Acknowledgement

It is almost inevitable to incur indebtedness to all who generously helped by

sharing their invaluable time and rich experience with me, without which this
project would not have been completed.

No task can be achieved alone, particularly while attempting to finish a

project of such magnitude. It took many special people to facilitate it and
support it. Hence I would like to acknowledge all of their valuable support and
convey my humble gratitude to them.

I sincerely thank my coordinator Prof G. H. RAO for giving opportunity to

select topic for project.

I would like to acknowledge my sincere gratitude to Prof. Mona Bhatia for

being my project guide and sharing her valuable ideas, constructive criticism
and motivation, which were the guiding light during the entire tenure of the
work.

Thank you for all for supporting me in making this project a reality

YUKTI. A. RUPARELIYA

INDEX
Sr no.
1

Particulars
Introduction

1.1 Executive summary

1.2 Objectives
1.3 Research & Methodology
1.4 Scope
1.5 Hypothesis
1.6 Limitations
2

Review Of Literature

Infrastructure In India
3.1 Meaning
3.2 Growth
3.3 Current Scenario

The Driving Forces Behind Infrastructure

Financing
4.1 Governments Role
4.2 Public-Private Partnership
4.3 Steps Taken By Government

Page no.

Sources Of Financing Infrastructure Projects

5.1 Private Sector
5.2 Equity Financing
5.3 External Debt
5.4 Tax Incentives
5.5 Project Financing
5.6 Salient Features

5.7 Build, Operate and Transfer Project

6
Problems Faced In Infrastructure Financing
6.1 Macro-economic Constraints
6.2 Institutional Constraints
6.3 Suggested Solutions
7

Recent Initiatives

Overview Of Mumbai Metro

Data Interpretation
9.1 Data Collection

9.2 Questionnaire & Interpretation

10
Findings & Suggestions
10.1 Findings
10.2 Suggestions
11
Conclusion
12

Bibliography

13

Annexure

CHAPTER 1
INTRODUCTION
1.1 EXECUTIVE SUMMARY:
The link between infrastructure and development is not a once for all affair. It
is a continuous process; and progress in development has to be preceded,
accompanied and followed by progress in infrastructure, if we are to fulfill our
declared objectives of a self-accelerating process of economic development.

Meaning:
Infrastructure is generally a set of interconnected structural elements that
provide the framework supporting an entire structure. The term has diverse
meanings in different fields, but is perhaps most widely understood to refer to
roads, airports, and utilities. These various elements may collectively be
termed civil infrastructure, municipal infrastructure, or simple public works,
although they may be developed and operated as private-sector or government
enterprises. In other applications infrastructure may refer to information
technology, informal and formal channels of communication, software
development tools, political and social networks, beliefs held by members of
particular groups.
The importance of infrastructure for sustained economic development and
improving the living standards of the population is well recognized. Yet,
millions of people, across the world lack access to roads, transport, electricity,
safe drinking water, and proper sanitation and communication facilities.
Inadequate and inefficient infrastructure only adds to transaction costs but also
prevents the economies from realizing their full growth potential.

With Indian economy moving to a high growth trajectory there is a critical

need to accelerate investments in infrastructure sector. Infect, infrastructure
has emerged as a key driver for sustaining the robust growth of the economy
and the government has been focusing on the development of infrastructure.
The honorable finance minister of India, while presenting the union budget4
for 2014-2015 acknowledged the need and significance of building adequate
infrastructure in the country.
In his Budget speech Mr. Jaitely proposed Setting up of an institution, called
3P India with a corpus of Rs. 500 crore to provide support to mainstreaming
PPPs. The stamp of Modinomics could not he missed in favoring the PPP
route for development as the BJPs manifesto and Prime Minister Narendra
Modi rooted for it to help create world-class infrastructure in the country.
However, Mr. Modi during his tenure as Gujarat Chief Minister had added
another P (People) to it to signify peoples involvement in such project and
the 4P concept was successfully tried in the Vadodara 1-lalot Toll Road
project. The favored PPP route ran like a common thread in Mr. Jaitleys
speech when he touched upon sectors such as urban renewal, urban
transportation and real estate and gas pipelines. The task before me today is
very challenging because we need to revive growth, particularly in
infrastructure to raise adequate resources for our developmental needs, Mr.
Jaitely said.

1.2 OBJECTIVE OF THE STUDY:

The objective of undertaking a project on infrastructure financing is to have
in-depth knowledge about the recent and current trends of infrastructure
financing in India.
The Objectives behind this project are:

 To understand the conceptual study about the infrastructure financing.

To know various products and services offered by infrastructure
financing.
To gain information regarding the technological, marketing and other
trends that is prevailing in infrastructure financing
To know the future scope involved in infrastructure industry.

1.3 RESEARCH AND METHODOLOGY:

There are two methods of collecting data for research and project work they
are:
Primary data collection
Secondary data collection
Primary data is the data which is collected from the field under the control and
supervision of an investigator. It is the original data has been collected
specially for the purpose of the study. It is collected by the researcher himself
either through interview or observation or questionnaires.
Secondary data is the data gathered and recorded by someone else prior and
for the purpose other than the current project. It is the data that already exists
and is refused. It is collected through previous research, official research and
other sources.
In this project the secondary data collection is used wherein relevant
information from books, journals, magazines and websites is taken.

1.4 SCOPE INFRASTRUCTURE FINANCING

1.4.1 DEFINITION:
The RBI Circular on definition of infrastructure defines infrastructure
financing as:
Any credit facility in whatever form extended by lenders (i.e. banks, Fls or
NBFCs) to an infrastructure facility as specified below falls within the
definition of infrastructure lending. In other words, a credit facility provided
to Borrower Company engaged in:
Developing or
Operating and maintain or
Developing, operating and maintaining any infrastructure facility that is a
project in any of the following sectors, or any infrastructure facility of similar
nature:
A road, including toll road, bridge or a rail system;
A highway project including other activities being an integral part of the
highway project:
a. A port, airport, inland waterway or inland port
b. A water supply project, irrigation project, water treatment
system sanitation and sewerage system or solid waste
management system

c. Telecommunications services whether basic or cellular,

including radio paging, domestic satellite service, network of
trunking, broadband network and internet services
d. An industrial park or special economic zones
e. Generation or generation and distribution of power
f. Transmission or distribution of power by laying a network of
new transmission or distribution lines
g. Construction relating to projects involving agro-processing and
supply of inputs to agriculture.

1.4.2 Characteristics of Infrastructure Financing:

Infrastructure projects differ in some very significant ways from
manufacturing projects and expansion and modernization projects undertaken
by companies:

1 Longer Maturity: 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 as long as 100
years, or longer.

2 Larger Amounts: While there could be several exceptions to this

rule, a meaningful sized infrastructure project could cost a great deal
of money. For example a kilometer of road or a mega-watt project
could cost as much as US $ 1.0 million and consequently amounts of

US $ 200.O to US $ 250.0 million (Rs. 9.00 billion to Rs. 12.00

billion) could be required per project.

3 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
uncertainly, environmental surprises, technological obsolescence (in
some industries such as telecommunications) and very importantly
political and policy related uncertainties.

4 Fixed and Low(but positive) Real Returns: Given the

importance of these investments and the cascading effect they could
have on the rest of the economy, annual returns here are often near
zero in real returns.
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.

1.4.3 Special Features of Infrastructure Financing

Large capital requirement
Funds requirement for longer duration
Long gestation periods
Cash losses likely in the initial years (Slow Return)

 Poor availability of foreign funds

Sector is sensitive to political environment and policy changes.

Services produced are non-tradable.

1.5 Limitations

Creation of a private monopoly

Raising of prices for users of infrastructure
Quality & accessibility of services
Transfer of exchange risk
No more hidden subsidies
Disputes can affect the quality of service
Termination can affect the continuity of services
Investors are looking ROE & ROE Depends Critically on the Tariff
rate

Chapter 2
Review Of Literature
Name Of Author:

The Comptroller and Auditor General

(C&AG), Sir Amyas Morse KCB,

Study Title:

UK National Guarantees scheme for

Infrastructure.

Published:
Conclusion:

National Audit Office (2015)

The National Audit Office scrutinizes public
spending for Parliament and is independent
of government. The Comptroller and
Auditor General (C&AG), Sir Amyas
Morse KCB, is an Officer of the House of
Commons and leads the NAO, which
employs some 820 employees. The C&AG
certifies the accounts of all government
departments and many other public sector
bodies. He has statutory authority to
examine and report to Parliament on
whether departments and the bodies they
fund have used their resources efficiently,
effectively, and with economy.

