PROJECT REPORT

ON

Infrastructure finance

SUBMITTED TO: SUBMITTED BY:MR.ANIL GHAI KISHORE YEOLEKAR

TRIM: III

ACKNOWLEDGEMENT

I wish to express my gratitude to those who helped me in accomplishing this challenging project on INFRASTRUCTURE FINANCE.No amount of written expression can show my deepest sense of gratitude to my Research guide MR.ANIL GHAI (A.G.M. FIN&ACCOUNTS) who motivated me to receive enormous amount of input and inspiration at the various stages during my project preparation or summer internship and assisted me in bringing out my project in the present form.

I thankfully acknowledge an active support by my guide who overwhelmingly shared his knowledge with me and strengthened my conceptual framework.

I am also thankful to all the employee of RITES LTD who supported me in various ways and enlightened me about the valuable information pertaining to my research work.Executive Summary

Infrastructure is the key to sustaining Indias aggressive economic growth. The fast growth of the economy in recent years has placed increasing stress on physical infrastructure such as railways, roads, highway, ports, metro, airports, irrigation, electricity, and urban and rural water supply and sanitation, urban and rural development all of which already suffer from a substantial deficit from the past in terms of capacities as well as efficiencies in the delivery of critical infrastructure services. The pattern of inclusive growth of the economy projected for the Eleventh Plan (2007-12), with GDP growth averaging 9% per year can be achieved only if this infrastructure deficit can be overcome and adequate investment takes place to support higher growth and an improved quality of life for both urban and rural communities. Planning Commission has projected investment requirement to be Rs. 40,99,240 crore, which would be twice the investments for the Eleventh Plan and estimates infrastructure spending of ($1000000000000) $1 trillion. The numbers clearly indicate that there has been a rise in infrastructure development and with the growing need for infrastructural development there would be need for rise in sources of funding as well. Thus the government has been inviting private participation in funding capacity building by way of Public Private Partnerships (PPP), commercial banks lending, take out financing, infrastructure financing institutions, infrastructure debt funds, external commercial borrowing, foreign direct investments etc and has been extending tax holidays to make funding feasible for lenders and borrowers. To stimulate public investment in infrastructure, a special purpose vehicle India Infrastructure Finance Company Limited (IIFCL) was set up for providing long-term financial assistance to infrastructure projects.After reading this project report we are able to know that:

What is the current situation in infrastructure sector in India?

Source of funding (financing)?

Issues in Infrastructure Financing?

Funding gap in infrastructure sector? Criteria of financing in infrastructure sector in India?

Role of RBI and central government in infrastructure? PPP projects and BOT projects in infrastructure sectors?DECLARATIONI KISHORE YEOLEKAR hereby declare that the project report titled,

INFRASTRUCTURE FINANCE completed by me is an original work conducted under the guidance of MR.ANILGHAI (A.G.M. FINANCE & ACCOUNTS) of RITES LTD Gurgaon.This report is based on the research work conducted by me and to the best of my knowledge I have undergone through each and every process required to accomplish the project work in the most effective manner.DATE: KISHORE YEOLEKAR

PLACE: IPER PGDM

TRIM IIICONTENT

1Introduction5

2Research methodology9

3Theoretical part11

4Case study30

5Data analysis38

6Suggestions44

7Bibliography48

CHAPTER: 1

INTRODUCTION

Infrastructure finance:

Infrastructure is understood as an important input for industrial and overall economic development. While this is certainly true, there is no clear definition of infrastructure according to the current usage of the term in India. Reserve Bank of India (RBI) circular on Definition of Infrastructure finance:As per the RBI, a credit facility is treated as infrastructure lending to a borrower company which is engaged in developing, operating and maintaining, or developing, operating and maintaining any infrastructure facility that is a project in any of the following sectors, or any infrastructure facility of a similar nature:

Road, including toll road, a bridge or a rail system.

Highway project including other activities being an integral part of the highway project.

port, inland waterway or inland port

airport

Railways (including rolling stock and mass transit system).

Rural and urban development.

water supply project, irrigation project, water treatment system

construction of educational institutions and hospitals, buildings

Oil and gas pipeline networks. Sanitation and sewerage system or solid waste management system Telecommunication services whether basic or cellular, including Radio paging, domestic satellite service (a satellite owned and operated by an Indian company for providing telecommunication service), network of trucking, broadband network and internet services

An industrial park or special economic zone Generation or generation and distribution of power

Transmission or distribution of power by laying a network of new transmission or distribution Any other infrastructure facility of similar nature.The Indian economy is going through its most remarkable phase of growth - with GDP growth rate at an average of 7.6% in the Tenth Plan Period (2002-03 to 2006-07). The Eleventh Five Year Plan (2007-12) projects an even higher average annual growth rate of 9%. Indias rapidly growing economy has been placing huge demands on power supply, roads, railways, highways, airports, ports, transportation systems, rural and urban development and water supply and sanitation. But, bottlenecks in both urban and rural infrastructure have been eroding the countrys competitiveness.Ramping up investments in infrastructure is critical for Indias growth, and to sustain the countrys battle against poverty. Supporting infrastructure investment is particularly important at this time, not just to sustain total domestic demand at a time of global crisis, but also to lay the foundations for stronger economic growth in the future. Since the global financial crisis in late 2008, long-term financing to sustain the development of infrastructure has become difficult to obtain. While in 2007, India was the leading destination among low & middle-income countries for private investment in infrastructure, recent evidence indicates that newer projects are being delayed because of the difficulties in securing private financing- particularly long-term private investment.During the preliminary assessment of investment in infrastructure in the Twelfth Plan (2012-17), Planning Commission has projected investment requirement to be Rs. 40,99,240 crore, which would be twice the investments for the Eleventh Plan and estimates infrastructure spending of ($1000000000000) $1 trillion. The numbers clearly indicate that there has been a rise in infrastructure development and with the growing need for infrastructural development there would be need for rise in sources of funding as well.

Thus the government has been inviting private participation in funding capacity building by way of Public Private Partnerships (PPP), commercial banks lending, take out financing, infrastructure financing institutions, infrastructure debt funds, external commercial borrowing, foreign direct investments etc and has been extending tax holidays to make funding feasible for lenders and borrowers. To stimulate public investment in infrastructure, a special purpose vehicle India Infrastructure Finance Company Limited (IIFCL) was set up for providing long-term financial assistance to infrastructure projects.It is estimated that more funds from the Central Government budget financed around 45 per cent of the total investment in infrastructure. The remaining 55 per cent was divided between debt financing and equity financing ,It will financed by the NBFCs. Notably other sources of financing, such as, External Commercial Borrowings (ECBs), equity, FDI and insurance companies , some fund financed by IIFCL and IDFC.It is estimated that more than half of the total estimated resource flows are likely to come from bank credit, while close to 15 per cent is estimated to come from external commercial borrowings. The resource flow from pension/insurance companies, which is potentially a high source of long term debt, is expected to provide resources by less than 7 per cent.CHAPTER: 2

RESEARCH METHODOLOGY

OBJECTIVE OF THE STUDY: To understand the financing of infrastructure sector. To understand the importance of emergence of ppp in the sector of infrastructure

To understand gap funding in infrastructure sector. METHODOLOGY:

The study cover infrastructure sector in India. In this project i have taken ppp projects in infrastructure sector and rites ltd. as a case study. SIGNIFICANCE:

In this project are helpful to understand the infrastructure sector in India. What is the issue, what is the source of findings, role or RBI and government in infrastructure sector. LIMITATIONS:

This report is only study can be done through secondary dataCHAPTER: 3

THEORITICAL BACKGROUND

Infrastructure finance:

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

Let us look at the broad pattern of financing of infrastructure in our country. According to the Planning Commission, during the first three years of Eleventh Five Year Plan (2007-2011), funds from the Central Government budget financed around 45 per cent of the total investment in infrastructure. The remaining 55 per cent was divided between debt financing (41 per cent) and equity financing (14 per cent). It is noteworthy that within the debt financing, commercial banks alone financed around 21 per cent and another 10 per cent was financed by the NBFCs. Notably other sources of financing, such as, External Commercial Borrowings (ECBs), equity, FDI and insurance companies financed less than 10 per cent of the total infrastructure investment each.

