class 35 - innovative infrastructure finance
TRANSCRIPT
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Innovative
Infrastructure Financing
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Extra-ordinary Urban Growth inLess Developed Countries
600 Million people added to the worldsurban population between 1990-2000
Close to 3 million people are added inAsia alone every month, i.e. equivalent toone new City a month
Of the 21 mega cities (popln. 10 million+)in the world today, 17 are estimated to bein developing countries
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1350 M
361330 M
459 M
(34%)366.3
(31.13%)285.35
(27.78%)217.61(25.71%)
62(17%)50 M(16%)
0
300
600
900
1200
1500
1947 1951 1961 1971 1981 1991 2001 2011 2021
Total Urban
Urbanisation Scenario inIndia
Decadal Growth Rate of Population (1991-2001
) Urban: 31.13% Rural 17.97%
1027 M11 May, 2000, 1000 M
1 March, 2001,
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705335
2395
0
20
40
60
80
1951 1971 1991 2001 2011 2021(Projected)
No. of Cities/Agglomerations with more than
1 Million Population
(37.8 % )
(33.0 % )
No.of Class-I Cities(> 1 Lakh) - 300 (1991)
% of Urban Population - 65%
India: Urbanisation ScenarioMetropolitan Cities/Agglomerations
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India : Million plus Cities andUrban Agglomerations - 2001
Category City
10 Mill ion+ (3) Greater Mumbai, Kolkata, Delhi
5 10 Million (3) Chennai, Bangalore, Hyderabad
3- 5 Million (2) Ahmedabad, Pune
2 3 Million (5) Surat, Kanpur, Jaipur, Lucknow, Nagpur
1 2 Million (22) Patna, Indore, Vadodara, Bhopal, Coimbatore,
Ludhiana, Kochi, Visakhapatnam, Agra,Varanasi, Madurai, Meerut, Nashik, Jabalpur,
Jamshedpur, Asansol, Dhanbad, Faridabad,
Allahabad, Amritsar, Vijayawada, Rajkot
35 million plus cities/ urban agglomerations
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Urban InfrastructureScenario in India
According to estimates of the Rakesh MohanCommittee total requirement for urban infrastructuredevelopment covering backlog, new investments andO&M costs for the next ten years is Rs. 2,50,000
Crores (US$ 57 Billion) The ninth Plan proposal identifies only around Rs.
12000 Crores. With anticipated growth in Tenth planproviding additional funds of Rs.13,000 Crores, the
total expected plan outlay comes to Rs. 25,000 Crores(US$ 5.7 Billion).
Funds for UI development fall short by more than 10times the requirement
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The Vicious Circle
LowCollection/Recovery
Low
Maintenance
Low ServiceLevel
Low Level of
Infrastructure
Low Capacity
to Pay
Low
Investments LowEqui l ibr ium
Cycle
VS/ KS
Ch ll f i
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Cities and Citizens get the infrastructure they
desire and deserve.
Challenges facingInfrastructure
Characteristics of infrastructure projects:
natural monopolies - non-exclusive nature in-elastic demand - huge investment required
for capital & maintenance
Traditionally Infrastructure provision seen as role ofgovernment
Schemes conceived as unitary service - no experience inunbundling
Although Financing options are rapidly changing due tofinancial, technological and organisational innovations
at project and policy levels- no clear guidelines forPrivate sector Participation
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Financing of InfrastructureSchemes Budgets of
Central Government State Governments
Local Governments
Raising loans from LIC/HUDCOand other Financial Institutions
Loans from International Funding Agencies likeOECF(JBIC), World Bank, ADB, KfW, USAID, etc.
Grant funds from Donor Agencies like DANIDA,DFID, CIDA, National Trust/ Missions
Every One Crorerupees spent in infrastructural provisionnow,saves Ten Croreon cost escalation and
public health care due to deficient services later!
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Role of Financing Agencies asFacilitators of Change
Principles of user-pay, abuser pay or polluter payto be used while determining the service charges toassess the practical aspect of pricing.
Willingness to Pay OR Willingness to Charge
For improving the sustainability of UI projects
emphasises Principle of full cost recovery Transparent, Targeted and Measurable subsidy, if
needed Cost savings through energy efficiency, reduction of
leakages, manpower rationalisation etc. Full autonomy to local bodies to determine tariffs Tariff fixation taking care of annual incremental cost,
O&M cost, debt dues, depreciation charges etc.
