1. Longer Maturity: Infrastructure finance tends to have maturities between 5 years to 40years. This reflects both the length of the construction period and the life of theunderlying asset that is created. A hydro-electric power project for example may takeas long as 5 years to construct but once constructed could have a life of as long as 100years, or longer.2. Larger Amounts: While there could be several exceptions to this rule, a meaningfulsized infrastructure project could cost a great deal of money. For example a kilometerof road or a mega-watt of power could cost as much as US$ 1.0 mn and consequentlyamounts of US$ 200.0 to US$ 250.0 mn (Rs.9.00 bn to Rs.12.00 bn) could be requiredper project.3. Higher Risk: Since large amounts are typically invested for long periods of time it is notsurprising that the underlying risks are also quite high. The risks arise from a variety offactors including demand uncertainty15, environmental surprises16, technologicalobsolescence (in some industries such as telecommunications) and very importantly,political and policy related uncertainties.4. Fixed and Low (but positive) Real Returns: Given the importance of these investmentsand the cascading effect higher pricing here could have on the rest of the economy,annual returns here are often near zero in real terms17. However, once again as in thecase of demand, while real returns could be near zero they are unlikely to be negativefor extended periods of time (which need not be the case for manufactured goods)18.Returns here need to be measured in real terms because often the revenue streams ofthe project are a function of the underlying rate of inflation.
The India Infrastructure Finance CorporationLtd. (IIFC) has since been corporatised andoperationalised. It will provide financialassistance through long term debt; eitherby way of refinance to banks and financialinstitutions or by direct lending to projectcompanies. It will lend upto 20% of the capitalcosts of a project.
For project appraisal andlending operations, IIFC would rely on the leadbanks associated with the respective projects.Inbuilt in this scheme is a preference for PublicPrivate Partnership (PPP) projects that areawarded to private companies selected througha competitive bidding process. Such projectswill be eligible for direct lending by IIFC,and will also receive an overriding priority.IIFC will raise funds from both domesticas well as external markets on the strengthof government guarantees, which willbe extended as necessary. In the first yearof its operation, a guarantee limit of Rs.10,000crore (US$ 2.2 billion) has been specified bythe government.IIFC is expected to provide the much neededlong-term debt for financing infrastructureprojects. In doing so, it will play a catalytic rolein building world-class infrastructure in India.
3.1 In this Scheme unless the context otherwise requires: [a]. Empowered Committee means a Committee set up for the purposes of this Scheme under the chairmanship of Secretary (Economic Affairs) and including Secretary, Planning commission, Secretary (Expenditure), Secretary (Financial Sector) and in his absence Special Secretary / Additional Secretary (Financial Sector) and Secretary of the line Ministry dealing with the subject. [b]. IIFCL means the India Infrastructure Finance Company Ltd (A company incorporated under the Companies Act, 1956). [c]. Lead Bank means the Financial Institution (FI) that is funding the project and is designated as such by the Inter-Institutional Group or consortium of Financial Institutions provided the risk exposure of IIFCL is less than that of the lead bank in a project. [d]. Long Term Debt means the Debt provided by the IIFCL to the project company where the average maturity for repayment exceeds 10 years (8.5 years in the case of IIFC(UK) Ltd.). [e]. Private Sector Company means a company in which 51% or more of the subscribed and paid-up equity is owned and controlled by private entities; [f]. Project Company means the company which is implementing the infrastructure project for which assistance is to be given by the IIFCL. [g]. Project Term means the duration of the contract or concession agreement for a PPP project; [h]. Public Private Partnership (PPP) Project means a project based on a contract or concession agreement, between a Government or a statutory entity on the one side and a Private Sector Company on the other-side, for delivering an infrastructure service on payment of user charges; [i]. Public Sector Company means a company in which 51% or more of the subscribed and paid-up equity is owned and controlled by the Central or a State Government, jointly or severally, and includes any undertaking designated as such by the Department of Public Enterprises and companies in which majority stake is held by Public Sector Companies other than financial institutions. [j]. Total Project Cost means the lower of the total capital! Cost of the project: [i] as estimated by the government / statutory entity that owns the project; [ii] as sanctioned by the Lead Bank; and [iii] as actually expended But does not include the cost of land incurred by the government / statutory entity
