Completion Report

Project Number: 40655 Loan Numbers: 2404 and 2509 November 2012

India: India Infrastructure Project Financing Facility

CURRENCY EQUIVALENTS (as of 5 September 2012)

Currency Unit – Indian rupee/s (Re/Rs) Rs1.00 _ $0.179

$1.00 _ Rs55.655

At Appraisal At Project Completion 4 October 2007 15 January 2010

Rs1.00 = $0.0253 $0.02187 $1.00 = Rs39.57 Rs45.69

ABBREVIATIONS ADB – Asian Development Bank CPS – country partnership strategy DMF – design and monitoring framework ESMU – environmental and social safeguard management unit ESSF – environmental and social safeguard framework FFA – framework financing agreement FI – financial intermediary FY – fiscal year FYP – five-year plan GDP – gross domestic product IIFCL – India Infrastructure Finance Company Limited IIPFF – India Infrastructure Project Financing Facility KfW – Kreditanstalt für Wiederaufbau LIBOR – London interbank offered rate MFF – multitranche financing facility MOF – Ministry of Finance NBFC-IFC – non-banking finance company–Infrastructure Finance Company PFR – periodic financing request PMU – project management unit PPP – public–private partnership RBI – Reserve Bank of India SIFTI – Scheme for Financing Viable Infrastructure Projects through a

Special Purpose Vehicle called the India Infrastructure Finance Company

SPV – special purpose vehicle TA – technical assistance

NOTES

(i) The fiscal year (FY) of the India Infrastructure Financing Company Limited (IIFCL)

and the Government of India ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2009 ends on 31 March 2010.

(ii) In this report, “Rs” and “$” refer to Indian rupees and US dollars, respectively.

Vice-President X. Zhao, Operations 1 Director General J. Miranda, South Asia Department (SARD) Director B. Carrasco, Public Management, Financial Sector and Trade Division,

SARD Team leader J. Romero-Torres, Financial Sector Specialist (Capital Markets and

Infrastructure), SARD Team members N. Bertsch, Financial Sector Specialist, SARD P. Gutierrez, Project Analyst, SARD A. Gacutan, Senior Operations Assistant, SARD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

I. BACKGROUND 1

A. History 1 B. Scope of Operations 1 C. Relationship with ADB and Other Lenders 2 D. Relevance of Design and Formulation 3 E. Related Technical Assistance 4

II. IMPLEMENTATION OF IIPFF 4

A. Operational Framework and Lending Policies of IIFCL 4 B. Characteristics of Subloans 5 C. Implementation and Internal Operations of Subprojects 6 D. Operational Performance of IIFCL 7 E. Financial Performance of IIFCL 8 F. Covenants 9 G. Performance of ADB 9

III. EVALUATION 9

A. Loan Appraisal 9 B. Implementation 10

IV. ASSESSMENT AND RECOMMENDATIONS 11

A. Relevance 11 B. Effectiveness in Achieving Outcomes 11 C. Efficiency in Achieving Outcome and Outputs 12 D. Preliminary Assessment of Sustainability 13 E. Impact 13 F. Overall Assessment 14 G. Lessons 14 H. Recommendations 15

APPENDIXES

1. Design and Monitoring Framework 16 2. Technical Assistance Completion Report 21 3. Scheme for Financing Viable Infrastructure Projects through a Special Purpose Vehicle 23 4. Updated Organizational Structure 29 5. Summary of Operational and Financial Performance 30 6. Assessment on Compliance with Undertakings under the Framework Financing Agreement (FFA) and Loan Agreement 31 7. Performance of India Infrastructure Project Financing Facility 40 8. Key Observations on Credit Appraisals by India Infrastructure Finance Company Ltd 44

i

BASIC DATA

A. Loan Identification 1. Country India 2. MFF Number M0017 3. Loan Title India Infrastructure Project Financing Facility 4. Borrower India Infrastructure Finance Company Limited 5. Name of Development Finance Institution India Infrastructure Finance Company Limited 6. Amount of Loan $500,000,000 7. Project Completion Report Number 1375

B. Loan Data

1. Pre-Appraisal - Date Started 6 August 2007 - Date Completed 27 August 2007

2. Loan Negotiations (LN2404-PFR1) - Date Started 24 October 2007 - Date Completed 16 November 2007 (LN2509-PFR2) - Date Started 18 February 2009 - Date Completed 18 February 2009

3. Dates of Board Approval (IIPFF) 14 December 2007 (LN2404-PFR1) 20 December 2007 (LN2509-PFR2) 24 February 2009

4. Dates of Loan Agreement (LN2404-PFR1) 3 March 2008 (LN2509-PFR2) 26 February 2009

5. Dates of Loan Effectiveness (LN2404-PFR1)

- In Loan Agreement 3 March 2008 - Actual 14 April 2008 - Number of Extensions none

(LN2509-PFR2) - In Loan Agreement 26 February 2009 - Actual 20 March 2009 - Number of Extensions none

6. Closing Date (LN2404-PFR1)

- In Loan Agreement 30 October 2009 - Actual 15 January 2010 - Number of Extensions 1

(LN2509-PFR2) - In Loan Agreement 30 November 2011 - Actual 26 August 2011 - Number of Extensions none

7. Terms of Loan - Interest Rate sum of LIBOR and 0.60% as provided by

Section 3.02 of the Loan Regulations, less a credit of 0.40% as provided by Section 3.03 of the Loan Regulations

- Maturity (number of years) 25 years - Grace Period (number of years) 5 years - Free Limit none - Repayment Terms Payable semi-annually on 15 June and 15

December of each year in accordance with Schedule 1 of the Loan Agreement

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8. Terms of Relending (if any) n/a 9. Interest Rate for Subloans

- Original - Revised

Market-based and adequate to cover all costs and risks associated with onlending, including any foreign exchange rate premium (Section 4.01 and paragraph 11 [iii] of Schedule 3 of Loan Agreement)

10. Disbursement a. Dates

(LN2404-PFR1) Initial Disbursement Final Disbursement Time Interval

9 May 2008 15 January 2010 20 months

Effective Date Original Closing Date Time Interval 14 April 2008 30 October 2009 18 months

(LN2509-PFR2) Initial Disbursement Final Disbursement Time Interval 14 December 2009 26 August 2011 20 months

Effective Date Original Closing Date Time Interval 20 March 2009 30 November 2011 32 months b. Amount ($’000)

(LN2404-PFR1 and LN2509-PFR2): Tranches 1 and 2

Subloan Original

Allocationa

Last Revised Allocation

b

Amount Disbursed

c

L&T Western Andhra Tollways Pvt. Ltd. 2,567,900 2,567,900 2,567,900 Trichy Tollways Ltd. 12,885,906 12,885,906 12,885,906 GMR Ulunderpet Expressways Pvt. Ltd. 18,111,075 18,111,075 18,111,075 MVR Infrastructure & Tollways Ltd. 8,927,241 8,927,241 8,927,241 Indu Navayuga Infra Projects Pvt. Ltd. 11,279,120 11,279,120 11,279,120 L&T Vadodara Bharuch Tollways Ltd. 14,571,461 14,571,461 14,571,461 Oriental Pathways (Indore) Pvt. Ltd. 27,643,740 27,643,740 27,643,740 Raipur Expressways Ltd. 6,928,634 6,928,634 6,928,634 Oriental Pathways (Nagpur) Pvt. Ltd. 11,838,719 11,838,719 11,838,719 Lucknow Sitapur Expressway Pvt. Ltd. 9,595,926 9,595,926 9,595,926 Oriental Pathways (Agra) Pvt. Ltd. 6,841,719 6,841,719 6,841,719 Ahmedabad Ring Road Infrastructure Ltd. 11,930,446 11,930,446 11,930,446 Kumrarapalyam Tollways Ltd. 6,257,113 6,257,113 6,257,113 Salem Tollways Ltd. 4,476,532 4,476,532 4,476,532 DS Toll Road Ltd. 10,467,990 10,467,990 10,467,990 NK Toll Road Ltd. 4,550,055 4,550,055 4,550,055 L & T Interstate 18,423,300 18,423,300 18,423,300 Delhi International Airport Pvt. Ltd. 57,595,896 57,595,896 57,595,896 Madurai-Tuticorin Expressways Ltd. 23,867,343 23,867,343 23,867,343 SU Toll Road Pvt. Ltd. 22,588,307 22,588,307 22,588,307 TK Toll Road Pvt. Ltd. 18,015,191 18,015,191 18,015,191 TD Toll Road Pvt. Ltd. 15,385,470 15,385,470 15,385,470 Ashoka Highways (Bhandara) Ltd. 17,654,119 17,654,119 17,654,119 Ashoka Highways (Durg) Ltd. 19,733,659 19,733,659 19,733,659 Jaora-Nayagaon Toll Road Co. Pvt. Ltd. 24,584,153 24,584,153 24,584,153 Nirmal BOT Ltd. 12,866,148 12,866,148 12,866,148 West Haryana Highways Project Pvt. Ltd. 19,191,357 19,191,357 19,191,357 Mumbai International Airport Ltd. 39,607,595 39,607,595 39,607,595 Western MP Infrastructure & Toll Road Pvt. 30,109,149 30,109,149 30,109,149 Gwalior Bypass Project Pvt. Ltd. 11,504,736 11,504,736 11,504,736

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Subloan

Original Allocation

a

Last Revised Allocation

b

Amount Disbursed

c

Total (US$ equivalent) 500,000,000 500,000,000 500,000,000 Total (Rupee equivalent) 23,083,949,381 23,083,949,381 23,083,949,381

Note: No partial cancellations and undisbursed balance. a

Actual US equivalent. b Total of last revised allocation and undisbursed balance.

c Actual US dollar equivalent.

C. Implementation Data

1. Number of Subloans 30 2. Sectoral Distribution of Subloans Sector No. of Projects Actual ($) Transport and ICT/Roads 28 402,796,509 Transport and ICT/Airports 2 97,203,491

Total 500,000,000 3. Project Performance Report Ratings

(LN2404-PFR1): Tranche 1 Ratings Implementation Period Development

Objectives Implementation

Progress From 14 April 2008 to 31 December 2008 S S From 1 January 2009 to 31 December 2009 S S From 1 January 2010 to 31 December 2010 S S Source: Historical PPR.

(LN2509-PFR2): Tranche 2 Ratings Implementation Period Development

Objectives Implementation

Progress From 28 February 2009 to 31 December 2009 S S From 1 January 2010 to 31 December 2010 S S From 1 January 2011 to 26 August 2011 1.00000 (On Track) Source: Historical PPR and e-Operations.

D. Data on Asian Development Bank Missions

Name of Mission

Date No. of Persons

No. of Person-Days

Specialization of Members

a

Fact-finding 4–16 December 2006 3 36 a, b, c Due diligence on safeguard policy issues 7–16 February 2007 5 45 a, b, d, e Consultation 14–16 June 2007 2 6 a, b Pre-appraisal 6–27 August 2007 5 105 a, b, d, e, f Consultation 23–28 September 2007 3 15 b, f Loan negotiations (Loan 2404) 24, 25, 30 October 2007

and 16 November 2007 3 12 b, i

Inception 9–18 April 2008 7 47 b, d, e, f, g, h Midterm review (Loan 2404) 3–14 November 2008 8 88 b, i, d, a, m, l, g Loan negotiations (Loan 2509) 18 February 2009 2 2 b, i Loan review (Loan 2404) 25 March 2009;

22 April 2009 1 2 b

Safeguard review mission 23–27 November 2009 2 10 e, l Midterm review (Loan 2509) 15–17 September 2011 2 6 b, k Project completion review

b 31 July–3 August 2012 2 8 b

a a = economist, b = finance specialist, c = finance officer, d = safeguard specialist, e = environment specialist, f = control officer, g

= director, h = control specialist, i = counsel, j = program officer, k = project officer, l = consultant, m = project analyst. b The project completion report was prepared by Jennifer Torres, Financial Sector Specialist; and Natalie Bertsch, Financial Sector

Specialist, Public Management, Financial Sector and Trade Division.

E. Related Loans (to some development finance institutions): Not applicable.

I. BACKGROUND A. History 1. The Government of India has identified infrastructure development as a key priority, and has emphasized the role of public–private partnership (PPP) in achieving growth. The government has estimated that investments of $514 billion in the Indian infrastructure sector are needed to achieve growth projection of 9% per annum within the 11th Five-Year Plan (FYP) (2007–2012).1 2. In order to scale up the development of infrastructure through PPP, the government established the India Infrastructure Finance Company Limited (IIFCL) in January 2006 as a wholly owned “government company,” incorporated under Section 619 of the Companies Act, 1956, to catalyze long-term financing for viable infrastructure projects. IIFCL’s operating paradigm is governed by “The Scheme for Financing Viable Infrastructure Projects through a Special Purpose Vehicle called the India Infrastructure Finance Company Limited” (SIFTI). Built into this scheme is a preference for PPP projects that are awarded to private companies selected through a competitive bidding process. IIFCL’s role is not only to catalyze investments from the private sector through PPP but also to draw in investable long-term resources from the market. IIFCL commenced operations in April 2006. 3. In February 2008, IIFC (UK) was incorporated as a wholly owned subsidiary of IIFCL, under the laws of England, to supplement IIFCL’s role and functions by lending part of India’s foreign exchange reserves to Indian companies implementing infrastructure projects. The Reserve Bank of India (RBI) has provided IIFC (UK) with a credit line of $5 billion for issuing bonds, denominated in US dollars with a tenure of 10 years at the 6 months’ London interbank offer rate (LIBOR), to onlend resources to Indian infrastructure companies, solely for meeting their capital expenditure outside India. 4. In FY2011–2012, IIFCL established a subsidiary, IIFCL Projects Limited, to provide project advisory services, including project appraisal and syndication services. IIFCL also initiated the process for launching an Infrastructure Debt Fund along with co-sponsors and investors for a corpus fund of around $1 billion, with an investment of around Rs 15 billion through mutual funds. It also acquired 41% of the total shareholdings in the Delhi Mumbai Industrial Corridor Development Corporation. On 5 January 2012, IIFCL launched its credit enhancement scheme for pilot transactions. The Asian Development Bank (ADB) is supporting IIFCL by providing a backstop guarantee facility of up to 50% of IIFCL’s underlying project risk.2 B. Scope of Operations 5. Lending operations. IIFCL has been incorporated as a special purpose vehicle (SPV) to fund commercially viable infrastructure projects,3 as defined under the SIFTI, which are implemented through a project company set up on a non-recourse basis, i.e. those set up as

1 The Government of India’s Planning Commission puts India’s estimated infrastructure investment needs during the

FY2012–FY2016 12th Five-Year Plan at $1 trillion. Government of India, Planning Commission. 2011. Faster, Sustainable and More Inclusive Growth. An Approach to the Twelfth Five-Year Plan. New Delhi.

2 ADB. 2012. Report and Recommendation of the President to the Board of Directors on the Proposed Guarantee Facility Credit Enhancement of Project Bonds (India). Manila.

3 The term ‘viable projects’ may also include those that will become viable after receiving viability gap funding under

a government scheme. The Government of India launched the Viability Gap Fund in 2005 to attract private investment into infrastructure projects that are economically justified but not commercially viable on user fees alone. Refer to “Financial Support to Public Private Partnerships in Infrastructure” (2006), www.infrastructure.gov.in.

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SPVs or those that are units of larger corporate entities but whose cash flows can be ring-fenced. 6. IIFCL funds viable infrastructure projects through long-term debt by (i) direct lending to project companies; (ii) refinancing to banks and financial institutions; (iii) takeout financing implemented through a tripartite financing agreement between IIFCL, the identified lender, and the borrower, and providing for a conditional takeout on a with-recourse basis (i.e., the project credit risks during the primary stages of development would be borne by the participating banks); or (iv) any other mode approved by the government. To be eligible for funding under this scheme, the project shall be implemented by a public sector company, a private sector company selected under a PPP initiative, or any private sector company. However, IIFCL shall assign overriding priority to PPP projects that are implemented by private sector companies selected through a competitive bidding process. IIFCL can lend up to 20% of the capital costs of a project. 7. Funding operations. Apart from equity investments by the government, IIFCL raises long-term debt from the open market. This debt can be any or all of the following: (i) rupee debt raised from the market through suitable instruments created for the purpose; IFCL would ordinarily raise the debt of maturity to 10 years and beyond; (ii) debt from bilateral or multilateral institutions; and (iii) foreign currency debt, including that incurred through external commercial borrowings raised with the government’s prior approval. In consultation with the Department of Economic Affairs, IIFCL can raise funds as and when required, from both domestic and external markets. In the first year of IIFCL’s operations, the government approved a guarantee limit of Rs100 billion. Subsequently, the guarantee has been provided on a case-by-case basis. C. Relationship with ADB and Other Lenders 8. Relationship with ADB. As part of its support for PPP in India, ADB has given IIFCL two multitranche financing facilities (MFFs), for a total of $1.2 billion: the India Infrastructure Project Financing Facility (IIPFF) of $500 million, and the Second India Infrastructure Project Financing Facility (IIPFF II) of $700 million. 4 The provision of financing through the MFF modality5 to IIFCL is well suited for PPP subprojects as they are typically developed in a phased manner based on project implementation requirements that can involve long gestation periods. Hence, this is ADB’s first innovative MFF financial intermediation provided directly to IIFCL to support the government’s infrastructure development agenda through enhancing the availability of much-needed long-term funds for infrastructure financing. 9. ADB, IIFCL, and the government signed a framework financing agreement (FFA) on 16 November 2007 for IIPFF and on 6 October 2009 for IIPFF II. On 14 December 2007, ADB’s Board of Directors approved the MFF. Both IIPFF and IIPFF II have repayment periods of 20 years, with interest rates determined in accordance with ADB’s LIBOR-based lending facility and other terms and conditions set forth in the loan and guarantee agreements.