The challenge of successful leaping the double digit growth barrier and, ensuring that the growth is tempered with inclusiveness, equity and concern for the aam admi can be met only through sustained investment in infrastructure. As per the preliminary estimates, there may be a substantial gap of up to 30 per cent in financing the even more ambitious target of 41 lakh crore of investment in infrastructure for the XII Plan period. The investment in infrastructure in the first 3 years of the Eleventh Plan Period (2007-2011) has well exceeded the target of 9, 81,119 crore. The actual investment was 10, 65,828 crore, which is 7.1 per cent of the GDP and 109 per cent of the targeted expenditure. Investments in sectors such as electricity, telecommunications, irrigation and oil and gas pipelines have exceeded the target during this period.

The recent measures initiated by Government to enable greater flow of funds into infrastructure, such as the takeout financing scheme of the India Infrastructure Finance Company Ltd (IIFCL); separate classification of infrastructure non-banking finance companies (NBFCs); and, long-term infrastructure bonds with tax exemption up to 20,000 for individual investors. As a result of these measures, the total bank lending to infrastructure has gone up from 8.68 per cent of total bank credit as at end-March 2008 to 10.8 per cent by end-March, 2010. The bond issuances by infrastructure companies have grown by 6.9 times between 2007-08 and 2009-10. IIFCL has taken up for active consideration, a large number of projects, under the take-out financing scheme which has the potential to release significant balance sheet space of commercial banks. There is an urgent need to strengthen the corporate bond market and develop credit enhancement mechanisms to enable infrastructure projects, typically non-recourse Special Purpose Vehicles (SPVs), to access long tenor funds available with insurance and pension funds. We also require some suitable regulatory changes for channelizing greater amounts of foreign capital, especially debt capital, into Indian infrastructure to bridge the large financing gap in infrastructure sector in India.Infrastructure funding is characterized by non recourse or limited recourse funding, large scale investment, long gestation period, high initial capital, low operating cost, repayments from the revenues generated from the project. Typically government has been the sole financier for these projects and has been responsible for implementation, operations and maintenance of these projects.

Investment in the Infrastructure Sector during the Eleventh Plan (2007-12):The eleventh five year plan of India recognized inadequate infrastructure as a major constraint on rapid growth. Recognizing the importance of infrastructure development in stimulating economic growth, Government of India planned to raise infrastructure investment to over 8 per cent of GDP by the end of the Eleventh Five Year Plan (2007-12). The total revised estimated expenditure for investment in infrastructure during the eleventh five year plan is estimated at around Rs 2011521 crore or US$ 502.88 billion (at an exchange rate of Rs 40/$). The total investment in infrastructure is estimated to have increased from 5.7 per cent of GDP in the base year (2006-07) of the Eleventh Plan to around 8.0 per cent in the last year of the Plan. To step up investment in the infrastructure sector, apart from increasing budgetary allocation for the sector, the Government has been encouraging the private sector to participate and invest in the sector. Resultantly, during the past four years, a number of Public-Private Partnerships (PPP) has come up in the sector. It may be mentioned that private investments accounted for about 36 per cent of total investment in infrastructure in the Eleventh Plan. Projected Investment in the Infrastructure Sector during the Twelfth Plan (2012-2017):To support the high economic growth, the investment requirements in the infrastructure sector is estimated to be around 41 lakh crore (revised to Rs 45 lakh crore in the Approach paper for the Twelfth Plan) during the Twelfth plan period. This implies that infrastructure investment will need to increase from about 8.0 per cent of GDP in the base year (2011-12) of the Plan to about 10.0 per cent of GDP in 2016-17. Over the plan period as a whole, the infrastructure investment is estimated to be about 9.95 per cent of GDP. Financing of this investment would require larger outlays from the public sector, but this has to be coupled with a more than proportional rise in private investment. Going forward, the share of private investment in infrastructure may, in fact, have to increase to 50.0 per cent in the Twelfth Plan. However, this estimate on infrastructure investment has to be understood with caution as the underlying assumption is nine per cent growth in GDP throughout the plan period. But at any case, even with GDP growth of seven or eight per cent, if we want to invest around ten per cent of GDP in the infrastructure sector, the financing requirement is going to be huge.

Sources of Infrastructure Funding:Public Private Partnership: According to Ministry of Finance Government of India the PPP project means a project based on a contract or concession agreement, between Government or statutory entity on the one side and a private sector company on the other side, for delivering infrastructure service on payment of user charges. The PPP model helps government implement its schemes in partnership with the private sector. Typically these are set up in a form of a Special Purpose Vehicle and are engaged in financing, operating and maintaining of the assets and project.

Bank Financing: Bank credit to the infrastructure sector increased steadily from 19992000 to 2001011, a compounded annual growth of 43.6 per cent. However, with bank findings there is an issue of asset liability mismatch, as infrastructure requires long term funding and the deposits of banks are short term in nature. Thus the need for developing the long term debt financing market was felt much and India Infrastructure Finance Company Limited (IIFCL) was formed.

India Infrastructure Finance Company Limited (IIFCL): IIFCL an special purpose vehicle (SPV), was incorporated in Jan, 2006, by the Central Government for providing long term loans for financing infrastructure projects, providing financial assistance up to 20% of the project costs, both through direct lending to project companies and by refinancing banks and financial institutions. IIFCL has raised Rs. 20,569 crore and approved 139 projects involving total investment of Rs. 2,00,884 crore by May 2010.Infrastructure Finance Companies (IFCs): RBI in 2010 notified a new category of NBFCs-ND-SI that are engaged predominantly in infrastructure financing as Infrastructure Finance Companies (IFCs)1 An IFC is defined as non deposit taking NBFC that fulfills the criteria mentioned below:

a minimum of 75 per cent of its total assets should be deployed in infrastructure loans as defined in Para 2(viii) of the Non Banking Financial (Non Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 not accept deposits from public

Net owned funds of Rs. 300 crore or above;

minimum credit rating 'A' or equivalent of CRISIL, FITCH, CARE, ICRA or equivalent rating by any other accrediting rating agencies

CRAR of 15 percent (with a minimum Tier I capital of 10 percent)

Infrastructure Finance Companies (IFCs), are permitted to avail of ECBs, including the outstanding ECBs, up to 50 per cent of their owned funds, for on-lending to the infrastructure sector as defined under the ECB policy. ECB beyond 50 per cent of the owned funds by financial institutions which are classified as Infrastructure Finance Companies are considered on a case to case basis.

Infrastructure Bonds: The infrastructure bonds have a maturity of 10 years but a lock-in period of five years and the investor has the option to sell the bonds back to the issuer. Alternatively, the bonds can be traded on the stock exchanges. What makes these bonds lucrative for investors and issuers is a) Section 80CCF, any individual or Hindu undivided family can invest up to Rs 20,000 in infrastructure bonds and avail of tax benefits b) these provide fixed returns and are reasonably safe and c) the amount raised by issue of infrastructure bonds by Infrastructure Finance Companies, u/s 80CCF of the Income Tax Act, 1961, shall not be treated as public deposit as provided in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998.