4.2 The IIFCL would raise funds as and when required, for on lending, in consultation with the Department of Economic Affairs. The magnitude of funds raised would be determined by demand from viable infrastructure projects. To the extent of any mismatch between the raising of funds and their disbursement, surplus funds would be invested in marketable government securities. 4.3 The borrowings of IIFCL may be guaranteed by the Government of India. The extent of guarantees to be provided shall be set at the beginning of each fiscal year by the Ministry of Finance, within the limits available under the Fiscal Responsibility & Budget Management Act. However bonds issued by IIFCL, unless otherwise directed by Government of India, will not be included against Statutory Liquidity Ratio requirements. For 2005-06, the extent of guarantee to be provided by Government of India will be Rs.10,000 crore. 4.4 The guarantee fee payable by the IIFCL would be 0.25% per annum on outstanding balances. 4.5 The facility of guarantees including the terms for guarantee will be reviewed after 5 years, and its continuation shall be subject to the outcome of the review. 4.6 As decided in the First Empowered Committee Meeting held on July 7, 2006; IIFC may raise funds from domestic institutions namely, banks, FIs etc, on the basis of the guarantees issued to IIFC. Funds of shorter duration than ten years may be raised only on account of asset-liability management consideration.
Viable projects may also include those projects that will become viable after receiving viability gap funding under a government scheme. The IIFCL shall finance only commercially viable projects. Viable projects may also include those projects that will become viable after receiving viability gap funding under a government scheme. 5.2 In order to be eligible for funding under this Scheme, a project shall meet the following criteria; [a]. The project shall be implemented (i.e. developed, financed and operated for the Project Term) by: [i]. A Public Sector Company; [ii]. A Private Sector Company selected under a PPP initiative; or [iii]. A Private Sector Company Provided that the SPV shall assign overriding priority to Private Public Partnership projects that are implemented by Private Sector Companies selected through a competitive bidding process. Provided further that a Private Sector Company, other than that defined in the first proviso above, would not be eligible for direct lending by the SPV and may be funded only through the refinance mode. The total lending for such private projects shall not exceed 20% of the lending programme of the SPV in any accounting year. The eligibility for direct lending and / or raising the limit of 20% will be reviewed at the end of one year having regard to the progress made in funding public sector and PPP infrastructure projects.
Only such projects which are implemented through a Project Company set up on a non-recourse basis shall be eligible for financing by IIFCL. As per the modifications in SIFTI brought out vide GoI, Banking Division (now DFS) OM No.1/78/2005-IF-1 dated April 23, 2007, para 5.3 of SIFTI is clarified so that only such projects, which are implemented by the borrower company directly, or though a special purpose vehicle, on a non-recourse basis, shall be eligible for financing by IIFCL. The amendments to Para 5.3 of SIFTI would be subject to maintaining an escrow account which may be entrusted to any bank involved in financing of the project and the discretion with regard to the bank would be that of the Board of Directors of IIFCL (modification advised by the GoI vide letter No. 1(78)/2005-IF.I dated April 30, 2007). 5.4 In the event that the IIFCL needs any clarification regarding eligibility of a project, it may refer the case to the Empowered Committee for appropriate directions.
