Need for efficient infrastructure services is increasingly recognized as a sine qua none of high and sustainable economic growth. So far, the provision of infrastructure services in India is largely in the Government sector. Budgetary allocation has been the principal source of financing capacity additions in infrastructure. As budgetary resources to support capacity additions have become scarce, development and financing of infrastructure was opened up to private/foreign participation. The Expert Group on the Commercialization of infrastructure Projects (Chairman: Dr. Rakesh Mohan), in its report submitted in June 1996, (for more details please see under committees) has argued that the total fund requirement of the infrastructure sector over the next five years is expected to be of the order of Rs.4,000 – 4,500billion.
The new approaches to finance infrastructure projects can be broadly classified as (i) Concession Approach and, (ii) Structured Financing Option. The Concession Approaching the concession approach, the concessionaire builds the project which is thereafter granted a franchise period during which the costs and returns can be recovered. There are various modes of financing under this option, viz.:i) BOT-Build, Operate and Transfer: (Eg:Madhya Pradesh Tools Ltd. (MPTL)funding of India’s first private sector road project).ii) BOLT – Build, Operate, Lease and Transfer: (Eg: The Own Your Wagon scheme, currently in operation in the Indian Railways, is a variant of BOLT under which set of wagons, purchased by private parties, is leased to the Railway on fixed rental).iii) BOOT – Build, Own, Operate and Transfer: (Eg: The proposed Rs.4,800crore elevated light rail transit system(ELRTS) in Bangalore is to be run on aBOOT basis).iv) BOO – Build, Own and Operate: (Eg:Paradip Port Trust’s planned construction of floating dry-dock at Paradip in Orissa).v) BOOS – Build, Own, Operate and Sell:(Better from the view point of risk reduction as well as equitable distribution of risks).Structured Financing Option Structured Financing Option (SFO) generally assumes two forms: (a) Non-recourse financing and (b) limited recourse financing. I) Non-recourse financing: Under this option, the debt instrument is secured by the cash-flows generated by the project or the collateral value of the specified assets financed by the instrument.
In the event of Banking Briefs 102 (For private circulation only) default on the structured instrument, the debt holders recourse would be limited to the underlying assets only and would not extend to general reserves and assets of the company. Panvel (Mumbai) By-Pass is the first example of SFO in India.ii) Limited Recourse Financing: Under this variant, in addition to project assets, the parent company attaches other assets/revenue-streams for servicing the instrument to improve its credit-worthiness. Thus, lenders have limited recourse to the assets of a company sponsoring the project. Take-out Financing Take-out financing structure is essentially a mechanism designed to enable banks to avoid asset liability maturity mismatches that may arise out of extending long term loans to infrastructure projects. Under the arrangement’s banks financing the infrastructure projects will have an arrangement with IDFC or any other financial institution for transferring to the latter the outstanding in their books on a pre-determined basis.
Govt. and Bank Participation Another way out could be the government issuing long-dated bonds at subsidized rates to fund infrastructure. The government may consider classifying these securities as approved securities for the statutory liquidity ratio (SLR) purposes. Banks have been permitted to issue guarantees to loans provided by other banks and lending institutions to infrastructure projects subject to certain conditions. Under the revised norms, a bank would be permitted to issue the guarantee in favor of loans extended by other banks or financial institutions, provided it also takes a funding share in the project. Further, the amount allowed for guarantee by the bank should not exceed twice the funding share assumed by it. Cash Flow Financing In cash-flow financing, the lenders estimate the cash flows of a project over its lifetime to see what kind of debt burdens it can support and at what rates. Then, the amount of debt, financing rate and the way of repayments can be tailored to fit the cash flows of the project. This helps both the lender and the project promoter. Escrow mechanism the escrow mechanism has been developed or independent power projects (IPP) which are built by private parties out of private funds and electricity supplied to state electricity boards (SEB). Essentially, it ensures that out of the revenues of the SEB, the debt obligations of the financing institutions will be paid first.
This is done by having some identified revenues being passed through a separate account called the escrow account to which the lenders also have a right to appropriate the funds in case the SEB defaults in making payments. This gives added comfort to the lender and allows the IPP to raise financial assistance. Subordinated debt financing Institutions have also talked about funding infrastructure projects through a quasi-equity instrument called subordinated debt which may have flexible maturity and payment terms. Though these loans will be more expensive than secured debt, they will at least ensure that a project starts up. Infrastructure, being long gestation projects with considerable risks, require innovative financial solutions to tackle them. Status of infrastructure financings at Mar 19th, 2004, the outstanding bank finance for infrastructure (power, telecommunication, Roads and Ports) were Rs.19655 Cr out of Rs. 7,64,383 Crores of outstanding bank credit representing 2.5%.