Take out financing: Takeout finance is the product emerging in the context of the funding of long-term infrastructure projects. Under this arrangement, the institution/the bank financing infrastructure projects will have an arrangement with any financial institution for transferring to the latter the outstanding in respect of such financing in their books on a predetermined basis. In view of the time lag involved in taking-over, the possibility of a default in the meantime cannot be ruled out. The norms of asset classification will have to be followed by the concerned bank/financial institution in whose books the account stands as balance sheet item as on the relevant date. If the lending institution observes that the asset has turned NPA on the basis of the record of recovery, it should be classified accordingly. The lending institution should not recognise income on accrual basis and account for the same only when it is paid by the borrower/ taking over institution (if the arrangement so provides). The lending institution should also make provisions against any asset turning into NPA pending its takeover by taking over institution. As and when the asset is taken over by the taking over institution, the corresponding provisions could be reversed. However, the taking over institution, on taking over such assets, should make provisions treating the account as NPA from the actual date of it becoming NPA even though the account was not in its books as on that date.

Take out financing approved through ECB route: Refinancing of domestic Rupee loans with ECB was not permitted. However, keeping in view the special funding needs of the infrastructure sector, RBI decided to review the ECB policy and put in place a scheme of take-out finance.

Take-out financing arrangement through ECB is permitted5, under the approval route, for refinancing of Rupee loans availed of from the domestic banks by eligible borrowers in the sea port and airport, roads including bridges and power sectors for the development of new projects, subject to the following conditions:

The corporate developing the infrastructure project should have a tripartite agreement with domestic banks and overseas recognized lenders for either a conditional or unconditional take-out of the loan within three years of the scheduled Commercial Operation Date (COD). The scheduled date of occurrence of the take-out should be clearly mentioned in the agreement.

The loan should have a minimum average maturity period of seven years.

The domestic bank financing the infrastructure project should comply with the extant prudential norms relating to take-out financing.

The fee payable, if any, to the overseas lender until the take-out shall not exceed 100 bps per annum.

On take-out, the residual loan agreed to be taken- out by the overseas lender would be considered as ECB and the loan should be designated in a convertible foreign currency and all extant norms relating to ECB should be complied with.

Domestic banks / Financial Institutions will not be permitted to guarantee the take-out finance

The domestic bank will not be allowed to carry any obligation on its balance sheet after the occurrence of the take-out event.

Reporting arrangement as prescribed under the ECB policy should be adhered to.

Foreign Direct Investment:

1) Investment in infrastructure companies in the Securities Market:-

Foreign investment is permitted in infrastructure companies in Securities Markets, namely, stock exchanges, depositories and clearing corporations, in compliance with SEBI Regulations and subject to the following conditions:

There is a composite ceiling of 49 per cent for Foreign Investment, with a FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital. FDI will be allowed with specific prior approval of FIPB

FII can invest only through purchases in the secondary market.

100% FDI is allowed under the Automatic Route in Development of townships, Housing, Built up infrastructure and Construction Development Projects but does not include real estate business.

2) Foreign Institutional Investors investment:-

The planning commission estimates that there is a gap of $100 billion in infrastructure funding that needs to be bridged from foreign sources. To enhance the flow of funds to the infrastructure sector, the FII limit for investment in corporate bonds, with residual maturity of over five years issued by companies in infrastructure sector, is being raised by an additional limit of US$ 20 billion taking the limit to US$ 25 billion. This will raise the total limit available to the FIIs for investment in corporate bonds to US$ 40 billion. Since most of the infrastructure companies are organised in the form of SPVs, FIIs would also be permitted to invest in unlisted bonds with a minimum lock-in period of three years. However, the FIIs will be allowed to trade amongst themselves during the lock-in period.Infrastructure Debt Funds: infrastructure projects have a long pay-back period; they require long-term financing in order to be sustainable and cost-effective. However, debt financing for infrastructure projects has been largely confined to banks who have difficulty in providing long-term debt due to their asset-liability mismatch. On the other hand, insurance and pension funds have stayed away on account of their risk perceptions.

This is a proposal for setting up an India Infrastructure Debt Fund (the Fund)

for Rs. 50,000 crore ($ 11 billion) to meet the needs of long-term debt for infrastructure projects that are set up through Public Private Partnerships (PPP).

The Fund will also help bridge the emerging gap in the total debt required for funding infrastructure projects which presently rely on commercial banks. The provision of low-cost long term debt is necessary for reducing the cost of infrastructure projects and this Fund would be a significant step in that direction. The Fund would only lend to projects that have entered into commercial operation after completion of construction. This would imply taking over of the existing debt of commercial banks and thus releasing their lending space for provision of loans to new projects. When the Fund is fully

Operational, it will also help create a secondary market for debt bonds. Financing Sources for Infrastructure Projects

Domestic SourcesExternal Sources

Equity Domestic investors (independently or in collaboration with international investors)

Public utilities

Dedicated Government Funds

Other institutional investors

Equity Foreign investors ( independently or in collaboration with domestic investors)

Equipment suppliers (in collaboration with domestic or international developers)

Dedicated infrastructure funds

Other international equity investors

Multilateral agencies

Debt Domestic commercial banks (35 year tenor)

Domestic term lending institutions (710 year tenor)

Domestic bond markets (710 year tenor)

Specialized infrastructure financing institutions such as Infrastructure Debt Funds

Debt International commercial banks (710 year tenor)

Export credit agencies (710 year tenor)

International bond markets (1030 year tenor)

Multilateral agencies (over 20 year tenor)

Criteria for Financing of Infrastructure Projects:

Banks, financial institutions are free to finance technically feasible, financially viable and bankable projects undertaken by both public sector and private sector undertakings subject to the following conditions:

The amount sanctioned should be within the overall ceiling of the prudential exposure norms prescribed by RBI for infrastructure financing.

Banks/ FIs should have the requisite expertise for appraising technical feasibility, financial viability and bankability of projects, with particular reference to the risk analysis and sensitivity analysis ( please see paragraph 4 also).

In respect of projects undertaken by public sector units, term loans may be sanctioned only for corporate entities (public sector undertakings registered under Companies Act or a Corporation established under the relevant statute). Further, such term loans should not be in lieu of or to substitute budgetary resources envisaged for the project. The term loan could supplement the budgetary resources if such supplementing was contemplated in the project design. While such public sector units may include Special Purpose Vehicles (SPVs) registered under the Companies Act set up for financing infrastructure projects, it should be ensured by banks and financial institutions that these loans/investments are not used for financing the budget of the State Governments. Whether such financing is done by way of extending loans or investing in bonds, banks and financial institutions should undertake due diligence on the viability and bankability of such projects to ensure that revenue stream from the project is sufficient to take care of the debt servicing obligations and that the repayment/servicing of debt is not out of budgetary resources. Further, in the case of financing SPVs, banks and financial institutions should ensure that the funding proposals are for specific monitor able projects.