CHAPTER 3
INFRASTRUCTURE IN INDIA
3.1 Introduction
The prosperity of a country depends directly on the development of
agriculture and industry. Agricultural production, however, requires irrigation,
power, credit, transport facilities, etc. industrial production requires not only
machinery and equipment but also skilled manpower, management, energy,
banking and insurance facilities, transport services which include railways,
road, and shipping, communication facilities, etc. All these facilities and
services constitute collectively the infrastructure of an economy and the
development and expansion of these facilities are an essential pre-condition
for increasing agricultural and industrial production in a country. In the last
200 years or more, industrial and agricultural revolutions in England and in
other countries were accompanied by a revolution in transport and
communications, the extensive use of coal and later oil as source of energy,
tremendous expansion in banking, insurance and other financial institutions to
finance production and trade, an explosion of knowledge of science and
technology, and so on.
Infrastructural facilities are often referred to as economic and social
overheads, they consists of:

Irrigation, including flood control and command area development

Energy: Coal, electricity, oil, and non- conventional sources

Transport: Railways, roads, shipping and civil aviation

Communications: Posts and telegraphs, telephones,

telecommunications etc.

Banking, finance and insurance

Science and technology

Heath, Hygiene and education

PIC

As per the World Banks definition infrastructure sectors include the energy,
information and communications; mining, transportation, urban development,
and water supply and sanitation, but education, health, and other social
services, as well as finance, public administration, and law, are treated
respectively.

3.2 Growth of Infrastructure since Independence

Indian planners were fully aware of the link between infrastructural facilities
and general economic development and, accordingly, they gave high priority
to the rapid expansion of these facilities right from the First Plan itself. The
plans have generally devoted over 50 percent of the total plan outlay on
infrastructure development.
Performance of Infrastructure Sectors over the planned period

Energy

Unit

1950-1951

2013-2014

1. Coal

m.tons

32

565

2. Electricity generated

b.kwh

642

3. Petroleum -crude oil

m.m.tons

0.4

38.4

1. Railway goods traffic

m.tons

73

1050.18

2. Cargo handled at major ports

m.tons

19

585

3. New telephones

Million

NA

916

Transport & Communication

As a result of the heavy investment on infrastructure, there has been

phenomenal increase in infrastructural facilities. For instance, coal production
rose from 32 million tons to 565million tons between 1951 and 2013. During
the same period, production of petroleum crude from 0.4 million tons to over
38.4 million metric tons likewise, there has been tremendous expansion in
other infrastructural facilities:

However, we should note the three basic features of infrastructural

development here:
i.

The heavy investments by the government on infrastructural facilities

are easily justified since they had provided necessary impetus for rapid
agricultural development and industrial expansion. In fact, without the
rapid development of the infrastructure, it would have been impossible
to register the threefold rise in agricultural production and seven-fold

ii.

rise in industrial production during the last five decades.

Though infrastructural facilities were not altogether neglected for the
rural areas expansion of irrigation, rural electrification, etc.
overwhelming emphasis was on the provision of infrastructural
facilities mainly for the urban areas. It is the people in our cities and
towns who could take full advantage of the development of power,
transport, communications, banking, and such social overheads as

iii.

education and health.

Infrastructural development has not only shown an urban-bias, but it
has also shown a bias in favor of the rich and more affluent. It is the
higher income groups who could take full advantage of such facilities,
as power, transport and communications, health, etc. The major and
medium irrigation works have generally benefited the rich farmers.
Our planners generally neglected the minor irrigation work which
would have benefited a large number of small and marginal farmers.

3.3 Current Scenario

ROADWAYS

RAILWAYS

CIVIL

POWER

AVIATION
SIZE

a. 48.65 lakh km of

d. Total rail

f.125 airports

i. Generation

total length-one of

network on

and airstrips.

actually

the largest in the

63,221 kms.

produced is 9

world.

e. 1.4 million

g. 122 million

b.70% of the cargo

employees.

passengers and

traffic and 85% of

1.5 million tons

the passenger traffic

of cargo.

billion units.

j. CAGR of 6

over past 5ye

h. Growth of

c. Highways

passenger traffic

constitute 2% of

in excess of

total length of road.

8.4%.

STRUCTURE a. NAHI (National

d. Owned by

e. 97 airports

g. Majority o

government.

owned and

generation,

Authority Of India)

operated by

transmission

is the apex

AAI (Airport

distribution

government body.

Authority Of

responsibiliti

India).

are with publ

Highways Of

b. Contracts are

sector or SEB

awarded through

f. Mumbai and

bidding.

Delhi

c. PPP through

airports have

contracts and BOT.

been privatized.

(State Electri
Boards).

h. Private sec
are mostly
involved in

generation an
distribution.

POLICY

a. 100% FDI for all

b. 100% FDI

development
projects.

e. 100% forei
equity in

c. Private
developers can

generation,
transmission

set up airstrips

distribution.

around airports.

f. 26% FDI+2
d. 100% tax

foreign

exemption for

institutional

the first 10

investment (F

years

g. Independen

regulators; ea
state its own
regulatory
commission.

OUTLOOK

a. Expected growth

d.

f. Passenger

h. 88,537 MW

is 19% p.a.

Development

traffic is

of new

b. Coordination

of railways on

projected to

generation

with other

par with global

grow at a

capacity is

ministries.

standards

CAGR of over

planned inter

c. The NAHI has

e. Focus on

15% in the next

the next 5 yea

allowed complete

low cost, rapid

five years

exit to equity

pay- back &

g. Major

investors for all

high return.

investment

concessions post-

planned in new

completion of

airports & up

projects.

gradation of
existing
airports.

i. Correspond

investment in
transmission
development
j. Allocation
the new coal
blocks to
National

Thermal Pow
Corporation.

Compounded Annual Growth Rate (in %)

INDUSTRY

2000-2004

2004-2008

2008-2013

2000-2013

Infrastructure

63.15

41.43

30.80

43.41

Power

78.97

29.56

33.54

44.78

Tele-communication

43.33

46.07

20.59

34.90

Roads and Ports

47.00

39.28

30.66

38.18

---

---

32.52

39.99

Other infrastructure

TOTAL

11.84

28.68

21.04

20.38

PIC

CHAPTER 4
THE DRIVING FORCES BEHIND INFRASTRUCTURE
FINANCING

The main forces which assist infrastructure financing are government, public
private partnership and commercial banks. They are elaborated as follows:

4.1 Governments Role in Infrastructure Financing

There is a need for large and continuing amounts of investments in almost all
areas of infrastructure in India. This includes transportation (road, ports.
railways and airports). Energy (generation and transmission), communications
(cables, television, fiber, mobile and satellite) and agriculture (irrigation,
processing and warehousing). The key issue is, while the need exists, how
these projects will get financed.
In the past the government has been the sole financer of these projects and has
often taken responsibility for implementation, operation, and maintenance as
well. There is a gradual recognition that this may not be the best way to
execute/finance these projects.
This recognition is based on considerations such as:

1. Cost efficiency: Privately implemented and managed projects are likely

to have a better record of delivering services which are cheaper and of a
higher quality. The India Infrastructure Report estimated that the India
economys growth rate would have been higher by about 2.5% if the delays
and cost overruns in public sector projects have been managed efficiently. 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 01 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. Allocation 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 center and state levels, for a variety of
reasons, there is a growing concern that the absolute and relative (to GDP &
GRDP rcsp.) levels of fiscal deficit are high and that incurring higher levels of
deficit to finance infrastructure projects is infeasible.
At the highest level, the governments infrastructure role is to ensure that
infrastructure makes its full contribution to sustainable development growth.
Central and local government and the private sector own all infrastructures.
Hence, the government must give attention to over-arching regulatory policy
issues that impact directly and indirectly on infrastructure as well as to sector
specific regulation. In essence, governments role in infrastructure provision is
to ensure that policy and institutional arrangements promote infrastructure
providers and users confidence. This means adopting policies to:
Monitor infrastructure issues actively;

 Assists transitions such as those arising from technological changes and

shocks (including disasters);

Market creation and facilitating competition;

Government should consider BTLO modes i.e. build, transfer, lease and
operate so that govt. also gets revenue during operations.
Government may think of giving special laws for financing, tax incentives
and resource mobilization;
Timely environmental clearances should be given so that project is not
delayed.
Rehabilitation of displaced persons should be taken care by the government.
Price rises can be expected as these adjustments take place. and the
government has a role to ensure that rises are reasonable. Infrastructure
investment needs to be timely- early enough to avoid bottlenecks and promote
confidence, but not so early, that financial and other resources are committed
too far in advance of need and asset- stranding risks arise. Government may
need to take the lead in promoting investment where bottlenecks are likely to
be particularly costly in eroding confidence. Intervention in infrastructure
sectors should only occur when it is necessary to achieve the governments
objectives.
The government has made several attempts to create the precondition for a
sustainable and scalable involvement of the private sector in the development
of infrastructure within the country.
These have included promotion of organizations which support infrastructure
financing such as:
Development finance Institutions (DFIs) such as Industrial Development Bank of India (IDBI)
Industrial Finance Corporation of India(IFCI) and

 The Industrial Credit and Investment Corporation of India (ICICI))

And specialized entities such as Power Finance Corporation (PFC)
Infrastructure Development and Finance Corporation( I DFC)
Urban Infrastructure Development Fund(UIDF) and
Tamil Nadu Urban Infrastructure Development Fund(TNUDF)

