Indian Infrastructure : Review

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1 Indian Infrastructure : Review September 2012

2 Contents Background 02 Status of Indian infrastructure development: (September) Status of the recommendations 10 Developments in infrastructure financing 18 Key challenges affecting India s infrastructure financing 22 Investing in Indian infrastructure: global investors perspective 27 Conclusion 28 Appendix I: Sources referred to by the City of London paper, Indian infrastructure: going beyond the soundbytes (2010) Appendix II: Infrascope 2011 Asia Pacific Rankings 32 Bibliography

3 I. Background In March 2010, the City of London and Execution Noble published a position paper Indian Infrastructure: going beyond the soundbytes. The position paper summarised the recommendations of previous reports on the issue of infrastructure finance, and explored the views of foreign and domestic investors and developers involved in infrastructure projects in India through interviews with market participants. Through analysis of these interviews and desk research, the paper highlighted a set of key issues facing infrastructure development in India, and recommendations to address these issues. For most observers, the easy answer to the question of what has held back infrastructure development is that India suffers from capital deficiency. But contrary to this widely held assumption, the availability of funds - whether equity or debt was not raised as the key issue by any of the interviewees in Most held the view that viable and properly planned projects do not face either debt or equity financing issues. Instead, a host of other issues were raised, with a strong consensus forming around the issues below: 1. Political and bureaucratic challenges; 2. Lack of a (meaningful) supply of bankable projects; 3. Lack of transparency in the PPP bidding and awarding processes of PPP projects; 4. Delays in regulatory approvals and land clearances; 5. Lack of availability of the right kind of long-term debt 6. Taxation issues; and 7. Lack of an independent regulatory authority. The approach document for the Twelfth Five Year Plan 1 ( ) has projected a requirement of US$1tn for India s infrastructure development, with the assumption that fifty per cent of the contribution - i.e. US$500mn - will be raised from the private sector, as opposed to 30 per cent in the previous Five Year Plan ( ). This raises the question whether the private sector (domestic and foreign investors) will be willing to provide this sum, and if sufficient funding can be generated within the stipulated time frame (2017) to meet India s infrastructure development target. This paper reviews and compares the status of the infrastructure development recommendations made by the 2010 City of London paper 2 with the status of infrastructure financing in India today. 1 The 12 th Five Year Plan is awaiting approval by the National Development Council which is expected by October The March 2010 City of London paper Indian infrastructure: going beyond the soundbytes collates the primary recommendations made by various committees, government reports, consultation papers and independent research since 2001 (see Appendix I). 2

4 This paper aims to: evaluate the status of Indian infrastructure development; compare the progress of the recommendations made by the governmental and independent reports between 2010 and 2012 (September); assess the progress in infrastructure financing in India; assess the key challenges affecting infrastructure financing in India; highlight the views of the foreign investor; and outline the steps that need to be implemented to meet India s infrastructure financing requirements. Approach & methodology The review paper refers to existing research reports, multilateral agency studies, newspaper articles and literature produced by government committees, the Planning Commission of India, the Ministry of Finance, the Reserve Bank of India, consultants and international agencies on developing and financing Indian infrastructure. 3

5 II. The status of Indian infrastructure development: The biggest obstacle to India s growth, which has declined to its slowest pace in nine years, is poor infrastructure across India. To help bridge the infrastructure funding gap, the Indian government now expects the private sector to fund half of the projected $1tn required for infrastructure development. However, infrastructure investments in India often fall prey to bureaucracy and land acquisition issues, stalling projects for years. Firms complain of red tape and lack of transparency in the awarding of contracts, while debt available to fund new ventures is limited and the market in which to bid for it is too aggressive. As a result, construction and funding targets for many infrastructure sub-sectors have not been achieved in recent years. Out of 583 projects worth more than 1.5bn rupees each, 235 have been delayed, according to the government's economic survey. Due to the impediments in infrastructure development in 2009, McKinsey estimated that India could suffer US$200bn 3 (around 10 per cent of GDP 4 ) by the fiscal year In terms of GDP growth rate, this would imply a loss of 1.1 per cent. Given the present slowdown in GDP, policy paralysis and the current global economic turmoil, this projection could very well come true. Table 1: India infrastructure investment projections 3 Based on exchange rate of INR 41 per USD (2009 figures) 4 Based on average GDP growth rate of 7.5 per cent between 2008 and

