infrastructure-financing-india pwc

Draft Final Report for the WORLD BANK September 2007

Infrastructure Public-Private Partnership (PPP) Financing in India

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Infrastructure Public-Private Partnership (PPP) Financing in India Draft Final Report September 2007

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Content

Main Report ACRONYMS......................................................................................................................................................... 5

CURRENCY EQUIVALENTS ........................................................................................................................... 6

1 EXECUTIVE SUMMARY ......................................................................................................................... 7

2 INTRODUCTION ..................................................................................................................................... 10

2.1 SOME POINTS/ASSUMPTIONS TO BE KEPT IN MIND .............................................................................. 10 2.2 OBJECTIVE OF THE STUDY ................................................................................................................... 12

3 OBJECTIVE 1: EVIDENCE BASED DESCRIPTION OF PRESENT FINANCING SOURCES

FOR PPP INFRASTRUCTURE ....................................................................................................................... 14

4 OBJECTIVE 2: ANALYSIS OF THE FINANCING OF PPP IN INDIA ............................................ 19

4.1.1 Debt financing ................................................................................................................................ 19 4.1.2 Equity Financing ............................................................................................................................ 25 4.1.3 Significance of Subordinated Debt ................................................................................................. 27 4.1.4 Strategic Investors and their Investment in the Projects................................................................. 28 4.1.5 Summary of Major Issues on the Debt and Equity Side.................................................................. 29 4.1.6 What is Happening in Infrastructure Financing in Other Countries?............................................ 29

5 OBJECTIVE 3: TO IDENTIFY CHANGES REQUIRED TO REDUCE AND EASE THE

IDENTIFIED CONSTRAINTS......................................................................................................................... 31

5.1 NEW AREAS TO FOCUS ON THE DEBT SIDE .......................................................................................... 31 5.1.1 Bonds as a Source of Fund ............................................................................................................. 31 5.1.2 Funding from Insurance, Pension and Provident Funds ................................................................ 33 5.1.3 Improving Bank capacity to lend to Infrastructure Sector.............................................................. 36 5.1.4 ECB as a Source of Infrastructure Financing ................................................................................ 36

5.2 NEW AREAS TO FOCUS ON THE EQUITY SIDE....................................................................................... 38 5.2.1 Holding Company Structure Creates Issue in Raising Equity ........................................................ 38 5.2.2 Private Equity Investment to Shore up Promoter Equity ................................................................ 39 5.2.3 Equities Market as a Source ........................................................................................................... 41 5.2.4 Role of International Developers.................................................................................................... 42

5.3 CONCLUSION ....................................................................................................................................... 43 7.1 LIST OF INTERVIEWS CONDUCTED ....................................................................................................... 53 7.2 LIST OF PPP PROJECTS......................................................................................................................... 54 7.3 SOURCES FOR PROJECT INFORMATION ................................................................................................. 60 7.4 ASSUMPTIONS ...................................................................................................................................... 64

7.4.1 Analysis Assumptions...................................................................................................................... 64 7.4.2 Regions ........................................................................................................................................... 65 7.4.3 Sample Sizes.................................................................................................................................... 66 7.4.4 Approximation of Financial Closure Year from Secondary Sources .............................................. 66 7.4.5 Approximation of TPC from Secondary Sources ............................................................................ 70


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Annexures

6 ANNEXURE 1 - PROCESS FOR SELECTION OF PPP INFRASTRUCTURE SECTORS FOR

THE DETAILED STUDY ................................................................................................................................. 44

7 ANNEXURE 2 - APPROACH AND METHODOLOGY OF THE STUDY ........................................ 51

8 ANNEXURE 3: SURVEY COVERAGE ................................................................................................. 74

9 ANNEXURE 4 - OTHER KEY TRENDS IN PPP INFRASTRUCTURE FINANCING.................... 79

10 ANNEXURE 5 - FUTURE LENDING TO PPP INFRASTRUCTURE PROJECTS FROM

COMMERCIAL BANKS IN INDIA ................................................................................................................ 92

11 ANNEXURE 6 - PROJECT RISK PROFILE AND RELATIONSHIP TO LENDING TERMS 108

12 ANNEXURE 7 - DIFFERENCES IN EQUITY INFUSION............................................................ 126

13 ANNEXURE 8 - REFINANCING OF PPP PROJECTS ................................................................. 129


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List of Exhibits EXHIBIT 1: SAMPLE SIZE FOR PROJECT INFORMATION COLLECTION ..................................................................... 14 EXHIBIT 2: TRENDS IN TOTAL 231 PROJECTS AND SAMPLE OF 104 PROJECTS ....................................................... 14 EXHIBIT 3: PPP PROJECTS IN DIFFERENT SECTORS BY NUMBER AND VALUE ....................................................... 16 EXHIBIT 4: TRENDS IN PPP PROJECTS BY AWARDING AUTHORITY ....................................................................... 16 EXHIBIT 5: OVERALL FINANCIAL STRUCTURE OF PPP PROJECTS IN INDIA ............................................................ 16 EXHIBIT 6: SOURCE OF SENIOR DEBT FUNDING .................................................................................................... 17 EXHIBIT 7: SOURCES OF DEBT BY SECTOR AND SHARE OF COMMERCIAL BANKS BY TYPE................................... 17 EXHIBIT 8: LOAN TENURE TO CONCESSION PERIOD RATIO FOR TEN PPP PROJECTS IN LAST TWO YEARS............ 22 EXHIBIT 9: DSCR REQUIRED BY BANKS ............................................................................................................... 23 EXHIBIT 10: PROJECT RISK CATEGORY AND AVERAGE INTEREST RATE ............................................................... 25 EXHIBIT 11: INCREASED GEARING OVER THE YEARS ............................................................................................ 26 EXHIBIT 12: DER BY SIZE ..................................................................................................................................... 26 EXHIBIT 13: SOURCES OF PURE EQUITY ................................................................................................................ 26 EXHIBIT 14: SOURCES OF EQUITY ......................................................................................................................... 27 EXHIBIT 15: INSTANCES OF SUB-DEBT BY YEAR AND SECTOR.............................................................................. 28 EXHIBIT 16: STRATEGIC INVESTMENT BY SECTOR ................................................................................................ 28 EXHIBIT 17: INVESTMENT BY LIFE AND NON-LIFE INSURER IN LAST THREE YEARS (USD MILLION) .................. 33 EXHIBIT 18: YEAR ON YEAR FUND COLLECTION BY EPFO................................................................................... 33 EXHIBIT 19: INVESTMENT BY INSURANCE COMPANIES IN RATED SECURITIES ...................................................... 34 EXHIBIT 20: CHINESE INSURANCE REGULATION ................................................................................................... 34 EXHIBIT 21: ECBS IN INFRASTRUCTURE (MARCH 2004 - FEBRUARY 2007).......................................................... 36 EXHIBIT 22: HOLDING COMPANY STRUCTURE AND ITS IMPLICATIONS ................................................................. 39 EXHIBIT 23: PE DEALS FOR THE YEAR 2006.......................................................................................................... 39 EXHIBIT 24: PRIVATE EQUITY INVESTMENTS IN THE YEAR 2006........................................................................... 40 EXHIBIT 25: INFRASTRUCTURE FUND BY MUTUAL FUNDS .................................................................................... 41 EXHIBIT 26: SECTORS CONSIDERED BY INFRASTRUCTURE DEFINITIONS BY VARIOUS AGENCIES ......................... 45 EXHIBIT 27: SELECTION OF SECTORS .................................................................................................................... 49 EXHIBIT 28: PROJECT METHODOLOGY .................................................................................................................. 51 EXHIBIT 29: REGIONAL DISTRIBUTION OF VALUE OF PPP PROJECTS BY STATE .................................................... 74 EXHIBIT 30: REGIONAL DISTRIBUTION OF PPP PROJECTS BY VALUE AND NUMBER ............................................. 74 EXHIBIT 31: SECTORAL DISTRIBUTION OF PROJECTS IN THE FOUR REGIONS......................................................... 75 EXHIBIT 32: REGIONAL DISTRIBUTION OF PROJECTS BY AWARDING AUTHORITY ................................................ 75 EXHIBIT 33: SECTOR WISE DISTRIBUTION OF STATE AND CENTRE PROJECTS BY NUMBER AND VALUE ............... 75 EXHIBIT 34: SIZE WISE GROUPING OF PPP PROJECTS BY VALUE AND NUMBER ................................................... 76 EXHIBIT 35: PROJECTS BY SIZE CLASSIFICATION AND SECTOR ............................................................................. 77 EXHIBIT 36: AVERAGE SIZE OF PROJECTS ............................................................................................................. 77 EXHIBIT 37: TRENDS IN AVERAGE SIZE OF ALL ROADS & BRIDGES AND NHAI PROJECTS .................................... 77 EXHIBIT 38: CENTRE AND STATE BY NUMBER AND VALUE................................................................................... 78 EXHIBIT 39: SECTORAL DISTRIBUTION OF CENTRE/STATE PROJECTS BY NUMBER AND VALUE ........................... 78 EXHIBIT 40: SECTORAL COMPOSITION BY VALUE AND NUMBER .......................................................................... 79 EXHIBIT 41: SIZE WISE DISTRIBUTION AND REGIONAL DISTRIBUTION .................................................................. 79 EXHIBIT 42: ISSUE OF NEGATIVE GRANT IN ROAD PROJECTS................................................................................ 80 EXHIBIT 43: SECTOR WISE NON GRANT, POSITIVE GRANT AND NEGATIVE GRANT PROJECTS ............................. 80 EXHIBIT 44: POSITIVE AND NEGATIVE GRANT PROJECTS – NUMBERS AND AMOUNT ........................................... 81 EXHIBIT 45: COUNT AND AMOUNT OF POSITIVE AND NEGATIVE GRANT IN ROAD & BRIDGES SECTOR ................ 82 EXHIBIT 46: FINANCING STRUCTURE FOR POSITIVE AND NON-GRANT PROJECTS AND ANNUITY AND NEGATIVE

GRANT PROJECTS ......................................................................................................................................... 82 EXHIBIT 47: FINANCING STRUCTURE BY AWARDING AUTHORITY AND SECTOR ................................................... 83 EXHIBIT 48: FINANCING STRUCTURE BY SIZE ....................................................................................................... 83 EXHIBIT 50: SOURCES OF DEBT BY YEAR AND SIZE .............................................................................................. 83 EXHIBIT 52: TREND IN DEBT FROM COMMERCIAL BANKS..................................................................................... 84 EXHIBIT 53: AVERAGE TENURE OF DEBT AND CONCESSION PERIOD .................................................................... 84 EXHIBIT 54: SENIOR DEBT TO PURE EQUITY RATIO BY SECTOR ........................................................................... 85 EXHIBIT 55: INCREASED GEARING ........................................................................................................................ 85 EXHIBIT 56: DER BY AWARDING AUTHORITY AND SIZE ...................................................................................... 86 EXHIBIT 57: DER BY SECTOR AND SIZE ................................................................................................................ 86 EXHIBIT 58: AVERAGE INTEREST RATE SPREAD OVER 10-YR G-SEC YIELD......................................................... 87 EXHIBIT 60: INTEREST RATE SPREADS AWARDING AUTHORITY ........................................................................... 87


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EXHIBIT 61: REDUCING RESETS ............................................................................................................................ 88 EXHIBIT 62: AVERAGE RESET PERIOD................................................................................................................... 88 EXHIBIT 63: SOURCES OF EQUITY ......................................................................................................................... 89 EXHIBIT 64 : STRATEGIC INVESTMENT BY SECTOR ............................................................................................... 89 EXHIBIT 65 : FDI ALLOWED BY SECTOR ............................................................................................................... 90 EXHIBIT 66: FDI IN PPP INFRASTRUCTURE ........................................................................................................... 90 EXHIBIT 67: EQUITY RETURNS EXPECTATIONS BY INVESTORS ............................................................................. 91 EXHIBIT 68: CREDIT OUTSTANDING OF COMMERCIAL BANKS (USD BILLION) ..................................................... 93 EXHIBIT 69: ROADS, PORTS & OTHERS PPP LENDING/ INFRASTRUCTURE LENDING RATIO BY BANKS IN INDIA TO

THESE SECTORS............................................................................................................................................. 96 EXHIBIT 70: PRIVATE SECTOR LENDING OUT OF TOTAL BANKS LENDING TO POWER PROJECTS IN USD BILLION .. 98 EXHIBIT 71: PPP POWER FINANCING CAPACITY OF BANKS IN NEXT 5 YEARS (USD BILLION) AT PRIVATE TO

INFRASTRUCTURE LENDING RATIOS OF 15% MEDIUM GROWTH................................................................... 98 EXHIBIT 72: CALCULATION OF DEBT FINANCING GAP .......................................................................................... 99 EXHIBIT 73: INFRASTRUCTURE LOAN OUTSTANDING OF IDFC............................................................................ 100 EXHIBIT 74: IDFC’S TRANSPORT PPP LENDING AS ON 31ST DECEMBER IN USD MILLION ................................. 100 EXHIBIT 75: PFC LENDING TO POWER PROJECTS IN USD BILLION ...................................................................... 102 EXHIBIT 76: FINANCING REQUIREMENT FROM SOURCES OTHER THAN COMMERCIAL BANKS AND FINANCIAL

INSTITUTIONS (USD BILLION) .................................................................................................................... 102 EXHIBIT 77: RISK AND INTEREST CHARGED ........................................................................................................ 110 EXHIBIT 78: DEBT ANNUITY PER KM AND RISK CATEGORY ................................................................................. 111 EXHIBIT 79: PROJECT CATEGORY AND DATA...................................................................................................... 126


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Acronyms ADB Asian Development Bank

ALM Asset Liability Management

APIIC Andhra Pradesh Industrial Infrastructure Corporation

BOT Build Operate Transfer

DEA Department of Economic Affairs

DER Debt to Equity Ratio

DFI Development Financial Institution

DIAL Delhi International Airport Limited

DoRTH Department of Road Transport and Highways

DSCR Debt Service Coverage Ratio

FII Foreign Institutional Investor

FPO Follow-on Public Offer

GDP Gross Domestic Product

GoI Government of India

G-Sec Government of India Securities

HCC Hindustan Construction Company

HDC Haldia Dock Complex

HIAL Hyderabad International Airport Limited

IDBI Industrial Development Bank of India

IDFC Infrastructure Development Financial Corporation

IFC International Finance Corporation

IIFCL India Infrastructure Finance Company Limited

IL&FS Infrastructure Leasing & Financial Services

INR Indian National Rupees

IPPs Independent Power Producers

IRDA Insurance Regulatory and Development Authority

JICA Japan International Cooperation Agency

JBIC Japan Bank for International Cooperation

KPCL Karnataka Power Corporation Limited

LIBOR London Interbank Rate

LIC Life Insurance Corporation of India

MCD Municipal Corporation of Delhi

MF Mutual Funds

MoF Ministry of Finance

MW Mega Watt

NBFC Non Banking Financial Company

NCD Non Convertible Debentures

NDMC New Delhi Municipal Corporation

NHAI National Highway Authority of India

NTBL Noida Toll Bridge Company Limited

PFC Power Finance Corporation

PFI Private Finance Initiative

PLR Prime Lending Rates

PMGSY Pradhan Mantri Gram Sadak Yojna

PNB Punjab National Bank

PPP Public Private Partnerships

PwC PricewaterhouseCoopers


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PWD Public Works Department

RBI Reserve Bank of India

RVNL Rail Vikas Nigam Limited

SBAR State Bank Advance Rate

SBI State Bank of India

SCB Scheduled Commercial Banks

SPV Special Purpose Vehicle

TOR Terms of Reference

ULB Urban Local Body

UNESCAP United Nations Economic and Social Commission for Asia and the Pacific

USD United States Dollar

VGF Viability Gap Funding

WB World Bank

’00,00,000 Crore

’00,000 Lakh

`

Currency Equivalents Conversion Factor 1 USD (US Dollars) = 45 INR (Indian National Rupees)

Conversion Factor 1 USD (US Dollars) = 0.034 UF1 (Unidad de Fomento)

Conversion Factor 10 USD (US Dollars) = 1MXN (Mexican peso)

Conversion Factor 1 USD (US Dollars) = 3 UDI2 (Unidades De Inversion)

All values are at historical value.

1 The Chilean UF (Unidad de Fomento) is a reference currency updated daily in relation to inflation, internal consumer prices, and currency fluctuations. Most long term contracts, mortgages, insurance premiums, house prices etc. are quoted in UF while the actual payments are made in Chilean pesos at the rate of the day. 2 The Mexican UDI is a inflation-adjusting reference currency used to price Investments and loans which is converted to pesos at the time of payment


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1 Executive Summary It is being increasingly recognised in India that lack of good quality infrastructure is a bottleneck that must be removed in order to maintain the growth rate shown by the country in the past two years. To achieve the targeted economic growth, there is an urgent need to increase the level of investments in infrastructure. Government estimates peg the total infrastructure investment requirement in the country at about USD320-350 billion over the next five years. Considering the high emphasis on using PPP as an important format for creation and maintenance of infrastructure and considering the realistic levels that PPPs can go upto, about 20% of the total (USD64 to 70 billion) is estimated to come from PPP route.

Though PPP infrastructure development in India is at a nascent stage, recent trends have been very encouraging. Our study has estimated that the total value of PPP infrastructure projects in India that have achieved financial close in the last ten years is about USD15.8 billion (in the study, sectors included are - all transport sectors, urban infrastructure, water & sanitation, power transmission and distribution). Hence, achieving the growth rate envisaged over next five years for investment from private players will definitely require a huge step-up approach to project development and implementation.

The good sign is that the year on year the trend is increasing. In the last 3 years alone, PPP infrastructure projects worth USD 8.2 billion (93 in number) have achieved financial close as against USD 5.1 billion (131 in number) projects in the previous 8 years.

Many PPP projects are in Roads & Bridges sector. However, other sectors have also participated in PPP infrastructure growth except for urban infrastructure sector, where success of PPP is yet to be tested. Regionally West along with South dominates in development of PPP infrastructure (accounting for more than 75% by value and also number of projects).

Infrastructure financing not only in terms of amount but also in terms of the cost and terms at which the finance is available to private players is very critical. The study shows that PPP infrastructure projects have so far been largely financed by debt (68% of project costs, on an average). The

Sectoral Distribution of PPP Projects by Value(Total Value USD15.8 billion)

Water Supply2.3%

Ports20.5%

Power Transmission

2.3%

Roads & Bridges53.7%

Solid Waste Management

0.4%

Railways1.8%

Waste Water0.1%

Power Distribution

1.8%

Airports17.2%

Trend in PPP Projects by Value

-

1.00

2.00

3.00

4.00

5.00

6.00

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year of Financial Close

US

D B

illio

n

Sources of Senior Debt (Total Value USD7.72 billion)

Commercial Banks72%

Others28%

Composition of Other Sources of Senior Debt

IIFCL34.4%

IFC4.9%

IDBI17.3%

IDFC22.0%

ADB3.7%

SIDBI3.2%

IL&FS3.1%

HUDCO2.6%

IFCI1.5%

Others5.5%

Insurance Companies

1.9%


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contribution of equity has been 25% with remaining coming from subordinate debt-3% and grant-4%.

Commercial banks are the major source of debt and constitutes 72% of all debts with other financial institutions such as IDFC, IIFCL, IDBI, IL&FS, etc. constituting the balance 28%. Interestingly, the tenor of term loan by banks is around 50% of concession period length (see charts overleaf).

Unlike the international markets that have a very high gearing, the typical gearing ratio in India is 70:30 though there is a clear trend towards increasing gearing ratios in recent projects, as also in the road sector which has moved the farthest in the PPP market. Commercial banks are comfortable lending to PPP projects despite having limited long term resources, but always with resets. The resets have shown a clear trend of becoming shorter and shorter in duration. In the absence of appropriate interest rate swaps in the market, project developers have limited choice. However, the survey reveals that when interest rates came down substantially, Developers have tried successfully to refinance their loans, particularly when the construction periods were over. This activity also mirrors what happens in the developed markets.

Internationally, banks that are active in the infrastructure PPP market have various options to manage their matching of long term lending with several products. Unlike international banks, which package and sell down their different debts to various types of buyers, the Indian banks do not have many options as yet.

From our survey and analysis of financing of PPP projects, other interesting observations on the debt side of funding are:

• Relationship banking or promoters strength is the most important factor that influences lending to PPP projects. Driven by the fact that there is little history of operational PPP projects, banks ask for corporate and sometime personal guarantees from the developers.

• Long term sources such as Insurance and Pension Funds are currently not going into PPP infrastructure, as they can invest in only in ‘AA’ rated instruments and there are no ‘AA’ rated instruments available from the SPVs of the PPP projects in the market as of now. Internationally, investment grade “BBB’ is the minimum rating requirement for Insurance and Pension Funds’ investment.

• Bonds are not a popular source of funding at all in the PPP market. Apart from the absence of an active market, the developers surveyed also indicated that the cost of issuing and credit enhancement makes these costlier than the term loan from banks. Though not explicitly stated, higher level of disclosure is also a reason. Absence of monoline institutions in India, unlike in the international scenario, is also an important reason.

• External Commercial Borrowings (ECBs) in the current scenario have become relatively less expensive and developers are looking at them favourably even with such loans having no option of long term forward cover or convertibility into rupee loan before their maturity. The ECB policies followed in the next few years will determine their contribution to financing of infrastructure projects.

Average Tenure and Concession Period

28

16

23

28

25

28

30

15

5

14

10

12

13

16

- 5 10 15 20 25 30 35

Water Supply

Solid Waste

Roads & Bridges

Railways

Power Transmission

Ports

Airports

Number of Years

Average Concession Period Average Tenure of Debt


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Of the USD11.48 billion investments made in the last 12 years (in the surveyed 104 PPP projects for which detailed financial information was obtained), the total equity was USD2.93 billion. Of this, the maximum equity (USD1.43 billion) has been funded in Roads & Bridges because of large number of projects being awarded on PPP basis in the last 3-4 years. On the Equity side, our survey reveals that majority of the equity, almost 82% is provided by developers themselves. Financial investors and other strategic sources are small. In a few cases, where the SPV has been set up as a joint venture between Government and the Developers, Government has made their equity contribution, typically limited to 26% or less. Clearly, if this trend were to continue, there would be big issue on the volume of equity available from the developers when significant up-scaling of PPP activity takes place.

However, there are very significant developments taking place in the market wherein strategic investors in the form of PE funds are entering in. Though the volume of their investments in infrastructure PPP market has been small till now (under USD300 million in the year 2006), it is expected that this will go up very rapidly with recent entry announcements by both Indian and international PE players. Many PE firms are looking at the infrastructure sector favourable and Government too has supported the setting up of a USD5 billion fund to invest in PPP projects.

Our survey identified certain key equity side constraints in PPP infrastructure financing. For example, FDI cannot come into Holding Companies (typically created by Developers combining a few infrastructure projects) under automatic route thus requiring specific Government approvals (FIPB). This restrains holding company to raise capital outside India. Given the fact that the Government has removed most hurdles for FDI into infrastructure in the country, this still remains a road block for FDI into PPP infrastructure.

Also, a two tier structure of holding & SPV companies (again typical of Indian infrastructure developers) results in cascading effect of Dividend Distribution Tax. The two tier structure is important for attracting equity investors to the PPP infrastructure projects because there are a number of exit restrictions to direct equity investments into SPVs as also the SPV’s existence is co-terminus to the concession period.

Accepting the recommendations of the Patil Committee Report, the Government has already taken some steps to develop the Bond Market. Also, the Government is actively looking at the initial recommendations of the Parekh Committee to address several constraints identified. The role of an important financing institution (IIFCL) is being examined for playing the role of a monoline institution.

It is therefore, our suggestion that on all these issues, namely bond market development, FDI into holding companies, cascading effect of dividend tax, and accessing insurance and pension funds, the Government should give preferential and liberal treatment as far as infrastructure investments are concerned.

Sources of Pure Equity (Total value USD2.93 billion)

Financial Institution

2%

Government10%

Developer82%

Strategic Inverstors

6%


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2 Introduction The Indian economy is going through its most remarkable phase of growth - with GDP growth rate at an average of 7.6% in the Tenth Plan Period (2002-03 to 2006-07) as compared to the average of 5.5% in the Ninth Plan Period (1997-98 to 2001-02). The Eleventh Five Year Plan projects an even higher average annual growth rate of 9%.

This rapid growth of the Indian economy has brought into focus the poor state of infrastructure in India. Congestion can be seen everywhere, be it roads, ports or airports and reports show that all sections of the Indian society, from the business community to the common man, feel constrained by the lack of adequate infrastructure. Their concern is highlighted in the approach paper to the 11th plan, put out by the Government of India (GoI), which states that, “The most important constraint in achieving a faster growth of manufacturing is the fact that infrastructure, consisting of roads, railways, ports, airports, communication and electric power, is not up to the standards prevalent in our competitor countries. This must be substantially rectified within the next 5-10 years if our enterprises are to compete effectively.”

The message coming from all quarters is that the continuation of the growth momentum of India will require significant improvement in infrastructure. Several estimates have been made about the level of infrastructure requirement in the next five years required to sustain a growth rate of 9 percent. The most widely quoted of these estimates is a GoI estimate which projects that, during the 5 years of the 11th plan period, USD 320 billion of infrastructure (in 2005-06 prices) will be required. The estimate also breaks down this requirement sector wise and projects that a majority of this investment will go in the power sector followed by railways and national highways.

In this report we deal with the likely challenges that will be encountered in financing of this infrastructure requirement. In recent times there have been several committees, individuals and interest groups that have given their recommendations on how to increase the level of financing for infrastructure projects. This report does not aim to replicate their work. Instead the focus of this report is on providing evidence based descriptions on the challenges of infrastructure financing- how infrastructure projects are being financed currently and the sufficiency of the existing means to finance future infrastructure requirements. In this report we present an extensive amount of primary data on the current situation in infrastructure financing, and this sets apart this report from others which mostly offer viewpoints of experts on the situation of infrastructure financing in India. In addition to the primary data we also present views from prominent stakeholders in the infrastructure sector on the challenges of financing infrastructure. Based on an understanding of the challenges we highlight our views on how infrastructure financing is going to evolve, especially in the near term. However, before we get into the analysis we need to clarify some important points/assumptions that we have made in the report.

2.1 Some Points/Assumptions to be Kept in Mind

Future Infrastructure requirement: As already stated earlier in the report, GoI estimates the level of infrastructure requirement in India in the next five years to be around USD 320 billion. However, it is difficult to determine the accuracy of this estimate.

This requirement is based on an estimate of infrastructure capacity expansion required in some chosen infrastructure sectors during the eleventh plan period. Projects chosen are mostly in the Central sector, for example in roads the estimate accounts explicitly for only National Highways and not for State Highways or Rural Roads. There is an ‘Other’ category which possibly encompasses infrastructure needs in the states and in sectors such as Special Economic Zones, telecommunication etc. However, estimating that only 17 percent of the USD 320 billion pie will go for these is definitely an underestimate. Also many estimates of infrastructure requirements even in the chosen sector are only preliminary and


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the financing requirements for the infrastructure are just ballpark. It is therefore, difficult to know what the actual requirements will be.

However, at the same time many experts doubt that the Government will be able to implement USD 320 billion worth of projects even if financing was available. They point to the limited capacity of Government departments and agencies and question their ability to formulate such a large number of projects. Because of this lack of capacity, they claim that while USD 320 billion of financing need might be projected, the actual financing need will be significantly less. In this sense the USD 320 billion figure is an overestimate.

Because it is difficult to pinpoint the actual future infrastructure requirement we will take the figure of USD 320 billion for analysis in this report. While it is clearly not the right number it does show that the infrastructure financing requirement is very large and that significant improvements need to be made to infrastructure financing in India to meet this large demand.

Focus on Public Private Partnership: Infrastructure development in India has largely been in the Government domain. However, in recent years Government of India (GoI) and State Government(s) have been putting an increasing focus in involving the private sector in infrastructure creation under the public private partnership (PPP) framework3. Two commonly cited reasons for this are as follows:

1. Funding the infrastructure deficit: Given the large investment required for infrastructure development in India and the scarce Government resources, it is unlikely that public funds would be adequate to meet the needs in this context. In addition, the Fiscal Responsibility and Budget Management Act4 and steps towards fiscal prudence adopted by both the Centre and State Governments have also contributed to the thought process of involving the private sector in the process of infrastructure development in the country.

2. Value addition: Apart from being an alternate source of finance, private sector participation is also viewed as a possible way of value addition in the various aspects of the value chain of infrastructure development including innovation, managerial efficiency in the project management process, adoption of better technology in key infrastructure areas etc.

PPPs are thus being seen as an important tool for producing an accelerated and larger pipeline of infrastructure investments, and catching up with the infrastructure deficit in the country.

In this report we will concern ourselves with the financing of infrastructure projects under the PPP framework. Government financing of infrastructure is done primarily from budgetary resources and public debt and Government provides guidance on its investments in many of its documents like the Union and State budgets, annual plans etc. In contrast PPP projects in India are not well documented and only very limited information is available on their financing in the public domain. Given that PPP projects are being looked at as an important means of meeting the infrastructure requirement in India we have focused this study on the financing of PPP infrastructure projects (in consultation with the GoI and World Bank).

Definition of Infrastructure: Infrastructure is defined differently by different reports/estimates and by different agencies. Currently there is no consensus on the sectors to be included in infrastructure. For example, the Economic Survey of India

3 GoI has specifically defined PPP in the “Scheme for financial support to Public Private Partnerships in Infrastructure” (also commonly known as Viability Gap Funding or VGF) as follows – “PPP 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.” 4 The FRBM bill, passed in August 2003, makes the government responsible for elimination of revenue deficit by 2008-09 and a fiscal deficit of 3 percent.


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published by the Reserve Bank of India includes “Storage Infrastructure” as a part of Infrastructure while it is not included as Infrastructure by most other agencies. Also most reports do not drill down to the sub-sectors which they include. For example while the Economic Survey includes inland waterways in its definition of transport sector some other agencies do not. Because of the diversity of definitions available we also need to clearly define the infrastructure sectors we will look at so as to not confuse the reader.

For defining Infrastructure for the purpose of this report we start with taking a comprehensive approach to the definition of infrastructure, basing it on as many relevant sectors as is done commonly by the Government agencies. However, for analysis in this report we have excluded some sectors as the focus of this report is on PPP infrastructure projects in particular and not on all infrastructure projects as in India PPP have not taken place in all infrastructure sectors and not all sectors are looked upon as equally amenable to PPP.

To come to our definition of PPP we developed some criteria and then subjected the infrastructure sectors to these criteria. Annexure 1 gives the details of the process we used for selecting PPP infrastructure sectors for the detailed study. Based on the process our definition of PPP infrastructure involves projects in the following:

1. Roads 2. Railways 3. Airports 4. Ports 5. Power including generation (to a limited extent), transmission and distribution 6. Urban water supply including treatment, transmission and distribution 7. Waste water including disposal and treatment 8. Solid waste management

These sectors include all prominent sectors highlighted by GoI in their estimation of the infrastructure financing requirement. Keeping the above points/assumptions as boundaries for this report the objectives of this study are described next.

2.2 Objective of the Study

The primary objectives of the study is to identify issues and constraints to Public Private Partnership (PPP) infrastructure financing which are foremost on the minds of market players/ stakeholders in the infrastructure financing market, and to elicit feedback to identify efforts required to ease the constraints. Specifically the objectives of the study are as follows:

1. To provide evidence-based descriptions of present financing sources for PPP infrastructure projects in India with an idea to specifically identify and assess financing constraints associated with such projects.

2. To analyse the financing of PPP in India in detail. The analysis will be used to identify: • Constraints to expanding the range of investors in infrastructure; • Constraints to financing faced by current investors; and • Financial innovations in India and abroad for infrastructure financing and their

applicability in Indian context. 3. To identify changes required to reduce and ease the identified constraints.

To meet these objectives a detailed approach and methodology was developed and agreed upon in consultation with GoI and the World Bank. This approach and methodology is highlighted in Annexure 2. The key elements of our methodology are as follows:

1. We prepared a detailed list of PPP projects in the sectors chosen for the study.

2. We met key stakeholders including sponsoring agencies, project developers and financial institutions to obtain detailed information on the mode of financing of the chosen


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projects. The data was then analyzed to bring out trends in Infrastructure financing in India. We also carried out detailed interviews with over 80 individuals representing the above institutions as well as some other developers, financial institutions, rating agencies and Government agencies. The interviews focussed on their perception of the issues with the current mode of PPP infrastructure financing and ways to ease the constraints.

The following sections detail out the objective listed above.


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3 Objective 1: Evidence Based Description of Present Financing Sources for PPP Infrastructure PPP projects have begun to take off in the infrastructure sector in India. In the infrastructure sectors chosen for the study we estimated that as many as 231 projects have already achieved financial close with a combined value of USD 15.80 billion. We were able to get detailed financial information for 104 of these projects, which form nearly 45 percent of the total PPP projects by number, but with a total value of USD 11.48 billion form more than 72 percent of the total PPP projects by value. This indicates that we have been able to capture detailed financing information for most large PPP projects in our sample. We could not obtain information for all the projects as for many projects the stakeholders refused to share financing details citing confidentiality or commercial reasons. In spite of that our sample of 104 projects is large enough to highlight the trends in financing of PPP infrastructure projects. Even for projects where we were not able to obtain detailed financial information we did manage to obtain other project information. Exhibit 1 & Exhibit 2 below highlight our coverage. Annexure 3 highlights the coverage of our survey in greater detail.

Exhibit 1: Sample Size for Project Information Collection

Number Value (USD billion)

Number % of total Value % of total

Project Information* 231 100% 15.80 100%

Detailed Financing Information 104 45% 11.48 72%

Notes:

*Considered only those projects that have achieved Financial Close

*As agreed with World Bank during inception phase, we have not considered:

• Urban projects less than USD1 million; cities less than 1 million population • Smaller road projects in states (below USD1 million) in MP, Maharashtra and Rajasthan (about 20

numbers.) • Select power distribution projects such as Noida, Ahmedabad and Mumbai; Real estate oriented projects

such as Nandi Corridor (NICE), Mumbai Car Park, etc.

We have also made assumptions in a very small number of projects about project costs, financial closure, etc

Exhibit 2: Trends in Total 231 Projects and Sample of 104 Projects

If we look at the temporal trend of the PPP projects in India we find that PPP projects clearly show an increasing trend in the past 10 years with a sharp increase particularly in the last 3 years. Out of the total projects more than 93 PPP infrastructure projects have

Value of PPP Projects

-

1.00

2.00

3.00

4.00

5.00

6.00

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


USD

Billio

n

Detailed Financial Information All PPP Projects

Number of PPP Project

0

10

20

30

40

50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year of Finanacial Close

Num

ber

Detailed Financial Information All PPP Projects


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achieved financial close in the last three years. This is as compared to a total of 131 projects in the previous 8 years5. If we look at a sector wise distribution, as can be seen from the graph below, road sector (especially National Highways) has seen the maximum activity in terms of the number of projects.

PPP Projects in India by Number(Total Number 224)

0

10

20

30

40

50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


Num

ber

Roads & Bridges Ports Airports

Railways Power Distribution Power Transmission

Solid Waste Management Waste Water Water Supply

In value terms we find that growth has been even steeper in the recent years. In 2006 projects worth USD 6 billion achieved financial close as compared to projects worth only USD1.8 billion in 2005. However, when looked at sector wise we find that road projects are not as dominant as they are by numbers. Roads sector which forms more than 81% of the total PPP project by number accounts for approximately 54% of the total projects by value (please refer to Exhibit 3). Even though the Port and Airport projects are fewer by number they are usually large by value and constitute 20.5% and 17.2% of the total PPP projects by value respectively.

5 Project achieving financial closure in the year 2007 (7 in number – 2 Airport, 5 Roads & Bridges) have been excluded in this trend analysis because the analysis cannot be done for the whole year in 2007. That is why in the graphs showing yearly trends the number of projects comes to 224 instead of 231 and the project value comes to USD 13.32 billion rather than USD15.8 billion.

PPP Projects in India by Value (Total Value USD13.32 billion)

-

1,000

2,000

3,000

4,000

5,000

6,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


USD Millio

n





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Exhibit 3: PPP Projects in Different Sectors by Number and Value

Sectoral Distribution of PPP Projects by Value(Total Value USD15.8 billion)

Water Supply2.3%

Ports20.5%

Power Transmission

2.3%



0.4%

Railways1.8%

Waste Water0.1%

Power Distribution

1.8%

Airports17.2%

Sectoral Distribution of PPP Projects by Number(Total Number 231)

Airports2% Power

Distribution2%

Ports8%

Roads & Bridges82%


2%

Water Supply2%

Railways2%

We also find that the number of projects awarded by Central Government agencies is only slightly higher than those of State projects. This bears testimony to the widespread acceptance of PPP projects in India. However, by value PPP projects awarded by Central agencies dominate over those in the states.

Exhibit 4: Trends in PPP Projects by Awarding Authority

If we look at the financing of these projects we find that PPP projects in India have been largely financed by plain vanilla debt6. On an average across all projects 68 percent of the project cost is usually financed by debt, 26 percent by promoter’s 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.

Exhibit 5: Overall Financial Structure of PPP projects in India

6 The analysis hereon is done for a sample of 104 projects for which we have detailed financing information.

PPP Projects Awarded by Centre/State by Number(Total Number 224)

Centre

State

-

10

20

30

40

50

60

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year of Financial Closure

Num

ber

PPP Projects Awarded by Centre/State by Value(Total Value USD13.32 billion)

Centre

State

-

1,000

2,000

3,000

4,000

5,000

6,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


USD Million

Financial Structuring of PPP Infrastrutcure Projects(Total Value USD11.48 billion)

Debt68%

Equity25%

Sub-Debt3%

Grant4%


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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.

Exhibit 6: Source of Senior Debt Funding

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. The project database shows that public sector banks dominates with a share of 82 percent, while share of private sector banks and foreign banks are only 13% and 5% respectively8.

