Infrastructure Finance: One Crore Ten Crore
Infrastructure Finance: One Crore Ten Crore
Infrastructure Finance: One Crore Ten Crore
“EveryOne
OneCrore
Crorerupees
rupeesspent
spentin
ininfrastructural
infrastructuralprovision
provision
now,
now,saves
savesTen
TenCrore
Croreononcost
costescalation
escalationand
and
public
publichealth
healthcare
caredue
dueto
todeficient
deficientservices
serviceslater!”
later!”
Infrastructure finance
INFRASTRUCTURE
FINANCE
Presented by :
Prashant G Sarfare 48
Infrastructure finance
1. Introduction
2. Indian Infrastructure Sector
3. Policy frame work
4. Source of Fund - Funding Agencies
5. Source of Fund - Type of Fund
6. Various Models for Financing Infrastructure
7. Challenges and Opportunity
8. Case Study : Noida toll bridge company Ltd
9. Conclusion
Introduction
Definition of ‘infrastructure lending’
• Any credit facility in whatever form extended by lenders
(i.e. banks, FIs or NBFCs) to an infrastructure facility as
specified below falls within the definition of
“infrastructure lending”.
• In other words, a credit facility provided to a borrower
company engaged in:
· developing or
· operating and maintaining, or
· developing, operating and maintaining roads , ports,
airports etc.
Development of Infrastructure in India
Government Funding
• Entire investment, construction, operating, and maintenance by
government
– Direct budgetary devolution (tax-payer money)
– Debt raised against government guarantees, (and “letters of comfort”)
– Financing primarily by HUDCO and LIC
– Loans from International Funding Agencies like OECF(JBIC),
World Bank, ADB, KfW, USAID, etc
• Countries throughout the region have recognized that the public sector is
unlikely to mobilize the required resources and that the private sector must
be brought in as a supplementary source of finance.
• STATE-OF-THE-ART
TECHNOLOGIES
• EFFICIENT PROJECT
MANAGEMENT /
MAINTENANCE
Advantages
1. Cost Efficiency:
privately implemented and managed projects are likely to have a better record of delivering services
which are cheaper2 and of a higher quality.3 The India Infrastructure Report (2003) estimates that the
Indian economy’s growth rate would have been higher by about 2.5% if the delays and cost overruns
in public sector projects had been managed efficiently.4 The report goes on to state that the
predominant cause for such delays / overruns was not under-funding of the projects, but arose, “on
account of clearances, land acquisition problems, besides factors internal to the entity implementing
the project”.
2. Equity Considerations:
since it is hard to argue that every infrastructure project uniformly benefits the entire population of
the country, it may be more appropriate to impose user charges which recover the cost of providing
these services directly from the user rather than from the country as a whole (the latter is the effect if
the government builds the project from its own pool of resources). If users are to be charged a fair
price then the project acquires a purely commercial character with the government then needing to
play the role only of a facilitator.
3. Allocational Efficiency:
Since users are likely to pay for services that they need the most, private participation and risk-return
management has the added benefit that scarce resources are automatically directed towards those
areas where the need is the greatest.
4. Fiscal Prudence:
Both at the centre and state levels, for a variety of reasons, there is a growing concern that the
absolute and relative (to GDP and GSDP respectively) levels of fiscal deficit are high and that
incurring higher levels of deficit to finance infrastructure projects is infeasible.8 Given the strength of
these arguments, the government has made several attempts to create the preconditions for a
sustainable and scaleable involvement of the private sector in the development of infrastructure
within the country. These have included promotion of DFIs such as idbi ifci fc idfc uidf etc
Possible option - variations
Guarantees / Risk
insurance / funding Equity
Project Project Sponsor
Syndicated
Export Credit Agencies funding
Infrastructure finance tends to have maturities between 5 years to 40 years. This reflects both
the length of the construction period and the life of the underlying asset that is created. A
hydro-electric power project for example may take as long as 5 years to construct but once
constructed could have a life of as long as 100 years, or longer.
• Larger Amounts:
a meaningful sized infrastructure project could cost a great deal of money. For example a
kilometer of road or a mega-watt of power could cost as much as US$ 1.0 mn and
consequently amounts of US$ 200.0 to US$ 250.0 mn (Rs.9.00 bn to Rs.12.00 bn) could be
required per project.
• Higher Risk:
Since large amounts are typically invested for long periods of time it is not surprising that the
underlying risks are also quite high. The risks arise from a variety of factors including demand
uncertainty,14 environmental surprises,15 technological obsolescence (in some industries such
as telecommunications) and very importantly, political and policy related uncertainties.
Characteristics of infrastructure finance
• Fixed and Low (but positive) Real Returns:
Given the importance of these investments and the cascading effect higher pricing here could
have on the rest of the economy, annual returns here are often near zero in real terms.16
However, once again as in the case of demand, while real returns could be near zero they are
unlikely to be negative for extended periods of time (which need not be the case for
manufactured goods. Returns here need to be measured in real terms because often the
revenue streams of the project are a function of the underlying rate of inflation
• Credit appraisal
The lenders finance the project looking at the creditworthiness of the project, not the
creditworthiness of the borrowing party. The repayment of the loans is made from the earnings
of the project.
Domestic sources External sources
Equity
Domestic developers (independently or in International developers (independently or
collaboration with international developers) in collaboration with domestic developers)
Public utilities (taking minority holdings) Equipment suppliers (in collaboration with
Other institutional investors (likely to be very domestic or international developers)
limited) Dedicated infrastructure funds
Other international equity investors
Multilateral agencies (International Finance
Corporation, Asian Development Bank)
Debt
Domestic commercial banks (3-5 years) International commercial banks (7-10 years)
Domestic term lending institutions (7-10 years) Export credit agencies (7-10 years)
Domestic bond markets (7-10 years) International bond markets (10-30 years)
Specialized infrastructure financing institutions Multilateral agencies (15-20 years)
Bilateral aid agencies
Sources and methods of financing
• Equity financing
Project sponsors are an important source of equity, but they contribute only
part of the total equity in most cases. Although preconstruction, or
developmental, costs represent only a small fraction of total cost in
infrastructure projects, they can nevertheless run into several millions of
dollars, all of which must be financed by equity provided by project
sponsors
• External debt financing
• Export credit agencies.
have been the dominant source of international capital to finance
infrastructure projects. In recent years export credit agencies
have tended to guarantee bank loans. Traditionally, they funded
public sector projects backed by sovereign guarantees, with
some willingness in recent years to lend against guarantees of
commercial banks
• International commercial banks
• International bond markets.
• Multilateral institutions
Domestic debt financing
• BOOT
i) Annuity Based Model
ii) Toll based model
• BOO
–Viability GAP Funding
–Revenue Sharing Model
–Tariff based bidding
BOOT:
»Mumbai and Delhi airport modernization has been carried out on this
model
Financing Infrastructure– Various Models
SPONSOR/S
SPV LENDERS
P
O
W EPC
E
R FUEL SUPPLY
P O & M
L
A OPERATIONS
N
T
S
A P
L O
E W
E
O R
F
SEB / GOVT.
default by SEB
LC non
operative
Escrow
non
operative
tier III
Govt guarantee