4.2 Public-Private Partnership

Necessity is the mother of all inventions
It was a need for an assured source of regular water supply by the water
intensive textile dyeing and processing units of Tirupur in the southern Indian
state of Tamil Nadu that led to the setting up south Asias first public-private
partnership in the water and sanitation sector. The result: Tripura residents,
who earlier received water on alternate days, started receiving water every day
for about 4-6 hours. The slow pace of infrastructure growth in the past led to
the realization that an alliance between the public and the private sectors is the
only solution to spur growth of infrastructure in the country. The Tirupur
project is a great example of the benefits of involving the private sector in
what would earlier have been considered a problem that falls under the
purview of the public sector.
Public Private Partnership (PPP) means once based on a contract concession
agreement between a government and statutory entity on the one side and a
private sector company on the other, for delivering an infrastructure service on
payment of user charges. PPPs are not a recent phenomenon. The first
example of a PPP, internationally, is that of the Water Works Company of
Boston, which is said to be the first private finn in America to provide
drinking water to citizens way back in 1652. PPPs are essentially win-win
solutions that seek to draw on the strengths of both sectors. Thus, the

efficiencies of the private sector can ensure better deliveries of public

infrastructure like roads, bridges, water supply and sewerage projects, ports
and airports, etc. he presence of the public sector ensures certain concession,
and mitigation of some risks. Thus, the combined capital and intellectual
resources of the public and private sectors can result in better, more efficient
services, without raising taxes for the public. Raising the large amounts of
funds necessary for infrastructure projects, especially in these times of fiscal
prudence. requires the participation of the private sector. The government has
also taken the initiative to provide Viability Gap Funding (a grant one-time or
deferred provided with the objective of makihg a project commercially viable.

9 Reasons for PPPs (PUBLIC-PRIVATE PARTNERSHIPS)

PPPs. like SEZs (Special Economic Zones) are the flavor of the season. The
issue is more whether PPPs can work, or not work. It is now about PPPs being
designed to work and succeed. And there are 9 big reasons for this:

1. Finances: There is a general consensus now that India should be

investing a minimum of 10% of its GDP in asset-creation in infrastructure.
There is also .convergence that we are, probably as a nation. Achieving about
5% GFCI (Gross Capital Formation in Infrastructure) as a percentage of GDP.
The gap is huge. To get India to reach even 9% in the next five years will
require investments to the rune of around $275-300 billion. Can the Centre
and States put together this quantum of investment in the next five years? No.
So we need private capital in infrastructure.

2. Structure: Unlike product-market economics, most public utilities and

core infrastructure services rest on ultimate sovereign ownership of the
underlying assets as well as often, monopolistic conditions of operation.
Without appropriate PPP formatting, private capital cannot flow in. Nor
should it be allowed to.

3. International Experience: Developing economies that have done

well reveal that 10 20% of GCFI can be garnered from private capital
sources. But relevant SPVs (Special Purpose Vehicles) under viable PPP
formats have to be created to serve as receptacles for receiving such private
capital.

4. Structuring Deal-Flow: Infrastructure projects require, on an

average, about 4 years from concept to commissioning. So, if $ 275 billion is
to be invested across five years, it means that there must be a ready-to-invest
pipeline of projects of at least $220 million at any point of time. Does the
government system have the capacity to structure, develop and execute $220
million worth of projects every year? Not really. You need the private sector to
play a complementary role. So PPP.

5. Managerial Acumen: PPP is not only about bringing in capital. Its

also about bringing in private sector efficiencies and best practices in to
public utilities management. These can be achieved through PPP formats that
are in the nature of operating contracts linked to service-delivery standards.

6. Independent Regulators: PPPs need a facilitative environment.

Across many sectors, there is a growing realization of the benefits of
independent regulatory authorities that stand as neutral umpires refereeing
conflicts across different stakeholders.

7. Transparent Selection: Successful PPPs have much to do with how

the private partner is chosen. And with much dirty linen on this subject having
been washed domestically and internationally, it is crystal clear that the best
bet is a transparent bid process using one rational discriminant criterion. And
that those involved in developing the project and bid criteria, cannot be
allowed to bid for it also.

8. Market Access v/s Privatization: PPPs in the Latin American

context have broadly been achieved by privatization-with the sovereign

selling the assets or its controlling stake. In emergent Asian economies the
preferred route seems to be by allowing market access for private players
into hitherto closed markets. This seems doable in the current coalition
context of Indias political economy.

9. Political Economy of PPPs: Unbridled free-market capitalism as well

as dominant state controls has both been seen in their best and worst forms in
the 20th century. The learning for the 21st century is that public capital
(coming as it does, tied-in with the sovereign responsibilities and public
accountability) and private capital (tics-in with private sector efficiencies and
incentives) both have to learn to work with each other in a mature manner.

4.3 Steps taken by the Government of India to encourage

PPPs:
Taking cognizance of the advantages that PPP offers in terms of cost saving,
access to specialized expertise and proprietary technology, sharing of risks
with the private sector and the ability to take up a larger shelf of infrastructure
investments. Government of India is actively encouraging them. To expedite
the PPP projects in the Central sector, the need for streamlining the appraisal
process was felt and accordingly an appraisal mechanism has been notified
including the setting up of the PPP Appraisal Committee that will be
responsible for the appraisal of PPP projects in the Central sector. To
accelerate and increase PPPs in infrastructure, two major initiatives have been
taken by the Government:
(a) Provision of viability gap funding; and
(b) Setting up of a SPV, India Infrastructure Finance Company Limited
(IIFCL) to meet the long term financing requirements of potential investors.

Commercial Banks and Infrastructure

Banks continue to be an important source of funds. For all the talk about an
increasing role for bonds and equities, banks accounted for 43 percent of total
financing for emerging market countries in 2000. just slightly less than the 46
percent banks provided in 1994.
While a few specialized entities exist (such as IDFC) which can play a key
role as new generation intermediaries, banks as a class are currently the best
positioned to play this role. But, even if all the suggestions regarding sources
of risk capital and sources of funds arc implemented there is a very real
concern that given so many competing choices Banks may choose to under
invest in infrastructure43 and focus instead on other businesses. Or, worse.
they could suffer from problems similar to those faced by the DFIs and in the
medium term render themselves ineffective.

Several steps need to be taken to strongly incentivize banks to

participate in infrastructure finance in a well-structured
manner:
1. Eliminate the distinction between an advance and an
investment:
Given the importance of instruments such as commercial paper and bonds in
providing finance to companies and the ease with which borrowers move
between one form of financing and another, there is a strong case that this
distinction should no longer be made even in the balance sheets of banks.
Even though both sets of instruments increase the level of credit risk borne by
the bank in an identical manner, considerations such as credit / deposit ratio,
priority sector requirements and a strong regulatory preference for
Advances over Investments create a distorted set of preferences. From a

risk management perspective in an environment of a larger and disparate set

of investors (domestic and international banks, mutual funds. His, insurance
companies, pension funds, l-HNIs etc.), sophisticated financial intermediaries
are likely to give a much more preferential treatment to liquid assets relative
to illiquid assets expressing a strong preference for instruments which may be
traded resulting into lower yields for tradable instruments. This would
become critical in the case of infrastructure finance because a very large
number of investors willing to invest in securitized paper would be needed.
Once the entire asset base of a bank is treated on par there would be much
greater incentive to participate in the market and not focus on originating
every single transaction.

2. Require detailed product and client segment level

profitability, NPA, provisioning and consumption of capital to
be reported:
This is important because otherwise income streams and growth from a few
segments mask the underperformance of the bank in other segments45. This
reduces incentives to build specialization in each area of business that the
bank is engaged in and creates the potential for future catastrophes once the
positive returns from the few sectors disappears. This reporting will ensure
that right from the beginning the banks are engaged in infrastructure finance
in a disciplined manner.

3. De-emphasize the role of the Non-Performing Asset Ratio as

an Independent Performance Measure:
In its evaluation of banks, despite the fact that strong provisioning guidelines
and capital adequacy rules have been imposed, in its recent guidelines, the
RBI has started to emphasize the NPA Ratio as a stand-alone performance
measure. This is both inconsistent and counter-productive. If provisioning has
been done properly then the Non-Performing Asset is actually the good part

of the loan (the bad part has already been provisioned away) and more
importantly if the lender has engaged in high-risk, high-return businesses
(such as infrastructure finance), he is likely to have a higher proportion of
assets which are not performing relatively to a lender that has only engaged in
low-risk businesses. The questions to ask would be are the risk-return models
in balance, i.e., what is the return on equity after an appropriate level of
provision has been taken and what is the capital adequacy. This independent
emphasis on the NPA ratio is sending a strong signal to banks that they need to
move away from businesses such as infrastructure finance.