Exhibit 7: Sources of Debt by Sector and Share of Commercial Banks by Type

7 IDBI has become a bank only after the 2004 we have therefore,, considered it to be an institutional lender in this report 8 Lenders break-up into banks or institutional investors is only available for debt amounting to USD4.18 Billion

Sources of Debt by Sector

0% 20% 40% 60% 80% 100%

Airports

Ports

Power Transmission

Railways

Roads & Bridges


Water Supply

Commercial Banks Institutions Others

Share of Commercial Banks by Type(Value USD5.6 billion)

Public Sector Bank82%

Foreign Bank5%

Private Sector Bank13%

Composition of Other Sources of Senior Debt

IIFCL34.4%

IFC4.9%

IDBI17.3%

IDFC22.0%

ADB3.7%

SIDBI3.2%

IL&FS3.1%

HUDCO2.6%

IFCI1.5%

Others5.5%

Insurance Companies

1.9%

Sources of Senior Debt (Total Value USD7.72 billion)

Commercial Banks72%

Others28%


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Equity contribution in projects, the next highest means of financing a project comes mostly in the form of promoter’s equity. In the past year a number of private equity players have been showing keen interest in financing a portion of 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 sub-debt 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 cases10.

Other key trends and analysis are presented in

9 The trend in 2000 and 2001 of relatively low debt levels and high equity levels is because of the closing of a few port projects during those years which had high levels of equity. 10 Some experts have raised the concern that developers are using grants from Government for reducing their equity contribution rather than reducing the debt component of the project. Annexure 8 highlights this issue in more detail.

Changes in Financial Structure Over the Year

0%

10%

20%

30%

40%

50%

60%

70%

80%

1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Senior Debt Equity Sub-Debt Grant

Sub-Debt from Commercial Banks by Source & Value

Lead64%

Not Known14%

Member22%


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4 Objective 2: Analysis of the Financing of PPP in India PPP projects in India are predominantly small in size (less than USD 50 million) by number of projects and these small projects are able to reach financial closure without much difficulty (given that they are viable and carry reasonable levels of risk). However, there are also a small number of large PPP projects (project size greater than USD 100 million), the financing of which is significantly more complicated. As can be seen from the accompanying graph while only 21 percent of the total PPP projects (or about 48 projects) are large projects, they account for nearly USD 11 billion in project size11. The average size of such large projects is approximately USD 230 million and financing each of such projects requires significant coordination between markets players involved in infrastructure financing.

In this section we analyze in detail the present modalities and issues in infrastructure financing particularly bringing out issues in the financing of large projects. The discussion is divided in two parts- first we analyze the modalities and issues in the use of Debt to finance infrastructure and second we analyze the modalities and issues concerning the use of equity and sub debt in financing of infrastructure projects. A discussion on grants is also incorporated in this section, where appropriate.

4.1.1 Debt financing

On the debt side we present the current trends on the basis of detailed information on debt financing information for the 104 projects, as indicated earlier. We also present views obtained from our interaction with the key financial institutions and developers. The value of total senior debt, for the 104 projects, aggregate to USD7.72 billion.

Box 1: Institutions Operating in Debt Financing of PPP Projects

The accompanying diagram gives a schematic representation of the types of institutions presently providing debt financing for PPP projects. As can be seen from the diagram PPP debt financing is dominated by commercial banks in India (the size of the circle depicts the size of lending to infrastructure). These banks offer mainly plain vanilla loans and sub debts where needed. However, as we will explore in detail later, the commercial banks are hampered by the lack of availability of long term finance as well as lack in providing innovative financial instruments.

The second group of institutions are DFI’s (development finance institutions) like IDBI, IDFC, HUDCO, PFC, and IL&FS etc. Some of them like IDFC have comparatively long term finance available from the Government and most of them were keen to introduce a portfolio of innovative financial products (like some initial use of take out financing by IDFC).

11 World Bank has estimated that 20 percent of the Infrastructure Financing requirement of USD 320 billion will come from PPP projects. This works out to a financing requirement of USD 64 billion for PPP infrastructure projects in the next 5 years. If the same trend in value and number of PPP projects continues in the future then it would be fair to assume that out of the USD 64 billion nearly 45 billion will come from a small number of large projects, financing of which will require significant financial innovation

Size Wise Grouping of PPP Projects by Value and Number(Value USD15.8 billion, Number 231)

61%

11%

18%

20%

21%

69%

0% 20% 40% 60% 80% 100%

by Number

by Value

<USD 50 Million USD 50-100 Million >USD 100 Million


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However, today their lending behaviour has become (for most purposes) not much different from commercial banks. They also are not prominent players as they lack size.

Finally there are bilateral and multilateral institutions. While they too have long term loans available and can offer innovative financial products (like political risk insurance, currency risk insurance etc.) their participation in lending to PPP projects is insignificant as of now.

Use of Innovative Financial Instruments

Availability of Long Term Finance

Low

High

High

Commercial Banks

Bilateral and MultilateralInstitutions

IDFCIDBI

IL&FS

Specialized Institutions-PFC, HDFC, HUDCO, Indian Railway Finance Corporation etc.

*Size of circle indicates relative sizein the financing pie

The project database shows commercial banks to be 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 (DFI’s) 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 due to changes in the SLR requirements by banks and disqualification of investment by banks in DFI bonds to meet their SLR requirements. Since then banks have become the largest source of financing for long term debt, with some erstwhile DFI’s like ICICI and IDBI have also converted themselves into banks. This raises questions on the future role of DFIs in financing of infrastructure projects.

Bank lending to the infrastructure sector has grown rapidly over the last few years. However, the growth in lending to infrastructure is not unique. In fact it is concomitant with a sharp rise in non food credit provided by banks, with strong growth in credit off take being observed in both the corporate and retail segments (more detailed projections for the PPP infrastructure lending by commercial banks is presented in Annexure 5). Also infrastructure projects are not unique in the need for 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


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deposit growth. This has resulted in banks liquidating their statutory reserves with the RBI to fund the credit demand.

While this is unlikely to cause banks to fail in India, yet there are some worrying signs. Firstly there is a rapid reduction in excess Statutory Liquidity Ratio12 (SLR) in the banking system. ICRA estimates that SLR has reduced to around USD 13 billion (Rs. 600 billion) as on March 2007 from over USD 55 billion (Rs. 2.5 trillion) as on March 2005 and around USD 26 billion (Rs. 1.2 trillion) as on March 2006. As a result the ability of the banks to repo these excess securities to meet liquidity pressures have reduced. Also by lending long term banks expose themselves to the risk of reduction in margins. 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.

RBI view on the ALM issue is that in the future banks role will have to be confined to supplementing long term lending rather than remain as the primary lenders. The development of other avenues for long term funding is important in the light of the fact that RBI is pushing the banks to become more stringent in lending long term. Internationally many banks avoid ALM by participating in infrastructure projects through bridge loans and mini perm loans during the riskier construction period of infrastructure projects. After the operations begin and the risks are lower then financing is sought from other less expensive long term lenders (like insurance firms) as well as from bond issues. In India the absence of such lenders makes such a situation difficult at present.

Another way in which International banks are able to manage their long term Asset Liability matching issue is selling down their loans in a variety of ways, sometimes packaging several project debts together, to buyers with different risk appetite. Typically these buyers include other banks, pension funds, insurance companies, other institutional investors etc. Since, the market is very liquid for such products, banks or the buyers of such products do not have major issue of asset-liability mismatches. The timing of such sell downs also range from immediate to few years depending on the risk profile of projects as well as the risk appetite of buyers.

Commercial banks in India are not able to meet their ALM mismatch in the same way. The market for such products is not liquid and hence not preferred by many investors. Banks can raise long term Bonds to provide long term debt to PPP projects. RBI through its annual Policy statement for the year 2004-05-issue of long-term Bonds by banks13 has allowed for this. The circular allows banks to raise rupee denominated long term bonds to the tune of bank’s exposure to infrastructure projects with residual maturity of more than 5 years. However, the cost of these long term funds to banks and ultimately to the PPP project is high and there is not much demand for expensive credit. Some institutions/ banks like IDBI, ICICI, UTI, and IDFC etc have raised long term funds through bonds for lending long term. However, competition with commercial banks, who lend long term using cheap retail assets (cost of assets being less than 5 percent in some cases), forces even the more prudent banking institutions to price below what is necessarily prudent.

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. Our interviews with banks indicate that 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.

12 SLR is that amount which a bank has to maintain in the form of cash, gold or approved securities with the Reserve Bank of India (RBI). The quantum is specified as some percentage of the total demand and time liabilities of a bank. This percentage is fixed by RBI and the minimum stands at 25 percent at present. 13 Circular number RBI/2004/236-DBOD No. BP.BC. 90 /21.01.002/ 2003-04 dated June 11, 2004


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As compared to India internationally the debt tenure is typically 80-90% of the concession period. For example, some of the PPP deals in the international market as presented in Exhibit 8 have average debt tenure to concession period ratio of 80%.

Exhibit 8: Loan Tenure to Concession Period Ratio for Ten PPP Projects in last Two Years

# Project Year of

Financial Close

Concession Period (years)

Debt Amount (million)

Currency Debt

Tenure (years)

Ratio

1. Lancashire Waste Project (UK)

2007 29 320 Pound 25 86%

2. The Keppel Seghers Tuas Project (Waste to Energy Project – Singapore)

2006 25 105 US Dollar 23 92%

132 Euro 18 60%

58 W 20 67%

3. The Uijeongbu light rail Project (Korea)

2006 30

51 W 23 77%

4. Limerick Tunnel conduit (Ireland)

2006 36 258 Euro 34 94%

167 Euro 18 90% 5.

The Brussels-North Wastewater Project (Belgium)

2006 20

100 Euro 19 95%

6. Cyprus Airports Project (Cyprus)

2006 25 542 Euro 19 76%

7. Calle 30 (Madrid) Ring-road Project (Phase-1) (Spain)

2005 35 1350 Euro 30 86%

8. Madrid's flagship ring-road 2005 35 1350 Euro 30 86%


28

16

23

28

25

28

30

15

5

14

10

12

13

16

- 5 10 15 20 25 30 35

Water Supply

Solid Waste

Roads & Bridges

Railways

Power Transmission

Ports

Airports

Number of Years



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project, Calle 30 (Spain) 1150 Euro 20 57%

9. E18 Grimstad-Kristians and road project (Norway)

2006 35 399 Euro 28 80%

10. Richmond Airport-Vancover rapid transit project (Canada)

2005 35 600 (Canadian Dollar)

25 71%

Average 80%

Source: Project Finance Magazine various issues

However, it must be noted that in UK too PPP loans, in the initial years, were of shorter period when compared to concession lengths, the reason being little known history of performance of PPP projects. Even now real toll projects, where the traffic risk is borne by the project companies, have relatively smaller debt tenure to concession length ratios.

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. In our interviews banks have indicated that they prefer a 1.5 DSCR or more, except for (NHAI) annuity projects where they are willing to look at lower DSCR (near 1.2) due to lower risk on projected revenues.

Exhibit 9: DSCR Required by Banks

In mature markets like UK, the Average DSCR in PPP projects range from 1.05-1.1. However, banks attributed this difference to the lack of history of PPP projects in India which forces the banks to keep a higher margin for repayment. Another reason for a higher DSCR in India is because the traffic risk in the project is also factored in by banks.

Along with high DSCR requirements banks in India also push for short reset period in projects. Volatile interest rate regime14 in India has been one of the factors that have led to

14 In order to assess the volatility we have analysed the four rates viz State Bank Advance Rate (SBAR), LIBOR, 5 Year Government Securities Rate & 10 Year Government Securities Rate. The accompanying exhibit shows a decline in average reset periods across years. From the point of view of projects short reset periods are potentially risk for infrastructure projects as an upward movement in rates can worsen project viability.

The volatility of the interest rate is also evident from the Standard Deviation of each of the above rates, presented in table below:

Benchmark Rates Standard Deviation

SBAR 0.013

3 year G-Sec 0.024

5 Year G-Sec 0.025

10 Year G-Sec 0.026

Libor 0.019

Source- RBI, SBI, Moneycafe website

Minimum DSCR Desired by Banks

1.2-1.524%

Around 1.550%

More than 1.526%


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banks to become cautious on interest rates. The accompanying exhibit shows a decline in average reset periods across years. From the point of view of projects short reset periods are potentially risk for infrastructure projects as an upward movement in rates can worsen project viability.

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, our interactions surprisingly showed that 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 we have not come across any project in our survey where there was 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 favourable 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. (Annexure 8 presents some of the case studies and international examples on refinancing of PPP infrastructure projects)

One view that we commonly encountered during our interviews was that despite some obvious safeguards adopted by banks in lending to the infrastructure sector it was doubtful whether the banks were pricing all the risks correctly. Some market participants felt that commercial banks were showing a lot of exuberance in lending to infrastructure sector and in the process was ignoring several project risks during lending. They felt that the situation of not building in risks in the lending terms was not sustainable and a tightening of lending conditions as well as the implementation of the Basel II norms might result in a reduction in lending by banks to the sector. It is important to analyze this claim because one of the significant criticisms of infrastructure development in China has been that banks have lent without prudence thereby saddling them with huge levels of Non Performing Assets.

Risk pricing by banks: To test whether risks are being priced appropriately by commercial banks we decided to analyze the lending terms of one set of projects all belonging to one sector (in our case the road sector) but with differing risk profiles (Annexure 6 details out our

It can be seen above that 5 Year G-Sec and 10 Year G-Sec have been more volatile than LIBOR and SBAR. SBAR is much less volatile and because of that, State Bank of India, the leading infrastructure lender in the country, has now linked its interest rate to SBAR instead of G-Sec.

Average Reset Periods

2.6

3.0 3.02.7

2.0

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2002 2003 2004 2005 2006

Year


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methodology and findings). Based on our analysis we categorized our sample of projects into high risk, medium risk and low risk. We analyzed the average interest rate charged to an infrastructure project belonging to the three categories for the years 2002 and 2006 (where a large set of projects were available). Separate analysis was done for 2002 and 2006 because the interest rate charged differs across years due to the variation in the rate of government securities. The following results were obtained from the analysis:

Exhibit 10: Project Risk Category and Average Interest Rate

Financial Closure Year Risk Category Average Interest Rate Low Risk 12.00

Medium Risk 13.00

2002

High Risk 10.00

Low Risk 9.09

Medium Risk 9.39

2006

High Risk 9.79

Note: Higher risk category number means higher project risk.

As can be seen from the table there does not seem to be any significant correlation between the level of risk in the project and the interest rate charge. It is easy to see why a perception can arise that risks are not being taken into account. However, that might not entirely be true.

Based on our data it is difficult to comment the level to which risks are taken into account. However, there does not seem to be any significant reason to believe that risks are not being taken into account during lending. Also the imminent implementation of the Basel II norms will require banks to become even more stringent on project lending.

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 SPV’s 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. (Though is difficult to assess the lending capacity of banks given the limited amount of information available still an attempt has been made to assess the PPP lending capacity of banks. The detailed methodology and findings of the assessment are presented in Annexure 5).

The next section discusses the trends and issues in equity financing in India.

4.1.2 Equity Financing

In our interviews with key stakeholders we found repeated reference to 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 realising 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 has increased from 2.1 in the year 2002 to 4.3 in the year 2006.


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Exhibit 11: Increased Gearing over the Years

Also while we find that DER has increased across the board for all project sizes, the maximum increase has been in the case of large projects. This indirectly hints at the problem identified by stakeholders- large volumes of equity capital are not easily available.

Exhibit 12: DER by Size

As per our analysis, total equity infused in PPP infrastructure projects (sector wise) is USD2.93 billion by the Year 2006. The maximum equity (USD1.43 billion) 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 also be seen from the accompanying graphic nearly 80 percent of this equity at the SPV level is infused by the promoter’s 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 the SPV level. Annexure 7 explores the differences in equity infusion by strong and small developers and looks at the restrictions on equity dilution in concession and loan agreements. However, equity from other sources does come in at the Promoter company/Holding company level through IPOs, private placements etc.

Exhibit 13: Sources of Pure Equity

Sources of Pure Equity (Total value USD2.93 billion)


2%

Government10%

Developer82%

Strategic Inverstors

6%

Value of Pure Equity for sectors(Total value USD2.93 billion)

Roads & Bridges, 1,429.5

Railways, 119.8

Airports, 511.0

Power Transmission,

107.6

Ports, 648.3

Water Supply, 102.3 Solid Waste

Management, 7.8

Debt to Equity Ratio(Senior Debt to Pure Equity)

2.1 2.02.3

2.6

4.3

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2002 2003 2004 2005 2006

Year

Ratio

Debt to Equity Ratio by Project Sizes(Senior Debt to Pure Equity)

-

1.0

2.0

3.0

4.0

5.0

6.0

2002 2003 2004 2005 2006

Year



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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 possibility15. In the projects analyzed 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 our data clearly shows that developers have been able to reduce the level of own equity invested in projects.

Exhibit 14: Sources of Equity

It can be seen that there has been substantial reduction in the percentage of equity provided from developer’s own source for three years after the year 2002. 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 developer’s 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. The next section explores the role of this important mechanism in reducing equity.

4.1.3 Significance of Subordinated Debt

As mentioned above taking on sub debt has been an important avenue through which developers try to reduce their equity stake. Sub-debt infusion in infrastructure PPP projects since Year 1998 has been presented below-

15 In some Port Sector projects like in Pipava, Mundra etc. the original promoter has been able to exit.

Source of Equity by Sector

76%

90%

65%

40%

5%

15%

36%

5%

20%

17%

21%

2%

3%

3%

2%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Roads & Bridges

Ports

Airports

Railways

Developers Financial Institution Government Strategic Inverstors Sub-Debt

Source of Equity by Year

92%

84%

86%

73%

61%

56%

77%

8%

15%

3%

27%

11%

24%

12%

11%

29%

20%

11%

1%

0% 20% 40% 60% 80% 100%

2000

2001

2002

2003

2004

2005

2006

Year

Developer Own Equity Other Source of Equity Sub-Debt


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Exhibit 15: Instances of Sub-Debt by Year and Sector

It may also be noted that there has been an increasing trend in sub-debt since the Year 2004. It can also be seen above that since 1998 an amount of USD333 million has been infused as sub-debt, in PPP infrastructure projects. It is also 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.

Our analysis of detailed financing information on the sample of 104 PPP projects reveals that 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. We also found that sub-debt arrangement becomes easy if the project IRR is comfortable and the developer is reputed.

In addition to sub debt we also found a limited number of strategic investors participating in a few PPP infrastructure projects. However, going forward their presence is likely to increase significantly.

4.1.4 Strategic Investors and their Investment in the Projects

Based on the survey information collected we found strategic investor in infrastructure sector in only 9 PPP projects. The exhibit below presents more details-

Exhibit 16: Strategic Investment by Sector

Sectors No of project with strategic investor

Equity Infused (USD Million)

Ports 4 29.89

Airports 3 102.15

Water Supply 1 30.00

Railways 1 4.89

Total 9 166.93

Sub-Debt Across Sectors by Value(Total Value USD333 million)

Railways9%

Roads & Bridges

86%

Ports4%


1%

Instances and Value of Sub-Debt (Total Value USD333 million)

3.13.1

2.2

44.348.0

93.3

139.0

0

5

10

15

20

25

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

Num

ber of In

stances


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It can be seen that a total of USD166.93 million has come as strategic investment in the PPP infrastructure projects and this investment is mainly in Ports & Airports sector. In addition to the lack of strategic investors there is also little Foreign Direct Investment in the infrastructure sector.

4.1.5 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 promoter’s 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.

4.1.6 What is Happening in Infrastructure Financing in Other Countries?

With an understanding of what is happening in India it is important to compare it with how infrastructure projects are financed in other countries. This will help to highlight the gaps faced by the infrastructure financing market in India and will also point to what can be done about them, based on the experiences in other countries. This review is predominantly focussed on infrastructure project development in other developing Asian countries (especially China, Indonesia, Malaysia and Thailand where a majority of the private sector investment in infrastructure have taken place) as the situation in many of these countries is similar to the situation in India.

India is not unique in having a substantial infrastructure creation requirement. In fact as early as the ninth five year plan (over the period 1996-2000) China had projected an infrastructure requirement of nearly USD 305 billion, close to the infrastructure financing requirement being projected in India for the 11th five year plan. And like India commercial banks have been the major source for financing this infrastructure requirement. The role of other financial institutions and capital markets has not been significant. It has also been seen that Chinese banks are also resorting to using the corporate finance model as opposed to project finance model for some infrastructure projects to bring in increased comfort.

As far as other Asian countries are concerned the infrastructure financing situation is also not much different from India. Before the Asian economic crisis there was a significant flow of foreign currency infrastructure financing, which was arranged by international banks. International bank participation was high in a lot of countries as banks followed international developers who participated significantly in developing infrastructure in these countries. The long term relationship between international banks and developers helped to give an additional sense of comfort in financing projects. Comfort was also got from various guarantees given by Governments to reduce the risk of the lenders. However, the experience of this first round of infrastructure development was bitter after the East Asian economic crisis hit. Some countries like Indonesia defaulted on the guarantees offered to project sponsors16 as they were hit by devaluation of the local currency. It was also realized during the crisis that many projects had been financed on the basis of questionable viability

16 India (famously in the Dhabol case) too defaulted but it was not because of the East Asian crisis.


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and under pressure from the economic downturn a lot of the projects suffered. As infrastructure projects floundered in the wake of the crisis the increased risk perception led to a significant reduction in the flow of capital for infrastructure projects in these countries.

With international capital flows drying up there has been an increased reliance on domestic markets and commercial banks in many countries to provide the financing needed for infrastructure projects. Infrastructure sector in countries with high liquidity in the banking system have been able to tide the crisis as local commercial banks in these countries have started to take a lead in infrastructure financing. The major reason for reliance on the banking system has been that other avenues for financing are not significantly developed in these markets.

China has seen the consequences of excessive reliance on commercial banks to lend to the infrastructure sector. Chinese banks are saddled with very high levels of NPAs and as a consequence very low returns on average assets. The returns on average assets for Chinese banks are in the below .20 as compared to Indian banks where these returns range from just below 1 to significantly more than 1. Banks are surviving only because of the high levels of liquidity in the market and because the Chinese Government is strongly backing them.

Confidence of international lenders has also slowly been returning. However, in their second coming international banks have often been beaten by highly liquid local banks which have been able to out price international banks as well as shown willingness to take higher levels of risk while giving out plain vanilla products. International banks with higher financing cost as well as currency risks have not been able to offer the kind of products needed by the markets in these countries. Another issue for the lack of financing products from international banks has been that the attendant legal underpinning necessary for such transactions is either absent or not easily enforceable in many countries.

If we contrast the above with the situation prevailing in India we find 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.

As the Chinese example shows large involvement of the banks in financing infrastructure can lead to deterioration in bank finances. Thus if the health of the banking sector has to be maintained (or improved upon in light of Basel II guidelines) then alternatives to bank lending in infrastructure projects will need to be found.

Also, going forward, a large proportion of the infrastructure financing will be local currency based even though other countries have successfully implemented projects with external commercial borrowing. This is because in India the RBI fears that a significant rise in liquidity in the market will increase the inflation rate which it wants to keep in check. Also RBI is quite stringent on exchange risk management.

While it is imperative that other sources of infrastructure financing will need to be tapped in India there are very few successful templates that exist in the developing world for developing markets for such financing. As a consequence India will have to largely chart its own course on the matter taking cognizance of developments elsewhere. The aim of the reforms will have to be to ease the constraints that are faced in infrastructure financing. In the next section we discuss some of the changes required.


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5 Objective 3: To Identify 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 promoter’s 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 90’s 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.

This section will highlight the areas where we feel changes are needed. It will also present some areas in which changes are already taking place. However, as already indicated at the beginning this report does not involve giving recommendations on the policy changes required as various other reports already describe them. Instead focus will be on detailing out the possibility for change in various areas and then leave it to the Ministry of Finance and other concerned stakeholders to decide on the exact path they want to follow to bring about changes.

5.1 New Areas to Focus on the Debt Side

On the debt side the major changes required are the introduction of new sources of financing to supplement bank lending to infrastructure projects and reducing the risk of bank lending to infrastructure. Large volumes of funds are locally available in India both with institutional investors as well as with the common public. Also funds can be accessed via external commercial borrowings. Development of the bond market, securitization, syndicated loans from international markets etc. are some of the ways of tapping the funds. In addition selling down of the infrastructure loans held by banks will help in maintaining the level of lending by banks. In this section we explore some of these issues in more detail.

5.1.1 Bonds as a Source of Fund

Bond market in India is one of the largest in the Asia and includes issuances by the Government (Central & State Governments), public sector undertakings, other Government bodies, financial institutions, banks and corporate. Despite there being a large number of players bond issuances are dominated by Central and State Governments through the issue of Government Securities (G-Sec). Current outstanding G-Secs are more than 25 percent of our GDP. In direct contrast the corporate bond market is not that well developed with a total bond issuance in 2005-06 of less than USD 20 billion. Also out of the total corporate bond


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issuance more than 90 percent are privately placed with institutions because of the onerous legal and regulatory requirements for attracting retail investors. The market for corporate bonds are dominated by issues from financial institutions and bond issues by private sector companies is limited. The lack of development of corporate bond market is an issue of special concern as they are a strong alternative source for finding of infrastructure projects.

India has short history of infrastructure bond issuance by financial institutions. Many development finance institutions used to issue infrastructure bonds for retail investors which were made attractive by an option of saving taxes. However, these issues have become limited. ICICI, one of the largest issuers of infrastructure bonds, has turned into a bank and now has access to significantly cheaper funds from retail deposits. Therefore, it has almost ceased any new issues of infrastructure bonds as the cost of the issue works out to more than 9 percent. Some other financial institutions like IDBI and Rural Electricity Corporation continue to issue infrastructure bonds but the volumes are not large.

Internationally project bonds are a significant source of financing in a few countries such as Chile and Malaysia. Chile has a developed corporate bond market and most infrastructure projects (particularly road projects) involve the issue of wrapped bonds or bonds that are secured by an additional guarantee viz., monoline insurers. In Mexico there is some activity in the issue of wrapped bonds However, the market is still in a nascent stage of development with a promising future (as financial institutions are increasingly looking at Mexico as the next market to develop after slowing down of concessioning activity in Chile). Malaysia too has a strong infrastructure bond market which differs from the Chilean bond market in that the market is dominated by Government Linked Companies who act as the project sponsors or demand off takers. These institutions typically have implicit Government guarantee which reduces the risk perception for investors. Unlike Chile bonds are not wrapped in Malaysia with Malaysia lacking a monoline. Also while project bond market in Chile is dominated by international banks as book runners and international rating agencies and monolines the infrastructure bond market in Malaysia is almost completely controlled by local banks and rating agencies. A separate paper has been prepared for the analysis of bond market development in India and its comparison with the bond market in emerging economies like Chile, Mexico and Malaysia. The paper highlights the role of bond markets in emerging economies in more detail. Our analysis and experience from Chile, Mexico and Malaysia suggests that there are four areas of reform that would provide a boost for bond market development in India:

• Improving market efficiency through strengthening trading, clearing and settlement systems for debt securities

• Lowering the regulatory burden and cost of raising debt

• Increasing institutional investor participation (insurance companies, pension funds and provident funds)

• Credit enhancement/guarantee framework for the development of infrastructure bond market

The Finance Ministry in India has already accepted the recommendations of the Patil committee report on Corporate Bond Markets in India which goes a long way in discussing the issues related to development of corporate debt securities market. Many of these are also relevant for the infrastructure debt securities like development of a trading platform for bond and securitised instruments as well as lowering the reporting burden for issuing debt securities. Government has taken steps to implement the recommendations. BSE and NSE have already been mandated to develop the trading platform for debt instruments within the guidelines issued by SEBI (Reference SEBI Circular number SEBI/CFD/DIL/BOND/1/2006/12/12 dated December 12, 2006). The Securities Contracts (Regulation) Amendment Bill, 2007 has been passed by the parliament facilitating dematerialisation of PTCs and hence paving the way for their listing and online trading.


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However, despite reforms infrastructure bond markets are unlikely to develop unless there is a pool of large institutional investors willing to invest. Next we discuss the role that insurance, pension and provident funds, large institutional investors in India, can play in the development of alternative means of financing.

5.1.2 Funding from Insurance, Pension and Provident Funds

Insurance, Pension and provident funds in India hold large volumes of long term funds. However, they have not been large scale players in the funding of infrastructure projects in the private sector.

Insurance sector in India was largely dominated by public sector insurance companies. The Government of India liberalised the insurance sector in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill which resulted in a host of private insurance companies operating in both life and non-life segments. As on 31st March, 2006, total fund invested by insurance market (both life and non-life) in India was to the tune of USD 97.7 Billion (please refer to Exhibit 17).

Exhibit 17: Investment by Life and Non-Life Insurer in Last Three Years (USD Million)

Insurer Infrastructure/ Social Sector Total

Financial Year Ended

(as on 31st March) 2004 2005 2006 2004 2005 2006

Public Sector Life Fund - LIC (A)

8,475.8 9,924.5 10,707.2 67,652.6 80,317.5 86,543.9

Private Sector Life Fund (B) 110.2 191.2 323.6 638.2 1,064.7 1,720.3

Total Life Fund (A+B) 8,586.0 10,115.8 11,030.8 68,290.9 81,382.2 88,264.1

Public Sector Non-Life Fund (C) 735.4 889.1 980.7 7,161.0 7,745.9 8,559.9

Private Sector Non-Life Fund (D)

64.6 86.3 126.4 411.2 567.9 847.3

Total Non-Life Fund (C+D) 800.1 975.5 1,107.1 7,572.2 8,313.8 9,407.2

GRAND TOTAL (A+B+C+D) 9,386.0 11,091.3 12,137.9 75,863.1 89,696.0 97,671.3

Percentage of Total 12.4% 12.4% 12.4%

Source: IRDA Annual reports

The major pension fund in India is the Employee Provident Fund Organisation (EPFO) which has a total investment of USD49.67 billion (as on 31st March, 2006) and year on year fund collection of USD5.26 billion under different schemes.

Exhibit 18: Year on Year Fund Collection by EPFO

Financial Year Ended FY 2003-04 FY 2004-05 FY 2005-06 Total Investment

as on 31st March 2006


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Provident Fund (USD Million) 2745.8 2870.7 3683.7 33,295

Pension Fund (USD Million) 1320.6 1447.1 1530.1 16,251

Deposit Linked Insurance Fund (USD Million)

39.0 42.6 49.0 122

Total (USD Million) 4105.3 4360.4 5262.8 49,668

Source- EPFO Website

Regulations mandate life insurance companies to keep invested a minimum of 15% of their fund in infrastructure or social sector and non-life insurance companies to keep invested minimum 10% of their fund in infrastructure or social sector. However, much of the investment by the insurance companies is in infrastructure created by the public sector and almost none in the private sector. This is because of a very high degree of risk averseness dictated largely by regulations.

Current regulations essentially prevent insurance and pension funds from participating in the bond market. Insurance funds are currently prohibited from investing in debt securities rated below ‘Very Strong’ i.e. AA. Most of the PPP infrastructure projects are implemented through SPV route. Hence, credit rating of a paper from a new company is unlikely to get AA or higher rating.

Internationally, insurance companies (Exhibit 19) do invest in securities rated below AA. On average 25% of the total investment by top ten insurance companies in the world is in securities rated A or BBB.

Exhibit 19: Investment by Insurance Companies in Rated Securities

Total

Investment (USD billion)

Life/ General Insurance

AAA AA to AA-

A+ to A-

BBB+ to

BBB-

Non - Investment

Grade

Not Assigned

Allianz 285 L.I & G.I 46% 18% 21% 5% 2% 9%

AIG 418 L.I & G.I 31% 27% 23% 14% 4% 1%

NYL 103 L.I 67% 25% 3% 4% 1% -

MetLife 243 L.I & G.I 74% 19% 4% 3% - -

SunLife 69 L.I 19% 17% 32% 29% 3% -

Prudential 165 L.I & G.I 69% 22% 5% 3% - -

Average 51% 21% 15% 10% 2% 5%

Source- Company Annual Report

In China, the guidelines for investment by insurance companies not only allow investment in securities rated below AA (details in Exhibit 20) but also allow issuance of sub-debt subject to prudential norms.

Exhibit 20: Chinese Insurance Regulation

“Provisional Measures Governing Bonds Investment by Insurance Institutional Investors” & “Provisional Measures Governing Subordinated Fixed Term Debt of Insurance Companies” formulated by China Insurance Regulatory Committee (CIRC), as stated on the Hong Kong Trade Development Council Website


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Financial Bonds and Subordinated Bonds of Commercial Banks

• Grade A rated by domestic credit rating institutions or equivalent grade of long term credit

• in the case of listing overseas and being freed from domestic grading, the rating should be BB grade as rated by international credit rating institutions

Enterprise (Corporate) Bonds

• AA grade granted by domestic credit rating institutions or long term credit rating equivalent to or above AA grade

Short Term Financing Bonds

• A-1 grade granted by domestic credit grading agencies or short term credit of equivalent grade

• for publicly listed companies that are freed from credit rating according to the Measures Governing Short Term Financing Bonds, the credit rating and follow-up rating during the last three years shall meet any of the following terms and conditions:

• AA grade granted by domestic credit rating agencies or long term credit grading equivalent to that of AA or higher;

• BBB grade granted by international credit rating agencies or long term credit grading equivalent to that of BBB or higher.

In UK, Pension funds/ insurance buy long term paper and also tend to be primary lenders. Also, investment grade i.e. BBB- is the cut-off for investment by insurance or pension funds. Insurance or pension funds however, charge a higher margin for lending on lower rated instruments.

Government of India has been reviewing the possibilities of channelising Insurance/ Pension/ Provident fund money into infrastructure projects. No firm proposal has been accepted yet. One possible way is for banks to issue long term bonds in the market, primarily targeting subscription from insurance/ pension funds. As long term bonds, floated by commercial banks, have high probability of receiving ‘AA’ or above rating, there will be no regulatory constraint for insurance/pension funds to invest in such bonds. The more important issue will be the coupon rate at which these bonds would be issued. If the rate is high, the costs to the banks and consequently to the projects will be high and not attractive. If the rates are low, the investments will not be attractive to the insurance/ pension funds.

There is also a possibility that debt securities issued by holding companies for their operational PPP projects may receive more than “AA” rating and hence fall within the current limits for investment by Insurance/ Pension/ Provident funds.

However, the history of PPPs in India is only around 10 years old and there are not many large PPP projects that are operational. As a result rating such products is not easy.

Currently the Central Government is also trying to appoint fund mangers for new pension fund schemes. This may facilitate flow of funds from pension schemes to infrastructure projects.

The Government has introduced the New Pension System (NPS) with effect from 01 January 2004. Under NPS retirement savings of individual NPS subscribers will be managed by professional Pension Fund(s) appointed by the PFRDA

The newly incorporated Pension Fund(s) will carry out its operations as directed by the Board of Trustees of the NPS Trust to be set up under the Indian Trust Act, 1882. Pension Fund (s) under the NPS shall be required to undertake wholesale asset management as prescribed by PFRDA/GOI.

Under the New Pension System it is proposed that there would be four broad categories of pension scheme with differential returns and portfolio (a mix of government securities, debt instrument and equity)

As demonstrated by the strong political opposition to Pension sector reforms in India the path to greater participation of these institutions in infrastructure financing will not be easy. In the meantime it will be important to look at ways by which commercial bank lending in infrastructure can be supported. The next section explores just such a way.


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5.1.3 Improving Bank capacity to lend to Infrastructure Sector

Commercial bank lending to infrastructure projects is subject to various threats. On one hand issues of asset liability mismatch generated by long term lending is leading RBI to advocate increased caution in lending to infrastructure projects. On the other hand group exposure norms, unless changed, are likely to make banks unable to lend to the large developers. The impending implementation of the Basel II norms will mean that the banks will have to significantly increase their risk weighting capital for lending long term.

Lending to infrastructure projects not only locks the banks’ fund for longer period but also expose the banks to risks such as - Maturity, Credit and Interest risk. Therefore, it is essential that they are able to manage their maturity risk by use of securitisation, credit risk by use of credit derivatives and interest rate risk by use of interest rate derivatives. Better management of infrastructure loan portfolio will help banks to release their locked up capital and redeploy the money into infrastructure credit.

However, in India:

• though a huge securitisation market exists there is not liquidity or secondary trading in these instruments;

• even with a huge market for Forward Rate Agreements (FRA) and Interest Rate Swaps (IRS) there is lack of depth in the interest rate derivatives market; and

• the market for credit derivatives does not exist

To deal with ALM issues for banks developments need to take place in the above areas (Annexure 5 provides a detailed discussion on these).

The other issue of concern is the group exposure norms which will affect the ability of banks to lend to large infrastructure promoters in the long term. Many players are making representations to the RBI and Finance Ministry for relaxing these norms. However, a final decision on this is yet to be taken.

The spectre of Basel II also hangs on bank lending to infrastructure projects. Basel II norms will require setting aside of larger amounts of capital than currently required for infrastructure loans. Therefore, to continue at the current levels of lending banks will need to recapitalize. Another way of dealing with the Basel II will be to securitize the loans on the books. The development of the securitization market thus becomes important also from the point of view of the impending implementation of the Basel II norms.

5.1.4 ECB as a Source of Infrastructure Financing

The demand for ECBs for infrastructure projects is a function of domestic interest rate scenario. Until recently when domestic interest rates were low, ECBs were expensive when compared to domestic term loans. As per the RBI database, total ECBs in last five years for infrastructure is to the tune of USD1.9 billion, and ECBs for PPP infrastructure is to the tune of USD227 million only.

The database on 104 projects accounts for USD254 million of ECB/FCNR loans in PPP Projects.