The terms at which the Project Company can access Long term Debt shall not be inferior to the terms at which refinanced debt is available to the Project Company.7.1 The IIFCL may fund viable infrastructure projects through the following modes: [a]. Long Term Debt; [b]. Refinance to Banks and Financial Institutions for loans, with tenor exceeding 10 years, granted by them. [c]. Any other mode approved by Government from time to time. 7.2 The Project Company will have the right to choose any of the modes of lending given above. The terms at which the Project Company can access Long term Debt shall not be inferior to the terms at which refinanced debt is available to the Project Company. 7.3 The total lending by the IIFCL to any Project Company shall not exceed 20% of the Total Project cost. Loans will be disbursed in proportion to debt disbursements from financial institutions. 7.4 The rate of interest charged by IIFCL shall be such as to cover all funding costs including administrative costs and guarantee fee, if any. 7.5 The IIFCL will release funds to the Lead Bank as and when due. The Lead Bank/ FI consortium will make disbursements on behalf of the IIFCL and seek reimbursement which shall be made within one month of receiving a demand, with necessary particulars, from the Lead Bank. In the fourth meeting of the Empowered committee held on January 14, 2008, it was decided that IIFCL may continue to disburse the loans on a pro-rata basis in terms of the project in-terse agreement / common loan agreement into the Escrow Account simultaneously along with the other banks in the consortium through the RTGS after receiving the Conformation Notice regarding the draw-down date from the Lead Bank / Lenders’ Agent appointed during the inter-institutional meeting (para 5.3 of SIFTI) stands modified.
.1 A project awarded to a Private Sector Company for development, financing, construction, maintenance and operation through Public Private Partnership (as defined in the Scheme for Viability Gap Funding) shall be accorded priority for lending under this Scheme. 8.2 In case of PPP projects, the private Sector Company shall be selected through a transparent and open competitive bidding process. 8.3 PPP projects based on standardized/model documents duly approved by the respective government would be preferred. Stand – alone documents may be subjected to detailed scrutiny by the IIFCL. 8.4 Prior to inviting offers through a open competitive bid, the concerned government or statutory entity may seek ‘in principle’ approval of the IIFCL for financial assistance under the Scheme. Any indication given by IIFCL at the pre-bid stage shall not be treated as a final commitment. Actual lending by IIFCL shall be governed by the appraisal by the Lead Bank carried out before financial closure of the project.
The legal cost including stamp duty shall be borne by the Lenders, who have availed the TakeoutFinance Scheme. Lender(s) may recover such costs from the Borrower.For infrastructure projects eligible for the Takeout Finance Scheme but yet to achieve financialclosure as on the Effective Date, IIFCL may also take certain direct exposure under SIFTI alongwith the Lenders.· In case of Take-out Financing, IIFCL direct lending to the project shall not exceed 10% of theproject cost and total lending including Takeout Financing by IIFCL shall not exceed 30% of totalproject cost.The above exposure shall further be subject to applicable regulatory norms.· After entering into Takeout Agreement, in case any fraud or forgery committed by the Borrowercomes to the notice of IIFCL, the Takeout Agreement shall stand terminated.· On the Scheduled Date of Occurrence of Takeout, the takeout will be executed in respect of onlythose loans, which are classified as standard assets in the books of the Lenders who have signedthe Takeout Agreement.· On the Scheduled Date of Occurrence of Takeout, the takeout will be executed if the project hasachieved an average Debt Service Coverage Ratio (1 year of operation) of at least 1.10.· Subject to the provisions of the Takeout Finance Scheme, at the time of occurrence of takeout,it will be the obligation of the Lender(s) and IIFCL, who have entered into Takeout Agreement,to effect the takeout without any protest, contest or demur.· At any time before or after occurrence of takeout, the Borrower will have the option to prepaythe loans pursuant to the relevant provisions of the Common Loan Agreement and TakeoutAgreement.· After entering into the Takeout Agreement but before the loans are taken out, if Lenderspropose any change in the loan terms i.e. restructuring of loan or related matters, IIFCL will beinvited to attend the relevant meeting of Lenders to be held pursuant to the Inter- CreditorAgreement and IIFCL’s views will be taken into consideration by Lenders in keeping with thespirit of the Takeout Agreement. If IIFCL is not agreeable to restructuring of loans, it will have anoption to opt out of the Takeout Agreement.· After the loans are taken out, IIFCL will become a party to the Inter- Creditor Agreement.· IIFCL will have the option to restructure loans taken out to suit the project ground realities andthe cash flows. Such restructuring may include increasing the extent of debt funding in theproject if allowed by the project cash flows. However, such an option will be exercised inaccordance with the provisions of the Inter Creditor Agreement.· Any amount of debt raised to fund any cost overrun in the project shall only be covered if thesame has been agreed to by the Lenders.· Once takeout is effected pursuant to the Takeout Agreement, IIFCL’s security interest in theproject’s assets and cash flows shall rank paripassu with senior debt extended by the Lender(s).