4. Directed Credit:
If banks behave as risk-neutral intermediaries, in order to get them to
participate in any sector the only requirement would be to ensure that the risks
and the returns of the sector are in balance. However, if the concern is that
banks are behaving in a risk- averse manner and there is a belief that the
positive externality of a rupee of investment in infrastructure exceeds that of a
similar rupee in any other sector, it would be very useful to explore the
inclusion of infrastructure as a component of the priority sector. However, this
should be done while also ensuring that banks are able to meet these
requirements by purchasing suitable instruments in the market and not only
through originating every asset themselves. RBI has taken a step in this
direction with the recent circular dated July 20, 2004 with respect to
Investment by banks in Mortgage Backed Securities Lending to Priority
Sector under Housing Loans. The circular has endorsed the view that
exposures of banks in securitized debt (currently restricted to Mortgage
Backed Securities) be classified as priority sector lending, if the underlying
assets satisfy priority sector norms. This would give a boost to channelizing
funds of banks, which may not have origination infrastructure in specific
sectors such as housing finance/infrastructure etc.

5. Capital market exposure limit and ability to take security of

shares.
Most of the infrastructure finance projects are executed through special
purpose vehicles (SPVs) floated by the sponsors. It is common for lenders,
both in India and abroad, to take charge over entire equity of the SPV as a part
of security package for the amounts lent. This facilitates easier management of
the asset from a lenders perspective. This requires the Banking Regulation
Act to be amended to enable banks to take pledge of shares exceeding 30.0%
of paid-up capital in case of infrastructure projects.

CHAPTER 5
SOURCES OF FINANCING INFRASTRUCTURE
PROJECTS

Fortunately for India, even though there is an acute scarcity of risk capital,
there is no shortage of the long-maturity funds that are required for
infrastructure finance. Individuals have shown a great deal of willingness to
save and hold those savings in very long-term assets either as 25 year deepdiscount bonds; very long-term savings linked insurance policies; savings
bank accounts: post-office savings and pension funds. However, the individual
investor is very risk averse and even at very large negative real returns appears
prepared to hold risk-free investments rather than risky ones. In addition even
though there has historically been a great deal of uncertainty surrounding the
rate of inflation within the Indian economy, the investor appears to show a
great deal of affinity for deposits and investments which have a fixed nominal
rate of return.

Given the characteristics of infrastructure finance, while aggregate supply of

hinds does not appear to be a problem. there is a need for intermediaries and
markets that are able to perform all the three functions of risk, maturity and
duration transformation. Other sources of funds have traditionally been the
government itself (central, state and urban local body) and multi-lateral
institutions such as the World Bank and Asian Development Bank.

5.1 Financing sources for Private sector infrastructure

DOMESTIC SOURCES

EXTERNAL SOURCES

EQUIT

Domestic developers

International developers

(independently or in collaboration

(independently or in

with international developers).

collaboration with domestic

Public utilities (taking minority

developers). Equipment suppliers

holdings). Other institutional

(in collaboration with domestic

investors (likely to be very

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

International commercial banks

years).

(7-10
years).

Domestic term lending institutions

(7-10 years).

Export credit agencies (7-10

Domestic bond markets (7-10

years).

years).

International bond markets (10-

Specia1ized infrastructure

30 years).

financing institutions.

Multilateral agencies (15-20

years).

5.2 Equity Financing

Private sector infrastructure projects require substantial equity financing, with
higher equity requirements required for projects with higher levels of
perceived risk. 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.
A limited amount of equity support for private sector infrastructure is also
available in multilateral organizations, such as the International Finance
Corporation and the private sector window of the Asian Development Bank.

The scope for raising equity from domestic capital markets is probably
limited. Public utilities and domestic institutional investors may be willing to
contribute part of the equity for project expansion, but significant domestic

equity support may not be forthcoming for new infrastructure projects until
there is a track record of performance. However, once project implementation
proceeds and revenues begin to be generated through partial commissioning, it
may be possible to tap a wider range of equity investors. This can be a useful
financing strategy in the case of power projects with more than one generating
unit.

5.3 External Debt Financing

Several sources of external debt financing are available to well-structured
private sector projects in countries with reasonable credit ratings.

Export credit agencies:

Export credit agencies, which provide direct finance and guarantee
commercial bank credit, have been the dominant source of international
capital to finance infrastructure projects. Traditionally, they funded public
sector projects backed by sovereign guarantees, with some willingness in
recent years to lend against guarantees of commercial banks. Unless the
agencies can reorient themselves to provide financing without sovereign
guarantees, their role in financing private sector infrastructure projects is
likely to be limited.

International commercial banks:

International commercial banks are the largest source of private finance for
infrastructure development in developing countries. Of the $22.3 billion raised

by developing countries for infrastructure financing in 1995, syndicated loans

accounted for $13.5 billion, bonds for $5.3 billion, and equity for about $3.5
billion (World Bank 1997). Banks tend to be hands-on financiers, lending on
the basis of a detailed analysis of project risk.
There are important limits to bank financing, however. The number of
international banks actively involved in developing countries is small, and
they are subject to exposure limits for projects and countries. This often leads
to syndication, which involves cumbersome procedures. Maturities of
commercial bank loans can be lengthened from the beginning through
multilateral guarantee support for later period repayments.

International bond markets:

Bond financing is in many ways the ideal source of finance for infrastructure.
Costs are higher than for syndicated loans, but maturities of ten to thirty years
are typical, and even longer maturities are available for creditworthy issuers.
Bond financing could be used in this way to refinance shorter-term loans
taken initially to finance the construction stage.

Multilateral institutions :
Multilateral institutions, such as the World Bank and the Asian Development
Bank, which have traditionally funded public sector infrastructure projects,
are now willing to support private sector projects. The International Finance
Corporation (IFC), the private sector arm of the World Bank Group, could
play an important role in financing private sector infrastructure.

Bilateral aid agencies:

Bilateral aid agencies have traditionally funded public sector infrastructure
projects, but their role in funding private sector projects is likely to be very
limited.

External Commercial Borrowing (ECB):

These include Yankee Bonds, Samurai Bonds, Dragon Bonds, Euro Currency
syndicated loan, Private placement, Global Registered Notes (GRNs), Global
Bonds and Medium Term note programmers (MTNs).

Syndicated Loans
The special features of syndicated loans are that they are available for medium
to longer period; specific to the requirements of the borrowers to suit their
projects, and availability of floating rate of interest. Most of the investors are
Asian/ European banks, FIs, Insurance Companies and pension funds.

Private Placement:
Private placement to financial institutions known as QIB (Qualified
Institutional Buyers) is allowed in India, without the kind of stringent
disclosure requirements needed for equity issues. Long tenure of bonds and
less restrictive covenants make this proposition conducive for financing power
projects.

Global Depository Receipts (GDR):

GDRs present an attractive avenue of funds for the Indian Companies. Indian
Companies can collect a large volume of funds in foreign currency through
Euro issues. GDRs are usually listed in Luxembourg and traded in London in
over the counter market or among a restricted group such as qualified
institutional buyers (QIBs) in the USA. The (JDRs do not have voting rights,
so there is no fear of loss of management control.

5.4 Tax Incentives

Faced with weak debt markets, many developing countries have sought to use
tax incentives to stimulate a larger flow of domestic savings to infrastructure
development. A wide variety of incentives arc in use in many countries:
In India, income tax incentives have been provided either to the
infrastructure project itself or to the investors in such a project.
Some infrastructure projects enjoy a tax holiday for a few years. but for
long-gestation projects this may not mean much in present value terms, as
these projects do not expect to make significant profits in the initial years.
Interest earned on certain infrastructure bonds has been exempted from
income tax.
Limited tax breaks have been given for equity investment in certain
infrastructure companies.

5.5 Project Financing

Project finance is the financing of long-term infrastructure and industrial
projects based upon a complex financial structure where project debt and
equity are used to finance the project, and debt is repaid using the cash flow
generated by operation of the project, rather than the general assets or

creditworthiness of the project sponsors. Because of this structure, the debt is

said to be nonrecourse to the project sponsors. Project finance is often more
complicated, and more expensive, than alternative financing methods. It is
most commonly used in the mining, transportation, telecommunication and
public utility industries.

5.6 Salient features of Project Finance:

The salient features of project finance are as follows:
1. 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.
2. Project financing is also known as limited recourse financing as the
borrower has a limited liability. The security taken by the lenders is largely
confined to the project assets.

Build-Operate-Transfer (BOT) is a form of project financing, wherein a

private entity receives a concession from the private or public sector to
finance, design, construct, and operate a facility for a specified period, often
as long as 20 or 30 years. After the concession period ends, ownership is
transferred back to the granting entity.

During the concession the project proponent is allowed to charge the users of
the facility appropriate tolls, fees, rentals. and charges stated in the concession
contract. This enables the project proponent to recover its investment,
operating and maintenance expenses in the project. Traditionally, such
projects provide for the infrastructure to be transferred to the government at
the end of the concession period.

The theory of BOT is as follows:

Build: A private company (or consortium) agrees with a government to
invest in a public infrastructure project. The company then secures their own
financing to construct the project.

Operate: The private developer then owns, maintains, and manages the
facility for an agreed concession period and recoups their investment through
charges or tolls.