Banks may also lend to SPVs in the private sector, registered under Companies Act for directly undertaking infrastructure projects which are financially viable and not for acting as mere financial intermediaries. Banks may ensure that the bankruptcy or financial difficulties of the parent/ sponsor should not affect the financial health of the SPV. Issues in Infrastructure Financing:

Funding Gap:

Funding Gap is the most important issue that indian infrastructure face on this front. According to the estimates made by the Planning Commission in March 2010, after taking into account the recent trends in different sources of infrastructure financing, the funding gap in the infrastructure sector during the last two years of the Eleventh Five Year Plan is likely to be Rs.1,27,570 crore, which is around 18 per cent of the total estimated requirement . The slowdown in the economy experienced after March 2010 has further aggravated this funding gap in the infrastructure sector during the Eleventh Plan. More recently, in the context of Eurozone debt crisis, accessing external resources by way of ECBs could also become difficult and this would also accentuate the funding gap.Fiscal Burden:

It has already seen that almost half of the total investment in the infrastructure sector was done by the Government through budget allocations. Here the point to be noted is that Government funds have competing demands, such as, education, health, employment generation, among others. Given that there is a limit to the Governments financing of infrastructure, especially in the context of a rule based fiscal policy framework, it is important to explore other avenues for financing infrastructure.Asset-Liability Mismatch of Commercial Banks:

After the budgetary support, next in line for financing infrastructure were funds from the commercial banking sector. However, it is a well known fact that these are institutions that primarily leverage on short-term liabilities and, as such, their ability to extend long-term loans to the infrastructure sector is limited. This is because, by doing so they get into serious asset-liability mismatches.Takeout financing:

Takeout financing offers a window to the banks to free their balance sheet from exposure to infrastructure loans lend to new projects and also enable better management of the asset liability position. In other words, takeout financing enables financing longer term projects with medium term funds. However, due to several factors the mechanism has not really emerged as a game-changer. One plausible reason is that the model does not envisage equitable distribution of risks and benefits. One of the oft repeated arguments is that banks assume credit and liquidity risk since the inception of the project but once the project is economically viable, taking out of the loan results in loss of opportunity of earning returns on seasoned loans. Further, if the original lenders/bankers are required to part with their security interest fully their residual exposure would be sub-ordinate to the interest of the take out financier.Investment Obligations of Insurance and Pension Funds:

From the point of view of asset-liability mismatches, insurance and pension funds are one of the best suited institutions to invest in the infrastructure sector. This is because, in contrast to the commercial banking sector, these institutions leverage on long-term liabilities. However, they are constrained by their obligation to invest a substantial portion of their funds in Government securities. Of course, in a way, this facilitates the financing of gross fiscal deficit of the Central Government and hence enables the Central Government to make more investments. However, this limits the direct investment of these institutions in the infrastructure sector.

Need for an Efficient and Vibrant Corporate Bond Market:

India has traditionally been a bank-dominated financial system with corporate raising resources through loan route/public deposits/FCCBs or private placements. This is probably due to a combination of factors, such as, banks find loan financing convenient as they do not have to mark to market loans in contrast to bonds, absence of a robust bankruptcy law, limited investor base, limited number of issuers, etc. This however, does not undermine the need for developing an efficient and vibrant corporate bond market in general, and for infrastructure financing, in particular. An active corporate bond market can facilitate long-term funding for the infrastructure sector. However, despite the various initiatives taken by the Reserve Bank, Securities & Exchange Board of India and Government of India, the corporate bond market is still a long way to go in providing adequate financing to the infrastructure sector in India.

Developing Municipal Bond Market for Financing Urban Infrastructure:

For large scale financing urban infrastructure which is assuming critical importance in the context of rapid urbanization, conventional fiscal transfers to the urban local bodies or municipals from governments are no longer considered sufficient. There have been some earnest experimentation by these bodies to tap unconventional methods of financing such as public private partnerships, utilizing urban assets more productively, accessing carbon credits, etc. but then these do not address the financing needs. One possible way of addressing the problem is developing a municipal bond market. Today, the size of the market is insignificant and distributed among a few municipals of Ahmedabad, Nashik and some around Bangalore. Given the fact that the credit ratings for the municipalities of the 63 Jawahar Nehru National Urban Renewal Mission (JNURM) cities are regularly released and quite a few of them are rated as investment grade, we need to provide them avenues to tap the markets. Absence of the secondary market for the municipal bonds, problems relating to rating of bonds, accounting practices followed by the municipal bodies, adequacy of user charges for generating cash flows for servicing of bonds, availability of escrow mechanism are some of the issues which require to be addressed to encourage investments.Insufficiency of User Charges:

It is a well known fact that a large part of the infrastructure sector in India (especially irrigation, water supply, urban sanitation, and state road transport) is not amenable to commercialisation for various reasons, such as, regulatory, political and legal constraints in the real sector. Due to this, Government is not in a position to levy sufficient user charges on these services. The insufficiency of user charges on infrastructure projects negatively affect the servicing of the infrastructure loans. Generally, such loans are taken on a non-recourse basis and are highly dependent on cash flows. Hence, levy and collection of appropriate user charges becomes essential for financial viability of the projects.

Legal and Procedural Issues:

It is mentioned earlier, infrastructure development involves long gestation periods, and also many legal and procedural issues. The problems related to infrastructure development range from those relating to land acquisition for the infrastructure project to environmental clearances for the project. Many a times there are legal issues involved in it and these increase procedural delays. The added uncertainty due to these factors affects the risk appetite of investors as well as banks to extend funds for the development of infrastructure.

The various issues in financing infrastructure, it is important to glance through what we have already done for facilitating fund flow to the sector. This will help us in understanding what more can be done. In fact, it is important to note that both the Central Government and the Reserve Bank of India have taken a lot of measures to facilitate fund flow to this sector especially during the recent years. Measures taken by the Central Government: Public-Private Partnership Projects in Infrastructure:As Government faces a tight budget constraint in the context of a rule based fiscal policy framework, it was important to encourage the private sector to invest more in the infrastructure sector. Resultantly, the Government started encouraging Public-Private Partnership (PPP) projects in the infrastructure sector. PPP mechanism provides built in credit enhancement for improving project viability by way of buyback guarantee, escrow arrangement, substitution rights for the lenders, etc. Government has taken several initiatives, especially to standardize the documents and process for structuring and award of PPP projects. This has improved transparency in relation to the issues involved in setting up PPP projects.

Setting up of various Committees to Simplify the Procedures:

Recently Government has set up many committees to facilitate more private funding into the infrastructure sector. These include Committee on Infrastructure, Cabinet Committee on Infrastructure, PPP Appraisal Committee and Empowered Committee among others. These were mainly aimed at streamlining the policies to ensure time bound creation of infrastructure and to develop an institutional framework that would facilitate more flow of funds to the infrastructure sector.

Viability Gap Funding:

Viability gap funding was introduced in 2006, which provides Central Government grants up to 20 per cent of the total capital cost to PPP projects undertaken by any central ministry, state government, statutory entity, or local body. The scheme aimed at providing upfront capital grant to PPP projects to enable financing of commercially unviable projects. The level of grant is the net present value of the gap between the project cost and estimated revenue generation over the concession period based on a user fee that was to be levied in a pre-determined manner.

Foreign Direct Investment and Infrastructure Development:

To facilitate infrastructure financing 100 per cent FDI is allowed under the automatic route in some of the sectors such as mining, power, civil aviation sector, construction and development projects, industrial parks, petroleum and natural gas sector, telecommunications and special economic zones. Further, FDI is also allowed through the Government approval route in some sectors such as civil aviation sector, (Domestic Airlines (beyond 49 per cent), Existing airports (beyond 74 per cent to 100 per cent)); investing companies in infrastructure/services sector (except telecom); Petroleum and Natural Gas sector refining PSU companies; Telecommunications Basic and Cellular Services (beyond 49 per cent to 74 per cent), ISP with gateways, radio paging, end-to-end bandwidth (beyond 49 per cent to 74 per cent, ISP without gateway (beyond 49 per cent); Satellites (up to 74 per cent) and, mining and mineral separation of titanium bearing minerals and ores (100 per cent).

