Infrastructure financing-india

Draft Final Report

for the WORLD BANK

September 2007

Infrastructure
Public-Private Partnership (PPP)
Financing in India

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

Content
Main Report
ACRONYMS......................................................................................................................................................... 5
CURRENCY EQUIVALENTS ........................................................................................................................... 6
1

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

2

INTRODUCTION ..................................................................................................................................... 10
2.1
2.2

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

3
OBJECTIVE 1: EVIDENCE BASED DESCRIPTION OF PRESENT FINANCING SOURCES
FOR PPP INFRASTRUCTURE ....................................................................................................................... 14
4

OBJECTIVE 2: ANALYSIS OF THE FINANCING OF PPP IN INDIA ............................................ 19
4.1.1
4.1.2
4.1.3
4.1.4
4.1.5
4.1.6

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

5
OBJECTIVE 3: TO IDENTIFY CHANGES REQUIRED TO REDUCE AND EASE THE
IDENTIFIED CONSTRAINTS......................................................................................................................... 31
5.1
NEW AREAS TO FOCUS ON THE DEBT SIDE .......................................................................................... 31
5.1.1 Bonds as a Source of Fund ............................................................................................................. 31
5.1.2 Funding from Insurance, Pension and Provident Funds ................................................................ 33
5.1.3 Improving Bank capacity to lend to Infrastructure Sector.............................................................. 36
5.1.4 ECB as a Source of Infrastructure Financing ................................................................................ 36
5.2
NEW AREAS TO FOCUS ON THE EQUITY SIDE ....................................................................................... 38
5.2.1 Holding Company Structure Creates Issue in Raising Equity ........................................................ 38
5.2.2 Private Equity Investment to Shore up Promoter Equity ................................................................ 39
5.2.3 Equities Market as a Source ........................................................................................................... 41
5.2.4 Role of International Developers.................................................................................................... 42
5.3
CONCLUSION ....................................................................................................................................... 43
7.1
LIST OF INTERVIEWS CONDUCTED ....................................................................................................... 53
7.2
LIST OF PPP PROJECTS......................................................................................................................... 54
7.3
SOURCES FOR PROJECT INFORMATION ................................................................................................. 60
7.4
ASSUMPTIONS ...................................................................................................................................... 64
7.4.1 Analysis Assumptions...................................................................................................................... 64
7.4.2 Regions ........................................................................................................................................... 65
7.4.3 Sample Sizes.................................................................................................................................... 66
7.4.4 Approximation of Financial Closure Year from Secondary Sources .............................................. 66
7.4.5 Approximation of TPC from Secondary Sources ............................................................................ 70

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Annexures
6
ANNEXURE 1 - PROCESS FOR SELECTION OF PPP INFRASTRUCTURE SECTORS FOR
THE DETAILED STUDY ................................................................................................................................. 44
7

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

8

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

9

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

10
ANNEXURE 5 - FUTURE LENDING TO PPP INFRASTRUCTURE PROJECTS FROM
COMMERCIAL BANKS IN INDIA ................................................................................................................ 92
11

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

12

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

13

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

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List of Exhibits
EXHIBIT 1: SAMPLE SIZE FOR PROJECT INFORMATION COLLECTION ..................................................................... 14
EXHIBIT 2: TRENDS IN TOTAL 231 PROJECTS AND SAMPLE OF 104 PROJECTS ....................................................... 14
EXHIBIT 3: PPP PROJECTS IN DIFFERENT SECTORS BY NUMBER AND VALUE ....................................................... 16
EXHIBIT 4: TRENDS IN PPP PROJECTS BY AWARDING AUTHORITY ....................................................................... 16
EXHIBIT 5: OVERALL FINANCIAL STRUCTURE OF PPP PROJECTS IN INDIA ............................................................ 16
EXHIBIT 6: SOURCE OF SENIOR DEBT FUNDING .................................................................................................... 17
EXHIBIT 7: SOURCES OF DEBT BY SECTOR AND SHARE OF COMMERCIAL BANKS BY TYPE ................................... 17
EXHIBIT 8: LOAN TENURE TO CONCESSION PERIOD RATIO FOR TEN PPP PROJECTS IN LAST TWO YEARS............ 22
EXHIBIT 9: DSCR REQUIRED BY BANKS ............................................................................................................... 23
EXHIBIT 10: PROJECT RISK CATEGORY AND AVERAGE INTEREST RATE ............................................................... 25
EXHIBIT 11: INCREASED GEARING OVER THE YEARS ............................................................................................ 26
EXHIBIT 12: DER BY SIZE ..................................................................................................................................... 26
EXHIBIT 13: SOURCES OF PURE EQUITY ................................................................................................................ 26
EXHIBIT 14: SOURCES OF EQUITY ......................................................................................................................... 27
EXHIBIT 15: INSTANCES OF SUB-DEBT BY YEAR AND SECTOR .............................................................................. 28
EXHIBIT 16: STRATEGIC INVESTMENT BY SECTOR ................................................................................................ 28
EXHIBIT 17: INVESTMENT BY LIFE AND NON-LIFE INSURER IN LAST THREE YEARS (USD MILLION) .................. 33
EXHIBIT 18: YEAR ON YEAR FUND COLLECTION BY EPFO................................................................................... 33
EXHIBIT 19: INVESTMENT BY INSURANCE COMPANIES IN RATED SECURITIES ...................................................... 34
EXHIBIT 20: CHINESE INSURANCE REGULATION ................................................................................................... 34
EXHIBIT 21: ECBS IN INFRASTRUCTURE (MARCH 2004 - FEBRUARY 2007).......................................................... 36
EXHIBIT 22: HOLDING COMPANY STRUCTURE AND ITS IMPLICATIONS ................................................................. 39
EXHIBIT 23: PE DEALS FOR THE YEAR 2006.......................................................................................................... 39
EXHIBIT 24: PRIVATE EQUITY INVESTMENTS IN THE YEAR 2006........................................................................... 40
EXHIBIT 25: INFRASTRUCTURE FUND BY MUTUAL FUNDS .................................................................................... 41
EXHIBIT 26: SECTORS CONSIDERED BY INFRASTRUCTURE DEFINITIONS BY VARIOUS AGENCIES ......................... 45
EXHIBIT 27: SELECTION OF SECTORS .................................................................................................................... 49
EXHIBIT 28: PROJECT METHODOLOGY .................................................................................................................. 51
EXHIBIT 29: REGIONAL DISTRIBUTION OF VALUE OF PPP PROJECTS BY STATE .................................................... 74
EXHIBIT 30: REGIONAL DISTRIBUTION OF PPP PROJECTS BY VALUE AND NUMBER ............................................. 74
EXHIBIT 31: SECTORAL DISTRIBUTION OF PROJECTS IN THE FOUR REGIONS......................................................... 75
EXHIBIT 32: REGIONAL DISTRIBUTION OF PROJECTS BY AWARDING AUTHORITY ................................................ 75
EXHIBIT 33: SECTOR WISE DISTRIBUTION OF STATE AND CENTRE PROJECTS BY NUMBER AND VALUE ............... 75
EXHIBIT 34: SIZE WISE GROUPING OF PPP PROJECTS BY VALUE AND NUMBER ................................................... 76
EXHIBIT 35: PROJECTS BY SIZE CLASSIFICATION AND SECTOR ............................................................................. 77
EXHIBIT 36: AVERAGE SIZE OF PROJECTS ............................................................................................................. 77
EXHIBIT 37: TRENDS IN AVERAGE SIZE OF ALL ROADS & BRIDGES AND NHAI PROJECTS .................................... 77
EXHIBIT 38: CENTRE AND STATE BY NUMBER AND VALUE................................................................................... 78
EXHIBIT 39: SECTORAL DISTRIBUTION OF CENTRE/STATE PROJECTS BY NUMBER AND VALUE ........................... 78
EXHIBIT 40: SECTORAL COMPOSITION BY VALUE AND NUMBER .......................................................................... 79
EXHIBIT 41: SIZE WISE DISTRIBUTION AND REGIONAL DISTRIBUTION .................................................................. 79
EXHIBIT 42: ISSUE OF NEGATIVE GRANT IN ROAD PROJECTS................................................................................ 80
EXHIBIT 43: SECTOR WISE NON GRANT, POSITIVE GRANT AND NEGATIVE GRANT PROJECTS ............................. 80
EXHIBIT 44: POSITIVE AND NEGATIVE GRANT PROJECTS – NUMBERS AND AMOUNT ........................................... 81
EXHIBIT 45: COUNT AND AMOUNT OF POSITIVE AND NEGATIVE GRANT IN ROAD & BRIDGES SECTOR ................ 82
EXHIBIT 46: FINANCING STRUCTURE FOR POSITIVE AND NON-GRANT PROJECTS AND ANNUITY AND NEGATIVE
GRANT PROJECTS ......................................................................................................................................... 82
EXHIBIT 47: FINANCING STRUCTURE BY AWARDING AUTHORITY AND SECTOR ................................................... 83
EXHIBIT 48: FINANCING STRUCTURE BY SIZE ....................................................................................................... 83
EXHIBIT 50: SOURCES OF DEBT BY YEAR AND SIZE .............................................................................................. 83
EXHIBIT 52: TREND IN DEBT FROM COMMERCIAL BANKS..................................................................................... 84
EXHIBIT 53: AVERAGE TENURE OF DEBT AND CONCESSION PERIOD .................................................................... 84
EXHIBIT 54: SENIOR DEBT TO PURE EQUITY RATIO BY SECTOR ........................................................................... 85
EXHIBIT 55: INCREASED GEARING ........................................................................................................................ 85
EXHIBIT 56: DER BY AWARDING AUTHORITY AND SIZE ...................................................................................... 86
EXHIBIT 57: DER BY SECTOR AND SIZE ................................................................................................................ 86
EXHIBIT 58: AVERAGE INTEREST RATE SPREAD OVER 10-YR G-SEC YIELD ......................................................... 87
EXHIBIT 60: INTEREST RATE SPREADS AWARDING AUTHORITY ........................................................................... 87

