk and/or low expand the range of the PS participation return projects. They may invest, but to less viable segments of the sector. only to the limited extent, but can not be a main force of development. Huge capital investment and resultant Viability gap fund scheme (among 37 long gestation period VGF proposals submitted to DEA to date, 21 has been given in-principle approvals. Among the combined projects cost of $2.2 billion, $0.56 billion would be VGFs). High transaction costs (long Model concession agreement negotiation, complicated risk allocation between the public sector and the private sector) Difficulty in securing the long term India Infrastructure Finance Company lending Limited The weak capacity of the public sector Establishment of PPP cells both at the for the implementation of PPP central and state government levels. programs The lack of expertise for identifying Establishment of India Infrastructure and developing PPP projects Development Fund to facilitate the preparation of projects (a revolving fund of $22 m was announced in this years budget, which will be recovered from successful bidders.

10.2Main Instruments Introduced by Government for Supping PPP

Viability gap fund: Original concept was to fill the gap between debt service requirements and the anticipated revenue flow in the form of annuities. This concept has been evolved toward a more front-loaded support. MOF has devised a specific assistance program to help PPP scheme to be used for infrastructure development by states and central PSUs. Grant would be provided by GOI toward the qualified BOT projects up to the amount of 20% of the project cost. The required grant should not exceed the 40% of the total project cost (the remaining 1%-20% has to be covered by other grant beside the above centrally funded VGF). The concessionaire should be selected through competitive bidding. User charges or service charges are to be predetermined. Annuity schemes: Total costs of construction and maintenance would be covered by the public sector. Those costs would be paid in annuity and only after the construction is completed. Incentive has been incorporated for faster and quality construction and also better maintenance (the amount of annuities would be reduced in case of failure of implementing specific performance requirements). Two schemes are available: (i) toll to be collected by the public sector; or (ii) toll to be collected by the concessionaires.

Underlying Reason for the adoption of PPP by Government:

The private sector can cover only a small part of infrastructure development needs. With provision of VGF or annuities, the extent of PS participation can be significantly expanded. With VGF With Annuity
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