6 The proposed 12 th Five Year Plan Throughout India there is a tremendous need for new and better infrastructure including roads, ports, schools, power plants, and telecommunications. India s former Finance Minister, Pranab Mukherjee, and Planning Commission Deputy Chairman Montek Singh Ahluhwalia have both emphasised that investing in infrastructure and accelerating its development are vital to economic growth. To achieve this aim, India s budget reiterated a commitment to spend Rs. 50tn (US$920bn) on infrastructure development during its Five Year Plan. Some, however, doubt the feasibility of the government s five year infrastructure spending goal, particularly the ability to attract $500bn in private investment, as major bottlenecks remain. Although the US$8bn Golden Quadrilateral project - which links major cities New Delhi, Mumbai, Kolkata and Chennai with modern highways - has been mostly completed, the roads sector as a whole has suffered the worst delays. There are numerous examples of incomplete projects, such as the Ganga Expressway, which was to be India's longest expressway, an eight-lane, 1,050- km (650-mile) road that would have run through Uttar Pradesh and connected one of the country's most backward regions to the doorstep of the nation's capital. The project was halted in May 2009, when the Allahabad High Court prevented the state government from proceeding with the project and directed it to obtain prior environmental clearance from the central government. Following that, farmers' unrest against land acquisition-related compensation issues added to the on-going woes: the project is currently at a standstill. The KMP Expressway, aimed at reducing congestion in New Delhi, was meant to be completed a year before the 2010 Commonwealth Games in Delhi. Instead, land disputes and bureaucratic delays caused it to miss several deadlines and it is now scheduled to be finished in May According to the Government of India s projected investment in the Infrastructure sector during the Twelfth Five Year Plan ( ), the infrastructure sector investment requirement is estimated to be US$1tn. This suggests that infrastructure investment will need to increase from about 8.0 per cent of GDP in the base year ( ) of the plan to about 10.0 per cent of GDP in Over the plan period as a whole, infrastructure investment is estimated to be about 9.95 per cent of GDP. Financing this investment will not only require larger outlays from the public sector, but will have to be matched with a more than proportional rise in private sector investment. The underlying assumption for this estimate is also challenging in the current climate: it is based on Indian GDP growth of 9 per cent (refer to Table 2) throughout the plan period, but currently India s quarterly (April July 2012) 5

7 GDP growth is 5.5 per cent 5. That said, if India wants to invest around 10 per cent of GDP in the infrastructure sector, the financing requirements is still going to be substantial. Table 2: Projected investment in infrastructure during the twelfth five year plan (Rs. bn at prices) Source: Mid-Term Appraisal of the Eleventh Five Year Plan, Planning Commission. Private sector funding would predominately come from the Indian infrastructure companies, but foreign investments in the form of FDI (Foreign Direct Investment), FII (Foreign Institutional Investment), dedicated foreign investments through infrastructure funds and private equity are also essential. Attracting foreign capital to finance Indian infrastructure is going to be an enormous challenge, given slowing Indian GDP growth, the economic and financial policy paralysis in India, the gloomy global economy and the potential impact of the fallout from the eurozone crisis. In an interview 6 to Reuters in June 2012, Bain & Co. Partner, Gopal Sarma, stated India will only achieve about US$650 bn of the projected US$1tn target, and that number could fall further if the government fails to lift corporate sentiment with some key policy decisions over the next 3-6 months." Prime Minister Singh has raised infrastructure targets and rolled out a system to track key projects under the Ministry of Finance. According to a Reuters report, a senior government adviser sharing his views on this development was quoted as saying, the renewed push would help make individual ministries more accountable on performance, but added that he didn't "expect miracles". In a recent statement to Reuters in June 2012, Vinayak Chatterjee, Chairman Feedback Infrastructure Services said, "(We're) not too optimistic, to be frank with you, because it is not the first time that such intentions have been made public, but I think there is a sense of fatigue with mere announcements of targets or mere announcements of new projects." 5 The Planning Commission has taken a note of this declining growth rate and is looking to revise it to 8.2 per cent, subject to final approval from National Development Council. 6 Source: 6