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EXHIBIT 61: REDUCING RESETS ............................................................................................................................ 88
EXHIBIT 62: AVERAGE RESET PERIOD ................................................................................................................... 88
EXHIBIT 63: SOURCES OF EQUITY ......................................................................................................................... 89
EXHIBIT 64 : STRATEGIC INVESTMENT BY SECTOR ............................................................................................... 89
EXHIBIT 65 : FDI ALLOWED BY SECTOR ............................................................................................................... 90
EXHIBIT 66: FDI IN PPP INFRASTRUCTURE ........................................................................................................... 90
EXHIBIT 67: EQUITY RETURNS EXPECTATIONS BY INVESTORS ............................................................................. 91
EXHIBIT 68: CREDIT OUTSTANDING OF COMMERCIAL BANKS (USD BILLION)..................................................... 93
EXHIBIT 69: ROADS, PORTS & OTHERS PPP LENDING/ INFRASTRUCTURE LENDING RATIO BY BANKS IN INDIA TO
THESE SECTORS............................................................................................................................................. 96
EXHIBIT 70: PRIVATE SECTOR LENDING OUT OF TOTAL BANKS LENDING TO POWER PROJECTS IN USD BILLION .. 98
EXHIBIT 71: PPP POWER FINANCING CAPACITY OF BANKS IN NEXT 5 YEARS (USD BILLION) AT PRIVATE TO
INFRASTRUCTURE LENDING RATIOS OF 15% MEDIUM GROWTH ................................................................... 98
EXHIBIT 72: CALCULATION OF DEBT FINANCING GAP .......................................................................................... 99
EXHIBIT 73: INFRASTRUCTURE LOAN OUTSTANDING OF IDFC ............................................................................ 100
EXHIBIT 74: IDFC’S TRANSPORT PPP LENDING AS ON 31ST DECEMBER IN USD MILLION ................................. 100
EXHIBIT 75: PFC LENDING TO POWER PROJECTS IN USD BILLION ...................................................................... 102
EXHIBIT 76: FINANCING REQUIREMENT FROM SOURCES OTHER THAN COMMERCIAL BANKS AND FINANCIAL
INSTITUTIONS (USD BILLION) .................................................................................................................... 102
EXHIBIT 77: RISK AND INTEREST CHARGED ........................................................................................................ 110
EXHIBIT 78: DEBT ANNUITY PER KM AND RISK CATEGORY ................................................................................. 111
EXHIBIT 79: PROJECT CATEGORY AND DATA ...................................................................................................... 126

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Acronyms
ADB

Asian Development Bank

ALM

Asset Liability Management

APIIC
BOT

Andhra Pradesh Industrial Infrastructure Corporation
Build Operate Transfer

DEA

Department of Economic Affairs

DER

Debt to Equity Ratio

DFI

Development Financial Institution

DIAL

Delhi International Airport Limited

DoRTH
DSCR
FII

Department of Road Transport and Highways
Debt Service Coverage Ratio
Foreign Institutional Investor

FPO

Follow-on Public Offer

GDP

Gross Domestic Product

GoI
G-Sec

Government of India
Government of India Securities

HCC

Hindustan Construction Company

HDC

Haldia Dock Complex

HIAL

Hyderabad International Airport Limited

IDBI
IDFC
IFC
IIFCL
IL&FS
INR

Industrial Development Bank of India
Infrastructure Development Financial Corporation
International Finance Corporation
India Infrastructure Finance Company Limited
Infrastructure Leasing & Financial Services
Indian National Rupees

IPPs

Independent Power Producers

IRDA

Insurance Regulatory and Development Authority

JICA

Japan International Cooperation Agency

JBIC

Japan Bank for International Cooperation

KPCL
LIBOR
LIC
MCD
MF
MoF
MW
NBFC
NCD
NDMC

Karnataka Power Corporation Limited
London Interbank Rate
Life Insurance Corporation of India
Municipal Corporation of Delhi
Mutual Funds
Ministry of Finance
Mega Watt
Non Banking Financial Company
Non Convertible Debentures
New Delhi Municipal Corporation

NHAI

National Highway Authority of India

NTBL

Noida Toll Bridge Company Limited

PFC
PFI
PLR
PMGSY

Power Finance Corporation
Private Finance Initiative
Prime Lending Rates
Pradhan Mantri Gram Sadak Yojna

PNB

Punjab National Bank

PPP

Public Private Partnerships

PwC

PricewaterhouseCoopers

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PWD
RBI

Public Works Department
Reserve Bank of India

RVNL

Rail Vikas Nigam Limited

SBAR

State Bank Advance Rate

SBI

State Bank of India

SCB

Scheduled Commercial Banks

SPV

Special Purpose Vehicle

TOR

Terms of Reference

ULB
UNESCAP

Urban Local Body
United Nations Economic and Social Commission for Asia and the Pacific

USD

United States Dollar

VGF

Viability Gap Funding

WB
’00,00,000
’00,000

World Bank
Crore
Lakh

`

Currency Equivalents
Conversion Factor 1 USD (US Dollars) = 45 INR (Indian National Rupees)
Conversion Factor 1 USD (US Dollars) = 0.034 UF1 (Unidad de Fomento)
Conversion Factor 10 USD (US Dollars) = 1MXN (Mexican peso)
Conversion Factor 1 USD (US Dollars) = 3 UDI2 (Unidades De Inversion)
All values are at historical value.

1

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

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Executive Summary
It is being increasingly recognised in India that lack of good quality infrastructure is a
bottleneck that must be removed in order to maintain the growth rate shown by the country
in the past two years. To achieve the targeted economic growth, there is an urgent need to
increase the level of investments in infrastructure. Government estimates peg the total
infrastructure investment requirement in the country at about USD320-350 billion over the
next five years. Considering the high emphasis on using PPP as an important format for
creation and maintenance of infrastructure and considering the realistic levels that PPPs can
go upto, about 20% of the total (USD64 to 70 billion) is estimated to come from PPP route.
Though PPP infrastructure development in India is at a nascent stage, recent trends have
been very encouraging. Our study has estimated that the total value of PPP infrastructure
projects in India that have achieved financial close in the last ten years is about USD15.8
billion (in the study, sectors included are - all transport sectors, urban infrastructure, water &
sanitation, power transmission and distribution). Hence, achieving the growth rate envisaged
over next five years for investment from private players will definitely require a huge step-up
approach to project development and implementation.
Sectoral Distribution of PPP Projects by Value
(Total Value USD15.8 billion)
Waste Water
0.1%
Water Supply
Solid Waste
2.3% Airports
Management
17.2%
0.4%

Ports
20.5%

Roads & Bridges
53.7%
Railways
1.8%

Power
Distribution
1.8%
Power
Transmission
2.3%

The good sign is that the year on year the
trend is increasing. In the last 3 years alone,
PPP infrastructure projects worth USD 8.2
billion (93 in number) have achieved financial
close as against USD 5.1 billion (131 in
number) projects in the previous 8 years.
Many PPP projects are in Roads & Bridges
sector. However, other sectors have also
participated in PPP infrastructure growth
except for urban infrastructure sector, where
success of PPP is yet to be tested. Regionally
West along with South dominates in
development
of
PPP
infrastructure
(accounting for more than 75% by value and
also number of projects).
Infrastructure financing not only in terms of
amount but also in terms of the cost and
terms at which the finance is available to
private players is very critical. The study
shows that PPP infrastructure projects have
so far been largely financed by debt (68% of
project costs, on an average). The