Table 1: Summary of ADB’s Current Lending to IIFCL MFF ADB Board Approval Loan Amount Rate of Interest Tenor* IIPFF Tranche 1 20 December 2007 $300 million 6M USD LIBOR + 20bps 25 years

4 ADB. 2007. Report and Recommendation of the President to the Board of Directors on India Infrastructure Project Financing Facility. Manila. (Loan 2404-IND, approved on 20 December, for $500 million); ADB. 2009. Report and Recommendation of the President to the Board of Directors on Second India Infrastructure Project Financing Facility. Manila (Loan 0037-IND, approved on 20 December 2009, for $700 million).

5 ADB. 2005. Innovation and Efficiency Initiative: Pilot Financing Instruments and Modalities. Manila.

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MFF ADB Board Approval Loan Amount Rate of Interest Tenor* Tranche 2 24 February 2009 $200 million 6M USD LIBOR + 20bps 25 years IIPFF II Tranche 1 27 November 2009 $210 million 6M USD LIBOR + 20bps 25 years Tranche 2 7 December 2010 $250 million 6M USD LIBOR + 30bps 25 years Tranche 3 1 December 2011 $240 million 6M USD LIBOR + 40bps 25 years ADB = Asian Development Bank, IIFCL = India Infrastructure Finance Company Limited, IIPFF = India Infrastructure Project Financing Facility, LIBOR = London interbank offered rate, MFF = multitranche financing facility. *including grace period of 5 years. Source: Asian Development Bank.

10. Relationship with other lenders. The following table provides a summary of IIFCL’s long-term borrowings from ADB and other financing institutions.

Table 2: IIFCL’s Borrowings with Other Lenders (as of 31 March 2012)

Other Lenders Loan Amount Rate of Interest Tenor IBRD (World Bank)

$1.195 billion

6M USD LIBOR + variable spread

20 years

KfW (Tranche 1) €16.6 million 0.75% 30 years KfW (Tranche 2) €33.4 million 4.99% 5 years Life Insurance Corporation of India Rs10.0 billion 8.56% 9 years National Small Savings Schemes Fund

Rs15.0 billion 9.00% 31 March 2013 (date of repayment)

KfW = Kreditanstalt für Wiederaufbau. Source: India Infrastructure Finance Company Limited Annual Report FY 2011–2012.

D. Relevance of Design and Formulation 11. Overall, both IIPFF and IIPFF II (collectively referred to herein as the ‘facility’) are MFF investment programs intended to finance subprojects included in the government’s scheme through IIFCL. The facility is an integral part of ADB’s sector strategy and compliments ADB’s parallel initiatives in PPP, contractual savings, and capital markets—all of which contribute to an enabling environment for long-term financing for infrastructure development.6 Under the first established IIPFF, ADB has provided financing to IIFCL’s investment program through an MFF amounting to $500 million over 4 years (FY2007–FY2011) to eligible infrastructure subprojects that are in accordance with the scheme and ADB-agreed criteria. It consists of tranches of $300 million (Tranche 1) and $200 million (Tranche 2). At the macro level, IIPFF has catalyzed private sector investments for infrastructure development of around $5.5 billion to finance 30 PPP subprojects. 12. IIFCL has financed, on average, around 11%–12% of the project costs. Catalyzing supplementary resources is thus an integral part of IIFCL’s operations. By providing long-term resources, IIFCL’s involvement has a significant catalytic effect. Private sector project sponsors will be more likely to commit debt and equity because a strong government-backed entity would typically have longer-term exposure to the project than other lenders. ADB’s support to IIFCL is thus critical in mobilizing private sector investment and improving project financing thereby improving the enabling environment for implementing PPP-type initiatives in India. This has resulted in the mainstreaming of PPP activity in India across sectors. ADB helps structure some

6 ADB’s ongoing TA projects are providing crucial support mainstreaming PPPs through the establishment of PPP

cells in selected states and central line ministries and capacity building support for, among others, PPP project preparation, appraisal and evaluation skills, building a PPP database, and refining the PPP policy and regulatory framework.

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of the potential PPP projects being identified through its long-standing technical assistance (TA) support, and makes them bankable. 7 13. The ADB country partnership strategy (CPS), 2009–2012, for India is closely aligned with India’s 11th FYP (2007–2012), which emphasizes faster and more inclusive growth to reduce poverty and support social development through the creation of infrastructural assets. The CPS, therefore, focuses on supporting inclusive and environmentally sustainable growth, catalyzing investment, and strengthening the results and knowledge orientation of ADB’s India program. The country operations business plan is in line with the CPS. The design and monitoring framework for IIPFF is in Appendix 1. E. Related Technical Assistance 14. A piggy-backed TA project of $500,000 was approved, along with IIPFF, to assist IIFCL in (i) strengthening the capacity of its resource management function to manage risks arising from its funding and financing activities; (ii) developing risk appraisal procedures, pricing tools, and credit risk management processes to enable IIFCL to acquire in-house project risk assessment capacity; (iii) identifying software and hardware for upgrading IIFCL’s resource management systems and processes; and (iv) training staff on resource management systems and risk assessment.8 The TA was effective on 26 March 2008. IIFCL was designated the executing agency. The original implementation period was 12 months, from July 2008 to June 2009. However, IIFCL asked to expand the scope of the TA to include: (i) capacity building of safeguard policy and compliance, and (ii) mobilization of the information technology procurement plan to support IIFCL’s then newly adopted risk management system. The change of TA scope and implementation arrangements delayed implementation until the first quarter of 2009. 15. Overall, the TA is considered as successful in achieving the intended impact of strengthening IIFCL’s in-house capacity to expand its operations in line with its business plan and the scheme. A separate technical completion report is in Appendix 2.

II. IMPLEMENTATION OF IIPFF A. Operational Framework and Lending Policies of IIFCL

16. IIFCL‘s policy role and operating conditions are governed by SIFTI (Appendix 3). The Ministry of Finance administers this scheme through IIFCL and the government has approved it. On 13 October 2011, the Union Cabinet approved the following revisions to SIFTI:9

(i) IIFCL may be brought under the regulatory oversight of the RBI by registering it as a ‘non-banking finance company–infrastructure finance company’ (NBFC-IFC).10

7 In addition to establishing PPP cells in 15 states and 6 infrastructure line ministries, ADB’s TA support for the

government’s PPP program to date has resulted in the identification of over 30 pilot projects across challenging sectors such as urban (water, sewerage, and solid waste management), health, education, power distribution, and the rural sector. Nearly 452 PPP projects are currently being developed across the country through the PPP cells supported by ADB.

8 ADB. 2007. Technical Assistance Report on India Capacity Development in India Infrastructure Finance Company Limited. Manila. (TA7030-IND).

9 The Ministry of Finance administers the scheme. The Union Cabinet approved it in 2006 and revised it in 2007,

2008, and 2011. 10

The Department of Financial Services, Ministry of Finance vide letter, dated 23 January 2012, asked the RBI to create a special category of NBFC-IFCs that are wholly owned by the government and whose borrowings are backed by sovereign guarantee. Such NBFCs are subjected to a far lower capital to risk weighted asset ratio than normal NBFCs. The RBI has yet to approve this request.

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(ii) The authorized capital of IIFCL may be increased from Rs20 billion to Rs50 billion with a proviso that it may be further increased to Rs80 billion with the approval of the finance minister.

(iii) The Board of IIFCL may be broad-based. (iv) Once IIFCL is brought under the regulatory oversight of the RBI, there will be no

need to constitute the oversight committee, as approved earlier by the cabinet. (v) SIFTI may be revised with the approval of the finance ministers.

17. IIFCL, as established under the Companies Act, 1956, does not come under the regulatory oversight of the Central Bank. Despite not being formally governed by RBI regulations, as a self-regulatory measure, IIFCL has adopted RBI norms for (i) nonperforming assets, (ii) asset classification, (iii) provisioning, (iv) income recognition, (v) credit concentration, (vi) special reserve maintenance (capital requirements), (vii) liquidity requirements, and (viii) resource raising. 18. Lending policies. The scheme defines the subproject selection criteria, appraisal, monitoring mechanisms, and lending terms for projects, including, inter alia, appraisal by the lead bank for technical, economic, and commercial viability. In addition, each subborrower funded under IIPFF is required to meet the following eligibility criteria, as agreed with ADB:

(i) be selected in accordance with ADB’s Procurement Guidelines (2010, as amended from time to time);

(ii) have adequate resources and financial capability to raise resources to complete and operate the relevant subproject successfully;

(iii) not be in default on any prior loan from IIFCL or from any of the participating members of the consortium of lenders;

(iv) be able to provide security as required by the consortium of lenders; (v) maintain appropriate financial records of income and expenditure to the satisfaction

of IIFCL and ADB; and (vi) comply, and cause each subproject to comply, with ADB, national, and state

policies, laws, and regulations relating to the environment, resettlement and indigenous peoples.

19. Between FY2009 and FY2011, IIFCL introduced new lending schemes and other initiatives in order to facilitate incremental lending to the infrastructure sector and mitigate the asset-liability mismatch for banks:

(i) a ‘takeout finance scheme’ to boost the availability of longer-tenor debt finance, and to address sector, group and entity exposure issues, and asset-liability mismatch concerns of lenders;

(ii) a ‘refinance scheme’ provided to banks and public financial institutions of up to 60% of the loan. IIFCL will sanction 10% of the project cost as against 20% where refinancing facilities are available for such projects;

(iii) a ‘credit enhancement scheme’ to guarantee a portion of the senior debt of operational infrastructure projects to improve the credit ratings from the ‘BBB’ category on the Indian national scale, to enable these projects to access the domestic bond market and refinance their existing bank debt; and

(iv) a wholly owned subsidiary (IIFCL Projects Limited) to provide advisory and project development.

B. Characteristics of Subloans 20. Subloans were extended under IIPFF to a range of subprojects subject to submission of a periodic financing request (PFR) by IIFCL and execution of related loan and guarantee

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agreements. Projects awarded to private sector companies that are selected through a transparent and open competitive bidding process for development financing, construction, operation, and maintenance through PPP are accorded priority under the scheme, which also receives corresponding sublending priority by ADB under IIPFF. 21. IIFCL submitted a list of subprojects identified for financing under IIPFF, including subprojects that can be substituted for subprojects not in compliance with ADB requirements. ADB received a list of 24 subprojects under the first PFR for $300 million (PFR 1), and 22 subprojects under the second PFR for $200 million (PFR 2). While the total volume of financing provided under IIPFF is only $500 million, it has catalyzed investments of around $5.5 billion (based on the total project costs estimated at Rs306 billion) from the private sector for financing a total of 30 PPP subprojects, of which 28 were road projects and 2 major international airport projects: Modernization of Delhi International Airport and Modernization of Mumbai International Airport. All subprojects funded under IIPFF are PPP projects. C. Implementation and Internal Operations of Subprojects 22. In the implementation of IIPFF, each subproject sanctioned by IIFCL has to undergo ADB review and approval prior to disbursement under IIPFF, as follows:

(i) IIFCL reviews the preliminary designs and cost estimates for all subprojects proposed under the respective tranches as approved by the lending consortium.

(ii) A screening committee of IIFCL and IIFCL board members meets to sanction the proposed subprojects.

(iii) Prior to the preparation of each PFR, the applicability and relevance of common environmental and social safeguard frameworks (ESSFs) for environmental impact, involuntary resettlement, and effect on indigenous peoples are assessed and updated to ensure their relevance and consistency with applicable country frameworks.

(iv) In formulating each new PFR, IIFCL reviews potential ongoing subprojects to ascertain their compliance with ESSF. These review reports are submitted to ADB together with other relevant safeguard documents for information and review. In the event of noncompliance found during such review, ADB would request a corrective action plan to be prepared by IIFCL and submitted to ADB for review and approval.

(v) IIFCL submits the compliance certificate along with the PFR to ADB for approval. A PFR includes information, including but not limited to: (a) the required loan amount; (b) the list of subprojects to be financed under the tranche; (c) appraisal reports for the listed subprojects; and (d) cost estimates and a detailed financing plan.

(vi) For new subprojects that were not included in the indicative list and for replacement of the subprojects that fail to be compliant with ADB’s ESSF requirements, the ESSF due diligence report and financial review of the project are required before submission to ADB for endorsement.

(vii) Once ADB endorses them, IIFCL submits the subloan evaluation form for each project for ADB’s financial approval.

(viii) Once ADB approves the subloan application form, IIFCL is instructed to submit the withdrawal application for the particular subloan.

23. Project management and reporting. A project management unit (PMU) oversees the day-to-day implementation of IIPFF, and is responsible for the identification, screening, selection, and monitoring of all subprojects to ensure compliance with ADB requirements, including ESSF. The PMU maintains a separate record for works, goods, and services financed out of the ADB loan proceeds. IIFCL has maintained separate project accounts according to

7

generally accepted accounting principles for all expenditures incurred under IIPFF and the subprojects, whether out of loan proceeds or from other sources, and has recorded, in a transparent manner, all funds received from the government, ADB, and other sources. IIPFF’s performance has three levels of review: (i) by IIFCL through the PMU (quarterly), (ii) by IIFCL’s Board of Directors (semi-annually), and (iii) by ADB (annually). IIFCL has generally complied with ADB reporting requirements. Every project is reviewed annually and a review note is put up to the IIFCL Board. The review is also made if there is any significant development in the project as well as part of the preparation process for the subsequent tranche (PFR 2) and follow-on MFF (IIPFF II). 24. Safeguards. To minimize and mitigate the environmental and social impacts of projects under IIFCL’s credit line, IIFCL developed an ESSF, with support from ADB, and implemented it.11 Both ADB and IIFCL staff visited all subproject sites to ensure compliance with ADB’s safeguard requirements. IIFCL prepared safeguard due diligence reports for review and approval by ADB. To strengthen the monitoring of subprojects’ safeguard compliance, an environmental and social safeguard management unit (ESMU) was set up in February 2010, as a condition for the loan effectiveness of the second ADB credit line to IIFCL, the IIPFF II. IIFCL conducted an audit of the implementation of safeguard plans of all ADB-funded subprojects and submitted the audit report to ADB on 21 September 2011.12 The safeguard audit report was reviewed by ADB’s Regional and Sustainable Development Department, which endorsed the methodology and scope of the audit and found it adequate for the subprojects reviewed and for the intended outcome. This is one of ADB’s notable achievements through IIPFF because this was the first time ADB conducted a safeguard audit for a financial sector–based project. ADB has also further developed the capacity of IIFCL’s ESMU and its awareness of standard safeguard policies, thereby setting a good precedent for MFF–financial intermediary (FI) modality. D. Operational Performance of IIFCL

(i) Organization, Management, and Staffing

25. IIFCL has significantly increased its staff to a total of 56 from only 12 in 2007. IIFCL is a professionally managed entity with a limited mandate and functional responsibility. Since its inception in 2006, IIFCL’s operations have improved noticeably, establishing in-house expertise on financing, accounting, auditing, human resources (HR), legal issues, and environmental and social safeguards.13 IIFCL’s organizational structure has been revised and updated to reflect its corporate expansion (Appendix 4). IIFCL has implemented an HR plan that includes recruitment and compensation schemes to attract highly qualified staff. Previously, IIFCL recruited senior and middle officers on secondment from other banks. These have been now absorbed into the company and their compensations determined in the HR plan.

(ii) Personnel Administration

26. In order to develop human resources, IIFCL has undertaken various initiatives to develop staff capacities within the organization, including through on-the-job training and

11

IIFCL’s ESSF can be accessed at http://www.iifcl.org/Content/ESMU.aspx. 12

India Infrastructure Finance Company Limited. 2011. Environmental and Social Safeguards Annual Audit Report on Projects with Lending Support of ADB through IIPFF I & II. India (available upon request)

13 The World Bank provided capacity building assistance to IIFCL in the amount of $5.0 million to strengthen IIFCL’s organizational needs, including support of human resource strategy development and implementation and staff training. This is one of the project components under the World Bank’s $1.195 billion loan to IIFCL, approved in August 2009.

8

participation in in-house as well as external training courses, conferences, and seminars. ADB also provided support through the piggy-backed TA in developing IIFCL’s capacity by enhancing its resource management and risk management functions (see the technical completion report in Appendix 2). To keep staff motivated and engaged, IIFCL implemented a wage revision in FY2011–2012, effective 1 November 2007.

(iii) Lending Operations

27. IIFCL’s lending operations grew substantially in FY2011–2012. IIFCL approved 229 infrastructure projects for a total of Rs403,730 million, an increase of 27% from last year’s direct lending sanctions. A total of 192 projects achieved financial closure, amounting to Rs265,030 million. Disbursement was made to 171 projects, totaling Rs203,770 million.

Table 3: IIFCL’s Direct Lending Portfolio 31 March 2012 31 March 2011 Fiscal Year Ending Rs million $ million Rs million $ million Loans sanctioned 403,730 7,254 317,780 5,709 Loans disbursed 203,770 3,661 153,250 2,753 Number of projects sanctioned* 229 176

Note: Including 37 pooled municipal debt obligations with total amount sanctioned at Rs2,300 million. Pooled municipal debt obligations were set up in 2008 by four sponsors, Infrastructure Leasing and Financial Services (IL&FS), IDBI Bank, and Canara Bank, along with other lenders, to finance urban infrastructure projects on a PPP basis. The projects include development of common infrastructure for small and medium-sized enterprises, solid waste management, power generation, waste water treatment, and other urban infrastructure facilities such as city bus transport.