Exhibit 21: ECBs in Infrastructure (March 2004 - February 2007)

Borrower Total IRFC 704.31 IDBI 349.84 IDFC 175.00 GTL Ltd. 175.00 SREI Infrastructure Finance Ltd. 158.90 Nava Bharat Ventures Ltd. 68.34


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IVRCL Infrastructures & Projects Ltd. 65.00

L&T Interstate Rd Corridor Ltd. 55.00

Hazira Port Pvt. Ltd. 50.00

Gateway Terminals India Pvt. Ltd. 40.00 Gamuda-WCT (India) Pvt. Ltd. 14.93

Jabalpur Corridor (I) Pvt. Ltd. 13.08

Madhucon Project Ltd. 12.00

Maytas infra Pvt. Ltd. 10.00

Gujarat Pipavav Port Limited 7.10

Kalindee Rail Nirman (Engineer) Ltd. 7.00

ETA Port Operation & Rapid Transport Systems Ltd. 6.60 Indian Infrastructure Equipment Ltd. 4.27 Halcrow Consulting India Ltd. 0.34 Digiwave Infrastructure & Services Pvt. Ltd. 0.33 Pragmacs Financial Services (P) Ltd 0.10 Grand Total 1917.14

Source: RBI Website

However, in the current scenario where the Indian sovereign rating has improved and the domestic lending rates have increased, ECBs have become cheaper than term loans. Even after we include the hedging cost and the withholding tax, ECBs are cheaper when compared to borrowings from domestic markets. Hence ECBs have become more attractive for Indian companies.

“We have recently raised Rs.500 crore (USD110 million) financing through a mix of FCNR loan and ECB for the Palanpur - Swaroopganj road project @ 6 month LIBOR +150 bps. 6 month LIBOR=

5.37%, thus interest rate was ~6.87%. Total cost of fund including hedging and withholding tax brings the overall interest rate close to 9% p.a.” L&T

Description

Indian construction and engineering major Larson & Toubro pulled off the external borrowing for an Indian roads BOT concession in September, 2006. L&T carried out the borrowing for L&T Interstate Road Corridor, an SPV floated by Larsen & Toubro (L&T) for the 76 km Palanpur - Swaroopganj road project.

The deal comprised of a US dollar equivalent Rs 500 crore 50/50 mix of domestic FCNR (foreign currency loans) and external commercial borrowing.

• The debt was priced at around 150 basis points above LIBOR.

• Citigroup was the Lead Banker and the Escrow Agent.

• The banks which did the deal were IFCL, Bank of Baroda and Abu Dhabi Commercial Bank.

• The deal also broke tenor (16.5 years) and debt equity ratio (9.09) records for an Indian project.

• L&T has an option of converting the FCNR portion of the loan into rupee loan after 3 years.

The financing is symptomatic of both the growing standing of the sponsor in the international debt market and a highly structured approach to long-term financing for infrastructure projects

Source: Project Finance Magazine February Issue

Cost of ECBs Reducing

“A fully-hedged dollar loan on a five-year basis would be at 9-10% for an AAA-rated company, whereas it is in the range of 11-12% in India. Yen is even cheaper due to its lower coupon rate and a subsequently lower withholding tax,” says Standard Chartered Bank director & regional head (South Asia, capital markets) Prakash Subramanian. In the current liquidity conditions, a large domestic firm can borrow 70-80 basis points above the Libor, the internationally-accepted benchmark rate for short-term interest rates. Add to this the hedging cost and the withholding tax — levied on payments made to non-residents — and the total cost of borrowing comes to 9.2-9.3%. Given the lower interest rate in Japan, ECBs in yen would be cheaper by another 15-20 basis points.

Despite the coming together of a few transactions ECBs are not likely to become a significant source for infrastructure financing. One of the important reasons for this is that In


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India the derivatives market is not developed enough to offer forward cover for more than 5 years. As a result RBI prescribes an all in price ceiling of 250 basis points over 6 month LIBOR. Even at this cost ECB seem to be a good source for financing/ refinancing of infrastructure projects. However, the new RBI guidelines in August 2007 have further curbed ECBs clearly indicating that the RBI is not in favour of ECB as a significant source of financing.

5.2 New Areas to Focus on the Equity Side

Changes are required on the equity side to make sure that the scarcity of equity with developers does not lead to a truncation of the number of projects reaching financial close. New sources of equity need to be explored, whether be it from private equity funds, securitization, accessing of capital markets etc to ensure that that a concomitant level of debt can be raised. This section highlights the issues around this.

5.2.1 Holding Company Structure Creates Issue in Raising Equity

Infrastructure projects in India are generally developed through individual project companies called Special Purpose Vehicles (SPVs). Group of SPVs are then held by a single company (Holding Company) separate from the main company of the developer. Creation of the holding company better protects the parent company from possible adverse impact in the concession business.

However, the creation of holding company structure also creates several problems. The holding companies are classified as non banking finance companies under RBI guidelines. This restricts accessing Foreign Direct Investment in a holding company as rules do not allow FDI under the automatic approval route17. Also the use of holding company structure brings about issues in terms of extra regulatory compliances because of their classification as NBFCs. Another significant issue with the holding company structure relates to the cascading effect of dividend distribution tax.

Maintaining a two/multi-tier SPV- Holding Company structure in India has some inherent tax inefficiencies resulting from the levy of Dividend Distribution Tax (DDT) at two levels and a cash trap issue on account of statutory transfer to reserves prior to dividend declaration. The situation has been presented by way of diagram below-

17 Under the existing FDI policy in India, any foreign investment in Indian holding companies / investment companies require a specific FIPB approval. Therefore,, it restrains infrastructure holding company to raise equity outside India.


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Exhibit 22: Holding Company Structure and its Implications

As can be seen from the above when an SPV declares dividend to its holding company, it has to pay “Dividend Distribution Tax (DDT)18” on the amount of dividend paid. Dividend is income for holding company and therefore, when it declares dividend to its parent company, it has to again pay DDT on the amount of dividend paid. This double taxation also acts as a deterrent to infrastructure companies trying to divest their equity in an existing concession. The next section explores this issue. DDT also makes it difficult for the promoters to try and take out equity through the securitization route.

5.2.2 Private Equity Investment to Shore up Promoter Equity

Many national and international private equity (PE) funds are showing interest in infrastructure sectors. Government’s recent approval of the USD 2 billion PE fund for infrastructure is an example of this trend.

In order to fill the gap of equity requirement in infrastructure sector “India Infrastructure Finance Initiative” was launched during February 2007 wherein IDFC Citigroup Inc. IIFCL and Blackstone Group Holding L.P came together to deploy USD5 billion in infrastructure projects. It has been reported that while USD2 billion would be deployed as equity USD3 billion would be deployed as long term finance with tenor of more than 10 years.

However, there are many issues around investment by the PE firms which prevents them from becoming a significant source of equity for infrastructure projects. Current regulations do not provide for private equity funds to participate as either bidder in the initial stage of an infrastructure project or to become majority owners of a concession after the project has been awarded through buying of shares. Promoters are also not too keen to explore the private equity route just as yet because it is expensive to take out equity got from a PE deal because of DDT.

A consequence of this is that PE deals in infrastructure during Calendar Year 2006 was very low at USD265 million forming only around 3.5% of total PE deals in the country in the same year (please refer Exhibit 23 below).

Exhibit 23: PE deals for the Year 2006

Particulars Amount

18 DDT is a tax payable by an Indian company on any amount of dividend distributed by it and the same is levied @ 14.03 % (12.5% plus 10% surcharge plus 2% education cess).

Parent company

Holding Company

SPV 1 SPV 2 SPV 3

Dividend + 12.5% dividend tax Dividend + 12.5%

dividend tax

Dividend + 12.5% dividend tax

Dividend + 12.5% dividend tax

Double Taxation Double taxation


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(USD Million)

Total PE deal Value 7460

PE deals in Infrastructure sector 265+

PE in Infrastructure/ Total PE deals 3.55%+

Source- PwC Research

Though the above table suggests that PE deals in infrastructure space are low our interviews have revealed that the trends are encouraging and investments are expected to rise especially because there is a perception in the market that issues around DDT will soon be addressed. The details of PE deals in infrastructure sector are also presented below-

Exhibit 24: Private Equity Investments in the year 2006

# Investor Investee Sector Stake Investment Value

(USD Million)

a. IDFC Private Equity’s India Development Fund

Delhi Airport Modernisation Project

Aviation 8% N.A.

b. JP Morgan Chase, IDFC PE- led Consortium

L&T- Infrastructure Projects

Infrastructure 21.6% 124.0

c. Farallon Capital Indiabulls Infrastructure

Infrastructure & Construction

60% 3.4

d. UTI Venture Fund & Middle Investor

Consolidated Construction Consortium

Infrastructure & Construction

NA 26.6

e. India development Fund (IDF)

GMR Infrastructure Real Estate & Infrastructure

4% N.A.

f. ICICI Venture Funds & IDFC


5% 56.6

g. Quantum Group of Funds (QGF)


1% 15.6

h. Citigroup GMR Infrastructure Real Estate & Infrastructure

1.4% 38.9

Total >265.1

Source- PwC Research

As issues around participation of PE funds get resolved they will ultimately become strong alternate avenues for raising equity for infrastructure projects19.

19 During our discussion with PE funds, it was understood that the critical factors they consider for investing to projects are three - 1. Promoter Group 2. Exit options


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5.2.3 Equities Market as a Source

Equities market is highly liquid in India at the moment and is scaling new heights. A strong secondary market has seen unprecedented interest from retail investors leading to a large number of companies tapping the primary market. Infrastructure companies in India too have been tapping the equity market through issuing shares for the holding companies in the primary markets. Interest in the stock issuances of the holding companies has been strong. However, here too the issue of DDT deters promoters from taking out equity because of DDT.

The growth story in infrastructure sector has also attracted Mutual Funds. Many MFs have started infrastructure focused fund where funds are invested in different sub-sectors of infrastructure. MFs so far have around USD1.65 billion of AUM in different infrastructure funds as presented below-

Exhibit 25: Infrastructure fund by Mutual Funds

# Fund name AUM (USD Million)

1. Reliance Diversified Power Sector Fund 207.2

2. ICICI Prudential Infrastructure Fund 380.4

3. DSP Merrill Lynch T.I.G.E.R. Fund 347.1

4. JM Basic Fund (Energy) 2.4

5. Birla Infrastructure Fund 100.8

6. UTI Infrastructure Fund 203.6

7. Tata Infrastructure Fund 293.0

8. Principal Infrastructure and Service Industries Fund 57.3

9. Sahara Infrastructure Fund 3.4

10. UTI Petro Fund 36.7

3. Equity Returns Strength and reputation of the promoter group is a factor that influences PE firm’s investment to some extent. However,, the most important aspect considered before finalisation of their investment is the exit options available. Many of these PE firm would like to exit their investment much quicker than it can currently happen in the infrastructure sector. Essentially most of the infrastructure investment requires them to stay invested for 10 to 12 years while they prefer to exit the investment in not more than 6 to 7 years. PE firm’s investment in infrastructure currently is mostly in the holding company of the infrastructure SPVs. They either invest in the developer company directly (mostly unlisted companies) or approach a listed company and take the preference share. This is because their investment at Holding company level not only gives them the high returns but also options for exit and a diversified risk portfolio. However,, there are instances of private equity fund investing directly in project SPV. For example, IDFC private Equity Fund has invested directly in Delhi International Airport and Pipavav Port. PE firms have also invested in Gujarat State Petronet Limited. PE funds normally invest at SPV level when returns on investment are very lucrative. Generally the desired returns on the investment by PE fund are over 20%. It may also be noted from the above table that most of investment under PE segment has been made by IDFC Private Equity which has raised fund from overseas institutions like- ADB, KfW and Pension Funds. Since gestation period in infrastructure projects is long, PE funds like to invest in such companies which are not listed and have potential to grow. The idea is to invest in an unlisted company, grow the business to a level and exit the investment with premium after getting the company listed. With the success of IDFC in PE space, many other players like- ACTIS & UTI have announced their plans to create similar funds for investment in infrastructure segment. As more and more such funds are established, it would assist a great deal in infrastructure development by way of meeting equity requirements of the developers.


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11. Can Infrastructure 17.6

12. JM Telecom Fund 2.0

Total 1651.7

Source- PARK Financials Advisors Ltd

However, definition of infrastructure is very wide for MFs. Infrastructure here includes many other sectors which have not been included in our study like – Oil & Gas, Cement, and Capital Goods etc. For the core infrastructure sectors the mutual funds currently invest only in publicly traded shares of holding companies. MFs provide another and possibly safer route for investors to participate in the infrastructure sector.

To increase the flow of investment in infrastructure sectors through tapping the institutional and retail investors Government of India is promoting the launching of Dedicated Infrastructure Funds (DIFs). The report of the committee established to suggest guidelines for operations of such funds has recommended that the DIFs will invest in the unlisted shares of infrastructure SPVs. The fund will operate as a close ended scheme of seven years with a possibility for extension and will be listed. The proposal shows how seriously the Government is working to bring about new avenues for increasing the level of equity available for infrastructure projects. The present proposal has a series of issues relating to concentration of risks and lack of returns to justify the risks. However, we feel that the proposal will be developed further to bring about a robust scheme.

In addition to these efforts to increase the level of availability of equity for Indian developers another way of spurring on the financing of infrastructure projects is to attract international developers in India. International developers will be able to bring with them much needed equity. The next section highlights this.

5.2.4 Role of International Developers

Currently International developers play an insignificant role in the development of infrastructure in India. The exceptions are a few instances of investment by international developers like Dubai Ports mainly in the ports sector. However, an increased role for such players will help, as these players will be able to tap project equity from their global operations.

International developers look for various comfort factors in a market before entering and investing in it. These comfort factors generally include the following:

• Legal and Regulatory framework i.e. the BOT Legislation, Road Fund Governance, NHAI autonomy and authority, Regulation of Traffic. In India while there a lot of the legislation exists there is still ambiguity in terms of Road Fund Governance and NHAI’s autonomy and authority.

• Currency risk, Local Financial markets and Taxation issues: i.e. infrastructure projects will have Rupee revenues which are very volatile and Bond market not well developed in India.

• Size of the projects: In India NHDP has individual project sizes that are generally too small to attract international investors.

• Return expectations of international developers vary with risk perceptions of a country. Risk perception of Foreign Investors increases as they venture out of familiar markets and increases exponentially in case of emerging markets like India because of greater uncertainty

Despite some uncertainty about certain factor for India, lot of international developers (UK and Spanish developers) have shown interest in investing in India. NHAI is also looking to


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bring out larger projects and this is likely to encourage international invertors to invest in Roads sector.

5.3 Conclusion

This report demonstrates that securing infrastructure financing for USD 320 billion worth of infrastructure requirement will prove challenging. The private sector has been playing an increasingly strong role in the development of infrastructure through the PPP route. But to continue growing several innovations will be needed in the way projects are financed in India.

New sources of funding need to be developed on both the debt and equity side. The current sources of financing in the form of commercial bank financing of debt requirements and equity from promoters have performed admirably in funding PPP projects and will continue to do so in the years to come. However, to take up a significant share of the infrastructure financing requirement through the PPP route these sources will need supplementing. Also possible impediments will need to be removed so that the current sources of debt and equity can be utilized more effectively.

This report has highlighted the issues around the current sources of debt and equity through evidence from an extensive primary survey. This is the unique contribution of this report for this is the first time such an exercise has been attempted at this scale. The report has also suggested areas in which changes need to happen to tackle the issues emanating form the reliance on current sources of infrastructure financing.

We feel that this report will significantly add to refining of policies needed to build a more robust infrastructure financing market in India as it is grounded on empirical data. This report presents the key aspects of financing. However, there is a significant level of other information which we have collected on PPP infrastructure development in India which has been either presented through annexure or through presentation to the Ministry of Finance, World Bank and other relevant stakeholders.


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6 Annexure 1 - Process for Selection of PPP Infrastructure Sectors for the Detailed Study

6.1 What is Infrastructure?

A more comprehensive definition of infrastructure has been provided by UNESCAP as - a term used to refer to the basic architecture of any system; mechanical, social, political or cultural. The expanded definition of infrastructure includes transport (for example Roads, Railways, Ports and Airports), public utilities (for example Power and Water Supply), public services (for example fire service, flood protection, police), national services (for example the defence, monetary and postal systems and the legal and regulatory system) along with “soft infrastructure,” which denotes institutions that maintain the health and cultural standards of the population (for example public education, health and social welfare).20

In India there is no one widely accepted definition of infrastructure mostly because no Government agency has clearly specified it. However, Government agencies do specify the sectors which fall under their definition of infrastructure. In the absence of any clear, all-accepted, common definition of infrastructure we use these sectors as surrogates for a direct definition of infrastructure.

20 http://www.unescap.org/pdd/ publications/ themestudy2006/ 8_ch2.pdf#search=%22definition% 20of%20infrastructure%20oxford%22


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A comparison of the sectors considered to be forming infrastructure as per definitions by various agencies is given in the following table:

Exhibit 26: Sectors Considered by Infrastructure Definitions by Various Agencies

Agency

Definition details

Ministry of Finance

Twelfth Finance Commission

(Infrastructure Index)

Ministry of Statistics and Programme

Implementation

Committee on Infrastructure, Planning

Commission Reserve Bank of India State Bank of India

Importance / Objective of the Organisation

Economic survey of India :A survey carried out every year under the Ministry of Finance for

Finance Budget

Study to rank states in terms of their level of infrastructure development

Central Government organisation responsible for planning integrated development of the statistical system in the country development

Planning commission is responsible for planning and allocation of plan fund for different projects. Committee on infrastructure has a mandate to initiate policies on PPP in Infrastructure

Controls and regulates the issue of Bank Notes, reserves, and currency & credit system in India

The largest commercial bank in India having largest lending portfolio in project finance in India

Sectors Included

Transport √ √ ½ √ √ √ √

Energy √ ½ √ ½ √½ √½ √ √

Communication √ √ √½ √ √ √

Urban Infrastructure X X X X √ X

IT X X X X √ X

Real Estate/ Industrial Parks

X X X X √ X

Sub Sectors Included • Power

• Highways and roads, railways, ports, airports, urban transport. (Steel and cement industry have been

• Power Generation, Transmission , Distribution

• Telecom

• Roads, Railways,

• Power

• Coal

• Steel

• Railways

• Ports

• Highway,

• Railway,

• Ports,

• Airports,

• Telecom,

• Highway, toll road, a bridge or a rail system, port, airport, inland waterway or inland port

• irrigation, water treatment system, sanitation and sewerage system or solid waste management system

• Road, urban infrastructure, ports and airports,

• Power and utilities, Oil & Gas, other natural resources,

• Telecommunications


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considered to as industries that contribute heavily to infrastructure development)

• Telecom, post,

Private Transport

• Telecommunications

• Fertilizers

• Cement

• Petroleum

• Airports

• Roads

• Power • basic telephony or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services;

• power generation, transmission and distribution

Source of Definition Infrastructure Chapter of the Economic Survey report 2004-2005

Capsule Report on Infrastructure Sectors Performance (April 2005)

http://infrastructure.gov.in Guidelines on infrastructure financing” issued by RBI vide its Order No. DBOD. No. BP. BC. 67 / 21.04.048/ 2002- 2003 dated 4th February 2003

Project Finance -Strategic Business Unit of State Bank of India

Note: ½ though the sector is included but all its sub-sectors are not included


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6.2 Defining PPP Infrastructure for this Study

For defining infrastructure for the purpose of this report we start with taking a comprehensive approach to the definition of infrastructure, basing it on as many relevant sectors as is done commonly by the Government agencies highlighted in the table above.

However, for analysis in this report we have not included all the above sectors as the focus of this report is on PPP infrastructure projects in particular and not on all infrastructure projects. And in India PPP have not taken place in all infrastructure sectors and not all sectors are looked upon as equally amenable to PPP.

Government of India has specifically defined PPP in the “Scheme for financial support to Public Private Partnerships in Infrastructure” (also commonly known as Viability Gap Funding or VGF) as follows –

“PPP 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.”

Public Private Partnerships

The understanding on PPP is also different across different countries. Some of these definitions are as follows:

Government of Australia defines PPP as:

A PPP can be described as a collaboration between the public and private sector to provide significant public infrastructure (or other facilities and services based on such infrastructure or facilities) premised on the allocation of risk to the party (either Government or the private sector) best able to manage it. The development of a policy supporting a PPP arrangement provides a structured framework for the procurement of Government social and economic infrastructure.

Ministry of Finance, Singapore defines PPP as:

PPP refers to long-term partnering relationships between the public and private sector to deliver services. It is a new approach that Government is adopting to increase private sector involvement in the delivery of public services.

Government of United Kingdom defines PPP as:

In UK PPP is more often referred to as PFI i.e. Private Finance Initiative. Private Finance Initiative (PFI) projects are arrangements where the public sector contracts to purchase quality services on a long-term basis so as to take advantage of private sector management skills incentivised by having private finance at risk. This includes concessions and franchises, where a private sector partner takes on the responsibility for providing a public service, including maintaining, enhancing or constructing the necessary infrastructure. Sometimes PFI is considered a form of PPPs other time it is used interchangeable with PPPs.

Government of Germany defines PPP as:

The German Government defines PPP as cooperation between the public and the private sector based on the following key aspects:

• Long-term contractual relationship,

• Lifecycle approach (combination of construction and operation services),

• Risk-transfer to the private partner (optimisation of the allocation of risk between public and private partner),

• Functional specification of services, appropriate scope for management decisions,

• Incentive and penalty mechanisms to achieve cost efficiency."

Source: World Bank and Individual Government Websites and PwC Research


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The guidelines define PPP in the infrastructure sectors (Roads & Bridges, Railways, Ports, Airports, Power, Urban Infrastructure, Water, Solid Waste Management, Sewerage, and Special Economic Zone) as eligible for Viability gap funding under the scheme.

To draw the boundary on the sectors to be included in the study, we consider those sectors which meet the following 5 criteria:

1. Sectors which have been defined as PPP in India (under VGF, etc),

2. “Level of commercialisation”: by which we imply level of existing privatisation and whether there is a scope for a public-private partnership. For example, telecom sector is largely private and we believe that it does not provide best model to study issues for PPP financing.

3. Existence of a significant number of PPPs in India in that sector,

4. Level of public authority executing the PPP project and

5. Scale of investment on the PPP project21

We use these criteria to identify the infrastructure sectors (sub-sectors) for this assignment. The figure below explains these criteria in more detail.

An additional criterion that has been used only for Urban Infrastructure projects is looking at PPP projects in only those cities with a population of 1 million or more.

The final list of sectors to be included and hence the list of projects to be studied is arrived at by applying the above mentioned criteria to the comprehensive list of infrastructure sectors and sub-sectors. The sectors included in our study based on the above mentioned criteria are marked as √ in Exhibit 27.

21 In some countries like Germany, the accommodation sector (e.g. schools, administration buildings, town halls, sport centres, day care centres) is a major area of PPPs. However, we have not included these sectors since they do not meet the criteria of scale of investment and level of authority involved.

VGF guidelines defines some PPP infrastructure sectors and we take the definition.

Infrastructure sectors which are already prominent in India are not included but others are.

Sector defined asPPP in India

Sector defined asPPP in India

Stage of Development

Stage of Development

Existence ofPPP in India

Existence ofPPP in India

Level ofAuthority

Level ofAuthority

Scale ofInvestment

Scale ofInvestment

Sectors in which a medium or large number of PPP projects exist are included.

PPPs in infrastructure can be important irrespective of the level of public authority.

Infrastructure sectors with an investment of less than $1 million are not included.

Definitions

ExamplesSome examples of sectors included are roads, power etc. while some sectors not included are health, education etc.

Sectors such as housing, telecom etc. already have a momentum of their own in India are classified as advanced and not included

Sectors such as airports and roads are included but SEZs, due to a small number of PPPs are not included.

Sectors in which PPP contracts are typically entered into by ULBs , e.g. some solid waste management projects, are also included.

We posit that infrastructure projects below that size are not very complex projects and are not thus not very relevant from the point of view of this study.


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Exhibit 27: Selection of Sectors

Criteria

Sector

Existence of PPPs in India

Level of authority handling the project

Scale of Investment

Is the sector named under Indian PPP scheme?

Level of Commerciali

sation

Final selection in the

scope of the study

Transportation

• Roads & Highways & Bridges

High Centre /State

High Yes Intermediary ��

• Railways Low Centre High Yes Preliminary ��

• Airports Medium Centre High Yes Intermediary ��

• Ports Medium Centre /State


• Mass transport (bus) High (Open Competition)

State High No Advanced X

• Mass transport (rail) Low Centre /State

High No Advanced X

• Mass transport (Airlines) High (Open Competition)

Centre High No Advanced X

• Mass transport (Ship, ferry and barge)

High (Open Competition)

State High No Advanced X

Energy

• Power22

o Generation High (Open Competition)

Centre /State

High Yes Intermediary �� (LIMITED EXTENT)

o Transmission Low Centre/ State


o Distribution Low State High Yes Intermediary ��

• Oil and Gas:

o E&P High (Open Competition)


o Transmission High Centre High No Advanced X

o Distribution (piped and retail)

Low Centre High No Advanced X

Urban Infrastructure

• Water Supply23

22 In case of power, only those new IPPs will be considered which are formed through SPVs and which provide an opportunity to understand refinancing, financial restructuring, etc. Other private IPPs, captive power plants which are balance sheet financed will be excluded.


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o Treatment Low State/ULB Low Yes Preliminary ��

o Transmission Low State/ULB Low Yes Preliminary ��

o Distribution Low ULB Low Yes Preliminary ��

• Waste water

o Disposal Low ULB Low Yes Preliminary ��

o Treatment Low ULB Low Yes Preliminary ��

• Solid Waste Management Medium ULB Low Yes Preliminary ��

• SEZ Low (Open Competition)

State High Yes Intermediary X

• Housing /real estate High (Open Competition)

State /ULB High Yes Advanced X

Telecommunication High (Open Competition)


23 If a water supply system caters water to general public as well as industrial units, the same will be considered. However, when such a system is built up dedicated for specific bulk industrial water consumers, the same has been excluded from the survey and analysis.


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7 Annexure 2 - Approach and Methodology of the Study To achieve these objectives a detailed methodology was discussed and agreed upon during the inception stage. This is pictorially depicted in Exhibit 28.

Exhibit 28: Project Methodology

Briefly, the methodology depicted above had the following steps:

Inception Stage

Defining Infrastructure

Defining PPP

Defining PPP Infrastructure

Developing Methodology

Analysis of Information Gathered

Phas

e I

Financing Details of Existing PPP

Infrastructure Projects

Survey and Interview Tools

Views & Expressions of Stakeholders

Phas

e II

Project Survey Analysis Stakeholder Interviews

Identification of Key issues on PPP Infrastructure Financing

Phas

e III

Debt Side Equity Side

Second Round of Stakeholder Interviews

Recommendations Debt Side Recommendations Equity Side

Stakeholder Workshop

Finalisation of the Recommendations


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1. As the first step the work involved short-listing projects from the entire universe of PPP infrastructure projects in India that we would survey for the purpose of this study. This was done through a step by step selection & elimination process described below:-

a. Selecting sectors to be included in the infrastructure project list, as there is no one widely accepted definition of infrastructure or the sectors it encompasses in India. This was done by comparing the definition of infrastructure & its sectors adopted by various Government agencies and arriving at the final list of sectors. The sectors that were short-listed for this study include:

i. Roads & Highways;

ii. Railways;

iii. Airports;

iv. Ports;

v. Water treatment, Transmission and Distribution;

vi. Waste Water and Solid Waste;

vii. Power Distribution and Transmission

b. The list of projects arrived at went through a process of elimination for projects that do not fall under the definition of PPP. The term ‘PPP in infrastructure’ is wide ranging and covers a number of ways in which the Government & private parties collaborate, invest and share risks to develop and/or operate and maintain infrastructure services. A lot of PPP’s however, like construction contracts to private contractors, lack any element of risk sharing built into them thus these interactions should not be mistaken for a PPP and were removed from the list.

2. Survey tools were then designed in consultation with the World Bank and the DEA for conducting interviews and collecting information on the short-listed projects. Two types of tools were used for the surveys.

a. Project Questionnaire for project financing information collection; and

b. Interview questionnaire for interviews of the key stakeholders.

3. The project information collected was then documented, analysed and presented in two levels. (Data coverage and characteristics is presented In Annexure 3)

a. Level one- involved analysing the PPP landscape in the country. This analysis was based on the basic project information available for the short-listed 231 projects (Please Refer 7.2 List of PPP Projects).

b. Level two- involved analysing the detailed financial information collected for a sample of 104 projects. This section presents the specific trends observed in the financing of PPP infrastructure in the country and substantiates our findings with views got from interviewing the various players involved. (Please refer 7.1 List of Interviews Conducted).

Assumptions for the project data analysis are also summarised in Section 7.4 Assumptions.

4. Analysis of interview information helped in understanding the key issues and priority attached to these issues by the stakeholders. Interviews were conducted through semi structured questionnaires which were a combination of qualitative and open-ended questions, designed to identify and capture interviewee’s needs, views and preferences across a broad range of issues and topics relevant to infrastructure financing in India.

5. Certain key issues on the debt and equity side have been identified from the analysis of the project database and inferences from stakeholders’ interviews. These key issues


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have been detailed out in this report. Subsequently, various options for removing the constraints have also been suggested and presented for both the debt and equity side.

6. These issue and the suggestions were then discussed with few select key stakeholders in the second round of interviews. This led to making more specific suggestions.

7. It is proposed that, further to the submission of this report and acceptance by the Department of Economic Affairs (DEA) Ministry of Finance, a workshop will be conducted where the report will be discussed with the key stakeholders. Subsequent to incorporation of the views of the key stakeholders, the final report will be submitted.

7.1 List of Interviews Conducted

# Type Organisation 1. Developer & FI IL&FS

2. Developer/ SPV Amma Lines

3. Developer/ SPV Balaji Infra Projects Ltd

4. Developer/ SPV Balaji Leasing & Industries Co. ltd

5. Developer/ SPV Bangalore International Airport Ltd

6. Developer/ SPV DS Constructions

7. Developer/ SPV Dubai Port International 8. Developer/ SPV Gangavaram Port Ltd.

9. Developer/ SPV GE Infrastructure

10. Developer/ SPV GMR Hyderabad International Airport Ltd. 11. Developer/ SPV GMR Infrastructure Ltd

12. Developer/ SPV Gujarat Pipava Port Limited 13. Developer/ SPV GVK

14. Developer/ SPV GVK (Alaknanada Hydro Power Company Ltd.)

15. Developer/ SPV Ideal Road Builders Private Limited

16. Developer/ SPV IDeCK (Infrastructure Development Corporation of Karnataka)

17. Developer/ SPV Macquarie Bank

18. Developer/ SPV Marg Constructions Ltd.

19. Developer/ SPV Nagarjuna Construction Company Limited

20. Developer/ SPV Nandi Infrastructure Corridor Enterprise Ltd

21. Developer/ SPV Noida Toll Bridge Company Limited

22. Developer/ SPV Petronet LNG

23. Developer/ SPV Ramky Enviro Engineers Ltd.

24. Developer/ SPV Ramky Infrastructure Ltd.

25. Developer/ SPV Reliance Energy

26. Developer/ SPV Road Infrastructure Development Company of Rajasthan Ltd (RIDCOR)

27. Developer/ SPV Veolia Environmental Services (earlier CES Onyx)

28. Developer/ SPV Zoom Developers

29. Financial Institution Bank Of Baroda

30. Financial Institution Canara Bank

31. Financial Institution DCB

32. Financial Institution ICICI

33. Financial Institution ICICI Bank

34. Financial Institution India Infrastructure Finance Company Limited (IIFCL)

35. Financial Institution Industrial Development Bank of India Ltd. (IDBI Bank) 36. Financial Institution Industrial Finance Corporation of India

37. Financial Institution Infrastructure Development Finance Company Limited (IDFC) 38. Financial Institution Life Insurance Corporation of India

39. Financial Institution NV Advisory Services Private Limited


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40. Financial Institution Old Lane (Private Equity Firm)

41. Financial Institution Power Finance Corporation 42. Financial Institution PPIAF

43. Financial Institution Royal Bank of Scotland London Office

44. Financial Institution State Bank of India – Corporate Banking and Project Finance (SBI) - SBI Caps

45. Financial Institution State Bank of India (SBI)

46. Financial Institution State Bank of India Lending Division

47. Financial Institution State Bank of India Resources Division

48. Financial Institution UTI Bank-Infrastructure Division

49. Government Agency Airports Authority of India (AAI) 50. Government Agency APIIC

51. Government Agency APRDC

52. Government Agency Chennai Municipal Corporation

53. Government Agency Cochin International Airport

54. Government Agency Cochin Port Trust 55. Government Agency Department of Economic Affairs, Ministry of Finance, Government of

India 56. Government Agency Ennore Port Trust Ltd

57. Government Agency Government of Karnataka 58. Government Agency Government of Karnataka

59. Government Agency Gujarat Infrastructure Development Board (GIDB) 60. Government Agency Gujarat Maritime Board

61. Government Agency Gujarat State Road Development Corporation

62. Government Agency InCAP

63. Government Agency Karnataka PWD Department

64. Government Agency Karnataka Road Development Corporation

65. Government Agency Karnataka Urban Infrastructure Development & Finance Corporation

66. Government Agency KSIDC

67. Government Agency Maharashtra Maritime Board

68. Government Agency Maharashtra State Road Development Corporation (MSRDC)

69. Government Agency Ministry of Civil Aviation

70. Government Agency Mumbai Metropolitan Region Development Authority (MMRDA) 71. Government Agency National highway Authority of India (NHAI) 72. Government Agency New Delhi Municipal Corporation (NDMC)

73. Government Agency New Tirupur Area Development Corporation Ltd.

74. Government Agency PowerGrid Corporation of India

75. Government Agency Public Works Department (PWD) Rajasthan

76. Government Agency Public Works Department (PWD) Madhya Pradesh

77. Government Agency Punjab Infrastructure Development Board (PIDB)

78. Government Agency Rail Vikas NIgam Limited (RVNL)

79. Government Agency Rajasthan State Roads Development and Construction Company (RSRDC)

80. Government Agency Tamil Nadu Industrial Development Corporation (TIDCO)

81. Government Agency Tamil Nadu Urban development Fund (TNUDF)

7.2 List of PPP Projects

We have taken following projects as complete set of PPP Projects in India (Total Number, 231 Total Value USD15.8. billion), which have achieved financial closure. It is to be noted that this list consists of projects from sectors chosen for this study and projects which are


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larger than USD1 million in size. Urban projects which are in cities smaller than 1 million in population are not considered.