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Trend in PPP Projects by Value
6.00
5.00
USD Billion

1

4.00
3.00
2.00
1.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year of Financial Close

Sources of Senior Debt

Others
28%

Commercial
Banks
72%

Composition of Other Sources of Senior Debt
Insurance
Companies
IFCI 1.9%
1.5%

Others
5.5%

HUDCO
2.6%
IL&FS
3.1%
SIDBI
3.2%
ADB
3.7% IFC
4.9%

IDBI
17.3%

IIFCL
34.4%

IDFC
22.0%

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contribution of equity has been 25% with
remaining coming from subordinate debt3% and grant-4%.
Commercial banks are the major source of
debt and constitutes 72% of all debts with
other financial institutions such as IDFC,
IIFCL, IDBI, IL&FS, etc. constituting the
balance 28%. Interestingly, the tenor of term
loan by banks is around 50% of concession
period length (see charts overleaf).

Average Tenure and Concession Period
16

Airports

30

13

Ports

28

12

Power Transmission

25

10

Railways

28
14

Roads & Bridges
5

Solid Waste

16
15

Water Supply
-

5

23

10

Average Concession Period

15
20
Number of Years

28
25

30

35

Average Tenure of Debt

Unlike the international markets that have a very high gearing, the typical gearing ratio in
India is 70:30 though there is a clear trend towards increasing gearing ratios in recent
projects, as also in the road sector which has moved the farthest in the PPP market.
Commercial banks are comfortable lending to PPP projects despite having limited long term
resources, but always with resets. The resets have shown a clear trend of becoming shorter
and shorter in duration. In the absence of appropriate interest rate swaps in the market,
project developers have limited choice. However, the survey reveals that when interest rates
came down substantially, Developers have tried successfully to refinance their loans,
particularly when the construction periods were over. This activity also mirrors what happens
in the developed markets.
Internationally, banks that are active in the infrastructure PPP market have various options to
manage their matching of long term lending with several products. Unlike international
banks, which package and sell down their different debts to various types of buyers, the
Indian banks do not have many options as yet.
From our survey and analysis of financing of PPP projects, other interesting observations on
the debt side of funding are:
•

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

•

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

•

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

•

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

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Of the USD11.48 billion investments made in the last 12 years (in the surveyed 104 PPP
projects for
which detailed financial
Sources of Pure Equity
(Total value USD2.93 billion)
information was obtained), the total equity
Strategic
was USD2.93 billion. Of this, the maximum
Inverstors
6%
Government
equity (USD1.43 billion) has been funded in
10%
Roads & Bridges because of large number of
Financial
Institution
projects being awarded on PPP basis in the
2%
last 3-4 years. On the Equity side, our survey
reveals that majority of the equity, almost
Developer
82%
82% is provided by developers themselves.
Financial investors and other strategic
sources are small. In a few cases, where the
SPV has been set up as a joint venture
between Government and the Developers, Government has made their equity contribution,
typically limited to 26% or less. Clearly, if this trend were to continue, there would be big
issue on the volume of equity available from the developers when significant up-scaling of
PPP activity takes place.
However, there are very significant developments taking place in the market wherein
strategic investors in the form of PE funds are entering in. Though the volume of their
investments in infrastructure PPP market has been small till now (under USD300 million in
the year 2006), it is expected that this will go up very rapidly with recent entry
announcements by both Indian and international PE players. Many PE firms are looking at
the infrastructure sector favourable and Government too has supported the setting up of a
USD5 billion fund to invest in PPP projects.
Our survey identified certain key equity side constraints in PPP infrastructure financing. For
example, FDI cannot come into Holding Companies (typically created by Developers
combining a few infrastructure projects) under automatic route thus requiring specific
Government approvals (FIPB). This restrains holding company to raise capital outside India.
Given the fact that the Government has removed most hurdles for FDI into infrastructure in
the country, this still remains a road block for FDI into PPP infrastructure.
Also, a two tier structure of holding & SPV companies (again typical of Indian infrastructure
developers) results in cascading effect of Dividend Distribution Tax. The two tier structure is
important for attracting equity investors to the PPP infrastructure projects because there are
a number of exit restrictions to direct equity investments into SPVs as also the SPV’s
existence is co-terminus to the concession period.
Accepting the recommendations of the Patil Committee Report, the Government has already
taken some steps to develop the Bond Market. Also, the Government is actively looking at
the initial recommendations of the Parekh Committee to address several constraints
identified. The role of an important financing institution (IIFCL) is being examined for playing
the role of a monoline institution.
It is therefore, our suggestion that on all these issues, namely bond market development,
FDI into holding companies, cascading effect of dividend tax, and accessing insurance and
pension funds, the Government should give preferential and liberal treatment as far as
infrastructure investments are concerned.

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2

Introduction
The Indian economy is going through its most remarkable phase of growth - with GDP
growth rate at an average of 7.6% in the Tenth Plan Period (2002-03 to 2006-07) as
compared to the average of 5.5% in the Ninth Plan Period (1997-98 to 2001-02). The
Eleventh Five Year Plan projects an even higher average annual growth rate of 9%.
This rapid growth of the Indian economy has brought into focus the poor state of
infrastructure in India. Congestion can be seen everywhere, be it roads, ports or airports and
reports show that all sections of the Indian society, from the business community to the
common man, feel constrained by the lack of adequate infrastructure. Their concern is
highlighted in the approach paper to the 11th plan, put out by the Government of India (GoI),
which states that, “The most important constraint in achieving a faster growth of
manufacturing is the fact that infrastructure, consisting of roads, railways, ports, airports,
communication and electric power, is not up to the standards prevalent in our competitor
countries. This must be substantially rectified within the next 5-10 years if our enterprises are
to compete effectively.”
The message coming from all quarters is that the continuation of the growth momentum of
India will require significant improvement in infrastructure. Several estimates have been
made about the level of infrastructure requirement in the next five years required to sustain a
growth rate of 9 percent. The most widely quoted of these estimates is a GoI estimate which
projects that, during the 5 years of the 11th plan period, USD 320 billion of infrastructure (in
2005-06 prices) will be required. The estimate also breaks down this requirement sector
wise and projects that a majority of this investment will go in the power sector followed by
railways and national highways.
In this report we deal with the likely challenges that will be encountered in financing of this
infrastructure requirement. In recent times there have been several committees, individuals
and interest groups that have given their recommendations on how to increase the level of
financing for infrastructure projects. This report does not aim to replicate their work. Instead
the focus of this report is on providing evidence based descriptions on the challenges
of infrastructure financing- how infrastructure projects are being financed currently and the
sufficiency of the existing means to finance future infrastructure requirements. In this report
we present an extensive amount of primary data on the current situation in infrastructure
financing, and this sets apart this report from others which mostly offer viewpoints of experts
on the situation of infrastructure financing in India. In addition to the primary data we also
present views from prominent stakeholders in the infrastructure sector on the challenges of
financing infrastructure. Based on an understanding of the challenges we highlight our views
on how infrastructure financing is going to evolve, especially in the near term. However,
before we get into the analysis we need to clarify some important points/assumptions that
we have made in the report.

