Green Financing for Railways Project in India

Introduction to the project

Mr. Trivedi, a consultant from WIMWI Consulting Group, had massive amounts of analysis and
decision-making pending for a large railway project being planned by a State Government. This
project was regarding a medium high-speed railway corridor between the state capital and a city
that boasted of high commercial activity and was approximately 250 km from the state capital.
The technologically advanced infrastructure and trains required for this project are manufactured
in India and are supported by the Make in India initiative.

Details of the Proposed Railway Project:

The project is expected to take around 10 years to complete with an estimated cost of around
INR 217 billion (Exhibit 5). In order to make the railway project environment friendly and
sustainable and the government had asked Mr. Trivedi to explore options for meeting the plant’s
energy requirements via renewable energy sources. The proposed project, had hourly energy
requirement of 75,000 Kwh.

The renewable energy could consist of a basket of solar power, wind power, or bioenergy. The
State had good potential for putting up solar and wind power, while bioenergy needed energy
plantations, water and involvement of farmers. These made bioenergy a challenging option, but
involvement of farmers was a politically attractive option for the State government. The relative
per MW capital costs of the three options were INR 50, 70 and 35 million respectively.

Indian Railways have been procuring power through the State Utilities at an average rate of Rs
6.75 per unit. If the railways were to set up its own renewable energy plant for supplying power,
in addition to incurring capital costs as described above, it would have to incur maintenance
expense of Rs 1.2 million per MW per annum (escalating at 5% p.a.) for wind and solar energy
projects. In case of a biomass plant, the production cost per unit of power would come to be
around Rs 2.5/ Kwh.

The task at hand of Mr. Trivedi was to explore options for cheap financing of the renewable
energy project so as to make it financially feasible. One of the options was to go for green bonds
as a source of debt financing. These bonds were becoming extremely popular in India with
majority of them issued for renewable power projects (Exhibit 4).

Green financing
Bonds of which proceeds are utilised to finance the projects regarding implementing climate
change and environmental solutions are called green bonds.

Green bonds are generally issued for capital intensive projects which have low risk revenue
streams over long period of time. Exhibit 2 provides the process for issuance of green bonds.
1|Page
As per the broad Securities and Exchange Board of India (SEBI) guidelines of 2017, for debt
securities to be considered as green, the various categories for which proceeds could be used
include renewable energy, clean transportation, green buildings, waste management, water
conservation, sustainable land use, etc (https://www.sebi.gov.in/legal/circulars/may-
2017/disclosure-requirements-for-issuance-and-listing-of-green-debt-securities_34988.html).

Green bonds are steadily growing in India (Exhibit 3). The cumulative green issuance from India
between 2015 and 2018 November stands at USD 7.15 Bn. In 2017, Indian Railway Finance
Corporation (IRFC) issued green bonds worth USD 500 mn to fund a series of low carbon
improvements in Indian railways infrastructure and rolling stock. It was issued at the yield of
3.835% and was the tightest spread over US treasury achieved for any Indian issuer over the last
decade. This issue was oversubscribed by 3x, signifying the global investor interest.

The yields of green bonds were generally lower than conventional bonds and the reason for that
was the higher disclosure requirements leading to transparency in usage of funds. Companies
have to periodically issue report detailing the use of funds raised via green bonds.

Process of listing green bonds

Exhibit 5 shows the different modes through which green bonds are issued and cost of financing
via each mode. In the past, green bonds issued in India were all done through international
exchanges like London Stock Exchange.

To issue green bonds a company needs to be compliant with the SEBI guidelines. Moreover, to
gain investor confidence, the globally accepted standards for green bonds by the Climate Bonds
Initiative should be complied with. (Exhibit 2)

Option to list the bond on an Indian exchange can also be explored. India INX, the international
exchange, recently launched a dedicated platform for climate and sustainability related bonds,
called the (Global Securities Market) GSM Green. It is India’s first listing platform that allows
raising funds in any currency from investors across the globe. The criteria for issuance of green
bonds in alignment with standards accepted globally, as given by ICMA's Green Bond Principles
and Climate Bonds Initiative (Exhibit 2).