Source: India Infrastructure Finance Company Limited Annual Reports.

28. Given IIFCL’s mandate of providing support to infrastructure projects, with priority for PPP projects, financial assistance was approved for 163 PPP projects, constituting 71% of the 229 projects sanctioned by IIFCL in FY2011. Roads, power, and airports were the prominent sectors selected for IIFCL funding and were spread across 24 states in India.

(iv) Other Operations

29. IIFCL has one offshore wholly owned subsidiary, IIFC (UK) Limited, based in London.14 IIFC’s cumulative disbursements in India since its inception in 2008, including letters of comfort to 12 infrastructure projects—in power, metro rail, ports, gas pipeline, and fertilizer manufacturing—aggregated to around $740 million as of March 2012. E. Financial Performance of IIFCL 30. As of 31 March 2012, IIFCL reported a 98% increase in net profit of Rs5,860 million compared to Rs2,960 million in the corresponding period the previous year. Revenues also increased by 30% whereas the growth in expenses was contained at 8% and this gap has translated into profits. Loan disbursements increased by Rs50,520 million, including refinancing and takeout financing. Operating expenses constitute a major portion of the total expenses, with finance or borrowing costs accounting for 98% in FY2012. IIFCL’s long-term borrowings amounted to Rs208,420 million as compared to Rs198,720 million from the previous year. IIFCL has been raising debt primarily through long-term unsecured loans by issuing bonds guaranteed by the government at 6.5% to 8.5% coupon. As in FY2012, 68% of total long-term borrowings are government-backed bonds and 32% are long-term loans from the National Small Savings

14

IIFCL has plans to move its overseas base from London to Amsterdam to take advantage of the favorable tax regime.

9

Schemes Fund, Life Insurance Corporation of India, ADB, World Bank, and the Kreditanstalt für Wiederaufbau (KfW). The government has regularly injected capital into IIFCL since its inception, raising its total paid-in capital from Rs3,000 million in FY2008 to Rs25,000 million in FY2012. IIFCL will continue to have adequate capitalization as continued support from the government is expected. Apart from equity, IIFCL’s operations rely on long-term debt for funding raised from the market through bonds and debt from financial institutions. The government guarantees almost all of IIFCL’s borrowings, ensuring full and timely payment of IIFCL’s principal and all accrued interests. The maximum amount of guarantees that IIFCL can draw on depend on its funding requirements after consultation with the government.15 31. At present, IIFCL has an international credit rating of BBB-/Stable equivalent to the sovereign credit rating from Standard & Poor’s and Fitch Ratings, and a AAA domestic rating. A summary of IIFCL’s financials over the last 5 years is in Appendix 5. F. Covenants 32. On 28 July 2011, IIFCL submitted the auditor’s certificate on the use of loan proceeds for FY2011, confirming IIFCL’s compliance with financial loan covenants. To date, there are no arrears in repayment of IIFCL’s current debt obligation. IIFCL has satisfactorily disclosed all information pertaining to ESSF, changes to IIFCL’s operations and policies, and revisions to SIFTI, among others on the company’s website. IIFCL submitted progress reports to ADB confirming compliance with reporting requirements. A detailed assessment of the loan and FFA covenants is in Appendix 6. G. Performance of ADB 33. Given the nature of subloans to infrastructure projects, ADB’s review and timing of approval depend on the quality and completeness of information provided by IIFCL. During initial implementation of IIPFF, there were delays in the approvals and disbursements of subprojects due to lack of capacity within IIFCL on safeguard assessments. To address the shortcomings, ADB provided extensive support through (i) the Department for International Development cluster TA, and (ii) cluster development TA7030 for safeguard consultant resources and separate training to help build the staff capacity of the ESMU within IIFCL to handle the ESSF review, adoption, and monitoring of the subprojects. In addition, ADB conducted an ESSF orientation workshop in July 2010 and follow-up training, including a workshop on the Safeguard Policy Statement (2009), in February and September 2011. Two of IIFCL’s procurement specialists also attended ADB-hosted seminars on “International Federation of Consulting Engineers (FIDIC) Conditions of Contract” in July 2011 and “Procurement Procedures” in September 2011. In addition, the project implementation team of ADB and IIFCL’s PMU worked as a team built on close partnership and trust. This approach enhanced the project’s performance. In this regard, ADB performed satisfactorily in implementation and in achieving full disbursement of the entire MFF of $500 million by 26 August 2011, well ahead of the target disbursement date of 30 November 2011.

III. EVALUATION A. Loan Appraisal 34. Distribution of subloans. IIFCL has supported PPP projects, particularly with ADB’s intervention under IIPFF. IIPFF, an MFF consisting of two tranches, funded a total of 30 PPP

15

The government has specified a guarantee limit of Rs100 billion.

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subprojects following the subproject and subborrower selection criteria as defined by the scheme and ADB. The provision of financing through the MFF modality to IIFCL is well suited for PPP as these projects are typically developed in a phased manner based on project implementation requirements that can involve long gestation periods. Therefore, the MFF modality provided IIFCL with flexibility to release financing in line with subproject readiness based on achievement of phased benchmarks, including finalization of risk-sharing arrangements, readiness of engineering and procurement contracts, and phased release of equity by subproject promoters. Individual loan proceeds under IIPFF have been disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). Tranche 1, under IIPFF, of $300 million, was fully disbursed on 15 January 2010 and Tranche 2, of $200 million, on 26 August 2011. Appendix 7 summarizes the disbursement performance status of IIPFF. 35. Covenants. The covenants and other undertakings in place between IIFCL, the government, and ADB in relation to IIPFF are satisfactory. However, the aggressive growth in IIFCL’s loan portfolio and introduction of new business initiatives warrant that the oversight (in terms of application of prudential norms) of IIFCL should come formally under the purview of the RBI and its conversion from a public financial institution to an NBFC-IFC is crucial. This should be monitored closely and could be taken up during ADB’s country tripartite portfolio review to expedite the RBI’s approval process of IIFCL’s conversion to NBFC status. 36. Quality of appraisal. When SIFTI was devised, IIFCL was not required to appraise the project by itself, but relied on the lead bank’s appraisal. However, SIFTI was revised to require its own credit appraisal. IIFCL has therefore developed an internal credit risk policy framework, which is based on the credit risk management system initially developed by CRISIL Risk and Infrastructure Solutions Limited, supported under ADB TA7030. IIFCL’s risk department undertakes independent risk analysis and mitigation suggestions as part of the rating report. The comments and observations provided by the risk department as part of the rating report are taken into consideration by the credit department and incorporated into the project proposals before they are submitted to the Board for approval. While IIFCL is continuously building its capacity to carry out credit appraisal, there is still significant reliance on information provided by the lead bank. Key observations are summarized in Appendix 8.

37. It is noteworthy to mention, however, that IIFCL is working with Deloitte Touche Tohmatsu India Private Limited on improving its policies, practices, methodologies, and solutions toward an integrated risk management framework,16 under TA support provided by the World Bank to further strengthen IIFCL’s credit, operations, and market risk management (including treasury operations) of IIFCL. B. Implementation 38. Overall, the implementation arrangements for IIPFF were conducted in such a manner that (i) the subprojects and subborrowers have been selected in accordance with the scheme and ADB’s agreed selection criteria, and following ADB’s Procurement Guidelines (2010, as amended from time to time); (ii) the subprojects have undergone comprehensive environmental and social safeguard due diligence, have prepared the necessary ESSF, and are compliant with all applicable ADB environmental and social safeguard policies and requirements; and (iii) the subprojects have complied with financial management eligibility criteria, including the need to

16

The integrated risk management system for IIFCL is part of the $5.0 million TA program provided by the World Bank. This TA complements the World Bank’s and International Bank for Reconstruction and Development’s $1.195 billion loan to IIFCL over a period of 6 years, approved in August 2009. See footnote 11.

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ensure that legal agreements include appropriate provisions for subproject accounting, statutory audit, and submission of certified utilization certificates before each disbursement and report. 39. While financial management systems—comprising IIFCL’s accounting, financial reporting, budgeting, control, and audit systems—are adequate, the systems for subproject financial management oversight and monitoring by IIFCL rely on controls exercised by the lead bank. However, internal controls and audits at the subproject level are now being factored into IIFCL’s monitoring and review mechanisms. The integrated risk management framework currently being developed by Deloitte for IIFCL will also look into factoring in operational risks in infrastructure projects associated with environmental and social safeguard issues and a more comprehensive framework on financial management, particularly on mechanisms for project oversight, monitoring, and reporting.

IV. ASSESSMENT AND RECOMMENDATIONS

A. Relevance 40. Overall, IIPFF is deemed highly relevant. India’s 11th FYP (2007–2012) emphasizes (i) continued focus on infrastructure development, i.e., road, rail, air and water transport, power, telecommunications, irrigation, and water supply storage; and (ii) measures to encourage PPPs for the financing, designing, implementing, and operating of existing and new infrastructure subprojects. This vision remains relevant beyond the 11th FYP. The approach paper to the 12th FYP (2013–2017) estimates total infrastructure investment requirements at $1 trillion. The share of private and PPP investments is expected to rise from 30% under the 11th FYP to 50% under the 12th FYP. Against the backdrop of the significant rupee depreciation in 2012, infrastructure investment requirements are expected to rise above estimates of $1 trillion. In the absence of a large volume of long-tenor US dollar funding in the local market, ADB’s continued assistance to IIFCL will be crucial in closing infrastructure gaps. As MFF is part of the major investment program of IIFCL, IIPFF it is highly relevant. B. Effectiveness in Achieving Outcomes 41. As outlined in IIPFF’s design and monitoring framework, the five major outcomes include: (i) increased private sector participation in infrastructure development through PPPs; (ii) contained and reduced fiscal deficit through private sector participation in infrastructure; (iii) improved lending terms of IIFCL for infrastructure subprojects; (iv) improved capacity in IIFCL to ensure that ADB funds are used for subprojects that conform to ESSF through relevant TA support; and (v) improved resource management and project risk assessment capabilities in IIFCL. 42. Increased private sector participation in infrastructure development through PPPs. The performance target outlined in the DMF to measure this outcome is IIPFF’s contribution to achieving India’s target GDP growth of 9% during 11th FYP. And, while this is considered too broad as an indicator, one project alone cannot attribute to a country’s economic growth nor can be used as a proxy to measure components of GDP. As an appropriate measure, IIPFF has achieved this outcome by catalyzing investments of around $5.5 billion (based on the total project costs estimated at Rs306 billion) from the private sector for financing 30 subprojects under a PPP modality. 43. Contained and reduced the fiscal deficit through private sector participation. While the fiscal deficit remained below 3% on average over the period of the 11th FYP, in line with India’s Fiscal Responsibility and Budget Management Act, 2003, it remains a sub-optimal

12

indicator since fiscal deficits depend on many variables beyond the project’s scope including GDP growth and revenue collection. It is therefore suggested to use declining government expenditure on infrastructure as a percentage of overall government capital expenditures as an improved indicator to measure this outcome. The percentage of capital expenditures (roads, bridges and civil aviation) decreased from 7.6% in FY2006-7 to 4.4% in FY 2011-12 highlighting the positive effect of private infrastructure investments for greater fiscal space in India.17 44. Improved lending terms of IIFCL for infrastructure subprojects. Based on the scheme, IIFCL cannot act as a consortium leader and has to follow the lead bank of the consortium with regard to credit terms, such as loan tenor, interest rate, and repayment schedule. The lead bank’s pricing and risk assessment are done in the context of its own risk profile, which is different from IIFCL’s risk profile. IIFCL does not factor in its individual or entity risks to assess the credit risk involved and price its lending product accordingly. Moreover, ADB’s Operational Manual D6 on Financial Intermediation Loans advocates that FIs should charge market-based rates to avoid discouraging domestic resource mobilization. As such, this outcome is not applicable under the design of IIPFF. While IIPFF did not lead to direct reduction of borrowing costs for the specific subprojects, it provided IIFCL the opportunity to provide refinance and takeout finance schemes to facilitate incremental lending to the infrastructure sector by addressing banks’ exposure and asset-liability mismatch constraints to enable banks to continue financing projects and sustain investor interest in PPP. In this regard, IIPFF has achieved the outcome of increased availability of long-term funds for infrastructure in India, thus enabling IIFCL and consortium lenders to finance longer tenor infrastructure projects. 45. Improved capacity in IIFCL to ensure that ADB funds are used for subprojects that conform to ESSF through relevant TA support. During IIPFF implementation, IIFCL built its capacity in environmental and social safeguard appraisals by initially outsourcing such appraisals and later building up an internal team. It now has sufficient capacity to ensure project compliance with the requirements of the ESSF.18 The respective performance targets of this outcome have been met since (i) IIFCL staff is able to understand and assess the project according to the adopted ESSF; (ii) an increasing number of projects for ESSF compliance are being assessed; and (iii) a risk management framework has been developed and was adopted in 2009. 46. Improved resource management and project risk assessment capabilities. IIFCL’s credit and safeguards appraisal teams have been strengthened in terms of number and capacity, and an improved risk model system was introduced in 2009 with support from ADB’s piggy-backed technical assistance. Refer to Appendix 2. 47. While some of the performance indicators used in the DMF are too broad and are not fully aligned with the intended outcomes, a thorough assessment of IIPFF’s achievement using appropriate indicators has shown that IIPFF is considered highly effective. C. Efficiency in Achieving Outcome and Outputs 48. IIPFF was supporting five outputs: (i) high-quality infrastructure assets created in various subsectors across the country; (ii) the availability of long-term funding to IIFCL and improved ability of IIFCL to provide long-term financing to subprojects; (iii) an international credit rating, attained by IIFCL and periodically updated; (iv) improved financial policies, staff capacity, and

17

Government of India. 2012. Data and Statistics. http://finmin.nic.in/reports/ipfstat.asp. 18

IIFCL established an ESMU in February 2010 and has five staff positions, including a unit head, two environment specialists, and two social safeguard specialists. A review of IIFCL’s ESSF, including a 2010 audit of ADB-supported IIFCL projects, revealed overall compliance with the ESSF requirements.

13

risk management systems of IIFCL; and (v) implementation of ESSF. IIPFF achieved the expected outputs by (i) financing 30 subprojects, thereby fully disbursing the allocated $500 million of IIPFF; (ii) reducing the gap in duration between asset and liability portfolio; (iii) improving financial policies, including voluntary prudential measures in line with RBI requirements, staff capacity, and an improved risk management system, including the expected fully automated credit appraisal process; and (iv) formally adopting the ESSF system in 2007 and the updated ESSF as per ADB’s safeguard policy statement in 2010. 49. By significantly leveraging IIPFF funding to finance 30 infrastructure projects with estimated total costs of $5.5 billion, the project is considered highly efficient in catalyzing much-needed infrastructure investments in India. No change in scope was required during implementation. ADB was highly efficient in disbursing the full facility with a lean project team and ahead of the originally proposed project completion date. D. Preliminary Assessment of Sustainability 50. IIPFF is likely to be sustainable. Since IIFCL may benefit from further ADB assistance, it was not given the highest rating of “most likely sustainable.” As demonstrated in earlier sections, IIFCL has substantially increased its lending portfolio and continues to pursue an aggressive growth strategy. Domestically, IIFCL is an increasingly important player in the financial markets and has so far raised Rs2.69 billion without any government guarantee. IIFCL should be able to tap international capital markets with its planned offshore bond medium-term note borrowing program for 2013. Notwithstanding, additional resources from multilateral development banks are required to meet the large volume of longer-tenor US dollar financing requirements for infrastructure in India. E. Impact 51. Overall, IIPFF contributed to the expected impact on improved per capita infrastructure availability in India. It generated significant benefits by supporting industrial and agricultural development leading to reduced vehicle operating costs, minimized delays in passenger and freight movements, and reductions in the number of road accidents. IIPFF supported the construction and expansion of more than 2,000 kilometers of road and the rehabilitation of two major international airports,19 which cater to tens of millions of passengers per year, both domestic and international (see Appendix 7). Several of the proposed performance indicators, such as the private investment in infrastructure to reach 30% of overall infrastructure investment during the 11th FYP, are inadequate in measuring the impact of IIPFF and have consequently not been used in the evaluation. 52. The impact of IIPFF on poverty reduction is likely to stem from the effect of increased infrastructure on gross domestic product (GDP) growth, domestic and foreign investment, and employment. The impact will be spread across India, with subprojects financed in states with comparatively lower income per capita, such as Uttar Pradesh, and higher income per capita states, such as Tamil Nadu. Of the subprojects funded under IIPFF, 28 of the 30 have been financed outside the centers of Delhi and Mumbai. 53. All subprojects were compliant with national and ADB safeguard policies. IIFCL built

19

IIPFF financed the modernization of Delhi International Airport and Mumbai International Airport. The Delhi International Airport (officially named the Indira Gandhi International Airport) is now ranked the fourth largest airport in the world in the category of airports serving 25–40 million passengers per annum. It also won a number of international awards, including Best Improved Airport at the Airports Council International Awards, and the British Construction Award for Terminal 3 as the Best International Project among 180 international projects.