2.1

Some Points/Assumptions to be Kept in Mind
Future Infrastructure requirement: As already stated earlier in the report, GoI estimates
the level of infrastructure requirement in India in the next five years to be around USD 320
billion. However, it is difficult to determine the accuracy of this estimate.
This requirement is based on an estimate of infrastructure capacity expansion required in
some chosen infrastructure sectors during the eleventh plan period. Projects chosen are
mostly in the Central sector, for example in roads the estimate accounts explicitly for only
National Highways and not for State Highways or Rural Roads. There is an ‘Other’ category
which possibly encompasses infrastructure needs in the states and in sectors such as
Special Economic Zones, telecommunication etc. However, estimating that only 17 percent
of the USD 320 billion pie will go for these is definitely an underestimate. Also many
estimates of infrastructure requirements even in the chosen sector are only preliminary and

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the financing requirements for the infrastructure are just ballpark. It is therefore, difficult to
know what the actual requirements will be.
However, at the same time many experts doubt that the Government will be able to
implement USD 320 billion worth of projects even if financing was available. They point to
the limited capacity of Government departments and agencies and question their ability to
formulate such a large number of projects. Because of this lack of capacity, they claim that
while USD 320 billion of financing need might be projected, the actual financing need will be
significantly less. In this sense the USD 320 billion figure is an overestimate.
Because it is difficult to pinpoint the actual future infrastructure requirement we will take the
figure of USD 320 billion for analysis in this report. While it is clearly not the right number it
does show that the infrastructure financing requirement is very large and that significant
improvements need to be made to infrastructure financing in India to meet this large
demand.
Focus on Public Private Partnership: Infrastructure development in India has largely been
in the Government domain. However, in recent years Government of India (GoI) and State
Government(s) have been putting an increasing focus in involving the private sector in
infrastructure creation under the public private partnership (PPP) framework3. Two
commonly cited reasons for this are as follows:
1. Funding the infrastructure deficit: Given the large investment required for
infrastructure development in India and the scarce Government resources, it is unlikely
that public funds would be adequate to meet the needs in this context. In addition, the
Fiscal Responsibility and Budget Management Act4 and steps towards fiscal prudence
adopted by both the Centre and State Governments have also contributed to the thought
process of involving the private sector in the process of infrastructure development in the
country.
2. Value addition: Apart from being an alternate source of finance, private sector
participation is also viewed as a possible way of value addition in the various aspects of
the value chain of infrastructure development including innovation, managerial efficiency
in the project management process, adoption of better technology in key infrastructure
areas etc.
PPPs are thus being seen as an important tool for producing an accelerated and larger
pipeline of infrastructure investments, and catching up with the infrastructure deficit in the
country.
In this report we will concern ourselves with the financing of infrastructure projects
under the PPP framework. Government financing of infrastructure is done primarily from
budgetary resources and public debt and Government provides guidance on its investments
in many of its documents like the Union and State budgets, annual plans etc. In contrast
PPP projects in India are not well documented and only very limited information is available
on their financing in the public domain. Given that PPP projects are being looked at as an
important means of meeting the infrastructure requirement in India we have focused this
study on the financing of PPP infrastructure projects (in consultation with the GoI and World
Bank).
Definition of Infrastructure: Infrastructure is defined differently by different
reports/estimates and by different agencies. Currently there is no consensus on the
sectors to be included in infrastructure. For example, the Economic Survey of India
3
GoI has specifically defined PPP in the “Scheme for financial support to Public Private Partnerships in Infrastructure”
(also commonly known as Viability Gap Funding or VGF) as follows –
“PPP means a project based on a contract or concession agreement between a Government or Statutory entity on the one side
and a private sector company on the other side for delivering an infrastructure service on payment of user charges.”
4
The FRBM bill, passed in August 2003, makes the government responsible for elimination of revenue deficit by 2008-09 and a
fiscal deficit of 3 percent.

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published by the Reserve Bank of India includes “Storage Infrastructure” as a part of
Infrastructure while it is not included as Infrastructure by most other agencies. Also most
reports do not drill down to the sub-sectors which they include. For example while the
Economic Survey includes inland waterways in its definition of transport sector some other
agencies do not. Because of the diversity of definitions available we also need to clearly
define the infrastructure sectors we will look at so as to not confuse the reader.
For defining Infrastructure for the purpose of this report we start with taking a
comprehensive approach to the definition of infrastructure, basing it on as many relevant
sectors as is done commonly by the Government agencies. However, for analysis in this
report we have excluded some sectors as the focus of this report is on PPP infrastructure
projects in particular and not on all infrastructure projects as in India PPP have not taken
place in all infrastructure sectors and not all sectors are looked upon as equally amenable to
PPP.
To come to our definition of PPP we developed some criteria and then subjected the
infrastructure sectors to these criteria. Annexure 1 gives the details of the process we used
for selecting PPP infrastructure sectors for the detailed study. Based on the process our
definition of PPP infrastructure involves projects in the following:
1.
2.
3.
4.
5.
6.
7.
8.

Roads
Railways
Airports
Ports
Power including generation (to a limited extent), transmission and distribution
Urban water supply including treatment, transmission and distribution
Waste water including disposal and treatment
Solid waste management

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

2.2

Objective of the Study
The primary objectives of the study is to identify issues and constraints to Public
Private Partnership (PPP) infrastructure financing which are foremost on the minds of
market players/ stakeholders in the infrastructure financing market, and to elicit feedback to
identify efforts required to ease the constraints. Specifically the objectives of the study are as
follows:
1. To provide evidence-based descriptions of present financing sources for PPP
infrastructure projects in India with an idea to specifically identify and assess financing
constraints associated with such projects.
2. To analyse the financing of PPP in India in detail. The analysis will be used to identify:
• Constraints to expanding the range of investors in infrastructure;
• Constraints to financing faced by current investors; and
• Financial innovations in India and abroad for infrastructure financing and their
applicability in Indian context.
3. To identify changes required to reduce and ease the identified constraints.
To meet these objectives a detailed approach and methodology was developed and agreed
upon in consultation with GoI and the World Bank. This approach and methodology is
highlighted in Annexure 2. The key elements of our methodology are as follows:
1. We prepared a detailed list of PPP projects in the sectors chosen for the study.
2. We met key stakeholders including sponsoring agencies, project developers and
financial institutions to obtain detailed information on the mode of financing of the chosen

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

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

Number
Number

Value (USD billion)

% of total

Value

% of total

Project Information*

231

100%

15.80

100%

Detailed Financing Information

104

45%

11.48

72%

Notes:
*Considered only those projects that have achieved Financial Close
*As agreed with World Bank during inception phase, we have not considered:
•
•
•

Urban projects less than USD1 million; cities less than 1 million population
Smaller road projects in states (below USD1 million) in MP, Maharashtra and Rajasthan (about 20
numbers.)
Select power distribution projects such as Noida, Ahmedabad and Mumbai; Real estate oriented projects
such as Nandi Corridor (NICE), Mumbai Car Park, etc.

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

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

Value of PPP Projects
50

5.00

40
Number

6.00

USD Billion

3

4.00
3.00
2.00

30
20
10

1.00

0

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

All PPP Projects

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year of Finanacial Close
Detailed Financial Information

All PPP Projects

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

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achieved financial close in the last three years. This is as compared to a total of 131 projects
in the previous 8 years5. If we look at a sector wise distribution, as can be seen from the
graph below, road sector (especially National Highways) has seen the maximum activity in
terms of the number of projects.
PPP Projects in India by Number
(Total Number 224)
50

Number

40

30

20

10

0
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006


Roads & Bridges
Railways
Solid Waste Management

Ports
Power Distribution
Waste Water

Airports
Power Transmission
Water Supply

In value terms we find that growth has been even steeper in the recent years. In 2006
projects worth USD 6 billion achieved financial close as compared to projects worth only
USD1.8 billion in 2005. However, when looked at sector wise we find that road projects are
not as dominant as they are by numbers. Roads sector which forms more than 81% of the
total PPP project by number accounts for approximately 54% of the total projects by value
(please refer to Exhibit 3). Even though the Port and Airport projects are fewer by number
they are usually large by value and constitute 20.5% and 17.2% of the total PPP projects by
value respectively.
PPP Projects in India by Value
6,000
USD Million

5,000
4,000
3,000
2,000
1,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Roads & Bridges
Railways

Ports
Power Distribution
Waste Water

Airports
Power Transmission
Water Supply

5

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

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

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

Waste Water
0.1%
Water Supply
Solid Waste
2.3% Airports
Management
17.2%
0.4%

Water Supply
2%
Airports Ports
Solid Waste
2%
8%
Power
Management
Distribution
2%
2%
Railways
2%

Ports
20.5%

Roads & Bridges
53.7%
Railways
1.8%

Power
Distribution
1.8%
Power
Transmission
2.3%

Roads & Bridges
82%

We also find that the number of projects awarded by Central Government agencies is only
slightly higher than those of State projects. This bears testimony to the widespread
acceptance of PPP projects in India. However, by value PPP projects awarded by Central
agencies dominate over those in the states.
Exhibit 4: Trends in PPP Projects by Awarding Authority
PPP Projects Awarded by Centre/State by Number
(Total Number 224)

PPP Projects Awarded by Centre/State by Value

5,000

40

4,000

USD Million

6,000

50

Number

60

30
State
20

3,000
2,000
State

10

1,000
Centre

Centre

-

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year of Financial Closure

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year of Financial Closure

If we look at the financing of these projects we find that PPP projects in India have been
largely financed by plain vanilla debt6. On an average across all projects 68 percent of the
project cost is usually financed by debt, 26 percent by promoter’s equity while only 2 percent
comes from sub-debt. The remaining 4 percent of the project cost comes from Government
grants of different kinds. The grants are mainly in the form of monetary support given by both
the State and the Central Government to make the projects viable.
Exhibit 5: Overall Financial Structure of PPP projects in India
Financial Structuring of PPP Infrastrutcure Projects
Sub-Debt Grant
4%
3%