# Sub-Sector Project Name 1. Airports Delhi International Airport (DIAL) 2. Airports Hyderabad International Airport 3. Airports Bangalore International Airport 4. Airports Mumbai International Airport (MIAL)

5. Ports Multipurpose berths at Visakhapatnam Port EQ8 & EQ9 (2 MT) 6. Ports Multipurpose General Cargo Berths 5A and 6A (5 MT), Mormugao 7. Ports Dahej Solid cargo terminal 8. Ports Hazira LNG Terminal 9. Ports Pipavav Port 10. Ports Jawaharlal Nehru Port Trust-Container Terminal III 11. Ports Multipurpose berth No.12 (0.50 MT/35000 TEUs) , Haldia 12. Ports Container Terminal at Multipurpose Berth outer harbour (4.8 MT),

Vizag 13. Ports Gangavaram Port 14. Ports Kakinada Port 15. Ports Krishnapatnam Port 16. Ports Dahej LNG Terminal 17. Ports Mundra Port (Development of Jetty, Approach Road, Railway Line

from Adipur to Mundra, Quay and related works) 18. Ports Karaikal Port 19. Ports Development of Container terminal (3.6) Mt at Tuticorin Port, Tamil

Nadu 20. Ports Development, Construction, Operation and Management of

International Container Transhipment Terminal at Vallarpadam, Cochin 21. Ports Jawaharlal Nehru Port Trust-Container Terminal I 22. Ports Multipurpose Berth No.4 A at Haldia (1.5 MT) 23. Ports Container Terminal at Chennai Stage 1 - 600 m Berth (5.60 MT) 24. Power Distribution Delhi distribution privatisation South West 25. Power Distribution Delhi distribution privatisation North West 26. Power Distribution Delhi Distribution Privatization Central Zone 27. Power Distribution Orrisa Distribution privatisation of CESCO

28. Power Distribution Orrisa Distribution privatisation of WESCO, NESCO & SOUTHCO 29. Power Transmission Transmission system associated with Tala HEP, East-North

Interconnector and Northern Region Transmission system

30. Railways Gandhidham-Palanpur GC project 31. Railways GC of Hassan-Mangalore metre gauge section 32. Railways Viramgam-Mehsana 33. Railways Surendranagar Mahuva Gauge Conversion 34. Roads & Bridges Ahmedabad - Mehsana Road 35. Roads & Bridges Vadodara - Halol Road 36. Roads & Bridges Development of Bypass Roads for Sandur Town Bellary district Under

Direct Tolling System 37. Roads & Bridges Four laning of Bangalore Mysore Road (Bangalore Maddur) 38. Roads & Bridges Widening and strengthening of Wadi Raichur Road 39. Roads & Bridges Development of New Mattancherry Bridge Build – Operate – Transfer

project in Cochin 40. Roads & Bridges Trivandrum City Road Improvement Project 41. Roads & Bridges Dewas-Ujjain-Badnagar-Badnawar Road 42. Roads & Bridges Hoshangabad-Piparia-Pachmarhi Road 43. Roads & Bridges Indore-Sanawad-Burhanpur-Edlabaad Road 44. Roads & Bridges Jabalpur-Narsinghpur-Pipana Road 45. Roads & Bridges Katni Bypass 46. Roads & Bridges Rewa-Jaisinghnagar-shahdol-Amarkantak Road


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47. Roads & Bridges Sagar-Damoh-Jabalpur Road 48. Roads & Bridges Satna-Maihar-Tala-Umaria Road 49. Roads & Bridges Seoni-Balaghat-Gondia Road 50. Roads & Bridges Ujjain-Agar-Susner-Jhalawad Road 51. Roads & Bridges Vadgaon Chakan Shikrapur repair work 23 Km Stretch 52. Roads & Bridges National Highway No 4, Mumbra Valan 5.4 Km Stretch, 4 Subways

and 1 ROB 53. Roads & Bridges Punjab Road Sector Project, Phase 2,Tranche III Development of

Dakha - Raikot - Barnala Road Project Road on BOT Basis 54. Roads & Bridges Bharatpur Bye Pass 55. Roads & Bridges Construction of Four lane road with Median strip of 1.2 mt. wide on

Bar-Bilara-Jodhpur Road SH-5 (km.90/0 to 105/0) 56. Roads & Bridges Construction of Kelva – Amet Road km. 0/0 to 18/0. 57. Roads & Bridges Construction of Nimbahera Bye Pass on NH-79 (Ajmera-Bhilwara-

Chittorgarh-Nimbhera-Ratlam-Indore Road) (km.209/087 to 217/400) 58. Roads & Bridges Construction of Pali Bye Pass on Jodhpur – Sumerpur Road NH-65 at

km.366 59. Roads & Bridges Construction of Udaipur Bye Pass Phase II 60. Roads & Bridges Improvement & Strengthening of Hanumangarh-Suratgarh road via

Peelibanga Km. 0/0 to 26/0 61. Roads & Bridges Improvement of Alwar-Bhiwari Road SH-25 (km.146/0 to 225/0) 62. Roads & Bridges Improvement of Banaswara-Udaipur Road SH-32 (Km.91/500 to

165/0) 63. Roads & Bridges Improvement of Jhalawar-Indore Road SH-1A (strengthening &

widening km.9/700 to 29/900), 6.0 km. away from Patan to State Border

64. Roads & Bridges Improvement of Manglana –Makrana Road (km.400/0 to 415/0 and Makrana – Bidiyad Road km.0/0 to 6/0).

65. Roads & Bridges Improvement of Sirohi-Mandar-Deesa Road SH-27 upto State Border (km.214/0 to 268/400)

66. Roads & Bridges Pali Bye Pass 67. Roads & Bridges Sikar Bye Pass 68. Roads & Bridges Upgradation/Strengthening & Renewal of SH-32 Udaipur-Salumber-

Banaswara Road (Km.5/0 to 72/0) 69. Roads & Bridges Widening & Improvement Kama – Nandgaon-Kausi Road 56/200 to

64/200 70. Roads & Bridges Widening & Improvement of Dantiwara – Piper City- Merta City Road

(Km.0/0 to 26/500) 71. Roads & Bridges Widening & Strengthening & Improvement of Mangalwar-Nimbhahera

Road (Km.0/0 to 40/0) 72. Roads & Bridges Widening & Strengthening of Challa-Neem-ka-thana-Kotpuli Road SH-

13 and MDR-25 (km.64/800 to 125/0) 73. Roads & Bridges Widening & Strengthening of Sikar-Jhunjunu-Loharu Road SH-8

(km.0/0 to 119/700) 74. Roads & Bridges Widening and Strengthening of Sri Ganganagar – Hanumangarh Road

SH-36 (km.1/500 to 56/0) 75. Roads & Bridges Widening Strengthening & Improvement of Nasirabad-Kekri-Deoli

Road SH-26 (km.25/0 to 56/500) 76. Roads & Bridges Construction of Additional two lane bridge and improvements to the

existing bridge across river Korathalayar at Km.26/4 of N.H.5

77. Roads & Bridges Karur Toll Bridge by Tamil Nadu Urban Infrastrucsture Financial Services Ltd., (TNUIFSL)

78. Roads & Bridges Satara - Kagal km 725 - km 592.24 Maharashtra

79. Roads & Bridges Tumkur - Neelmangala km 62 - km 29.5 Karnataka 80. Roads & Bridges Maharastra Border-Belgaum km 592 - km 515 Karnataka 81. Roads & Bridges Hyderabad Bangalore section (NS-2/BOT/AP-5)/ Km 135.469 to Km

211/ Andhra Pradesh 82. Roads & Bridges Aadloor Yellareddy to Gundla Pochampalli (NS-2/BOT/AP-2) Km 367


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to Km 447/ Andhra Pradesh 83. Roads & Bridges Tuni - Dharmavaram (AP-16) km 300 - km 253 Andhra Pradesh 84. Roads & Bridges Dharmavaram - Rajahmundry (AP-15)/ km 253 -km 200/ Andhra

Pradesh 85. Roads & Bridges Nellore Bypass km 178 .2- km 161 Andhra Pradesh 86. Roads & Bridges Nellore - Tada (AP-7) km 163.6 - km 52.8 Andhra Pradesh 87. Roads & Bridges Rajkot Bypass & Gondal Jetpur (Package-VII)/ km 185.00 to km

175.00/ Gujarat 88. Roads & Bridges Thrissur to Angamali (KL-I)/ Km. 270.000 to Km. 316.70/ Kerala 89. Roads & Bridges Nandigama – Vijayawada/ Andhra Pradesh 90. Roads & Bridges Strengthening and Improvement of Mangalwar - Nimbahera- Neemuch

(km 40 to 50) 91. Roads & Bridges Strengthening and Improvement of Sirohi - Anadara - Reodar-

Mandar Road 92. Roads & Bridges Widening Strengthening & Improvement of Nasirabad-Kekri-Deoli

Road SH-26 (km.25/0 to 56/500) 93. Roads & Bridges Bhiwandi Chinchoti , Repair of 22 KM Strecth 94. Roads & Bridges Bhiwandi - Repair of 18.35 Km Stretch 95. Roads & Bridges Vadgaon Chakan - 30 Km Repair work 96. Roads & Bridges Malhar Peth Pandarpur - 36 Km Repair work 97. Roads & Bridges Pune - Ahmednagar 4 lanning 98. Roads & Bridges Vellhe Shrikrapur Jijuri Nera Lonand 7.27 Km, 1 bridge, 1 ROB 99. Roads & Bridges Nagpur Vardha Yevatmal - Bridge on Krishna River 100. Roads & Bridges Seri Talayajval - Bridge on Krishna River 101. Roads & Bridges Ahmednagar Karmala Temuni Repair of 59 Km Stretch 102. Roads & Bridges Mohol Kurul Kamdhi Repair work for 24 Km Strech

103. Roads & Bridges Pandarpur Bypass Repair work - 10 Km Stretch 104. Roads & Bridges Pandarpur Mohol - Repair of 11.12 Km 105. Roads & Bridges Pune - Pond repair of 31.8 Km Stretch 106. Roads & Bridges Ahmednagar Karmala (Sholapur Dist) Temuni 6.56 Km Stretch with a

Bridge 107. Roads & Bridges Sholapur Dist a) Mangalveda Vijapur repair b) Begampur Mangalveda

( Total 31.85 Km)

108. Roads & Bridges Sholapur Dist - Kuduvadi Latur 1 Railway ROB and 4.83 Km Stretch 109. Roads & Bridges Surat Dhule Edlabad - 5.1 Km Stretch 110. Roads & Bridges Nashik to Sukedi Phata 15 Km Stretch and 1 ROB 111. Roads & Bridges Prakasha-Chadvel-Samoda-Vindur, 76 Km Stretch and 3 Bridges 112. Roads & Bridges Ahmednagar Karmala 70.60 Km Stretch Repair work 113. Roads & Bridges Ahmednagar - Dond 44.6 Km Stretch Repair work 114. Roads & Bridges Ahmednagar - Takli - kajhi - Bhum , Repair and Maintainance of 41

Km stretch and 2 Bridges 115. Roads & Bridges Nasik Vani - Repair of 44 Km Stretch 116. Roads & Bridges Jalgaon Neri Puhur repair work for 48.4 km Stretch 117. Roads & Bridges Muktanagar - Banhanpur repair work for 31.4 Km Stretch 118. Roads & Bridges Tuljapur Ugni - repairework for 28.5 Km 119. Roads & Bridges District Nanded, Sirur Mukhed Narsi Bilol, Repair work for 32 Km

Stretch 120. Roads & Bridges Nanded - Narsi Reapairwork for 43 Km Stretch 121. Roads & Bridges Nanded - Ardhapur - Varnaga 30 Km Stretch 122. Roads & Bridges Nagpur - APMC Market and Ring Road Connecting Road Repairwork

for 8.2 Km Strech 123. Roads & Bridges Devri - Sirpur reapirwork for 13.4 Km Stretch 124. Roads & Bridges Varil Bandra 4.11 Km of Road Stretch and 1 Bridge on Vanganga 125. Roads & Bridges Thane-Bhiwandi Bypass 126. Roads & Bridges Construction of additional 2-lane with tunnel in Khambatki Ghat on NH

4 127. Roads & Bridges Construction of Six Bridges


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128. Roads & Bridges Kosasthalyar Bridge 129. Roads & Bridges Wainganga Bridge 130. Roads & Bridges Mahi Bridge 131. Roads & Bridges Bridge across river Watrak 132. Roads & Bridges Narmada bridge 133. Roads & Bridges Patalganga Bridge & ROB 134. Roads & Bridges 4-laning of Pune-Sholapur road Km. 14/00 to 40/00 of NH 9 135. Roads & Bridges Construction of Bridge across Pinglai river in km 113/800 on NH 6 136. Roads & Bridges Pune-Nasik( Khed) (km 12.90 to 42.00) 137. Roads & Bridges Nardhana ROB

138. Roads & Bridges Chalthan Road Over Bridge 139. Roads & Bridges ROB at Derabassi 140. Roads & Bridges Nasirabad ROB 141. Roads & Bridges 4-laning of Raipur-Durg section of NH 6 from Km. 282.0 to Km.308.6

in the State of Chhatisgarh 142. Roads & Bridges Bhuj-Nakhtrana Road 143. Roads & Bridges Chhayapuri ROB 144. Roads & Bridges Himmatnagar bypass 145. Roads & Bridges Kim Mandvi Road 146. Roads & Bridges Western Expressway 147. Roads & Bridges Hoshangabad-Harda-Khandwa Road 148. Roads & Bridges Raisen-Rahatgarh Road 149. Roads & Bridges Upgradation, Operation and Maintenance of Patiala - Malerkotla Road

on B.O.T.Basis 150. Roads & Bridges Upgradation, Operation and Maintenanceof Balachaur Dasuya Road

on B.O.T.Basis 151. Roads & Bridges Upgradation, Operation and Maintenanceof Hoshiarpur - Tanda Road

on B.O.T. Basis 152. Roads & Bridges Upgradation, Operation and Maintenanceof Kiratpursahib - Una Road

on B.O.T. Basis 153. Roads & Bridges Upgradation, Operation and Maintenanceof Patiala Patran Road on

B.O.T. Basis 154. Roads & Bridges Mahapura (near Jaipur) - Kishangarh (6 Lane) km 273.5 - km 363.885

Rajasthan 155. Roads & Bridges Ahmedabad-Vadodara Exp. Way Phase-I & II / km 0.0 - km 43.4/

Gujarat

156. Roads & Bridges Bharuch to Surat Package BOT- II / 4 lanning/ Gujarat 157. Roads & Bridges Vadodara to Bharuch Package BOT-1/ 6 lanning/ Gujarat 158. Roads & Bridges Delhi - Gurgaon Section (Access Controlled 8/6 Lane)/ km 14.3 - km

42/ Delhi(9.7)/Haryana(18)

159. Roads & Bridges Farukhanagar to Kottakata (NS-2/AP-3)/ Km. 34.140 to km 80.050/ Andhra Pradesh

160. Roads & Bridges Farukhanagar to Kotakatta (NS-2/AP-4)/ Km 80.050 to km 135.469/ Andhra Pradesh

161. Roads & Bridges Four laning from km 53.0 to km 100.0 of Kumarapalayam-Chengapalli section of NH-47 on BOT basis.(Contract Package No. NS-2/BOT/TN-7)

162. Roads & Bridges Four laning from km 0.0 to km 53.0 of Salem – Kumarapalayam on NH-47 on BOT basis.(Contract Package No. NS-2/BOT/TN-6)

163. Roads & Bridges Karur to Madurai (TN-5) Km 373.275 to km 426.6Tamil Nadu (Dindigul-Samyanallore)

164. Roads & Bridges Karur to Madurai (TN-4) Km 305.6 to Km 373.275 Tamil Nadu (Karur to Dindigul)

165. Roads & Bridges Salem to Karur (NS-2/TN-3) Km 258.645 to Km 292.6 Tamil Nadu (Widening of Namakkal)

166. Roads & Bridges Salem to Karur (NS-2/TN-2) Km. 207.050 to Km 248.625 Tamil Nadu 167. Roads & Bridges Krishnagiri to Thopurghat (NS-2/TN1) Km. 94.000 to 156 Tamil Nadu


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168. Roads & Bridges Nagpur – Kondhali/ Km 9.2 to Km 50/ Maharashtra 169. Roads & Bridges Kondhali – Telegaon/ Km 50 to Km 100/ Maharashtra 170. Roads & Bridges Aurang - Raipur Km 232 to Km. 281 Chattisgarh 171. Roads & Bridges Durg Bypass/ (2 Laned new facility)/ Chattisgarh 172. Roads & Bridges Ankapalli – Tuni/ km 359.2 - km 300/ Andhra Pradesh 173. Roads & Bridges Haldia Port NH-41 (from Kolaghat on NH-6 to Haldia) West Bengal 174. Roads & Bridges Vishakhapatnam Port 3.6 km 4 laned, 8.57 km 2 laned Andhra

Pradesh 175. Roads & Bridges Bara to Orai/ km 449 to 422 on NH-2 & km 255 to km 220/ Uttar

Pradesh 176. Roads & Bridges Jhansi to Lalitpur (NS-1/BOT/UP-2)/ Km 0 to Km 49.79/ Uttar Pradesh 177. Roads & Bridges Jhansi to Lalitpur (NS-1/BOT/UP-3)/ Km 49.7 to Km 99/ Uttar Pradesh 178. Roads & Bridges Jawaharlal Nehru Port Phase-I/ Maharashtra 179. Roads & Bridges New Mangalore Port NH-17 (Suratkal-Nantur Section), NH-48 (Padil

Bantwal Section)/ Karnataka 180. Roads & Bridges Meerut-Muzaffarnagar/ Km 52.250 to Km.131.00/ Uttar Pradesh 181. Roads & Bridges Moradabad Bypass/ (2 Laned new facility)/ Uttar Pradesh 182. Roads & Bridges Gwalior Bypass (NS-1/BOT/MP-1)/ Km 0 to Km 42.033/ Madhya

Pradesh 183. Roads & Bridges Tuticorin Port/ NH-7A (Tuticorin - Tirunelveli section)/ Tamil Nadu 184. Roads & Bridges Second Vivekananda Bridge and Approach/ West Bengal 185. Roads & Bridges Panagarh – Palsit/ km 517 - km 581/ West Bengal 186. Roads & Bridges Palsit – Dankuni/ km 581 - km 646/ West Bengal

187. Roads & Bridges Tindivanam - Ulundurpet (Pkg -VI-A) km 121 - km 192.25/ Tamil Nadu 188. Roads & Bridges Ulundurpet - Padalur (Pkg- VI-B) km 192.25 - km 285.00 Tamil Nadu 189. Roads & Bridges Padalur - Trichy (Pkg - VI-C)/ km 285.00 - km 325.00/ Tamil Nadu 190. Roads & Bridges Chennai - Ennore Express Way 191. Roads & Bridges Palanpur to Swaroopganj (Rajasthan -42 km & Gujarat-34 km )/ km

264 to km 340 (Rajasthan 42 km & Gujarat -34 km)/ Gujarat[34]/Rajasthan[42]

192. Roads & Bridges Cochin Port/ km 348/382 - km 358 750 Including 5 Major Bridges/ Kerala

193. Roads & Bridges Panipat Elevated Highway/ Km 96.00 to 86.00/ Haryana

194. Roads & Bridges Port Connectivity to Mormugoa/ NH-17B (from Port to Verna Junction on NH-17)/ Goa

195. Roads & Bridges Tambaram - Tindivanam km 28 - km 121/ Tamil Nadu

196. Roads & Bridges Jawaharlal Nehru Port Phase-II/ SH-54 + Amramarg + Panvel Creek Bridge/ Maharashtra

197. Roads & Bridges Paradip Port/ NH-5A (from km 0 to km 77)/ Orissa 198. Roads & Bridges Bharatpur-Mahua/ km. 63 to Km. 120/ Rajasthan

199. Roads & Bridges Mahua-Jaipur/ Km. 120 to Km 228/ Rajasthan 200. Roads & Bridges Agra – Bharatpur/ Rajasthan[20]/Uttar Pradesh[25] 201. Roads & Bridges Thanjavur – Trichy/ km 80 - km 135.750/ Tamil Nadu 202. Roads & Bridges Sitapur – Lucknow/ Km 488.27 to km 413.20/ Uttar Pradesh 203. Roads & Bridges Madurai-Arupukottai-Tuticorin/ km 138.8 to km 264.5/ Tamil Nadu 204. Roads & Bridges Four laning from km 407.100 to km 456.100 of NH-1 (Jalandhar –

Amritsar Section) in the State of Punjab on BOT basis 205. Roads & Bridges Ambala – Zirakpur/ Km. 5/735 to Km. 39/961 of NH-22 and Km. 0/0 to

Km. 0/871 of NH-21 Haryana[6]/ Punjab[30] 206. Roads & Bridges Gonde-Vadape (Thane)/ Km. 440/000 to Km. 539/500 Maharashtra 207. Roads & Bridges Dhule - Pimpalgaon Km. 380/0 to Km. 265/0 Maharashtra 208. Roads & Bridges Indore-Khalghat/ Madhya Pradesh 209. Roads & Bridges Guna Bypass/ Km. 319/700 to Km. 332/100 / Madhya Pradesh 210. Roads & Bridges Ahmedabad Ring Road 211. Roads & Bridges Pachpatre to Raniji ki Gol (TR-1) 212. Roads & Bridges Pachpatre to Raniji ki Gol (TR-2) 213. Roads & Bridges Hanumangarh to Kishangarh (HK-1)


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214. Roads & Bridges Hanumangarh to Kishangarh (HK-2) 215. Roads & Bridges Alwar-Sikandara 216. Roads & Bridges Lalsot to Jhalawad (LJ-1) 217. Roads & Bridges Lalsot to Jhalawad (LJ-2) 218. Roads & Bridges Noida Toll Bridge 219. Roads & Bridges East Coast Road 220. Roads & Bridges Coimbatore Bypass & Athupalam bridge 221. Roads & Bridges Hubli-Dharwad Bypass 222. Solid Waste

Management Collection and Transportation of Municipal Solid Waste

223. Solid Waste Management

Sanitary Landfills in Bangalore


Waste to Energy Project Mandur


Solid waste management in Chennai (CONSERVANCY OPERATIONS IN ZONES 6, 8 AND 10 OF CORPORATION OF CHENNAI (WITH SUPPORT FROM -TIDCO)


Solid Waste Management at Haldia

227. Waste Water Sewerage Treatment Plant for underground drainage in Alandur by Tamil Nadu Urban Infrastructure Financial Services Ltd. (TNUIFSL)

228. Water Supply Sheonath River, Industrial water supply in Boarai 229. Water Supply Dewas Industrial water supply project 230. Water Supply Tirupur Water Supply and Sewerage Project 231. Water Supply CMWSSB-CWSAP-100MLD Sea Water Desalination Plant at Minjur,

Chennai on DBOOT basis in the State of Tamil Nadu

7.3 Sources for Project Information

Following is the list of PPP Projects for which we have collected detailed financial information and analysed.

Total Number = 104

Total Value = USD11.48 billion

# Name State Sub-Sector Type of Source Mode of

Information Collection

1. Hyderabad International Airport Andhra Pradesh Airports Project Questionnaire

Developer

2. New Bangalore International Airport

Karnataka Airports Project Questionnaire

Developer

3. Mumbai International Airport (BIAL)

Maharashtra Airports From Loan Documents


4. Gangavaram Port Andhra Pradesh Ports Project Questionnaire

Developer

5. Kakinada Seaports Ltd Andhra Pradesh Ports From Loan Documents


6. Krishnapatnam Port Andhra Pradesh Ports Project Questionnaire

Developer

7. Dahej LNG Terminal Gujarat Ports Project Questionnaire

Developer

8. Mundra Port (Development fo Jetty, Approach Road, Ralway Line from Adipur to Mundra, Quay and related works)

Gujarat Ports Board Memo on Infra Projects


9. Karaikal Port Pondicherry Ports From Loan Documents


10. Development of Container terminal (3.6) Mt at Tuticorin Port, Tamil Nadu

Tamil Nadu Ports Project Questionnaire

Developer

11. Development, Construction, Kerala Ports Project Developer


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Operation and Management of International Container Transshipment Terminal at Vallarpadam, Cochin

Questionnaire

12. Nhava Sheva International Container Terminal Pvt Ltd.

Maharashtra Ports Project Questionnaire

Developer

13. Multipurpose Berth No.4 A at Haldia (1.5 MT)

West Bengal Ports Verbal Communication

Others/Project Atlas Report

14. Container Terminal at Chennai Stage 1 - 600 m Berth (5.60 MT)

Tamil Nadu Ports Project Questionnaire

Developer

15. Transmission system associated with Tala HEP, East-North Interconnector and Northern Region Transmission System

West Bengal Power Transmission

Project Questionnaire

Developer

16. Gandhidham-Palanpur GC project

Gujarat Railways Project Questionnaire

Government Agency

17. GC of Hassan-Mangalore Metere gauge section

Karnataka Railways Project Questionnaire

Government Agency

18. Viramgam-Mehsana Gujarat Railways Others Others

19. Surendranagar Mahuva Gauge Conversion (Pipavav Railway Corporation Ltd PRCL)

Gujarat Railways Project Questionnaire

Government Agency

20. Bhuj Nakthrana Road Gujarat Roads & Bridges Project Questionnaire

Government Agency

21. Chayyapuri ROB Gujarat Roads & Bridges Project Questionnaire

Government Agency

22. Himmatnagar Bypass Gujarat Roads & Bridges Project Questionnaire

Government Agency

23. Kim - Mandvi Road Gujarat Roads & Bridges Project Questionnaire

Government Agency

24. Western Expressway Haryana Roads & Bridges From Loan Documents


25. Hoshangabad-Harda-Khandwa Road

Madhya Pradesh Roads & Bridges Verbal Communication

Developer

26. Raisen-Rahatgarh Road Madhya Pradesh Roads & Bridges Verbal Communication

Developer

27. Upgradation, Operation and Maintenance of Patiala - Malerkotla Road on B.O.T.Basis

Punjab Roads & Bridges Project Questionnaire

Government Agency

28. Punjab Road Sector Project: Phase II – Upgradation, Operation and Maintenance of Balachaur – Dasuya Road on B.O.T Basis


Government Agency

29. Upgradation, Operation and Maintenanceof Hoshiarpur - Tanda Road on B.O.T. Basis


Government Agency

30. Upgradation, Operation and Maintenanceof Kiratpursahib - Una Road on B.O.T. Basis


Government Agency

31. Upgradation, Operation and Maintenanceof Patiala Patran Road on B.O.T. Basis


Government Agency

32. Mahapura (near Jaipur) - Kishangarh (6 lane) km 273.5 - km 363.885 Rajasthan

Rajasthan Roads & Bridges Project Questionnaire

Developer

33. Ahmedabad-Vadodara Exp. Way Phase I - km 0.0 to km 43.4 Gujarat & Phase II - - km 43.4 to km 93.302 Nadiad-Dakod SH-Gujarat

Gujarat Roads & Bridges From Loan Documents

Government Agency

34. Bharuch-Surat package BOT-II / 4 laning / Gujarat


Government Agency

35. Vadodara to Bharuch Package BOT-1/ 6 lanning/ Gujarat



36. Delhi-Gurgaon Delhi Roads & Bridges From Loan Documents

Government Agency

37. Farukhanagar to Kottakata (NS-2/AP-3)/ Km. 34.140 to km 80.050/ Andhra Pradesh

Andhra Pradesh Roads & Bridges Project Questionnaire

Developer

38. Farukhanagar to Kotakatta (NS-2/AP-4)/ Km 80.050 to km 135.469/ Andhra Pradesh

Andhra Pradesh Roads & Bridges From Loan Documents



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39. Four laning from km 53.0 to km 100.0 of Kumarapalayam-Chengapalli section of NH-47 on BOT basis.(Contract Package No. NS-2/BOT/TN-7)

Tamil Nadu Roads & Bridges Project Questionnaire

Developer

40. Four laning from km 0.0 to km 53.0 of Salem – Kumarapalayam on NH-47 on BOT basis.(Contract Package No. NS-2/BOT/TN-6)


Developer

41. Karur to Madurai (TN-5) Km 373.275 to km 426.6Tamil Nadu

Tamil Nadu Roads & Bridges From Loan Documents


42. Karur to Madurai (TN-4) Km 305.6 to Km 373.275 Tamil Nadu (Karur to Dindigul)



43. Salem to Karur (NS-2/TN-3) Km 258.645 to Km 292.6 Tamil Nadu



44. Salem to Karur (NS-2/TN-2) Km. 207.050 to Km 248.625 Tamil Nadu

Tamil Nadu Roads & Bridges Verbal Communication

Others

45. Krishnagiri to Thopurghat (NS-2/TN1) Km. 94.000 to 156 Tamil Nadu


Others

46. Nagpur – Kondhali/ Km 9.2 to Km 50/ Maharashtra

Maharashtra Roads & Bridges From Loan Documents

Government Agency

47. Kondhali – Telegaon/ Km 50 to Km 100/ Maharashtra


Government Agency

48. Aurang - Raipur Km 232 to Km. 281 Chattisgarh

Chattisgarh Roads & Bridges From Loan Documents

Government Agency

49. Durg Bypass/ (2 Laned new facility)/ Chattisgarh

Chattisgarh Roads & Bridges From Loan Documents

Government Agency

50. Ankapalli – Tuni/ km 359.2 - km 300/ Andhra Pradesh

Andhra Pradesh Roads & Bridges Project Questionnaire

Developer

51. Haldia Port NH-41 (from Kolaghat on NH-6 to Haldia) West Bengal

West Bengal Roads & Bridges From Loan Documents

Government Agency

52. Vishakhapatnam Port 3.6 km 4 laned, 8.57 km 2 laned Andhra Pradesh

Andhra Pradesh Roads & Bridges From Loan Documents

Government Agency

53. Bara to Orai/ km 449 to 422 on NH-2 & km 255 to km 220/ Uttar Pradesh

Uttar Pradesh Roads & Bridges From Loan Documents


54. Jhansi to Lalitpur (NS-1/BOT/UP-2)/ Km 0 to Km 49.79/ Uttar Pradesh



55. Jhansi to Lalitpur (NS-1/BOT/UP-3)/ Km 49.7 to Km 99/ Uttar Pradesh



56. Jawaharlal Nehru Port Phase-I/ Maharashtra


Government Agency

57. New Mangalore Port NH-17 (Suratkal-Nantur Section), NH-48 (Padil Bantwal Section)/ Karnataka

Karnataka Roads & Bridges From Loan Documents

Government Agency

58. Meerut-Muzaffarnagar/ Km 52.250 to Km.131.00/ Uttar Pradesh


Government Agency

59. Moradabad Bypass/ (2 Laned new facility)/ Uttar Pradesh


Government Agency

60. Gwalior Bypass (NS-1/BOT/MP-1) km 0 to km 42.033 / Madhya Pradesh

Madhya Pradesh Roads & Bridges Project Questionnaire

Developer

61. Tuticorin Port/ NH-7A (Tuticorin - Tirunelveli section)/ Tamil Nadu


Government Agency

62. Second Vivekananda Bridge and Approach/ West Bengal


Government Agency

63. Panagarh – Palsit/ km 517 - km 581/ West Bengal


Government Agency

64. Palsit – Dankuni/ km 581 - km 646/ West Bengal


Government Agency

65. Tindivanam - Ulunderpet package VI-a / km 121 to km 192.25 / Tamil Nadu


Others

66. Ulundurpet - Padalur (Pkg- VI-B) km 192.25 - km 285.00 Tamil


Government Agency


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Nadu

67. Padalur-Trichy Package VI-6 / km 285.00 to km 325.00 / Tamil Nadu


Others

68. Chennai - Ennore Express Way Tamil Nadu Roads & Bridges From Loan Documents

Government Agency

69. Palanpur to Swaroopganj (Rajasthan -42 km & Gujarat-34 km )/ km 264 to km 340 (Rajasthan 42 km & Gujarat -34 km)/ Gujarat[34]/Rajasthan[42]

Rajasthan Roads & Bridges From Loan Documents


70. Cochin Port/ km 348/382 - km 358 750 Including 5 Major Bridges/ Kerala

Kerala Roads & Bridges From Loan Documents

Government Agency

71. Panipat Elevated Highway/ Km 96.00 to 86.00/ Haryana

Haryana Roads & Bridges Project Questionnaire


72. Port Connectivity to Mormugoa/ NH-17B (from Port to Verna Junction on NH-17)/ Goa

Goa Roads & Bridges From Loan Documents

Government Agency

73. Tambaram - Tindivanam km 28 - km 121/ Tamil Nadu


Developer

74. Jawaharlal Nehru Port Phase-II/ SH-54 + Amramarg + Panvel Creek Bridge/ Maharashtra


Government Agency

75. Paradip Port/ NH-5A (from km 0 to km 77)/ Orissa

Orissa Roads & Bridges From Loan Documents

Government Agency

76. Bharatpur-Mahua/ km. 63 to Km. 120/ Rajasthan


Government Agency

77. Mahua-Jaipur/ Km. 120 to Km 228/ Rajasthan


Government Agency

78. Agra – Bharatpur/ Rajasthan[20]/Uttar Pradesh[25]


Government Agency

79. Thanjavur – Trichy/ km 80 - km 135.750/ Tamil Nadu


Government Agency

80. Sitapur – Lucknow/ Km 488.27 to km 413.20/ Uttar Pradesh


Government Agency

81. Madurai-Arupukottai-Tuticorin/ km 138.8 to km 264.5/ Tamil Nadu


Others

82. Four laning from km 407.100 to km 456.100 of NH-1 (Jalandhar –Amritsar Section) in the State of Punjab on BOT basis


Developer

83. Ambala – Zirakpur/ Km. 5/735 to Km. 39/961 of NH-22 and Km. 0/0 to Km. 0/871 of NH-21 Haryana[6]/ Punjab[30]

Punjab Roads & Bridges From Loan Documents

Government Agency

84. Gonde-Vadape (Thane)/ Km. 440/000 to Km. 539/500 Maharashtra


Government Agency

85. Dhule - Pimpalgaon Km. 380/0 to Km. 265/0 Maharashtra

Maharashtra Roads & Bridges Project Questionnaire


86. Indore-Khalghat/ Madhya Pradesh

Madhya Pradesh Roads & Bridges From Loan Documents

Government Agency

87. Guna Bypass/ Km. 319/700 to Km. 332/100 / Madhya Pradesh

Madhya Pradesh Roads & Bridges From Loan Documents

Government Agency

88. Ahmedabad Ring Road Gujarat Roads & Bridges From Loan Documents


89. Pachpatre to Raniji ki Gol (TR-1) Rajasthan Roads & Bridges Project Questionnaire

Government Agency

90. Pachpatre to Raniji ki Gol (TR-2) Rajasthan Roads & Bridges Project Questionnaire

Government Agency

91. Hanumangarh to Kishangarh (HK-1)


Government Agency

92. Hanumangarh to Kishangarh (HK-2)


Government Agency

93. Alwar-Sikandara Rajasthan Roads & Bridges Project Questionnaire

Government Agency

94. Lalsot to Jhalawad (LJ-1) Rajasthan Roads & Bridges Project Questionnaire

Government Agency

95. Lalsot to Jhalawad (LJ-2) Rajasthan Roads & Bridges Project Questionnaire

Government Agency

96. Noida Toll Bridge Uttar Pradesh Roads & Bridges Verbal Others


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Communication

97. East Cost Road Tamil Nadu Roads & Bridges Verbal Communication

Others

98. Coimbatore Bypass Tamil Nadu Roads & Bridges Verbal Communication

Others/Project Atlas Report

99. Hubli-Dharwad Bypass Karnataka Roads & Bridges Verbal Communication

Others/ ICICI Memo

100. Solid waste management in Chennai (Conservancy operations in zones 6, 8 and 10 of corporation of Chennai (with support from Tamil Nadu Industrial Development Corporation-TIDCO)

Tamil Nadu Solid Waste Management


Government Agency

101. Solid Waste Management at Haldia

West Bengal Solid Waste Management


Developer

102. Dewas Industrial water supply project

Madhya Pradesh Water Supply Verbal Communication

Developer

103. Tirupur Water Supply andSewerage Project

Tamil Nadu Water Supply Project Questionnaire

Developer

104. CMWSSB-CWSAP-100MLD Sea Water Desalination Plant at Minjur, Chennai on DBOOT basis in the State of Tamil Nadu

Tamil Nadu Water Supply Project Questionnaire

Developer

7.4 Assumptions

7.4.1 Analysis Assumptions

o Currency Conversion

1 USD = 45 INR for all currency conversions.

o Time of Financial Information

Financial information for any projects is captured as it was at the time of financial closure of the project. A year has been taken from January to December and not the financial year unless states otherwise.

o Total project Cost (TPC)

Total Project Cost is calculated based on following equation:

TPC = Debt + Equity + Sub-Debt + Grant

Negative grant is not considered in TPC in any way. Effect of negative grant on volume of financing, if any, has also been taken out.

o Debt-Equity Ratio

For analysis, Debt Equity Ratio has been calculated as ratio of Senior Debt with Pure Equity. Sub-Debt and Grant portions are not considered on either for this calculation.

o Centre/State Projects

Projects awarded by Port trusts are considered as Centre awarded projects.

o IRRs

Project IRR, Equity IRR, and Dividend IRR are taken post-tax figures as provided by the information source.

o Senior Lenders

Senior lenders are taken as those lenders which have first charge on assets.

o Tenures


pwc 65

Tenure of loans include Moratorium period.

o Interest Free Loans

Interest free loans by Government or Government entities is considered as debt while calculating Debt-Equity ratio but in not considered in volume of debt or in analysis of interest rates.

o Multi-project SPVs

Details of projects are captured per project and not by per SPV. For example in Rajasthan RIDCOR is a single SPV which handles 7 Road projects and these are treated as 7 separate projects.

o NHAI Projects

Complete set of NHAI projects is taken as it is given on NHAI web-site. Same has been cross-checked with NHAI for consistency and some non-listed projects have been added after getting confirmation from NHAI officials.

o Contract Period/Concession Period

Contract periods include construction period.

Extendable portions of contract periods/concession periods are taken out from concession period for calculation.

o Sources of Equity

Source of Equity is taken in “Government” category where equity is provided by Central/State Government, Port trusts, or other quasi-Government entities like, NHAI, APIIC, AAI, KSIIDC, CONCOR, RVNL etc.

Source of Equity is taken in “Strategic Investors/Financial Institutions” category where equity is provided by strategic investors like Zurich Airport or by Financial Intuitions like IDFC, IL&FS, IFCI or by organisations like LIC, GIC etc.

o Sources of Debt

Source of Debt is taken in “Commercial Banks” category where debt is provided by institutions like ICICI Bank, State Bank of India, Canara Bank, Bank of Baroda, Union Bank of India, Punjab National Bank, UTI Bank, Indian Bank, etc.

Source of Debt is taken in “Financial Institutions” category where debt is provided by institutions like IDFC, IL&FS, LIC, IIFCL, SIDBI, IDBI and Government or Quasi-Government entities.

Source of Debt is taken in “Others” category where debt is provided through internal accruals, customer’s deposit etc

7.4.2 Regions

Region States

North Delhi, Jammu and Kashmir, Haryana, Punjab, Uttrakhand, Uttar Pradesh, Madhya Pradesh, Chattisgarh

West Maharashtra, Gujarat, Rajasthan, Goa

East Orissa, West Bengal, Bihar, North-Eastern states

South Karnataka, Andhra Pradesh, Tamil Nadu, Kerala, Pondicherry


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7.4.3 Sample Sizes

Following is the sample size for some important analysis given in the report.

Total Number of Projects for which Financial Information is captured and analysed

104 Projects

Interest Rates of loans analysed for 85 Projects

Reset Periods in Loans analysed for 53 Projects

Tenure of Loans analysed for 89 Projects

7.4.4 Approximation of Financial Closure Year from Secondary Sources

For following projects (Total Number 93) we have approximated year of financial closure from secondary sources. These secondary sources include (indicative):

o Websites of promoters or SPVs

o Government websites and reports

o News clips and Press releases

o References in other Presentations/Reports/Studies

We have maintained critical view while considering this data for analysis.