14

their internal capacity on environmental and social safeguards during the implementation period. The ESSF was adopted in 2007 and updated in 2010. Most important, IIFCL recognized the importance of safeguard compliance for fast and successful project construction and implementation. Reports from subproject management companies indicate that illegal squatting by informal shop owners on acquired land is the main reason for delays in construction. F. Overall Assessment 54. IIPFF catalyzed investments of around $5.5 billion (based on total project costs estimated at Rs306 billion) to finance 30 infrastructure projects in the road and airport sectors in India, which were all financed under a PPP modality and implemented in full compliance with national and ADB safeguard policies and regulations. As such, it widely contributed to the intended impact of improving per capita infrastructure availability in India. Overall, IIPFF’s assessment is considered as (i) highly relevant, (ii) highly effective, (iii) highly efficient, and (iv) likely to be sustainable and is therefore considered a highly successful project. G. Lessons 55. Project-related. Since IIPFF was rated as highly successful, the lessons learned focus on ADB operations in the financial sector in India rather than being limited to the appraisal and implementation of the facility. While the executing agency did not raise any concerns about ADB’s 4-month approval process for subprojects under IIPFF, they built it into their own appraisal procedures to allow for effective coordination with the other consortium lenders. This demonstrates that (i) clear communication and adequate expectations about the length of ADB’s implementation procedures are essential to ensure the executing agency’s satisfaction with ADB; and (ii) there is room to improve and streamline internal implementation procedures to reduce endorsements to less than 4 months, thereby demonstrating client-orientation and relevance. 56. The Ministry of Finance (MOF) emphasized the limited fiscal space for public guarantees, including to IIFCL. MOF agrees with IIFCL on the importance of credit enhancement products without guarantees by the sovereign. ADB was asked to play a catalytic role in the development and implementation of such products. The MOF and the executing agency both expressed concern about the delays in the approval process. ADB clearly needs to strengthen innovative product development to ensure that interventions are relevant to changes and developments in the financial markets in India and to increase internal coordination to avoid delays in credit risk appraisal and approval. 57. Another lesson learned is the importance of dialogue and raising awareness for environmental and social safeguards. Initially, the emphasis on safeguards was considered a hindrance rather than an important aspect of IIFCL’s project appraisal. Continuous dialogue and awareness raising with senior management and staff training on safeguards were crucial in making safeguards an important consideration in the credit decision-making process. IIPFF benefitted from extensive coordination and collaboration with other development partners such as the World Bank, Japan Bank for International Cooperation, and KfW to develop a common ESSF. 58. General. In assessing the overall effectiveness of ADB’s intervention through the facility, the performance indicators should be more accurate and aligned with the stated impact and outcomes following ADB’s Guidelines for Preparing a Design and Monitoring Framework (2007).

15

H. Recommendations 59. Future monitoring. IIPFF has been fully disbursed and the loan accounts for PFR 1 closed on 15 January 2010 and for PFR 2 on 26 August 2011. No further action or follow-up is required. However, with the implementation of ADB’s MFF investment program, IIPFF II, which is currently ongoing, it is critical that ADB monitor not only the performance of the facility and the subprojects, but that it also keep abreast of any ongoing and future plans of IIFCL, given its strong growth trajectory and aggressive plans. Bi-yearly project review missions should be continued not only for monitoring purposes and updating developments in IIFCL, but also to further strengthen ADB’s engagement with IIFCL and the government for future interventions in infrastructure financing. 60. Governance of IIFCL. IFCL has been voluntarily adhering to the prudential norms set out by the RBI. However, the application to register IIFCL as an NBFC has yet to be approved. Meanwhile, the Department of Financial Services has asked the RBI to create a special category of NBFC-IFCs that are wholly owned by the government and whose borrowings are backed by sovereign guarantee. Such NBFCs would be subject to a far lower capital to risk-weighted asset ratio than normal NBFCs. Considering the systemic significance of IIFCL and its linkages with other FIs, its conversion to NBFC-IFC status under regulatory oversight of the RBI with clearly defined prudential norms will enhance IIFCL’s professional capability and enforce the government’s commitment to safeguard IIFCL’s long-term sustainability. 61. Additional assistance. Further financial assistance to IIFCL should be provided for (i) a third credit line, and (ii) credit enhancement products, subject to management and ADB Board approval. Infrastructure challenges are enormous, preventing India from achieving its potential GDP growth. Accordingly, US dollar long-term financing requirements are large, exacerbated by the rupee depreciation of approximately 20% to the US dollar, and not locally available in the required volume. 62. ADB project performance monitoring and evaluation. ADB policy guidelines require that individual project completion reports for each tranche and a facility completion report be prepared for the overall MFF for evaluation purposes. However, this does not properly reflect the unique characteristics of the MFF-FI, which is applicable to IIPFF. MFF-FI takes into consideration the overall risks that will be borne by ADB in providing loans or investments to a development finance institution and not solely on the subprojects itself. With the adoption of time-slicing in IIPFF, which permits multiple subprojects to be financed under both tranches, it is impractical to clearly distinguish the different impact of the two tranches. Therefore, only one project completion report for MFF-FIs should be prepared, including an improved template that provides for individual annexes for the respective tranches. A review of ADB’s Operations Manual OM D14 and the PAI 6.07 is necessary for an efficient and streamlined project performance monitoring system.

Appendix 1

16

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance

Targets/Indicators

Data Sources/Reporting

Mechanisms

Assumptions and Risks

Impact Improved per capita infrastructure availability in India

Reduction in peak and average energy deficit during 11th FYP (2007–2012) Achieving target seaport capacity of 1,300 MTPA during 11th FYP (2007–2012) Widening of national highways in line with National Highways Development Project during 11th FYP (2007–2012) Achievement of national urban transport policy goals during 11th FYP (2007–2012) Private investment in infrastructure to reach 30% of overall infrastructure investment during 11th FYP (2007–2012)

International and domestic business climate surveys Annual reports on infrastructure availability including Planning Commission studies ADB review and evaluation missions Economic survey of India, industry reports, and relevant government publications

Assumptions Continued priority accorded to infrastructure sector Continued priority accorded to financial sector development Increased efficiency of infrastructure investment Strong government commitment to IIFCL Risks Government commitment to infrastructure and financial sector reforms diluted Subprojects are not commissioned in time

Outcomes Increased private sector participation in infrastructure development through PPPs

Contribution in achieving the targeted 9% GDP growth during 11th FYP (2007–2012)

Planning Commission reports Economic survey of India Relevant government publications

Assumption Government policy of encouraging PPPs continues Risks Lack of government commitment and capability to carry forward reform agenda Possible reduction in the target GDP growth rate due to the current global financial turmoil

Containing and reducing fiscal deficit through private sector participation in infrastructure

Contribution in achieving fiscal deficit target of 3% GDP in line with FRBM Act, 2003, by 31 March

Annual budget announcements by the government RBI reports

Assumption Continued commitment of the government to fiscal discipline

Appendix 1

17

Design Summary

Performance

Targets/Indicators

Data Sources/Reporting

Mechanisms

Assumptions and Risks

2009 ADB–India Economic Quarterly Bulletin IMF India reports

Risks Unforeseen fiscal stress Decline in government commitment to FRBM Act, 2003 Impact of the current financial turmoil

Improved lending terms of IIFCL for infrastructure subprojects

Reduction in average borrowing costs for IIFCL and improvement in availability of finance for infrastructure during 11th FYP (2007–2012) Increased duration of financing provided by IIFCL for subprojects over time during 11th FYP (2007–2012)

Progress reports by PMU Rating agencies’ reports Lead banks’ reports IIFCL annual reports IPPMS data and reports

Assumptions Government’s financial sector and infrastructure sector reforms continue Government guarantee for IIFCL’s borrowings continues IIFCL maintains and/or improves its current credit ratings Risks Financial sector and infrastructure sector reforms curtailed Government guarantee to IIFCL diluted and/or curtailed Sovereign and IIFCL’s credit ratings deteriorate The current credit crunch situation continues longer than expected

Improved IIFCL capacity to ensure that ADB funds are used for subprojects that conform to ESSF through relevant TA support

IIFCL staff are able to (i) understand the ESSF, and (ii) use ESSF to assess proposed subprojects during FY2009–FY2010 Year-on-year improvement in number of subprojects assessed for compliance under ESSF between FY2008 and FY2011

ADB review missions Quarterly, semiannual, and annual reports by IIFCL World Bank review missions IPPMS data and PMU progress reports

Assumptions Deployment of adequate and suitable staff resources Trained staff will continue to work for IIFCL IIFCL absorbs capacity with regard to ESSF compliance through TA IIFCL ensures availability of suitable staff

Appendix 1

18

Design Summary

Performance

Targets/Indicators

Data Sources/Reporting

Mechanisms

Assumptions and Risks

Risk management system developed by consultants to be adopted by IIFCL in April 2009

Risks Trained staff may leave Delays in procuring relevant subproject documents from subborrowers, lead banks, and lead syndicators

Improved resource management and project risk assessment capabilities in IIFCL

Reduction in duration gap between asset and liability portfolio of IIFCL between FY2008 and FY2011 Enhanced processes, systems, and staff capacity for subproject risk assessment between FY2008 and FY2011 Improvements in (i) asset profile, (ii) liquidity indicators, and (iii) value at risk indicators between FY2008 and FY2011

Quarterly, semiannual, and annual reports by IIFCL Investment bank reports of IIFCL bond issuances Rating agencies’ reports IPPMS data and PMU progress reports

Assumptions Deployment of suitable staff Trained staff will be retained by IIFCL IIFCL absorbs resource and risk management capacity through TA Risks Inability of IIFCL to deploy suitable staff in a timely manner Trained staff may leave IIFCL Staff capability may decline in the absence of continuous training and inappropriate human resource strategy, which is largely dependent on secondment basis

Outputs High-quality infrastructure assets created in various subsectors across the country

Average subloan size of $20 million–$30 million 30–40 subprojects financed during FY2008–FY2011 Full utilization of the first tranche of $300 million by June 2009 Full utilization of the second tranche by November 2011

Quarterly, semiannual, and annual reports by IIFCL ADB review mission reports

Assumptions IIFCL’s long-term lending mandate continues IIFCL undertakes structured borrowing program based on risk-return considerations and subproject financing requirements Risk The government de-emphasizes IIFCL’s long-term lending mandate

Availability of long- Reduction in duration Rating agencies’ IIFCL’s portfolio quality

Appendix 1

19

Design Summary

Performance

Targets/Indicators

Data Sources/Reporting

Mechanisms

Assumptions and Risks

term funding to IIFCL and improved ability of IIFCL to provide long-term financing to subprojects

gap between asset and liability portfolio of IIFCL during FY2008–FY2011

reports IIFCL annual reports, IPPMS data, and PMU progress reports

deteriorates, which results in shortening of its lending terms Regulatory and policy risks leading to above

International credit rating attained by IIFCL and periodically updated

Annual credit rating of BBB+ or higher by internationally accredited rating agencies by end September each year

Rating agencies’ updates Investment bank reports of IIFCL bond issuances

Assumption Rating assessments and reviews are rigorous and conducted on time Risk Counterpart staff from IIFCL and line ministries not made available on time to rating agencies

Improved (i) financial policies, (ii) staff capacity, and (iii) risk management systems of IIFCL

Improved financial policies, ALM policy and tools, investment policies, deal documentation formats, pricing tools, and risk appraisal templates to be approved by the IIFCL Board by November 2008 and to be put in effect by start of fiscal year 2009

IIFCL ALM data ADB and World Bank review missions Rating agencies’ updates IPPMS data and PMU progress reports

Assumptions High-quality consultant reports prepared on time IIFCL staff are able to adapt to the new risk management and pricing systems Risks Trained staff may leave IIFCL Staff capability may decline in the absence of continuous training

Implementation of ESSF

Adoption and implementation of ESSF for each of the subprojects sanctioned by IIFCL High-quality due diligence ESSF reports during the IIPFF implementation period

ADB reviews Consultant reports World Bank review reports IIFCL compliance certificates for subprojects PMU progress reports

Assumptions Rigorous and timely reviews conducted Timely availability of required documents from subborrowers Risks Counterpart staff from IIFCL and subborrowers are not made available in time for ESSF Delay in obtaining the required documents from subborrowers Non-availability of qualified staff and resources

Appendix 1

20

Activities with Milestones Part A: Preparatory capacity building (up to fourth quarter 2009) 1.1 Identifying subproject pipeline to be financed through ADB funds 1.2 Retain common ESSF 1.3 Continue adequate monitoring arrangements for ADB 1.4 Develop capacity in PMU in IIFCL (by March 2009) 1.5 Continue due diligence of potential subprojects Part B: Additional capacity development (continues to second quarter 2010) 2.1 Determining capacity building requirements for resource

management and project risk management functions (by March 2009) 2.1.1 Adopting guidelines, manuals, and specifications for IIFCL

resource management and project risk assessment (by May 2009), including − Financial policies − ALM policy − Pricing tools and risk appraisal templates − Deal documentation formats − Back-office requirements − Resources management system requirements

2.2 Providing capacity development support and training (December 2009) for resource management to − enhance the risk management capacity − use risk-assessment models and develop options for appropriate

risk-sharing schemes, such as guarantees − effectively use tools for assessing value for money − usage of resource management systems and documentation,

understand the structure and regulatory implications of concession contracts

− address issues relating to competition and regulation in infrastructure

2.3 Assessing the impact of training to feed into redesign of training program during the midterm review

Part C: Tranche release progress and reporting (continues to third quarter 2011) 3.1 Periodic Financing Request for the second tranche (PFR 2) of $200

million for submission by January 2009 3.2 Second tranche disbursement requirements indicated (first quarter

2009) 3.3 Full utilization of the first tranche of $300 million by 30 June 2009 3.4 Full utilization of the second tranche of $200 million by no later than

30 November 2011 3.5 Supporting documentation submitted regarding compliance with ADB

requirements (quarterly, semiannual, and annual reports)

Inputs ADB Second and last tranche of $200 million National consultants (33 person-months) Review missions Participation in tripartite meetings Government/IIFCL Counterpart staff Office accommodation and transport Administrative services Facilitation for meetings Obtaining necessary information from subborrowers and/or lead syndicators Participation in tripartite meetings

ADB = Asian Development Bank, ALM = asset-liability management, ESSF = environmental and social safeguard framework, FRBM = Fiscal Responsibility and Budget Management, FYP = five-year plan, GDP = gross domestic product, IIFCL = India Infrastructure Finance Company Limited, IMF = International Monetary Fund, IPPMS = investment program performance management system, MTPA = million tons per annum, PFR = periodic financing request, PMU = project management unit, PPP = public–private partnership, RBI = Reserve Bank of India, TA = technical assistance. Source: Asian Development Bank.

Appendix 2 21

TECHNICAL ASSISTANCE COMPLETION REPORT Division: SAPF TA No., Country, and Name Amount Approved: $500,000 TA 7030-IND: Capacity Development in India Infrastructure Finance Company Limited

Revised Amount: n/a

Executing Agency: Ministry of Finance, Department of Economic Affairs

Source of Funding: TASF

Amount Undisbursed: $131,299

Amount Utilized: $368,701

TA Approval Date: 14 December 2007

TA Signing Date: 26 March 2008

Fielding of First Consultants: 23 June 2009

TA Completion Date Original: 30 June 2009

Actual: 30 September 2011

Account Closing Date Original: 30 June 2009

Actual: 31 December 2011

Description The India Infrastructure Finance Company Limited (IIFCL) has asked the Asian Development Bank (ADB) for advisory technical assistance (TA) to build additional internal capacity required to expand operational strength and enhance functional capabilities. Specifically, the TA will help IIFCL improve its resource management (treasury) capabilities and develop its ability to conduct an independent risk assessment of subprojects. The capacity addition proposed by IIFCL is necessary as IIFCL is being positioned to occupy a central role in infrastructure financing and is expected to assume an increasingly important role in providing long-term funds to the infrastructure sector. IIFCL is also expected to play a catalytic role in attracting funding from both domestic and foreign institutional and private equity funds to infrastructure subprojects being developed under the public–private partnership (PPP) modality in India. The Ministry of Finance (MOF) is the executing agency while IIFCL is the implementing agency. The TA has been processed as part of the India Infrastructure Project Financing Facility (IIPFF). Expected Impact, Outcome, and Outputs The impact was increased capacity within IIFCL to expand its operations in line with its business plan and the scheme. The expected outcomes were: (i) capacity development in IIFCL with respect to resource management functionality; (ii) capacity development in IIFCL with respect to subproject risk assessment; and (iii) risk-based pricing benchmarks for infrastructure financing. The expected outputs include: (i) financial policy documents, risk management procedures and guidelines, deal processing documentation, and design of training modules for risk management; (ii) identification of appropriate software and hardware requirements for enhancing resource management functionality; (iii) pricing tools, project risk appraisal documentation, and risk assessment templates; (iv) capital allocation methodologies, including value at risk models; and (v) identification of appropriate training modules and staff training in risk management and appraisal. The TA was expected to result in IIFCL expanding its balance sheet in line with its business plan and being able to develop a capital allocation framework. The TA was expected to enable additional flow of funding to infrastructure projects in India as IIFCL should be able to fulfill its mandate more effectively. Through its expanding operations, IIFCL would facilitate the flow of capital to projects that would otherwise be denied financing and contribute to reducing the vast infrastructure deficit that exists in India. The TA was only partly relevant since an essential component on safeguards was added during implementation. A minor change in scope was required to include capacity development on social and environmental safeguards, notably the performance of safeguard due diligence for subprojects financed under IIPFF. At the time of evaluation, further TA support was deemed less relevant since IIFCL is able to independently finance internal capacity development. In a broader context, assistance to IIPFF, which the TA is supporting, is deemed highly relevant. In continuation of the 11th Five-Year Plan (FYP) 2007–2012, the approach paper to the 12th FYP 2012–2017 estimates total infrastructure investment requirements at $1 trillion. The share of private and PPP investments is expected to rise from 30% under the 11th FYP to 50% under the 12th FYP. Delivery of Inputs and Conduct of Activities There were four individual contracts hired through a firm with total of 27 person-months to deliver the required activities under the TA. However, delivery of inputs was delayed as consultants were only mobilized (23 June 2009) more than one year after the TA signing (26 March 2008). Notwithstanding the initial delays, the executing agency generally appreciated the inputs provided by the consultants. The performance evaluation of the consultants was satisfactory with the notable exception of one consultant who was rated generally satisfactory. In addition, the TA further required a change in scope to include a new component on strengthening IIFCL’s capacity in environmental and social safeguard due diligence on ADB-financed subprojects. Since IIFCL’s lack of capacity on safeguards was known to the project team at the time of TA processing, it should have been included in the original project design. This aspect is adversely impacting the efficiency rating of the project. As a result, the TA was extended twice, for a total of more than 2 years, from the original completion date of 30 June 2009 to 30 September 2011. The project team