Equity
25%

Debt
68%

6

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

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The institutions which dominate infrastructure financing in India are commercial banks. Out
of a total debt financing done for PPP projects nearly 72 percent can be attributed to term
loans from banks while other institutional lenders provide the rest. This is slightly higher than
what is prevalent in the financing of infrastructure in developing countries overall, where
World Bank estimates suggest that nearly 62 percent of the financing comes from this
source.
Out of the debt financing of USD7.72 billion, 72% can be attributed to term loans from
commercial banks. USD1.93 billion, which forms 28% of the total debt funding, is from
sources other than banks. Players like IIFCL (34.4%), IDFC (22%) and IDBI7 (17.3%)
dominate in the funding from other sources.
Exhibit 6: Source of Senior Debt Funding
Composition of Other Sources of Senior Debt

Sources of Senior Debt

Insurance
Companies
IFCI 1.9%
1.5%

Others
5.5%

HUDCO

Others
28%

2.6%
IL&FS
3.1%
SIDBI
3.2%
ADB
3.7% IFC
4.9%

IIFCL
34.4%

Commercial
Banks
72%
IDBI
17.3%

IDFC
22.0%

Banks and other institutional lenders provide debt on a syndicated basis, especially for large
projects. There are nearly 30 lenders which are active in the infrastructure financing market
and participate in the lending syndications. However, only 6-7 of these play the role of lead
banks in the syndicate and have the capacity to appraise projects. Others rely on the
appraisal carried out by the lead bank for lending to projects.
Within commercial banks we find that a majority of the senior debt funding is done through
public sector banks in India. The project database shows that public sector banks dominates
with a share of 82 percent, while share of private sector banks and foreign banks are only
13% and 5% respectively8.
Exhibit 7: Sources of Debt by Sector and Share of Commercial Banks by Type
Sources of Debt by Sector

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

Water Supply

Foreign Bank
5%


Private Sector
Bank
13%

Roads & Bridges
Railways
Power Transmission
Ports
Airports
0%

20%

40%

Commercial Banks

7
8

60%

80%

Institutions

100%

Public Sector
Bank
82%

Others

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

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Equity contribution in projects, the next highest means of financing a project comes mostly in
the form of promoter’s equity. In the past year a number of private equity players have been
showing keen interest in financing a portion of the equity. However, the difficulty in being
able to take out equity from the project SPV has slowed down the extent of private equity
deals in the sector.
The only financial innovation of any sort that has
taken place is the issuing of sub-debt to cover a
portion of the equity. A unique aspect of the sub
Not Known
14%
debt issue in India is that as much as 86 percent
of the sub debt is lent from institutions which
syndicate the issue of senior debt. If we look at
the financial structuring of infrastructure projects
Member
over the years we find that the level of or senior
22%
debt has been increasing over the years while the
Lead
level of equity has been going down9. What the
64%
trend demonstrates is that bankers seem to be
getting more confident on the infrastructure
projects. From 2004 we find an increased
optimism for infrastructure projects with a drop in equity required below the commonly
accepted 30 percent. In some projects, especially in the road sector, promoter equity even
went below 10 percent. However, to compensate for the lower levels of equity banks often
insist on sub debt to be taken by the promoter, with the level of sub debt going to as much
as 25 percent in some cases10.
Sub-Debt from Commercial Banks by Source & Value

Changes in Financial Structure Over the Year
80%
70%
60%
50%
40%
30%
20%
10%
0%
1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Senior Debt

Equity

Sub-Debt

Grant

Other key trends and analysis are presented in

9

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

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4

Objective 2: Analysis of the Financing of PPP in India
PPP projects in India are
Size Wise Grouping of PPP Projects by Value and Number
predominantly small in
(Value USD15.8 billion, Number 231)
size (less than USD 50
million) by number of
projects and these small
by Value 11%
20%
69%
projects are able to reach
financial closure without
much difficulty (given that
they are viable and carry
61%
18%
21%
reasonable levels of risk). by Number
However, there are also
a small number of large
PPP projects (project
0%
20%
40%
60%
80%
100%
size greater than USD
<USD 50 Million USD 50-100 Million >USD 100 Million
100 million), the financing
of which is significantly more complicated. As can be seen from the accompanying graph
while only 21 percent of the total PPP projects (or about 48 projects) are large projects, they
account for nearly USD 11 billion in project size11. The average size of such large projects is
approximately USD 230 million and financing each of such projects requires significant
coordination between markets players involved in infrastructure financing.
In this section we analyze in detail the present modalities and issues in infrastructure
financing particularly bringing out issues in the financing of large projects. The discussion is
divided in two parts- first we analyze the modalities and issues in the use of Debt to finance
infrastructure and second we analyze the modalities and issues concerning the use of equity
and sub debt in financing of infrastructure projects. A discussion on grants is also
incorporated in this section, where appropriate.

4.1.1

Debt financing
On the debt side we present the current trends on the basis of detailed information on debt
financing information for the 104 projects, as indicated earlier. We also present views
obtained from our interaction with the key financial institutions and developers. The value of
total senior debt, for the 104 projects, aggregate to USD7.72 billion.
Box 1: Institutions Operating in Debt Financing of PPP Projects

The accompanying diagram gives a schematic representation of the types of institutions
presently providing debt financing for PPP projects. As can be seen from the diagram PPP
debt financing is dominated by commercial banks in India (the size of the circle depicts the
size of lending to infrastructure). These banks offer mainly plain vanilla loans and sub debts
where needed. However, as we will explore in detail later, the commercial banks are
hampered by the lack of availability of long term finance as well as lack in providing
innovative financial instruments.
The second group of institutions are DFI’s (development finance institutions) like IDBI, IDFC,
HUDCO, PFC, and IL&FS etc. Some of them like IDFC have comparatively long term
finance available from the Government and most of them were keen to introduce a portfolio
of innovative financial products (like some initial use of take out financing by IDFC).

11

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

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September 2007

However, today their lending behaviour has become (for most purposes) not much different
from commercial banks. They also are not prominent players as they lack size.
Finally there are bilateral and multilateral institutions. While they too have long term loans
available and can offer innovative financial products (like political risk insurance, currency
risk insurance etc.) their participation in lending to PPP projects is insignificant as of now.

Availability of Long Term Finance

High

Bilateral and Multilateral
Institutions
IL&FS
IDBI
IDFC

Commercial
Banks

Low

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

*

Size of circle indicates relative size
in the financing pie
High

Use of Innovative Financial Instruments

The project database shows commercial banks to be the predominant source of long term
debt. However, this has not always been so. Historically requirements of long term debt by
industry were predominantly met from development finance institutions (DFI’s) promoted by
the GoI. The financial sector reforms started in the 1990s allowed the private sector to raise
long term finance from banks and international capital markets. At the same time it made
DFIs unable to raise long-term resources at reasonable cost due to changes in the SLR
requirements by banks and disqualification of investment by banks in DFI bonds to meet
their SLR requirements. Since then banks have become the largest source of financing for
long term debt, with some erstwhile DFI’s like ICICI and IDBI have also converted
themselves into banks. This raises questions on the future role of DFIs in financing of
infrastructure projects.
Bank lending to the infrastructure sector has grown rapidly over the last few years. However,
the growth in lending to infrastructure is not unique. In fact it is concomitant with a sharp rise
in non food credit provided by banks, with strong growth in credit off take being observed in
both the corporate and retail segments (more detailed projections for the PPP infrastructure
lending by commercial banks is presented in Annexure 5). Also infrastructure projects are
not unique in the need for long term loan. Significant proportion of the credit demand for the
long term exists in other sectors like real estate. This demand for long term loan from
multiple sectors will eventually hamper the lending by commercial banks due to the issue of
Asset Liability Mismatch. This issue is explored next.
Asset Liability Mismatch (ALM): Long term financing by banks exposes them to the risk of
asset liability mismatch. The major source of fund for Indian banks is saving bank deposits
and term deposits, the maturity profile of which ranges from less than 6 months to 5 years.
Such deposits account for over 80 percent of the liabilities of Public Sector banks and
around 73 percent for Private Sector banks. Lending long term with such a short term asset
base exposes the banks to ALM risks.