Setting up of India Infrastructure Finance Company Limited (IIFCL):Another major development was the setting up of IIFCL by the Central Government for providing long-term loans to the infrastructure projects. IIFCL is involved both in direct lending to project companies and refinancing of banks and other financial institutions. IIFCL can provide funds to the infrastructure project up to 20 per cent of the total project cost as long-term debt. Recently, IIFCL has come up with modifications to its takeout finance scheme, which will make the infrastructure loans cheaper. Further, IIFCL has decided to go for a transparent and competitive pricing for its takeout financing to ensure fair treatment to all participants. With this change, all developers irrespective of their size will get same treatment from the IIFCL depending on the rating of the project.

Relaxation in take-out financing scheme of IIFCL:The pricing mechanism of the recently announced takeout finance scheme of IIFCL is now based on credit rating of the project and is declared upfront. The rules related to timing of the takeout have also been changed. While for road projects the takeout can take place after commercial operation date (COD), for other sectors it has been relaxed to six months. Under existing norms, takeout financing can only be done one year after the scheduled COD of the project. Another notable change is that the developer can now approach for takeout financing unlike earlier scheme where only the banks could exercise such an option. Further, lenders, instead of paying commission to IIFCL, would now be compensated up to a certain percentage of interest gain accruing to the borrower under the take-out finance scheme. Besides, interest rates to be charged by IIFCL have now become non-discretionary and transparent. Setting up of Infrastructure Debt Funds: In the Union Budget for 2011-12, the Union Finance Minister announced the setting up of Infrastructure Debt Funds (IDFs) to accelerate the flow of long-term funds to the infrastructure projects. Accordingly, in November 2011, Reserve Bank of India and the Securities and Exchange Board of India (SEBI) notified detailed guidelines for setting up of IDFs which can either be a mutual fund (trusts) (IDF-MF) or an NBFC (companies) (IDF-NBFC). The Scheduled commercial banks are allowed to act as sponsors to IDF-MFs and IDF-NBFCs with prior approval from RBI subject to certain terms and conditions. Further, to attract off-shore funds into IDFs, Government of India is contemplating the reduction of withholding tax on interest payments on the borrowings by the IDFs from 20 per cent to 5 per cent. Income of the IDFs is also expected to be exempt from income tax. The IDF-NBFC can raise resources through issue of either rupee or dollar denominated bonds of minimum five year maturity. IDFs are expected to channelize funds from insurance companies, pension funds and other long term sources into infrastructure sector. This will provide an alternative source of foreign currency funds for the infrastructure projects. However, certain dimensions need to be kept in mind while assessing the success of the model. Infrastructure financing presents quite a few challenges like; little tangible security, high debt equity ratio, long implementation and repayment periods, etc. Banks and financial institutions have over the years gained experience and expertise in assessing and pricing these risks. IDFs are likely to face severe challenges on these issues. Therefore, these Funds have been allowed to invest only in PPP and post commencement operations date (COD) infrastructure projects which have completed at least one year of satisfactory commercial operations. Of course, IDF-MFs can also be set up in respect of non-PPP projects under higher risk-return framework. If a bank has a mutual fund, then it can float an infrastructure debt fund, mop up resources from investors, including private equity and strategic investors, and invest the proceeds in the equity of infrastructure projects. Thus, IDFs could be game changers in the way infrastructure projects are being financed.

Tapping the retail investor base through Infrastructure Bonds:To provide further impetus to infrastructure financing, Government of India has permitted IFCI, IDFC, LIC and infrastructure finance firms to issue long-term infrastructure bonds providing for tax benefit of up to Rs.20,000 in the year of investment, under the Income Tax Act. The tax-free status has been granted by the government to these bonds issued only by designated financial institutions. By introduction of such instruments, the retail base can be tapped for raising funds for infrastructure projects. Of the proposed Rs. 30,000 crore funds to be raised, National Highway Authority of India (NHAI) & the Railway Finance Corporation are raising Rs. 10,000 crore each and HUDCO another Rs. 5,000 crore. Major steps taken by the Reserve Bank:

The Reserve Bank has initiated a number of regulatory measures/concessions for facilitating increased flow of credit to infrastructure projects. I will briefly touch upon a few of the critical measures taken in this regard.

Use of Foreign Exchange Reserves for Infrastructure Development:In India, the increase in quantum of foreign exchange reserves during the decade of 2000, coupled with escalating infrastructure constraints and the related financing deficit led to a debate on possibility of using foreign exchange reserves for investment in infrastructure sector. Although use of reserves for such purposes does not meet the criterion of reserve management objectives, a special and limited window has been created. Accordingly, IIFC (UK) Ltd. was incorporated in London and was set up in April 2008. Under this scheme, RBI invests, in tranches, up to an aggregate amount of USD 5 billion in fully government guaranteed foreign currency denominated bonds issued by this overseas Special Purpose Vehicles (SPV) of the IIFCL. The funds, thus raised, are to be utilized by the company for on-lending to the Indian companies implementing infrastructure projects in India and/or to co-finance the ECBs of such projects for capital expenditure outside India without creating any monetary impact.

Enhanced Exposure norms:In view of the generally large requirements of funds for infrastructure projects, the existing RBI guidelines provide for enhanced exposure ceilings for the infrastructure lending. The credit exposure ceiling limits are 15 per cent of capital funds in case of a single borrower and 40 per cent of capital funds in the case of a borrower group. Credit exposure to a single borrower may exceed the exposure norm of 15 per cent of the bank's capital funds by an additional 5 per cent (i.e., up to 20 per cent) and a borrower group may exceed the exposure norm by an additional 10 per cent (i.e., up to 50 per cent), provided the additional credit exposure is on account of extension of credit to infrastructure projects.

Asset-Liability Management in the context of Infrastructure Financing:In order to meet long term financing requirements of infrastructure projects and address asset liability management issue, banks are permitted to enter into take out financing arrangement with IDFC/other FIs. Further, banks have also been allowed to issue long term bonds with a minimum maturity of five years to the extent of their exposure of residual maturity of more than five years to the infrastructure sector.

Issuance of Guarantee:

Keeping in view the special features of lending to infrastructure projects, viz., high degree of appraisal skills on the part of lenders and availability of resources of a maturity matching with the project period, banks are permitted to issue guarantees favouring other lending institutions in respect of infrastructure projects provided the bank issuing the guarantee takes a funded share in the project at least to the extent of five per cent of the project cost and undertakes normal credit appraisal, monitoring and follow up of the project.

Financing Promoters Equity:

Banks have been permitted to extend finance for funding promoters equity in cases where the proposal involves acquisition of share in an existing company engaged in implementing or operating an infrastructure project in India, subject to certain conditions.

Relaxation from Capital Market Exposure:In order to encourage lending by banks to the infrastructure, the promoters shares in the SPV of an infrastructure project pledged to the lending bank is permitted to be excluded from the banks capital market exposure.

Permission to invest in Unrated Bonds:In order to encourage banks to increase the flow of credit to infrastructure sector, banks are allowed to invest in unrated bonds of companies engaged in infrastructure activities within the ceiling of 10 per cent for unlisted non SLR securities.

Relaxation in the Classification of Investments:Investment by banks in the long-term bonds issued by companies engaged in executing infrastructure projects and having a minimum residual maturity of seven years are allowed to be classified under the HTM category, which means they need not be marked to market.

Relaxations relating to asset classification: With effect from March 31, 2008, the infrastructure project accounts of banks were permitted to be classified as sub-standard if the date of commencement of commercial production extended beyond a period of two years (as against 6 months in the case of other projects) after the date of completion of the project, as originally envisaged. With effect from March 31, 2010, if an infrastructure project loan classified as standard asset is restructured any time during the above period of two years, it can be retained as a standard asset if the fresh date of commencement of operations is fixed within certain limits prescribed by the Reserve Bank, and provided the account continues to be serviced as per the restructured terms.