Compulsory 100% metering Operation of escrow account
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Issues Involved in Infrastructure Financing:Financial Institutions Perspective
ISSUES: Asset liability mismatch due to short term borrowing vs. longterm
funding. Large volume of resources for capital intensive projects Locking up of funds in specific large projects. High risk involved in greenfield ventures Non-uniformity in appraisal, guidelines and documentation
requirements Lack of tangible security and partial or nil recourse basis offunding projects.
Norms restricting exposure to individual agencies.RISKS:
Political risks & Implementation risks. Risks of default by borrowing agency Risks of prepayment in falling interest rate scenario Foreign Exchange Risks and currency fluctuations
In this context, alternatives in service delivery and innovations in
resource mobilisation being explored by Financial InstitutionsHUDCO, IDFC, ICICI, IL&FS and LIC
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Some Innovative User pay Instruments
Infrastructure Type Innovative user pay Instruments
Water Supply - Advance registration charges, Connectioncharges, Enhancement of water tariff, Waterbenefit tax/water tax, Betterment charges,Development charges, Utilization from othersources such as octroi, property tax, sale ofplots etc. and Charges from water Kiosks
Sewerage - Connection Charges, Sewerage Cess Tax,Conservancy Tax, Sale of Renewable waste,Sale of Sludge and Sale of Nutrient richwastewater.
Solid waste - Collection Charges, Cess, Sale of Renewable
waste, and Fines for dumping waste. Roads/Fly-overs/ - Toll Tax, Land as a Resource and Advertising
Bridges
Airports/Rly. Stations/ - Surcharge on tickets,using land as a resource,Bus Terminals Toll Tax, User, Charges for transportation
terminals and advertising rights.
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WATER SUPPLY Water resource management & Development of source
Treatment of water and bulk supply - Water PurchaseAgreement
Distribution / Operation and Maintenance (O&M) Billing / Collection
SANITATION Sewerage network (collection system)
Pumping Stations(Installation and O&M)
Disposal system - Through taxes (on the basis of waterconsumed)
Commercialisation to Privatisation:Illustrative List of Potential Unbundling Packages
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Increased emphasis on Private SectorParticipation in Urban Infrastructure
The imperative need forPrivate SectorParticipation for:
EXTENDED RESOURCES
EFFICIENT PROJECTMANAGEMENT /
MAINTENANCE
STATE-OF-THE-ART
TECHNOLOGIES
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Route to Private SectorParticipation
The concept of Public-Private -Partnership is
generally seen as one of these models:
Build-Operate-Transfer (BOT)
Build-Operate-Own-Transfer (BOOT)
Build-Operate-Lease-Transfer (BOLT)
Rehabilitate-Operate-Transfer (ROT)
Design-Build-Finance-Operate-Transfer (DBFOT)
In INDIA full blown Private Sector Participation
models have not been put into place, so far
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Options for Private SectorParticipation (PSP)
However, the various options available, in order ofincreasing Private Participation in Water Supply &Sanitation Projects being taken up are:
Service Contracts Management Contracts Lease Concession
With experience and later on, through BOT/BOOT etc. Divestiture
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Private Sector Participation in Water Utilities -Manila Experience
Successful involvement of Private Sector in Power Generationand Distribution; Largest effort in privatisation of Waterutilities.
Metropolitan Water Works and Sewerage System (MWSS) hadcovered only 67% population with intermittent water supplyand 8 % with sewerage system in 1994.
56 per cent of 3000 mld supply was non-revenue water
MWSS privatised in 1997 and split into two.
Manila divided into two Zones - East and West.
Two Consortia led by - BENPRES for West and AYALA foreast -selected to run water works on 25 year franchise; BothGroups offered rates lower than the prevalent rate (8.78 pesos)
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Private Sector Participation in Water Utilities -Buenos Aires Experience
National Public Company OSN was in charge of water &sewerage.