# Project Name Sub-Sector Financial Closure Year 1. Gangavaram Port Ports 2005 2. Krishnapatnam Port Ports 2005

3. Multipurpose berths at Visakhapatnam Port EQ8 & EQ9 (2 MT)

Ports 2002

4. Sheonath River, Industrial water supply in Boarai

Water Supply 1998

5. Multipurpose General Cargo Berths 5A and 6A (5 MT), Mormugao

Ports 2000

6. Vadodara - Halol Road Roads & Bridges 1998 7. Bhuj-Nakhtrana Road Roads & Bridges 2002 8. Chhayapuri ROB Roads & Bridges 2003 9. Himmatnagar bypass Roads & Bridges 2002 10. Kim Mandvi Road Roads & Bridges 2003 11. Development of Bypass Roads

for Sandur Town Bellary district Under Direct Tolling System

Roads & Bridges 2006

12. Four laning of Bangalore Mysore Road (Bangalore Maddur)


13. Widening and strengthening of Wadi Raichur Road


14. Sanitary Landfills in Bangalore Solid Waste Management 2004 15. Development of New

Mattancherry Bridge Build – Operate – Transfer project in Cochin


16. Trivandrum City Road Improvement Project


17. Dewas-Ujjain-Badnagar- Roads & Bridges 2003


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Badnawar Road 18. Hoshangabad-Harda-Khandwa

Road Roads & Bridges 2006

19. Hoshangabad-Piparia-Pachmarhi Road


20. Indore-Sanawad-Burhanpur-Edlabaad Road


21. Jabalpur-Narsinghpur-Pipana Road


22. Raisen-Rahatgarh Road Roads & Bridges 2006

23. Rewa-Jaisinghnagar-shahdol-Amarkantak Road


24. Sagar-Damoh-Jabalpur Road Roads & Bridges 2004

25. Satna-Maihar-Tala-Umaria Road


26. Seoni-Balaghat-Gondia Road Roads & Bridges 2003

27. Ujjain-Agar-Susner-Jhalawad Road


28. Up gradation, Operation and Maintenance of Patiala - Malerkotla Road on B.O.T.Basis


29. Up gradation, Operation and Maintenance of Balachaur Dasuya Road on B.O.T.Basis


30. Up gradation, Operation and Maintenance of Hoshiarpur - Tanda Road on B.O.T. Basis


31. Up gradation, Operation and Maintenance of Kiratpursahib - Una Road on B.O.T. Basis


32. Up gradation, Operation and Maintenance of Patiala Patran Road on B.O.T. Basis


33. Construction of Additional two lane bridge and improvements to the existing bridge across river Korathalayar at Km.26/4 of N.H.5


34. Karur Toll Bridge by Tamil Nadu Urban Infrastructure Financial Services Ltd., (TNUIFSL)


35. Sewerage Treatment Plant for underground drainage in Alandur by Tamil Nadu Urban Infrastructure Financial Services Ltd. (TNUIFSL)

Waste Water 2000

36. Tirupur Water Supply and Sewerage Project

Water Supply 1995

37. Solid Waste Management at Haldia

Solid Waste Management 2004

38. Bara to Orai/ km 449 to 422 on NH-2 & km 255 to km 220/ Uttar Pradesh


39. Gwalior Bypass (NS-1/BOT/MP-1)/ Km 0 to Km 42.033/ Madhya Pradesh


40. Tindivanam - Ulundurpet (Pkg -VI-A) km 121 - km 192.25/ Tamil Nadu



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41. Padalur - Trichy (Pkg - VI-C)/ km 285.00 - km 325.00/ Tamil Nadu


42. CMWSSB-CWSAP-100MLD Sea Water Desalination Plant at Minjur, Chennai on DBOOT basis in the State of Tamil Nadu

Water Supply 2006

43. Transmission system associated with Tala HEP, East-North Interconnector and Northern Region Transmission system

Power Transmission 2005

44. Development of Container terminal (3.6) Mt at Tuticorin Port, Tamil Nadu

Ports 1998

45. Development, Construction, Operation and Management of International Container Transshipment Terminal at Vallarpadam, Cochin

Ports 2006

46. GC of Hassan-Mangalore metre gauge section

Railways 2004

47. Container Terminal at Chennai Stage 1 - 600 m Berth (5.60 MT)

Ports 2001

48. East Coast Road Roads & Bridges 2001 49. Bhiwandi Chinchoti , Repair of

22 KM Strecth Roads & Bridges 1998

50. Bhiwandi - Repair of 18.35 Km Stretch


51. Vadgaon Chakan - 30 Km Repair work


52. Malhar Peth Pandarpur - 36 Km Repair work


53. Pune - Ahmednagar 4 lanning Roads & Bridges 2003 54. Vellhe Shrikrapur Jijuri Nera

Lonand 7.27 Km, 1 bridge, 1 ROB


55. Nagpur Vardha Yevatmal - Bridge on Krishna River


56. Seri Talayajval - Bridge on Krishna River


57. Ahmednagar Karmala Temuni Repair of 59 Km Stretch


58. Mohol Kurul Kamdhi Repair work for 24 Km Strech


59. Pandarpur Bypass Repair work - 10 Km Stretch


60. Pandarpur Mohol - Repair of 11.12 Km


61. Pune - Pond repair of 31.8 Km Stretch


62. Ahmednagar Karmala (Sholapur Dist) Temuni 6.56 Km Stretch with a Bridge


63. Sholapur Dist a) Mangalveda Vijapur repair b) Begampur Mangalveda ( Total 31.85 Km)



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64. Sholapur Dist - Kuduvadi Latur 1 Railway ROB and 4.83 Km Stretch


65. Surat Dhule Edlabad - 5.1 Km Stretch


66. Nashik to Sukedi Phata 15 Km Stretch and 1 ROB


67. Prakasha-Chadvel-Samoda-Vindur, 76 Km Stretch and 3 Bridges


68. Ahmednagar Karmala 70.60 Km Stretch Repair work


69. Ahmednagar - Dond 44.6 Km Stretch Repair work


70. Ahmednagar - Takli - kajhi - Bhum , Repair and Maintainance of 41 Km stretch and 2 Bridges


71. Nasik Vani - Repair of 44 Km Stretch


72. Jalgaon Neri Puhur repair work for 48.4 km Stretch


73. Muktanagar - Banhanpur repair work for 31.4 Km Stretch


74. Tuljapur Ugni - repairework for 28.5 Km


75. District Nanded, Sirur Mukhed Narsi Bilol, Repair work for 32 Km Stretch


76. Nanded - Narsi Reapairwork for 43 Km Stretch


77. Nanded - Ardhapur - Varnaga 30 Km Stretch


78. Nagpur - APMC Market and Ring Road Connecting Road Repairwork for 8.2 Km Strech


79. Devri - Sirpur reapirwork for 13.4 Km Stretch


80. Varil Bandra 4.11 Km of Road Stretch and 1 Bridge on Vanganga


81. Coimbatore Bypass & Athupalam bridge


82. Thane-Bhiwandi Bypass Roads & Bridges 1996 83. Construction of additional 2-lane

with tunnel in Khambatki Ghat on NH 4


84. Construction of Six Bridges Roads & Bridges 1997 85. Kosasthalyar Bridge Roads & Bridges 1997 86. Wainganga Bridge Roads & Bridges 1999 87. Mahi Bridge Roads & Bridges 1997 88. Bridge across river Watrak Roads & Bridges 1999 89. Narmada bridge Roads & Bridges 1999 90. Patalganga Bridge & ROB Roads & Bridges 1998 91. 4-laning of Pune-Sholapur road

Km. 14/00 to 40/00 of NH 9 Roads & Bridges 1998

92. Construction of Bridge across Pinglai river in km 113/800 on



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NH 6 93. Pune-Nasik( Khed) (km

12.90 to 42.00) Roads & Bridges 2004

94. Nardhana ROB Roads & Bridges 1999 95. Chalthan Road Over Bridge Roads & Bridges 1998 96. ROB at Derabassi Roads & Bridges 2000 97. Nasirabad ROB Roads & Bridges 1999

7.4.5 Approximation of TPC from Secondary Sources

For following projects (Total Number 54, Total Value USD 3.75 billion) we have approximated Total project Cost (TPC) from secondary sources. These secondary sources include (indicative):

o Websites of promoters or SPVs

o Government websites and reports

o News clips and Press releases

o References in other Presentations/Reports/Studies

We have maintained critical view while considering this data for analysis.

# Project Name State TPC Assumed (INR Crore)

TPC Assumed (USD Million)

1. Multipurpose berths at Visakhapatnam Port EQ8 & EQ9 (2 MT)

Andhra Pradesh 240.00 53.33

2. Sheonath River, Industrial water supply in Boarai

Chhattisgarh 9.00 2.00

3. Multipurpose General Cargo Berths 5A and 6A (5 MT), Mormugao

Goa 224.00 49.78

4. Vadodara - Halol Road Gujarat 161.00 35.78 5. Development of Bypass

Roads for Sandur Town Bellary district Under Direct Tolling System

Karnataka 19.00 4.22

6. Four laning of Bangalore Mysore Road (Bangalore Maddur)


7. Widening and strengthening of Wadi Raichur Road


8. Sanitary Landfills in Bangalore


9. Development of New Mattancherry Bridge Build – Operate – Transfer project in Cochin

Kerala 30.00 6.67

10. Trivandrum City Road Improvement Project

Kerala 221.39 49.20

11. Dewas-Ujjain-Badnagar-Badnawar Road

Madhya Pradesh 49.30 10.96

12. Hoshangabad-Piparia-Pachmarhi Road


13. Indore-Sanawad-Burhanpur-Edlabaad



pwc 71

Road 14. Jabalpur-Narsinghpur-

Pipana Road Madhya Pradesh 74.16 16.48

15. Rewa-Jaisinghnagar-shahdol-Amarkantak Road


16. Sagar-Damoh-Jabalpur Road


17. Satna-Maihar-Tala-Umaria Road


18. Seoni-Balaghat-Gondia Road


19. Ujjain-Agar-Susner-Jhalawad Road


20. Construction of Additional two lane bridge and improvements to the existing bridge across river Korathalayar at Km.26/4 of N.H.5

Tamil Nadu 25.00 5.56

21. Karur Toll Bridge by Tamil Nadu Urban Infrastructure Financial Services Ltd., (TNUIFSL)


22. Sewerage Treatment Plant for underground drainage in Alandur by Tamil Nadu Urban Infrastructure Financial Services Ltd. (TNUIFSL)


23. Bhiwandi Chinchoti , Repair of 22 KM Strecth

Maharashtra 14.40 3.20

24. Bhiwandi - Repair of 18.35 Km Stretch


25. Vadgaon Chakan - 30 Km Repair work


26. Malhar Peth Pandarpur - 36 Km Repair work


27. Pune - Ahmednagar 4 lanning


28. Vellhe Shrikrapur Jijuri Nera Lonand 7.27 Km, 1 bridge, 1 ROB


29. Nagpur Vardha Yevatmal - Bridge on Krishna River


30. Seri Talayajval - Bridge on Krishna River


31. Ahmednagar Karmala Temuni Repair of 59 Km Stretch


32. Mohol Kurul Kamdhi Repair work for 24 Km Strech


33. Pandarpur Bypass Repair work - 10 Km Stretch


34. Pandarpur Mohol - Repair of 11.12 Km


35. Pune - Pond repair of 31.8 Km Stretch



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36. Ahmednagar Karmala (Sholapur Dist) Temuni 6.56 Km Stretch with a Bridge


37. Sholapur Dist a) Mangalveda Vijapur repair b) Begampur Mangalveda ( Total 31.85 Km)


38. Sholapur Dist - Kuduvadi Latur 1 Railway ROB and 4.83 Km Stretch


39. Surat Dhule Edlabad - 5.1 Km Stretch


40. Nashik to Sukedi Phata 15 Km Stretch and 1 ROB


41. Prakasha-Chadvel-Samoda-Vindur, 76 Km Stretch and 3 Bridges


42. Ahmednagar Karmala 70.60 Km Stretch Repair work


43. Ahmednagar - Dond 44.6 Km Stretch Repair work


44. Ahmednagar - Takli - kajhi - Bhum , Repair and Maintainance of 41 Km stretch and 2 Bridges


45. Nasik Vani - Repair of 44 Km Stretch


46. Jalgaon Neri Puhur repair work for 48.4 km Stretch


47. Muktanagar - Banhanpur repair work for 31.4 Km Stretch


48. Tuljapur Ugni - repairework for 28.5 Km


49. District Nanded, Sirur Mukhed Narsi Bilol, Repair work for 32 Km Stretch


50. Nanded - Narsi Reapairwork for 43 Km Stretch


51. Nanded - Ardhapur - Varnaga 30 Km Stretch


52. Nagpur - APMC Market and Ring Road Connecting Road Repairwork for 8.2 Km Strech


53. Devri - Sirpur reapirwork for 13.4 Km Stretch


54. Varil Bandra 4.11 Km of Road Stretch and 1 Bridge on Vanganga


55. Thane-Bhiwandi Bypass Maharashtra 103.00 22.89 56. Construction of additional

2-lane with tunnel in Khambatki Ghat on NH 4



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57. Construction of Six Bridges

Andhra Pradesh 50.00 11.11

58. Kosasthalyar Bridge Tamil Nadu 30.00 6.67 59. Wainganga Bridge Maharashtra 32.60 7.24 60. Mahi Bridge Gujarat 42.00 9.33 61. Bridge across river

Watrak Gujarat 48.20 10.71

62. Narmada bridge Gujarat 113.00 25.11 63. Patalganga Bridge & ROB Maharashtra 33.30 7.40 64. 4-laning of Pune-Sholapur

road Km. 14/00 to 40/00 of NH 9


65. Construction of Bridge across Pinglai river in km 113/800 on NH 6


66. Pune-Nasik( Khed) (km 12.90 to 42.00)


67. Nardhana ROB Maharashtra 34.21 7.60 68. Chalthan Road Over

Bridge Gujarat 10.00 2.22

69. ROB at Derabassi Punjab 31.48 7.00


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8 Annexure 3: Survey Coverage

8.1.1 Projects by Region24

Of the 231 projects across the country, more than three fourths are in the Southern and Western regions (for classifications of states by region please refer Assumptions Section 7.4.2 Regions).

Exhibit 29: Regional Distribution of Value of PPP projects by State

Western region followed by the Southern region dominates both in terms of number and value of projects.

a. 43% of the PPP projects by number are located in the Western region followed by South which has 32% of the projects by number.

b. In terms of value again the West dominates with 50% of the projects by value followed by the South with 25% of the projects by value.

Exhibit 30: Regional Distribution of PPP Projects by Value and Number

24 Regions defined in Section 7.4.2

19%

17% 13%

6%

13%

6%

Regional Distribution of PPP Projects

6%

7%

50%

43%

19%

18%

25%

32%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Number

Value

Percentage

East West North South


pwc 75

The larger number of projects in the Western region, however, can be attributed to about 100 Roads & Bridges projects awarded by the State Governments in the region. High values in the West come from the Port projects.

Exhibit 31: Sectoral Distribution of Projects in the Four Regions

Clearly the State projects in the West are making the difference in the total number and value of Projects in the West.

Exhibit 32: Regional Distribution of Projects by Awarding Authority

Exhibit 33: Sector Wise distribution of State and Centre Projects by Number and Value

Regional Distribution of Centre and State Projects by Number (Total number 231)

-

20

40

60

80

100

120

140

North West East South

Number

Centre State

Regional Distribution of Centre and State Projects by Value (Total Value USD15.8 billion)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


USD m

illion

Centre State

PPP Projects Across Region by Number(Total number 231)

0

20

40

60

80

100

120


Num

ber




PPP Projects Across Region by Value(Total Value USD15.8 billion)

-

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00


US

D M

illio

n




Centre Projects by Region and Number(Total Number 107)

0

5

10

15

20

25

30

35


Num

ber of Pro

jects

Roads & Bridges Ports Railways Airports Power Transmission

Centre Projects by Region and Value(Total Value USD11.33 billion)

-

500

1,000

1,500

2,000

2,500

3,000


US

D m

illio

n

Roads & Bridges Ports Airports Railways


pwc 76

Though it is the road projects that are more in number and value for Centre projects in all regions, it is the port projects awarded by the States in the West that are more in value and are also contributing significantly to the value of projects for the West. In South too the port projects awarded by State are high in value.

8.1.2 Projects Categorised by Size

For analyzing projects by size, the sample of PPP projects (total number 231) was classified into three categories of their Total Project Cost (TPC):

• more than USD100 million,

• between USD50-100 million, and

• less than USD50 million.

Exhibit 34: Size Wise Grouping of PPP Projects by Value and Number

As seen in Exhibit 34 above, 61% of the total projects by number have a TPC of less than USD50 million. However, when seen in terms of value this constitutes only 11% of total PPP projects analysed. Even though the projects with values more than USD100 million are only 21% by number, these constitute 69% of the projects by total value.

Sectoral composition of projects with project cost more than USD100 million shows that it is the high value Port and Airport projects which though small in number add significantly to the total value.

Some of the Road, Port and Airport projects contributing the value include:-

• Road & Bridge projects- such as Western Expressway (USD425 million) Vadodara to Bharuch (USD322 million), Bharuch to Surat (USD313 million)

• Port projects- such as Hazira LNG Terminal (USD667 million), Dahej LNG (USD622 million), Mundra Port (USD467 million) and

• Airport projects- (Mumbai) MIAL (USD1,294 million), (Delhi) DIAL(USD622 million), (Bangalore) BIAL(USD413 million) and (Hyderabad) HIAL(USD391 million)

State Projects by Region and Value(Total Value USD4.48 billion)

-200400600800

1,0001,2001,4001,6001,800


USD

mill

ion

Roads & Bridges Ports

Solid Waste Management Waste Water

Water Supply

State Projects by Region and Number(Total Number 124)

-5

5

15

25

35

45

55

65

75


Num

ber of Pro

jects

Roads & Bridges Ports

Power Distribution Solid Waste Management

Waste Water Water Supply

Size Wise Grouping of PPP Projects by Value and Number(Value USD15.8 billion, Number 231)

61%

11%

18%

20%

21%

69%

0% 20% 40% 60% 80% 100%

by Number

by Value



pwc 77

Exhibit 35: Projects by Size Classification and Sector

Exhibit 36 shows the average size of PPP projects by sector (The position of the sphere with respect to the y-axis indicates the average size of projects in the sector whereas the size of the sphere indicates the volume of projects). This shows that though small in numbers the average size of Airport projects (USD680 million) is larger than the average size of Power Transmission project (one project of size USD358 million) which is larger than the average size of Port projects which is much larger as compared to the other sectors.

Exhibit 36: Average Size of Projects

Average size of PPP projects across sectors (Exhibit 36) shows an increasing trend in the last five years.

Even though this increase in average size of PPP projects can be attributed mainly to the Airport projects which achieved financial closure in 2006, an analysis of the Roads & Bridges sector sizes also shows an increasing trend (USD18.8 million to USD95.2 million).

Exhibit 37: Trends in Average size of all Roads & Bridges and NHAI projects

Sectoral Composition of Projects of by Size and Number(Total Number 231)

0% 20% 40% 60% 80% 100%

<USD 50 Million

USD 50-100 Million

>USD 100 Million




Sectoral Composition of Projects of Size and Value(Total Value USD15.8 billion)

0% 20% 40% 60% 80% 100%

<USD 50 Million

USD 50-100 Million

>USD 100 Million




Value and Average Size of Projects(Total Value USD15.8 billion)

Airports

Ports

Power Transmission

Railways

Roads & Bridges

Water Supply

Power DistributionSolid Waste Management

(100.00)

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

0 2 4 6 8 10Sector

Avera

ge S

ize U

SD

Millio

n

Average Size of Projects (All Sectors)

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


USD

Mill

ion

Average Size of Central Road Projects

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


US

D m

illio

n

Average Size of Road Projects

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

USD

mill

ion


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8.1.3 Projects by Type of Awarding Authority

The analysis of 231 projects by the type of awarding authority (i.e. Centre or State), reveal that though States dominate in terms of the number of PPP projects awarded (55%), they trail the Centre in terms of the total value of the projects (Centre is 72%).

Exhibit 38: Centre and State by Number and Value

This is because most State projects sizes are less than USD50 million and Central project sizes and in particular Airport sector projects (Delhi Airport, Mumbai Airport, Bangalore Airport, Hyderabad Airport) are large (more than USD100 million).

Exhibit 39: Sectoral Distribution of Centre/State Projects by Number and Value

Following points emerge from the Exhibit 39:

1. By number, Roads and Bridges sector form the largest proportion in projects awarded both by States and by Centre.

2. By value, Airport projects form a large proportion of the projects awarded by the Centre.

The Port projects are almost the same with respect to number of projects awarded by State and Centre. However, the State Port projects are mainly Greenfield projects of larger size.

PPP Project Composition by Awarding Authority

Centre

Centre

State

State

0% 20% 40% 60% 80% 100%

by Number

by Value

Percentage

Sectoral Composition of Projects Awarded by Centre/State by Value (Total Value USD15.8 billion)

0% 20% 40% 60% 80% 100%

Centre

State




Sectoral Composition of Projects Awarded by Centre/State by Number (Total number 231)

0% 20% 40% 60% 80% 100%

Centre

State





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9 Annexure 4 - Other Key Trends in PPP Infrastructure Financing This section of the report discusses some of the evidence and experience based observation from both the project surveys and interviews which have been used to arrive at the issues detailed out further in the next section of the report. Analysis in this section pertains to the observations derived from our sample of 104 projects for which we have detailed financing information as well as the views expressed by key stakeholders in more than 80 interviews held during the course of this study. [Make this clear in summary]

9.1 Composition of the Sample of 104 projects

Out of the 231 projects studied by us, more detailed financing information was available for 104 projects. These 104 projects having a total project cost of USD11.48 billion form 73% of 231 projects by value (as mentioned earlier, not all stakeholders and sources were willing to share details of financing and financial information for various confidentiality and commercial reasons). Sector composition of the sample of 104 PPP projects by number and value is representative of the entire lot of 231 projects.

Exhibit 40: Sectoral Composition by Value and Number

The number and value captured with respect to size and regional distribution of the projects is as shown in the charts below.

Exhibit 41: Size wise Distribution and Regional Distribution

9.2 Trends in Financing Structure

Our analysis of financing structure of the 104 PPP projects taken together reveal that the PPP projects in India have been historically financed by (on an average) 68% debt, 26% equity, 2% sub-debt [from equity investors or third parties?] and 4% Government grant.

Reagional Distribution of the Sample(Number-104, Value-USD11.48 million)

23%

16%

32%

39%

11%

9%

34%

36%

0% 20% 40% 60% 80% 100%

by Number

by Value


PPP Projects Captured in the Sample(Number-104, Value-USD11.48 billion)

33%

6%

32%

22%

35%

72%

0% 20% 40% 60% 80% 100%

by Number

by Value


Sectoral Composition of Sample by Value (Total Value USD11.48 billion)

Ports15.6%

Water Supply3.1%

Airports18.3%

Power Transmission

3.1%


Railways2.5%


0.2%

Sectoral Composition of Sample by Number(Total Number 104)

Water Supply2.9%

Ports10.6%


Railways3.8%

Power Transmission

1.0%


1.9%

Airports2.9%


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The 4% grant mentioned above has been mainly in the form of monitory support given by both the State and the Central Government to make the projects viable. Going forward VGF may play an important role in easy availability of finance for otherwise non-viable projects.

Exhibit 42: Issue of Negative Grant in Road Projects

Negative grants (or the premium that a developer offers to pay to take the concession) is treated as part of the project cost for financing purpose, specially when bidder is required to pay the entire money up-front/during construction period (for example, in case of Road projects such as Ahmedabad -Barauch, Delhi Gurgaon, etc).

When bidder quotes negative grant to be paid over some years, the money to be paid before construction is completed is generally capitalised as project cost while post-construction it is expected to be funded from accruals from the project operations. This pattern is the case with almost all the projects. However, many of such projects are yet to commence operations and as such how the negative grant would be funded during the operations in reality is yet to be tested.

In the Model Concession Agreement (MCA) finalised recently , the concept of negative grant is substituted by bidding for Premium (as a percentage of revenue to the concessionaire) which has to be specified by NHAI (and which increases by 1% point every year) and the bidder can quote the year from which they start paying the premium. This concept is yet to be tested and projects are yet to be awarded.

9.2.1 Role of Grants in PPP Infrastructure Financing

In the survey of Indian infrastructure PPPs, our analysis showed that about 5% of the total project costs of all the projects were funded out of Grants received from the Government. This is significant considering that not all projects receive grant. It was therefore, decided to analyse the impact of grants on project structure in greater detail. In order to analyse the grant, we have divided the PPP projects (104 projects on which we have detailed financing information) into three categories –

1. Positive grant projects

2. Negative grant projects

3. Non grant projects

Grant, also referred to as positive grant in India, and is commonly known to be the amount which project awarding authority provides to the project sponsor to support the financial viability of a project. Projects, which are not commercially viable on their own, often require a fund support from the Government. In India, often the bidding criteria in the projects that require grant support is the amount of grant a sponsor requires for the project. The project sponsor who requires minimum grant support from the authority wins the project.

Some PPP projects are highly commercially viable and therefore, the awarding authorities prefer to award the project to the bidder who offers to pay a premium to the Government. This amount is often referred to as Negative grant in India. Negative grant is the amount which project sponsors offer to pay to the project awarding authority in lieu of being awarded the project. In such projects, the amount of premium a project sponsor is willing to pay to the Government is the final bidding criteria. The project is awarded to the sponsor who pays the maximum negative grant.

Positive grant in a project is often deducted from the Total Project Cost by the Bankers to calculate the debt equity ratio or any other parameter of the project. While negative grant is added to the project cost after which the financing is arranged. Therefore, our analysis, in this section on positive and negative grant, relates to only those PPP projects where grant (either positive/ negative) exists during construction phase.

Sector wise analysis of 104 PPP projects shows the projects under each of above categories as follows-

Exhibit 43: Sector Wise Non Grant, Positive Grant and Negative Grant Projects

Sub-sectors Non grant projects

Positive Grant Projects

Negative Grant Projects

Total

Airports 1 2 3


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Ports 10 1 11

Power Transmission 1 1

Railways 4 4

Roads & Bridges 42 31 7 80

Solid Waste Management 1 1 2

Water Supply 2 1 3

Grand Total 61 35 8 104

We can see that there is no grant (positive or negative) under in Railways and Power Transmission sectors. While Solid Waste Management and Water Supply each has one positive grant project, two positive grant projects are in Airports and one negative grant project in Ports sector. Maximum number (80 projects) of grant projects is under Roads & Bridges sector. All sectors other than Roads & Bridges have very few positive or negative grant projects which is too small to be analysed to get any inference. Therefore, we have confined the grant analysis to Roads & Bridges sector only.

Grant in Road & Bridges Projects

The year wise occurrence of positive and negative grant projects under Roads & Bridges sector is presented below-

Exhibit 44: Positive and Negative Grant Projects – Numbers and Amount

Positive Grant Negative Grant Year

Count Amount

(USD Million) Count

Amount (USD Million)

1995 - - - -

1996 - - - -

1997 - - - -

1998 1 6.0 - -

1999 - - - -

2000 - - - -

2001 2 3.9 - -

2002 - - - -

2003 2 47.8 - -

2004 1 26.7 - -

2005 3 12.3 - -

2006 20 213.6 7 337.5

2007 2 46.3 - -

Total 31 356.5 7 337.5

The table above shows that during the period from 1995 to 200725, around USD 356.5 million has been given as grant by awarding authorities in Roads & Bridges and around USD 337.5 million were negative grant during the same period. It is also important to mention that as there were large numbers of projects awarded during the years 2005/2006 and many projects achieved financial close during these years maximum number instances of positive and negative grant projects are also witnessed in the year 2006.

In India, both the State and Centre Governments have awarded PPP projects. The positive and negative grants under the Roads & Bridges sectors by Centre and State awarding authorities are indicated below. It is interesting to note that Negative grants are seen only in respect of projects awarded by Centre.

25 Our data base includes PPP projects achieved financial closure till March 2007 only.


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Exhibit 45: Count and Amount of Positive and Negative Grant in Road & Bridges sector

Positive Grant (USD Million)

Negative Grant (USD Million) Awarded by

Count Amount Count Amount

Centre 22 306.0 7 337.5

State 9 50.5 - -

Grand Total 31 356.5 7 337.5

It can also been noted that the average positive grant (USD 14 million) per project for projects awarded by the Centre is much more than average positive grant (USD 5.5 million) per project for projects awarded by the State. This is due to small size of the projects awarded by the State.

Impact of Grant on Debt and Equity

In order to analyse the impact of grant on project structure we have calculated the debt, equity26 and grant as percentage of total project cost27 under Roads & Bridges sector and carried out the analysis for two different categories of projects viz. - Non-grant and Positive grant projects.

Exhibit 46: Financing Structure for Positive and Non-Grant Projects and Annuity and Negative Grant Projects

Above chart shows that equity reduces from 31% (non-grant projects) to 21% (in positive grant projects) and debt reduces from 69% (non-grant projects) to 64% (in positive grant projects) correspondingly. It is clear, therefore, that grant is largely replacing equity contribution, though a small portion of the grant is responsible for reducing the debt also.

Correspondingly, the chart above also depicts the differences in the structure for annuity and negative grant projects and there doesn’t seem to be any significant difference in the structure.

9.2.2 Financing Structure by Awarding Authority, Sector and Size of Project

The financing structure does not vary significantly by awarding authorities. However, by sector, Port projects have witnessed a higher level of equity with practically no grant.

26 Subordinate debt has been taken as part of equity. 27 In the case of negative grant projects, project cost has been taken excluding negative grant.

Roads & Bridges

69%

64%

31%

21% 15%

0% 20% 40% 60% 80% 100%

Non-Grant Projects

Positive Grantprojects

Debt Equity Grant

Roads & Bridges

74%

73%

22%

25%

4%

2%

0% 20% 40% 60% 80% 100%

Negative GrantProjects

Annuity Projects

Debt Equity Sub Debt


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Exhibit 47: Financing Structure by Awarding Authority and Sector

Projects of size less than USD100 million, show higher incidence and value of sub-debt. Also interestingly grant seems to be replacing equity rather than debt except for small projects (less than USD50 million), where grant also replaces debt as shown in Exhibit 48.

Exhibit 48: Financing Structure by Size

9.3 Trends in PPP Financing on Debt Side

We have analysed debt financing from the point of view of Sources, Tenor, Debt to Equity Ratio28, Interest Rates, and Reset Periods. The trends presented in this section have been analysed on the basis of detailed debt financing information received for the 104 projects as well as our interaction with the key financial institutions and developers. The value of total senior debt, for the 104 projects, aggregate to USD7.72 billion. Also when asked, most developers were of the view that banks not only meet current financing needs adequately, but also keenly compete to lend to infrastructure projects.

Exhibit 49: Sources of Debt by Year and Size

28 Debt to Equity Ratio (DER) we have considered as senior debt to pure equity

Year Wise Sources of Debt

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007


Sources of Debt by Sector

0% 20% 40% 60% 80% 100%

Airports

Ports

Power Transmission

Railways

Roads & Bridges


Water Supply


Financing Structure of Projects Across Sectors

46%

66%

48%

70%

71%

63%

68%

34%

29%

41%

30%

24%

36%

22%

11%

11%

5%

9%

5%

5%

5%

1%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%


Water Supply

Railways

Power Transmission

Airports

Ports

Roads & Bridges

Debt Equity Sub-Debt Grant

Financial Structure of Projects across Awarding Agencies

66%

25%

27%

68%

4

3 4

3

0% 20% 40% 60% 80% 100%

Centre

State


Financial Structure of Projects across Project Sizes

58%

66%

68%

26%

23%

26%

9% 7%

6

2

4

4

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

<USD 50 Million

USD 50-100 Million

>USD 100 Million



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Further break-up of sources of debt by year provided in Exhibit 49 show increasing contribution by institutions lenders. Analysis of commercial banks lending to PPP projects, in our database reveals that, Public Sector banks dominates with a share of 82%, while share of Private Sector banks and foreign banks is only 13% and 5% respectively29. If we look at the trends and composition over the years the lending from private sector banks is increasing while there is no trend in debt from financial institutions and foreign banks.

Exhibit 50: Trend in Debt from Commercial Banks

9.3.1 Tenure of Loans

Trends on tenure of loans from our sample of projects30 show that tenure varies between 12 to 17 years for most projects. We found that banks in India lend to infrastructure projects with tenure of up to 17 years – albeit with resets.

Exhibit 51: Average Tenure of Debt and Concession Period

Average tenure when compared with the concession periods is generally less than 50% of the average concession period in that sector except for roads and bridges sector where average tenure is slightly more than 50% of the average concession period.

It emerges from our interviews that Bank’s capacity (and willingness) to lend to infrastructure projects where the tenure of loans required are generally more than 15-20 years is rather limited. Most developers however, have not expressed any concern regarding the non availability of more than 20 year tenures.

29 Lenders break-up into banks or institutional investors is only available for debt amounting to USD4.18 Billion 30 Our analysis on tenure is based on a sample size of 89 Projects only, because authentic information was available only for this sample size


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 1998 1999 2000 2001 2002 2003 2004 2005 2006

Foreign Bank Private Sector Bank Public Sector Bank Financial Instituions


0

2000

4000

6000

8000

10000

12000

14000

16000

18000

1995 1998 1999 2000 2001 2002 2003 2004 2005 2006

Foreign Bank Private Sector Bank Public Sector Bank Financial Instituions


28

16

23

28

25

28

30

15

5

14

10

12

13

16

- 5 10 15 20 25 30 35

Water Supply

Solid Waste

Roads & Bridges

Railways

Power Transmission

Ports

Airports

Number of Years



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Restructuring of loans with respect to interest rate, tenure of loan etc. has taken place in some projects which have suffered financially after the initial loan agreement. However, no instances of roll over have been witnessed so far.

9.3.2 Debt to Equity Ratio (DER)31

Senior Debt to Pure Equity Ratio (DER) over the years has increased from 2.1 in the year 2002 to 4.3 in the year 2006. However, the ratios vary significantly with sectors.

Exhibit 52: Senior Debt to Pure Equity Ratio by Sector

Sub-Sector 2002 2003 2004 2005 2006 Airports - - - - 3.5

Ports 1.7 1.9 - 2.1 2.2

Power Transmission - - - 2.3 -

Railways 2.3 0.8 1.5 -

Roads & Bridges 2.2 2.0 2.5 3.2 4.6

Solid Waste Management - - 3.3 - -

Water Supply - - - 2.3 3.4

Simple Average 2.1 2.0 2.3 2.6 4.3

Exhibit 53: Increased Gearing

DER by sector shows that the gearing in Roads and Bridges sector has increased from year 2002 to year 2006. DER in ports sector however, has been almost constant at 2 and is much lower than the gearing in Roads and Brides, Water Supply and Airports sector. Airport projects which have happened only in the last year show a higher DER of 3.6.

On average, State awarded projects show higher leveraging than the Central projects. However, Debt to TPC does not vary. This apparent contradiction is because of higher levels of grant provided in State projects, rather than any increase in the debt provided (once again hinting that grant is viewed as replacing equity).

Smaller project have generally shown lower levels of DER over the years.

31 Debt Equity Ratio has been calculated as ratio of Senior Debt with Pure Equity. Sub-Debt and Grant portions are not considered on either for this calculation. DER for projects like the Rajasthan RIDCOR’s road projects where financing structure significantly different have been ignored for analysis of DER. RIDCOR is an SPV set-up together by the Governemnt fo Rajashtan and IL&FS. RIDCOR intern has sisghed a concession agreement with the Government of Rajasthan for 7 road projects in the State. IL&FS and government has an equal stake in RIDCOR. The financing structure also includes an interest free loan from the government and a sub-debt from IL&FS with moratorium of 15 years. Hence, when we take up DER (pure Debt to pure equity) in this project it is 23, while in other road PPP projects it ranges between 0.63 and 12.

Debt to Equity Ratio by Sector(Senior Debt to Pure Equity)

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2002 2003 2004 2005 2006

YearAirports Ports Power Transmission

Railways Roads & Bridges Water Supply


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Exhibit 54: DER by Awarding Authority and Size32

When seen from both size and sector, DER of Roads & Bridges and Water projects increase with sizes.

Exhibit 55: DER by Sector and Size

However, this is reverse in Port Projects. The reverse trend in Ports sector does not show any relation with the awarding authority. Higher DER for the Port projects of less than USD50-100 million is due to the high DER achieved by Tuticorin Port project (Development of Container terminal 3.6Mt at Tuticorin Port, Tamil Nadu) in 1998. [Either exclude the project and recalculate OR explain why this project achieved a high DER]

9.3.3 Interest Rates33

Comparison of interest rates spreads (interest rates over the base rates of the 10 year Government Securities), shows a decreasing trend over the years. Average spreads in the year 2003 was 3.66 which increased to 4.5 in the year 2004 and reduces to 1.64 in the year 2006. Reason for the increased spread in 2004 is the decreasing G-Sec yield in that year. [It is not normal market behaviour that a fall in the underlying rate leads to an increase in spreads. Further clarification required]

32 Sample for mid size projects (USD50-100 million) consist of Tuticorin Port Connectivity Projects of NHAI in the year 2003 and Paradip Port connectivity project of NHAI & RVNL’s Hassan-Mangalore gauge conversion project in the year 2004. 33 Sample size for analysis on interest rate is 85 Projects.

Size and Sector Wise Average DER(Senior Debt to Pure Equity)

-

1.0

2.0

3.0

4.0

5.0

6.0


DER

Roads & Bridges Ports Railways Water Supply

Debt to Equity Ratio by Project Sizes(Senior Debt to Pure Equity)

-

1.0

2.0

3.0

4.0

5.0

6.0

2002 2003 2004 2005 2006

Year


Debt to Equity Ratio by Awarding Authority(Senior Debt to Pure Equity)

-0.51.01.52.02.53.03.54.04.55.0

2002 2003 2004 2005 2006

Year

Centre State


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Exhibit 56: Average Interest Rate Spread over 10-Yr G-Sec Yield

The standard deviation of the spreads (across projects during a given year) has also been reducing indicating a convergence in lending rates between institutions and across projects. Standard deviation of spreads has reduced from 2.2 in the year 2002 to 0.9 in the year 2006.

Average Spread (year 2005 & 2006)34 for Roads and Bridges sector is 1.9 with ports closer to roads at 1.73. However, spreads for Airports sector has been low at 0.11. Water supply and sanitation projects on the other hand have received debt at much higher spread clearly indicating higher risk perception for the sector (again admittedly for low sample base).

In the last two years (2005 & 2006), we find that the larger projects have attracted relatively lower interest rate. This is largely because of the lower interest rates obtained by the large Airport projects and reflects the increasing comfort of lenders with large PPP projects. Even in the relatively advanced NHAI projects we find that the trend of larger projects attracting lower rates of interest continues.