22 Appendix 2

was diligent, conducted more than nine review missions (which were combined review missions for the IIPFF), and established a working relationship with the executing agency and the implementing agency based on trust and common understanding, which was essential in achieving the outcomes despite the several inefficiencies demonstrated in this section. The performance of ADB and the EA are therefore rated as satisfactory. Overall, the TA has been evaluated as less efficient as a result of (i) extensions of over 2 years, (ii) inclusion of one distinctive component on safeguards, and (iii) initial delay in fielding consultants after TA signing. Evaluation of Outputs and Achievement of Outcome The TA has been evaluated as effective since the outcomes and outputs have been generally achieved. IIFCL has been expanding its balance sheets. During FY2010–FY2011 alone, IIFCL’s balance sheet size increased by 15%, from Rs205.69 billion ($4.19 billion) to Rs236.62 billion ($4.82 billion). The company’s operating income rose by 25%, from Rs15.49 billion ($315.29 million) to Rs19.32 billion ($393.24 million). Under the TA, IIFCL has procured hardware and software to enable it to undertake an independent credit risk assessment of projects and develop an internal credit rating and migration model. Relevant staff has been trained. The risk model has been continuously improved, including the challenges of assumptions in the risk models. The TA further supported the effective adoption of the environmental and social safeguard framework and the capacity development of the internal team to undertake due diligence for subprojects. Notably, during TA implementation, senior management at IIFCL increasingly became convinced that safeguard adherence is more than an obligation, it is also a useful procedure to identify projects whose smooth implementation ensures strong financial returns. As of August 2012, IIFCL comprises a fully fledged in-house safeguard team. Overall Assessment and Rating Overall, the TA is assessed as successful given that it is considered (i) partly relevant, (ii) effective, (iii) less efficient, and (iv) most likely sustainable as demonstrated in earlier sections. To summarize, the TA was relevant at the time of project processing but required adjustments to remain relevant. While further ADB assistance seems required for infrastructure financing, IIFCL no longer requires institutional capacity support. This implies that the intervention was effective in strengthening IIFCL institutional capacity and will be most likely sustainable since IIFCL is able to finance further capacity building with internal funds. The outcome has been achieved despite inefficiencies described in the delivery of inputs and activities. By stating three outcomes, the design and monitoring framework (DMF) is not in line with ADB’s Guidelines for Preparing a Design and Monitoring Framework (2007), which prescribes the outcome as “limited to one succinct statement to ensure clarity and focus.” The TA is considered much likely to be sustainable since IIFCL has matured in terms of project finance experience and has successfully expanded its balance sheets. In August 2012, ADB was informed that further automation of IIFCL business processes will be financed with internal funds. Currently, it seems that no further donor grants are required to finance IIFCL institutional capacity development and support. Major Lessons Major lessons include the following: (i) the implementing agency recommended sharing more information on costing, disbursements, and recruitment processes during both processing and implementation to ensure best use of TA funds for the intended purpose; (ii) a greater degree of flexibility should be included in the TA design, notably for institutional capacity development, since requirements and needs may evolve in line with institutional development and market conditions; (iii) the DMF should be designed in line with ADB’s Guidelines for Preparing a Design and Monitoring Framework (2007) to ensure an adequate basis for evaluation in the TA completion report (TCR); and (iv) the TA intervention should be evaluated as part of the IIPFF project completion report since it does not constitute a stand-alone intervention. Recommendations and Follow-Up Actions To address lessons learned from this project, there should be: (i) greater transparency and information-sharing between ADB and the relevant implementing agency during processing and implementation of TA projects; (ii), flexibility in TA design to ensure relevance and client-orientation; (iii) enhanced quality in designing the DMF to ensure clarity of the project’s objectives and provide a baseline for quality-based evaluation at the date of project completion; and (iv) review of relevant ADB policies and guidelines to include the TCR as part of the PCR of the project the TA was supporting. Prepared by: Natalie Bertsch Designation: Financial Sector Specialist

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

Appendix 3 23

SCHEME FOR FINANCING VIABLE INFRASTRUCTURE PROJECTS THROUGH A SPECIAL PURPOSE VEHICLE

(Revised)

1. Preamble A. Whereas the Government of India recognizes that there is a significant deficit in the

availability of physical infrastructure across different sectors and that this is hindering economic development;

B. Whereas the development of infrastructure requires debt of longer maturity to

supplement the debt funds presently available; and C. Whereas the Government of India recognizes that such debt is usually not available

because of the following constraints:

(i) Absence of benchmark rates for raising long-term debt from the market; (ii) Asset-liability mismatch of the tenor of debt in case of most financial institutions;

and (iii) High cost of long-term debt;

D. Now, therefore, the Government of India has decided to put into effect the following

scheme for providing financial support to improve the viability of infrastructure projects. 2. Short Title and Extent a. The Scheme will be called the Scheme for financing Viable Infrastructure Projects. It will be administered by the Ministry of Finance through India Infrastructure Finance Company Limited (IIFCL). b. The modified Scheme will come into force with effect from 13 October 2011. 3. Definitions In this Scheme unless the context otherwise requires:

a. Empowered Committee means a committee set up for the purposes of this Scheme consisting of Secretary (Economic Affairs), Secretary (Planning Commission), Secretary (Expenditure), and Secretary (Financial Sector) as Convener and in his absence Special Secretary/Additional Secretary (Financial Sector) and Secretary of the Line Ministry dealing with the subject.

b. IIFCL means the India Infrastructure Finance Company Ltd (A company

incorporated under the Companies Act, 1956).

c. Lead Bank means the bank/financial institution that is funding the project and is designated as such by the inter-institutional group or consortium of banks/FIs provided the risk exposure of IIFCL is less than that of the lead bank in a project.

d. Long-term Debt means the debt provided by the IIFCL to the project company

where the average maturity for repayment exceeds 10 years (8.5 years in the

24 Appendix 3

case of IIFC(UK) Ltd).

e. Private Sector Company means a company in which 51% or more of the subscribed and paid-up equity is owned and controlled by private entities.

f. Project Company means the company which is implementing the infrastructure

project for which assistance is to be given by the IIFCL.

g. Project Term means the duration of the contract or concession agreement for a public–private partnership (PPP) project.

h. PPP Project means a project based on a contract or concession agreement,

between a government or a statutory entity on the one side and a private sector company on the other side, for delivering an infrastructure service on payment of user charges.

i. Public Sector Company means a company in which 51% or more of the

subscribed and paid-up equity is owned and controlled by the central or a state government, jointly or severally, and includes any undertaking designated as such by the Department of Public Enterprises and companies in which majority stake is held by public sector companies other than financial institutions.

j. Total Project Cost means the total capital cost of the project as approved by the

Lead Bank subject to the condition that IIFCL should be able to cover the risk between the public–private partnership approval committee (PPPAC) approved cost and the Lead Bank approved cost by seeking guarantees from the holding company or any other form of recourse.

k. Subordinate Debt means a debt which ranks lower in security than the project

debt carrying a pari passu charge. 4. Sources of funding for IIFCL 4.1 Apart from equity, IIFCL shall be funded through long-term debt raised from the following sources:

• Rupee debt raised from the market, through suitable instruments created for the purpose; the IIFCL would ordinarily raise debt of maturity of 10 years and beyond.

• Debt from bilateral or multilateral institutions such as the World Bank and Asian Development Bank.

• Foreign currency debt, including through external commercial borrowings raised with prior approval of the government.

• Short-term debt from banks/FIs only to manage any asset-liability mismatch.

4.2 IIFCL would raise funds as and when required, for onlending, in consultation with the Department of Financial Services. To the extent of any mismatch between the raising of funds and their disbursement, surplus funds would be invested in marketable government securities. 4.3 The borrowings of IIFCL may be guaranteed by the Government of India. The extent of guarantees to be provided shall be set at the beginning of each fiscal year by the Ministry of

Appendix 3 25

Finance, within the limits available under the Fiscal Responsibility & Budget Management Act. 4.4 The guarantee fee payable by IIFCL and IIFC (UK) would be decided by the Ministry of Finance from time to time. 4.5 The facility of guarantees, including the terms for guarantee, will be reviewed in the Ministry of Finance from time to time and its continuation shall be subject to the outcome of the review. 5. Eligibility Criteria for Projects 5.1 The IIFCL shall finance only commercially viable projects. Viable projects may also include those projects that will become viable after receiving viability gap funding under a government scheme. 5.2 In order to be eligible for funding under this Scheme, a project shall meet the following criteria:

(i) The project shall be implemented (i.e., developed, financed, and operated for the project term) by: • a public sector company, • a private sector company selected under a PPP initiative, or • a private sector company. Provided that IIFCL shall accord overriding priority for lending under this Scheme to PPP projects that are implemented by private sector companies selected through a competitive bidding process.

Provided further that IIFCL can lend directly to projects set up by private companies subject to the following conditions: • The service to be provided by the infrastructure project is regulated or the

project is being set up under a memorandum of understanding arrangement with the central government, any state government, or a PSU.

• The tenor of IIFCL lending should be larger than that of the longest tenor commercial debt by at least 2 years.

• Direct lending plus the refinance business, if any, on account of this category of borrowers (private sector companies not selected through a competitive bidding process) should not exceed 20% of the total lending by IIFCL in any accounting year.

(ii) Provided that in case of railway projects that are not amendable to operation by a

private sector company, the Empowered Committee may relax the eligibility criterion relating to operation by such company.

(iii) The project should be from one of the following sectors:

• road and bridges, railways, seaports, airports, inland waterways, and other transportation projects;

• power; • urban transport, water supply, sewage, solid waste management, and

26 Appendix 3

other physical infrastructure in urban areas; • gas pipelines; • infrastructure projects in special economic zones; • international convention centers and other tourism infrastructure projects; • cold storage chains; • warehouses; and • the fertilizer manufacturing industry. Provided that the Empowered Committee may, with approval of the Finance Minister, add or delete any sector/subsectors from this list.

5.3 Only such projects, which are implemented by the borrower company directly, or through a special purpose vehicle on a nonrecourse basis, and where an escrow account is maintained by any one of the banks financing the project, shall be eligible for financing by IIFCL. 5.4 In the event that the IIFCL needs any clarification regarding eligibility of a project, it may refer the case to the Empowered Committee for appropriate directions. 6. Appraisal and Monitoring by Lead Bank 6.1 IIFCL shall consider sanction of a loan to a project based on the appraisal of the Lead Bank or of reputed appraising institutions/banks/international FIs. In case of appraisal other than by the Lead Bank, the disbursement of loans by IIFCL will be subject to its acceptance and sanction of loan by the Lead Bank. Based on such appraisal, the IIFCL may consider and approve funding to the extent indicated in Article 7 below. 6.2 The Lead Bank shall be responsible for regular monitoring and periodic evaluation of compliance of the project with agreed milestones and performance levels, particularly for the purpose of disbursement of IIFCL funds. It shall send periodic progress reports in such form and at such times, as may be prescribed by IIFCL. 7. Mode of Funding 7.1 IIFCL may fund viable infrastructure projects through the following modes:

(i) long-term debt, (ii) refinance to banks and public FIs for loans granted by them, (iii) take-out financing, (iv) subordinate debt, and (v) any other mode approved by the Ministry of Finance from time to time.

7.2 The total lending by IIFCL to any project company shall not exceed 20% of the total project cost. In the case of take-out financing, direct lending to the project shall not exceed 10% of the project cost and total lending including take-out financing by IIFCL shall not exceed 30% of the total project cost. Loans will be disbursed in proportion to debt disbursements from banks/FIs. The above exposure shall further be subject to applicable regulatory norms. 7.3 The rate of interest charged by IIFCL shall be determined on the basis of its base rate plus, which will be arrived at on the basis of the average cost of funds, including administrative

Appendix 3 27

costs, average return on net worth, and cost of guarantee fees, etc. 7.4 The charge on project assets shall be pari passu with project debt (other than subordinate debt) and will continue beyond the tenure of project debt (other than subordinate debt) until such time as the amounts lent by IIFCL, together with interest and other charges thereon, remain outstanding. 7.5 Subordinate debt. Provided that IIFCL can provide subordinate debt, subject to the following conditions:

(i) The project should have been awarded through open competitive bidding; (ii) It should have been approved by the PPPAC under the guidelines for formulation,

appraisal and approval of PPP projects or by the empowered institution under the guidelines for financial support to PPP in infrastructure;

(iii) The concession agreement should provide for an escrow account that would secure the annual repayment of subordinate debt before returns on equity are paid;

(iv) In the case of termination of concession agreement, the concessioning authority will pay in terms of termination payment at least 80% of the subordinate debt on account of a concessionaire default or concessioning authority default, during operation period of the concession in the escrow account as mentioned in the model concession agreement (MCA). Where MCA is not available, a similar provision should be incorporated;

(v) Subordinate debt shall not exceed 10% of the total project cost and shall form part of the maximum limit of 20% as specified in paragraph 7.2 of the SIFTI;

(vi) Subordinate debt to be borrowed by the project company from any or all sources shall not exceed one half of its paid up and subscribed equity;

(vii) Subordinate debt lenders shall have second charge on all assets (including receivables) of the Borrower, both present and future, to secure the subordinate debt as mentioned in the loan agreement. The said second charge to secure subordinate debt shall rank pari passu with all lenders for their subordinate debts. The above-mentioned second charge of subordinate debt lenders shall be subordinate to the first pari passu charge of the senior lenders for their senior debts; and

(viii) Subordinate debt shall not be converted into equity. 8. Lending to PPP Projects 8.1 In case of PPP projects, the private sector company shall be selected through a transparent and open competitive bidding process. 8.2 PPP projects based on standardized/model documents duly approved by the respective government would be preferred. Stand-alone documents may be subjected to detailed scrutiny by the IIFCL. 8.3 Prior to inviting offers through an open competitive bid, the concerned government or statutory entity may seek ‘in principle’ approval of the IIFCL for financial assistance under the Scheme. Any indication given by IIFCL at the pre-bid stage shall not be treated as a final commitment. Actual lending by IIFCL shall be governed by the appraisal by the Lead Bank carried out before financial closure of the project.

28 Appendix 3

9. Review of the Scheme 9.1 The Scheme may be reviewed by the government in the Ministry of Finance, Department of Financial Services, as and when required. 9.2 IIFCL would be regulated by the Reserve Bank of India. 9.3 Modifications to the SIFTI may be made at the level of Empowered Committee subject to the approval of the Finance Minister.

Appendix 4 29

UPDATED ORGANIZATIONAL STRUCTURE

Source: India Infrastructure Finance Company Limited.

Appendix 5

30

SUMMARY OF OPERATIONAL AND FINANCIAL PERFORMANCE (in Rs million)

Income Statement FY2011 FY2010 FY2009 FY2008 FY2007 Total revenue 25,445 19,519 15,856 6,349 1,202 Total expenses 16,320 15,062 13,483 4,851 867 Provision for standard loan assets 470 - - - - Profit before tax 8,660 4,460 2,373 1,505 338 Tax expense 2,800 2,960 841 499 89 Net profit 5,860 2,960 1,538 1,006 248 Balance Sheet Current assets 93,612 95,176 107,788 110,384 25,815 Long-term loans and advances 180,371 141,410 97,457 49,151 16,923 Total assets 279,271 241,072 209,701 161,177 43,875 Long-term borrowings 208,420 198,720 184,744 144,194 32,002 Share capital 25,000 20,000 18,000 10,000 3,000 Cash Flow Statement Net cash from operations (18,827) (9,383) (133,338) (22,784) 5,508 Net cash from investing (206) (40) (1,446) (1,266) (1) Net cash from financing 15,541 13,368 34,321 109,539 35,197 Key Ratios Non-performing assets - - - - - Debt equity ratio (x) 6.43 8.15 8.85 10.06 4.20 Credit to borrowing ratio 0.87 0.71 0.71 0.34 0.53 Return on assets (%) 2.25 1.31 0.83 0.98 0.57 Debt service coverage ratio (x) 1.55 1.30 1.19 1.35 1.43 Interest coverage ratio (x) 1.57 1.32 1.19 1.35 1.43

Note: IIFCL’s computation on net cash from operations differs from the audited financial statement due to modification of presentation commencing FY2012. All other figures remain the same. Source: India Infrastructure Finance Company Limited Annual Report.