Unaccounted-for water was about 45% of production
Objective of PSP: To reduce Government burden and minimise
the price for service delivery Privatised in 1993 - Through Concession, thus effectivelykeeping the fixed assets under Public Ownership
Single private firm to operate on 30 years concession period tobe revived by re-bidding later
Responsible to operate and maintain fixed assets and expandcoverage and guarantee water quality
Pricing to incorporate subsidy already existing, first pricereview after 5 years
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Improvements in Water and SanitationServices after Awarding the Concession in
Buenos Aires
Indicator Before theConcession
(1992)
December
1995
Percentage
change (%)
Production capacity
(millions cum/ day)
3.4 4.3 27
Population served(M)
Water
Sewerage
6.0
4.9
6.5
5.3
8.8
6.4
Employees per 1,000
connections
7,450 4,250 -43
Response time for
repairs (hours)
180 48 -73
Meters in service 30,000 170,000 460
P i t S t P ti i ti i W t
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Reasons for success : Comprehensive and transparent bidding process - Two
Envelope System
Independent Regulatory Agency established by Government to
monitor concessionaire, enforce the terms of contracts andregulatory specifications and levy fines where necessary
Contract had provision for adjustment and re-negotiationduring enforcement of concessional period (after 2 years theinitial reduction of tariff partly withdrawn in view of more
capital investment on system improvement, than originallyestimated)
Re-negotiation : transparent and stakeholders involved
Tariff policy had a fixed portion to cover cost of infrastructureand a variable part proportional to consumption
Private Sector Participation in WaterUtilities - Buenos Aires Experience
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Indian Experience in Privatisation ofWater Supply & Sanitation
Tiruppur Water Supply and Sewerage Project
Implemented through a SPV New Tiruppur AreaDevelopment Corporation (NTADC) promotedby Infrastructure Leasing & Financing Services(IL&FS) Tiruppur Exporters Association (TEA) TamilNadu Corporation for Industrial Infrastructure
Development (TACID) Estimated Project cost - Rs. 900 Crores at 1998
prices (Rs. 1000 crore at present). O&M contract to consortium of
Mahindra & Mahindra+United Utilities International,North West Water +Bechtel
Attained financial closure with 10% stake by LIC &
GIC.
Indian Experience in Privatisation
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Pune Water Supply and Sewerage Project - Developed by Pune Municipal Corporation at a
estimated project cost of Rs. 750 crores ($ 187.5 M)later revised to Rs. 392 Crores with HUDCO assistance
Private Sector Participation envisaged in Construction,Operation and Maintenance, Tariff collection
Financial Participation in addition to HUDCO expected fromIL&FS, ICICI, HDFC, IDFC and Bank of Maharashtra
Request for proposal sought
Tie-ups: Anglian Water + Trafalgar House & ShirkesBinnie Black + Veatch & Thames Water + L&TKrugger + Generale Des eaux & Shanska Int.Preussag + Tata ProjectsHyundai + Sundram ChemicalsHanjin + Krupp and Zoom Development Group
Political Risk - work re-tendered at RfP level
Indian Experience in Privatisationof
Water Supply & Sanitation
Indian Experience in Privatisation
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Bangalore Water Supply Project BOOT arrangement for sourcing 500 mld
water.
Establishment of two Tertiary WaterTreatment Plants (of total 60 mld capacity)with HUDCO assistance
Private Sector (Industries) to undertakelaying of feeder mains
envisages provision of 500 mld of water tothe city on a BOT basis with estimatedproject cost is Rs. 800 Crores (US$ 173 M).
Indian Experience in Privatisationof
Water Supply & Sanitation
Indian Experience in Privatisation
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Chennai Metro Water Out of 119 Sewerage Pumping Stations, Operation
& Maintenance of 70 by private sector
Sourcing of water in 7 wells through private sector
Construction of 300 mld Water Treatment Plant by- M/s Hindustan Dorr Oliver Ltd. And O&M byM/s Richardson Cruddas
New Chembarampakkam WTP of 530 mld capacity(over and above the existing 600 mld capacity)
Bid documents for BOT by TCS
HUDCO funding availed
Indian Experience in Privatisationof
Water Supply & Sanitation
Indian Experience in Privatisation
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Private Sector Participation on the anvil inwater supply & Sanitation Nagpur - Dewas Kolhapur - Cochin
Vishakhapatnam - Dharwad Goa - Alandur
Karnataka Urban Water Supply and DrainageBoard (KUWS&DB) for Management Contract
in Distribution and O&MTowns Selected for the initiative are
- Mysore - Mangalore
- Hubli Dharwad - Gulbarga
Indian Experience in Privatisationof
Water Supply & Sanitation
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Privatisation experience in India inSolid Waste Management
ENBEE Infrastructure Ltd. onBOO basis in Nagpur
M/s Excel Industries Bio-degradation of solid wastein
Vijayawada, Calcutta,Mumbai, Bhopal, Bangalore,Gwalior, Cochin & Calicut
M/s CELCO in Hyderabad Common hospital waste
treatment plant by GJMulticlave in Hyderabad
Compost plant by IVR Enviro atTiruppur
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Privatisation experience in Transportation Pali Bye-pass, Rajasthan - TCI
Infrastructure Ltd
Coimbatore Bye-pass (L & T) Karur Bridge on BOT basis by
East Coast Constns &Infrastructure Pvt. Ltd.
