Financing Infrastructure

Projects
Group 2B
INTRODUCTION
Overview of Infrastructure Financing
• Infrastructure development is a capital intensive process with low operating costs and
high initial costs. It needs long term financing because of its long gestation periods.

• The riskiness of the projects fall as they mature. Factors such as strength and experience
of promoters, clarity on govt policies, tax benefits, RBI policies and project structuring
play crucial roles.

• In India, almost 42% of the total infrastructure financing is borne by the commercial
banks.

History of Infrastructure Financing

1 9 9 1 -9 3 11999971--9983 2003-04 2007-09 2 0 1 2-17 PRE SE N T

The share of public Due to a slowdown, the Revival of the Indian RBI acted against Fiscal stimulus was In 2019, the government
sector investment in share of private economy took place. inflation by raising withdrawn and growth announced the National
infrastructure brought investments remained National Highway CRR in 2007. The slowed down. Private Infrastructure Pipeline. It
down to 25% through constant. In areas requiring Development Program & fiscal stimulus after infrastructure firms went involves an outlay of Rs.102
LPG reforms, little regulation (airlines, Prime Minister’s Gram 2008, took the form into deep trouble and NPAs Lakh Crores for infrastructure
delicensing & abolition courier services, telecom), Sadak Yojana were major of investments in rose in many banks, projects over the next 5 years,
of the Industrial Policy private investments drivers for the inclusion infrastructure. especially PSU banks . to be shared by the centre
Resolution of 1956. continued. of private sector. (39%), states (40%) and the
private sector (21%)..
INSTRUMENTS FOR INFRASTRUCTURE
FINANCING Bank Credits NBFC Financing
• In 2019, due to tightening of interest rates, challenging
• Gross bank credit to the sector stood at INR 10.56 trillion in macroeconomic factors and ILFS default, the confidence of
Mar 19 as compared to INR 8.9 trillion in Mar 18 NBFCs shook
• Despite this degrowth, share of IFC in total infrastructure credit
• Banks can finance a project through: increased to 50% as on September 2019 as compared to 2015
 Consortium of banks
 External Commercial Borrowings
Capital Markets & IPO
Segments of Bank Credits (as on 31st May, 2019)
• 2018-19 saw listing of public sector railway undertakings
Prior
ity • Fundraising through IPOs slowed down in 2018-19. There were
Serv
ices
Sect
orInfra
9 PPOs in 2018-19 as compared to 12 in 2017-18
20% 24%stru
Agri
cult
ctur
e Bonds and Insurance Companies
ure [PE
10% RC • Bonds are issued by way of government borrowings. private
Pers InduENT
onal strieAG placements and issuance of commercial paper
Loa
ns
s E]
16%
• Life insurers are required to invest 15% in infrastructure firms
20% as specified by IRDA
• These insurance companies generally invest in AAA rated
• Issues in Bank Financing:
infrastructure bonds
 Asset Liability Mismatch
• As per CRISIL report, the infrastructure sector would require
 Sector-wise caps
INR 10 trillion of funding through bond market by FY 2021
 Low liquidity due to the Limits set by RBI
RBI GUIDELINES

Infrastructure lending

A credit facility extended by lenders to a borrower for exposure in the following infrastructure sub-sectors will qualify as
'infrastructure lending’ (As per RBI Master Circular- Loans and Advances – Statutory and Other Restrictions” on July 01, 2015) :

Category Infrastructure sub-sectors

Transport i Roads and bridges
ii Ports
iii Inland Waterways
iv Airport
v Railway Track, tunnels, viaducts, bridges
vi Urban Public Transport (except rolling stock in case of urban road transport)
Energy i Electricity Generation
ii Electricity Transmission
iii Electricity Distribution
iv Oil pipelines
v Oil / Gas / Liquefied Natural Gas (LNG) storage facility 3
vi Gas pipelines
Water & Sanitation i Solid Waste Management
ii Water supply pipelines
iii Water treatment plants
iv Sewage collection, treatment and disposal system
v Irrigation (dams, channels, embankments etc)
vi Storm Water Drainage System
vii Slurry Pipelines
Communication i Telecommunication (Fixed network)
ii Telecommunication towers
iii Telecommunication & Telecom Services
Social and Commercial i Education Institutions (capital stock)
Infrastructure ii Hospitals (capital stock)
Three-star or higher category classified hotels located outside cities with population of more than 1
iii
million
iv Common infrastructure for industrial parks, SEZ, tourism facilities and agriculture markets
v Fertilizer (Capital investment)
vi Post-harvest storage infrastructure for agriculture and horticultural produce including cold storage
vii Terminal markets
viii Soil-testing laboratories
ix Cold Chain
x Hotels with project cost of more than Rs.200 crores each in any place in India and of any star rating;
xi Convention Centres with project cost of more than Rs.300 crore each.
 Criteria for financing