One manifestation of ALM is in terms of liquidity risk. This is the risk that excessive long term
lending growing faster than the growth in credit will result in banks failing to repay its short
term depositors. As long as there is surplus liquidity in the banking system there is very little
liquidity risk. This situation prevailed in the Indian banking system for a long time when the
deposit growth was much higher than the credit off-take. However, in the past 2-3 years the
situation has reversed, with credit off-take (including long term credit off-take) far exceeding

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deposit growth. This has resulted in banks liquidating their statutory reserves with the RBI to
fund the credit demand.
While this is unlikely to cause banks to fail in India, yet there are some worrying signs. Firstly
there is a rapid reduction in excess Statutory Liquidity Ratio12 (SLR) in the banking system.
ICRA estimates that SLR has reduced to around USD 13 billion (Rs. 600 billion) as on March
2007 from over USD 55 billion (Rs. 2.5 trillion) as on March 2005 and around USD 26 billion
(Rs. 1.2 trillion) as on March 2006. As a result the ability of the banks to repo these excess
securities to meet liquidity pressures have reduced. Also by lending long term banks expose
themselves to the risk of reduction in margins. To service liabilities and to meet credit
demand banks need deposits. The scarcity of deposits in such a situation leads them to pay
ever higher premium for them. In India this has been seen in the form of high interest rate
time deposits being issued by banks to improve their liquidity situation.
RBI view on the ALM issue is that in the future banks role will have to be confined to
supplementing long term lending rather than remain as the primary lenders. The
development of other avenues for long term funding is important in the light of the fact that
RBI is pushing the banks to become more stringent in lending long term. Internationally
many banks avoid ALM by participating in infrastructure projects through bridge loans and
mini perm loans during the riskier construction period of infrastructure projects. After the
operations begin and the risks are lower then financing is sought from other less expensive
long term lenders (like insurance firms) as well as from bond issues. In India the absence of
such lenders makes such a situation difficult at present.
Another way in which International banks are able to manage their long term Asset Liability
matching issue is selling down their loans in a variety of ways, sometimes packaging several
project debts together, to buyers with different risk appetite. Typically these buyers include
other banks, pension funds, insurance companies, other institutional investors etc. Since, the
market is very liquid for such products, banks or the buyers of such products do not have
major issue of asset-liability mismatches. The timing of such sell downs also range from
immediate to few years depending on the risk profile of projects as well as the risk appetite
of buyers.
Commercial banks in India are not able to meet their ALM mismatch in the same way. The
market for such products is not liquid and hence not preferred by many investors. Banks can
raise long term Bonds to provide long term debt to PPP projects. RBI through its annual
Policy statement for the year 2004-05-issue of long-term Bonds by banks13 has allowed for
this. The circular allows banks to raise rupee denominated long term bonds to the tune of
bank’s exposure to infrastructure projects with residual maturity of more than 5 years.
However, the cost of these long term funds to banks and ultimately to the PPP project is high
and there is not much demand for expensive credit. Some institutions/ banks like IDBI, ICICI,
UTI, and IDFC etc have raised long term funds through bonds for lending long term.
However, competition with commercial banks, who lend long term using cheap retail assets
(cost of assets being less than 5 percent in some cases), forces even the more prudent
banking institutions to price below what is necessarily prudent.
In addition, to ALM issues another issue with the present financing of the debt component of
infrastructure projects relates to the short tenure of loans and the reset periods on offer.
Tenure and Reset Period of Infrastructure Loans: Presently the tenure of infrastructure
loans is nearly half of the concession period. Our interviews with banks indicate that the
short tenure is possibly given by the banks to give them enough time for restructuring the
infrastructure asset in the event that something goes wrong with the project.

12

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

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Average Tenure and Concession Period
16

Airports

30

13

Ports

28

12

Power Transmission

25

10

Railways

28
14

Roads & Bridges
5

Solid Waste

16
15

Water Supply
-

23

5

10

28

15
20
Number of Years

Average Concession Period

25

30

35

Average Tenure of Debt

As compared to India internationally the debt tenure is typically 80-90% of the concession
period. For example, some of the PPP deals in the international market as presented in
Exhibit 8 have average debt tenure to concession period ratio of 80%.
Exhibit 8: Loan Tenure to Concession Period Ratio for Ten PPP Projects in last Two Years
#
1.

Year of
Financial
Close

Project

Debt
Amount
(million)

Debt
Tenure
(years)

Currency

Ratio

4.

5.

6.

7.

8.

2007

29

320

Pound

25

86%

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

2006

25

105

US Dollar

23

92%

The Uijeongbu
Project (Korea)

2006

30

132

Euro

18

60%

W

20

67%

51

3.

Project

58

2.

Lancashire Waste
(UK)

Concession
Period (years)

W

23

77%

Limerick
(Ireland)

Tunnel

The
Wastewater
(Belgium)

light

rail

conduit

2006

36

258

Euro

34

94%

Brussels-North
Project

2006

20

167

Euro

18

90%

100

Euro

19

95%

Cyprus
Airports
(Cyprus)

Project

2006

25

542

Euro

19

76%

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

2005

35

1350

Euro

30

86%

Madrid's flagship ring-road

2005

35

1350

Euro

30

86%

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project, Calle 30 (Spain)
9.

10.

1150

Euro

20

57%

E18 Grimstad-Kristians and
road project (Norway)

2006

35

399

Euro

28

80%

Richmond Airport-Vancover
rapid
transit
project
(Canada)

2005

35

600

(Canadian
Dollar)

25

71%

Average

80%

Source: Project Finance Magazine various issues
However, it must be noted that in UK too PPP loans, in the initial years, were of shorter
period when compared to concession lengths, the reason being little known history of
performance of PPP projects. Even now real toll projects, where the traffic risk is borne by
the project companies, have relatively smaller debt tenure to concession length ratios.
The significant issue with debt financing in India is that in addition to short tenure banks also
ask for short resets and high Average Debt Service Cover Ratio (DSCR) from promoters. In
our interviews banks have indicated that they prefer a 1.5 DSCR or more, except for (NHAI)
annuity projects where they are willing to look at lower DSCR (near 1.2) due to lower risk on
projected revenues.
Exhibit 9: DSCR Required by Banks
Minimum DSCR Desired by Banks
1.2-1.5
24%

More than 1.5
26%

Around 1.5
50%

In mature markets like UK, the Average DSCR in PPP projects range from 1.05-1.1.
However, banks attributed this difference to the lack of history of PPP projects in India which
forces the banks to keep a higher margin for repayment. Another reason for a higher DSCR
in India is because the traffic risk in the project is also factored in by banks.
Along with high DSCR requirements banks in India also push for short reset period in
projects. Volatile interest rate regime14 in India has been one of the factors that have led to

14

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

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

Standard Deviation

SBAR

0.013

3 year G-Sec

0.024

5 Year G-Sec

0.025

10 Year G-Sec

0.026

Libor
0.019
Source- RBI, SBI, Moneycafe website

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Draft Final Report
September 2007

banks to become cautious on interest rates. The accompanying exhibit shows a decline in
average reset periods across years. From the point of view of projects short reset periods
are potentially risk for infrastructure projects as an upward movement in rates can worsen
project
viability.
Average Reset Periods
3.5
3.0

3.0

3.0
2.7

2.6

2.5

2.0

2.0
1.5
1.0
0.5
2002

2003

2004

2005

2006

Year

The reset period for some of the recent projects have become yearly. Yearly reset periods
are a way of passing the entire interest rate risk to the project. However, our interactions
surprisingly showed that many developers actually preferred shorter resets. This is because
the experience in India has been one of falling interest rates and projects being refinanced at
a lower rate. Having said this we have not come across any project in our survey where
there was an increase in interest rates because of the reset clause. The possible reason for
this phenomenon is that in general the interest rates have been falling over the years of the
survey and also that banks generally perceive a lower risk when the project construction
period is over.
Post construction, when the majority of the risks have been covered, the developers
frequently renegotiate the loan terms with the commercial banks to more favourable terms.
However, in the present system renegotiations have to be carried out for individual projects
which can be both time consuming and expensive. There is no availability of institutions
which actively seek projects to take up on their own once the construction risk is over.
(Annexure 8 presents some of the case studies and international examples on refinancing of
PPP infrastructure projects)
One view that we commonly encountered during our interviews was that despite some
obvious safeguards adopted by banks in lending to the infrastructure sector it was doubtful
whether the banks were pricing all the risks correctly. Some market participants felt that
commercial banks were showing a lot of exuberance in lending to infrastructure sector and in
the process was ignoring several project risks during lending. They felt that the situation of
not building in risks in the lending terms was not sustainable and a tightening of lending
conditions as well as the implementation of the Basel II norms might result in a reduction in
lending by banks to the sector. It is important to analyze this claim because one of the
significant criticisms of infrastructure development in China has been that banks have lent
without prudence thereby saddling them with huge levels of Non Performing Assets.
Risk pricing by banks: To test whether risks are being priced appropriately by commercial
banks we decided to analyze the lending terms of one set of projects all belonging to one
sector (in our case the road sector) but with differing risk profiles (Annexure 6 details out our

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

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Draft Final Report
September 2007

methodology and findings). Based on our analysis we categorized our sample of projects
into high risk, medium risk and low risk. We analyzed the average interest rate charged to an
infrastructure project belonging to the three categories for the years 2002 and 2006 (where a
large set of projects were available). Separate analysis was done for 2002 and 2006
because the interest rate charged differs across years due to the variation in the rate of
government securities. The following results were obtained from the analysis:
Exhibit 10: Project Risk Category and Average Interest Rate
Financial Closure Year
2002

Risk Category
Low Risk
Medium Risk
High Risk

2006

Average Interest Rate
12.00
13.00
10.00

Low Risk
Medium Risk
High Risk

9.09
9.39
9.79

Note: Higher risk category number means higher project risk.

