1 24-Feb-20

Financing Infrastructure Projects - PPP

Mubeen Rafat

2 24-Feb-20

Definition of Infrastructure

Rangarajan Commission

Rakesh Mohan Report

RBI

Income Tax

Ministry of Finance – Economic Survey

World Bank

Decision of Empowered Committee of CoI

3 24-Feb-20

Characteristics of Infrastructure Sectors

1. Natural monopoly

2. High-sunk costs

3. Non-tradability of output

4. Non-rivalness (up to congestion limits) in consumption

5. Possibility of price exclusion

6. Bestowing externalities on society

Source – Rangarajan Commission

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Characteristics of Infrastructure Projects…1

Features Attributes

Longer Maturity • Maturities greater than 10 years • Reflects both the length of the construction period and the life- span of the underlying asset

Large Investments • Great deal of money (Investments) • Depends on number of Kms in case of Road / MW in case of Power

Higher Risk • Demand uncertainty • Environmental transformations • Technological obsolescence (Telecom sector) • Political and policy related uncertainties

About Infrastructure Financing

5 24-Feb-20

Characteristics of Infrastructure Projects…2

Features Attributes

Non-recourse or limited recourse financing

• Lenders to be repaid from revenues generated by the projects

High initial capital and low operating cost

• Mix of complex and varied contractual arrangements

Uncertainty in Financial Projections • Changes in law, policies etc can never be accurately captured in financial projections

Lower Incentives for Private players • Projects are uncertain and returns are lower on risk adjusted basis • Additional incentives are necessary to attract private investment. Ex: VGF schemes

About Infrastructure Financing

6 24-Feb-20

Sector Rangarajan Commission

Rakesh Mohan Report/CSO RBI

Income Tax IRDA

Ministry of Finance

World Bank

Empowered Sub Committee of COI

Electricity Yes Yes Yes Yes Yes Yes Yes

Yes (incl. R&M of Power Stns)

Water Supply Yes Yes Yes Yes Yes Yes Yes Yes

Sewerage Yes Yes Yes Yes Yes Yes Yes

Yes (incldg SWM and Street Lighting)

Telecommunications Yes Yes Yes Yes Yes Yes Yes Yes Roads & Bridges Yes Yes Yes Yes Yes Yes Yes Yes

Ports Yes Yes Yes Yes Yes Yes Yes

Yes (incldg inland waterways)

Airports Yes Yes Yes Yes Yes Yes Yes Yes Rail (rolling stock) Yes Yes Yes Yes Yes Yes Yes

Railways Yes Yes Yes Yes Yes Yes Yes Yes ( incldg MTS)

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Sector Rangarajan Commission

Rakesh Mohan Report/CSO RBI

Income Tax IRDA

Ministry of Finance

World Bank

Empowered Sub Committee of COI

Wind Energy Yes(CSO) Yes (Solar Energy)

Irrigation Yes Yes Yes Yes Yes Yes (Watershed Dev)

Storage Yes Yes Yes (at ports) Yes

Housing Yes

Urban services; as Yes Yes Yes (SWM) Yes

Street lighting, No(CSO) Solid Waste Management

Oil production & pipelines Yes Yes Yes (oil pipelines onlly)

Mining Yes

Gas distribution Yes Yes Yes (gas pipelines onlly)

Aircrafts Yes Yes Vehicles, trucks, buses etc (Road Transport System) Yes Yes

Industrial Park/ SEZ Yes (RM) Yes Yes Yes Educational Institutions Yes Yes Hospitals Yes Yes Posts Yes

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Definition of Infrastructure

Physical Infrastructure

Technology Infrastructure

Human Infrastructure

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Economic Infrastructure

It directly supports economic system from inside.

It improves the quality of economic resources and thus raises the production.

Increases physical capital of a nation

It is directly correlated with the GDP.

It indirectly supports the economic system from inside.

It improves the quality of human resources and thus, improves the efficiency of man-power.

Increases the human capital of a nation.

It will help in the development of human capital.

Difference Between Economic & Social Infrastructure

Social Infrastructure

Budget 2020

₹100 lakh crore to be invested on infrastructure over the next 5 years • National Infrastructure Pipeline:

• -Rs. 103 lakh crore worth projects; launched on 31st December 2019

• -More than 6500 projects across sectors, to be classified as per their size and stage of development

• ₹1.7 lakh crore proposed for transport infrastructure in 2020-21

• National Logistics Policy to be released soon:

• To clarify roles of the Union Government, State Governments and key regulators.