Kemptee-Kalamana Toll Road in
Nagpur Karur Bridge on BOT basis
Faridabad Byepass
NOIDA Toll Bridge Company
Cochin International Airportin Joint Sector by CIAL
Bangalore Airport
Ports Pipavav, Positra, Adani,Kakinada, Ennore, Cochin, Mumbai
I t t i i BOT
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Important issues in a BOTarrangement
Who are the parties to the contract ?
What are the objects and scope of the BOTarrangement?
What is the duration that might lead to earlytermination?
What are the obligations of the BOT operator ? What are the obligations of the guarantor ? What are the key regulatory provisions ? How will the key risks be managed ? How will performance be measured and monitored ?
How will the assets be transferred to the BOT operator? What are the consents required ? Who will be responsible for environmental liabilities ? How will disputes be resolved ?
C d S f S i
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Countdown Steps for StructuringPrivate Sector Participation
Process Structuring and Stages - countdown
09 Expression of Intent by Public Agencies
08 Firming up the Project Contours (Consultants)
07 Short-listing of Private Parties 06 Project Description Report
05 Pre-qualification of existing bidders
04 Issue of Request for Proposal (RFP)
03 Evaluation of Bids 02 Negotiations
01 Award of the Contract (Financial Closure)
00 Commencement of Work
Evolving Appropriate
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Legal and Regulatory Framework Simplification of Legislation
Techno -Legal Regime (Australian UtilitiesCommission, U.K. initiatives-OFTEL, OFWATS)
over-arching legislation in the line of Federal Law ofPhilippines (BOT, BOO,etc)
State/City Level Regulatory Bodies in India
CERC / SERC in Power Sector TRAI (set to become CCI) in Telecom / ICE sector
NHAI in highways sector
Need for similar regulators in Urban Infrastructure
Evolving AppropriateOrganisational/Institutional
Mechanisms
U b I f t t
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Urban Infrastructure -Regulatory Authority
Utility &
Shareholders Users
Political
Authorities
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The Regulatory Mechanism
Regulate prices Promote operating efficiency
Specify and monitor service standards
Control externalities
Maintain public good functions Ensure asset serviceability
Ensure development of essential infrastructure
Prevent manipulation of land values
Prevent unfair trade practices Promote efficient use
Ensure responsiveness to final customer needs
Model BOT Laws
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Model BOT Laws
Gujarat Infrastructure Development Act 1999
First State to formulate a separate act Draws from the experiences in Philippines
Authorises the Govt./agencies to enter intoconcession agreements
Provides a list of various forms of assistance to beprovided to the developer including exemption oftaxes etc.
Competitive bidding mandatory for ensuringtransparency
The concession agreement to prescribe the user feeto be charged by the developer
Need for replication in other States
Infrastructure Authority
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Infrastructure Authority Infrastructure Authority formed under Infrastructure
Development Enabling Act (IDEA), Andhra Pradesh
Envisaged Roles for Infrastructure Authority: Conceptualisation of projects - Processing of the projects
Mobilising public opinion - Advisory role to the government
Co-ordination - Monitoring / approval of bidding
Implementation of P-P-P-P - Prioritisation of projects Preparation of schedule. - Approval of TOR for consultancy
Budgeting / financial allocation - Expedite clearances and permits
Tariff fixing, user/abuser charges and cost recovery
Model contract principles
Supervision over implementation and project management
Proposes a Swiss Challenge Approach for evaluating thesingle bid for projects brought by proprietary agencies
Legal Issues in Urban Infrastructure
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Legal Issues in Urban InfrastructureFinancing
Security Mechanism for UI Projects
Non-availability of Conventional securities (government
guarantees, corporate / bank guarantees) Letters of comfort not a legal security option Collateral Securities and Equipment Leases used in
certain infrastructure
Mortgages not viable securities in most UI projects Need for partial or non-recourse financing and
legislative changes for treatment as Secured Loans in theBook of Accounts
Negative lien could be considered only as a transientsecurity instrument Escrow accounts of receivables
enhances transparency of the cash-flows
ensures sufficient balance for immediate repayments.