I. The amount sanctioned should be within the overall ceiling of III. In respect of projects undertaken public sector
the prudential exposure norms prescribed by RBI for undertakings registered under Companies Act or a
infrastructure financing, i.e. Single borrower: Upto 20% of capital Corporation established under the relevant statute.
funds, Group borrowers: Upto 50% of capital funds

II. Banks/FIs should have the requisite expertise for appraising
technical feasibility, financial viability and bankability of
projects, with particular reference to the risk analysis and
sensitivity analysis.
IV. Banks may also lend to Special Purpose Vehicles (SPVs)
in the private sector, registered under the Companies Act for
directly undertaking infrastructure projects which are
financially viable and not for acting as mere financial
intermediaries.

Infrastructure Finance Companies

• Minimum, 75% of the total assets of the • The company must have a minimum net worth of
company, should be deployed in the Rs 300 Crore.
infrastructure loans.
(IFCs)
• The capital to risk weighted asset ratio or • The company should have a minimum credit rating
CRAR of the company should be at 15% of “A” or equivalent of CRISIL, or equivalent to any
with Tier-I capital at 10%. other accrediting rating agencies.
PROJECT APPRAISAL PROCESS
Contractual Structure Appraisal Documents
Project Documents
Concession/License Agreement Agreement with the government granting
Co
the right to the project vehicle to develop
v en the project
Cr an
ed t s
Shareholders' Agreement Agreement between all the shareholders of
ts

i tE
en

nh the SPV, including project sponsors

ym

Lenders an
Pa

Funding ce
Protection m
en Engineering Procurement and Agreement between the SPV & EPC that
t Construction (EPC) Contract gives the sole right of the EPC in designing,
procuring, constructing, testing and finally
commissioning the plant/facility according
to specifications laid down in the contract
within a specified date and at a certain cost

Constitution of SPV Operations and Maintenance Agreement between the SPV & O&M
Li Contract to
ov nka Contract contractor to operate the plant/ facility to
er g build
& e of Contract to maintain, operate ensure its productivity and smooth
tak ha functioning.
ing nd and collect till/tariff
ov ling
er
Finance Documents
Loan Agreement Amount and purpose of the loan & the term
of the loans or repayment schedule
Inter-Creditor Agreement A syndication owing to the large loans in
infrastructure.
COVENANTS

• A covenant is a promise in an indenture, or any other formal
debt agreement, that certain activities will or will not be
carried out or that certain thresholds will be met
Financial Covenants
The borrower shall comply with the following financial covenants:
 Total Long Term Gearing not exceeding 70:30
 DSCR not less than 1.25 times
 Security cover of not less than 1.33 times

Affirmative Covenants: Negative Covenants:

• An affirmative or
positive covenant is a
clause in a loan contract
that requires a borrower
to perform specific
action
• Negative covenants are
put in place to make
borrowers refrain from
certain actions that could
result in the deterioration
of their credit standing
and ability to repay
existing debt
Shareholding Covenants
The aggregate direct and indirect shareholding of the Sponsors
shall not be less than X% of the total Shareholding of the company.
Challenges
• Reduced flexibility in managerial decision making for the
borrower
• Disclosure covenant requires firms to disclose sometimes
proprietary information to a consortium of banks thus
increasing the chances of leaks
APPRAISAL BY BANK
Detailed Appraisal
Management Appraisal
Technical Feasibility
Commercial Viability
Financial Viability
Long Term Debt Equity
Ratio
Interest Coverage Ratio
Lenders need confidence in the
management along with the project
team involved and the sponsors.
Need for proven technology,
capital and operating costs and
probability and incidence of
obsolescence
Commercialization is the prime
aspect if private participation is
required.
The process of evaluation of
viability of a project by assessing
the value of net cash flows and
resulting interpretation.
Important Ratios for Infrastructure Finance
Long term Debt/Net Worth
Profit before Interest and Taxes/ Interest
Payments for the Year
Financial Viability
Financial appraisal views investment
decision from the perspectives of the
Financial Vs Economic Appraisal organization undertaking the
investment including lenders' interest.
Economic appraisal considers impact
of the project on the organization
sponsoring the project and also
benefits and costs of the project for
other government agencies, private
enterprises and individuals.
Estimate accuracy and general
soundness of capital structure
Cost of Project
Need to look at – Itemised Cost of
Project, Means of Finance, Capturing
Cash Flows, Financial analysis
Fixed assets Coverage Fixed Assets / Term Loan and Other Long-Term
Ratio Debt Obligations
Debt Service Coverage Profit after Tax + Interest + Depreciation/
Ratio Interest + Principal
RISKS INVOLVED

Pre-Construction Construction Operation Stage Risks Applicable

Risks Stage Risks Risks at ALL Stages

1. Market Risk - due to 1. Project Completion Risks- 1. Demand Risk – risk due 1. Political Risk - due to
industry outlook Any start-up delay would to volatility of demand the omissions and
have a serious impact on estimation for commissions of the
2. Asset Liability the cash flows and debt Infrastructure governments and local
Mismatch - to have bond servicing 2. Management- Personnel authorities
financing either at the a. Time Overrun Risk Risk - risk pertaining to 2. Environmental Risk -
initial stage or project b. Cost Overrun Risk key personnel, company's ability to
finance being taken out responsible for the manage the
off-bond financing after administration of the environmental issues
commercial operation 2. Sponsor Risk – subject to project 3. Force Majeure Risk -
commitment of the sponsor 3. Operational Costs Risk – risk that rise out of the
due to operational control of any party.
inefficiency 4. Interest Rate Risk –
due to volatility of
market and the type of
debt obligations of the
borrower
MAJOR PLAYERS

Financing for infrastructure projects has largely been through Government funding and multilateral institutions. In the 1990s,
Development Financial Institutions (DFIs) were set up through budgetary allocation. Post 1990s, with the relaxation of norms by
the RBI, commercial banks also forayed into infrastructure lending. At present the line between the role of DFIs and commercial
banks have blurred due to overlapping of their functions

Category Institution
Multilateral Institutions World Bank
Asian Development Bank (ADB)
Development Financial Institutions (DFIs) Infrastructure Development Finance Company (IDFC)
Industrial Development Bank of India (IDBI)
Industrial Credit and Investment Corporation of India (ICICI)
India Infrastructure Finance Company Limited (IIFCL)
Industrial Finance Corporation of India (IFCI)
Commercial Banks State Bank of India (SBI)
Investment Institutions Life Insurance Corporation (LIC)
Infrastructure Finance Companies (IFCs) Power Finance Corporation (PFC)
Rural Electrification Corporation (REC)
COMPARATIVE ANALYSIS

Lending and NPA Of Commercial Banks in Infrastructure Sector (in Rs. crores) Lending and NPA of IFCs
(in Rs. Crores)
400,000
360,549 300,000 281,063
350,000
257,239
300,000 250,000

250,000 200,000

200,000
150,000
150,000 130,832
100,000
100,000
68,213
38,742 50,000 29,540
50,000 20,349
10.7% 14,287 10.9% 18,229 26.7%
0 0
SBI ICICI Bank IDBI Bank PFC REC

Total Assets NPA Total Assets NPA

Particulars SBI ICICI IDBI Both IFCs are allowed to raise funds by issuing Capital
Infrastructure advances as a % total advances 14.58% 9.2% 16.61% gains exemption Infrastructure bonds at low rate which
NPAs of Infrastructure loans / Total Gross NPAs 26% 24% 20.1% have credit ratings at par with sovereign ratings of
India. Because of this, they are also able to rely on
As of September 2019, these 3 banks formed 26.36% of the total advances to Infrastructure sector. (Total
Advances- Rs. 21.2 trillion)
External Commercial Borrowings.
THANK YOU