Exhibit 57: Interest Rate Spreads Awarding Authority

34 Average 10 year G-Sec yield for the year 2005 & 2006 is taken as 7.5%

Average Interest for Centre Projects (year 2005 & 2006)

11.4

9.4

-

1.5

3.0

4.5

6.0

7.5

9.0

10.5

12.0

Centre State

10 year Average G Sec

Interest Rate Spreads over 10 Year G-Sec over the Years

2.2

3.8

4.9

2.3

1.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2002 2003 2004 2005 2006

Standard Deviation of Interest Rate Spread

2.2

0.7

1.5

0.6

0.9

-

0.5

1.0

1.5

2.0

2.5

2002 2003 2004 2005 2006


Average Interest Rates

9.4 9.4

10.9

9.2 9.2

7.2

5.6 5.9

7.07.6

-

2.0

4.0

6.0

8.0

10.0

12.0

2002 2003 2004 2005 2006

Average Interest Rate 10 year G-Sec Yield

Average Interest Rates(Year 2005-2006)

10.5

7.6

9.1

7.5

9.3

7.57.57.57.57.5

-

2.0

4.0

6.0

8.0

10.0

Airports Ports Railways Roads & Bridges Water Supply

Average Interest Rate 10 year G-Sec Yield


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In last two years (2005-2006), Central Government projects in all sectors attracted relatively lower interest rates than State Government projects, reflecting the lower risk perception of lenders with Central agencies. While, State sponsored projects get an average spread of 3.9 percentage points above 10year G-sec yield, Central Government projects get an average spread of 2 percentage points above the 10year G-sec yield.

9.3.4 Interest Rate Resets

While the spread has decreased, interest rate reset periods35 (Exhibit 58) have reduced particularly in Roads sector. Clearly the banks though lending for longer term, have reset clauses to hedge against the volatile interest rates in India. Average reset periods across sectors have reduced from 2.6 years in 2003 to 2.0 years in 2006.

Exhibit 58: Reducing Resets36

As seen in Exhibit 59 average reset periods for Central Government projects is lower than the State Government awarded projects across sectors. Also smaller projects (USD50-100 million) have been seen to have smaller reset periods. When seen by sector, the Ports and Roads & Bridges sector has smaller reset periods (an average of 2 years) as opposed to Airport and Railway projects that have average reset periods of about 3 years.

Exhibit 59: Average Reset Period

Average of Reset (2005-

2006) Standard Deviation of Reset

Period By Awarding Authority

Centre 2.1 1.0

State 2.7 0.5

By Size Category

Less than USD50 million 2.8 0.6

Between USD50-100 million 2.7 0.8

More than USD100 million 1.9 0.8

By Sector

Airports* 3.0 -

Ports 2.1 1.3

Power Transmission* 3.0 -

Railways 3.0 -

Roads & Bridges 2.2 1.1

Water Supply* 2.5 0.7

35 Sample size for analysis on reset is 53 projects 36 Data on reset was not available for any road projects in the year 2004

Average Reset Periods

2.6

3.0 3.02.7

2.0

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2002 2003 2004 2005 2006

Year

Average Reset Periods (Road Sector)

2.6

3.0

-

3.0

2.0

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2002 2003 2004 2005 2006

Year


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* Small Sample Size

Note: This analysis is based on the information received form the loan documents at the time of financial closure. It may be true that the terms and conditions negotiated at the time of reset in the lifecycle of a project in more mature projects may be different, however, this information is confidential we have not been able to access this.

9.4 Trends in PPP Financing on Equity Side

It can be seen above that total equity funded in PPP infrastructure projects is USD2.93 billion till the Year 2006.

Exhibit 60: Sources of Equity

Exhibit 60 depicts that there has been substantial reduction in equity from developer’s own source for three years after the year 2002, that is primarily due to more number of such projects (like –Railways, Airports) being implemented after the year 2002 where either strategic investor or Government or both have also funded equity. Exhibit 60 shows sector wise equity (including sub-debt) funding. The Exhibit shows that equity funding by developers has been low in Airports & Railways projects as compared to Ports and Roads & Bridges projects. Since the airport and railways projects were awarded after the year 2002, the overall developer’s equity has come down after that year.

Sub-debt has also played important role in reducing the developer’s own equity after the year 2003. We believe that such trend would continue in the future as well, given the huge requirement of equity expected.

9.4.1 Strategic Investors and their Investment in the Projects

As per information provided by the stakeholders, strategic investor in infrastructure sector has been found in only 9 PPP projects. Strategic investor in different sectors and amount invested by them is presented below-

Exhibit 61 : Strategic Investment by Sector

Sectors No of project with strategic investor

Equity Infused (USD Million)

Ports 4 29.89 Airports 3 102.15 Water Supply 1 30.00

Railways 1 4.89 Total 9 166.93

It can be observed above that total USD166.93 million has come as strategic investment in the PPP infrastructure projects and this investment is mainly in Ports & Airports sector.

Beside, in order to attract Foreign Direct Investment (FDI) in infrastructure, GoI opened that sector for FDI and allowed 100% FDI (under automatic route) as presented below-

Why tabulate?

Source of Equity by Sector

76%

90%

65%

40%

5%

15%

36%

5%

20%

17%

21%

2%

3%

3%

2%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Roads & Bridges

Ports

Airports

Railways

Developers Financial Institution Government Strategic Inverstors Sub-Debt

Source of Equity by Year

92%

84%

86%

73%

61%

56%

77%

8%

15%

3%

27%

11%

24%

12%

11%

29%

20%

11%

1%

0% 20% 40% 60% 80% 100%

2000

2001

2002

2003

2004

2005

2006

Year

Developer Own Equity Other Source of Equity Sub-Debt


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Exhibit 62 : FDI Allowed by Sector

Sector Limit Roads, Highways & Bridges 100% Ports & Harbour 100% Airport 100%* Power 100%

Mass Rapid Metro Transit System 100% Water 100%

* Beyond 74%, Government Approval is required for existing airports. 100% is allowed for Greenfield airports under automatic route.

Though, FDI limit in infrastructure is 100% in almost all the sectors above, FDI in infrastructure PPP projects has been very low (11%). Maximum FDI has been seen in Ports followed by Airports and Roads and Bridges Sector (refer as per Exhibit 63).

Exhibit 63: FDI in PPP Infrastructure

Though FDI in PPP infrastructure projects is very low, it may be noted that ports sector has been high in attracting FDI (in terms of value) followed by Airports, Road & Bridges and Solid Waste Management. It may also be noted that FDI cases are more in those sectors like Ports & Airports where operational expertise doesn’t exist with Indian developers and FDI has come from Strategic Foreign Investors.

It is very important to note that FDI in Road & Bridge is very low at USD50.95 million despite that sector being very active in terms of PPP initiative. The low penetration of FDI in Roads & Bridges is probably because the projects being implemented are small and local developer/contractors are capable of implementing it and that the overseas investors/ developers have yet to get confidence in this segment.

9.4.2 Returns and Expectations of the Investors from the equity invested

Considering the huge requirement of equity for PPP infrastructure projects, it was imperative to find out the return expectation of investors. We have therefore, asked the developers about the equity returns expectations they have from the PPP projects. Developers stated their expected equity returns only in 22 cases. The equity returns expectation (these are not calculated returns but only expectations as stated by the developers) as furnished by the developers is presented below:-

FDI in PPP Infrastructure (Total equity USD2.93 billion)

FDI11%

Domestic Equity 89%

Sector wise FDI ( USD 322 Million)

Ports, 163.42

Airports, 102.15

Roads & Bridges, 50.95

Solid Waste Management,

5.56


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Exhibit 64: Equity Returns Expectations by Investors37

It can be seen above that equity returns are more than 16% in approximately 73% of the 22 PPP projects. Hence it can be inferred that the developers expectation of equity returns from infrastructure PPP projects are high and this might be due to high gestation periods for infrastructure projects.

At the same time it is worth to mention that most of the infrastructure developers (especially in roads & bridges) have their own construction division which gets the construction contract for the PPP projects they have won. These developers then, earn a margin on the construction contracts which increases their overall returns. The equity return expectation, as stated by the developers is exclusive of the margin earned by them on corresponding construction contracts and hence the actual returns expectations would be much higher for the developer who is also the construction contractor for the project.

37 Sample size is 22 projects

Equity Returns in PPP

18%

9%

32%

41%

Between 8% & 12% Between 12% & 16%

Between 16% & 20% More than 20%


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10 Annexure 5 - Future Lending to PPP Infrastructure Projects from Commercial Banks in India

10.1 Introduction

The banking financial institutions in India are categorised into three types - commercial banks, co-operative banks and regional rural banks. The commercial banking sector again comprises of public sector banks, private banks and foreign banks. The commercial banks in India are regulated by the Reserve Bank of India (RBI) and there are no differences in regulations for public sector of private sector banks. Public sector banks like the State Bank of India and its associates are owned by the Government of India. These banks in India account for almost three fourth of the banking sector and a similar pattern exist in the Infrastructure debt market too.

Apart from commercial banks there are other lending institutions categorised as financial institutions in India. India has a two-tier structure of financial institutions - all India financial institutions and institutions at the State level. All India financial institutions comprise term-lending institutions, specialized institutions and investment institutions. State level institutions comprise of State Financial Institutions and State Industrial Development Corporations providing project finance, equipment leasing, corporate loans, short-term loans and bill discounting facilities to corporate. These Institutions are non-Banking institutions i.e. they do not accept deposits from the public. In India, in the infrastructure sector Government holds majority shares in many of these financial institutions e.g. IRFC, PFC, and HUDCO etc. There are other financial institutions which were started as specialised institutions by the Government, but later Government stakes were significantly diluted or sold to other investors e.g. IDFC and IL&FS. There are other specialised financial institutions like ICICI and IDBI which have been converted into commercial banks and were earlier prominent lenders in the infrastructure sector.

Tax free bonds were one of the major sources of fund for these financial institutions. However, most of the tax sops on such bonds by the Government financial institutions have now been withdrawn by the Government.

Some of the prominent financial institutions currently operating in the infrastructure debt market are IIFCL, IDFC, PFC and IRFC. The composition of lending from commercial banks and financial institutions is presented in the main report.

Our survey of historical data on PPP financing in India reveals that commercial banks have been dominant players in PPP financing. Therefore, it is imperative to analyse the capacity of commercial banks to lend towards infrastructure sector in the backdrop of huge investment projection made by the Government.

In this Annexure we have therefore, tried to assess the lending capacities of commercial banks and financial institutions like IDFC, IRFC etc in India. There can be other sources of debt funding like foreign banks, multilaterals, mutual funds, insurance & pension funds etc. which have not been analysed in this Annexure.

It is important to mention that commercial banks don’t differentiate PPP infrastructure financing with other infrastructure financing for the purpose of reporting the data. Therefore, all lending towards infrastructure either PPP or non-PPP has been reported under only one sector head “Infrastructure”. However, within Infrastructure sector there are sub-sectors such as Power, Telecommunications, Roads & Ports & Others. Due to non-availability of data on commercial banks outstanding towards PPP infrastructure financing, we have based the estimation on our survey data as the base for PPP financing in India, with some minor adjustments.


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Even though our survey data provided some insights into the volume of financing by the Banking sector for PPP projects surveyed, we find that there is a wide variation from one Bank to another in the volumes of lending to PPP as a proportion of their infrastructure lending or as a proportion of their total lending. Hence, it is not really possible to assess the capacity of banks to PPP lending separately. Also, there are no separate regulations or reporting requirements for PPP lending. Therefore, we have endeavoured to work out only some broad estimation.

10.2 Lending Capacity of Commercial Banks

Over last seven years, there has been substantial upsurge in lending towards infrastructure sector by the banks as presented below-

Exhibit 65: Credit Outstanding of Commercial Banks (USD Billion)

Financial Year*

Sector 1998 1999 2000 2001 2002 2003 2004 2005 2006

Infrastructure Total

(USD Billion) 0.70 1.32 1.61 2.52 3.29 7.71 9.86 17.56 24.17

Telecommunication

(USD Billion)

0.45 0.51 0.44 0.81 0.88 1.76 2.27 3.51 3.94

Power

(USD Billion)

0.15 0.47 0.73 1.17 1.64 4.73 5.55 8.61 12.86

Roads, Ports & Others

(USD Billion)

0.10 0.35 0.44 0.54 0.77 1.22 2.04 5.44 7.37

Note: For the purpose of this note table and this note we have taken 1USD =45 INR

*Financial Year in India is from April to March i.e. FY 1999 is April 1998 to March 1999

Source- RBI

As per the table above, total credit outstanding by commercial banks to infrastructure sector was to the tune of USD 24 billion as on 31st March 2006 and the same has grown from a mere USD 0.7 billion as on 31st March 1998. The sudden jump in FY2005 was due to merger of IDBI bank with IDBI during that year (IDBI earlier was not a Bank but FI). It may be noted that the growth in infrastructure credit during the FY2006 was around 37.7% which was way above the growth in industrial lending (28.6%) during the same year.

Credit outstanding of commercial banks to Infrastructure as on 31st March 2007 is not available. We have projected it to be USD31.2 billion, on the basis of “RBI Annual Policy Statement for 2007-08”. As per RBI Annual Policy Statement for 2007-08, infrastructure lending has increased by 21.7% by December 2006. The same growth percentage has been applied to each sector’s outstanding to arrive at the figure as on 31st March 2007.

10.2.1 Methodology for Assessing Infrastructure Lending Capacity of Banks

Banks’ lending towards any particular sector depends on a number of macroeconomic and other factors. We have adopted a very simple methodology of holding discussions with experienced Bankers active in the market, rather than attempting to establish complex relationships between these factors and the lending volumes. We have tried to keep an even mix of public and private sector banks in the interview to understand the complexities of their lending to infrastructure.

Therefore, we have projected the total credit outstanding to infrastructure from commercial banks at the growth rates based on our discussions with the banks. The generally agreed views of these banks suggest that future growth towards infrastructure lending could be


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anywhere between 20-25%. However, it is important to mention that we have considered sectors such as- Power, Roads, Ports and others (credit outstanding of which is depicted above) for the purpose of our analysis excluding “telecommunication” which is highly privatised sector. Therefore, infrastructure outstanding from here onwards would means outstanding of sectors considered for the analysis.

There are several reasons that we have observed for such a view on the growth in infrastructure lending.

• The data on credit & deposit growth of banks for the last couple of years reveals that credit growth has outpaced the deposit growth and RBI had to intervene to slow down the credit growth.

• Simultaneously, in the past 4-5 years, tremendous growth in credit has led many banks to liquidate their extra investment in Government of India securities and deploy them in credit.

Therefore, banks are of the view that any further increase in growth-rate in credit from banks can be sustained only if there are other resources available to banks, example capital relief by use of credit derivatives etc. These options have been discussed later in this annexure.

Based on our understanding in the sector and the discussions with the banks, we have therefore, taken three scenarios viz, 20%, 25% and 30% for the growth-rate of outstanding credit of infrastructure by banks, with the upper limit for our projection at 30%.

Infrastructure Outstanding Projection

We have taken the total outstanding of commercial banks to infrastructure sector as on 31st March 200738 as the base figure for our projection. Thereafter we have applied the growth rate as estimated above to the base lending figure and projected that for next 5 years. The projection under different growth rate has been presented below-

Scenario – I (20% growth in infrastructure outstanding)

Year 2008 2009 2010 2011 2012

Power Sector- Infrastructure outstanding in USD Billion

20 24 29 34 41

Road, Ports & Others Sector- Infrastructure outstanding in USD Billion

11 14 16 20 24

Scenario – II (25% growth in infrastructure outstanding)

Year 2008 2009 2010 2011 2012

Power Sector- Infrastructure outstanding in USD Billion

21 26 32 40 51


12 15 19 23 29

38 Estimated from growth rate fo 21.7% which was also assumed to continue from 31st December 2006 till 31st March 2007


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Scenario – III (30% growth in Infrastructure outstanding)

Year 2008 2009 2010 2011 2012

Power Sector- Infrastructure Outstanding in USD Billion

22 28 36 47 62


12 16 21 27 35

Ratio of PPP Lending to Infrastructure Lending by Banks

Bank lending to the infrastructure sector has grown rapidly over the last few years. However, the growth in lending to infrastructure is not unique. In fact it is concomitant with a sharp rise in non food credit provided by banks, with strong growth in credit off take being observed in both the corporate and retail segments. However, PPP infrastructure as a subset of total infrastructure has show a sharper increase in the last few years. In the last two years more and more small and large projects are coming up on PPP, rather than going for development from budgetary sources. Hence, the PPP lending by commercial banks has also shown a significant growth rate over the last few years.

To compute the PPP lending capacity of banks we have relied extensively on our data base of PPP financing in India. We have computed the ratio of Infrastructure lending to PPP lending following the steps as below –

a. Step 1 – Computation of PPP debt finance by banks till the Year 1997

b. Step 2 – Computation of PPP debt finance by banks till the Year 2006

c. Step 3 – Computation of Net Increase in PPP Debt and Total Infrastructure lending till the Year 2006

d. Step 4 – Computation of PPP lending to infrastructure lending Ratio

The above steps have been used for computation of ratio in the sector “Roads, Ports & Others” for which we have substantial data base. Since in our survey we didn’t consider Power sector, therefore, we don’t have substantial data base on Power sector financing and therefore, Power sector projection has been made separately using a separate methodology.

a. Step 1- Computation of PPP debt finance by banks till the Year 1997

Data on infrastructure outstanding by banks was available only for the financial years, while the database accounted for calendar year data. Therefore, for the purpose of computing a comparable data on PPP debt we have taken the PPP debt financing (from the database) till the calendar year 1997 (i.e. December 1997) as corresponding to FY 1997-1998. We have taken Calendar year 1997 as beginning year for PPP debt financing because FY 1997-1998 (ending on 31st March 1998) covers major part of calendar year 1997 and the PPP lending by banks till the Year 1997 was only around USD 0.1 billion.

It may also be mentioned that complete financing data on some projects is not available and therefore, we have made suitable assumptions on bank finance of those projects on the basis of information available on other comparable projects.

b. Step 2- Computation of PPP debt finance by banks till the Year 2006

Under step 2, we calculated the total PPP debt finance by banks till the Year 2006. In order to compute the PPP debt figure till the Year 2006, we have made some adjustments in the debt financed during the Year 2005 and 2006. these adjustments have been made to account for the fact that database only reports the total amount sanctioned by the banks in


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the calendar year, while the entire debt is not drawn from the bank in the same year, but is drawn over a longer period. To make adjustments for this difference between the database and the RBI data we have assumed that the debts sanctioned in a last two years, i.e. the Years 2005 and 2006, would be released in equal amount over a period of three years. These amounts are generally released over the construction period which is on an average 3 years for these infrastructure projects. Therefore, we have assumed that only 1/3rd of the amount sanctioned in 2006 would have been disbursed by the end of FY2006 and 2/3rd of the amount sanctioned in 2005 would have been disbursed by the end of FY2006.

The analysis of our data after making the above adjustments show that total PPP debt financed by banks till the year 2006 was around USD 3.3 billion.

c. Step 3 - Computation of Net Increase in PPP Debt and Total Infrastructure lending in the period from the year 1997 to the year 2006

Under Step 3, we computed the net increase in PPP Debt and total infrastructure lending by banks. As per our analysis, net increase in PPP lending during 1997-2006 was around USD 3.2 billion and net increase in total infrastructure lending to “Road, Ports & Others” was around USD 9.4 billion during the same period.

d. Step 4 – Computation of Ratio

The ratio of net increase in PPP lending to net increase in infrastructure credit to roads, ports & others by banks was calculated. The ratio, works out to 33% (USD 3.2 billion/ USD 9.40 billion). This means banks in India have lent broadly around 33% of their total Road, Ports & Others infrastructure lending towards PPP in those sectors.

The analysis of our data also shows that there has been significant upward move in PPP lending by banks in the last three years and particularly in the year 2006. Therefore, we have also worked out the PPP lending to total infrastructure lending ratio for the period 2004-2006 and for the year 2006 as well. The increase has been calculated in the same way as the increase for the period 1997-2006. The result for the three periods is presented in the table below:

Exhibit 66: Roads, Ports & Others PPP lending/ Infrastructure lending ratio by Banks in India to these sectors

Period Ratio Year 1997-2006 33% Year 2004-2006 3639% Year 2006 62%

As we can see the ratio of 62% for the year 2006 is much higher than the ratio of 36% for the period 2004-06 and 33% for the period 1997-2006. The higher ratio in the year 2006 is primarily due to large number of PPP projects receiving disbursement during that year. Therefore, we believe that if the projected infrastructure investment is achieved the PPP lending to total infrastructure lending ratio in these sectors could be anywhere between 33% and 62% in the future, and more likely to be over 50%

We believe that going forward, if the growth rate envisaged for infrastructure investment actually happens, the number of PPP projects would increase considerably and as a result the ratio of PPP lending to total infrastructure lending would also increase. We have

39 Suitable adjustment has been made in the bank infrastructure credit outstanding figure as on 31st March 2004 because of conversion of IDBI Ltd into Bank after FY 2003-04.


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therefore, assumed a medium growth scenario where the ratio of PPP to infrastructure lending is 50% in the above sectors such as Roads, Ports & Others.

10.2.2 PPP Lending Capacity of Commercial Banks to Roads, Ports & Other sector PPPs

We have also projected infrastructure credit outstanding of banks under three scenarios and for the ratio of 50% (PPP to Infrastructure credit by banks in roads, ports & other sectors), the projections of PPP infrastructure lending capacity of banks are as presented below-

Scenario – I (20% growth in infrastructure outstanding to roads, ports & other sectors)

2008 2009 2010 2011 2012

YoY PPP lending capacity of banks–(USD Billion) 1.0 1.1 1.4 1.6 2.0

Scenario – II (25% growth in Infrastructure outstanding to roads, ports & other sectors)

2008 2009 2010 2011 2012


Scenario – III (30% growth in Infrastructure outstanding to roads, ports & other sectors)

2008 2009 2010 2011 2012


On the basis of the above computation, total PPP lending capacity of commercial banks towards Roads, Ports & Others over the next 5 years under different scenarios has been shown in the table below-

Roads, Ports & Others PPP Financing Capacity of Banks in next 5 years (USD billion) at PPP Lending to Infrastructure lending ratios of 20% Medium Growth

Roads, Ports & Others Infrastructure Outstanding Growth of Banks

PPP Financing Capacity of Banks in next 5 years

30% - High Growth 12.9

25% - Medium Growth 9.8

20% - Low Growth 7.1

The data on disbursement by banks and repayment period is not available and therefore, repayment during the next 5 years has not been considered. If we consider repayment also, the above figure would be higher but not substantially higher.

Thus, as per our analysis and projection, the maximum capacity of commercial banks to lend towards Roads, Ports & Others PPP would be around USD 12.9 billion in next five years.


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10.2.3 PPP Lending Capacity of Commercial Banks to Power PPP

As stated before, in our survey we excluded the Power sector and therefore, we don’t have detailed financing information of private sector power Generation projects (the IPPs). As a result we cannot follow the same steps as done for Roads, Ports & Other infrastructure sector to compute Power PPP lending to total power sector lending ratio.

In order to derive the ratio of private sector power projects lending to overall lending to power projects by banks we have taken our assumption on the basis of two reports - “Report of the Committee on Financing of Power Sector During the 10th and the 11th Plan” (also called the Kohli Committee report) and “Report of Working Group on Power for 11th Plan” -which states the private sector lending out of total banks lending to power projects as below-

Exhibit 67: Private sector lending out of total Banks lending to power projects in USD Billion

Lenders State Power Projects

Central Power Projects

Private Power Projects

Total

Banks & AIFI 8.3 13.0 2.4 23.6

As per the reports, banks & AIFIs are expected to lend USD 2.4 billion (10% of their total lending) to power projects for private sectors. However, we have assumed the credit from commercial banks to private sector to be around 15% due to faster conceptualisation and implementation of projects by them compared to State and Central projects.

For the ratio of 15%, the projections of PPP infrastructure lending capacity of banks to power sector are as presented below-

Scenario – I (20% growth in Power sector infrastructure outstanding)

2008 2009 2010 2011 2012


Scenario – II (25% growth in Power sector Infrastructure outstanding)

2008 2009 2010 2011 2012

YoY PPP lending capacity of banks–(USD Billion 0.6 0.8 1.0 1.2 1.5

Scenario – III (30% growth in Power sector Infrastructure outstanding)

2008 2009 2010 2011 2012

YoY PPP lending capacity of banks–(USD Billion 0.7 1.0 1.3 1.6 2.1

On the basis of the above computation, total PPP lending capacity of commercial banks towards Power sector over the next 5 years under different scenarios has been shown in the table below-

Exhibit 68: PPP Power Financing Capacity of Banks in next 5 years (USD billion) at Private to Infrastructure lending ratios of 15% Medium Growth

Power Sector Outstanding Growth of Banks

PPP Financing Capacity of Banks in next 5 years

30% - High Growth 6.7

25% - Medium Growth 5.1

20% - Low Growth 3.7


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As per our analysis, the maximum capacity of commercial banks to lend towards Power PPP would be around USD 6.7 billion in next five years.

10.2.4 Further requirement of debt financing from other sources

Considering the investment requirement for PPP infrastructure at around USD64 billion over this period, commercial banks will not be able to meet the debt funding requirement.

Exhibit 69: Calculation of Debt Financing Gap

Amount (USD Billion)

Infrastructure investment requirement 64.0

Estimated Government Grant – 5% 3.2

Investment requirement without grant 60.8

Debt Requirement - 80%* (DER 4:1) 48.6

Banks maximum lending capacity (12.9+6.7) 19.6 (40.4%)

Further requirement of debt financing from other sources

29.0

* 80% is just one scenario, but is a very likely one.

If the projected investment requirement for PPP infrastructure in India (USD 64 billion) in the next five years actually happens the contribution of commercial banks to PPP debt funding, which is currently around 80%, is likely to reduce drastically to a more likely figure of 40% (the maximum capacity deduced above is 19.6 billion which is 40.4% of USD 64 billion).

On one hand issues of asset liability mismatch generated by long term lending to infrastructure projects as also to other retail sectors is leading RBI to advocate increased caution in lending to infrastructure projects. On the other hand group exposure norms, unless changed, are likely to make banks unable to lend to the large developers. The impending implementation of the Basel II norms will mean that the banks will have to significantly increase their risk weighting capital for lending long term. Within the ambit of current RBI policies and implementation of Basel II norms commercial banks’ lending to PPP infrastructure is unlikely to increase beyond the limit (~USD 19.6billion) deduced above.

Financial institutions that are a major source of finance for PPP infrastructure also may not be able to meet the gap. We have therefore, tried to look at their potential to lend to PPP infrastructure and arrive at a gap that will have to be financed by other sources like bonds, foreign banks etc.

10.3 PPP Debt Financing Through Other Financial Institutions

The requirement of debt financing from other sources is to the tune of USD 29 billion. These other sources may include financial institutions like IIFCL, IDFC, PFC and IRFC. We have therefore, on the basis of some assumptions, estimated the approximate amount of debt funding that may be available from these four institutions as some of these financial institutions will be able to meet the USD 29 billion requirement.

10.3.1 Debt Funding From IIFCL

In the past, apart from commercial banks, other financial institutions such as IDFC and IIFCL were also debt financiers, though their share was not high. Going forward, Government of


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India’s policy is to make large amount of funds available to IIFCL and enable it to raise even more fund more from the international market. Therefore, IIFCL is likely to play a more significant role in PPP infrastructure lending.

However, IIFCL’s exposure is currently limited to 20% of the total debt financing requirement in a project. Assuming the same contribution for the future PPP project, and assuming that IIFCL is able to raise the amount as well as able to deploy the entire amount into credit IIFCL’s portion can go upto about USD 10 billion over the next 5 years ( 20% of debt requirement for PPP computed at 80% of project costs after reducing 5% grants). Incidentally, this is not very different from about USD 2.2 billion per year that GOI may guarantee for IIFCL to raise resources.

10.3.2 PPP Lending Capacity of IDFC

Infrastructure Development Finance Company Ltd (IDFC) is a specialized financial institution focused towards infrastructure lending. Over the 5 years, it has financed a number of infrastructure projects and achieved remarkable growth in its lending to infrastructure sector as presented below-

Exhibit 70: Infrastructure loan outstanding of IDFC

Sectors FY2003 FY2004 FY2005 FY2006 FY2007 CAGR Energy (in USD Million) 215 392 536 829 1206 53.8% Transportation (in USD Million)

187 254 406 627 835 45.3%

Telecommunication(in USD Million)

177 271 422 403 526 31.3%

Commercial , Industrial & Others (in USD Million)

12 65 204 381 526 158.2%

Total Infrastructure loan outstanding (in USD Million)

591 983 1568 2240 3092 51.2%

Source- Company Annual Reports & prospectus

CAGR of total outstanding to infrastructure sectors, over the last 5 years (FY2003-2007) has been whopping 51.2%. Sector wise credit outstanding data of IDFC is not available and therefore, we have taken sectoral exposure40 percentage to calculate that. Simultaneously, the data on PPP lending is not available and therefore, we have relied on our data base to arrive at IDFC share in total PPP debt finance.

PPP Transport Lending Capacity of IDFC

Our analysis of data base shows that IDFC share in total Transport PPP debt finance is mere 5% or USD 428 million at the end of calendar year 2006. PPP lending of IDFC over the last 5 years has been presented below-

Exhibit 71: IDFC’s transport PPP lending as on 31st December in USD Million

Sectors 2002 2003 2004 2005 2006

Transport sector PPP lending (in USD Million)

166 194 207 225 428

Transport PPP lending to total transport infrastructure lending was 40% over the last three years (2004-2006). However, given the ambitious plans being drawn-up by IDFC

40 Exposure means approvals, less cancellations less repayments plus defaults of interest, penal interest and liquidated damages, and includes funded and non-funded debt and equity.


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management, the focus of IDFC in private sector infrastructure projects and huge investment expectation by Government in this sector the ratio is expected to increase. Therefore, we have assumed that ratio to be 50% over the next five years and ascertained the YoY PPP lending capacity of IDFC. We have also assumed the growth rate of 40% on total transport infrastructure outstanding of IDFC.

Projected lending to PPP transport infrastructure by IDFC in USD Million

Sectors FY2008 FY2009 FY2010 FY2011 FY2012

Total transport Infrastructure outstanding (USD Million)

1169 1636 2291 3207 4490

Total PPP lending (USD Million) 584 818 1146 1604 2245

YoY PPP Lending Capacity of IDFC (USD Million)

156 234 327 458 641

On the basis of above calculation, total transport PPP lending capacity of IDFC work out to be USD 1.8 billion over the next five years.

Even if we assume the transport PPP lending of IDFC to increase more sharply to reach 60% of its total transport infrastructure outstanding over the next 5 years, its total transport PPP lending capacity would increase only to USD 2.3 billion.

PPP Power Lending capacity of IDFC

In order to assess PPP power sector lending capacity of IDFC, we have adopted same methodology as in the case of banks capacity to Power sector. On the basis of “Report of Working Group on Power for 11th Plan”, we have assumed the IDFC lending to private power projects to be around 15%. Considering the CAGR of 40% in power sector credit outstanding and 15% for private sector power projects, IDFC capacity to lend towards PPP power projects works out to be 0.8 billion.

Even if we assume the PPP Power projects lending of IDFC to increase more sharply to 20% of its total power sector outstanding over the next 5 years, its total Power PPP lending capacity would increase only to USD 1.1 billion.

10.3.3 Lending from PFC

As per our data base, institutions like PFC and IRFC have been very small players in PPP infrastructure financing and the main reason is the less number of PPP in Power and Railways sectors. However, that would not be the case in future because of big increase expected in PPP in these two sectors.

PFC has been a pioneer in financing power sector projects in India. It is the leading power sector public financial institution providing fund and non-fund based support to power sector projects. As of 31st March 2007, the total credit outstanding by PFC was USD 9.8 billion registering a CAGR of 21.8% since FY 2002. As on 31st March 2006, out of USD 7.91 billion, around USD 5.12 billion is towards generation which accounts for 60% of total outstanding.

However, of the total loan assets outstanding as on September 30, 2006 only 3.70% of the loan assets were extended to joint sector utilities and 8.10% of the loan assets were extended to private power utilities


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“Report of Working Group on Power for 11th Plan” states the private sector lending out of total PFC lending to power projects as below-

Exhibit 72: PFC lending to power projects in USD Billion

Lenders State Power Projects

Central Power Projects

Private Power Projects

Total

PFC 14.4 1.8 1.8 18.0

As per the above table, total lending by PFC to private sector appear to be only USD 1.8 billion which is not substantial to bridge the gap of USD 29 billion.

10.3.4 Lending from IRFC

Indian Railway Finance Corporation Ltd. (IRFC) is a dedicated financing arm of the Ministry of Railways (MoR) to finance the railways projects. IRFC is wholly owned by and has a close working relationship with the MoR. The MoR approves IRFC's annual borrowing limits and proposed borrowings. The MoR notifies the company of its funding requirements after the railway budget is approved by Parliament.

At the end of the financial year, IRFC enters into a standard lease agreement with the MoR, wherein the assets financed by it are earmarked and lease rentals are fixed at a mark-up over the average borrowing costs for the year. The ministry pays lease rentals to the company every half year.

During the year 2005-06, IRFC funded acquisition of 228 Locomotives, 2125 Passenger Coaches and 3884 Freight Cars valued at USD 0.73 billion. As on 31st March 2006, cumulative moving infrastructure assets financed by IRFC was valued at USD 7.9 billion. For the year 2006-07, financial requirement target of USD 927 million has been given by MoR. In addition target of around USD 11.11 million has been given for financing the projects being implemented by Railway Vikas Nigam Limited (RVNL). It may be mentioned that RVNL is an arm of MoR to implement the projects with private participation.

IRFC has been the major financer for MoR and would continue to play a major role in railways financing. However, as IRFC’s total funding to private sector was only around USD 0.73 billion during the FY2005-06 it is not very clear as to how much IRFC would be able to finance the investment requirement in Railways to private sector. If we assume the year on year funding to increase by 30%, total funding capacity of IRFC works out to be USD 10.9 billion in next five years. If we assume 10% of total funding of IRFC to go towards PPP in railways, its capacity amounts to USD 1.10 billion only in next five years.

10.3.5 Financing Requirement from Sources Other than Commercial Banks and Financial Institutions

If we consider the lending capacity of institutions as discussed above, the final gap works out to be USD 12.7 billion as presented below-

Exhibit 73: Financing Requirement from Sources Other than Commercial Banks and Financial Institutions (USD billion)

Lenders Capacity to lend towards PPP

Gap after banks lending capacity 29.0

IDFC 3.4


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IIFCL 10.0

PFC 1.8

IRFC 1.1

Final Gap in PPP financing 12.7

It can be seen above that the final gap in PPP financing, after considering all major lenders, amounts to nearly USD 12.7 billion which would be required to be financed by other possible sources like- Foreign banks, Bond market borrowings, ECBs, Insurance Companies, Pension Fund etc., Although, some steps have been taken by Government to initiate reform in the bonds market and Pension Fund, major funding from these sources cannot not be expected in the near future.

10.4 Possibility of Banks Lending more to Infrastructure Sector

It can be concluded from above that commercial banks as well as financial institutions cannot meet the entire debt financing requirement of USD 48.6 billion, unless major financial sector changes take place which can significantly change the exposure of banks to PPP sector.

During our survey, it was repeatedly mentioned by many of the Bankers that they will have to be more concerned in the future on the Asset-Liability mismatch issue when infrastructure sector lending volumes increase substantially. As we have indicated earlier in the main report, banks do not really have long term liabilities to match long term assets they will have to live with in the infrastructure sector loans.

Lending to infrastructure projects not only locks the banks’ fund for longer period but also expose the banks to risks such as - Maturity, Credit and Interest risk. Therefore, it is essential that they are able to manage their maturity risk by use of securitisation, credit risk by use of credit derivatives and interest rate risk by use of interest rate derivatives. Better management of infrastructure loan portfolio will help banks to release their locked up capital and redeploy the money into infrastructure credit.

Therefore, it is important to understand the current situation and issues faced by banks in securitisation, credit derivatives and also interest rate derivatives in India.

10.4.1 Securitisation

Securitisation as a financial instrument has been in practice in India since the early 1990s – essentially as a device of bilateral acquisitions of portfolios of finance companies. Some of the early securitisation deals involved actual sale of loans or quasi-securitisations where creation of any form of security was rare and the portfolios simply moved from balance sheet of one originator over to that of another. As there were no rules for regulatory capital requirements, most of the so called securitisation investors were actually taking exposure on the balance sheet of the originator. However, the securitisation transaction structures in India have evolved over time. From unstratified pass-throughs, the market has several types of multi-tranche paper now, including prepayment protecting, and prepayment-protected classes.

The National Housing Bank (Amendment) Act, 2000 came into force from June 12, 2000, which, provides for creating Special Purpose Vehicle (SPV) Trust by NHB for taking up securitisation transactions and issuing MBS in various forms. Securitisation through Mortgage baked securities actually started in a big way after the amendment to National Housing Bank Act. NHB through this amendment could facilitate securitisation transactions involving assignment of retail housing loans from the Housing Finance Corporations to NHB.


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The loans, repayable in equated monthly instalments (EMIs), were packaged and offered to investors as Pass Through Certificates (PTCs) by NHB, acting as Issuer and Trustee. The housing loans, which constitute the receivables to be securitised, are held by a Special Purpose Vehicle (SPV) in the nature of a trust, declared by NHB. The PTCs are in the nature of trust certificates and represent proportionate undivided beneficial interest in the pool of housing loans.

“The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002” (The Act) was also enacted in 2002 to promote the setting up of asset reconstruction/securitisation companies to take over the Non Performing Assets (NPA) accumulated with the banks and public financial institutions.