Transfer: After the concessionary period the company transfers ownership

and operation of the facility to the government or relevant state authority.

The other variants of financing include:

Following models for privatization of road infrastructure is available.

Sr.no

NAME

Build operate transfer

DESCRIPTION
Concession is given to private party to
finance, build, operate and maintain the

(BOT)

facility. Investors collect the user fee during

the concession to recover the cost of
construction, debt servicing and operation
cost. At the end of the concession, the
facility reverts back to Govt. who has given

Build own operate

the concession.
Similar to the BOT hut without the transfer

(BOO)

of ownership.

Build own operate

Same as BOT but the project is transferred to

transfer

the Govt. after a negotiated period.

(BOOT)

Build transfer lease

Govt. provides the right of way on which the

operate (BTLO)

highway is built. Private party has to pay a

nominal rent of payment for the use of the

Develop build

land.
This is a new concept. Initially the company

operate (DBO)

does not assume commercial risk but is

financially accountable for building and
operating the system as per specification.
Later on the company assumes commercial
risk as per the appropriate regulations laid by
Govt.

Parties to BOT Project

There are a number of major parties to any BOT project and all of them have
particular reasons to be involved in the project. The contractual arrangements
between those parties, and the allocation of risks. can be complex.

Government

Revenue

Concession

Share

Agreement

BOT Operator

Loans

Equity

Sponsor

Supply
Contract

Lenders
EPC Contractor

Development and financing risk lies with the private party

The major parties to a BOT project will usually include:

1. Government agency:
A government department or statutory authority is a pivotal party. It will:
a. grant the sponsor the concession, that is the right to build own and
operate the facility,

b. grant a long term lease of or sell the site to the sponsor and
c. Often acquire most or all of the service provided by the facility.

The government agency is normally the primary party. It will initiate the
project, conduct the tendering process and evaluation of tenderers and will
grant the sponsor the concession, and where necessary, the off take agreement.

2. Sponsor
The sponsor is the party, usually a consortium of interested groups (typically
including a construction group. an operator, a financing institution, and other
various groups) which, in response to the invitation by the Government
Department, prepares the proposal to construct, operate and finance, the
particular project. The sponsor may take the form of a company, a partnership,
a limited partnership, a unit trust or an unincorporated joint venture.

3. Construction Contractor
The construction company may also be one of the sponsors. It will take
construction and completion risks, that is, the risk of completing the project on
time within budget and to specifications.

4. Operation and Maintenance Contractor

The operator will be expected to sign a long-term contract with the sponsor
for the operation and maintenance of the facility. Again the operator may also
inject equity in the projects.

5. Financiers

In a large project there is likely to be a syndicate of banks providing the debt

funds to the sponsor. The banks will require a first security over the
infrastructure created. The same or different banks will often provide a standby loan facility for any cost overruns not covered by the construction contract.

6. Other Parties
Other parties such as insurers, equipment suppliers and engineering and
design consultants will also be involved. Most of the parties
too will involve their lawyers and financial and tax advisers.

Advantages of BOT projects are:

1. The government gets the benefit of the private sector to mobilize finances
and to use the best management skills in the construction, operation and
maintenance of the project.
2. The private participation also ensures efficiency and quality by using the
best equipment.
3. The projects are conducted in a fully competitive bidding situation and are
thus completed at the lowest possible cost
.

Why private projects like BOT are costly?

BOT projects are normally costlier if it is compared with the project report
prepared by Govt. departments.
Following are the causes:
i. Full finding is to be done by the private company and hence full project cost
is required to be mobilized whereas the Govt. department does not need to

mobilize full money in one go.

ii. Burden of interest during the construction on loans is required which is
absent in cash funded govt. projects.
iii. Cash flow is a major problem for BOY project as a whole investment is to
be done upfront and investments are regulated by investors. Each and
everything has to be fully insures and sometimes multilayer insurance which
increases the cost of financing. In case of Govt. projects money comes as and
when required as per budgeting allocation.
iv. Returns are not assured.
v. All Liabilities of debt service and equity return commence after physical
completion of project, which is absent in case of Govt. projects.
vi. Pre bid/post bid award expenses arc high such as
a) Expenditure on conducting feasibility study, engineering survey and
preparation of concept design and drawing.
b) Expenditure on financial viability analysis
c) Legal expenses on formation of companies
d) Travel cost overseas partners and other bid documentation
e) Detailed engineering cost such as design , drawing , survey legal &
financial management cost
f) Higher staff as Indian and foreign specialists have to be hired
g) Higher operation maintenance and repair cost
h) Project maintenance fee
i) Rupee devaluation; inflation and interest rate fluctuation
j) Cost of risk during construction stage such as cost and time over runs,
during up finances during construction. law and order Problem created by
local influential people and political uncertainty.

CHAPTER 6
PROBLEMS FACED IN INFRASTRUCTURE FINANCING

6.1 Macro-economic constraints

A. Nature of savings:
It is envisaged that Gross Domestic Savings (GDS) will rise by 1% point of
GDP in each year of the Twelfth Plan and that achieving the target investment
would involve channeling half of the incremental savings to infrastructure.
This is under the assumption that physical savings (as a percentage of GDS)
does not increase in keeping with the current trend. If, however, the GDS rises
as envisaged, but is accompanied by an increase in physical savings (as a
percent of GDP) from the current level, the degree of financial intermediation
required will have to be even higher. because physical savings are not
available lbr intermediation: only financial savings are. Clearly, in the medium
term, additional access by infrastructure sectors to external finance both in the
form of foreign equity capital and long term debt finance (including from
multilateral agencies) would be necessary, more so if the share of financial
savings in GDP does not rise as envisaged.

B. Fiscal discipline:
Within the constraints of the FRBM (Fiscal Responsibility & Budget
Management) laws, there will be limited scope for central and state
governments to raise their support budgetary as well as guarantees to
infrastructure (as share of GDP) in the coming years. The implication is that
the Government per se can finance only a small part of the financing gap; the
predominant part of the gap has to be bridged by private sector and PSUs

(through extra-budgetary resources). The challenge for the government, with

limited budgetary resources at its command, would be to improve the
efficiency of its spending on infrastructure (capacity creation and subsidy) on
one hand and leverage private and non-budgetary PSU investments on the
other. In this context, the challenge will be to encourage private companies
and PSUs which have strong cash surpluses and access to private financing to
take up an increasing share of the burden for developing the countrys
infrastructure. One option is to design some well-targeted and sustainable
fiscal incentives to specific infrastructure sectors for stimulating
nongovernment investment (i.e.. investment by the private sector and PSUs).

C. Availability of risk capital:

One of the key constraints in infrastructure financing is the lack of availability
of risk capital to support debt-raising. Adequate flow of equity capital into
infrastructure sectors has not been forthcoming, despite the fact that the
domestic equity market is well developed. This underlines the need for
developing the market for other forms of risk capital such as mezzanine
financing, subordinated debt and private equity. Shortage of risk capital in the
domestic market is also grounds for seeking larger FDI into infrastructure,
which would not only narrow the risk capital gap, but also usher in requisite
skills to implement and monitor projects in line with global best practices.

D. Concentration of risk:
The financing risks of some of the infrastructure sectors, especially the ones
that require large amounts of funds have tended to get concentrated in the
hands of few financiers. With rising average size of projects, the problem is
getting compounded. Indian lenders are increasingly facing a challenge based
on their existing single-asset and single-industry exposure norms, which are
meant for protecting the stability of the financing system. This emphasizes the
need to improve the capacity as well as the sophistication of the financing

system to distribute risks more widely and efficiently on one hand and to
explore the possibility of making an exception for infrastructure as
regards exposure norms in certain cases, on the other.

E. Capacity to absorb capital inflows:

It may be observed that India has a large external debt capacity. India could
borrow an additional $ 120 billion in the next five years and yet maintain its
external debt to GDP ratio at the current level (about 15 percent), which is
considered sustainable. Even if a third of this capacity is used for financing
infrastructure, it would cover about 10 percent of the infrastructure financing
gap envisaged over the next five year period. Further, since infrastructure
related debt is long-tenured, they would not pose any threat to external
viability. However, the economys ability to absorb various capital inflows
poses challenges with relation to monetary management. So far, the response
to this challenge has been to either allow the rupee to appreciate, sterilize
capital inflows, allow larger capital outflows, or impose restrictions
specifically on the inflow of debt capital. The last measure is especially blunt
for it pre-supposes that all inflows of equity capital are necessarily superior to
any kind of foreign debt capital. It also ends up discriminating in favor of
larger corporate borrowers, and against infrastructure projects, the latter
typically being developed by SPVs. It is evident that until such time as we get
to full capital account convertibility, there will necessarily remain a need for
prioritization of capital inflows. In this context it is essential to ensure that the
needs of the infrastructure sector get the priority they deserve relative to the
needs of the wider corporate sector such that the Planning Commissions GDP
growth targets are not jeopardized.

