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CHAPTER:-1 INTRODUCTION
Infrastructure Financing is the long term financing of infrastructure and
industrial projects based upon the projected cash flows of the project
rather than the balance sheets of the project sponsors. Usually, an
Infrastructure project financing structure involves a number of equity
investors, known as sponsors, as well as a syndicate of banks or other
lending institutions that provide loans to the operation.
Large sections of planners and policy makers in the country have argued
that there exists no serious problem of infrastructural deficiency that can
not be tackled through management solutions. All that is needed is to
restructure the system of governance, legal and administrative framework
in a manner that the standard reform measures can be implemented.
Reduction of public sector intervention, ensuring appropriate prices for
infrastructure and civic amenities through elimination or reduction of
subsidies, development of capital market for resource mobilisation,
facilitating private and joint sector projects, simplification of legislative
system to bring about appropriate land use changes and location of
economic activities etc. are being advocated as the remedial package
(World Bank 1995, Expert Group on Commercialisation of Infrastructure
1996, World Bank 1998). The public sector and other para-statal agencies
that had been assigned the responsibility of producing and distributing
infrastructural facilities have come in for sharp criticism on grounds of
inefficiency, lack of cost effectiveness, resulting in continued dependence
on grants for sustenance. Some kind of "financial discipline" has already
been imposed by the government and Reserve Bank of India, forcing
these agencies to generate resources internally and borrow from
bodies, financial agencies and banks are currently being done by the
institutions like Information and Credit Rating Agency of India (ICRA),
Credit Analysis and Research (CARE) and Credit Rating Information
Services of India Limited (CRISIL) etc. The rating of the urban local
bodies has, however, been done so far by only CRISIL, that too only since
1995-96. Given the controls of the state government on the borrowing
agencies, it is not easy for any institution to assess the "functioning and
managerial capabilities" of these agencies in any meaningful manner so as
to give a precise rating. Furthermore, the "present financial position" of an
agency in no way reflects its strength or managerial efficiency. There
could be several reasons for the revenue income, expenditure and
budgetary surplus to be high other than its administrative efficiency. Large
sums being received as grants or as remuneration for providing certain
services could explain that. Political Decentralisation and Investment in
Infrastructure and Basic Services by Local Bodies Earlier, the role of
central and state governments in local affairs was not clearly defined. It
consisted of ad-hoc and fragmented efforts at programmatic level. Since
mid eighties, however, a process of shifting the responsibility to the local
level has manifested clearly. Political decentralisation through
Constitutional Amendment Act has been hailed as a panacea for the
problems of infrastructural deficiency in urban centres. It is argued that
the Act enables the local bodies to undertake planning and development
responsibility as also mobilise resources for infrastructural investment.
Objectives:
To study the benefits of infrastructure finance
DATA COLLECTION
the analysis is purely based on the secondary data. Secondary research based
on
Internet source
Infrastructure finance & finance books
time which need not be the case for manufactured goods. Returns
here need to be measured in real terms because often the revenue
streams of the project are a function of the underlying rate of
inflation.
Equity
trustees and does not appear on sponsor companies balance sheets. Debt
financing usually takes the form of a combination of bank loans (usually
syndicated for large projects), sponsor loans, subordinated loans,
suppliers credits, and bonds of the project company. Corporate and
project finance is clearly applicable only to private and club goods type of
infrastructure for which there is sufficient revenue stream that can be
legally collateralized to lenders.
GROWTH POTENTIAL
Planning commission is targeting an investment of 51 lakh crores over
the duration of the twelfth five year plan which is almost double the
amount proposed under the eleventh plan. While the share of public
investment is projected to decrease from 62% to a level of 53% in the
twelfth plan, the share of private investment is projected to increase from
38% (eleventh plan) to 47% (twelfth plan) of the total investment.
In comparison to eleventh plan, a very significant growth (>100%) in
investments (Budgetary & Private) has been projected for Non-
Conventional Energy, MRTS, Ports and Storage. All the other sectors are
also projected to have an investment growth of >50%. Planning
commission is expecting private sector to play a key role in twelfth plan
with an overall investment growth of 131%. Private investment is
projected to grow in all the infrastructure sectors with Railways, Water
Supply, Storage and Ports projected to grow at >200% whereas
investment in other sectors is projected to grow at >100%. Overall private
GOVERNMENT INITIATIVES
In order to broaden the base, the government promoted Industrial
Finance Corporation of India (IFCI) to provide long term capital to
industry. Reserve Bank of India (RBI) promoted Industrial Development
Bank of India (IDBI) for the same purpose. Besides, Industrial Credit and
Investment Corporation of India (ICICI) was incorporated in the private
sector. These three institutions were to lend money for project finance,
while banks would support the working capital needs of industry.