31Appendix 6

ASSESSMENT ON COMPLIANCE W

ITH UNDERTAKINGS UNDER THE

FRAMEWORK FINANCING AGREEMENT (FFA)1 AND LOAN AGREEMENT

Item/Source

Loan Covenants

Status

Assessment/

Recommendations

Loan

Agre

em

ent,

Art

icle

III,

Description

of

Pro

ject; U

se o

f P

roceeds o

f th

e L

oan,

Section 3

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r th

e B

orr

ow

er

pro

poses t

o m

ake a

sublo

an,

the

B

orr

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sh

all,

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re r

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with

dra

wa

l, su

bm

it to

A

DB

a

n

app

licatio

n

for

appro

val

of

such

sub

loa

n

in

accord

ance

with

the

ap

pro

val

pro

ced

ure

se

t out

in

para

gra

ph 4

of

schedule

3 o

f th

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gre

em

ent. S

uch

app

lication

sha

ll b

e in

a

fo

rm satis

facto

ry to

A

DB

and

shall

co

nta

in a

description

and a

ppra

isal

of

the q

ua

lifie

d

pro

ject,

the

term

s

and

conditio

ns

of

the

pro

po

sed

sublo

an,

and

such

oth

er

info

rmatio

n

as

AD

B

shall

reasona

bly

req

uest.

IIF

CL

su

bm

itted

su

bpro

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fo

r financin

g

und

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24

04

(T

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and

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25

09

(T

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in a

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with t

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appro

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set

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ph

4,

sche

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3

, of

the

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revi

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and

appro

ved

30

subpro

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un

der

Loa

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404

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d

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25

09.

A t

ota

l of

$50

0 m

illio

n

to 3

0 s

ubpro

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was d

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ed.

Com

plie

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Loan

Agre

em

ent,

Art

icle

III D

escription

of

Pro

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se o

f P

roceeds o

f th

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Section 3

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With

dra

wals

fr

om

th

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loa

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account

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made

fo

r re

imburs

em

ent

of

reaso

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expen

diture

s

incurr

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under

the p

roje

ct

befo

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an

12

month

s b

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ate

of

the l

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subje

ct

to a

maxim

um

am

ount

equ

ivale

nt

to 2

0%

of

the

lo

an a

mount,

pro

vided

(i) s

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xpe

nditure

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hall

have

been

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ed i

n f

ull

com

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nce w

ith A

DB

’s P

rocure

ment

Guid

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es (

201

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p

olic

ies,

an

d (i

i) suita

ble

pro

vis

ions sh

all

be

in

clu

ded in t

he e

xis

ting s

ub

loa

n a

gre

em

ents

to r

eflect

the

pro

vis

ions o

f A

rtic

le IV

of

the lo

an a

gre

em

ent.

$60 m

illio

n f

or

Loa

n 2

404

and $

40

m

illio

n

for

Lo

an

25

09

were

dis

burs

ed

for

elig

ible

su

bpro

jects

under

retr

oactive

fin

ancin

g

for

expenses

incurr

ed

not

more

th

an

12 m

onth

s b

efo

re s

ign

ing

of

rela

ted

agre

em

ents

.

Com

plie

d

Loan

Agre

em

ent,

Art

icle

IV

Sublo

ans

Sub

loan

agre

em

ents

shall

inclu

de

pro

vis

ions

sta

ted

in

S

ections 4

.01–

4.0

3 o

f th

e loan a

gre

em

ent.

IIF

CL’s

sub

loan

agre

em

ents

w

ith

the

syn

dic

ate

d

lead

o

f each

subpro

ject

conta

in

com

mon

term

s th

at

incorp

ora

te

the

pro

vis

ions

in

the s

ections m

entio

ned.

Com

plie

d

Loan

Agre

em

ent,

Art

icle

V,

Part

icula

r C

ovena

nts

, S

ectio

n

5.0

2

The B

orr

ow

er

shall,

at

all

tim

es,

make a

dequate

pro

vis

ion

to

pro

tect

itse

lf a

gain

st

an

y lo

ss r

esultin

g f

rom

changes in

th

e

rate

of

exchange

betw

een

Ind

ian

rupees

and

the

curr

ency

or

curr

encie

s

in

wh

ich

the

Borr

ow

er’s

outs

tan

din

g m

one

y ob

ligations w

ill h

ave

to b

e m

et.

IIF

CL’s

hedg

ing s

trate

gy

has t

aken

into

acco

unt

risks ass

ocia

ted

with

cro

ss

curr

ency

sw

aps

with

a

25-

year

repa

yment

and

10-y

ear

inte

rest

rate

ris

k t

hat

can

be r

olle

d

Com

plie

d

1 A

ll F

FA

un

de

rtakin

gs h

ave

bee

n r

eplic

ate

d in

th

e L

oa

n A

gre

em

ent

for

Tra

nch

e I.

32 Appendix 6

Item/Source

Loan Covenants

Status

Assessment/

Recommendations

ove

r upo

n e

xp

iration o

f th

e t

erm

. Loan

Agre

em

ent,

Art

icle

V,

Part

icula

r C

ovena

nts

, S

ectio

n

5.0

3

The B

orr

ow

er

sh

all

not

make a

sublo

an t

o a

ny

qu

alif

ied

ente

rpri

se

un

less

such

qualif

ied

ente

rpri

se

has

at

its

dis

posa

l, or

has

made

appro

priate

arr

ang

em

ents

to

obta

in

as

an

d

wh

en

require

d,

all

fundin

g,

inclu

din

g

adeq

uate

work

ing c

ap

ital,

and

oth

er

reso

urc

es w

hic

h a

re

require

d b

y such q

ualif

ied e

nte

rpri

se f

or

the c

arr

yin

g o

ut

of

its q

ualif

ied p

roje

ct

in r

espect

of

wh

ich t

he s

ublo

an is t

o

be m

ade.

Each

subpro

ject

is

subje

ct

to

IIF

CL’s

exam

ination o

f its

accounts

, in

clu

din

g

its

fundin

g

sourc

e,

ensurin

g

a

1.0

debt

serv

ice

cove

rag

e

ratio

fo

r each

subborr

ow

er.

Com

plie

d

Loan

Agre

em

ent,

Art

icle

V,

Part

icula

r C

ovena

nts

, S

ectio

n

5.0

4

The

Borr

ow

er

sha

ll m

ain

tain

re

cord

s

and

accounts

adeq

uate

to r

ecord

the p

rogre

ss o

f each q

ualif

ied p

roje

ct

(inclu

din

g t

he c

ost

there

of)

and

to

reflect, i

n a

ccord

ance

with

consis

tently

main

tain

ed s

ou

nd a

ccounting

pri

ncip

les,

the o

pera

tions a

nd f

ina

ncia

l cond

ition o

f th

e B

orr

ow

er,

as

part

of

the r

ecord

s a

nd a

ccounts

refe

rred t

o i

n S

ectio

n

7.0

3 o

f th

e loa

n r

eg

ula

tions.

IIF

CL m

ain

tain

s d

eta

iled i

nspectio

n

report

s

on

the

sta

tus

of

its

subpro

jects

, in

w

hic

h

its

financia

l and

ph

ysic

al

pro

gre

ss

are

m

onito

red

aga

inst

targ

et

pro

jectio

ns,

com

plia

nce

w

ith

environm

enta

l and

socia

l safe

guard

s.

An

y is

sue

s

with

consort

ium

banks

and

oth

er

observ

ations

are

note

d.

The

m

issio

n

inspecte

d

sam

ple

site

pro

ject

report

s

and

ind

epen

den

t eng

ine

er’s r

ep

ort

s.

Thre

e l

eve

ls o

f a

udit a

re p

ractic

ed

b

y IIF

CL:

(i)

inte

rnal

au

dits

, (i

i)

sta

tuto

ry

aud

its

do

ne

b

y an

in

depe

nde

nt

aud

itor

appo

inte

d

by

the

IIF

CL

Bo

ard

, a

nd

(iii)

audits

done

by

the

Com

ptr

olle

r and

A

ud

itor

Genera

l of

Ind

ia

that

are

app

licab

le

to

the

centr

al

pub

lic

secto

r ente

rpri

se.

Com

plie

d

Loan

Agre

em

ent,

Art

icle

V,

Part

icula

r C

ovena

nts

, S

ectio

n

5.0

5

(i)

The B

orr

ow

er

shall

furn

ish

to A

DB

all

such r

eport

s

and

info

rmatio

n

as

AD

B

shall

reason

ably

re

quest

concern

ing

the

qua

lifie

d

ente

rpri

ses,

the

qua

lifie

d

pro

jects

, and t

he s

ub

loans a

s p

art

of

the r

eport

s a

nd

info

rmatio

n r

efe

rred t

o i

n S

ectio

n 7

.04(a

) of

the l

oa

n

regula

tions.

IIF

CL m

ain

tain

s in

its

re

cord

s th

e

ind

epe

nde

nt

eng

ine

er’s re

port

a

nd

in

spection

report

s

for

each

subpro

ject.

Furt

herm

ore

, IIF

CL

conducts

its

o

wn

site

vi

sits

to

valid

ate

and

docum

ent

pro

ject

Com

plie

d

33Appendix 6

Item/Source

Loan Covenants

Status

Assessment/

Recommendations

(ii)

T

he

Borr

ow

er

shall

inclu

de

info

rmatio

n

on

the

executio

n o

f th

e q

ualif

ied

pro

jects

and

th

eir

costs

as

part

of

the r

ep

ort

refe

rred t

o in S

ection 7

.04(d

) of

the

loa

n r

eg

ula

tions.

sta

tus.

All

such r

ecord

s ha

ve b

een m

ade

ava

ilab

le t

o A

DB

. Loan

Agre

em

ent,

Art

icle

V,

Part

icula

r C

ovena

nts

, S

ectio

n

5.0

6

(i)

The B

orr

ow

er

shall

have i

ts a

ccounts

and f

inancia

l sta

tem

ents

(bala

nce s

heet,

sta

tem

ent

of

incom

e a

nd

expenses,

an

d r

ela

ted s

tate

ments

) audite

d a

nnu

ally

, in

accord

ance

with

appro

priate

a

uditin

g

sta

ndard

s

consis

tently

app

lied,

by

indepe

nde

nt

au

ditors

wh

ose

qua

lific

ations,

experi

ence

, and t

erm

s o

f re

fere

nce a

re

accepta

ble

to

A

DB

an

d

shall

pro

mptly,

aft

er

their

pre

para

tio

n b

ut

in a

ny

eve

nt

not

late

r th

an 6

month

s

aft

er

the c

lose o

f th

e f

iscal

year

to w

hic

h t

he

y re

late

, fu

rnis

h to

A

DB

(a

) cert

ifie

d copie

s of

such audited

accounts

an

d f

inancia

l sta

tem

ents

, and (

b)

the

report

of

the a

ud

itors

rela

tin

g t

here

to (

inclu

din

g t

he a

uditors

' opin

ion

on

the

use

of

the

loan

pro

ceeds

and

com

plia

nce w

ith t

he f

inancia

l co

venan

ts o

f th

e l

oan

agre

em

ent)

, a

ll in

th

e

Englis

h

langu

ag

e.

Th

e

Borr

ow

er

sha

ll fu

rnis

h

to

AD

B

such

furt

he

r in

form

atio

n c

oncern

ing s

uch a

ccounts

and f

ina

ncia

l sta

tem

ents

and t

he a

udit t

here

of

as A

DB

sha

ll, f

rom

tim

e to tim

e, re

asona

bly

re

quest.

(ii)

T

he B

orr

ow

er

shall

en

able

AD

B,

upo

n A

DB

's r

equ

est,

to d

iscuss t

he

Borr

ow

er's f

inancia

l sta

tem

ents

an

d its

financia

l aff

airs fr

om

tim

e to

tim

e w

ith th

e a

uditors

appo

inte

d

by

the

Borr

ow

er

purs

uant

to

Section

5.0

6(a

) h

ere

abo

ve a

nd sh

all

auth

ori

ze and

re

qu

ire

an

y re

pre

senta

tive

of

such a

uditors

to p

art

icip

ate

in

an

y such d

iscussio

ns re

queste

d b

y A

DB

, pro

vided

th

at

an

y such

dis

cussio

n s

hall

be c

onducte

d o

nly

in

th

e p

rese

nce o

f an

auth

ori

zed o

ffic

er

of

the B

orr

ow

er.

IIF

CL’s

rep

ort

ed its

au

dited

bala

nce

sheet

and pro

fit

and lo

ss account

for

the f

iscal ye

ars

end

ing

31 M

arc

h

2008

, 20

09,

201

0,

and 2

011 i

n i

ts

respectiv

e

ann

ual

rep

ort

s.

The

Off

ice

of

Com

ptr

olle

r an

d

Au

ditor

Genera

l of

India

appo

inte

d G

upta

, N

and

a &

Co,

chart

ere

d a

ccounta

nts

(f

or

FY

20

09)

and

P

. R

. M

ehra

&

C

o.

(for

FY

2011)

as

sta

tuto

ry

aud

itors

. IIF

CL s

ubm

itted a

n a

udit c

ert

ific

ate

on t

he s

ub

pro

ject

accounts

audited

b

y P

RY

D &

Associa

tes (

Chart

ere

d

Accounta

nts

).

Com

plie

d

Loan

Agre

em

ent,

Sched

ule

2,

Pro

cure

ment of

Goods

and W

ork

s, C

onsultin

g

Serv

ices, p

ara

s. 3–

4

The

Borr

ow

er

sha

ll ca

use

qua

lifie

d

ente

rprises

to

(i)

adop

t, t

o t

he

exte

nt

possib

le,

inte

rnationa

lly c

om

petit

ive

bid

din

g p

roced

ure

s w

he

n t

he a

mount

of

the in

vestm

ent

is

unusua

lly

larg

e

and

eco

nom

y an

d

eff

icie

ncy

ca

n

be

gain

ed b

y fo

llow

ing s

uch p

rocedure

s;

an

d (

ii) e

nsure

that

the g

oods a

nd w

ork

s t

o b

e f

inanced b

y sublo

ans s

hall

be

Built

in

to

IIF

CL

’s

“Sch

em

e

for

Fin

ancin

g

Via

ble

In

frastr

uctu

re

Pro

jects

” is

a pre

fere

nce fo

r P

PP

pro

jects

that

are

aw

ard

ed t

o p

riva

te

com

panie

s

sele

cte

d

thro

ugh

a

com

petit

ive bid

din

g pro

ce

ss.

Such

Com

plie

d

34 Appendix 6

Item/Source

Loan Covenants

Status

Assessment/

Recommendations

purc

hased at

a re

asona

ble

price,

account

bein

g ta

ken

als

o o

f re

leva

nt

facto

rs s

uch a

s t

ime o

f deliv

ery

, eff

icie

ncy

and re

liabili

ty of

the go

od

s,

and th

eir su

itab

ility

fo

r th

e

qua

lifie

d p

roje

ct

an

d,

in the

case o

f consultin

g s

erv

ices,

of

their q

ua

lity

an

d t

he c

om

pete

nce

of

the p

art

ies r

en

de

ring

th

em

.

For

bu

ild-o

pera

te-t

ransfe

r pro

jects

an

d

vari

ants

, if

the

qua

lifie

d

ente

rprise

or

en

gin

eeri

ng,

pro

cure

ment,

and

constr

uctio

n

co

ntr

acto

r is

sele

cte

d

thro

ug

h

com

petitive

bid

din

g am

ong i

nte

rnatio

nal

entities i

n a

ccord

ance w

ith

pro

cedure

s a

ccep

tab

le t

o A

DB

, such q

ualif

ied e

nte

rprise

or

contr

acto

r m

ay

ap

ply

its

ow

n

pro

ced

ure

s

for

pro

cure

ment

pro

vid

ed

th

at

such p

rocure

ment

is f

or

go

ods

and

work

s,

and

consu

ltin

g

serv

ices

supp

lied

fr

om

, or

pro

duce

d in

, A

DB

m

em

ber

countr

ies.

To th

is en

d,

the

qua

lifie

d

ente

rpri

se

sh

all

ensure

th

at

the

am

oun

t of

pro

cure

ment

of

go

ods,

work

s,

and

consu

lting

serv

ices

from

AD

B m

em

ber

countr

ies i

s a

t le

ast

equ

al

to t

he s

ize

of

the s

ub

loa

n f

or

the q

ua

lifie

d p

roje

ct.

pro

jects

w

ill

be

elig

ible

fo

r direct

len

din

g

by

IIF

CL

and

will

als

o

receiv

e p

riority

.

Loan

Agre

em

ent,

Sched

ule

2, In

dustr

ial

or

Inte

llectu

al P

ropert

y R

igh

ts, para

. 5

(i)

The

Borr

ow

er

sha

ll ca

use

qua

lifie

d

ente

rprises

to

ensure

that

all

goods a

nd w

ork

s p

rocure

d (

inclu

din

g,

with

out

limita

tion,

all

com

pute

r hard

ware

, soft

ware

and

sys

tem

s,

whe

ther

separa

tely

pro

cure

d

or

incorp

ora

ted

w

ithin

oth

er

goo

ds

and

serv

ices

pro

cure

d)

do

not

vio

late

or

infr

inge

an

y in

dustr

ial

pro

pert

y or

inte

llectu

al

pro

pert

y ri

ght

or

cla

im o

f an

y th

ird p

art

y.

(ii)

T

he

Borr

ow

er

sha

ll ca

use

qua

lifie

d

ente

rprises

to

ensure

th

at

all

contr

acts

fo

r th

e

pro

cure

ment

of

goods

an

d

work

s conta

in

ap

pro

pri

ate

re

pre

senta

tions,

warr

antie

s

and,

if

ap

pro

pri

ate

, in

dem

niti

es

from

th

e

con

tracto

r or

supp

lier

with

re

spect

to t

he m

atters

refe

rred t

o i

n s

ubp

ara

gra

ph

(a

) of

this

para

gra

ph

.

These

are

cove

red

und

er

inta

ng

ible

s

and

form

part

of

the

security

g

iven

to

len

de

rs.

The

qua

lifie

d e

nte

rpri

se is

exp

ecte

d to

fo

llow

all

the

nation

al

law

s,

inclu

din

g l

aw

re

latin

g t

o i

nte

llectu

al

pro

pert

y ri

ght.