Innovative Escrow Account for
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Innovative Escrow Account forTransportation
fleet augmentation
upgradation of infrastructure
computerisation
Escrow
Rs. 1000 / bus / day(US$ 20.8) deposited in
escrow account out ofthe anticipated daily
revenue of Rs. 5760 perbus (US$ 120)
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Innovative ResourceAvenues in
UI Financing
Financing Options Matrix
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Financing Options MatrixS.No
Charac t e r is t i cs o f I n f ras t ruc tu re
Pro jec ts
Issue(s) Opt ions/ Al t er nat ives
1 Capital intensive Scarcity ofResources
Multilateral financing Consortium/Syndication Federal Govt. Guarantee with
financial support
2 Long Gestationperiod
Asset LiabilityMismatch
Take out financing Long Term Borrowing
Securitisation of receivables3 Working Capital
requirementsbased on ProjectPhasing
Overlapping ofproject
implementnschedules
Flexible financing delinkingconstruction stage frompost-construction phase
Cash flow financing
4
Inadequatereturns anduncertainty onreturns
High cost offunds,Defaults/NPA
risk
Tax Incentives Priority Sector Lending Sub-ordinate debt finance Firm tariff policy Escrow Accounts Power Purchase Agreements
Sinking funds
Fi i O ti M t i
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Financing Options MatrixS.No
Charac t e r is t i cs o f I n f ras t ruc tu re
Pro jec ts
Issue(s) Opt ions/ Al t er nat ives
5 Long Term borrowing Interest rate &Currency
fluctuations
Interest Rate Swap Forward Rate Agreements Floating Interest Rates
6 Multiple debtservicing obligations
High debtequity ratio
Sub-ordinate debt financing Equity infusion from strategic
partners7 Lack of tangibleassets andcollateral/security
Realization ofloan amount
on liquidationor default
Letters of comfort Pari passu charge on Escrow
Account Bank Guarantees
8 Varied expertise and
advanced technology
Lack of
appraisal &operationalskills
Joint Ventures
Special Purpose Vehicles
9 Pioneering nature /Feasibility risk
Risk ofen masse
deployment
Venture Capital Funds Project Initialisation Funds
Consortium financing /
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Consortium financing /Group lending
For capital intensive projects and greenfield venturesbeyond lending capacity of single financial institution
Pooling of resources for funding the project.
Ensures sharing of the risks involved.
Needs rationalisation and standardisation of appraisalprocedures, lending guidelines and legal documentationof the constituent financial institutions
Need for pari passu charge on the escrow account assecurity to the partner institutions.
Desirable to provide a single window facility based ontripartite or joint agreements with the borrowing agency.
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Takeout Financing
Par t ne r Ins t i t u t ion
5 years 10 years
Pr imary
Lender
TENURE OF LOAN(15 years)
Outs t and ing Loan Amt .(Pr inc ipa l + In t erest )
Transfer o f Loan
Accoun ts
Fees /Commi tmen t
Charges
Liabilities of primarylender on projectabsolved at the endof a specified period
Partner institutiontransfers pertinent
loan accounts to itsown books, in lieu ofan agreed fee orcommitment charge.
Both parties bear the
project risks after thetake-out based on anon-recoursestructure.
pari passucharge onthe escrow account
as security option.
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Innovative Financing Mechanisms
Sub-ordinate (Mezzanine) Debt Financing: Internal restrictions on equity participation by financial
institutions,
Lower equity and hence limited debt-equity ratio of newState level bodies for infrastructure projects restrict themfrom market borrowing on a large scale.