• A single window e-logistics market to be created

• Focus to be on generation of employment, skills and making MSMEs competitive

• National Skill Development Agency to give special thrust to infrastructure-focused skill development opportunities

-Project preparation facility for infrastructure projects proposed

-To actively involve young engineers, management graduates and economists from Universities

-Infrastructure agencies of the government to involve youth-power in start-ups

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Infrastructure Financing: Factors

Factors

Project viability

Realizat-ion of user costs

Avoiding time and

costs overrun

Contract enforce-

ment

Efficient utilizatio

n of funds

Critical role of Infrastructure in India’s development most of the state and local governments in India are not in a position to undertake these investments

- Therefore ,various flagship programs had to be dependent on central assistance.

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INFRASTRUCTURE IN INDIA

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Domestic Capital Market

Euro Market & Foreign Capital

Market

Multilateral Development

Banks

Foreign Suppliers

Credit

Commercial Banks/ Specialised Financial Institutions

Leasing

Project participants - Contractors

- Equipment vendors

FUNDING OPTIONS

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2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

2.1 Mining & Quarrying (incl. Coal) 1.67% 1.55% 1.42% 1.35% 1.43% 1.29% 1.53% 1.45%

2.2 Food Processing 4.86% 5.26% 5.81% 6.45% 5.50% 5.43% 5.76% 5.44%

2.3 Beverage & Tobacco 0.78% 0.74% 0.73% 0.70% 0.66% 0.64% 0.58% 0.51%

2.4 Textiles 8.23% 8.23% 8.04% 7.60% 7.54% 7.32% 7.78% 7.05%

2.6 Wood & Wood Products 0.32% 0.34% 0.37% 0.37% 0.35% 0.39% 0.40% 0.41%

2.7 Paper & Paper Products 1.29% 1.27% 1.30% 1.28% 1.30% 1.22% 1.13% 1.05%

2.8 Petroleum, Coal Products & Nuclear Fuels 3.16% 2.88% 2.58% 2.11% 1.88% 2.22% 2.41% 2.19%

2.9 Chemicals & Chemical Products 6.56% 7.14% 6.61% 5.81% 6.03% 6.43% 6.04% 6.64%

2.1 Rubber, Plastic & their Products 1.54% 1.40% 1.47% 1.42% 1.37% 1.46% 1.57% 1.59%

2.11 Glass & Glassware 0.32% 0.33% 0.35% 0.33% 0.33% 0.30% 0.31% 0.34%

2.12 Cement & Cement Products 1.91% 2.06% 2.14% 2.11% 1.99% 2.02% 1.95% 1.93%

2.13 Basic Metal & Metal Product 13.51% 14.08% 14.34% 14.50% 15.23% 15.71% 15.41% 12.88%

2.14 All Engineering 5.83% 5.76% 5.82% 5.79% 5.65% 5.58% 5.75% 5.84%

2.15 Vehicles, Vehicle Parts & Transport Equipment 2.67% 2.64% 2.64% 2.57% 2.53% 2.75% 2.92% 2.77%

2.16 Gems & Jewellery 2.65% 2.74% 2.78% 2.70% 2.66% 2.58% 2.69% 2.50%

2.17 Construction 2.51% 2.34% 2.49% 2.80% 2.73% 3.07% 3.34% 3.45%

2.18 Infrastructure 32.52% 32.72% 33.24% 34.79% 35.33% 33.82% 33.01% 36.59%

2.18.1 Power 17.08% 18.65% 19.35% 20.98% 21.24% 19.61% 19.25% 19.72%

2.18.2 Telecommunications 4.85% 3.94% 3.51% 3.46% 3.34% 3.17% 3.13% 4.01%

2.18.3 Roads 5.73% 5.89% 6.27% 6.35% 6.50% 6.72% 6.17% 6.47%

2.18.4 Other Infrastructure 4.86% 4.25% 4.11% 4.00% 4.25% 4.33% 4.45% 6.39%

2.19 Other Industries 9.28% 8.11% 7.47% 6.92% 7.12% 7.36% 7.00% 7.00%

Industries 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Source : Reserve Bank of India.