Loan

Agre

em

ent,

Sched

ule

3,

Execution

of

Pro

ject; F

ina

ncia

l

The B

orr

ow

er,

as t

he P

roje

ct

executing a

ge

ncy,

sh

all

set

up

a

PM

U

to

monito

r th

e

scre

enin

g

and

sele

ctio

n

of

qua

lifie

d p

roje

cts

in c

onsu

ltation

with t

he c

onsort

ium

of

A

PM

U

was

esta

blis

hed

with

appro

priate

sta

ffin

g

for

the

purp

oses

of

da

y-to

-da

y

Com

plie

d

35Appendix 6

Item/Source

Loan Covenants

Status

Assessment/

Recommendations

Matters

, Im

ple

menta

tion

Arr

angem

ents

len

ders

a

nd

als

o

the

da

y-to

-da

y im

ple

menta

tion.

The

PM

U

sh

all

als

o

be

resp

onsib

le

for

ensurin

g

that

all

qua

lifie

d p

roje

cts

are

in c

om

plia

nce w

ith t

he E

SS

F a

nd

app

licab

le

natio

nal

an

d

sta

te

polic

ies,

law

s,

and

re

gula

tions r

ela

tin

g t

o t

he e

nvironm

ent, r

esett

lem

ent, a

nd

in

dig

enous p

eo

ple

.

The P

MU

sh

all

be s

taff

ed w

ith e

xis

ting r

esourc

es o

f th

e

Borr

ow

er

and su

pport

ed b

y consu

ltants

to

b

e pro

vid

ed

under

TA

by

AD

B.

The P

MU

sta

ff s

hall

com

prise s

pecia

lists

with

expert

ise in

risk

managem

ent

and

pro

ject

advis

ory

w

ork

. A

senio

r off

icer,

report

ing d

irectly

to t

he c

hairm

an a

nd m

anagin

g

directo

r of

the B

orr

ow

er,

shall

be a

ppo

inte

d f

or

ensu

ring

com

plia

nce w

ith t

he

ES

SF

. T

he P

MU

sha

ll a

lso h

ave a

ded

icate

d financia

l/accoun

ting

off

icer

to m

onito

r pro

ject

accounts

an

d p

rocess c

laim

s.

The

board

of

directo

rs

of

the

Borr

ow

er

shall

pro

vid

e

polic

y direction a

nd

str

ate

gic

ove

rsig

ht fo

r th

e P

roje

ct.

managem

ent

of

the

facili

ty,

inclu

din

g

safe

guard

co

mplia

nce.

Mr.

A

run

Kum

ar,

A

ssocia

te

Vic

e

Pre

sid

ent

of

IIF

CL,

was a

ppo

inte

d

as t

he P

MU

hea

d,

with

the

support

of

Mr.

A

nil

Taneja

, D

ep

uty

V

ice

P

resid

ent;

M

r. M

. S

ahu,

Assis

tant

Vic

e

Pre

sid

en

t;

and

Mr.

S

. K

. S

harm

a,

Assis

tant

Vic

e P

resid

ent.

In

ad

ditio

n,

two

safe

guard

specia

lists

, M

r.

Hari

P

rakash,

En

viro

nm

enta

l S

pecia

list;

and

Mr.

M

. K

. M

ohanty

, S

ocia

l S

afe

guard

S

pecia

list, w

ere

recru

ited t

o a

ssis

t th

e P

MU

via

AD

B’s

TA

. T

he P

MU

m

onito

rs t

he i

mple

menta

tion o

f th

e

subpro

jects

fin

ance

d b

y th

e f

acili

ty.

The

functio

ns

of

the

P

MU

w

ere

fo

und s

atis

facto

ry.

Under

the

Cha

irm

an’s

le

aders

hip

, IIF

CL’s

bo

ard

of

directo

rs

has

pro

vid

ed

contin

uous

directio

n

an

d

ove

rsig

ht to

IIP

FF

. Loan

Agre

em

ent,

Sched

ule

3,

Execution

of

Pro

ject; F

ina

ncia

l M

atters

, S

ele

ction

Crite

ria, p

ara

. 3

(i)

Each q

ualif

ied e

nte

rprise a

nd q

ualif

ied p

roje

ct

shall

satis

fy,

at

all

tim

es,

the s

ubborr

ow

er

an

d s

ubpro

ject

sele

ction crite

ria

as set

out

in th

e S

chem

e,

wh

ich

in

clu

des,

inte

r a

lia,

appra

isal

there

of

by

the

lea

d

bank/d

esig

nate

d

lea

d

syn

dic

ato

r fo

r te

chn

ical,

econom

ic, and c

om

merc

ial v

iabili

ty.

(ii)

W

ithout

limita

tion

to

para

gra

ph

3(a

) ab

ove,

each

qua

lifie

d e

nte

rprise s

hall:

(a

) be s

ele

cte

d in a

ccord

ance w

ith A

DB

’s

Pro

cure

ment G

uid

elin

es (

2010,

as a

mended

from

tim

e to tim

e);

(b

) have a

deq

uate

resourc

es a

nd f

ina

ncia

l capa

bili

ty

to r

ais

e r

esourc

es to c

om

ple

te a

nd o

pera

te t

he

rele

vant

qu

alif

ied p

roje

ct su

ccessf

ully

;

The

Schem

e

define

s

the

subborr

ow

er

and

subpro

ject

sele

ction

crite

ria,

appra

isal

and

m

onito

ring

mechanis

ms,

and

le

ndin

g

term

s

for

pro

jects

, in

clu

din

g,

inte

r alia

, a

ppra

isal b

y th

e

lea

d b

ank f

or

technic

al,

econom

ic,

and c

om

merc

ial v

iab

ility

. T

hirty

su

bpro

jects

ha

ve

bee

n

subm

itted t

o A

DB

for

pri

or

revi

ew

, as

agre

ed

in

the

pro

ject

loan

agre

em

ent.

A

revi

ew

of

the

subpro

jects

’ e

ligib

ility

crite

ria,

Com

plie

d

36 Appendix 6

Item/Source

Loan Covenants

Status

Assessment/

Recommendations

(c)

not b

e in d

efa

ult

on a

ny

pri

or

loa

n f

rom

the

Borr

ow

er

or

from

an

y of

the

part

icip

atin

g

mem

bers

of

the c

onsort

ium

of

lend

ers

; (d

) be a

ble

to p

rovid

e s

ecurity

as r

equir

ed b

y th

e

consort

ium

of

lenders

; (e

) m

ain

tain

appro

priate

fin

ancia

l re

cord

s o

f in

com

e

and e

xpen

diture

to

the

satisfa

ctio

n o

f th

e

Borr

ow

er

and A

DB

; a

nd

(f)

com

ply

and c

ause e

ach q

ualif

ied p

roje

ct to

com

ply

with

AD

B’s

and n

ationa

l an

d s

tate

polic

ies,

law

s,

and r

egu

latio

ns r

ela

tin

g to t

he

environm

ent, r

esett

lem

ent, a

nd ind

igeno

us

peop

les.

inclu

din

g

financia

l a

nd

e

conom

ic

viabili

ty,

and positiv

e d

evelo

pm

ent

impact, h

as a

lso

be

en m

ade.

It i

s

found t

ha

t a

ll su

bpro

jects

have m

et

the e

ligib

ility

crite

ria a

s a

gre

ed w

ith

AD

B.

Loan

Agre

em

ent,

Sched

ule

3,

Execution

of

Pro

ject; F

ina

ncia

l M

atters

, A

ppro

val

Pro

cedure

, p

ara

. 4

The B

orr

ow

er

sha

ll ensure

that

all

qu

alif

ied p

roje

cts

are

subm

itted to A

DB

for

prior

revie

w a

nd a

ppro

val.

IIF

CL

has

subm

itted

pro

ject

info

rmatio

n

mem

ora

ndum

s

for

30

subpro

jects

pro

pose

d f

or

fina

ncin

g

under

Lo

ans 2

40

4 a

nd

25

09.

AD

B

appro

ved

these

subpro

jects

fo

r financin

g.

The

elig

ible

su

bpro

jects

w

ere

re

vie

we

d a

nd

ascert

ain

ed f

or

com

plia

nce

with

the

ES

SF

an

d

necessary

safe

guard

co

mplia

nce

cert

ific

ate

s w

ere

su

bm

itted.

Com

plie

d

Loan

Agre

em

ent,

Sched

ule

3,

Execution

of

Pro

ject; F

ina

ncia

l M

atters

, E

nvi

ronm

ent,

Resettle

ment, a

nd

In

dig

en

ous P

eo

ple

s

The

Borr

ow

er

shall

imple

ment

the

en

viro

nm

enta

l m

anagem

ent

sys

tem

fra

mew

ork

as s

et

out

in t

he E

SS

F in

accord

ance

with

its

te

rms

and

accepta

ble

to

A

DB

to

ensure

th

at

each qu

alif

ied

pro

ject

is im

ple

mente

d a

nd

undert

aken i

n c

om

plia

nce w

ith a

pplic

ab

le e

nvironm

en

tal

law

s,

rule

s,

regu

latio

ns,

and

polic

ies

of

Ind

ia

an

d

the

re

leva

nt

sta

tes,

and

AD

B’s

En

viro

nm

ent P

olic

y (2

00

2).

T

he

Borr

ow

er

sha

ll im

ple

ment

the

socia

l safe

gu

ard

fr

am

ew

ork

as s

et

out

in t

he E

SS

F i

n a

ccord

ance w

ith i

ts

term

s a

nd a

ccepta

ble

to A

DB

and s

hall

ensure

tha

t fo

r each q

ua

lifie

d p

roje

ct, w

hic

h involv

es la

nd

acqu

isitio

n a

nd

has

resettle

ment

impacts

, th

e

resett

lem

ent

pla

n

is

subm

itted

to

AD

B

for

ap

pro

val

befo

re

it

ap

pro

ves

the

qua

lifie

d p

roje

ct.

Sub

pro

jects

are

assessed

for

com

plia

nce

with

the

ES

SF

befo

re

appro

val f

or

AD

B f

inancin

g.

Com

plie

d.

37Appendix 6

Item/Source

Loan Covenants

Status

Assessment/

Recommendations

The

Borr

ow

er

shall

cause

each

qua

lifie

d

ente

rprise

to

ensure

th

at

qua

lifie

d

pro

jects

do

not

ad

vers

ely

aff

ect

vuln

era

ble

gro

ups,

such

as i

nd

igeno

us p

eop

les,

and

, in

th

e

eve

nt

of

an

y im

pact

or

the

ir

involv

em

ent,

the

B

orr

ow

er

shall

ca

use

each

qualif

ied

en

terp

rise

to

im

ple

ment

the s

ocia

l safe

guard

fra

mew

ork

as s

et

out

in

the

ES

SF

in

accord

ance

with

its

te

rms

to

en

sure

com

plia

nce

with

A

DB

’s

Polic

y on

Ind

ige

nous

Pe

op

les

(1998).

Loan

Agre

em

ent,

Sched

ule

3,

Execution

of

Pro

ject; F

ina

ncia

l M

atters

, para

. 11

The B

orr

ow

er

sha

ll ensure

that:

(i)

it com

plie

s,

at

all

times,

with t

he p

rudentia

l norm

s,

as

made

applic

able

to

it

by

the

guara

nto

r,

inclu

din

g

capita

l ad

equ

acy,

incom

e r

ecogn

ition,

cla

ssific

ation

, and p

rovis

ionin

g o

f no

np

erf

orm

ing a

ssets

; (ii)

it

main

tain

s a

debt

serv

ice c

ove

rag

e r

atio

of

at

least

1:0

and

ensure

s t

hat

it has n

o a

rrears

in r

epa

yment

of

its c

urr

ent de

bt o

blig

atio

ns; and

(iii)

the

on

len

din

g

rate

s

to

qua

lifie

d

ente

rprises

are

m

ark

et-

based a

nd

ad

equ

ate

to c

ove

r all

costs

and

risks

associa

ted

with

onle

ndin

g,

inclu

din

g

an

y fo

reig

n e

xcha

nge

ris

k p

rem

ium

.

Curr

ently,

IIF

CL is

no

t re

quire

d to

adhere

to

an

y pru

dentia

l norm

s.

Ho

we

ver,

as

a

se

lf-r

egu

lato

ry

measure

, IIF

CL

has

ad

opte

d

pru

de

ntial

norm

s

rela

ting

to

asset

cla

ssific

atio

n

pre

scribe

d

by

the

R

eserv

e

Bank

of

India

fo

r banks.

Accord

ingly

, IIF

CL

cla

ssifie

s

its

assets

as n

onp

erf

orm

ing fo

llow

ing

th

e

90

da

ys

defa

ult

norm

s.

And

curr

ently,

IIF

CL

has

zero

nonp

erf

orm

ing lo

ans.

IIF

CL c

onfirm

s that:

(i)

it m

ain

tain

s

a

debt

se

rvic

e

cove

rag

e

ratio

of

at

least

1:0

and

there

is

no

arr

ea

r in

re

pa

yme

nt

of

its

curr

ent

de

bt

oblig

atio

ns, an

d

(ii)

the o

nle

ndin

g r

ate

s t

o q

ualif

ied

ente

rpri

ses

are

m

ark

et-

based

and a

deq

uate

to c

ove

r a

ll costs

and

risks

ass

ocia

ted

w

ith

onle

nd

ing

, in

clu

din

g a

ny

fore

ign

exchange

ris

k p

rem

ium

.

Com

plie

d

Loan

Agre

em

ent,

Sched

ule

3,

Execution

of

Pro

ject;

The

Borr

ow

er

shall

ensure

th

at

acco

unta

bili

ty

and

tr

anspare

ncy

are

m

ain

tain

ed

in

its

opera

tions

thro

ugh

sta

kehold

er

meetin

gs a

nd p

ub

lication

of

pro

gre

ss r

ep

ort

s

IIF

CL h

as s

atisfa

cto

rily

dis

clo

sed a

ll th

e i

nfo

rmatio

n p

ert

ain

ing t

o E

SS

F,

changes

in

com

pan

y o

pera

tions

Com

plie

d

38 Appendix 6

Item/Source

Loan Covenants

Status

Assessment/

Recommendations

Gove

rnance;

Anticorr

uption,

para

. 12 (

Lo

an 2

40

4);

para

. 13 (

Lo

an 2

50

9)

thro

ug

h

the

dura

tion

of

the

Pro

ject,

an

d

inte

rnal

pro

cedure

s a

nd c

ontr

ols

are

instit

ute

d,

main

tain

ed,

and

com

plie

d

with

to

pre

ve

nt

an

y corr

upt,

fraud

ule

nt,

collu

siv

e,

or

co

erc

ive

pra

ctic

es.

The

Borr

ow

er

shall

ensure

th

at

an

appro

priate

corp

ora

te

go

vern

ance

fram

ew

ork

is

fo

rmula

ted

in

accord

ance

with

its

com

pre

hensiv

e

busin

ess

pla

n

and

in

tern

atio

na

l best

pra

ctic

es a

nd r

eport

ed i

n i

ts a

nnua

l re

port

to i

ts b

oard

of

directo

rs

an

d

AD

B.

Consis

tent

with

its

com

mitm

ent

to

good

go

vern

ance,

accoun

tabili

ty,

an

d t

ransp

are

ncy,

AD

B

reserv

es th

e rig

ht

to

exa

min

e and re

vie

w a

ny

alle

ged

corr

upt,

fraudu

len

t,

co

llusiv

e,

or

co

erc

ive

pra

ctices

rela

ting t

o t

he q

ua

lifie

d p

roje

cts

.

and

po

licie

s,

and

so

fo

rth,

on

th

e

com

pan

y’s

website.

Pub

lic

com

munic

atio

n

and

info

rmatio

n

transpare

ncy

ha

ve

incre

ased

sig

nific

an

tly.

Loan

Agre

em

ent,

Sched

ule

3,

Execution

of

Pro

ject;

Perf

orm

ance

Mon

itori

ng a

nd

Evalu

ation,

para

. 13

(Loan 2

40

4);

para

. 1

4

(Loan 2

50

9)

With

in 6

month

s o

f th

e e

ffectiv

e d

ate

, th

e B

orr

ow

er

shall

esta

blis

h

base

line

data

fo

r sele

ct

ind

icato

rs

und

er

the

in

vestm

ent

pro

gra

m

perf

orm

ance

monito

ring

sys

tem

accepta

ble

to

A

DB

. W

ithout

limiti

ng

the

gen

era

lity

of

Section 7

.04 o

f th

e l

oan r

egu

lations,

the B

orr

ow

er

shall

subm

it to

A

DB

th

e

quart

erl

y pro

gre

ss

report

s

and

a

com

ple

tion

report

within

th

ree m

onth

s o

f th

e c

om

ple

tion

of

the P

roje

ct.

IIF

CL

has

en

gag

ed

CR

ISIL

In

fra

Solu

tions

Lim

ited

to

recom

mend

regula

tory

n

orm

s

that

shou

ld

govern

IIF

CL.

CR

ISIL

R

isk

Solu

tions

has

pre

pare

d

the

re

gula

tory

n

orm

s

based

on

the

fo

llow

ing:

(i)

norm

s fo

llow

ed b

y com

para

ble

org

an

izations w

orl

dw

ide

, a

nd

(ii)

a

regu

lato

ry

fram

ew

ork

fo

r banks

in

India

an

d

its

unders

tand

ing

of

the

busin

ess

pla

n

of

IIF

CL.

This

w

as

subm

itted t

o t

he I

IFC

L B

oa

rd f

or

appro

val i

n N

ove

mber

200

8.