Certain relaxations as far as conditions specified for deriving asset classification benefits under our restructuring guidelines are made in respect of infrastructure exposure of banks i.e. in respect of repayment period of restructured advances and regarding tangible security.

Infrastructure Debt Funds

Realizing the potential of Infrastructure Debt Funds in enhancing financing to the sector, Reserve Bank of India has, as a special case, permitted several prudential relaxations. Sponsor bank of IDFNBFC has been permitted to contribute up to 49 per cent of the equity.In order to enable and encourage higher quantum of take out financing by an IDF-NBFC, they have been permitted to take-on up to 50 per cent of its capital fund for individual projects. An additional exposure of 10 per cent can be taken subject to the approval of the Board. On a case to case basis, Reserve Bank will permit such entities for additional exposures of another 15 per cent, subject to conditions. Thus, exposure can go up to 75 per cent of the capital funds.Another significant relaxation is that for the purpose of computing capital adequacy of the IDF-NBFC, bonds covering PPP and post COD projects in existence over a year of commercial operation shall be assigned a lower risk weight of 50 percent.

Under the extant provisions of Foreign Exchange Management Act, (FEMA) 1999, Reserve Bank has allowed investment on repatriation basis by new class of eligible non-resident investors (viz. SWFs, multilateral agencies, pension funds, insurance funds, endowment funds) in Rupee and Foreign Currency denominated bonds issued by IDF-NBFCs and Rupee denominated units issued by IDF-MFs set up as SEBI registered Mutual Funds. IDFs would in turn lend to infrastructure projects as intermediaries. Further, SEBI registered FIIs, HNIs registered with SEBI and NRIs have also been allowed to invest in Rupee denominated bonds issued by the IDF-NBFCs and Rupee denominated units issued by IDF-MFs set up as SEBI registered domestic Mutual Funds. The original maturity of all the securities at the time of first investments by such investors shall be five years and the investments would be subject to a lock in period of three years. All such investments (excluding those by NRIs) will however be within an overall cap of US$ 10 billion (which would be within the overall cap of USD 25 billion for FII investment in infrastructure debt).

Introduction of Credit Default Swaps:

The introduction of Credit Default Swaps (CDS) would help banks to manage exposures while increasing credit penetration, and lending to infrastructure and large firms without being constrained by the extant regulatory prescriptions in respect of single borrower gross exposure limits. With effect from November 30, 2011, the Reserve Bank of India has also permitted CDS on unlisted but rated bonds of infrastructure companies and unlisted/unrated bonds issued by the SPVs set up by infrastructure companies. While introducing the CDS, which caused considerable regulatory concern during global financial crisis in 2008-09, a calibrated approach has been followed, focusing on product safety and systemic stability issues. The intention was to introduce a plain vanilla CDS which is easily understood by the market. CDS has been designed to limit excessive leverage and build-up in risk positions and at the same time ensures credit risk mitigation. Therefore, users are not allowed to buy naked CDS, buying credit protection without underlying risk exposures. In order to restrict the users from holding naked CDS positions; physical delivery is mandated in case of credit events. Transparency in the CDS market which was major concern in other markets during the financial crisis would be ensured through mandatory reporting of trades by market makers on the CDS trade reporting platform coupled with periodic dissemination of information by the trade repository to the market and also to the regulators. These measures are going to provide fillip to bonds issued by infrastructure companies. Corporate Bond Market:

Reserve Bank has issued guidelines on repo in corporate bonds to make the market more active. Further, all entities regulated by Reserve Bank of India are reporting corporate trades on FIMMDA developed platform, enabling greater transparency and thereby facilitating better price discovery. To ensure smooth settlement in the secondary market, RBI has permitted clearing houses of the exchanges to have a funds account with RBI to facilitate Delivery versus Payments (DvP-I) based settlement of trades. Primary dealers have been permitted higher exposure limits for corporate to enable better market making. As mentioned above, CDS on corporate bonds has been introduced to facilitate hedging of credit risk associated with holding of corporate bonds. Other measures, including permitting banks to classify investments in non-SLR bonds issued by companies engaged in infrastructure activities and having a minimum residual maturity of seven years under the HTM category and investment in non-SLR debt securities which are proposed to be listed as investment in listed securities are expected to provide fillip to the market.

Liberalisation & Rationalization of ECB policies:Corporate implementing infrastructure projects were eligible to avail of ECB up to USD 500 million in a financial year under the automatic route. This limit has been raised to USD 750 million. Infrastructure Finance Companies (IFCs) i.e., Non Banking Financial Companies (NBFCs) categorized as IFCs by the Reserve Bank, are permitted to avail of ECBs, including the outstanding ECBs, up to 50 per cent of their owned funds, for on-lending to the infrastructure sector as defined under the ECB policy, subject to their complying with certain conditions. The Reserve Bank has further liberalized the ECB policy relating to the infrastructure sector in September 2011. Under this dispensation, the direct foreign equity holder (holding minimum 25 per cent of the paid-up capital) and indirect foreign equity holder holding at least 51 per cent of the paid-up capital will be permitted to provide credit enhancement for the domestic debt raised by Indian companies engaged exclusively in the development of infrastructure and infrastructure finance companies without prior approval from the Reserve Bank.CHAPTER: 4

CASE STUDYI have take rites ltd as a case study because rites ltd one of the public company which are done great job in the field of infrastructure sector in India as well as abroad. And on more take ppp projects as case study.

Rites ltd.

Rites limited were incorporated in India in 1974 under the companies act, 1956 for rendering consultancy services for railways in India and abroad. it was incorporated as a private limited company with the name of rail India technical and economics service private limited was converted into public limited company on February 5, 2008. The company soon transformed itself from a railway consultancy firm to the activities connected with other modes of transport, with multidimensional activities. Today rites ltd. is a multi-disciplinary organization engaged in various areas related to consultancy at home and abroad ranging from concept to commissioning as well as project management.

It is a PSU, international multi- disciplinary consultancy organization rendering comprehensive professional services in various sectors including highways, railways, bridges, metro rail, urban transport & development, airports, inland waterways and port sectors. It undertakes consultancy business along with export, lease of locomotives, rolling stock, project management consultancy etc.

The company has been accorded the MINI RATNA GRADE-1 status by the govt. of India by the virtue of operational efficiency and financial status. It is an ISO 9001: 2000 certified.

RITES have had operational experience in over 62 countries across Africa, southeast, Middle East and Latin America.

RITES is an ISO 9001-2008 certified company and is the first public sector undertaking in which finance & accounting division got the ISO certification in the year 2002. Fin & accounts division has made out quality and procedure manuals to comply with the ISO certification requirements and are presently in use. RITES Ltd. Is a multi- disciplinary organization & It has business operations in the following area: Consultancy

Export

Lease

Inspection

Operation and management

Project management

EPC-Turnkey

Concession business

Training and capacity building

Procurement services material system management SECTORS OF OPERATION:Sectors Of Operations

Railways Ports & Water Resources

Highways Ropeways

Bridges & Tunnel Information Technology

Geo Technology Financial Services

Airport Urban Development

Buildings Urban Transport

RITES SERVUCE SPECTRUM:Rites Service Spectrum

Airport Engineering Highway Engineering

Architecture & Design Human Resource Development

Bridge & Tunnel Engineering Information Technology

Design- Mechanical, Civil, Electrical Material System Mgt.

Electrical Engineering Operation & Mgt.