Sr. No. Industry Outstanding as on last reporting Friday in March

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Multilateral Aid

In 2018-19

World Bank committed over $1000 mn towards 3 projects

Asian Development Bank extended financial assistance to the tune of $2199 mn to 10 projects

Japan International Cooperation Agency provided ODA of around $3146 mn to 7 projects

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Bond Market Higher uptake for bond issues in the past 15-18 months

Private placements through private companies

Most of the bond issues from road and power sector

SBI raises $650 mn through green bond issue in September 2018 for environment friendly projects

• Muncipal bonds 8.7 bn were raised in 2018-19, from 5 issues

Pune, Hyderabad and Indore

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Fiscal stresses Cutbacks in investments – affecting asset acquisition

Dilapidated and failure-prone assets

Inefficiencies of public provision of infrastructure services

Technological changes

Developments of financial markets and innovative products

Increased ability of private operators and their financiers to assume risks

RATIONALE FOR PPP

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The Vicious Circle

Low Collection/ Recovery

Low Maintenance

Low Service Level

Low Level of Infrastructure

Low Capacity to Pay

Low Investments

Low Equilibrium

Cycle

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Some infrastructure segments are difficult to put in PPP

Below cost user charges do not permit commercial viability of standalone operations

Inherent risks deter private investments

Even in activities that can be put in PPP “access” for poor need to be ensured

Optimal balance of equity with efficiency considerations

LIMITATIONS

Therefore, the Government will continue to play a role in providing services …

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ROLE OF THE GOVERNMENT

Leading private capital into projects

Catalysing investments in projects which are bankable

Rationalising policy frameworks

Risk mitigation

Bridging the financing gap to make projects viable

VGF

Maintaining and promoting “access”

Commercial providers will not deliver to the poor

… but, there needs to be a change in the way

these services are provided. How?

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Need for Alternative Models

Commercialisation - cost recovery & sustainability Privatisation - finance, technology & management capacity Community participation - responsiveness and sense of ownership/ involvement Risk Sharing mechanisms Regulatory authorities to ensure fair play

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Public Private Partnerships

“A long-term contract between a private party and a Government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance".

PPP Knowledge Lab World Bank

Public procurement projects - service contracts or turnkey construction contracts

Privatisation – public sector gives up legal title

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PPP is a win-win relationship between the government and various private sector players for the purpose of delivering a service by sharing the risks and rewards of the venture under a contractual obligation.

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PPP mode Development of assets of world class

standards

Improved maintenance and management

of assets

Provision of efficient services

Risk Sharing

Affordable prices through greater

competition

Win win relationship

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Different modes of Pvt Sector vs Govt

Mode Asset

Ownership

O&M Capital

Investment

Commercial

Risk

Duration

(Years)

Management

Contract

Public Public &

private

Public Public 3-5

Lease Public Private Public Shared 8-15

Concession Public Private Private Private 25-30

BOT Private/

Public

Private Private Private 20-30

Divestiture Private/ Pvt.

& Public

Private Private Private Indefinite

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“Value for the Public’s Money” is a combination of PRICE AND RISK

Average

PPP

Tariff

Level of Sector RISK Borne by Government

PPP Option

#1

Public “Utility” Curves

The Private

Sector’s

Price-Risk

Offer Curve

PPP Option

#3

PPP

Option #2

P’ P’’

P’’’

Lowest-priced bid is often not the best bid

Low High

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Optimal vs. Minimal Public Risk-Sharing

Public Support High Pub. Risk Low Pub. Risk

Public’s

Value

For

Money

Private Sector’s

Price-Risk Offer Curve

Low VfM

High VfM

PPP Price (Cost/ Output Unit)

Minimal Public

Support, But Low VfM

Moderate Public

Support, => Optimal

VfM

Low PPP Price

High PPP Price

VfM

Public VfM

Utility Curves

Operating/

Avail. Risk

Technology/

Eq. Install. Risk

Market/

Demand Risk

Land

Acq.

Political

Risk

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Govt Support for PPP projects

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Way Ahead India moving towards a $4-$5 trillion economy in the next decade from the current $2 trillion plus economy Massive infrastructure needs – gap of $526 bn by 2040 Exploring alternative source of funds and creating and enabling environment Securitisation of Infrastructure loans Maintaining macroeconomic stability to keep the country on the high growth trajectory

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Seawoods Railway station

The 520,000-square-foot Sea woods rail station

1.5 million square feet of world-class retail space

3.1 million square feet of Class A office space

1.4 million square feet of parking and support space

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Seawoods Railway Station

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Alternative Funding Sources Infrastructure Investment Trust (InvIT)