Com

plie

d

Loan

Agre

em

ent,

Sched

ule

3,

Execution

of

Pro

ject; P

roje

ct

Revie

w,

para

. 14

(L

oan 2

40

4);

para

. 1

5

(Loan 2

50

9)

The B

orr

ow

er

shall

revie

w t

he p

erf

orm

ance o

f th

e P

roje

ct

thro

ug

h th

e P

MU

on

a

q

uart

erl

y basis

, w

hic

h sh

all

be

com

ple

ted b

y th

e 1

0th

da

y of

the

m

onth

fo

llow

ing

th

e

quart

erl

y re

vie

w.

The b

oard

of

directo

rs o

f th

e B

orr

ow

er

shall

revie

w

the

perf

orm

ance

sem

i-annua

lly

and

shall

forw

ard

sem

i-annu

al pro

gre

ss r

eport

s t

o A

DB

by

the 1

0th

da

y of

the

month

follo

win

g t

he

sem

i-annu

al

revi

ew

. A

DB

shall

revi

ew

quart

erl

y a

nd s

em

i-annua

l pro

gre

ss r

ep

ort

s durin

g its

annu

al re

vie

w m

issio

ns a

nd d

uri

ng t

he t

ripart

ite

revi

ew

s c

ha

ired b

y th

e g

uara

nto

r.

IIF

CL

pre

pare

d

quart

erl

y re

port

s

for

their M

ana

gem

ent and B

oard

.

IIF

CL

subm

itted

se

mi-annual

pro

gre

ss r

eport

s to

AD

B.

Mid

term

re

vie

w

mis

sio

ns

were

field

ed f

rom

3–14 N

ove

mber

200

8

and 1

5–

17 S

ep

tem

ber

201

1.

Com

plie

d

39Appendix 6

Item/Source

Loan Covenants

Status

Assessment/

Recommendations

In a

dditio

n,

a m

idte

rm r

evi

ew

sha

ll be c

on

ducte

d b

y A

DB

and t

he B

orr

ow

er

in t

he f

inancia

l ye

ar

200

8–2

009.

In a

dditio

n,

a m

idte

rm r

evi

ew

sha

ll be c

on

ducte

d b

y A

DB

and t

he B

orr

ow

er

in t

he f

inancia

l ye

ar

201

0–2

011.

AD

B =

Asia

n D

eve

lop

me

nt

Ba

nk,

ES

SF

= e

nvi

ronm

ent

and

socia

l sa

feg

uard

fra

me

wo

rk,

IIF

CL

= I

ndia

Infr

astr

uctu

re F

ina

nce

Com

pa

ny

Lim

ited

, P

MU

= p

roje

ct

ma

nag

em

en

t u

nit,

PP

P =

pu

blic

–p

riva

te p

art

ne

rsh

ip.

40 Appendix 7

PERFORMANCE OF INDIA INFRASTRUCTURE PROJECT FINANCING FACILITY

Item

No.

Subborrower

2404

Disbursed $

Amount

2509

Disbursed

$ Amount

Facility

Total

Disbursed

Total Project

Cost

Total Km Road

Financed

Physical

Profitability

1

L&

T W

este

rn

And

hra

T

ollw

ays

Pvt

. Ltd

.

2,5

67,9

00

2,5

67,9

00

3,7

23,3

00,0

00

55.4

2

CO

D

achie

ved o

n

30/0

3/2

010

Toll

is b

ein

g c

olle

cte

d

and it

is a

s p

er

the

pro

jectio

n.

2

Trich

y T

ollw

ays

Ltd

. 12,8

85,9

06

12,8

85,9

06

7,4

75,7

00,0

00

92.0

0

The p

roje

ct

achie

ved

CO

D o

n

04/0

9/2

009.

Toll

colle

ction f

or

the

pro

ject is

alm

ost 67%

of

the p

roje

ction,

ho

we

ver,

the a

ccount

is r

egu

lar.

3

GM

R

Ulu

nderp

et

Expre

ssw

ays

P

vt. Ltd

.

18,1

11,0

75

18,1

11,0

75

7,9

50,0

00,0

00

71.2

5

CO

D

achie

ved o

n

23/0

7/2

009

Toll

is b

ein

g c

olle

cte

d

and t

oll

is a

lmost 70%

of

the p

roje

ction a

nd

the a

ccou

nt

is r

egu

lar.

4

MV

R

Infr

astr

uctu

re &

T

ollw

ays

Ltd

.

8,9

27,2

41

8,9

27,2

41

2,5

63,0

00,0

00

68.7

0

CO

D

achie

ved o

n

06/0

8/0

9

Toll

colle

ction f

or

the

pro

ject in

201

0–2

011

is

56%

of

the

pro

jectio

n. T

he

account

is r

egu

lar.

5

Indu N

ava

yug

a

Infr

a P

roje

cts

P

vt. Ltd

.

11,1

57,9

62

121,1

58

11,2

79,1

20

4,1

10,0

00,0

00

40.0

0

CO

D

achie

ved o

n

05/0

5/2

012

Toll

is b

ein

g c

olle

cte

d

and it

is too e

arl

y to

com

ment on

pro

fita

bili

ty.

6

L&

T V

ad

odara

B

haru

ch

T

ollw

ays

Ltd

.

14,5

71,4

61

14,5

71,4

61

14,5

00,0

00,0

00

83.3

0

CO

D

achie

ved o

n

7/0

7/2

00

9

Toll

is b

ein

g c

olle

cte

d

and it

is 9

4%

of

the

pro

jecte

d to

ll colle

ction

. T

he a

ccount

is r

egu

lar.

7

Orienta

l P

ath

wa

ys

(Indore

) P

vt.

Ltd

.

27,6

43,7

40

27,6

43,7

40

6,5

00,0

00,0

00

72.1

0

The

subpro

ject

achie

ved

CO

D o

n

18/1

2/2

009.

Toll

is b

ein

g c

olle

cte

d

and it

is 8

8%

of

the

pro

jectio

n. T

he

account

is r

egu

lar.

8

Raip

ur

Expre

ssw

ays

4,8

94,0

12

2,0

34,6

22

6,9

28,6

34

2,8

60,0

00,0

00

42.0

0

The p

roje

ct

has a

chie

ved

The p

roje

ct is

und

er

imple

menta

tion.

41Appendix 7

Item

No.

Subborrower

2404

Disbursed $

Amount

2509

Disbursed

$ Amount

Facility

Total

Disbursed

Total Project

Cost

Total Km Road

Financed

Physical

Profitability

Ltd

. 98%

of

ph

ysic

al

pro

gre

ss.

9

Orienta

l P

ath

wa

ys

(Nagpur)

Pvt

. Ltd

.

11,8

38,7

19

11,8

38,7

19

3,1

78,4

00,0

00

50.0

0

The p

roje

ct

achie

ved

CO

D o

n

24/0

4/2

008.

Toll

is b

ein

g c

olle

cte

d

and it

is 7

2.9

2%

of

the

pro

jecte

d to

ll fo

r th

e

year

200

9–2

010

. T

he

account

is r

egu

lar.

10

Lucknow

S

itapur

Expre

ssw

ay

Pvt

. Ltd

.

7,4

36,6

43

2,1

59,2

83

9,5

95,9

26

4,5

04,1

00,0

00

75.0

7

The p

roje

ct

achie

ved

CO

D o

n

18/1

2/2

011.

Toll

is b

ein

g c

olle

cte

d

and it

is too e

arl

y to

com

ment on

pro

fita

bili

ty

11

Orienta

l P

ath

wa

ys

(Agra

) P

vt.

Ltd

.

6,5

87,0

92

254,6

27

6,8

41,7

19

2,2

41,0

00,0

00

45.1

4

CO

D

achie

ved o

n

18/0

6/0

9

Toll

is b

ein

g c

olle

cte

d

and t

oll

colle

ction is

alm

ost 60%

of

the

pro

jectio

n, ho

we

ver,

th

e c

om

pan

y is

re

gula

rizi

ng.

12

Ahm

edabad

R

ing

Roa

d

Infr

astr

uctu

re

Ltd

.

11,9

30,4

46

11,9

30,4

46

5,1

49,6

00,0

00

76.3

1

The f

inal

CO

D f

or

the

pro

ject w

as

achie

ved o

n

30/0

6/2

008.

Toll

is b

ein

g c

olle

cte

d

and it

is a

s p

er

the

pro

jectio

n. T

he

account

is r

egu

lar.

13

Kum

rara

paly

am

T

ollw

ays

Ltd

. 6,2

57,1

13

6,2

57,1

13

4,2

14,4

00,0

00

47.0

0

CO

D

achie

ved o

n

26/0

8/0

9

Toll

is b

ein

g c

olle

cte

d

and it

is lo

wer

than t

he

pro

jectio

n,

wh

ich w

as

60%

of

the

pro

jection

for

FY

2012,

he

nce, th

e

account

is r

egu

lar.

14

Sale

m T

ollw

ays

Ltd

. 3,5

17,6

92

958,8

40

4,4

76,5

32

5,0

11,3

00,0

00

53.0

0

CO

D

com

menced

on

01/0

7/2

010

Toll

is b

ein

g c

olle

cte

d

and it

is too e

arl

y to

com

ment on

pro

fita

bili

ty.

15

DS

Toll

Roa

d

Ltd

. 10,4

67,9

90

10,4

67,9

90

4,1

50,0

00,0

00

53.3

3

The p

roje

ct has b

een p

re-p

aid

by

the

develo

per.

16

NK

Toll

Roa

d

4,5

50,0

55

4,5

50,0

55

3,4

47,6

00,0

00

43.9

8

The p

roje

ct has b

een p

re-p

aid

by

the

42 Appendix 7

Item

No.

Subborrower

2404

Disbursed $

Amount

2509

Disbursed

$ Amount

Facility

Total

Disbursed

Total Project

Cost

Total Km Road

Financed

Physical

Profitability

Ltd

. develo

per.

17

L &

T Inte

rsta

te

18,4

23,3

00

18,4

23,3

00

5,5

37,6

00,0

00

76.0

0

The p

roje

ct

achie

ved

CO

D o

n

24/0

5/2

009.

Toll

is b

ein

g c

olle

cte

d

and it

is a

s p

er

the

pro

jectio

n. T

he

account

is r

egu

lar.

18

Delh

i In

tern

atio

na

l A

irp

ort

Pri

vate

Ltd

.

50,5

47,4

38

7,0

48,4

58

57,5

95,8

96

88,9

00,0

00,0

00

Expansio

n

and

modern

ization

of

Indira

Gandh

i In

tern

atio

na

l A

irp

ort

(IG

IA)

at D

elh

i

CO

D

achie

ved o

n

31/0

3/2

010

Fees a

re b

ein

g

colle

cte

d a

nd it

is a

s

per

the

pro

jection. T

he

account

is r

egu

lar.

19

Madura

i-T

utic

orin

Expre

ssw

ays

Ltd

.

20,2

04,3

05

3,6

63,0

39

23,8

67,3

43

9,2

00,0

00,0

00

125.7

0

The p

roje

ct

achie

ved

pro

vis

ional

com

ple

tion

cert

ific

ate

on

01/0

7/2

011.

Toll

is b

ein

g c

olle

cte

d

and it

is too e

arl

y to

com

ment on

pro

fita

bili

ty.

20

SU

Toll

Roa

d

Pvt

. Ltd

. 6,0

20,9

56

16,5

67,3

51

22,5

88,3

07

10,6

13,0

00,0

00

136.3

6

The p

roje

ct

achie

ved

CO

D o

n

28/0

7/2

012.

Toll

is b

ein

g c

olle

cte

d

and it

is too e

arl

y to

com

ment on

pro

fita

bili

ty.

21

TK

Toll

Road

Pvt

. Ltd

. 4,0

93,6

57

13,9

21,5

35

18,0

15,1

91

7,3

18,4

00,0

00

79.2

0

The p

roje

ct

has a

chie

ved

82.0

4%

of

ph

ysic

al

pro

gre

ss.

The s

ubpro

ject is

under

imple

menta

tion

.

22

TD

Toll

Ro

ad

Pvt

. Ltd

. 4,4

21,0

98

10,9

64,3

72

15,3

85,4

70

5,3

73,2

00,0

00

88.6

0

CO

D

achie

ved o

n

10/0

1/1

2

Toll

is b

ein

g c

olle

cte

d

and it

is lo

wer

than t

he

pro

jectio

n, he

nce, th

e

account

is r

egu

lar.

23

Ashoka

Hig

hw

ays

(B

han

dara

) L

td.

14,1

37,4

21

3,5

16,6

97

17,6

54,1

19

5,3

50,0

00,0

00

80.0

0

CO

D

achie

ved o

n

06/1

0/2

010

Toll

is b

ein

g c

olle

cte

d

and it

is 6

6%

of

the

pro

jecte

d to

ll colle

ction

. T

he a

ccount

43Appendix 7

Item

No.

Subborrower

2404

Disbursed $

Amount

2509

Disbursed

$ Amount

Facility

Total

Disbursed

Total Project

Cost

Total Km Road

Financed

Physical

Profitability

is r

egu

lar.

24

Ashoka

Hig

hw

ays

(D

urg

) Ltd

.

7,6

09,4

00

12,1

24,2

59

19,7

33,6

59

5,8

00,0

00,0

00

82.6

0

CO

D

achie

ved o

n

04/0

2/2

012

Toll

is b

ein

g c

olle

cte

d

and t

oll

colle

ction is

more

than the

pro

jectio

n. T

he

account

is r

egu

lar.

25

Jaora

-N

aya

ga

on T

oll

Road C

o.

Pvt.

Ltd

.

11,1

97,3

79

13,3

86,7

75

24,5

84,1

53

8,4

30,0

00,0

00

127.8

1

CO

D

achie

ved o

n

17/0

2/2

012

Toll

is b

ein

g c

olle

cte

d

and t

oll

colle

ction is in

line w

ith p

roje

ctio

n.

The a

ccount is

re

gula

r.

26

Nirm

al B

OT

Ltd

.

12,8

66,1

48

12,8

66,1

48

3,1

50,0

00,0

00

30.0

0

The p

roje

ct has b

een p

re-p

aid

by

the

develo

per.

27

West H

ary

ana

Hig

hw

ays

P

roje

ct P

vt.

Ltd

.

19,1

91,3

57

19,1

91,3

57

5,8

60,5

00,0

00

57.3

0

The p

hys

ica

l pro

gre

ss o

f th

e p

roje

ct

is

96.1

1%

.

The p

roje

ct is

und

er

imple

menta

tion.

28

Mum

bai

Inte

rna

tiona

l A

irp

ort

Ltd

.

39,6

07,5

95

39,6

07,5

95

58,2

58,0

00,0

00

Expansio

n a

nd

m

odern

ization

of

Mum

bai A

irport

at M

ahara

shtr

a

The p

roje

ct

has a

chie

ved

65%

ph

ysic

al

pro

gre

ss o

n

Dec. 20

11.

The p

roje

ct is

und

er

imple

menta

tion.

29

Weste

rn M

P

Infr

astr

uctu

re &

T

oll

Roa

d P

vt.

30,1

09,1

49

30,1

09,1

49

7,2

85,7

00,0

00

125.0

0

The p

roje

ct

achie

ved

CO

D o

n

4/0

6/2

01

2.

Toll

is b

ein

g c

olle

cte

d

and t

oll

colle

ction is

more

than the

pro

jectio

n. T

he

account

is r

egu

lar.

30

Gw

alio

r B

ypass

Pro

ject P

vt.

Ltd

.

11,5

04,7

36

11,5

04,7

36

3,3

21,2

00,0

00

87.0

0

The p

roje

ct has b

een p

re-p

aid

by

the

develo

per.

TOTAL

300,000,000 200,000,000 500,000,000 305,976,000,000

2,064.16

CO

D =

co

mm

erc

ial o

pe

ratio

n d

ate

, km

= k

ilom

ete

r, P

PP

= p

ub

lic–

priva

te p

art

ne

rship

. N

ote

: A

ll sub

pro

ject

s a

re P

PP

-re

late

d.

So

urc

e:

Asia

n D

eve

lopm

en

t B

an

k.

Appendix 8

44

KEY OBSERVATIONS ON CREDIT APPRAISALS BY INDIA INFRASTRUCTURE FINANCE COMPANY LTD

(i) While India Infrastructure Finance Company Limited (IIFCL) conducts its own credit and

risk assessments of the project proposal, the lead bank’s interpretation of the concession agreement is still relied upon. There are cases whereby project proposals from lead banks get deferred on the basis of comments or observations from IIFCL’s risk department.

(ii) IIFCL does not use its own rating model to price the loan. There is no independent pricing mechanism for loans—the rate of interest charged is equivalent to the highest rate charged by any bank in the consortium. However, improvements to the IIFCL rating model developed by CRISIL are currently underway to include provision in the software for pricing the credit risk as per the risk profile of the project and build statistical data to calculate the parameters necessary to price the risks.

(iii) IIFCL does not have internal guidelines for the security and follows other banks in the consortium. Moreover, the rating framework does not explicitly assess the risks arising from the terms of concession agreement and risk allocation mechanism as envisaged in the concession agreement.

(iv) IIFCL extends term loans of tenors longer than 10 years for viable infrastructure projects with the lending being based on a broad framework provided under the Scheme for Financing Viable Infrastructure Projects through the India Infrastructure Finance Company Limited. While the scheme provides that IIFCL shall provide long-term assistance to a project company whose average maturity payment exceeds 10 years, there have been few instances where loans have been extended when the average maturity falls below 10 years. As explained by IIFCL management, these cases were sanctioned before the relevant provision was inserted into the scheme.