6.2. Institutional constraints

A. Commercial Banks:
Commercial banks have registered a high growth in their exposure to
infrastructure (57 percent CAGR) in last five years (2001/02-2005/06), which
has been possible partly due to a small starting base. With the impending
constraints on government spending (including on infrastructure) due to the
FRBM laws at a time when infrastructure spending is sought to be
accelerated, the banking systems exposure to infrastructure would have to
rise significantly as a percent of GDP. It is possible that sector exposure norms
and maturity mismatches may prevent banks from meeting this challenge.
Further, the overall capitalization for public sector banks is also a constraint
for these banks to significantly increase their infrastructure financing
portfolio.

B. Insurance companies:
Eligible investors such as insurance companies have invested limited amounts
in private infrastructure development. This can be attributed to regulatory
restrictions, underdeveloped corporate bond markets and the absence of
efficient credit risk transfer mechanisms (such as securitization. credit
derivatives, credit insurance etc.). Furthermore, insurance companies
traditional preference for investment in public sector has meant that their
contribution to infrastructure development by private sponsors is even less.

C. Specialized NBFCs:
Though a relatively new entrant to infrastructure financing, NBFCs share has
been growing rapidly especially in the backdrop of a diminishing role of
development financial institutions. In the future. NBFCs are expected to play
a more critical role in infrastructure development.

Major constraints to the growth prospects of these NBFCs have beena) Their inability to optimally utilize their capital and balance sheets through
mechanisms like securitization; and
b) Their limited access to low cost financing options. Further, even more so
than commercial banks. NBFCs arc increasingly facing exposure norm
constraints in financing infrastructure.

D. Infrastructure focused central PSUs:

It may be noted that these PSUs already play a significant role in
infrastructure financing (accounting for nearly 40 percent of Indias
infrastructure spending) and would have to continue to do so in future. But,
several PSUs, especially those in roads, transport and communication, have
not adequately leveraged the strength of their balance sheets to raise resources
from the market and some have large amounts of idle cash. This is ironical
considering that there is a general shortage for equity/risk capital for
infrastructure projects in the country.

6.3 Suggested Solution

The Committee of Infrastructure proposes several initiatives which are
classified under the following major heads:
A. Development of domestic debt capital market
i) Introduction of credit derivatives
ii) Regulatory asymmetry between loans and bonds
iii) Efficiency of private placement market
B. Tapping the potential of insurance sector
i) Harmonizing the definition of Infrastructure
ii) Liberalizing investment guidelines for debt instruments
iii) Liberalizing investment guidelines for equity instruments

C. Rationalizing banks and NBFCs participation in infrastructure financing

i) Asset side management
ii) Liability side management
iii) Gold Deposits
D. Fiscal recommendations
i) Tax treatment on unlisted equity shares
ii) Withholding tax
iii) Tax rebate on investment in UMPPs
E. Facilitating equity flows into infrastructure
i) Liberalizing buyback regulations
ii) Change in initial bidders
F. Inducing foreign investments into infrastructure
i) Steps for improving Fl! participation
ii) Separate treatment for infrastructure holding companies
iii) Refinancing through ECBs
G. Utilizing foreign exchange reserves
Also, financing a rapid development of infrastructure would require India to
embark on a strategy that aims at:
Improving intermediation of domestic financial savings so that they are
channeled to meet the specific requirements of infrastructure investment such
as those relating to risk, tenor and scale
Facilitating targeted access to foreign financial savings
Distributing financial risk more widely and efficiently across the domestic
financial system and abroad, to avoid excessive concentration
Making infrastructure financing--especially in sectors where it has not been
traditionally forthcoming--relatively more attractive for a wide spectrum of
investor/ financier classes by providing more liberal regulatory regimes for
infrastructure vis--vis non-infrastructure sectors and in some cases, offering
well-designed fiscal incentives.

CHAPTER 7
RECENT INITIATIVES

7.1. Harmonized Master List of Infrastructure Sub-sectors

To resolve the issue of uniform definition of infrastructure, a Harmonized
Master list of Infrastructure Sub-sectors has been drawn up and published in
the Gazette of India dated 7 October 2013. An institutional mechanism has
been set up under the chairmanship of the Secretary, Department of Economic
Affairs, with representation from the Planning Commission. Department of
Revenue, Reserve Bank of India (RBI), Securities and Exchange Board of
India (SEBI). Insurance Regulatory and Development Authority (IRDA),
Pension Fund Regulatory and Development Authority (PFRDA), and
concerned ministry for updating the master list and revisiting the sub-sectors
outside the master list on the basis of well-defined principles.

7.2. Infrastructure Financing

a. The Cabinet Committee on Investment (CCI) set up under the
chairmanship of the Prime Minister on 2 January 2013 to expedite clearances
and decisions on large infrastructure projects, cleared 303 projects with
aggregate investment of 6.95,437 crore up to end February 2014.

b. Infrastructure Debt Fund: The government has conceptualized

infrastructure debt funds (IDF) for sourcing long-term debt for infrastructure
projects. Potential investors under IDFs may include off-shore institutional
investors, off-shore high net worth individuals (HNIs), and other institutional
investors (insurance funds. pension funds, sovereign wealth funds, etc.). An
Il)F can be set up either as a trust or as a non-banking financial company

(NBFC). The income of IDFs has been exempted from income tax. So far, two
IDF-NBFCs and five IDF-mutual funds (MFs) have been operational
zed.

c. Tax-free Bonds: The government has attempted to broaden the

corporate bond market by according tax-free status to infrastructure bonds for
addressing the specific needs of infrastructure deficit, especially in sectors
such as roads, ports, airports and power, which are essential for economic
growth in any country. During financial year 2013-14, the government has
allowed issue of tax-free bonds amounting to 50,000 crore, to central public
sector undertakings (CPSUs) for a period of 10, 15, and 20 years.

d. Municipal Borrowing: With a view to deepening the bond markets

for infrastructure finance, draft guidelines framework has been prepared for
issuance of municipal bonds in India.

7.3. Public-Private Partnership Initiatives in India

The Government of India is promoting public-private partnerships (PPP) as an
effective tool for bringing private-sector efficiencies in creation of economic
and social infrastructure assets and for delivery of quality public services. By
end March 2014 there were over 1300 projects in the infrastructure sector with
a total project cost (TPC) of Rs.6.94,040 crore. These projects arc at different
stages of implementation, i.e. bidding, construction, and operational.

a. Viability Gap Funding for PPP Projects: Under the scheme for
financial support to PPPs in infrastructure (Viability Gap Funding [VGF]
Scheme), 178 projects have been granted approval with a TPC of 88.697

crore and VOF support of 16,894 crore, of which 1455 crore has been
disbursed.

b. Support for Project Development of PPP Projects: The India

Infrastructure Project Development Fund (IIPDF) was launched in December
2007 to facilitate quality project development for PPP projects and ensure
transparency in procurement of consultants and projects. So far 53 projects
have been approved with IJPDF assistance.

c. National PPP Capacity Building Program: The National PPP

Capacity Building Program was launched in December 2010, and has been
rolled out in 16 states and two central training institutes. i.e. the Indian
Maritime University and Lal Bahadur Shastri National Academy of
Administration. The roll-out in the respective institutes Commenced in 201112. So far, 160 training programmers have been conducted to train over 5000
public functionaries who deal with PPPs in their domain.

d. Online toolkits for PPP projects for five sectors are available on
the Department of Economic Affairs. Ministry of Finance, website on PPPs.
i.e. www.pppinindia.com. The PPP toolkit is a web-based resource that has
been designed to help improve decision making for infrastructure PPPs in
India and to improve the quality of infrastructure PPPs that are implemented
in India.

CHAPTER 8
AN OVERVIEW OF MUMBAI METRO
8.1 Introduction
The Mumbai Metro is a metro system serving the Indian city of
Mumbai. The system is designed to reduce traffic congestion in the city, and
supplement the existing, but severely overcrowded Mumbai Suburban
Railway network. It will be built in three phases over a 15-year period, with
overall completion expected in 2021. When complete. the core system will
comprise three high-capacity metro railway lines. span ning a total of 63
kilometers (39 mi).
In June 2006. the then Prime Minister of India. Man Mohan Singh inaugurated
the first phase of the Mumbai Metro project. Construction work began in
February 2008. A successful trial run was conducted in May 2013, and the
systems first line entered operation on 8 June 2014. as some aspects of the
project were afflicted by delays and cost issues.
The Mumbai Metro is Indias first public private partnership metro project in
which all the three phases (construction. operation and maintenance) were
given to a private player.

LINE

TERMINAL

OPENING DATE

LENGTH

STATIONS

LINE 1

Versova Ghatkopar

8 JUNE 2014

(km)
11.40

LINE 2

Dahisar Mankhurd

Planning

40.2

37

LINE 3

Colaba

2020

33

27

SEEPZ

8.2 Need for Mumbai Metro

12

Mumbai the financial capital of India is the heart of commercial and trade
activities of the country where 11 million people travel daily by Public
Transport with modal share of Rail - 52 & Bus 26%.The existing suburban
rail system is under extreme pressure and existing role of the bus system is
limited for providing feeder services to Suburban railways. There are
constraints to expand the existing roads and rail network capacity and many
pockets in Island City & Suburbs are not served by rail based mass transport
system. In order to provide rail based mass transit facility to people residing in
the areas not connected by existing Suburban Rail System and to enable them
to reach the stations within the distance of to 1 km with proper interchange
facilities the metro master plan has been prepared.