IPO of IRB’s InvIT had a lacklustre performance Sterlite Power Indigrid IndInfravit in May 2018, Canada Pension Plan Invetsmnet Baord and allianz Capital Partners acquire 30% and 25% stake respectively

National Investment Infrastructure Fund Partnered with DP World to create paltform for invetsmnets in ports, tarnsportation and logistics Partnered with HDFC in an invetsment paltform for mid income and afforadbale housing Secured invets,ents of up to % 400 mn from Temasek Acquired IDFC Infartsrcutue Finance Ltd from IDFC Received approval for $100mn equity invetsment from AIIB

New developemnt Bank Asian Infratsrcuture Invetsmnet Bank Indian pesnsion and insurance funds contricbute much less Foreign sovereign wealth funds , pension funds and PE players are ishwoin interets in strssed assets in power and raod sectors.

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Tax Incentives

Integrated business of handling, storage, and transportation of food grains.

Commercial production or refining of mineral oils.

Processing, preservation, and packaging of fruits or vegetables.

Operating and maintaining a hospital in a rural area.

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Financing infrastructure in 11th five year plan

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Financing Mix

XI Plan Government – 45% Banks/ NBFC/ Fis/LIC – 35% Equity/FDI – 14% Others - ECB etc – 6%

Private sector in India, unlike US and other countries where bonds play a bigger role, till now has been sourcing its funding by way of internal accruals, equity raising and bank financing – debt.

Bond market has not grown.

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Bond market in various countries play major role in funding of Infrastructure

SOURCE : DIPP – Discussion paper on financing requirements of infrastructure and industry

Country Sector-wise Total

Govt. FI’s Corporates

China 1,500.80 (49%) 974.60 (32%) 572.20 (19%) 3,047.60

France 1,834.00 (54%) 1,300.60 (38%) 286.90 (8%) 3,421.50

Germany 1,817.70 (65%) 593.60 (21%) 403.30 (14%) 2,814.60

India 610.40 (86%) 75.50 (11%) 25.10 (4%) 711.00

Japan 11,579.90 (85%) 1,127.50 (8%) 867.70 (6%) 13,575.10

Singapore 105.50 (81%) 23.20 (18%) 2.00 (2%) 130.70

South Korea 512.80 (44%) 257.70 (22%) 404.60 (34%) 1,175.10

UK 1,394.80 (81%) 311.60 (18%) 20.70 (1%) 1,727.10

USA 11,403.40 (45%) 11,134.70 (44%) 2,937.20 (12%) 25,475.30

USD bn

Indian Bond market is very shallow as compared to other countries

Most of the Bond issuance is done by Govt of India

Countries like China, France, USA, South Korea, etc. have a vibrant bond market where FI’s raise capital

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Infrastructure Lending

Domestic financial sector – banks, NBFCs, FIs, insurance

Cos. – has provided almost 35% of the funds during 11th

plan.

Banking sector exposure has increased more than fourfold

from Rs. 1.43 lakh cr as of March, 2007 to Rs. 7.86 lakh cr

as of March 2014

Power – 4.03 lakh cr Roads and ports – 1.31 lakh cr

Asset quality – Gross NPA Ratio has increased from 0.61 in

Mar 2009 to 1.45 in Mar 2014. Power and telecom being

0.57 and 3.23.

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Infrastructure Lending With increased participation expected from the

private sector in the 12th plan, debt and equity

requirements will multiply several times, almost

3X.

Infrastructure lending has been mainly through

vanilla term loans offered at floating rates i.e.

bank’s Base Rate + Spread, usually with triggers

(covenants) for change of the interest rate due to

deterioration in financial parameters like DSCR,

Debt Equity ratio, default in other terms and

conditions, etc.

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Bond Market - Profile Issuances are dominated by banks and public sector companies. Private sector, nonfinancial corporate issuers represent a smaller proportion.

Issuers with triple-A ratings raise funds with ease from the markets as compared to firms with lower ratings - ~ 70%

Private placements mostly dominate the primary segment of the corporate debt market accounting for more than 98 per cent of the total issuance of corporate debt (2013-14) in India.

The issuance process is also impacted by costs, such as, stamp duties, transfer costs, etc. which needs rationalisation.