India INX gives an advantage in terms of supportive regulatory framework and tax structure
which is similar to other global financial centers. These include waiver of several taxes like
commodity transaction tax, capital gains tax and GST, dividend distribution tax, security
transaction tax. However, given the exchange was set up recently, it has not been able to
generate considerable investor traction.

2|Page
Mr. Trivedi also had to decide whether to issue the bonds in domestic currency (Masala Bonds)
or Foreign Currency. In case the issue is made via foreign currency bonds, the currency
depreciation risk will have to be born by the railways. However, the rate of interest of foreign
currency bonds is lower than domestic currency bonds (Exhibit 5).

The renewable energy project was expected to take 5 years to complete. Given that the capital
outflows will be distributed over the 5 years, the bond issuance would have to be done in
tranches. It was expected that the disclosure of the incremental steps taken towards project
completion and compliance with green standards can aid the incremental financing through
heightened investor confidence and possibly lead to lowered costs

Benefits for Indian Railways in the long run

Raising finds via. Green bonds will have following benefits for Indian railways: -
1. Transparency- Many railway projects are burdened by red tapism. Green bond issue will
improve transparency and promote compliance
2. Project Execution- Over 200 delayed railway projects face cost overrun of Rs 2.21 lakh
crore. Green bond compliance requirements could deter the delays.
(https://www.businesstoday.in/current/economy-politics/railways-indian-railways-
projects-delay-in-projects-railways-news/story/338999.html)
3. Sustainability- Funds from green bonds should be used for projects which are sustainable
and include renewable power projects, green buildings, water and waste management
systems
4. Cheap and adequate funding- Given the need to attract funds for such railway projects,
green bonds can act as a cheap source of funding

Decisions to be made
Mr Trivedi had to make the following decisions:
1. The percentage of renewable power project cost to be financed via. Debt and Equity
2. Whether the project could be financed by green bonds entirely?
3. Whether this could be from the start itself or should financing be done incrementally as
the execution of the project progresses?
4. Comparison of different forms of renewable energy (solar, wind, biomass)
5. Whether to issue the bonds nationally (INX) or internationally? Whether the bonds
should be issued as masala bonds or foreign currency denominated bonds?
6. In case the setting up of renewable power plant is not financially or practically feasible,
should the railways go for purchasing power from the grid and buying an equivalent
amount of Renewable Energy Certificates (REC) from the market? This option has to be
explored in light of the fact that the state has committed to potential investors and
stakeholders that the railway project will be environment friendly and sustainable.
The price trend of RECs is given in Exhibit 7
3|Page
4|Page
Exhibit 1: Project Cost

Total Cost (INR billion) 216.97

Renewable energy (solar, wind
and bioenergy) and connecting
infrastructure 19.25
Station Buildings (conventional) 1.68
Elevated Viaduct (conventional) 110
Plantation Cost 0.01
Waste Management 0.1
Water Management 0.15
Other Costs 85.78
Note: These estimates could go up by 15%

Exhibit 2: Climate Bonds Certification process

Source: - https://www.climatebonds.net/certification

Exhibit 3: Green Bond history in India

5|Page
Source: https://www.teriin.org/sites/default/files/2018-05/Report%20under%20NFA
%20grant_2018.pdf

6|Page
 Exhibit 4: Use of Green bond proceeds in India
2% 2%
13%

Renewable Energy
Transport
Water Conservation
Adaptation
83%

Source: https://www.teriin.org/sites/default/files/2018-05/Report%20under%20NFA
%20grant_2018.pdf

Exhibit 5: Possible modes of Green Bond issue

Source: - https://www.climatebonds.net/

Exhibit 6: Expected cost of Debt financing

Dollar Denominated* Rupee Denominated

Based on IFRC issue 3.85% 7.35%
3.50% 7.00%
3.00% 6.50%
In Case of Credit 2.50% 6.00%

7|Page
 Enhancement

* Rupee is expected to depreciate relative to the US Dollar at a rate of 4%-8% per year
Source: https://www.teriin.org/sites/default/files/2018-05/Report%20under%20NFA
%20grant_2018.pdf

Exhibit 7: REC Prices over last 2 years

REC Price/Kwh
3.0

2.5

2.0

1.5

1.0

0.5

0.0

8|Page