MMRDA
Mumbai Metropolitan Region Development Authority with an objective of
improving traffic and transportation scenario in Mumbai Metropolitan Region
(MMR) appointed M/s. Delhi Metro Rail Corporation (DMRC) along with
Tata Consultancy Services (TCS) and Indian Institute of Technology (IIT),
Mumbai in May, 2003 to prepare the Master Plan for Mumbai Metro and the
Detailed Project Report for priority corridors. The Master Plan includes nine
corridors covering a length of 146.5 kms out of which 32.5 kms is proposed
underground and rest is elevated. The total updated cost of the Mumbai Metro
master plan is Rs. 67,618 Cr. @ 2012 price level. The master plan provides
integration with Churchgate station. Chatrapati Shivaji Terminus, Mumbai
Central and Bandra Terminus. International and the Domestic airports, at
Sewri with Mumbai Trans Harbour Link, at Mankhurd suburban for Navi
Mumbai. Subsequently a public hearing was conducted on 22ndianuary. 2004
for opinions, suggestions and comments on the Master plan.

PIC
8.3 MUMBAI METRO LINE 1
Versova-Andheri-Ghatkopar corridor is 11.40 Km elevated corridor.
It will enable connectivity of Eastern & Western suburbs to Western &
Central Railway.
Facilitates smooth and efficient interchange between suburban rail system
and MRT System at Andheri and Ghatkopar Stations.
Reduces the Journey time from 71 minutes to 21 minutes, between Versova
and Ghatkopar.

PIC

Providing rail based access to the MIDC, SEEPZ and commercial

developments

Project Features

Route length
Number of Total Station

11.40km (Elevated)
12

Platform Length

135 m (6 Coaches)

Car Depot

D.N.Nagar

Length of Coach

22m

Max. Speed

80kmph

Average Speed

35 kmph

Seating Arrangement

Parallel to Coach

Estimate Ridership

2021-6.65 lakh per day

(PHPDT-23,321) 2031-8.83
lakh per day (PHPDT-30,491)

Environment in Coach

Air Conditioned

Ticketing System

Automatic Collection

Detail of Project

Project Name

Versova-Andheri- Ghatkopar Metro

Corridor (Fully Elevated)

Format

PPP (Public Private Partnership)

Project Implementing Agency

Mumbai Metro One Private Limited

SPV Mumbai Metro One private
Limited (MMOPL) a Special Purpose
Vehicle (SPV) has been incorporated
jointly by Mumbai Metropolitan
Region Development Authority (MM
RDA), Reliance Energy Limited
(REL) and Veolia Transport France
for implementation of Mass Rapid
Transport System (MRTS) along
Versova- Andheri Ghatkopar (VAG)
corridor.

Total Project Cost

Rs. 2,356 cr.

Implementation period

20072012 (As per Concession

Agreement)

Present Status
The work of Metro Line-I project is almost completed and trial runs are in
progress. After clearance from Commissioner of Railway Safety, the project
will be opened for public.

8.4 MUMBAI METRO LINE 2

The Charkop-Bandra-Mankhurd Corridor of Mumbai MRTS begins from the

Northern Suburbs of Mumbai at Charkop and stretches up to Mankhurd (via
Bandra and Kurla) in the East. The route length of the Corridor is 31.87 km.
This corridor is planned as elevated for its entire length having 27 Metro
Stations. Car Shed facilities have been planned at both ends of corridor at
Charkop and Mankhurd.

Project Features

Gauge (Nominal)

1435 mm

Route Length (between dead ends)

31 .871 Kin

Number of stations

27 Nos. (elevated)

Design speed

80 kmph

Seating arrangement

Longitudinal

Capacity

1178 Pax.

Maintenance Car Shed

Charkop & Mankhurd

D. N. Nagar (Metro Line- I)
Bandra (Western Railway)

Interchange stations at

Kurla(Central and Harbour Line)

V. N. PuravMarg (Mono Rail-Line I)
Mankhurd (Harbour Line)

Detail of Project

Project Name

Charkop-Bandra-Mankhurd Corridor

Format

(Metro Line 2)
Public Private Partnership (PPP) /
Built Operate Transfer (BOT)

Project Implementing Agency

Govt. of Maharashtra/Mumbai
Metropolitan Region Development
Authority/Mumbai Metro Rail

Project cost
Special Purpose Vehicle

Corporation
Rs. 7,660 cr.
Mumbai Metro Transport Private
Limited (MMTPL)

Present Status
Government of Maharashtra (GoM) accorded approval to the bid document
on 26thMarch, 2009.
Urban Development Department. GoM on 31st July. 2009 published Gazette
Notification under Tramways Act, 1886 for this corridor.
In its 1 25th meeting held on 3rd August. 2009. Authority approved the
Project.
Bhoomi-pujan ceremony was held on 18th August. 2009 by Her Excellency
President of India.
Special Purpose Vehicle (SPV) Mumbai Metro Transport Pvt. Ltd.
(MMTPL) incorporated on 29th October, 2009.
Concession Agreement between GoM and MMTPL has been signed on
21st January, 2010.
GoM vide Govt. Resolution dated 22nd October, 2010 nominated Mumbai
Metro Rail Corporation Ltd. (MMRC) as the Project Implementing Agency
(PIAI for this project.
MMRC gave approval for alignment & station locations and handed over

Right of Way (ROW) for 19 km.

Western Railway. Central Railway. Public Works Department. Airport
Authority of India and Roads & Traffic Department of Municipal Corporation
of Greater Mumbai have granted the in principle approval with conditions.
Ministry of Environment and Forests (MoEF) has granted Coastal
Regulation Zone (CRZ) clearance the alignment and Metro Car Sheds with
conditions on 20th December. 2011. In spite of all preliminary work
completed by Concessionaire: the Concessionaire expressed inability to start
the work due to the two critical conditions laid down by MoEF such as no
work is permitted in CRZ except stabling which should he constructed on
stilts with gaps / open spaces to he provide in between for proper sunlight and
ventilation.
MMRDAIMMRC is perusing with MoEF for allowing washing, repairing
and maintenance outside CRZ l area in Car Shed

8.5 MUMBAI METRO LINE 3

Metro Line 3 Colaba Bandra - SEEPZ is 32.50 km long and fully

underground with 27 stations. It connects major CBDs of Narirnan point and

Bandra-Kurla Complex, Domestic and International Airport and industrial
areas of MIDC and SEEPZ.
Connects various areas in island city that are not served by Suburban
Railways i.e. Kalbadevi, Worli. Prabhadevi. Airport area and Andheri.
The project is funded by Japan International Co-operation Agency (JICA)
who will provide loan assistance to the tune of Rs. 13,235 Cr. The rest of the
expenditure will be made available by Govt. of India. Govt. of Maharashtra/
MMRDA in the form of equity and subordinate debt and funds from MIAL.

Project Features

Route Length

32.5 km (Fully Underground)

Total stations

27 Nos. (26 U/g + I at grade)

Headway

3/2.5 minutes

Train /Platform Length

8 car train/I 85 m

Car Shed

Aarey Colony

Depth of Tunnel Approximately

15-20m. ( Below Ground)

2021-13 lakh per day (PHPDT

Estimated Ridership

Train carrying capacity

39.000)
2031 17 lakh per day(PHPDT
42,000)
6 car- 1,792 passengers
8 car 2,406 passengers

Project Details
Project Name

Colaba Bandra SEEPZ Metro

Corridor (Fully Underground)

Format

Engineering. Procurement and

Construction (EPC)

Project Implementing Agency

Mumbai Metro Rail Corporation

SPV

MMRCL shall convert into joint

ownership (50) a SPV of Govt. of
India (GoI) & Govt. of Maharashtra
(GoM) on similar patters as for Delhi
Metro, Bangalore Metro, Chennai

Total project completion cost

Metro and Kochi Metro.

Rs. 23,136 cr.

Implementation period

2013-2014 to 2019-2020

Present Status
The Central Cabinet accorded approval for the project on 27th June 2013.
Loan Agreement signed by JICA on 17th Sept 2013
The project is notified under Metro Act by MoUD on 18th Sept 2013.
The process for appointing General Consultant (GC) and Pre-Qualification
of contractor for civil works is in progress.

CHAPTER 9
DATA INTERPRETATION
9.1 Data Collection
The researcher prepared 10 questions. They gave around 140 questionnaires
and received 119 feedbacks.