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Sectoral Breakup of Projected Investment

Sector XI Plan XII Plan

Electricity 658630 165 32% 1289946 322 31%

Roads & bridges 278658 70 14% 500977 125 12%

Telecommunications 345134 86 17% 1095550 274 26% Railways incldg MRTS 200802 50 10% 320361 80 8%

Irrigation incl Watershed 246234 62 12% 387808 97 9% Water supply & Sanitation 111689 28 5% 173730 43 4%

Ports, 40647 10 2% 63452 16 2%

Airports, 36138 9 2% 65656 16 2%

Storage, 8966 2 0% 29376 7 1% Oil & Gas pipelines 127306 32 6% 258482 65 6%

2054204 514 100% 4185338 1045 100%

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Magnitude of Problem Issues & Suggestions

Issue: Our target of at least Rs 51 lakh cr investment is ambitious against proven capacity

Suggestions

Budgetary limitations imply that Government needs to seriously build capacity for offering PPP projects for participation to both domestic and foreign investors – there is no substitute to FDI and ECB

At any point in time US$ 270-350 million worth of projects have to be on offer and Government machinery needs to gear up this capacity with professional advice from World Bank (PPIAF) and Consultants

Finance Ministry, Planning Commission and RBI need to work out strategy of how funds could be made available for infra development

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Financing Issues & Suggestions Issue: Long term funds up to & beyond 15 years are limited and only from banking sector (who face risk of ALM mismatch)

Suggestions

Channelize long term resources with Insurance & PF

ECBs in theory are possible, but lenders are risk averse due to legacy (Enron). ECB lenders can be attracted in Securitization/ refinancing deals which are not allowed by RBI.

ECB cap of US$ 18 billion is also a limiting factor

An ideal structure, subject to RBI approval would be a Take-Out structure with Domestic lenders being replaced by ECB post COD

Develop capital markets as sources for funding Infra projects either on individual basis or on a pooled finance basis

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Policy / Regulatory Issues & Suggestions

Issues:

Allocation of risks in an equitable manner (Govt authorities are tending to pass on risks of land acquisition, environmental approvals, right-of-way clearance, etc on to developer)

Separation of conflict of interest when policy maker, regulator and operator is one entity.

Suggestions:

Apply the principle of allocation of risks to the party which is best placed to manage it economically and efficiently

Incorporate stake-holder consultations in design of concession agreements

Provide a grievance mechanism to resolve disputes quickly

Create independent sector regulator to sit on judgement

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Implementation Issues & Suggestions

Issues:

Inordinate delays in conception to award, inefficient or “managed” competitive bidding process

Suggestions:

Expedite process – rope in competent advisors if necessary

Offer of infra tax benefits should be with a long term view – reinstate

If benefits are withdrawn, compensation to be automatic

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Project financing

Prof Mubeen Rafat

54 24-Feb-20

Project Cost - Funding

Project cost is the sum total of all funds required to be infused by providers of long-term capital until the time a project starts generating net positive cash flows

This includes any working capital that may have to be funded by long-term funds

This includes the interest on loans during the above period

Any funds inflow or revenues or subsidy during this period go towards funding of project cost and reduce the peak funding requirement for equity and debt.

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Sources of funding projects

Own/Direct Indirect

Sources of funds

Kind • Government

Guarantees

Savings & Sell-down

• Improvement in revenue,

productivity or cost control

• Sell-down of assets/cashflows,

licenses

PPP • BOT/BOOT • O&M and

Agency Contracts

• Privatization

Cash • Equity/

Internal generation

• Budgetary allocation

• Borrowings

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Sources of long term finance Over 15 years

5 to 10 years

Upto 5 years

Multi-lateral funding (ADB, World Bank, USAID, etc.)

Direct

Through FIs

Insurance firms (LIC & GIC)

Pension Funds

Financial Institutions & Banks with suitable resets

Commercial Banks

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Project Finance lenders

Lead players (yesterday)

IDBI

ICICI

IFCI

IL&FS

(emerging)

SBI

IDFC

Punjab National Bank

UTI Bank

Participants (at all times)

SBI

LIC

HUDCO

Public sector Banks

Private sector Banks

(emerging)

SIDBI

L&T Infrastructure Finance

Yes Bank, SREI

Citi Bank, ADCB, etc.

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Project Finance: Characteristics of Infrastructure projects

Substantial capital investments

Long gestation periods

Investments may not yield any return for initial few years (back ended cash flows)

Typically highly leveraged transaction

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What is project finance

Project Finance is a technique of non-recourse or limited recourse financing in which the project lender principally

look to the cash flow of a single project as security for their long-term loans.

In India the term Project Finance was generally applied to long term loans given by Term Lending institutions (Fis) to new (or modernisation/ upgradation) industrial projects as compared to working capital facility extended by commercial banks.