ROLE OF IIFCL IN INFRASTRUCTURAL FINANCING<br />K K JINDAL<br />
WHAT IS INFRASTRUCTURAL Financing?<br />There is a need for large and continuing amounts of investment in almost all areas of infrastructure in India.<br />This includes transportation (roads, ports, railways, and airports),energy (generation and transmission), communications (cable, television, fiber, mobile and satellite) and agriculture (irrigation, processing and warehousing).<br />The key issue is, while the need exists, how will these projects get financed.<br />
Characteristics of infrastructural financing<br />
Financing infrastructure in 11th five year plan<br />
Infrastructure Financing required in 2010-11 and 2011-12<br />
Role of IIFCL<br />IIFCL was incorporated on 5 January 2006 under the Companies Act 1956 as a wholly government-owned company.<br />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:<br />(i) Direct lending to eligible projects<br />(ii) Refinance to banks and financing institutions (FIs) for loans with a tenor of 5years or more<br />(iii) Any other method approved by the Government of India (GOI)<br />
IIFCL is adopting a focused approach by addressing projects from the following sectors.<br /> (i) Roads & bridges, railways, seaports, airports, inland waterways, other transportation projects<br /> (ii) Power<br /> (iii) Urban transport, water supply, sewerage, solid waste management, and other physical infrastructure in urban areas<br /> (iv) Gas pipelines<br /> (v) Infrastructure projects in special economic zones<br /> (vi) International convention centers, other tourism-related infrastructure<br /> (vii) Infrastructure projects in Special Economic Zones<br /> (viii) Other infrastructure projects, as may be determined from time to time<br />
Subordinate debt: It is expected to help PPP infrastructure projects to achieve faster financial closure.<br />Refinance to Banks: IIFCL to refinance upto 80% of the long term infrastructure loans disbursed by banks.<br />Iifcl and its mode of financing<br />
Scheme for financing viable infrastructure projects through India Infrastructure Finance Company Limited (IIFCL)<br />
Funding of IIFCL under the scheme<br />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:<br /> [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.<br /> [b] Debt from bilateral or multilateral institutions such as the World Bank and Asian Development Bank.<br /> [c] Foreign currency debt, including through external commercial borrowings raised with prior approval of the Government.<br />
Funding of iifccontinue….<br />The IIFCL raise funds as and when required, for on lending, in consultation with the Department of Economic Affairs.<br /> The borrowings of IIFCL is guaranteed by the Government of India.<br />The guarantee fee payable by the IIFCL is 0.25% per annum on outstanding balances<br />The facility of guarantees including the terms for guarantee will be reviewed after 5 years, and its continuation shall be subject to the outcome of the review.<br />IIFC may raise funds from domestic institutions namely, banks, FIs etc.<br />
Project finance by iifc<br />The IIFCL finance only commercially viable projects. <br />The project shall be implemented (i.e. developed, financed and operated for the Project Term) by:<br /> [i] A Public Sector Company<br /> [ii] A Private Sector Company selected under a PPP initiative; or<br /> [iii] A Private Sector Company<br /> Provided that the SPV shall assign overriding priority to Private Public Partnership projects that are implemented by Private Sector Companies selected through a competitive bidding process.<br />
Project finance by iifcconti…<br />Provided that in case of Railway projects that are not amendable to operation by a Private Sector Company, the Empowered Committee may relax the eligibility criterion relating to operation by such company.<br />Only such projects which are implemented through a Project Company set up on a non-recourse basis shall be eligible for financing by IIFCL.<br />In the event that the IIFCL needs any clarification regarding eligibility of a project, it may refer the case to the Empowered Committee for appropriate directions.<br />
Appraisal & Monitoring by Lead Bank<br />The Lead Bank shall present its appraisal of the project for the consideration of the IIFCL<br />The IIFCL will not normally be required to carry out any independent appraisal of the project.<br /> The Lead Bank shall be responsible for regular monitoring and periodic evaluation of compliance of the project with agreed milestones and performance levels, particularly for purpose of disbursement of IIFCL funds. It shall send periodic progress reports in such form and at such times, as may be prescribed by IIFCL.<br />