Export & Leasing Ports Harbors

Financial Management Quality Assurance

Geo-Technology Ropeway

Signaling & Telecom Traffic Logistics & Economics

Training Urban Development & Transport

Water Resources & Waterways

PPP PROJECTS:PPP Projects in infrastructure sector:

Public Private Partnership project as per Government of India means a project based on a long term contract or concession agreement, between a Government or statutory entity on the one side and a private sector company on the other side, for delivering an infrastructure service on payment of user charges. The concession agreement is specifically targeted towards financing, designing, implementing and operating infrastructure facilities and the collaborative ventures are built around mutually agreed allocation of resources, risks and returns. The Governments framework and measures for promoting PPPs draw on international experience with appropriate adaptations to the Indian context4 include the following.

(i) Establishing a PPP cell in the Department of Economic Affairs (DEA) in the Ministry of Finance for coordinating the mainstreaming of PPPs nationwide.

(ii) Institutionalizing PPP Cells in selected states and central line ministries for identifying and developing potential PPP opportunities, developing PPP projects, and bringing them to market for financial closure.

(iii) Establishing India Infrastructure Project Development Fund for financing PPP project preparation activities such as conduct of feasibility studies.

(iv) Establishing the IIFCL, the executing agency (EA) for the proposed Facility, for facilitating access to long-term funds for infrastructure development.

(v) Launching the Viability Gap Fund with a current annual allocation of about $340million for encouraging PPPs. Measures taken to encourage PPP: In airports and ports sectors, Model Concession Agreements are being developed to encourage public private partnerships. Planning Commission has already drafted the Model Concession Agreement for the Roads sector. At the same time, public investments are being stepped up, coupled with revamping of Airports Authority of India (AAI), National Highways Authority of India (NHAI) and Port Trusts. The core group on NHDP Financing has submitted its report on the suggested financing pattern for NHDP. The report of the IMG on restructuring of NHAI has been finalized. A Task Force appointed by Committee on Infrastructure has finalised the financing plan of ports. In the railway sector, a number of projects are being funded by public private partnership, State Government participation, funding of projects of national importance through the general exchequer and multi-lateral funding. Ministry of Railways has formed a PSU, the Rail Vikas Nigam Limited (RVNL). RVNL has been entrusted with the task of promoting public private partnership for railway projects. Railways have also decided to set up dedicated freight corridors on Delhi-Howrah and Delhi-Mumbai routes. This project is likely to be financed through non-railway funding in the form of bilateral, multi-lateral funding, etc. Decision has been taken to allow private parties to participate in container services, hitherto the preserve of CONCOR. A model concession agreement has been finalized by the IMG constituted for this purpose. The Task Force on financing of the development and modernization of 35non-metro airports has finalized its report. The Task Force has also recommended that the city side development in all airports should be taken up through PPPs.

Viability Gap Funding:

Some PPP projects which have economic and social justification but are not commercially viable need support from the Government to cover this viability gap. The central Government has therefore notified a scheme for financial support to infrastructure projects that are to be undertaken through PPP posed by Central Ministries, State Governments and statutory authorities. A private concessionaire shall be eligible for VGF only if it is selected on the basis of open competitive bidding and is responsible for financing, construction, maintenance and operation of the project during the concession period. The project should provide a service against payment of a pre-determined tariff or user charge. The proposal for VGF consists of concession agreement, state support agreement, substitution agreement, escrow agreement, O&M agreement, shareholders' agreement and the detailed project report. The proposal is circulated by the PPP cell to all members of the Empowered Institution, which is chaired by the Additional Secretary, Economic Affairs for their comments within four weeks. The comments are sent back to the proposer of VGF for response within two weeks. After the comments are received the proposal along with the comments are submitted to Empowered Institution for 'in principle' approval. The PPP cell has to indicate whether the proposal conforms to the mandatory requirements of the scheme. Once cleared by the Empowered Institution, the project would be eligible for financial support under the scheme. The quantum of VGF shall be in the form of a capital grant at the stage of project construction. The amount shall be equivalent to the lowest bid for capital subsidy, but subject to a maximum of 20% of the total project cost. In case the sponsoring Ministry/State Government/ Statutory entity proposes to provide any assistance over and above the said VGF, it shall be restricted to a further 20% of the total project cost. Financial bids shall be invited by the concerned Ministry, State Government or statutory entity, as the case may be, for award of the project within four months of the approval of the Empowered Institution. The period may however be increased by DEA if necessary. The private concessionaire is selected through a transparent and open competitive bidding process and the criterion for bidding shall be the amount of VGF required. Within three months from the date of award, the lead financial institution shall present its appraisal of the project for consideration and approval of the Empowered Institution. The appraisal shall be accompanied by an updated application in the prescribed format along with the detailed project report and project agreements. The lead financial institution shall verify the contents of the application and convey its recommendation to the Empowered Institution. Prior to final approval by the Empowered Institution, the Ministry/State Government/statutory entity shall certify that the bidding process on forms to the provisions of this scheme and that all the conditions specified in the scheme have been complied with. After the final approval, the Empowered Institution, the lead financial institution and the private concessionaire shall enter into a tripartite agreement in such format as may be prescribed by the Empowered Committee headed by Secretary, DEA from time to time. A Lead Financial Institution shall be the financial institution that is funding the project and in case of a consortium of FIs, the FI designated as such by the consortium shall be the lead financial institution. VGF shall be disbursed only after the private sector concessionaire has subscribed and expended the equity contribution required for the project and will be released in proportion to debt disbursements remaining to be disbursed thereafter. VGF shall be released to the Lead Financial Institution as and when due. The final sanction for VGF up to Rs.100 cr per project is given by Empowered Institution, for VGF between Rs. 100-200 cr is given by Empowered Committee and for VGF above Rs.200 cr is given by Empowered Committee with the approval of Finance Minister. Under the VGF scheme, twenty three projects with project cost of Rs. 11114.69 crore have been given in principle/final approval involving an estimated Viability Gap Funding of Rs.2690.32 crore.

PPP Projects in Central and States SectorsSl. No.SectorCompleted ProjectsProjects Under ImplementationProjects in PipelineTotal

No. of ProjectsProjects Cost(Rs. crore)No. of ProjectsProjects Cost(Rs. crore)No. of ProjectsProjects Cost(Rs. crore)No. of ProjectsProjects Cost(Rs. crore)

(A) Central Sector

1National Highways5520,139127103,4556052,573242176,167

2Major Ports299,6772034,1382416,9647360,779

3Airports35,883223,3101412,3871941,580

4Railways51,16642,363695,5351599,064

Total (A)9236,8651531,63,2661041,77,4393493,77,590

(B) State Sector

1Roads14111,4389128,901234132,668466173,007

2Non-Major Ports2026,9644055,8532541,07385123,890

3Airports24,95774,57194,2651813,793

4Railways150033124812

5Power1419,0199629,5858982,245199130,849

6Urban Infrastructure958,61110342,54622781,265425132,422

7Other Sectors683,0539451,60525791,166419145,824

Total (B)34074,0424322,13,5618444,32,9941,616720,597

(C) Grand Total (A + B)4321,10,9075853,76,8279486,10,4331,9651,098,187

CHAPTER: 5

DATA ANALYSISTable: 1INVESTMENT IN 10TH AND 11TH FIVE YEAR PLAN10th five year plan Actual Investments11th Five year Plan Revised estimates

Power 3,40,2376,58,630

Roads & bridges 1,27,1072,78,658

Telecommunications 1,01,8893,45,134

Railways 1,02,0912,00,802

Irrigation 1,19,8942,46,234

Water supply & sanitation 60,1081,11,689

Ports 22,99740,647

Airports 6,89336,138

Storage 56438,966

Oil & gas pipelines 32,3671,27,306

Total9192262054204

Table: 2 Sector-wise investments in the Eleventh Plan working document

INR-billionsExpenditure X plan Investments planned Xith plan (initial estimates)Investments targets (after 15% cut)PPP opportunity% Private share