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Extent of sponsor recourse

Full-recourse Akin to corporate finance

Non-recourse finance Extremely rare

Limited recourse finance Completion guarantees

Undertakings to cover cost overruns

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Limited recourse financing...

Insulates sponsors from project debt and risk of project failure

Enables them to share some risks in a large project with other participants

Overcome the inability to borrow through a corporate loan as balance sheet cannot support the project debt

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Future cash flows from the project are the primary source of debt repayment

Project finance is cash flow based

Cash flow based financing for infrastructure projects

Significant value of the project is derived from intangibles and not from the assets created

Estimation of debt requirement of the project depends on the future cash flows of the project as against the capital expenditure incurred in conventional projects

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Project finance needs strong security structure

Security structure needs to be more stringent than a normal project assistance and typically includes -

Legal mortgage of all assets, including receivables (as opposed to the normal equitable mortgage)

Pledge of promoter shareholdings in the project company

Escrow mechanism for cash flows of the company

Assignment in favour of lenders of all the project contracts

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Project finance vs. corporate finance

Project Finance Corporate Finance

(balance-sheet funding)

• Recourse limited to

identified pool of assets

• Recourse to all the assets

of the borrower

• Contracts/license

agreement/Take-or-Pay

contract is key security

• Physical assets are the

key security & market

value may be realisable

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Lenders’ approach to financing Focus on economically strong projects

Back strong sponsors with successful track record in implementing large projects

Comprehensive due diligence on all counterparties (incl. EPC contractor, O&M contractor, Licensor, etc)

Insist on complete financial closure before commitment of any funds

Arranging project finance requires substantial time and cost

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KSFs for Project Financier …1

Deep knowledge of the sectors to understand the various risks

Structuring capabilities for appropriate risk mitigation in the context of limited recourse financing

Ability to take and manage large exposures to meet the funding requirements

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Deep knowledge of each of the sectors is critical to understand and mitigate risks

KSFs for Project Financier …2

Infrastructure projects are complex as compared to conventional projects

Service providers - often monopolistic

Investments are typically bulky and lumpy

Typically highly leveraged projects

Long payback periods

Influence of externalities

Variation in risk profile across different infrastructure sectors

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Basis for lenders’ risk aversion Lenders have the maximum money on a project rated at “BBB” and the minimum returns

whereas The developers put a small money as equity and aspire for

supernormal profits

The Users get a facility for which they can pay if they so wish (or protest/use alternatives, etc.)

The Government puts no money but has the right to intervene, take over if it is dissatisfied

yet

the lenders’ lenders are not so easy on them and besides expecting a “AAA” rating also face stringent RBI/SEBI regulations

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Project preparation & development

Establishing independent commercial viability of the project: demand, revenues & costs

Identification of risks, allocation & mitigation

Project structuring & role of private sector

Comprehensive information memorandum covering studies & draft contract agreements

Designing transparent competitive bidding process

Transparent & fair procurement process

Co-ordination issues: Identification of nodal agency and defining roles of other agencies

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Stakeholder concerns

Capacity building of government / public agencies

Interest and capacity among private sector operators

Addressing financing issues of lenders and investors

Ensuring adequacy of services at affordable rates by the users

Building awareness for “pay for use” principle among consumers

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Government/Local Authority

Sustained improvement in provision of Infrastructure

Conserving scarce public resources

Creation of facilities and provision of efficient services

Transparency and fair process

Protection of Social/Developmental commitments

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Developer/Investor

Commercial viability of project

Freedom & flexibility in conduct of business

Avoidance of risks beyond control

Fairness in transaction

Delays in approvals

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Consumers/Users

Availability of facilities & services

Acceptable levels of tariffs/taxes/tolls

Delivery of promised level of service

Appropriate grievance redress system

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Project Financiers/Lenders

Financial viability

Degree of certainty

Risk mitigation measures

Freedom to exercise step-in-and-cure-rights

Protection against defaults by Government and developer

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Toll road securitization Project Cost : Rs. 280 million (funded by equity & corporate loan)

Status : Completion in two months time

Concession : 13 Years

NPV of toll receipts: Rs.600 million

Interest rate : 13.0%

The promoter proposes to securitise toll receivables up-front i.e. prior to start of project operation

Will you lend? If yes, then

What amount?

Under what conditions?

For what tenure?