Funding could be considered as deemed equity for aspecific period granting the bodies better financialleverage
Cashflow financing:
institutional funding to be tailor-made to suit the financialrequirements at various stages of the project calling forcash-flow financing.
Securitisation of
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Securitisation ofReceivables
SPV Investors
LendingIns t i t u t i on Bor rower
Periodic Cash Flows
Pass ThroughCertificates
Loan
Fees
OutstandingLoan
Portfolio
Repayments
S
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Securitisation of receivables Conversion of future cash receivables into financial or
debt instruments tradable in capital market Role of SPV as intermediary:
assumes the entire credit risk on the securitised receivables ofselected outstanding loan portfolio
Insulates the lender from bankruptcy & insolvency risks
repackages the receivables into pass-through certificates ofmanageable lots for onward trading in the secondary market. Principal and interest components of the repayments are
passed on to the security owner.
Merits to Investor: Continuous cash flow on Securitised instruments over the life of
the loan and principal depletes over time. Advantages to Lending Institution: reduces the locking up of funds in a few projects. facilitates reduction in borrowings ensures better asset-liability management. provides efficient exit option for the financial institutions to
transfer the risks of default and prepayment
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Emerging State Level Initiatives for
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Emerging State Level Initiatives forFinancing Urban Infrastructure
State Level Urban Development Funds like TNUDF &
MUDF in Tamilnadu Maharashtra, for facilitatingprivate sector participation bringing in commercialorientation, improving financial management ,assisting ULBs accessing capital markets.
State level urban development Finance Corporationsformed
APUFIDCO - TUFIDCO
KUDFC - KUIDFC
Gujarat Municipal Finance Board Tax intercept concept introduced in Madhya Pradesh
State for urban development loan servicing fund forlocal bodies.
FDI in Infrastructure
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FDI in Infrastructure Foreign Direct Investment(FDI) could be permitted through:
Financial Collaborations
Joint Ventures / Technical Collaborations Capital Markets via Global Depository Receipts (GDRs / Euro
issues)
Private Placements or Preferential Allotments
In India, FDI upto 100% permitted in airports (beyond 74%
with approval) and Mass Rapid Transit Systems. FDI upto 100 % permitted in
Integrated township development including housing,commercial premises, hotels, resorts
City and regional urban infrastructure facilities Manufacture of building materials Development of Land with allied infrastructure as part of
integrated township development Enabling guidelines required to prevent capital flight (lock
in period) and regulate repatriation of profits in FDI
S i l E i Z
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Special Economic Zones Proposal to set up Special Economic Zones (SEZ) in
various parts of country as duty-free zones forindustrial, service and trade operations to attractforeign investment and facilitate expeditiousdevelopment.
Proposal for a new SEZ at major Ports
The policy envisages the treatment of SEZs as priorityareas in provision of infrastructure, convergence instatutory clearances, exemption from duties andlevies as well as liberal regulations.
SEZs as industrial townships would need priority forintegrated provision of infrastructure facilities.
Imperatives for Sustainability in
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Imperatives for Sustainability inInfrastructure Financing
Development of
Legal & Regulatory
Institutional Mechanism
Fiscal & Financial Framework
Need for an Integrated Management of Urban Infrastructure &Intersectoral Co-ordination.
Creation of a new Breed of Urban Managers sensitised andresponsible for taking on the challenges in urban infrastructure
HUDCOs efforts for capacity building in decentalised training.
Curriculum upgradation to provide not only technical inputs(Civil Engg.+ Transportation Engg. + Hydraulic engineering +Public Health Engineering ); but also Financial Engineering.
Towards Sustainability in
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Towards Sustainability inInfrastructure Development
Development of innovative financing andsecurity mechanisms
Enabling Public-Private-Peoples-Partnerships(PPPP) and Government-Citizen Partnerships
General consensus on common national issues Role of the media
creating awareness and disseminating best practiceshighlighting the deficiencies and pertinent issues
mobilising unified public opinion attracting infrastructural investments
protecting vulnerable interest groups / environment
Towards equitable and balanced Infrastructure
development and economic growth.
Vicious Circle to Virtuous Cycle
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Vicious Circle to Virtuous Cycle
HighCollection/Recovery
Higher levelMaintenance
High ServiceLevel
High Level ofInfrastructure
HigherWillingness
HigherInvestments
HighEqui l ibr ium
Cycle