9.2 Questionnaire and Interpretation

1. Under which age group do you belong?
Age
18-25

%
78.06

26-35

%
18.08

36-50

%
2.06%

Interpretation: According to the research

done the respondents of

different ages were: 18-25 --- 76.08%,

26-35 --- 18.08%
36-50 --- 2.06%

2. Do you know what infrastructure finance is?

a. YES
b. NO

YES
NO

77.03%
22.07%

Knowledge
22%
YES
NO
78%

Interpretation: Almost 77.3% knew what is infrastructure finance and

22.7% are not aware of what is infrastructure finance.

3. In which sector of infrastructure major investments should

be required?
a) Rail
b) Road

c) Airport
d) Telcom

Sectors
Rail
Road
Airport
Telcom

31.09%
50.09%
4.03%
12.09%

Sectors
4%
Rail

12%

Road

32%
Airport

Telcom

51%

Interpretation: The responses showed that 50.9% of finance should be

used for road, 31.9% for rail, 12.9% for telecom and 4.3%
for airport.

4. Will infrastructure provide effective service to public?

a) Yes
b) No
YES
NO

97.04%
2.06%

Effective Service
2%
Yes

No
98%

Interpretation: 97.4% of respondents think that the infrastructure

service provided is effective whereas rest 2.6% do not
think its effective.

5. What according to you are the driving forces of

infrastructural financing?
a) Government
b) Public-Private Partnership

Driving Forces
Government
PPP

53.04%
46.06%

Driving Forces

46%
Government

54%PPP

Interpretation: The responses showed that 53.4% of driving forces are

from government and 46.6% are from Public Private
Partnership.

6. Do you think because of infrastructure economy of India has

improved?
a) Yes
b) No

Economy
YES
NO

89.07%
10.03%

Economy
10%
Yes

No
90%

Interpretation: Yes, 89.7% think that economy of India has improved

because of infrastructure, while 10.3% of them think that
it has not improved.

7. What according to you should be the sources of

infrastructural financing?
a) Equity financing
b) Debt financing
c) Tax incentives
d) Project financing

Sources
Equity financing
Debt financing
Tax incentives
Project financing

18.03%
9.06%
27%
45.02%

Sources
18%
Equity

45% Debt

Tax 9%

Project

27%

Interpretation: According to responses received, 45.2% think that project

financing should be the source, whereas 27% think it
should be tax incentive,18.3% for equity financing and
remaining 9.6% for debt financing.

8. What are risks included in infrastructure?

a) Price risk
b) Operating risk

c) Technology risk
d) Interest rate risk

Risks
Price risk
Operating risk
Technology
Interest rate risk

21.01%
31.06%
27.02%
20.02%

Risk
20%
Price

Operating
27%

21%
Technology

Interest rate

31%

Interpretation: The risk included in infrastructure is more in operating risk

that is 31.6%, continuing with 27.2% in technology risk,
21.1% in price risk and 20.2% in interest rate risk.

9. Should government utilize more money for infrastructure?

a) Yes
b) No

Utilization
Yes
No

92.04%
7.06%

Utilization of Money
7%
YES

NO
93%

Interpretation: Yes, 92.4% of them think that government should utilize

more money on infrastructure and 7.6% of them think that
government should not utilize more money on
infrastructure.

10. What does success look like by infrastructure?

a) Under developed
b) Developing
c) Developed

Success
Under developed
Developing
Developed

8.04%
70.06%
21%

Success

21%

8%

Under developed
Developing
Developed

71%

Interpretation: 70.6% of them think the success of infrastructure will look

like the developing country whereas 21% of them think as
developed country whereas 8.4% of them think as it underdeveloped country.

CHAPTER 10
Findings and Suggestions
10.1 Findings
1. According to the research done the respondents of different ages are
a. 18-25with 78.06% b. 26-35 with 18.08%

c. 36-50 with 2.06%.

2. Almost 77.03% knew what infrastructure financing is and 22.07% are

not aware about infrastructure financing is.
3. The responses showed that 50.09% of finance should be used for road,
12.09% for rail,12.09% for telcom and remaining 4.03% for airport.
4. 97.04% of respondents think that the infrastructure services provided is
effective whereas rest 2.06% do not think it as effective.
5. The responses showed that 53.04% driving forces are from government
while 46.06% are from Public-Private Partnership.
6. Yes, 89.07% think that economy of India has improved because of
infrastructure while 10.03 of them think that it has not.
7. According to responses received, 45.02% think that project financing
should be the source, whereas 27% think it should be tax incentives,
18.03% for equity financing and remaining 9.06% for debt financing.
8. The risk included in infrastructure is more in operating risk i.e. 31.06%,
continuing with 27.02% in technology risk, 21.01% in price risk and
20.02% in interest rate risk.
9. Yes, 92.04% of them think that government should utilize more money
for infrastructure and 7.06% of them think that money should not be
utilized for infrastructure.
10. 70.06% of them think the success of infrastructure will look like the
developing country whereas 21% think it be a developing country
and 8.04% think that it would be an under developed county.

10.2SUGGESTIONS

The infrastructure sector has taken our message on boards that we should try
and desist from asking for tax breaks and tax reliefs. It is the ability to create
an enabling environment for raising capital and project development
increasing. It is been tried this year to restrict for demand tax breaks but on
focus on some crucial enabling aspects.

In line with these perspectives, here are some few suggestions:

Mobilizing for retail saving for infrastructure
Annuity for rural infrastructure
A long-term debt market for infrastructure

Allowing non-banking finance companies (NBFCs) and commercial banks to

raise infrastructure bonds. Abolishing the minimum alternative tax in the
period of availment of income tax holiday. Boarding the mandate of the India
infrastructure finance company ltd.

CONCLUSIONS

It is a well-known fact that most infrastructure projects are stalled not because
of financing issues, but other administrative and regulatory hurdles. More than
half of the bank credit to infrastructure goes to the power sector.
Notwithstanding some deceleration in recent years, bank credit to power
sector has been growing at a rate higher than overall bank credit to
infrastructure. Power projects today are stalled not because of lack of credit
but because of lack of supply of fuel and uncertainties with regard to coal
pricing and power tariffs, towards which Government has recently taken some
measures. After power, banks have the most exposure to roads, where projects
are stuck because of delays in land acquisition, environment and forest
clearances. The sector which has seen the maximum dip in bank credit within
infrastructure is telecom, particularly since January 2012 when 2G licenses
were cancelled. Thus, credit moderation to infrastructure sector is a
consequence of sector- specific issues/bottlenecks. Let me remind that banks
are public entities and carry out their operations using depositors money. It is,
therefore, reasonable to expect banks to look for viability of projects and the
safety of their money before committing to funding new projects.

Let me conclude by saying that for India to return to the higher growth
trajectory, infrastructure problems need to be sorted out with utmost priority.
There is a need to make infrastructure projects commercially viable, improve
the market sentiment through continuance of reforms and effective
governance on the part of the Government with regard to implementation of
projects. Let us, however, not wait for others to take action, but we ourselves
begin to contribute our might in the right earnest. All the stakeholders in this

area have to diligently work towards improving their productivity and

efficiency. As regards financing. I would like to say that there is no dearth of
finance for infrastructure development and. especially, for commercially
viable projects. However, concomitantly, it is important that banks in general
and public sector banks in particular, shift to an information based project
appraisal system so as to ensure that the precious funds are not stuck in
unproductive projects. Some other issues like creating a mechanism for
recovery of the cost through appropriate pricing regime, simplification of
project clearance by a centralized authority, etc. need to be worked upon on a
priority basis.

Given the long term nature of infrastructure financing, which is beyond the
normal 5- 8 year loan tenors of commercial banks, and the decreasing scope
for incremental financing by banks, there may be a case for relaxing norms for
pension/insurance/provident funds so that they can till in some of the gap in
debt financing. But nothing will work if the general sentiment with regard to
progress of infrastructure.

BIBLIOGRAPHY

I) Reports:
a) Infrastructure budget 2014-2015
b) The Twelfth Five-Year Plan

2) Newspapers:
a) The Economic Times
b) The Hindu

3) Internet:
a) www.rbi.org.in
b) www.mmrda .maharashtra.gov. in
c) www. relaincemumbaimetro.com

CHAPTER 13
ANNEXURE

1. Under which age group do you belong?

a.18-25

b. 26-35

c. 36-50

2. Do you know what infrastructure finance is?

a. Yes

b. No

3. In which sector of infrastructure major investments should be required?

a. Rail

b. Road

c. Airport

d. Telcom

4. Will infrastructure provide effective service to public?

a. Yes

b. No

5 What according to you are the driving forces of infrastructural financing?

a. Government

b. Public-Private Partnership

6. Do you think because of infrastructure economy of India has improved?

a. Yes

b. No

7. What according to you should be the sources of infrastructural financing?

a. Equity financing

b. Debt financing

c. Tax incentives

d. Project financing

8. What are risks included in infrastructure?

a. Price risk

b. Operating risk

c. Technology risk d. Interest rate risk

9. Should government utilize more money for infrastructure?
a. Yes

b. No

10. What does success look like by infrastructure?

a. Under developed

b. Developing c. Developed