FINANCING OF INFRASTRUCTURE- CHALLENGES & OPPORTUNITIES S K Goel Chairman & Managing Director India Infrastructure Finance Company Ltd New Delhi

Infrastructure: The Crucial Growth Factor Indian economy is on the path to strong recovery It is expected that during , India would revert back to 9% GDP growth Fast economic growth and growing population have led to huge demand-supply infrastructure deficit Lack of adequate and quality infrastructure is proving to be binding constraint in sustaining, deepening and expanding India’s economic growth and global competitiveness Infrastructure deficit estimated to cost 1 to 2% growth in GDP every year.

Infrastructure Deficit Roads & Highways- National highway network is 66,590 Kms which constitutes only 2% of total road network but carries about 40% of total traffic. Power generation capacity- During the 11th Plan period, against revised target of 62,000MW capacity, capacity of 32,507 MW (52%) has been added. Peak power deficit range around 12-13%. Ports- India has 12 major ports and 200 non-major ports which handle 95% of India’s trade in terms of volume and 70% in terms of value. However, the average turnaround time in India’s port was 4.54 days in 2009 compared to 10 hours in Hong kong. Civil aviation- Only two airports viz., Delhi and Mumbai account for 43% of passenger traffic and 55% of cargo traffic in the country. Urban Infrastructure- India has the second largest urban system in the world and 285 million people or 29% of the population live in urban areas. This is expected to reach 40% by Telecom - In the area of telecom, India has done well. Teledensity (telephones per 100 persons) has grown from 1.9% in 1998 to 60% in August 2010.

Infrastructure Investment Requirements In the 11 th Plan period ( ), total infrastructure investment requirement has been estimated at USD 514 billion. As per the Mid term appraisal of the 11 th Plan, during the first 3 years of the plan period Of the projected investment of USD 245 billion, the actual investment was USD 266 billion. This has been mainly due to over achievement in sectors like telecom, electricity and airports. However, sectors like roads, ports and railways have shown underachievement. During the 12 th five year plan ( ), the total investment requirements in infrastructure sector would be USD 1 trillion. The large investment requirements cannot be met entirely by the public sector. The role of PPP in the coming years will therefore gain more importance It is expected that at least 50% of the investment would have to come from the private sector and by , share of private investment will surpass public investment

Infrastructure Financing Currently, over 80% of infrastructure projects in the country are financed by public sector banks. Bank’s lending to the infrastructure sector has grown significantly over the years recording a compound annual growth rate of 49% during the last 10 years.

Issues in Infra Financing Bank lending going forward is likely to be constrained: 1. RBI Prudential Exposure Norms As per RBI prescribed prudential norms, in case of infrastructure projects, banks can take exposure up to For single party- 20% of their capital funds + 5% after approval of their Board For group 50% of their capital funds + 5% after approval of their Board Most of the banks are operating at ceiling levels having little headroom to lend further The low resource base will not allow smaller banks to take large exposures as required in the case of infrastructure projects. 2. Asset-Liability Mismatch 79% of the bank deposits have tenure of less than 3 years, while in the case of infrastructure projects, the loans are generally for years. Thus, to mobilize the required resources, especially by way of private investment, it is imperative that we find alternative mechanisms for financing.

7 Financing by IIFCL India Infrastructure Finance Co Ltd (IIFCL) established in January 2006, became operational in April 2006 to provide long term financial assistance to commercially viable infrastructure projects with overriding priority to PPP projects. IIFCL provides Long term debt by way of direct financing 20% of the project cost is financed Loans to have average maturity of more than 10 years Subordinate debt finance Refinance to banks and other eligible institutions for their loans to infrastructure projects in roads, ports, competitively bid power and railway projects UK subsidiary provides foreign currency loans to Indian infrastructure projects.

IIFCL’s Portfolio SECTOR CUMULATIVE GROSS SANCTIONS CUMULATIVE DISBURSEMENTS No. of Projects Amt Sanctioned No. of Projects Amt Disbursed Road Power Airport Port Urban Infra PMDO Refinance TOTAL Rs crore Projects sanctioned by IIFCL are spread over in 24 states of the country. Of the 160 proposals sanctioned, 137 (88%) cases have achieved financial closure which indicates that participation of IIFCL has helped in speeding up financial closure. Commercial Operation Date (CoD) has been achieved in 18 road projects and 2 port projects. (As on 31 st October 2010)

Need for alternative financing options TAKEOUT FINANCING IIFCL, a policy-based institution can partly address the constraints faced by banks Takeout finance can free up capital for banks and facilitate incremental lending to infrastructure Takeout financing is a viable option before banks to address asset liability mismatch issue and group exposure constraint Takeout financing scheme introduced by IIFCL in April 2010 First set of takeout finance deals signed recently More proposals in the pipeline 9

Need for alternative financing options NEED TO DEVELOP CORPORATE BOND MARKET The corporate debt market is at a nascent stage and is predominated by government securities. Reasons for slow development of the bond market high compliance costs limited appetite for corporate bonds preference for bank loans compared to bonds high stamp duty. Bond markets need to be well developed to encourage greater participation by insurance and pension funds, and thereby reduce dependence on banks

Need for Long term Investors Insurance companies and pension funds are potentially a high source of long-term debt. Internationally, insurance companies invest on an average 25% of their funds in less than AA rated paper. However, in case of India, participation of insurance companies in infrastructure has been limited due to regulatory requirements. Insurance companies are currently allowed to invest in debt securities rated AA and above.

Need for Credit Enhancement Demand for debt instruments in India is largely limited only to highest safety papers (AAA and AA rated papers) Around 72% of infrastructure SPVs in India are rated in the BBB and A categories, while an estimated 18% - 20% of infrastructure SPVs are rated in the sub – investment grade. A credit enhancement instrument that leads to an improvement in ratings of infrastructure SPV bonds raised by developers (SPV) would lead to major players with long term funds like insurance and PF getting enthused to subscribe to such bonds. IIFCL has taken up the task of evolving a credit enhancement product 12

Private Equity investments Domestic resources may not be sufficient to bridge the investment gap, thus, there is need to attract foreign capital. PE investors have shown keen interest in India’s infra sector: As per available data, during , total PE investments in power sector alone was USD 820 million in 14 deals Recently, a PE deal for about Rs 400 cr was done in Road sector In 2010, till June, deal sizes in the range of USD million have been done in infrastructure. The flow of PE investments in infrastructure sector should be increased through enabling policy environment. 13

Need for infrastructure equity funds Indian developers do not have enough long term equity resources Dedicated infrastructure funds provide long term high risk equity capital The longer term horizon of such funds help supplement strategic long term foreign capital Early stage incubation of infrastructure assets by infrastructure funds can, after they attain maturity, become suitable for annuity seekers like pension funds and insurance companies 14

Conclusion India continues to remain infra-deficit economy which is acting as a binding constraint on achieving higher economic growth. Development of corporate bond market, introduction of innovations like credit enhancement, securitisation etc is important Long term investors like pension funds and insurance companies should be encouraged to invest in infrastructure sector through appropriate changes in policy and regulatory requirements. Attracting foreign investments through PE investments and launching of dedicated infrastructure funds need to be taken up. 15

THANK YOU