Securitisation volumes in India have been scaling new peaks every year since these acts have been passed. The securitisation market in India reached new highs till about 2005. Standard and Poor’s reported the Asian securitisation data for 2003, and India was no. 2 in ex-Japan Asia in terms of volumes, next only after Korea. Though the gap between India and Korea was huge, the Indian market continued to grow at cumulative growth rate of nearly 100% through 2004.

However, in early 2006, the RBI came out with guidelines on regulatory capital treatment for securitisation. ICRA’s report on “Update on Indian Structured Finance products-June 2007” reports a slow down in the growth rate of securitisation activity and reduction in size of transactions in the year 2005-2006 and 2006-2007. Apart from the issuance of securitisation guidelines by the RBI, tight liquidity conditions and rise in interest rates too led to the slow-down in securitisation in the year 2006.

In the year 2007, the securitisation market in India has picked up again and shown an increase of 44% over previous year, according to ICRA’s June 2007 report.

During the financial year 2007, around 65% of the securitised assets were originated by banks and the balance by NBFCs. Interestingly; according to the report, many of these transactions were in LSO category where single corporate loans were securitised by banks. A common structure used has been a longer tenure loan with annual put and call option, wherein under the securitisation transaction it is mandatory for the SPV to exercise the loan recall option at the end of one year, thereby effectively ensuring one year tenure for the investor. There has been no multi-credit CDO in the Indian market till now.

In Infrastructure there has been securitisation of two annuity projects by GMR and a BOT project by L&T. These securitisations have been simple transactions where based on the future cash flows of annuity to the project company from NHAI, the project company has raised more loan from banks. GMR has refinanced its initial loans (at around 10%) for two annuity projects at 7.5% plus raised extra debt to invest in other projects. While L&T too has refinanced its loan for Coimbatore bypass project and raised extra debt to invest in other projects. These are not the conventional securitisations through issue of PTCs to investors.

Few of the issues in the Indian securitisation market are:

• Current regulations in India had slowed the rapid growth of securitisation market. However, the market is now moving towards international standards and Basel II norms. The market is picking up again and has come out of the initial shock of stricter capital requirements. Following RBI guidelines analysts believe originators will more actively look to place mezzanine (second loss) piece with investors to reduce the capital impact.

• Limited investor base, comprising mutual funds and a few private sector banks;

• Banks play a dominating role in the secondary markets in India, while mutual funds are emerging as another major player as investors in the securitisation market. Other players that are very active in the international market like Insurance and pension funds are not active in India. In India, pension funds are unable to access the securitisation market, while insurance funds have limited presence in the market.


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Reports are that mutual fund, which are the major investors in the market are actively diverting investments into other markets like equity for higher returns. While, in countries like Peru and Columbia institutional investors have been the key participants leading to development and increase in depth of the securitisation market. Investor base in India can therefore, be widened only by bringing in insurance and pension funds into the market. This however, may only be possible, if the investment regulation for these funds is relaxed from AA to BBB or atleast A.

• Simultaneously, securitisation market in other emerging economies is being increasingly accessed directly by private infrastructure companies to finance PPP projects. However, in India the dominance of banks in the sector and illiquidity in the markets for such instruments, has led to stifling of issuance of securitisation products by Corporates.

• Compared to India, other emerging market economies like Brazil, and Mexico have many types of asset classes being securitised. While in India only three asset classes were securitised in the year 2007. The reason being, no participation from public sector banks which have huge loan portfolios and hence huge potential of securitising their loans. Another reason is that the current regulatory guidelines have reduced the capital relief to banks through securitisation and only certain asset classes where relief is higher are being securitised.

• Most investments in securitised paper in India are made on a “hold to maturity” basis and Pass-though certificates (“PTCs”) are still not classified as securities and hence are not tradable on the stock exchange. The secondary market for securitised paper is therefore, virtually non-existent with little trading and all issuance being privately placed. In one of the major move by the Government of India recently, PTCs have been classified as securities by including it within the definition of tradable securities. We believe that with the inclusion of PTCs under securities, liquidity will increase which would lead to further growth in securitisation.

10.4.2 Credit Derivatives

World over, credit derivatives are the major instrument today for banks to manage their risks and are a very important component of the market today. Products like Credit default swaps, credit linked notes, and indexed trades are showing tremendous increase in the global market. Credit derivatives also increase liquidity in the secondary market with banks issuing papers to transfer their credit risk by sometimes packaging several project debts together, to buyers with different risk appetite. Typically the buyers of these products would include other banks, pension funds, insurance companies, other institutional investors etc. Since, the market is very liquid for such products internationally, banks or the buyers of such products do not have issue of asset-liability mismatches. The timing of such sell downs also range from immediate to few years depending on the risk profile of projects.

Credit Derivatives Globally

Credit Derivatives is one of the fastest growing markets in the banking industry. The growth of the global credit derivatives market has outperformed all expectations from the year 2004 and continues to do so. Credit default swaps and full indexed trades are the most traded instruments in the global credit derivatives market today.


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There are many factors that have contributed to the rapid growth in credit derivatives market in the world today, including: greater focus by banks and other financial institutions on risk management; a more rigorous approach to risk/return judgments by lenders and investors and an increasing tendency on the part of banks to look at their credit risk exposures on a portfolio-wide basis; efforts by market intermediaries to generate fee income; a generally low interest rate environment, which has encouraged firms to search for yield pickup through broadening the range of instruments they are prepared to hold; and arbitrage opportunities arising from different regulatory capital requirements applied to different kinds of financial firm. However, there are still some issues in the international market that are being debated constantly such as need for market participants to improve risk management capabilities and for supervisors and regulators to continue improving their understanding of the associated issues.

Source: BBA Credit Derivatives Report 2006

However, credit derivatives market in India today is virtually non existent. Apart from some single loan securitisation which we can call CDOs, other instruments are non-existent in India.

RBI in March 2003 had issued "Draft guidelines for introduction of Credit Derivatives in India" for comments. The draft guidelines talked about enabling the banks and the financial institutions, in India, to manage their credit risk by permitting them the use of credit risk hedging techniques like the credit derivatives. The instruments included were the Credit Default Swap (CDS), Credit Default Option, Credit Linked Note (CLN), Credit Linked Deposits/ Credit Linked Certificates of Deposit, Repackaged Notes, Collateralised Debt Obligations (CDOs), and Total Return Swaps. However, these guidelines were not finalised.

Subsequent to RBI’s Annual Policy Statement 2007-08 wherein, it was considered appropriate to introduce credit derivatives in a calibrated manner at this juncture, and to begin with permit commercial banks and Primary Dealers to transact in single-entity credit default swaps, RBI in May 2007 had issued Draft guidelines for only one credit derivative – the Credit Default Swaps for comments.

Institutional investors are the major investors in the credit derivatives market. The primary reason for this is that credit derivatives provide access to otherwise inaccessible retail loan market to these institutional investors. Insurance funds, pension funds and mutual funds can access the retail loan market without going to the market, by buying into the products structured by banks, on the basis of the underlying retail loans. However, currently in India the banks, especially the public sector banks are unable to issue credit derivatives and hence there is no market for such products.

Apart from the regulatory guidelines not being in place there are other bottlenecks faced by banks currently in India. These bottlenecks include the non-availability of skilled manpower in the Public Sector banks (PSU banks) and the lack of sophisticated IT infrastructure in the PSU banks to handle monitoring of such complex structures and trading. The public sector banks interviewed by us voiced these concerns specifically.

10.4.3 Interest Rate Derivatives

In India interest rate derivatives came into existence in 1999 when OTC trading of interest rate derivatives for balance sheet management and market making purpose was allowed by the RBI.


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The Reserve Bank of India, had issued guidelines for Scheduled commercial banks (excluding Regional Rural banks), primary dealers and all-India financial institutions in 1999 to undertake Forward Rate Agreements and Interest Rate Swaps (FRAs/IRS) as a product. The guidelines not only allowed the mentioned institutions to trade in FRAs/IRS for their own balance sheet management but also for market making purposes. Corporates were also allowed to use IRS and FRA to hedge their exposures.

Further, in June 2003, the Reserve Bank of India had issued guidelines to banks/primary dealers/FIs for transacting in exchange traded interest rate futures only in three Government securities viz notional 10-year Government security, a 3-month Treasury Bill rate and a 10-year Government zero coupons.

Since then, the interest rate derivatives market in India has been grown drastically, however, dominated by OTC trading. The volumes in interest rate derivatives market in India have reached USD 150billion in the year 200441 while as of December 2006, the notional amount outstanding combined in the OTC/exchange derivatives markets for interest rate derivatives accounted for USD325 billion.

In the Indian Market:

• Although the interest rate derivatives are available for tenure of upto 10 years, there is still lack of depth in the market in terms of the type of products available. Contracts like Interest rate caps, floors, swaptions etc. are not available in India.

• The Indian Market is dominated by the OTC trading, with exchange trading in futures only in Government securities. Even in these securities the volumes are not very large.

• In infrastructure the players in the interest rate derivatives market include Corporates like L&T and Reliance which have strong treasuries to manage and monitor their risks and PSUs like NHB, REC, PFC, IRFC, etc. Other smaller Corporates have not been accessing the market to hedge their interest rate risks.

RBI is taking some steps to further develop the interest rate derivatives market in India, such as:

• to have a mechanism for transparent capture and dissemination of trade information as well as an efficient post-trade processing infrastructure in the OTC market. CCIL is being advised to start a trade reporting platform for Rupee Interest Rate Swaps (IRS);

a Working Group is being set up to go into all the relevant issues and to suggest measures to facilitate the development of the interest rate futures market.

41 Source: Rakesh Mohan. 2004. Debt Markets in India – Issues and Prospects as reported in RBI Bulletin December 2004


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11 Annexure 6 - Project Risk Profile and Relationship to Lending Terms

11.1 Background to the Analysis

The preliminary analysis of the financing of PPP projects as also the meetings and discussions with various stakeholders of the PPP projects gave a distinct impression that pricing of risks is not being done appropriately while setting the terms of the debts by the bankers. To test this hypothesis further, within the limitation of data available, it was decided to analyse the lending terms of one set of projects all belonging to one sector but with differing risk profiles.

11.2 Methodology

We selected two sets of data from the Roads sector -projects that achieved financial closure in 2002 and in 2006- for risk profiling and evaluation (Data list provided in Annex 1). Since the India G-Sec rates changed substantially during the study period, it was decided to consider projects that achieved financial closure in the same year only and hence two sets of results were obtained (one for 2002 and the other for 2006).

Within the limitations on the data availability, we then listed a few independent parameters that will define the risk profile of a project. While typically banks use parameters like the Construction risk, O&M risk, Regulatory risk, Demand risk etc and evaluate lending to infrastructure project on the basis of set measures (refer box below), which are captured in a loan term sheet. However, our data on the financial closure terms do not capture these information and therefore, we have tried to develop the risk profiles of the projects based on the risk variable on which the data is available.

A typical project risk evaluation is done in the following manner:

• Banks agree on financing the project if they feel they have a basic comfort with the promoter, the sector and the project concept.

• If acceptable financial analysis is carried out by banks. The primary factor looked at is the Debt Service Coverage Ratio and sometimes also the Loan Life Coverage Ratio.

• The pricing of the loan is done on the basis of discussion with promoters, comparison with pricing got for similar projects from other banks as well as the pricing on a similarly project financed earlier. This comparison probably results in similarities in the interest rate of the loan.

• Several risks like Construction risk, O&M risk, Regulatory risk, Demand risk etc. are rated on the basis of judgement of the bank’s deal team and in all the high risk areas specific mitigation measures are demanded. Some typical risk mitigation measures are:

o Construction risk- Cost and time overrun support to be brought in form of equity

o Promoter risk- Corporate guarantee, sponsor support

o Technology risk- Liquidated damages to be given by technology provider

o Demand risk- Creation of a Debt service reserve account

• In addition banks also earn from projects beyond the debt that they give out. Other income which can earn fee based income for banks comes from providing financial advisory to the project, providing guarantees and carrying out the loan syndication for the project. These are also often taken into account while pricing the loan.

As seen above risk mitigation measures are the additional costs which are to be borne by riskier projects.


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Our interviews had also given us a fair Idea on weightage that the bankers would assign to these parameters. We assigned scores (0 to 3) against the magnitude of risk (no risk, low to high risk) and arrived at the risk marking table to be used (see below).

Parameters for risk profiling and the method of marking

Risk Parameters

HIGH AVERAGE LOW Weightage

Developer (Net Worth) in USD Million

< 100 100-1000 > 1000

Score 3 2 1

20.0%

Developer (Revenue) in USD Million

< 200 200-500 > 500

Score 3 2 1 15.0%

Independence of the construction contractor

Not independent

Partially Fully

independent Score 3 2 1

0.0%

Awarded by State Centre Score 2 1

10.0%

Region Centre/East North/South/West Score 2 1

2.5%

Project type Annuity/BOT BOT Annuity Score 3 1

15.0%

Project Size <100 Crore

100-500 Crore

>500 Crore

Score 3 2 1 5.0%

Project IRR <12% 12%-15% >15% Score 3 2 1

15.0%

Contract period <15 yrs 15-20 yrs >20 yrs Score 3 2 1

2.5%

Grant from the Government No Yes Score 1 0

10.0%

Negative Grant Yes No Score 2 0

5.0%

Against each project of our sample, we then applied the above marking and calculated the final risk score for each project. A composite score was calculated for each project. Lower score for a project would mean lower the overall risk profile of the project. The projects were then arranged in a descending order and grouped into High /Medium /Low risk on the basis of cut-off scores as in table below:

Overall risk categorisation

Composite Score >2.2 1.5-2.2 <1.5 Categorised Score ( overall risk category)

3 (high)

2 (medium)

1 (low)

The composite risk profile and the categorised score of the projects are listed in Annex 2.

We then looked at the information pertaining to the lending terms of these projects and attempted to see if there is any clear relationship between the risk profile (as obtained from the above method) and the actual lending by the bankers. For this purpose, we first considered the actual interest rate charged.


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11.3 Relationship between the Risk Profile and the Lending Terms

Based on the risk profile generated for the selected project we did not find significant relationship between the project risk and the interest rate. Even higher risk weighted projects have also been able to achieve low interest rates. As seen from the table below average interest rate for the projects in the three risk categories does not show any relationship with the risk category in either 2002 projects or 2006 projects.

Exhibit 74: Risk and Interest Charged

Financial Closure Year Risk Category Average Interest Rate 2002 1 12.00

2002 2 13.00

2002 3 10.00

2006 1 9.09

2006 2 9.39

2006 3 9.79

Project Type Risk Category Average Interest Rate Annuity 1 12.00

Annuity 2 9.50

BOT 1 9.09

BOT 2 9.54

BOT 3 9.82

Note: Outlier Projects showing extremely high or low interest rate have been removed from the analysis.

This could either mean that pricing of interest rates is not linked to risk profile or it could also mean that other factors (other than interest rates) are being used by bankers to price higher risks. Some further discussions with bankers have revealed that the risk evaluation framework used by many banks invariable allocate maximum risk to PPP infrastructure projects. Therefore, banks ask for other comfort factors (such as balance sheet support from sponsors, corporate and sometimes personal guarantees from promoters, creation of debt service reserves, etc.) which can not be captured in the evaluation the relationship between the project risk and lending terms. Therefore, based on the comfort factors developers finally provide, the banks tweak the interest rates a bit. Therefore, it is difficult to conclude that risks are not being priced properly.

During our discussions, it was also revealed that most banks have their own risk evaluation frameworks, while some other banks do not appraise the projects themselves but rely heavily on the lead bank for the analysis and appraisal. However, these frameworks capture most of the typical project risks that PPP infrastructure projects have, even though it is not very clear as to how exactly the results of the risk analysis by banks get converted into a pricing decision. If the project risks are not priced into the interest rates there could be other factors where it could be priced like the debt repayment terms.

Therefore, to further examine the relationship between the risk profiles and the lending terms, we considered another theoretical parameter called the ‘Debt Annuity per Kilometre’ used by some rating agencies to compare toll road and railway projects. Debt Annuity per Kilometre here is defined as the annualised debt at a fixed rate of interest (we took 10%) for a tenure that leaves 1 year tail from the concession period, divided by the length (in Km) of the road project. For example, if a road project with project cost of USD 100 million and concession period of 30 year for certain road length (say 100 km) has a debt of USD 70 million, the annualised payment of USD 70 million at 10% rate of interest and repayment


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over 29 years is called the Debt annuity per kilometre. Typically, a project perceived as a higher risk project should have a lower debt annuity per Km to give the bankers a higher level of comfort.

We have looked at the average debt annuity per km for project under the three risk categories by year and by project type (i.e. annuity or BOT) and for two years (i.e. 2002 & 2006). Interestingly, we find that there is a clear relationship between debt annuity per Km and the project risk as far as high risk and other projects are concerned. However, between medium risk and low risk projects, there is not much of a difference in debt annuity per Km.

Exhibit 75: Debt annuity per Km and risk category

Financial Closure Year Risk Category Debt Annuity per Km.

(USD million) 2002 1 0.15

2002 2 0.10

2002 3

2006 1 0.14

2006 2 0.15

2006 3 0.10

Project Type Risk Category Debt Annuity per Km.

(USD million) Annuity 1 0.15

Annuity 2 0.13

BOT 1 0.14

BOT 2 0.14

BOT 3 0.10

Note: Outlier Projects showing extremely high or low debt annuity per km have been removed from the analysis.

11.4 Conclusion

Based on the limited analysis carried out here, it is difficult to conclude definitively that bankers are not pricing their risks appropriately (or for that matter that they are). Due to the smallness of sample with similar fixed parameters (year, sector, etc.) and due to the complexity of pricing parameters (interest rates, DSCR, guarantees, etc.) it would not be possible to come to anything other than subjective conclusions.


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11.5 Data List

Proj Code

Project Name Primary

Developers Length (Km.)

Annuity Awarded by Code

Region Code

Financial Closure Year

Concession Period (Yrs)

TPC (USD Million)

Project IRR

A1 Ankapalli – Tuni/ km 359.2 - km 300/ Andhra Pradesh

GMR 58.95 Annuity 1 4 2002 17.5 68.20 NA

A2 Gwalior Bypass (NS-1/BOT/MP-1) km 0 to km 42.033 / Madhya Pradesh

Ramky Infrastructure Ltd.

42.00 Annuity 1 1 2002 20.0 66.67 13.00

A3 Palsit – Dankuni/ km 581 - km 646/ West Bengal

Gamuda Malaysia 65.00 Annuity 1 3 2002 20.0 90.02 NA

A4 Panagarh – Palsit/ km 517 - km 581/ West Bengal

Gamuda Malaysia 64.46 Annuity 1 3 2002 20.0 126.99 NA

A5 Tambaram - Tindivanam km 28 - km 121/ Tamil Nadu

GMR 93.00 Annuity 1 4 2002 17.5 88.08 NA

RS1 Bhuj Nakthrana Road M.S. Khurana Engineering

45.00 BOT 2 2 2002 13.0 7.78 NA

RS2 Himmatnagar Bypass MSK Projects(I) Ltd. 8.00 BOT 2 2 2002 15.0 1.56 NA

RC1 Haldia Port NH-41 (from Kolaghat on NH-6 to Haldia) West Bengal

NHAI 53.00 BOT 1 3 2002 30.0 60.67 NA

RC2 Jawaharlal Nehru Port Phase-I/ Maharashtra

NHAI 30.00 BOT 1 2 2002 30.0 39.56 14.60

RC3 Jawaharlal Nehru Port Phase-II/ SH-54 + Amramarg + Panvel Creek Bridge/ Maharashtra

NHAI 14.35 BOT 1 2 2002 30.0 39.13 NA

RC4 New Mangalore Port NH-17 (Suratkal-Nantur Section), NH-48 (Padil Bantwal Section)/ Karnataka

NHAI 37.00 BOT 1 4 2002 30.0 40.56 11.28

A6 Bara to Orai/ km 449 to 422 on NH-2 & km 255 to km 220/ Uttar Pradesh

Nagarjuna Construction Company Ltd.

62.80 Annuity 1 1 2006 20.0 129.96 NA

RS3 Hoshangabad-Harda-Khandwa Road MSK Projects(I) Ltd. 185.60 BOT 2 1 2006 15.0 21.33 NA

RS4 Punjab Road Sector Project: Phase II – Upgradation, Operation and Maintenance of Balachaur – Dasuya Road on B.O.T Basis

Rohan Builders India Pvt. Ltd.

104.96 BOT 2 1 2006 17.0 28.78 21.08

RS5 Raisen-Rahatgarh Road MSK Projects(I) Ltd. 100.00 BOT 2 1 2006 15.0 14.67 NA

RS5 Upgradation, Operation and Maintenance of Patiala - Malerkotla Road on B.O.T. Basis

IDEB Projects Pvt Ltd.

55.70 BOT 2 1 2006 16.5 16.43 8.69

RC5 Agra – Bharatpur/ Rajasthan[20]/Uttar Pradesh[25]

Oriental Structural Engineers Pvt. Ltd.

45.00 BOT 1 1 2006 20.0 49.80 NA


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RC6 Ambala – Zirakpur/ Km. 5/735 to Km. 39/961 of NH-22 and Km. 0/0 to Km. 0/871 of NH-21 Haryana[6]/ Punjab[30]

GMR 36.00 BOT 1 1 2006 20.0 86.92 NA

RC7 Aurang - Raipur Km 232 to Km. 281 Chattisgarh

DS Construction Ltd.

45.00 BOT 1 3 2006 25.0 63.56 17.22

RC8 Bharatpur-Mahua/ km. 63 to Km. 120/ Rajasthan

Madhucon Projects Ltd.

57.00 BOT 1 2 2006 25.0 66.21 NA

RC9 Bharuch-Surat package BOT-II / 4 laning / Gujarat

Ideal Road Builders Pvt. Ltd.

65.00 BOT 1 2 2006 20.0 313.13 NA

RC10 Chennai - Ennore Express Way NHAI 21.10 BOT 1 4 2006 30.0 68.67 12.60

RC11 Farukhanagar to Kotakatta (NS-2/AP-4)/ Km 80.050 to km 135.469/ Andhra Pradesh

L&T 55.74 BOT 1 4 2006 20.0 82.74 NA

RC12 Farukhanagar to Kottakata (NS-2/AP-3)/ Km. 34.140 to km 80.050/ Andhra Pradesh

GMR 46.16 BOT 1 4 2006 20.0 104.74 13.38

RC13 Four laning from km 0.0 to km 53.0 of Salem – Kumarapalayam on NH-47 on BOT basis.(Contract Package No. NS-2/BOT/TN-6)

IVRCL Infrastructure Projects Ltd.

53.53 BOT 1 4 2006 20.0 111.56 14.79

RC14 Four laning from km 407.100 to km 456.100 of NH-1 (Jalandhar –Amritsar Section) in the State of Punjab on BOT basis


49.00 BOT 1 1 2006 20.0 52.83 11.60

RC15 Four laning from km 53.0 to km 100.0 of Kumarapalayam-Chengapalli section of NH-47 on BOT basis.(Contract Package No. NS-2/BOT/TN-7)


48.51 BOT 1 4 2006 20.0 93.68 16.26

RC16 Gonde-Vadape (Thane)/ Km. 440/000 to Km. 539/500 Maharashtra

Gammon India 100.00 BOT 1 2 2006 20.0 167.33 NA

RC17 Guna Bypass/ Km. 319/700 to Km. 332/100 / Madhya Pradesh


14.00 BOT 1 1 2006 15.0 14.67 NA

RC18 Indore-Khalghat/ Madhya Pradesh Oriental Structural Engineers Pvt. Ltd.

80.00 BOT 1 1 2006 20.0 144.44 NA

RC19 Karur to Madurai (TN-4) Km 305.6 to Km 373.275 Tamil Nadu (Karur to Dindigul)


68.13 BOT 1 4 2006 20.0 82.96 NA

RC20 Karur to Madurai (TN-5) Km 373.275 to km 426.6Tamil Nadu

Reliance Energy Ltd.

53.03 BOT 1 4 2006 20.0 92.22 NA

RC21 Kondhali – Telegaon/ Km 50 to Km 100/ Maharashtra


50.00 BOT 1 2 2006 20.0 70.63 NA

RC22 Krishnagiri to Thopurghat (NS-2/TN1) Km. 94.000 to 156 Tamil Nadu

L&T 62.50 BOT 1 4 2006 20.0 116.67 NA


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RC23 Mahua-Jaipur/ Km. 120 to Km 228/ Rajasthan

IJM 108.00 BOT 1 2 2006 25.0 117.64 NA

RC24 Meerut-Muzaffarnagar/ Km 52.250 to Km.131.00/ Uttar Pradesh

Gayatri Projects Ltd. 79.00 BOT 1 1 2006 20.0 118.89 NA

RC25 Nagpur – Kondhali/ Km 9.2 to Km 50/ Maharashtra

Atlanta Construction Co.

40.00 BOT 1 2 2006 20.0 50.28 NA

RC26 Padalur-Trichy Package VI-6 / km 285.00 to km 325.00 / Tamil Nadu

Navayuga 40.00 BOT 1 4 2006 25.0 91.33 NA

RC27 Palanpur to Swaroopganj (Rajasthan -42 km & Gujarat-34 km )/ km 264 to km 340 (Rajasthan 42 km & Gujarat -34 km)/ Gujarat[34]/Rajasthan[42]

L&T 76.00 BOT 1 2 2006 20.0 123.42 8.89

RC28 Panipat Elevated Highway/ Km 96.00 to 86.00/ Haryana

L&T 10.00 BOT 1 1 2006 20.0 93.67

RC29 Salem to Karur (NS-2/TN-2) Km. 207.050 to Km 248.625 Tamil Nadu

MVR 41.55 BOT 1 4 2006 20.0 57.16 19.99

RC30 Salem to Karur (NS-2/TN-3) Km 258.645 to Km 292.6 Tamil Nadu


33.48 BOT 1 4 2006 20.0 76.62 11.97

RC31 Sitapur – Lucknow/ Km 488.27 to km 413.20/ Uttar Pradesh


75.00 BOT 1 1 2006 20.0 100.09 NA

RC32 Tindivanam - Ulunderpet package VI-a / km 121 to km 192.25 / Tamil Nadu

GMR 71.25 BOT 1 4 2006 20.0 176.67 NA

RC33 Ulundurpet - Padalur (Pkg- VI-B) km 192.25 - km 285.00 Tamil Nadu

IJM 92.75 BOT 1 4 2006 20.0 166.22 14.65

RC33 Vadodara to Bharuch Package BOT-1/ 6 lanning/ Gujarat

L&T 83.30 BOT 1 2 2006 15.0 322.22 13.25

RC33 Western Expressway DS Construction Ltd.

135.60 BOT 1 1 2006 30.0 425.56 11.97

Awarded by: Code 1 = Centre Projects; Code 2 = State Projects

Region: Code 1 = Centre; Code 2 = Western; Code 3 = Eastern; Code 4 = Southern,

NA = Data Not available


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Proj Code

Project Name Primary

Developers

Debt (USD Million

Debt as percentage of TPC

Sub Debt as

percentage of TPC

Grant (Y/N)

Negative Grant (Y/N

Debt Equity Ratio*

Debt Equity Ratio **

Tenure (Yrs)

Reset Period (Yrs)

Moratorium Period (in Years)

Interest Rate (%)

Corporate / Personal Guarantee


GMR 50.69 74% 0% N N

2.9 2.9 15.0 5.00 0.0 7.50 NA


Ramky Infrastructure Ltd.

44.44 67% 0% N N

2.0 2.0 NA NA NA NA

NA


Gamuda Malaysia

74.26 75% 7% N N

3.0 3.0 15.0 1.00 3.0 12.00 NA


Gamuda Malaysia

93.11 73% 0% N N

2.7 2.7 15.0 1.00 3.0 12.00 NA


GMR 64.30 73% 0% N N

2.7 2.7 15.0 5.00 0.0 7.50 NA

RS1 Bhuj Nakthrana Road M.S. Khurana Engineering

5.45 70% 0% N N

2.3 2.3 10.5 NA 1.5 10.00 1

RS2 Himmatnagar Bypass MSK Projects(I) Ltd.

1.09 70% 0% N N

2.3 2.3 NA NA 1.5 NA NA


NHAI 45.29 38% 37% N N

0.6 0.6 12.0 1.00 2.0 13.00 NA


NHAI 22.89 41% 17% N N

0.7 0.7 NA NA NA NA NA


NHAI 23.36 37% 22% N N



NHAI 20.28 50% 0% N N



Nagarjuna Construction Company Ltd.

97.47 75% 0% N N

3.0 3.0 13.5 1.00 3.0 9.50 NA

RS3 Hoshangabad-Harda-Khandwa Road

MSK Projects(I) Ltd.

5.22 24% 0% Y N

0.3 1.1 8.0 NA NA

11.00 NA


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Rohan Builders India Pvt. Ltd.

14.80 51% 0% Y N

1.1 4.9 7.0 NA 2.0 10.25 NA

RS5 Raisen-Rahatgarh Road MSK Projects(I) Ltd.

4.00 27% 0% Y N

0.4 1.2 9.0 NA NA

8.50 NA

RS5 Upgradation, Operation and Maintenance of Patiala - Malerkotla Road on B.O.T.Basis

IDEB Projects Pvt Ltd.

9.56 58% 0% Y N

1.4 7.8 10.0 NA 3.0 10.00 NA



37.33 75% 0% N N

3.0 3.0 15.0 1.00 4.5 9.75 NA


GMR 66.22 72% 4% N

Y 1.7 2.6 15.0 3.00 4.3 8.50 NA



44.44 70% 0% Y N

2.3 2.4 13.7 2.00 2.0 10.00 NA



44.10 67% 0% Y N

2.0 3.2 12.0 NA 3.0 8.50 NA


Ideal Road Builders Pvt. Ltd.

269.10 86% 0% N

Y 1.7 6.1 11.0 3.00 1.0 9.25 1

RC10 Chennai - Ennore Express Way

NHAI 26.67 39% 0% N N

0.6 0.6 15.0 NA 3.0 8.00 NA


L&T 60.30 64% 9% Y N

1.8 2.7 15.3 3.00 3.0 9.19 NA


GMR 78.57 75% 0% N N

3.0 3.0 16.0 3.00 2.0 9.25 1



65.11 44% 14% Y N

0.8 1.5 15.0 3.00 3.0 9.25 NA


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34.89 66% 0% Y N

1.9 3.8 8.0 NA 3.3 8.25 NA



75.33 76% 5% Y N

3.1 3.8 15.0 3.00 3.0 9.25 NA


Gammon India 144.44 86% 0% Y N 6.3 12.5 15.0 3.00 4.0 9.00 1



9.33 64% 0% N

Y 1.6 1.8 11.0 3.00 2.0 9.00 NA

RC18 Indore-Khalghat/ Madhya Pradesh


115.56 80% 0% N

N 4.0 4.0 15.0 1.00 4.0 10.00 NA



49.78 60% 0% Y N

1.5 3.0 16.0 NA 3.5 8.50 NA



84.18 80% 11% N N

4.0 4.0 16.0 1.00 1.0 9.25 NA



54.44 77% 0% Y N 3.4 3.9 15.0 3.00 3.8 9.50 NA


L&T 99.11 75% 10% N Y 0.8 3.0 14.1 3.00 4.3 8.25 NA


IJM 76.44 65% 0% Y N

1.9 2.4 12.5 3.00 3.3 8.25 NA


Gayatri Projects Ltd.

85.56 66% 6% Y N

2.0 2.9 14.6 3.00 4.0 10.20 NA


Atlanta Construction Co.

24.44 49% 0% Y N

0.9 1.9 13.0 0.08 3.0 9.50 1


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Navayuga 59.11 65% 0% Y N

1.8 3.1 14.0 2.00 3.5 9.50 NA


L&T 111.11 90% 0% N N

9.0 9.0 16.5 0.50 3.0 NA NA


L&T 74.93 70% 10% N Y 0.6 2.3 13.2 NA 4.0 10.21 NA


MVR 46.00 75% 5% N Y 1.0 3.0 15.0 3.00 3.0 10.77 1



61.33 80% 0% Y N 4.0 6.2 14.8 1.00 1.0 9.25 NA



47.56 48% 0% Y N 0.9 1.8 15.0 2.00 4.0 10.00 NA


GMR 132.50 75% 0% N Y 1.9 3.0 15.0 3.00 3.5 9.25 NA


IJM 120.22 65% 7% Y N 1.9 2.2 14.5 NA 1.2 9.73 NA


L&T 312.56 80% 17% N N

4.0 4.0 13.6 2.00 4.0 10.15 NA

RC33 Western Expressway DS Construction Ltd.

255.33 60% 0% N N

1.5 1.5 13.8 1.00 3.0 10.50 NA

* Senior Debt to Pure Equity

** Sub-Debt has been included on the equity side

11.6 Composite Risk Profile and the Categorised Score of the Projects

Weightage 20% 15% 0% 10% 3% 15% 5% 15% 3% 10% 5%

Proj Code

Project Name Developer (Revenue)

Developer (Net

Worth)

Independence of the

construction contractor

Awarded by

Region Project type Annuity/BOT

Project Size

Project IRR

Contract period

Grant from the

Government

Negative Grant

Composite Risk Profile Score

Risk Category


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Weightage 20% 15% 0% 10% 3% 15% 5% 15% 3% 10% 5%

Proj Code


Developer (Net

Worth)

Independence of the


Awarded by


Project Size

Project IRR

Contract period

Grant from the

Government

Negative Grant


Risk Category


2 3 2 1 1 1 2 2 2 1 1 1.73 2


1 2 1 1 1 1 2 2 2 1 1 1.38 1


1 1 1 1 2 1 2 2 2 1 1 1.25 1


1 1 1 1 2 1 1 2 2 1 1 1.20 1


2 3 2 1 1 1 2 2 2 1 1 1.73 2

BS1 Bhuj Nakthrana Road 3 3 3 2 2 3 3 2 3 2 2 2.58 3

BS2 Himmatnagar Bypass 2 3 3 2 2 3 3 2 3 2 2 2.38 3

BC1 Haldia Port NH-41 (from Kolaghat on NH-6 to Haldia) West Bengal

1 1 1 1 2 3 2 2 1 1 1 1.53 2

BC2 Jawaharlal Nehru Port Phase-I/ Maharashtra

1 1 1 1 2 3 3 2 1 1 1 1.58 2

BC3 Jawaharlal Nehru Port Phase-II/ SH-54 + Amramarg + Panvel Creek Bridge/ Maharashtra

1 1 1 1 2 3 3 2 1 1 1 1.58 2

BC4 New Mangalore Port NH-17 (Suratkal-Nantur Section), NH-48 (Padil Bantwal Section)/ Karnataka

1 1 1 1 1 3 3 3 1 1 1 1.70 2


2 2 3 1 1 1 1 2 2 1 1 1.53 2

BS3 Hoshangabad-Harda-Khandwa Road

2 3 3 2 1 3 3 2 3 1 2 2.25 3

BS4 Punjab Road Sector Project: Phase II – Upgradation, Operation and Maintenance of

3 3 3 2 1 3 3 1 2 1 2 2.28 3


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Weightage 20% 15% 0% 10% 3% 15% 5% 15% 3% 10% 5%

Proj Code


Developer (Net

Worth)

Independence of the


Awarded by


Project Size

Project IRR

Contract period

Grant from the

Government

Negative Grant


Risk Category

Balachaur – Dasuya Road on B.O.T Basis

BS5 Raisen-Rahatgarh Road 2 3 3 2 1 3 3 2 3 1 2 2.25 3

BS5 Upgradation, Operation and Maintenance of Patiala - Malerkotla Road on B.O.T.Basis

3 3 3 2 1 3 3 3 2 1 2 2.58 3

BC5 Agra – Bharatpur/ Rajasthan[20]/Uttar Pradesh[25]

3 3 3 1 1 3 2 2 2 1 1 2.23 3

BC6 Ambala – Zirakpur/ Km. 5/735 to Km. 39/961 of NH-22 and Km. 0/0 to Km. 0/871 of NH-21 Haryana[6]/ Punjab[30]

2 3 2 1 1 3 2 2 2 1 2 2.08 2

BC7 Aurang - Raipur Km 232 to Km. 281 Chattisgarh

2 3 3 1 2 3 2 1 1 0 1 1.78 2

BC8 Bharatpur-Mahua/ km. 63 to Km. 120/ Rajasthan

3 3 3 1 2 3 2 2 1 0 1 2.13 2

BC9 Bharuch-Surat package BOT-II / 4 laning / Gujarat

3 3 3 1 2 3 1 2 2 1 2 2.25 3

BC10 Chennai - Ennore Express Way

1 1 1 1 1 3 2 2 1 1 1 1.50 1

BC11 Farukhanagar to Kotakatta (NS-2/AP-4)/ Km 80.050 to km 135.469/ Andhra Pradesh

1 1 3 1 1 3 2 2 2 0 0 1.38 1

BC12 Farukhanagar to Kotakatta (NS-2/AP-3)/ Km. 34.140 to km 80.050/ Andhra Pradesh

2 3 2 1 1 3 2 2 2 1 0 1.98 2

BC13 Four laning from km 0.0 to km 53.0 of Salem – Kumarapalayam on NH-47 on BOT basis.(Contract Package No. NS-2/BOT/TN-6)

2 2 3 1 1 3 1 2 2 0 0 1.68 2

BC14 Four laning from km 407.100 to km 456.100 of NH-1 (Jalandhar –

2 2 3 1 1 3 2 3 2 0 0 1.88 2


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Weightage 20% 15% 0% 10% 3% 15% 5% 15% 3% 10% 5%

Proj Code


Developer (Net

Worth)

Independence of the


Awarded by


Project Size

Project IRR

Contract period

Grant from the

Government

Negative Grant


Risk Category

Amritsar Section) in the State of Punjab on BOT basis

BC15 Four laning from km 53.0 to km 100.0 of Kumarapalayam-Chengapalli section of NH-47 on BOT basis.(Contract Package No. NS-2/BOT/TN-7)

2 2 3 1 1 3 2 1 2 0 0 1.58 2

BC16 Gonde-Vadape (Thane)/ Km. 440/000 to Km. 539/500 Maharashtra

2 2 1 1 2 3 1 2 2 0 0 1.70 2

BC17 Guna Bypass/ Km. 319/700 to Km. 332/100 / Madhya Pradesh

2 2 3 1 1 3 3 2 3 1 2 2.00 2

BC18 Indore-Khalghat/ Madhya Pradesh

3 3 3 1 1 3 1 2 2 1 0 2.13 2

BC19 Karur to Madurai (TN-4) Km 305.6 to Km 373.275 Tamil Nadu (Karur to Dindigul)

3 3 3 1 1 3 2 2 2 0 0 2.08 2

BC20 Karur to Madurai (TN-5) Km 373.275 to km 426.6Tamil Nadu

1 1 1 1 1 3 2 2 2 1 0 1.48 1

BC21 Kondhali – Telegaon/ Km 50 to Km 100/ Maharashtra

3 3 3 1 2 3 2 2 2 0 0 2.10 2

BC22 Krishnagiri to Thopurghat (NS-2/TN1) Km. 94.000 to 156 Tamil Nadu

1 1 3 1 1 3 1 2 2 1 2 1.53 2

BC23 Mahua-Jaipur/ Km. 120 to Km 228/ Rajasthan

1 1 1 1 2 3 1 2 1 0 0 1.33 1

BC24 Meerut-Muzaffarnagar/ Km 52.250 to Km.131.00/ Uttar Pradesh

3 3 3 1 1 3 1 2 2 0 0 2.03 2

BC25 Nagpur – Kondhali/ Km 9.2 to Km 50/ Maharashtra

3 3 3 1 2 3 2 2 2 0 0 2.10 2

BC26 Padalur-Trichy Package VI-6 / km 285.00 to km

3 2 3 1 1 3 2 2 1 0 0 1.90 2


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Weightage 20% 15% 0% 10% 3% 15% 5% 15% 3% 10% 5%

Proj Code


Developer (Net

Worth)

Independence of the


Awarded by


Project Size

Project IRR

Contract period

Grant from the

Government

Negative Grant


Risk Category

325.00 / Tamil Nadu

BC27 Palanpur to Swaroopganj (Rajasthan -42 km & Gujarat-34 km )/ km 264 to km 340 (Rajasthan 42 km & Gujarat -34 km)/ Gujarat[34]/Rajasthan[42]

1 1 3 1 2 3 1 3 2 1 0 1.60 2

BC28 Panipat Elevated Highway/ Km 96.00 to 86.00/ Haryana

1 1 3 1 1 3 2 2 2 1 2 1.58 2

BC29 Salem to Karur (NS-2/TN-2) Km. 207.050 to Km 248.625 Tamil Nadu

3 3 3 1 1 3 2 1 2 1 2 2.13 2

BC30 Salem to Karur (NS-2/TN-3) Km 258.645 to Km 292.6 Tamil Nadu

1 1 1 1 1 3 2 3 2 0 0 1.53 2

BC31 Sitapur – Lucknow/ Km 488.27 to km 413.20/ Uttar Pradesh

2 3 3 1 1 3 2 2 2 0 0 1.88 2

BC32 Tindivanam - Ulunderpet package VI-a / km 121 to km 192.25 / Tamil Nadu

2 3 2 1 1 3 1 2 2 1 2 2.03 2

BC33 Ulundurpet - Padalur (Pkg- VI-B) km 192.25 - km 285.00 Tamil Nadu

1 1 1 1 1 3 1 2 2 0 0 1.33 1

BC33 Vadodara to Bharuch Package BOT-1/ 6 laning/ Gujarat

1 1 3 1 2 3 1 2 3 1 0 1.48 1

BC33 Western Expressway 2 3 3 1 1 3 1 3 1 1 0 2.05 2


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11.7 Value of the Evaluating Parameters

Proj Code Project Name Debt

Annuity per Km.