Until the early 1990s, all interest rates in the India economy were
determined by the Government or RBI. Similarly, equity shares had to be
issued at a price determined by the Controller of Capital Issues (CCI).
Several brokers and sub-brokers were active in mobilising money from
retail investors. Issues of securities to the public were handled by
Merchant Bankers. Gradually, as part of liberalisation, interest rates were
freed.
Currently, RBI only controls a few short term interest rates. Besides,
with the creation of Securities and Exchange Board of India (SEBI), a
regulatory framework was created for companies to decide the premium at
which they would issue shares. A phase of consolidation followed, and the
phenomenon of universal banking was introduced. Some of the
institutions mentioned above changed form or were merged into other
institutions. Universal banks started offering a range of retail and
ROAD AHEAD
A coordinated effort is required from the government, Reserve Bank of
India, Securities and Exchange Board of India and Insurance Regulatory
and Development Authority (IRDA) to create a vibrant bond market.
The various infrastructure sectors have unique operating environment and sectoral
characteristics. These result in different risk profiles of the infrastructure sectors.
The different profiles mean the various risks associated with projects which
constitute the risk profile though remain the same but the severity of the risks will
vary from sector to another. The risk profiles and operating environment of two of
the infrastructure sectors, power and transportation sectors, wherein private sectors
have been actively involved are discussed below.
Power Sector: In power sector, governments have privatized this sector and
discontinued the monopoly of state utilities by inviting private sector in the form of
Independent Power Producers (IPPs) who build generating plants initially on BOO
(Build/Own/Operate) basis and on BOT basis, later on. The IPP then fed the
electricity generated from their plants into state controlled distribution and
The output from the power project is sold to a public entity unlike other sectors
such as highway where the infrastructural services is consumed by several users.
However, the multiplicity of IPPs in a country also creates the problem of volatility
of power prices since keen completion may lower tariffs. There may also be
chances of refusal by the public entity to buy the power in spite of entering into
power purchase agreement if the power generated does not meeting the agreed
specification.
The power plants are often subjected to technical and environmental risk where
careful consideration is necessary. The construction process of power plant is often
complex resulting in completion risk. Besides the technical complexity, the project
sponsor need to set up adequate transportation facility from the point of production
of raw material such as coal, and gas to power plant to ensure uninterrupted supply
for continuous generation of power in case of fuel/gas fired and thermal power
plants. In addition, other major risk that may be evident in case of power sector is
the fluctuation of the production due to variation in cost and availability of fuel
where IPP is committed to a take-or-pay fuel supply contract. In case of take or pay
contractual agreement, one party agrees to purchase a specific amount of another
party's goods or services or to pay the equivalent cost even if the goods or services
are not needed.
Cost overruns and delays are other major sources of the risk due to the constraints
such as geographical disadvantages while constructing in difficult terrains such as
hilly terrains or may be due to delay in the land acquisition, where especially for a
road project it is both expensive and can be slow. The right of way disputes also
hamper the work progress leading to cost overruns. The foreign exchange risk is
one of the risks encountered in case of tunnel and bridge projects which use
sophisticated technology with important equipment.
Tunnel and bridge: Tunnels can be either land borne or water borne. Water
borne tunnel can be either immersed or submerged tunnels. Land borne tunnel and
immersed tunnels are prone to geological risks as they have to be excavated or
drilled through uncertain rock mass and soil. Safety at work and disturbance to
surface traffic are major concerns especially in municipal areas. Health risks are
also encountered if the compressed air has to be used for stability and ground water
control. In case of submerged tunnel, the stability of the seabed is an issue at stake
during operation stage which could lead to traffic accidents and fire breakouts.
This can be a critical risk in case of long tunnels which demands the need for the
prevention of it while undertaking the physical design and management of the
facilities. In case of bridges, hydrological and weather conditions may impose
severe constraints besides the restrictions due to geological conditions. All these
could pose technical and design challenges which ultimately affect the completion
of project on time and within budget.
Airports and ports : Business associated with aviation has to keep pace with
ever increasing demand for speed efficiency and new technology. The commercial
success of airports also depends heavily on regional or international trader
prosperity. Integration with other connecting facilities such as domestic airports
and highways is important as delay in the completion of these can affect the
projected revenues.
CLASSIFICATION OF RISK
Infrastructure projects are associated with various types of risks. These risks are
common to most of the projects under various infrastructure sectors. In order to
facilitate management of these risks, they are categorised into groups under various
classification schemes. One of the most common classification schemes is to
categorize the risks into project risks, financial, and political risks.