Lending Terms<br /> The Project Company will have the right to choose any of the modes of lending given above. <br />The total lending by the IIFCL to any Project Company does not exceed 20% of the Total Project cost<br /> The rate of interest charged by IIFCL is such as to cover all funding costs including administrative costs and guarantee fee, if any.<br />The IIFCL will release funds to the Lead Bank as and when due<br />
Lending terms<br />Recovery of loans advanced by IIFCL shall be the responsibility of the Lead Bank.<br />The charge on project assets shall be paripassu with project debt (other than subordinate debt) and will continue beyond the tenure of project debt (other than subordinate debt) till such time the amounts lent by IIFCL, together with interest and other charges thereon remain outstanding.<br /> The IIFCL, the Lead Bank and the Project Company shall enter into a Tripartite Agreement for the purposes of this scheme<br /> The first two years of operation of the Scheme, projects meeting the eligibility criteria could be funded on a first-come, first served basis. <br />
Lending to PPP Projects<br /> In case of PPP projects, the private Sector Company shall be selected through a transparent and open competitive bidding process.<br />PPP projects based on standardized/model documents duly approved by the respective government would be preferred<br />Prior to inviting offers through a open competitive bid, the concerned government or statutory entity may seek ‘in principle’ approval of the IIFCL for financial assistance under the Scheme<br />
Take out financing scheme formed by iifc<br />TAKE OUT FINANCE: <br /> Infrastructure projects may need financing arrangements in which the project can be financed initially on the basis of shorter-term debt (such as credit from suppliers to finance equipment purchase) that is refinanced later by longer-term debt. A specialized institution could help guarantee such refinancing within a predetermined financing cost. This amounts to giving the project an assurance that if refinancing is not available on specified terms when needed, it will either be provided directly by the institution or the difference between the predetermined cost of financing and the cost at which funds can be raised will be reimbursed to the project. A commercial fee should, of course, be charged for this service <br />
FEATURE OF TAKE OUT FINANCE SCHEME<br />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.<br />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.<br />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 year of operation) of at least 1.10.<br />Once takeout is effected pursuant to the Takeout Agreement, IIFCL’s security interest in the project’s assets and cash flows shall rank paripassu with senior debt extended by the Lender(s).<br />
IIFCL is the SPV created. In keeping with the Budget announcement, the company would render financial assistance through-<br />– Direct lending to eligible projects<br />– Refinance to banks and financial institutions (FIs) for loans with tenor of five years or more<br />– Any other method approved by GOI<br />The other salient features of infrastructure funding through the company are:<br /> ! Loan assistance from SPV shall not exceed 20 per cent of project cost.<br /> ! A project awarded to a private sector company for development, financing, construction through PPP shall have overriding priority under the scheme.<br /> ! Private sector companies will not be eligible for direct lending and only the refinancing option will be available in such cases. Further, the total lending to such projects will be kept within 20 per cent of the lending programme of the IIFCL.<br /> ! The rate of interest charged by IIFCL shall be such as to cover all fund costs including guarantee fee as well as administrative cost.<br />IIFCL is expected to be a very lean organization which would keep overheads to the minimum and thus keep the cost of funds for infrastructure at a competitive level. The company would fill the gap for long term infrastructure finance which the banks are not in a position to address owing to concerns relating to mismatches in assets and liabilities<br />