As can be seen from the table there does not seem to be any significant correlation between
the level of risk in the project and the interest rate charge. It is easy to see why a perception
can arise that risks are not being taken into account. However, that might not entirely be
true.
Based on our data it is difficult to comment the level to which risks are taken into account.
However, there does not seem to be any significant reason to believe that risks are not being
taken into account during lending. Also the imminent implementation of the Basel II norms
will require banks to become even more stringent on project lending.
A bigger cause of worry for lending by banks is that RBI exposure norms may constraint the
lending to some developers by banks. RBI classifies infrastructure financing to SPV’s in
India as forming part of the group exposure of the parent company. Beyond a certain point
banks are not allowed to take further exposure to these companies. In the current situation
large companies with varied interests are likely to hit the group exposure norms in the next
2-3 years preventing banks from lending to them. Institutions such as the IIFCL have been
actively lobbying the RBI and Finance Ministry to do away with the group exposure norms for
infrastructure. However, till now the RBI has stuck to not making any changes to the group
exposure norms. But if no changes are made then companies will be forced to look at
additional means of financing the debt component of the projects. This situation might
become a driver for change in the project finance market as existing commercial banks will
be forced slow down the growth in lending to the infrastructure sector. (Though is difficult to
assess the lending capacity of banks given the limited amount of information available still
an attempt has been made to assess the PPP lending capacity of banks. The detailed
methodology and findings of the assessment are presented in Annexure 5).
The next section discusses the trends and issues in equity financing in India.

4.1.2

Equity Financing
In our interviews with key stakeholders we found repeated reference to one key issue- the
amount of equity required to attract large volume of debt in the infrastructure sector is not
available. The lack of adequate amounts of risk capital is leading promoters of large
infrastructure projects to push for ever higher leverage from commercial banks. The
commercial banks on their part have largely acquiesced to their demands realising that
reaching financial closure would be difficult otherwise.
If we look at the numbers we find that Senior Debt to Pure Equity Ratio (DER) over the years
for all sectors has increased has increased from 2.1 in the year 2002 to 4.3 in the year 2006.

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Draft Final Report
September 2007

Exhibit 11: Increased Gearing over the Years
Debt to Equity Ratio

Ratio

(Senior Debt to Pure Equity)

5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
-

4.3

2.6

2.3

2.1

2.0

2002

2003

2004

2005

2006

Year

Also while we find that DER has increased across the board for all project sizes, the
maximum increase has been in the case of large projects. This indirectly hints at the problem
identified by stakeholders- large volumes of equity capital are not easily available.
Exhibit 12: DER by Size
Debt to Equity Ratio by Project Sizes
(Senior Debt to Pure Equity)

6.0
5.0
4.0
3.0
2.0
1.0
2002

2003

2004

2005

2006

Year
<USD 50 Million

USD 50-100 Million

>USD 100 Million

As per our analysis, total equity infused in PPP infrastructure projects (sector wise) is
USD2.93 billion by the Year 2006. The maximum equity (USD1.43 billion) has been brought
in Roads & Bridges which is due to the large number of projects being awarded on PPP
basis in the last 3-4 years. As can also be seen from the accompanying graphic nearly 80
percent of this equity at the SPV level is infused by the promoter’s themselves. This is
because due to the lack of exit options at the SPV level, lock-in etc. very few equity
providers are willing to participate at the SPV level. Annexure 7 explores the differences in
equity infusion by strong and small developers and looks at the restrictions on equity dilution
in concession and loan agreements. However, equity from other sources does come in at
the Promoter company/Holding company level through IPOs, private placements etc.
Exhibit 13: Sources of Pure Equity
Value of Pure Equity for sectors
Solid Waste
Management,
7.8

Water Supply,
102.3
Airports, 511.0

Sources of Pure Equity

Government
10%

Strategic
Inverstors
6%

Financial
Institution
2%

Roads &
Bridges,
1,429.5

Ports, 648.3

Power
Transmission,
107.6
Railways,
119.8

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Developer
82%

26

Draft Final Report
September 2007

One major reason for the predominance of equity infusion by developers is that currently
there are several restrictions on equity investments. The way rules are structured in India
makes taking out of the equity by the developers very expensive. This issue is discussed in
detail later in the report.
The ability of a developer to reduce their equity in the project is important so that it can
recycle the equity into other projects. Equity can be shared at the beginning of the project or
it can be sold off later in the project. However, in India many concession agreements do not
allow the developer to sell off their equity in the project. Internationally it is common for
financial investors to take over the project once the construction phase is over. This is
because once the construction risk is over financial institutions are more adept at increasing
the returns on the project equity as compared to a developer. The financial investor in turn
hires a contractor/s to provide for O&M. In the Indian situation this can especially work as no
developer really has the experience to claim that they adept at operating the assets in
comparison to some one else. While some movement has been seen in this direction, with
the new NHAI agreements allowing for more selling down of the equity, many concession
agreements still do not even provide for such a possibility15. In the projects analyzed we
have not seen financial investors become a part of the bidding consortium. However, the
situation is slowly changing with IDFC, SREI and Macquarie showing some interest in
infrastructure projects in India in recent times.
Despite these restrictions our data clearly shows that developers have been able to reduce
the level of own equity invested in projects.
Exhibit 14: Sources of Equity
Source of Equity by Sector

Source of Equity by Year

3%

2006

77%

2005

56%

2004
Year

12%
24%

61%

2003

11%

29%

20%

40%

Developer Own Equity

36%

21%

65%

15%

20%

3%

Ports

8%

60%

80%

Other Source of Equity

90%

100%

Sub-Debt

2%
5%

1%

15%

92%

0%

Airports

3% 11%

84%

2000

40%

27%
86%

2001

Railways

20%

73%

2002

11%

2%

Roads & Bridges

76%

0%

10%

Developers

20%

30%

Financial Institution

40%

5%

50%

Government

60%

70%

Strategic Inverstors

80%

17%

90%

100%

Sub-Debt

It can be seen that there has been substantial reduction in the percentage of equity provided
from developer’s own source for three years after the year 2002. A sector wise analysis
shows that equity funding by developers has been supplemented by Government equity as
well as sub debt in Airports & Railways projects while developer’s equity has been
supplemented primarily by sub debt in the Roads & Bridges projects. As can be seen, sub
debt has emerged as the primary means by which developers reduce their equity infusion.
The next section explores the role of this important mechanism in reducing equity.

4.1.3

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

15

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

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Draft Final Report
September 2007

Exhibit 15: Instances of Sub-Debt by Year and Sector
Instances and Value of Sub-Debt
(Total Value USD333 million)

Number of Instances

25

Sub-Debt Across Sectors by Value
(Total Value USD333 million)
139.0

Solid Waste
Management
1%

93.3

20

Ports
4%

Railways
9%

15
10
5

44.3
3.1

3.1

48.0

2.2

0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Roads &
Bridges
86%

Year

It may also be noted that there has been an increasing trend in sub-debt since the Year
2004. It can also be seen above that since 1998 an amount of USD333 million has been
infused as sub-debt, in PPP infrastructure projects. It is also important to mention that
majority of sub-debt (86%) has come in Road & Bridges PPP projects which is a matured
and more active sector now in terms of PPP initiative.
Our analysis of detailed financing information on the sample of 104 PPP projects reveals
that against the popular perception, sub-debt is not limited to annuity projects in Roads &
Bridges sector and only about 7% of projects having sub-debt are annuity projects.
Analysis of the data shows that most of the sub-debt has been provided by the senior
lenders themselves. This clearly means that sub debt is not really considered as
quasi equity, providing the lenders with the requisite amount of risk capital, but more
as a way to assist developers in putting less equity in the projects. In return for
‘conserving’ the equity of the developers banks charge a higher rate of interest on the
sub debt thereby improving the overall yield on the project debt. We also found that
sub-debt arrangement becomes easy if the project IRR is comfortable and the developer is
reputed.
In addition to sub debt we also found a limited number of strategic investors participating in a
few PPP infrastructure projects. However, going forward their presence is likely to increase
significantly.