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Securitisation Debt can be given, based on outcome of due diligence

Comprehensive traffic count and willingness to pay study

Proper security structure

Safeguard against initial teething trouble events like slow traffic buildup, litigations and other Force Majeure events

Against termination due to FM events and event of default

Trust and Retention Account to regulate project cash flows

Amount to be based on comfort of project cash flows

Over collatarisation of atleast 25% be maintained

Tenure of debt should be such that there should be a residual concession period of 2-3 years for contingencies

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Project Company

Indian FIs & Banks

EPC Contractor

EPC Contract

PPA

O&M Contractor

Fuel Supply Contractor

Sponsor

ECAs SEB

Guarantee

Rupee Debt

Sponsor Shareholder's

Agreement ECBs

Guarantee

Typical contractual structure: Power

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Securitisation - Concept

Providing loan today for receipts tomorrow

Fairly predictable and reliable stream of revenue net of all associated costs

However, a cushion is kept for

All incidental & other costs

Margin of error (volatility in the cash flows)

A positive tail at the end of the period

Provide contingent recourse to sponsors against any unpredictable events

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Conditions for securitisation

Project characteristics

Project to have been implemented and operational (most risks are behind now)

Revenue stream well established & predictable

Project doing better than expected

Project lenders willing to accept prepayment

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Applications of securitisation

Road projects that have higher toll receipts than expected

All annuity projects of NHAI

Power projects (after creditworthiness of SEBs has been established beyond a shadow of doubt!)

Pooled infrastructure assets

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OBJECTIVE OF TAKEOUT FINANCE

To expand sources of finance for infrastructure projects by

facilitating participation of new entities

To address sectoral /group/entity exposure issues and asset liability

mismatch concerns of lenders

To boost the availability of longer tenor debt finance for projects

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TAKE OUT FINANCE SCHEME In case of Take-out Financing, IIFCL direct lending to the

project does not exceed 10% of the project cost and total

lending including Takeout Financing by IIFCL shall not exceed

30% of total project cost.

On the Scheduled Date of Occurrence of Takeout, the takeout

will be executed in respect of only those loans, which are

classified as standard assets in the books of the Lenders who

have signed the Takeout Agreement.

On the Scheduled Date of Occurrence of Takeout, the takeout

will be executed if the project has achieved an average Debt

Service Coverage Ratio (1 y ear of operation) of at least 1.10.

Once takeout is effected pursuant to the Takeout Agreement,

IIFCL’s security interest in the project’s assets and cash flows

shall rank pari passu with senior debt extended by the

Lender(s).

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83

PPP mode

Maximizing investment

Budgetary constraints

Development of assets of world class

standards

Improved maintenance and management

of assets

Provision of efficient services

Affordable prices through greater

competition

Risk Sharing

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CREDIT ENHANCEMENT SCHEME

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Role of IIFCL

IIFCL – 2006

IIFCL is an apex financial intermediary for purposes of the development and financing of infrastructure projects and facilities in the country.

IIFCL renders financial assistance through: • Direct lending to eligible projects

• Refinance to banks and financing institutions (FIs) for loans with a tenor of 5years or more

• Any other method approved by the Government of India (GOI)

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Measures taken by the Govt

Public-Private Partnership Projects

Setting up Committees to simplify procedures

COI. CCoI, PPP Appraisal Committee, Empowered Committee

Viability Gap Funding

FDI – 100%

Setting up of IIFCL

Setting up of Infrastructure Debt Funds

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Scheme for financing viable infrastructure projects through India Infrastructure Finance Company Limited (IIFCL)

Empowered Committee

IIFCL

Lead Bank

Long Term Debt

Private Sector Company

Project Company

Project Term

Public Private Partnership (PPP) Project

Public Sector Company

Total Project Cost

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88

Setting up Subsidiary at UK

Participation in Special Funds- IIIF

DMIC - Western Corridor- pass through Loan from

JBIC

MOUs with 28 banks/ FIs for backward & forward

linkages – for Project Development, Syndications,

Debt, Equity.

Refinance Scheme for Banks.

INDIA INFRASTRUCTURE FINANCE

COMPANY LTD. - INITIATIVES

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Funding of IIFCL Apart from its equity, the IIFCL ussually funded through long-term debt raised from the open market. This debt can be any or all of the following:

[a] 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.

[b] Debt from bilateral or multilateral institutions such as the World Bank and Asian Development Bank.

[c] Foreign currency debt, including through external commercial borrowings raised with prior approval of the Government.