Power 2,9197,2536,1651,62526

Roads 1,4493,6683,118112536

Telecom 1,2343,1412,670177767

Railways 1,1973,0352,58050520

Irrigation 1,1152,6252,2310

Water Supply and Sanitation 6482,3431,991543

Ports 4187073954574

Airports 6840934721261

Storage4826322411250

gas872412056532

total investment8,80523,84920,271602030

Table: 3 infrastructure investments

infrastructure investments

FINANCIAL YEARINVESTMENT

FY 03350

FY 041440

FY 051550

FY 061690

FY 071800

FY 082674

FY 093176

FY 103842

FY 114726

FY 125853

Table: 4 Funding Gap in Infrastructure Finance during 2010-11 and 2011-12 Funding Gap in Infrastructure Finance during 2010-11 and 2011-12

Source of FundsEstimatedRequirementEstimatedAvailability (As per trends)Funding Gap

Commercial Banks2,67,480202027

NBFCs (Including IIFCL)1,24,699100651

Insurance Companies52,046423301,25,685

External Commercial Borrowings (ECBs)76,98450515

Total Debt Funds5,21,208395523

Equity( Including FDI.)1,86,4561845711,885

Total7,07,6645,80,094127570

Table: 5 Comparison of Infrastructure Availability in India

Items

Population(million)NationalExpressways(000 miles)MajorAirportsElectricityProduction(billion of kWh)Port Shipments(billion tons)

India11003.7176520.4

PRC 130025562,5002.9

United States

3004718940001.4

KWh = kilowatt-hour, PRC = Peoples Republic of China.

Sources: International Monetary Fund,

Table: 6 Projected Investment in Infrastructure during the Twelfth Five Year Plan Table: 7 Sources of Debt Projected Investment in Infrastructure during the Twelfth Five Year Plan

(Rs crore at 200607 prices)

yearsBase year (2011-12)2012-132013-142014-152015-162016-17Total XI Plan

GDP at market prices (Rs crore)63,14,26568,82,54975,01,97881,77,15689,13,10097,15,2804,11,90,064

Rate of growth of GDP (%)9999999

Infrastructure investment as % of GDP8.3799.59.910.310.79.95

Infrastructure investment (Rs crore)5,28,3166,19,4297,12,6888,09,5389,18,04910,39,53540,99,240

Infrastructure investment132.08154.86178.17 202.38229.51259.881,024.81

(US$ billion) @ Rs 40/$

Sources of Debt

(at 200607 price)

200708200809 200910201011201112total XI plan

Domestic Bank Credit498486320780147101626128862423691

Non-Bank Finance Companies2385231485415605485972415224171

Pension/Insurance Companies9077998410983120811328955414

External Commercial Borrowing (ECB)1959321768241842686829851122263

External Commercial Borrowing (ECB)102370126444156874195435244416825539

Estimated Requirement of Debt 131718155704187333229571283709988035

US billons. $32.9338.9346.8357.3970.93247.01

Gap between Estimated Requirement and Likely Debt Resources2934829260304603413639292162496

US billons. $7.347.317.618.539.8240.62

CHAPTER7:

SUGGESTIONSUGGESTION:

We all need to think and come out with innovative suggestions. Now let me share some of my thoughts in this regard with you.

Making the Infrastructure Project Commercially Viable:

This is the first and foremost thing we should do for financing infrastructure in a sustainable manner. As mentioned earlier infrastructure projects involve huge financing requirements, most of which are met by banks and other financial institutions directly and indirectly. Thus, it is very important to make the project commercially viable to ensure regular servicing of the loan. This will lead to sustainable development of infrastructure without jeopardizing the soundness of the financial sector. Project appraisal and follow-up capabilities of many banks, particularly public sector banks, also need focused attention and up gradation so that project viability can be properly evaluated and risk mitigates provided where needed.

Greater Participation of State Governments:

In a federal country like India, participation and support of the State governments is essential for developing high quality infrastructure. The State governments support in maintenance of law and order, land acquisition, rehabilitation and settlement of displaced persons, shifting of utilities, and obtaining environmental clearances are necessary for the projects undertaken by the Central Government or the private sector. It is satisfying to know that many State governments have also initiated several PPP projects for improving infrastructure.Improving efficiency of the Corporate Bond Market

As has been noted, vibrant corporate bond market will reduce the dependence on the banking sector for funds. Further, coordinated regulatory initiatives could be considered in the areas involving standardization of stamp duties on corporate bonds across the states, encouraging public issuance and bringing in institutional investors in a big way. It is also important to broad base the investor base by bringing in new classes of institutional investors (like insurance companies, pension funds, provident funds, etc.) apart from banks into this market. We also need to reorient the investment guidelines of institutional investors like insurance companies, provident funds, etc. since the existing mandates of most of these institutions do not permit large investment in corporate bonds. As of now, the insurance and pension funds are legally required to invest a substantial proportion of their funds in Government Securities. These investment requirements limit their ability to invest in infrastructure bonds. Further, they can only invest in a blue chip stock, which is also acting as a limiting factor since most of the SPVs created for infrastructure funding are unlisted entities. Interest rate derivatives to hedge interest rate risks are being broadened. Reserve Bank has therefore permitted introduction of Interest Rate Futures (IRFs) on 91 day Treasury bills and 10 year G-sec papers. Reserve Bank is also considering further broadening the IRF products by including cash settled IRFs in the two and five year segments.

Credit Enhancement

One of the major obstacles in attracting foreign debt capital for infrastructure is the sovereign credit rating ceiling. Domestic investors are also inhibited due to high level of credit risk perception, particularly in the absence of sound bankruptcy framework. A credit enhancement mechanism can possibly bridge the rating cap between the investment norms, risk perceptions and actual ratings. Ideally, the credit enhancement should not be provided by the banks as they are already over-exposed to the sector. Further, such bank based backup facility will not lead to genuine development of corporate bond market. Instead we need to think creatively of other mechanisms involving national or supranational support. Working towards this direction, recently Asian Development Bank has offered to partially guarantee infrastructure bonds issued by the Indian companies. One can expect with hope positive outcome from such an arrangement.

Simplification of Procedures Enabling Single Window Clearance

It is well recognized that while funding is the major problem for infrastructure financing, there are other issues which aggravate the problems of raising funds. These include legal disputes regarding land acquisition, delay in getting other clearances (leading to time and cost overruns) and linkages (e.g. coal, power, water, etc.) among others. It is felt that in respect of mega-projects, beyond certain cut-off point, single window clearance approach could cut down the implementation period. Once we solve these peripheral but critical issues with regard to an infrastructure project, it will greatly facilitate flow of funds to the projects and help in maintaining asset quality to the comfort of the lenders.

We also need to develop new financial markets for municipal bonds to enable infrastructure financing at the grass root levels. We need to create depth, liquidity and vibrancy in the G-Sec and corporate bond market so as to enable raising of finance and reduce dependence on the banking system. At the same time, there is a need to widen our investor base and offer adequate risk mitigating financial products, such as, CDS. Market players should also actively participate in such markets after the products have been introduced. A Working Group has been set up by the Reserve Bank recently to examine the issues and recommend measures to further improve the depth and breadth of the G-Sec market. A vibrant G-Sec market would facilitate growth of the corporate debt market. We also need to revisit the existing provisions of stamp duty governed by separate State Government Acts in respect of corporate bond transactions.

CHAPTER: 8

BIBLIOGRAPHY

Bibliography:

Reference book:

Indian infrastructure

News papers: the economic times

the financial express

Web links: www.planningcommission.gov.in www.infrastructure.gov.in www.projectfinancemagazine.com www.worldbank.org.

www.pppinindia.com

16