4.1.4

Strategic Investors and their Investment in the Projects
Based on the survey information collected we found strategic investor in infrastructure sector
in only 9 PPP projects. The exhibit below presents more detailsExhibit 16: Strategic Investment by Sector
No of project with
strategic investor

Equity Infused (USD
Million)

Ports

4

29.89

Airports

3

102.15

Water Supply

1

30.00

Railways

1

4.89

Total

9

166.93

Sectors

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Draft Final Report
September 2007

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

4.1.5

Summary of Major Issues on the Debt and Equity Side
We find that on the debt side the major lenders are commercial banks. Going forward relying
on commercial banks as major lenders is precarious as banks are likely to be constrained in
their future lending due to the issue of asset liability mismatch. Also banks have not been
able to offer very long tenure loans and the reset period on these loans is very short. Finally
the exposure norms may prevent banks from lending to large developers in India thereby
stymieing the growth of PPP infrastructure in India.
On the equity side we find that promoter’s of PPP infrastructure projects have to put in most
of the equity requirement of an infrastructure project. There is an acute shortage of equity
with private developers and if the present trend continues then they will not be able to attract
the requisite amount of debt for the projects. Use of sub debt has eased the equity
requirement somewhat. However, restrictions on taking out of the equity by developers
remain a cause for concern. Involvement of financial investors in bidding for infrastructure
projects is also limited at present as is the involvement of strategic investors and
international companies.

4.1.6

What is Happening in Infrastructure Financing in Other Countries?
With an understanding of what is happening in India it is important to compare it with how
infrastructure projects are financed in other countries. This will help to highlight the gaps
faced by the infrastructure financing market in India and will also point to what can be done
about them, based on the experiences in other countries. This review is predominantly
focussed on infrastructure project development in other developing Asian countries
(especially China, Indonesia, Malaysia and Thailand where a majority of the private sector
investment in infrastructure have taken place) as the situation in many of these countries is
similar to the situation in India.
India is not unique in having a substantial infrastructure creation requirement. In fact as early
as the ninth five year plan (over the period 1996-2000) China had projected an infrastructure
requirement of nearly USD 305 billion, close to the infrastructure financing requirement being
projected in India for the 11th five year plan. And like India commercial banks have been the
major source for financing this infrastructure requirement. The role of other financial
institutions and capital markets has not been significant. It has also been seen that Chinese
banks are also resorting to using the corporate finance model as opposed to project finance
model for some infrastructure projects to bring in increased comfort.
As far as other Asian countries are concerned the infrastructure financing situation is also
not much different from India. Before the Asian economic crisis there was a significant flow
of foreign currency infrastructure financing, which was arranged by international banks.
International bank participation was high in a lot of countries as banks followed international
developers who participated significantly in developing infrastructure in these countries. The
long term relationship between international banks and developers helped to give an
additional sense of comfort in financing projects. Comfort was also got from various
guarantees given by Governments to reduce the risk of the lenders. However, the
experience of this first round of infrastructure development was bitter after the East Asian
economic crisis hit. Some countries like Indonesia defaulted on the guarantees offered to
project sponsors16 as they were hit by devaluation of the local currency. It was also realized
during the crisis that many projects had been financed on the basis of questionable viability
16

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

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Draft Final Report
September 2007

and under pressure from the economic downturn a lot of the projects suffered. As
infrastructure projects floundered in the wake of the crisis the increased risk perception led
to a significant reduction in the flow of capital for infrastructure projects in these countries.
With international capital flows drying up there has been an increased reliance on domestic
markets and commercial banks in many countries to provide the financing needed for
infrastructure projects. Infrastructure sector in countries with high liquidity in the banking
system have been able to tide the crisis as local commercial banks in these countries have
started to take a lead in infrastructure financing. The major reason for reliance on the
banking system has been that other avenues for financing are not significantly developed in
these markets.
China has seen the consequences of excessive reliance on commercial banks to lend to the
infrastructure sector. Chinese banks are saddled with very high levels of NPAs and as a
consequence very low returns on average assets. The returns on average assets for
Chinese banks are in the below .20 as compared to Indian banks where these returns range
from just below 1 to significantly more than 1. Banks are surviving only because of the high
levels of liquidity in the market and because the Chinese Government is strongly backing
them.
Confidence of international lenders has also slowly been returning. However, in their second
coming international banks have often been beaten by highly liquid local banks which have
been able to out price international banks as well as shown willingness to take higher levels
of risk while giving out plain vanilla products. International banks with higher financing cost
as well as currency risks have not been able to offer the kind of products needed by the
markets in these countries. Another issue for the lack of financing products from international
banks has been that the attendant legal underpinning necessary for such transactions is
either absent or not easily enforceable in many countries.
If we contrast the above with the situation prevailing in India we find that there are many
similarities. Commercial banks lead infrastructure financing in India like elsewhere. Also like
India most other developing countries lack alternative means of financing infrastructure.
There are some countries like Chile and Malaysia which also have a strong corporate bond
market which helps in raising infrastructure bonds. But even in these countries the tenure of
the bonds is not significantly more than the tenure being offered by the banks to
infrastructure projects in India.
As the Chinese example shows large involvement of the banks in financing infrastructure
can lead to deterioration in bank finances. Thus if the health of the banking sector has to be
maintained (or improved upon in light of Basel II guidelines) then alternatives to bank lending
in infrastructure projects will need to be found.
Also, going forward, a large proportion of the infrastructure financing will be local currency
based even though other countries have successfully implemented projects with external
commercial borrowing. This is because in India the RBI fears that a significant rise in liquidity
in the market will increase the inflation rate which it wants to keep in check. Also RBI is quite
stringent on exchange risk management.
While it is imperative that other sources of infrastructure financing will need to be tapped in
India there are very few successful templates that exist in the developing world for
developing markets for such financing. As a consequence India will have to largely chart its
own course on the matter taking cognizance of developments elsewhere. The aim of the
reforms will have to be to ease the constraints that are faced in infrastructure financing. In
the next section we discuss some of the changes required.

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Draft Final Report
September 2007

5

Objective 3: To Identify Changes Required to Reduce and
Ease the Identified Constraints
As discussed in the previous section, from a financing point of view there are several
changes required to help ease the requirements of the infrastructure sector in the long run.
Many of these issues are already recognized by the GoI and in particular the Ministry of
Finance. It is important to understand that these changes, even if forthcoming, will not yield
dramatic results. It is highly unlikely that the requirement of USD 320 billion will be financed
if the constraints are removed as results of many of these changes will only be seen in their
full force in the long run. That is why the changes required should be viewed at as forward
looking activities which need to be rolled out to streamline the financing requirement in the
future.
Changes are required both on the debt side and the equity side. On the debt side new
sources of funds need to be developed to reduce the reliance of infrastructure financing on
commercial bank lending. Also to continue the momentum of bank financing of infrastructure
changes need to take place so that banks do not concentrate risks from long term lending.
On the equity side as well new sources of equity need to be explored to ease the scarcity
being faced by excessive reliance on promoter’s equity.
It is important to keep in mind that changes required should not be such that they
compromise on risk assessment of projects or give out bad loans. India already has had
experience with such lending by development finance institutions to the corporate sector.
These institutions where saddled with large amounts of bad loans and fiscal imperatives post
the reform in 90’s led to a fading away of many such institutions. Thus while infrastructure
development is critical we assume that the Government will not take it up at the cost of
prudence.
This section will highlight the areas where we feel changes are needed. It will also present
some areas in which changes are already taking place. However, as already indicated at the
beginning this report does not involve giving recommendations on the policy changes
required as various other reports already describe them. Instead focus will be on detailing
out the possibility for change in various areas and then leave it to the Ministry of Finance and
other concerned stakeholders to decide on the exact path they want to follow to bring about
changes.

5.1

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

5.1.1

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

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Infrastructure financing-india

Infrastructure financing-india

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