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• Offtake guarantee

• Domestic fuel availability

• Discom turmaround

• Strenghtening isntitutionsl capcity

Power

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Challenges

Increase in Central Govt spending but difficult to accelerate from current levels

Banl lending to infra is down

Immediate term challenges to UDAY bonds and froam laon waivers

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Incraese private invetsments and reduce

burden on Govt spending

Tein balance sheet problem – allevaite stressed assets

BoradecaIm[prove producitivity and efficieny in spending

Isntituiotnliase capital market innovations

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IDFs

Naitoan; bond markey

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State Level

Restore fiscal helath and create space tp expand infra spedning

Nodel infra funds and empoered sectoral impleemnatation agnecies ot access orvate capital and invst

Support cities thru municpal binds

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Infrastructure – Scenario Infrastructure spend as a percentage of GDP and in absolute terms has been on the rise –

10th Plan 5.01% of GDP(Rs.9.14 lakh cr),

11thPlan 7.27%of GDP(Rs.19.57 lakh cr),

12th Plan – 9-10% of GDP Plan projected about Rs. 51 lakh cr

Almost two fold increase every plan period

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Infrastructure – Scenario

India has adopted private sector led model for infrastructure development

22.1% (Rs. 2.02 lakh cr) in 10th plan, 37.3% (Rs. 7.3 lakh cr) in 11th plan and almost 47% projected for the 12th plan

(Rs. 24 lakh cr)

Almost 3 fold increase every plan period.

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Highway Projects Highways projects worth Rs 200 crore have been approved for improving connectivity between Gujarat, Maharashtra, Rajasthan, Madhya Pradesh and Diu for approx Rs 200 crore have been approved.

Nearly 33,000 kilometres of National Highways have been constructed in the last four years & work is underway on another 53,000 kilometres.

Government aims at completing two lakh kilometres of National Highways by the year 2022.

Minister of State for Road Transport and Highways Mansukh Lal Mandaviya Sept 2018.

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•Infrastrcuture Invetsment gap of $526 bn by 2040 •India moving towards a $4-$5 trillion economy n the next decade

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Equity Financing

Private Equity during 2018-19 (till Nov 2018), 28 PE deals worth Rs 475 bn up from 21 PE deals worth Rs 172 bn in the corresponding period last year. (In 2017-18, 34 deals worth around Rs 348 bn

Renewable energy and logistics attracted maximum funds

IPOs – 7 IPOs raised funds of Rs 14 bn as compared to 10 IPOs in same period in 2017-18 raising Rs 60bn

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Alternative Funding Sources Infrastructure Investment Trust (InvIT)

IPO of IRB’s InvIT had a lacklustre performance

Sterlite Power Indigrid

IndInfravit in May 2018, Canada Pension Plan Investment Board and Allianz Capital Partners acquire 30% and 25% stake respectively

National Investment Infrastructure Fund

Partnered with DP World to create platform for investment in ports, transportation and logistics

Partnered with HDFC in an investment platform for mid income and affordable housing

Secured investments of up to $400 mn from Temasek

Acquired IDFC Infrastructure Finance Ltd from IDFC

Received approval for $100mn equity investment from AIIB

New Development Bank

Asian Infrastructure Investment Bank

Indian pension and insurance funds contribute much less

Foreign sovereign wealth funds , pension funds and PE players are showing interest in stressed assets in power and road sectors.

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Infrastructure Investment Trusts (InvITs)

Conceptualised three years ago and one of the fastest financial products

Three InvIT listings have raised capital of Rs 100 bn

Better than debt instruments due to lower volatility, higher returns and lower leverage

Success in Japan , Singapore, Hong Kong , US and UK

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Way Ahead

India moving towards a $4-$5 trillion economy in the next decade from the current $2 trillion plus economy Massive infrastructure needs – gap of $526 bn by 2040 Exploring alternative source of funds and creating and enabling environment Securitisation of Infrastructure loans Maintaining macroeconomic stability to keep the country on the high growth trajectory

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Anticipated Expenditure to go on an over-drive in the XII Plan

5.0%

6.4% 7.2% 7.5% 7.9%

8.4% 7.9%

8.4% 8.9%

9.6% 10.4%

0%

2%

4%

6%

8%

10%

12%

0.00

50.00

100.00

150.00

200.00

250.00

300.00

XPlan

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Spend as % of GDP(RHS)

Spending plan for infrastructure during the XI and the XII plan