Project risks include various risks such as completion risks, performance risks,
operation & maintenance risks, financing risks, revenue risks, and input supply
risks. Completion risks refer to the risk that project will not be completed on time
or within budget. The failure to complete the project on time could be due to other
risks such as delay in land acquisition risk or due to permit risk. Permit risk is the
risk that necessary permits, approvals, and licenses for construction, investment
and financing, and operating could not be obtained on time. Failure to complete the
project on time could be due to third party risks, the risks that the project's third
parties (i.e. public authority) fail to perform their obligations such as providing
connection and utilities for the project or relocation of utilities.
Performance risk is the risk that the project fails to perform as expected on
completion. The sources for performance risk could be due to poor design or
adoption of inadequate technology.
O&M risks refer to the risks associated with the need for increased maintenance of
assets or machinery over the term of the project in order to meet performance
requirements leading to cost overruns and reduce the availability of the project.
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.
(15% of capital funds). This mandates need for better risk diversification
and distribution
Exploring Alternatives
To overcome these challenges and find a way for easy availability of
funds for infra finance, we can explore following alternatives:
1. Developing domestic bond market, Credit Default
Swaps & derivatives
India receives substantial amount of FII investment in debt instruments.
But most of this investment is concentrated in government securities and
corporate bonds
finance these projects for a medium term by sharing some of the risks
with institutions like IDFC. This reduced risk exposure will allow banks
to increase their financing of infrastructure projects.
7. Foreign borrowings
With respect to foreign borrowings, several options are there like
increasing the cap rate for longer tenure loans, relaxing refinancing
criteria for existing ECBs/FCCBs; allow Indian banks for credit enhance
ECBs (which is currently allowed only for foreign banks), etc.
The primary source of repayment of these loans is the future cash flows
accrued from the project once they are completed and ready for public
use. These cash flows can act as a security under certain conditions and
debt covenants. For instance in case of road/highway development
projects, RBI passed an order that a) annuities under build-operate-
transfer (BOT) model and b) toll collection rights where there are
provisions to compensate the project sponsor if a certain level of traffic is
not achieved, be treated as tangible securities.
If we contrast the above with the situation prevailing in India it has been
found that there are many similarities. Commercial banks lead
infrastructure financing in India like elsewhere. Also like India most other
developing countries lack alternative means of financing infrastructure.
There are some countries like Chile and Malaysia which also have a
strong corporate bond market which helps in raising infrastructure bonds.
But even in these countries the tenure of the bonds is not significantly
more than the tenure being offered by the banks to infrastructure projects
in India.
FINANCE
Fund Based
Term loan
Demand loan
Bank guarantees
Deffered Payment Guarantees
Letter of Credit
Buyers credit
Working capital
The periodical liability for interest and principal remains in the currency
of the loan and is translated into rupees at the prevailing rate of exchange
for making payments to the respective Bank/financial institutions. These
term loans typically represent secured borrowing. Assets which are
financed with the proceeds of the term loan provide the prime security.
Other assets of the firm may serve as additional/collateral security. All
loans provided by banks, along with interest, liquidated damages,
commitment charges, expenses, etc., are secured by way of:
a. First equitable mortgage of all immovable properties of the
borrower, both present and future. If the term loan is extended by more
than one bank, then the charge on the assets to the lenders is normally on
pari passu basis.
Demand Loan:
This is the fund demanded instantaneously by borrower due to uncertain
changes in the situation (e.g. economic downturn, inflation, price rise in
manufacturing product etc.). This is the loan (such as an overdraft) with or
without a fixed maturity date, but which can be recalled anytime by the
lender and must be paid in full on the date of demand. This is generally
not used for project finance but its relevance with project finance becomes
more important in adverse situations if term loan is already financed for
the project. These loans are generally repayable on the basis of repayment
Buyers Credit:
According to FEMA guidelines on Trade Credits, Buyers Credit refers
to loans for payment of imports into India arranged by the importer from a
bank or financial institution outside India for maturity of less than three
years.
Buyers credit for imports of raw material/non capital goods into India
can be availed for maximum period of one year and Buyers credit for
capital goods can be availed for maximum period of less than three years.
The credit can be raised irrespective of whether import takes place under
an arrangement of letter of credit issued by a bank in India or whether the
supplier sends the bills on collection basis.
Under the buyers credit arrangement, the exporter i.e. supplier of the
goods receives payment instantly in case of sight documents and on due
date of the drafts/bills.
Buyers Credit is arranged for a maturity of less than three years. No roll
over/extension is permitted beyond the permissible period. Buyers credit
for three years and above comes under the purview of ECB, which are
strictly governed by ECB guidelines of RBI.
Bank Guarantee:
Guarantee is a contract to execute the promise, or discharge the liability
of a third person in case of his default. In the ordinary course of business,
the bank often issues guarantees on behalf of its customers in favour of
third parties. When the bank issues such a guarantee, it assumes a
responsibility to pay the beneficiary, in the event of a default made by the
customer. A bank guarantee enables the customer (debtor) to acquire
goods, buy equipment, or draw down loans, and thereby expand business
activity.