Debt/KM Interest Rate

DER Tail Tenure to

Concession period ratio

Minimum DSCR

Corporate/ Personal Guarantee


0.11 0.86 Outlier 2.9 2.50 85.71% NA NA


0.13 1.06 NA 2.0 NA 0.00% NA NA


0.14 1.14 12.00 3.0 5.00 75.00% NA NA


0.17 1.44 12.00 2.7 5.00 75.00% NA NA


0.09 0.69 Outlier 2.7 2.50 85.71% NA NA

RS1 Bhuj Nakthrana Road Outlier Outlier 10.00 2.3 2.50 80.77% NA 1

RS2 Himmatnagar Bypass Outlier Outlier 2.3 NA 0.00% NA NA


0.09 0.85 13.00 0.6 18.00 40.00% NA NA


0.08 0.76 NA 0.7 NA 0.00% NA NA


0.17 1.63 NA 0.6 NA 0.00% NA NA


0.06 0.55 NA 1.0 NA 0.00% NA NA


0.19 1.55 9.50 3.0 6.50 67.50% NA NA

RS3 Hoshangabad-Harda-Khandwa Road Outlier Outlier 11.00 1.1 7.00 53.33% NA NA


Outlier Outlier 10.25 4.9 10.00 41.18% NA NA

RS5 Raisen-Rahatgarh Road Outlier Outlier 8.50 1.2 6.00 60.00% NA NA

RS5 Upgradation, Operation and Maintenance of Patiala - Malerkotla Road on B.O.T.Basis



0.10 0.83 9.75 3.0 5.00 75.00% NA NA


0.22 Outlier 8.50 2.6 5.00 75.00% NA NA


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0.11 0.99 10.00 2.4 11.30 54.80% NA NA


0.09 0.77 8.50 3.2 13.00 48.00% NA NA


Outlier Outlier 9.25 6.1 9.00 55.00% NA 1

RC10 Chennai - Ennore Express Way 0.13 1.26 8.00 0.6 15.00 50.00% NA NA


0.13 1.08 9.19 2.7 4.75 76.25% NA NA


0.20 1.70 9.25 3.0 4.00 80.00% NA 1


0.15 1.22 9.25 1.5 5.00 75.00% NA NA


0.09 0.71 8.25 3.8 12.00 40.00% NA NA


0.19 1.55 9.25 3.8 5.00 75.00% NA NA


0.17 1.44 9.00 12.5 5.00 75.00% NA 1


0.09 0.67 9.00 1.8 4.00 73.33% NA NA

RC18 Indore-Khalghat/ Madhya Pradesh 0.17 1.44 10.00 4.0 5.00 75.00% NA NA


0.09 0.73 8.50 3.0 4.00 80.00% 1.41 NA


0.19 1.59 9.25 4.0 4.00 80.00% NA NA


0.13 1.09 9.50 3.9 5.00 75.00% NA NA


0.19 1.59 8.25 3.0 5.86 70.70% 1.93 NA


0.08 0.71 8.25 2.4 12.50 50.00% NA NA


0.13 1.08 10.20 2.9 5.45 72.75% NA NA


0.07 0.61 9.50 1.9 7.00 65.00% NA 1


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0.16 1.48 9.50 3.1 11.00 56.00% NA NA


0.17 1.46 NA 9.0 3.50 82.50% 1.1 NA


Outlier Outlier 10.21 2.3 6.83 65.83% 1.53 NA


0.13 1.11 10.77 3.0 5.00 75.00% 2.22 1


0.22 9.25 6.2 5.25 73.75% NA NA


0.08 0.63 10.00 1.8 5.00 75.00% NA NA


0.22 9.25 3.0 5.00 75.00% NA NA


0.15 1.30 9.73 2.2 5.52 72.40% NA NA



RC33 Western Expressway 0.20 1.88 10.50 1.5 16.25 45.83% NA NA Outlier – Data deleted due to an exceptional value


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12 Annexure 7 - Differences in Equity Infusion The risk profile mentioned in Annexure 6 above was compared with the amount of equity infusion in the projects. However, there was no relationship that could be derived from the analysis. We therefore, carried out an analysis that looked at the following:

1. First, we have looked at equity differences in projects under two categories of projects–

a. Project that has atleast one strong developer

b. Project that does not have a strong developer

This helps us understand how presence of a strong developer affects the infusion of equity in a PPP project.

2. Second, we have tried to understand how covenants in concession and loan agreements restrict equity dilution in India.

We have analysed the data for only the Road sector because firstly, it is the only sector in India, where PPP format is in advanced stages of development and secondly, the sample size is significant only in the road sector to carry out any meaningful analysis

12.1 Equity Differences in Projects

We have divided the sample of road projects into two basic categories:

Categories

1 – One or more strong developer

2 – One or more small developer

Note: Strength of the developer is a judgemental definition based on the market size, reputation, and number of projects undertaken.

The list of the projects, their categories and the data on them is provided in Exhibit 76. The sample size and equity brought in each category is as follows:

Exhibit 76: Project Category and Data

Project Category 1 2 Sample Size 31 30

Average Project TPC (USD Million) 114.70 68.28

Average Equity per Project (USD Million) 24.35 13.15

Average Equity as percentage of TPC 22% 21%

Average Sub-Debt per Project (USD Million) 12.07 4.76

Average Sub Debt as percentage of TPC 4% 2%

Average Grant per Project (USD Million) 13.87 10.04

Average Grant as percentage of TPC 6% 13%

Average Debt Equity Ratio (including Sub-debt) 3.24 3.12

It can be seen clearly from above that large developers are taking up bigger projects and small developers are taking up smaller projects in road sector in India. Hence the average amount of equity per project is also proportional. There is not much variation in terms of the proportion of equity.

However, there are some differences in terms of the percentage of sub-debt and grant in the projects. Smaller developers are investing in smaller projects which have higher amount of grant support from the Government while larger developers are investing in large projects which have smaller grant component. There is slight variation in the sub-debt too. Percentage of sub-debt on an average in projects taken up by large developers is more than


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the percentage of sub-debt on an average in projects taken up by small developers. The difference in DER by category is not significant to reach any meaningful conclusion.

12.2 Covenants in the Concession Agreements and Loan Agreements Restricting Dilution of Equity

There are some restrictions that are placed on the continuation of holding of equity (i.e. Lock-in) by the developers in the Concession agreement and also in loan documentation. These conditions restrict equity dilution below a certain percentage, as presented in the table below:

# Agreement

Type Type of Covenant Actual conditions imposed Restriction Implications

1 Concession Agreement (often referred to as Old Concession Agreement in Roads)

Conditions are imposed on the percentage of equity to be maintained by a developer during various stages of the project life cycle

The equity share holding of the Lead Developer (with its associates) in the issued and paid up equity share capital of the SPV shall not be less than (a) 51% (fifty one percent) during the Construction Period and for 3 (three) years following COD, and (b) 26% (twenty six per cent) during the balance remaining Operations Period.

Other member of the Consortium shall hold not less than 10% (ten per cent) of SPV’s equity at all times during the Concession Period

The covenants in the agreement do not impose limit on the total equity (either in amount or in percentage) to be brought by any consortium of developers. However, it imposes restriction only on the composition of that equity by mandating the lead developer to maintain a minimum percentage of the total equity of the SPV.

Equity dilution below 26% by the lead developer is not possible.

2 Concession Agreement (often referred to as New Concession Agreement in Roads)

Conditions are imposed on the percentage of equity to be maintained by a developer during various stages of the project life cycle

Equity of the existing promoters/ Consortium Members, together with their Associates in the total Equity of the SPV, not to decline below

1. 51% (fifty one per cent) during Construction Period,

2. 33% (thirty three per cent) thereof during a period of 3 (three) years following Project Completion Date, and

3. 26% (twenty six per cent) thereof, or such lower proportion as may be permitted by the Authority during the remaining Concession Period

Even in the new concession agreement for roads, covenants in the agreement do not impose limit on the total equity (either in amount or in percentage) to be brought by any consortium of developers. However, it imposes restriction only on the composition of that equity by mandating the lead developer to maintain a minimum percentage of the total equity of the

Equity dilution below 26% by the lead developer is not possible.


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SPV.

3 Loan Agreement*

The SPV has to pledge a percentage of its shares in lieu of the loan

pledge of all the shares (equity and preference) of the SPV representing 51% of the paid up share capital of the SPV, till the life of the loan

Often more than 51% of the SPV’s shares are pledged with the banks and hence can not be diluted over the life of the loan.

Lenders also have a nominee on the board of the borrower /SPV and there are certain conditions where consent is mandatory from the lenders.

The shares pledged with the banks’ can not be sold or transferred.

* conditions indicated here are only samples. All loan documentation may or may not have such conditions.

Internationally, like in Latin American countries the project finance is many times on a limited recourse basis. In some cases, lenders request additional involvement from the sponsors after construction period. For example lenders may request sponsors to increase equity when maintenance and operation costs are larger than expected in the initial financial plan. In other cases, lenders request additional equity from sponsors if actual traffic is lower than forecasted42.

42 Source: Paulina Beato. (2000). Road Concessions: Lessons Learned from the Experience of Four Countries, Best Practice Study. Financial Markets Division of the Sustainable Development Department. Inter-American Development Bank.


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13 Annexure 8 - Refinancing of PPP Projects Refinancing of debt is a common feature in PPP infrastructure financing. Refinancing of debt, to reduce the cost in PPP projects is generally associated with the reduction in construction risk after the initial construction phase is over. Also, a maturing PPP market means early PPP projects can now access better financing terms than those available when the contracts were let.

13.1 Refinancing of PPP Projects in India – some Case Studies

In India, we find that many PPP projects have been refinanced due to a variety of reasons such as:

• Lowering of risks after the initial construction is over and revenues have started stabilising;

• Significant drop in interest rates in the market;

• Projects distressed due to shortfalls in projected revenues and hence inability to service agreed level of debt;

We have presented, the case study, under each of the above refinancing reasons to better understand the relationship of risk and refinancing.

For example Narmada Bridge Project (refer Case 1) of L&T has been refinanced at a rate lower than initial terms leading to significant reduction (300 Basis points) in the debt funding cost. This project has been refinanced on account of two reasons – reduction in the initial construction risk and the decrease in the market interest rates. Refinancing here has been through banks different from those at the initial financial closure stage.

Case 1 – Narmada Bridge Projects

Project Narmada Bridge Project Developer L&T SPV Narmada Infrastructure & Construction Enterprise Ltd Year of Financial Close 1999 Total Cost USD 25 million (INR113 crore) Construction Period 3 years Background: NICE is an SPV formed by L&T for design, construction, maintenance and operation of the second Narmada bridge at Zadeshwar on NH-8 in Gujarat. This project was undertaken on BOT basis. The scope of the project included the construction of a 1.4km-long bridge adjacent to the first bridge, along with 4.6km of approach roads. Commercial service began in November 2000. The concession was awarded for a period of 15 years, including the construction period. Funding Details : The project was financed in the Debt Equity Ratio of 2:1 and total debt was funded by 4 (four) bankers. The debt was financed @13% p.a. during the construction phase and reset was fixed after three years which means after construction phase. Refinancing : Since the term loan was available for reset after construction phase, L&T was searching for the best rate available in the market. L&T had considered that it was possible to get the rate lower than original rate (13%) because the construction risk was over in the project. The refinancing was done through a mix of FCNR and term loans. L&T converted the loan by one bank into Yen denominated FCNR loan and replaced the loan of other three banks with new bank which offered best rate. By this refinancing, L&T was able to reduce the interest cost of its debt by over 300 basis points.

In two other projects – the Kalyani group’s Hubli-Dharwad and NTBCL’s Noida Toll Bridge (refer Case 2 & 3) - the refinancing was done primarily because project revenues were lower


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than the projected revenues, leading to inability of the project to service the debt. Also, in both cases the financial closure was achieved at a time when market lending rates were very high and subsequently the market lending rates had dropped drastically. Hence the debt in both cases was refinanced at significantly lower rates. Part of the Noida Bridge was also financed through the first ever public issue of project bond by any project company in India, and the bond issue was also refinanced.

Case 2 – Hubli-Dharwad Refinancing

Project Hubli-Dharwad Bypass Developer Kalyani group SPV Nandi Highway Developers Limited (NHDL), Year of Financial Close 1998 Total Cost USD 19.95 million (INR 89.8 Crore) Construction Period 3 years Background: Nandi Highway Developers Limited (NHDL), an assisted company promoted by Bharat Forge Limited of the Kalyani Group, has undertaken the Hubli-Dharwad Bypass Project in Karnataka on NH 24 on BOT basis. The company has been granted the concession for a period of 26 years. Funding Details : The average cost of debt for the project was 16.1% being financed through a combination of Senior and subordinated debt from ICICI and IDBI infrastructure Bond. NCDs from ICICI have interest rate of 2.75% over ILTPR (ICICI long Term Prime Lending Rate) which was around 14%# and the repayment schedule has 36 instalments commencing from April 15, 2003 and ending on January 15, 2012. Subordinated loans have interest rate of 2.65% over ILTPR. Repayment for USD2.56 million (INR11.5 Crore) involves 12 quarterly instalments and balance USD0.56 million (INR 2.5 Lakh) is to be repaid in 36 quarterly instalments. Subsequently, ICICI had sold down NCDs amounting to USD9.42 million (INR 42.4 Crore) to Debentures Securitisation Trusts (DST) in March 2001. Investors subscribed to Pass Through Certificates at 12.75% interest rate. Refinancing : Refinancing of the project was done because the project was not able to service the high cost debt, as there was much lower traffic on the road than what was projected. Also, the market interest rates have dropped significantly. The loan was refinanced from the same banks at significantly lower rates. The developers agreed to pay the prepayment penalties for both the term loans and the PTCs (loan securitised further by the ICICI bank). Refinancing was through NCDs from ICICI with interest rate of 1.05% over ILTPR which was around 12.5%* and the repayment schedule of 34 unequal instalments commencing from June 15, 2009 and ending on September 15, 2017. part of the loan was also in the form of Subordinated Cumulative Non Convertible Debentures (SCNCDs) with interest rate of 4.5% over ILTPR.

# as per newspaper report on 2nd March 1999; * as per ICICI on 14

th March 2001

Case 3 – Noida Toll Bridge

Project Noida Toll Bridge Developer IL&FS SPV Noida Toll Bridge Company Limited Year of Financial Close 1998 Total Cost USD 86.66 million (INR 390 Crore) Construction Period 2 Years Background: Noida Toll Bridge Company Limited (NTBCL) has been set up to develop, establish, construct, operate and maintain the Delhi to Noida Bridge under the “Build-Own-Operate-Transfer” (BOOT) basis. An 8 lane, 10.3 km link across the river Yamuna, the Noida Toll Bridge project comprises of - a 552 meter long main bridge, 3 minor bridges, 8 lane approach roads on embankments and a 27 lane 150 meter long toll plaza. Funding Details : The debt for the project was raised in two parts. First through term loan form banks and second through issues of


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Deep Discount Bonds (DDBs) the DDB issued on 3rd November 1999 had an option of takeout, making it the first Public Offer with take out financing arrangement. Nominal Value and Issue Amount were at par. Takeout Lenders were IDFC and IL&FS.

No. of DDB’s Issue Price

(USD) Redemption period (years)

Redemption price (USD)

Annualized Return

Total Size (USD million)

100,000 115.05 16 1035.43 14.67% 11.505 Refinancing :

The Group however, had to rationalize its debt structure primarily because of the following reasons:

1. During the initial years of commencing operations, actual cash inflows were significantly lower than anticipated as toll traffic/ revenue did not meet the levels anticipated in the projections affecting the repayment schedule for debt obligations.

2. The interest rates had fallen substantially as compared to the rates at which the initial borrowing had been carried out.

Refinancing of the term Loan: Term loan from banks were refinanced through different consortium of banks including IDFC and IL&FS.

As per the restructuring of term loans, fifty percent of the outstanding loan of the Financial Institutions and others aggregating USD 21,635,790 was bifurcated equally into Part A and Part B.

Part A - For fifty percent, the lenders were issued Zero Coupon Bond - “Series A” amounting to USD 10,817,895 with the following repayment terms:

• Bonds will bear Zero interest • Bonds will be paid in two equal instalments

- First instalment – 31 March 2005 of USD 5,408,947 Second instalment – 31 March 2006 of USD 5,408,947

Part B – The balance 50% of USD 10,817,895 has been retained as term loan carrying interest of 12.5% per annum and the same is repayable by 2010 - 2014. The effective rate of interest, considering the payment schedule, is 8.5% per annum.

Infrastructure Development Finance Company Limited (IDFC) has converted USD 12,701,026 being the value of DDBs purchased by them under the scheme of restructuring of DDBs into the term loan. The term loan is repayable during 2010-14. The loan carries interest at the rate of 8.5% per annum payable quarterly on 31 March, 30 June, 30 September and 31 December every year.

NTBCL had taken term loans from a consortium of eight banks at interest ranging from 13.50% to 14.50% per annum. Post restructuring, the term loans from banks, amounting to USD 28,000,000 carry interest at a rate of 8.5%. The term loans from banks are payable during 2004-13.

Refinancing of the DDBs: In the initial DDB issue NTBCL had the put/call option guaranteed by the IDFC and IL&FS. DDB holders had the option to tender the DDBs for takeout which would be purchased by Takeout Lenders – IDFC and IL&FS on the anniversary date falling on the 5

th (3

rd November 2004) and 9

th (3

rd November 2008) anniversary from the

allotment of DDB. The maximum limits for IDFC and IL&FS are 60% and 40% respectively of the number of DDBs issued. The effective yields at the end of 5 years from date of allotment was to 13.70% and at the end of 9 years from date of allotment was to be 14.19%

Of restructuring of the DDB the DDB holders were given two options to be exercised on 7th February, 2006:

Key Features

Option 1

(Continuation)

• Yield of 13.7% p.a. till March 2002 & Yield of 8.50% p.a. thereafter

• Bonds to mature on 3rd Nov, 2015 at a Redemption value of USD476.65

• NTBCL would have call purchase option on DDB after 24th Nov, 2005 with above yield rates

Option 2

(Encashment)

• ILFS & IDFC to takeout DDB on 3rd Nov, 2004

• Price of redemption USD218.59 per DDB giving an effective yield of 13.7% as per the yield guaranteed for end of 5 years from date of allotment


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• For any delay interest rate of 8.5% p.a. to be available to holders

Only around 17% of the initial number of bonds were continued under Option 1, rest of the bonds were taken-out by IL&FS and IDFC under Option 2

Another example of refinancing is the Coimbatore Bypass. Refinancing in the Coimbatore Bypass was done, not only to reduce the cost of borrowing after the stabilisation of traffic but also to securitize the future revenues of the project. The developer of the Coimbatore Bypass (Case 4) has raised debt on the project which is significantly more that the initial amount of debt.

Case 4 – Coimbatore Bypass

Project Coimbatore Bypass Road Projects Developer L&T SPV L&T Transport Infrastructure Ltd (LTIL) Year of Financial Close 1999 Total Cost USD 28.9 million (INR 103 crore) Construction Period 2 years Background: This SPV was formed to design and construct a Bypass road at Coimbatore. This project is the first private road project executed on BOT basis in Tamil Nadu. The scope of this project included construction of a 28km bypass road along with an additional two-lane bridge across river Noyyal at Athupalam. The concession period, including construction time has been 32 years for the bypass and 21 years for the Athupalam bridge. Funding Details : The project was financed with the Debt Equity Ratio of 1.5:1 and total debt was funded by 3 (three) bankers. The debt was financed at average interest rate of 14.05% p.a. and reset was reportedly fixed after three years. Refinancing : During the financial year 2002-03 LTIL replaced one bank with a new bank which offered lesser interest rate and then the other two banks also brought down their interest rate on the reset date. LTIL was able to bring down interest rate by 70 basis points.

During the financial year 2006-07, LTIL raised additional loan to the extent of USD 20 million (INR90 crore) by discounting the future toll revenues. The additional loan of USD 20 million has in turn been given as loan to the promoter to use the same for investment in other projects. The idea of raising additional loan was to get upfront the major portion of future cash flows to equity shareholders.

13.1.1 Significance of Lending to Projects through NCDs

The Hubli-Dharwad project was financed through the issue of Non Convertible Debentures (NCD) to ICICI. ICICI had lent to the Hubli-Dharwad project through its borrowing from an ADB facility (line of Credit) called ‘Private Sector Infrastructure Facility’. Other financial institutions like IFCI were also given this line of credit for onward lending to Infrastructure Projects. One of the criteria for utilisation of the fund from the ADB facility was that the onward lending has to be through NCDs. The facility had put in this condition to improve the liquidity in the Corporate Debt market in India. However, ADBs ‘Project Performance Evaluation Report’ states that the NCDs issued under various loans under the facility had virtually no liquidity, and thus the loan’s contribution to the corporate market development was marginal.

Our survey database on 104 projects too shows that banks lending to PPP projects through NCDs was at a very small level (around USD 70 million) and that too only till the year 2004.

• Our discussion with banks reveals that banks were lending to PPP projects through NCDs prior to 2004 because income from banks’ investment in infrastructure was tax


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free and NCDs were counted as investments for banks, while term loans are not. These tax rebates were however, withdrawn after March 2004.

• Simultaneously, in November 2003, RBI issued guidelines on investments by banks in non-SLR (Statutory Liquidity Ratio) securities issued by companies, banks, financial institutions, Central and State Government sponsored institutions and special purpose vehicles. These guidelines apply to primary market subscriptions and secondary market purchases. Pursuant to these guidelines, banks are prohibited from investing in non-SLR securities with an original maturity of less than one year, other than commercial paper and certificates of deposits. Banks are also prohibited from investing in unrated securities. A bank’s investment in unlisted non-SLR securities may not exceed 10% of its total investment in non-SLR securities as at the end of the preceding fiscal year with a sub-ceiling of 5% for investments in bonds of public sector undertakings. Hence banks could not lend to unrated NCDs while Borrowers (developers of infrastructure projects) were not very keen to get the projects rated.

13.1.2 Significance of Interest Rate Reset in Refinancing of Loans

Instead of lending fixed rate or completely floating rate the banks in India lend to infrastructure projects with reset clause. Reset means that the interest rate is reset at a predetermined formula at periodic interval (e.g. every 2 years or 3 years) during the loan tenure. Often the interest rates in India are pegged with the lending bank’s Prime Lending Rate (PLR) or an external benchmark, for example G-Sec or LIBOR43.

Interest rate reset clause also has a provision for prepayment of loan without premium on the reset date. We had discussion with some of the banks on the reset clause and they were of the view that this clause leads to prepayment risk from their borrowers, especially when interest rates are declining i.e. if the market interest rate is lower than the reset rate, then at the reset date, developers try to refinance or renegotiate the loan.

This was the scenario in India during the falling interest rate regime during the years 2001-2004 (10 year G-Sec during the years 1998-1999 was around 12% and had dropped to 5% in the year 2004). Market rates during this period had dropped drastically and developers were able to get loan at rates which were much lower than the reset rates. Therefore, during this period, developers had often negotiated with the financiers to reset the interest rate at a value lower than the one calculated through the predetermined formula. This actually meant that either the same banks refinanced the project loan at lower rates or other banks, that were ready to offer lower rates, refinanced the old loan. Therefore, during our interviews banks also stated that, after these experiences, they more often than not lend without the “prepayment without penalty at reset date” clause.

13.2 Refinancing of PPP Projects in Emerging Market Economies – some Case Studies

Reasons for refinancing of projects in other emerging markets follow a pattern quite similar to what is in India. For example, in Chile some of the concession companies that have originally issued bonds at high interest rates earlier were locking in lower rates during the lower interest rate regime of 2004-2005. During this period concessions which took on fixed rate debt at 8% or 9% in the late 1990s were being refinanced at just over 3%.

One such refinancing of a road concession in Chile was the Maipo toll road (Refer case 5). Apart from the falling interest rate regime revenue shortfall was also a major reason for refinancing. The Maipo toll road in Chile was exposed to some indirect traffic risk despite

43 Indexing of interest rates with either inflation or currency changes is not common in India. Our data base has no case of inflation or currency linked interest rate in any project.


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minimum revenue guarantees. Therefore, project revenues were not enough to ensure payment of the bonds on time, in an under-performing Chilean economy.

Case 5 – Maipo toll road-Chile

Project Autopista del Maipo toll road-Chile Developer Cintra Year of Financial Close 2001 refinancing in 2004 Total Debt USD 421 million Construction Period 1 year Background: Autopista del Maipo is a 266 Km toll road initially financed in the year 2001 and refinanced in 2004. Primary reason of refinancing being the shortfall in revenues to service the debt, even when the concession by the Chilean Government guaranteed minimum revenue. The project was sponsored by a company called Cintra Funding Details : The Autopista del Maipo toll road project was originally financed in 2001 in a USD 421 million bond issue in the US 144A market. However, despite minimum revenue guarantees from the Chilean Government, the revenue from the road was not enough to ensure payment of the notes on time. Consequently, Cintra the project sponsor began negotiations in 2002 with the Chilean Ministerio de Obras Publicas (MOP) to opt into the new MDI regime. Refinancing : The refinancing takes the form of a USD 450 million shelf registration in the local market – the first use of such a structure in the Chilean project market – and a USD 60 million standby facility from ABN Amro.

Of the USD450 million, around USD175 million (UF44

6 million) were placed by BBVA (A multinational financial service provider) immediately. The 19-year bonds have a bullet repayment profile, although principal is payable in three instalments in the three years following maturity. The Bond issue came in at an all time low for the Chilean infrastructure market and was able to achieve 29bp over the Chilean long bond (BTU) yield. Despite the initial unfamiliarity of investors (and regulators) both with the MDI and the concept of the shelf, the deal was 12 times oversubscribed – the initial face value of the issue is USD 169 (UF5.8 million).

Bonds can be drawn down at any time during the 30-year life of the shelf and terms of each tranche negotiated at time of issuance. MBIA is committed to insure all bonds throughout the life of the concession.

The primary reason for the shelf registration is that the full USD450 million shelf will not, under the base case, be required. These bonds will only be required if, under extremely poor traffic conditions, the project company cannot meet interest and principal payments on the existing debt.

The minimum size of any future issue is around USD 43.75 (UF1.5 million). Therefore, to make payments in the period it takes for the potential bond issue to reach the ideal size, or to tide the borrower over a choppy period in the bond markets, the deal also features a standby liquidity facility.

This facility, provided by bookrunner ABN Amro, has an initial seven-year tenor, and will be automatically renewed provided the credit ratings of both MBIA and ABN Amro stay at AA.

Autopista del Maipo is not a refinancing in the traditional sense. The original 144A bonds remain in place, with MBIA taking the role of agent, but the new bonds rank alongside the old issue, requiring the lender's counsel to carefully work over the inter-creditor issues.

Critical to this process was the fact that MBIA had also wrapped the original deal. The terms of the original 144A notes did not permit any change to the concession agreement, collateral or support obligations from Cintra. However, the terms of the MBIA wrap gave the insurer the right to consent to all such amendments on behalf of US investors and hence the flexibility to get the second deal done.

44 The Chilean UF (Unidad de Fomento) is a reference currency updated daily in relation to inflation, internal consumer prices, and currency fluctuations. Most long term contracts, mortgages, insurance premiums, house prices etc. are quoted in UF while the actual payments are made in Chilean pesos at the rate of the day.


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Another example of refinancing of a project distressed due to shortfalls revenues is the toll road concession in Mexico - Autopista Mexico-Toluca toll road

Case 6 – Mextol- Mexico

Project Autopista Mexico-Toluca toll road - Mexico Developer PACSA Year of Financial Close Originally financed in 1989 and refinanced thrice thereafter. this case is the third

refinancing which happened in 2006 Total Debt Refinancing of USD400 million (UDI1.2 billion) Construction Period Not known Background: Autopista Mexico-Toluca toll road (Mextol) is a 21km limited access highway between Mexico City and Toluca, in the State of Mexico. Originally tendered in 1989 and refinanced in 1992 in the 144A market, the project suffered in the 1990s when a wave of bankruptcies hit Mexico's toll roads. Amendments were made to the concession agreement with many rights transferred to the Government trust that issued the 2003 debt. Part of that refinancing involved the Government converting part of what it was owed by Mextol into subordinated debt.

Operational for 15 years the toll road had become one of the most expensive routes in Mexico on a per kilometre basis. Part of Mextol's problem stemmed from lower than expected traffic levels. Over two thirds of road users choose to avoid it, preferring instead the lower quality – but free – Route 15 that runs parallel. Cutting the tariffs was expected to boost volumes and reverse this problem.

The 2006 Mextol refinancing therefore, had the objective to obtain a longer tenor on the debt and cut toll tariffs by an average of 40% due to lower debt service.

Refinancing : The USD400 million (UDI1.2 billion) refinancing of Mextol was completed through project bond structured in the local market wrapped by MBIA though its PADEIM programme called ‘Programa AAA de Infraestructura Mexico’. The refinancing achieved a benchmark 22-year tenor from the monoline MBIA.

The refinancing also included USD 147 million (MXN1.47 billion) of unwrapped subordinated debt, due in 2030, when the concession expires.

There are some examples in other countries where projects were refinanced for reasons like increasing leverage and achieving a longer tenure on debt. For example the Taweelah A2 project in UAE where the 17-year original loan of USD575 million which was raised in the year 1999 was refinanced in 2004 from a syndicated loan of USD552 million for tenure ranging between 16.25-year.

13.3 Sharing of Refinancing Gains

13.3.1 Sharing of Refinancing Gains in India

India still has a long way to go before any sharing of refinancing gain is possible. Sharing of refinancing gain in the Indian context will be quite different from mature markets such as UK because of the fundamental difference in the risk allocation in PPP projects. Most of the projects currently being bid out in India are the BOT projects where developers carry the entire revenue risk. Even in the Annuity based BOT toll concession, where revenue is guaranteed by the authority, refinancing gain has not been shared with the authority because the toll concession provisions in India do not freeze the overall return to concessionaire. In India, refinancing of term loan is very closely related to interest reset which is mutually agreed between borrower and the banker. However, any gain arising due to refinancing of loan is not shared by the borrower with the authority because of entire risk being borne by the concessionaire.

As we can see from the case studies mentioned, even though there are significant refinancing gains achieved by the projects, there has been no case of sharing of refinancing gain. Though this was thought of in earlier IPPs (Independent Power Producers) where Government had guaranteed returns to the developers, it is not being considered in the new


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PPPs in India, as most of the projects are on BOT basis, where developers bear the entire revenue risk.

13.3.2 Sharing of Refinancing Gains in UK

Sharing of debt refinancing gains is an accepted practice now (50:50 sharing) in UK. In the more matured PPP/ PFI infrastructure market in the world like UK sharing of refinancing gain is a factor of the characteristics of PPP/ PFI projects. In UK, unlike India, PPP/ PFI projects are based on availability based payment. Traffic risk in toll projects is borne by Government authority.

What is being debated is the gain sharing of secondary equity sale. It is a normal feature of long term projects in UK that there may be refinancing in the form of changes to the debt or equity finance during the life of the project. This is because there is a greater risk at the construction phase which, once completed, enables better financing terms to be obtained. Also, a maturing PPP market means early PPP projects can now access better financing terms than those available when the contracts were let.

Some of these early refinancing which had taken place in UK had generated very high rates of return to the private sector investors due to additional risks to the public sector in the form of higher termination liabilities and extended contract periods. Therefore, in 2002, the UK Government introduced arrangements for the private sector to share PFI debt refinancing gains with the public sector (50:50 formula). In 2003, the Government expected the public sector to receive USD350-400 million (BP175–200 million45) from the sharing arrangements on early PFI deals. But, up to December 2006 the Government had secured the right to gains of only USD 186million (BP93 million), with hospital projects contributing USD 156 million (BP78 million).

Refinancing in UK is governed by the Refinancing Clause in Office of Government Commerce (OGC) Guidance on Standardisation of PFI Contracts which provides that Private sector will share the gain of refinancing with Government Authority. The provisions of refinancing is mentioned below-

• The Contractor shall obtain the Authority’s prior written consent to any Qualifying Refinancing and both the Authority and the Contractor shall at all times act in good faith with respect to any Refinancing

• The Authority shall be entitled to receive a 50 per cent share of any Refinancing Gain.

• The Authority shall not withhold or delay its consent to a Qualifying Refinancing to obtain a greater than 50 per cent share of the Refinancing Gain.

• The Contractor shall promptly provide the Authority with full details of any proposed Qualifying Refinancing, including a copy of the proposed financial model relating to it (if any) and the basis for the assumptions used in the proposed financial model. The Authority shall (before, during and at any time after any Refinancing) have unrestricted rights of audit over any financial model and documentation (including any aspect of the calculation of the Refinancing Gain) used in connection with that Refinancing (whether the Refinancing is a Qualifying Refinancing or not).

• The Authority shall have the right to elect to receive its share of any Refinancing Gain as:

o a single payment in an amount less than or equal to any Distribution made on or about the date of the Refinancing;

o a reduction in the Unitary Charge over the remaining term of the Contract; or

o a combination of any of the above.

• The Authority and the Contractor will negotiate in good faith to agree the basis and method of calculation of the Refinancing Gain and payment of the Authority’s share of the Refinancing Gain (taking into account how the Authority has elected to receive its share of the Refinancing Gain under the point e above). If the parties fail to agree the basis and method of calculation of the Refinancing Gain or the payment of the Authority’s share, the dispute shall be determined in accordance with provisions of dispute resolution.

The Refinancing Gain shall be calculated after taking into account the reasonable and proper professional costs

45 Conversion rate for the purpose of this paper has been taken as 1 BP=2 USD


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that each party directly incurs in relation to the Qualifying Refinancing and on the basis that all reasonable and proper professional costs incurred by the Authority will be paid to the Authority by the Contractor within 28 days of any Qualifying Refinancing.

Government guarantees to the downside of concessionaire’s revenue is the key reason for sharing of refinancing gain in UK. Because the concessionaire is assured a particular return on his investment in PFI projects and the authority takes the entire traffic risk, it is expected that the authorities share any significant upside in concessionaire’s revenue.