The borrower has to provide the Bank with the preliminary information.
The borrower has to prepare a detailed project report, which is submitted
to the bank and on the basis of which the final report is prepared. In case
of a syndication arrangement, the lead arranger prepares an Information
Memorandum in consultation with the borrowing entity.
3. Project Appraisal:
A detailed and critical appraisal of the project is necessary, before taking
a final decision about financing any project, whether individually or
jointly. The appraisal methodology of the banks should keep pace with
ever changing economic environment and also addresses the various types
of risks viz. industry, business, financial, management etc.
Bank has to ensure that the people behind the project have the required
knowledge and expertise in the proposed line of activity, enough owned
funds to meet the promoters contribution. The projections submitted by
the promoters should be realistic and achievable and the project must have
enough surplus generation to service debt in a reasonable period of time
after meeting the normal business expenditures.
Banks gets information about the company, its brief history, business
activities, Business model, details of the promoters, Board of directors,
shareholding pattern, capital structure etc.
the purpose for which the loan is taken, security provided by the
borrower, financial indicators, types of risk faced by the project etc.
meticulous care, not only to safeguard the interests of the term- lending
institutions but also to ensure optimization of returns on the total
investment in the project.
L&T IDPL has acquired concessions through a competitive bidding process, for
the development of Roads, Bridges, Hyderabad Metro Rail, Ports and Power
Transmission Line projects and is also constantly exploring new opportunities
across sectors for their viability.
Since it's inception in 1995, L&T IDPL has completed landmark infrastructure
projects across key sectors like Roads, Bridges, Ports, Airports,Water Supply,
Hydel Energy and Urban Infrastructure.
In addition to its project portfolio, L&T IDPL has installed Wind Energy
Generators (WEGs) with a capacity of 8.7 MW in Udumalpet and Tirunelveli
districts of Tamil Nadu in March 2010. The energy generated is utilized for captive
consumption.The WEGs are eligible for 16,128 Carbon Emission Reduction (CER)
certificates per year until 2022 as a result of the carbon reduction by these wind
generators.
Toronto, with offices in Hong Kong, London, New York City and So Paulo,
CPPIB is governed and managed independently of the Canada Pension Plan.
Content
L&T Infra Overview
Indias Wind Sector
Lenders Risk Assessment
O&M
Power Evacuation
Board, L&T Infra has presence across the entire Inf.ra sector
Company Overview
Incorporated in 2007 and is a wholly owned subsidiary of L&T Finance
Holdings
Provides financial products and services to clients in Infrastructure space
Granted Infrastructure Finance Company
(IFC) status by RBI in July 2010
Notified as a Public Financial Institution
(PFI) under Companies Act in June 2011
Total asset size of ~ Rs. 13,300 Crores (Dec12) across Power, Roads, Oil
& Gas, Telecom, Ports & Shipping and Urban Infrastructure
Expertise
Experienced in Infra domain
Access to L&Ts knowledge base
Investment Ability
Ability to provide debt upto Rs.500 crore to an Infra Project
Active syndication debt can arrange large long term financing
Services
Strong relationship with
Quick turnaround time for proposals
Track Record
~ Rs. 13,300 crore Portfolio in a span of just 5+ years
> 20 deals Advisory mandates completed
Offers Tailor-made solutions through financial innovation
in the sector
Repayments stitched to match cash flows
Top up & securitization transactions post completion
~20% of portfolio in renewable sector
Largest financier of Solar projects on non-recourse basis
Extensive experience in financing mini-hydro and wind projects
across diverse geographies
Financed around 700 MW of projects across renewable sector
Financed ~130 MW of operational wind power projects & ~ 120 MW
of under construction wind power projects
Exposure of ~ Rs.1,300 Cr to Wind Sector
Most of the potential assessed sites have an annual mean wind power
density above 200-250 Watt per square meter (W/m2) at 50 meter height.
The Wind Atlas has projected Indian wind power installable potential
(name plate rating) as 1,02,788 MW @ 80m hub height by Centre for
Wind Energy Technology (C-WET).
Preferential Tariff
Renewable
Purchase Obligation
Others
RECOMMENDATIONS
INFRASTRUCTURE FINANCE Page 59
PRAHLADRAI DALMIA LIONS COLLEGE OF COMMERCE AND ECONOMICS
assessment, for this bank should make different teams to work on projects of
different sectors, this will help them to specialize in one sector and also will
lead to
better understanding of risks and opportunities in those sectors.
Banks should also have a team focusing entirely on the study of the risks
aspects
of the projects
To move up the value chain or acquire relationships and scale in India, banks
ECONOMIC TIMES
L & T INFRA-FINANCE .COM
INVESTOPEDIA
www.infrastructure.com
http://nptel.ac.in/courses/110106043/