8 PPP in India India has reached the second stage of PPP (public private partnership) maturity. The PPP policy and draft rules 7, which are in place, should ideally remove uncertainties and help attract significant investment in the proposed US$500-bn in PPP projects. Corroborating the fact that India has achieved a certain degree of maturity in PPP is a recent study commissioned by the Asian Development Bank (ADB). The study shows India outscoring China and Japan to rank* third in the performance of public-private-partnership (PPP) projects among Asia-Pacific nations. The report measures each country s efforts to involve the private sector in infrastructure development. The ADB s 2011 Infrascope Report published in March 2012, was prepared by the Economist Intelligence Unit. Table 3: India s Overall index Overall Regulatory Institutional Operational Investment Financial Sub-national index framework framework maturity climate facilities adjustment Score Rank Source: ADB 2011 Infrascope Report March 2012 According to the ADB Report, PPP projects have a deep history in India, with a high level of overall acceptance and use of the model. There is no PPP act at a federal level, leading to a certain amount of disconnectedness and regional variation (some states have their own PPP policies or acts). However, in recent years several national bodies have begun to be seen as components of the institutional structure for PPPs, such as the Committee on Infrastructure (chaired by the Prime Minister), the Planning Commission and the PPP Unit of the Department of Economic Affairs. Following a Supreme Court ruling in 2009, the awarding of PPP projects is subject to the meeting of requirements on transparency and competition. Strategic planning, pre-feasibility analysis, financial viability, PPP suitability, and readiness must all be demonstrated, leading to a process that is seen as largely fair and predictable, albeit time-consuming. The study states that 7 In September 2012, the draft of a national Public-Private Partnership (PPP) policy seeking to ensure transparency was released. The ministry of finance released the draft for discussion, while stating it would publish separate mandatory disclosure norms for projects and also set up a dedicated dispute resolution mechanism to address issues related to bidding and award of PPP projects. The draft says every PPP project would be vetted at the central government level, even where no capital subsidy is expected to obtain clearance from the relevant authorities. Though PPP Approval Committee functions under the finance secretary, its policy making agenda was so far being coordinated by the PPP cell in the Planning Commission. With the finalisation of the policy, the latter might not have much say in PPP norms. * Refer to Appendix II 7

9 dispute-resolution takes place through either amicable settlement or arbitration; foreign bidders can also make use of international arbitration. According to the study, Indian government agencies have a relatively high level of proficiency in PPP projects, particularly with regard to monitoring of construction. Assistance from multilateral agencies has also helped, although there is a certain skill and capacity shortage in the oversight of operation and management. While there is still the lack of a properly evolved framework, riskallocation has been improving since the introduction of Model Concession Agreements in However, the fact that states are gaining in power can be a complicating factor, as outlook, local laws and the willingness of administrations to adhere to those laws vary by area. In terms of finance, matters have improved, with a variety of initiatives (such as the creation of the Viability Gap Fund, and the India Infrastructure Finance Company Ltd) enabling greater participation of private finance in infrastructure. Foreign financial institutions and multilateral agencies can issue bonds in rupees, and private equity participation is also increasing US$4bn was invested in 2010, up from US$1bn four years previously. But issues remain. Ajay Saxena, PPP expert, Asian Development Bank during an interview with the Business Standard in February 2012 said that PPP projects in the field of power, roads, urban infrastructure are facing problems regarding availability of fuel, finances and necessary skillset. The need of the hour is capacity building. Though a lot of things have taken place in PPP projects, the government, private sector, industry and business chambers besides the consulting agencies will have to pay attention on the matter. Gujarat state The recent ADB report points that the state of Gujarat, is the best destination in India for PPP projects. The legal framework is solid and the Gujarat Infrastructure Development Act (1999) sets a comprehensive framework for a variety of projects. The Gujarat Infrastructure Development Board (GIDB) oversees projects and provides a relatively high standard of expertise and judgement. The infrastructure assignments are awarded through competitive bidding. Table 4: Gujarat s Overall index Overall Regulatory Institutional Operational Investment Financial Sub-national Index framework framework maturity climate facilities adjustment Score Rank Source: ADB 2011 Infrascope Report March 2012 Institutionally, Gujarat has a strong system, with a clear delineation of responsibilities between the GIDB, and the line departments of procuring 8

10 government agencies. The technical expertise of GIDB staff is also adjudged to be high. The GIDB provides a fair and clear mechanism for the selection of concessionaires, and, in practice, this system typically works well. In terms of financing, Gujarat is in a strong position, having emerged as a top investment destination in India; the government is also fiscally credible, meaning that payment risk is considered very low. The Gujarat State Guarantee Redemption Fund (initiated in 2010) acts as a cushion for contingent liabilities arising out of state guarantees. Conclusion While India s PPP framework has improved, further coordination at a central level is needed, as well as improvement to governance capabilities for infrastructure projects across India if it is to meet its infrastructure development target. 9

11 III. Developments in Infrastructure Financing The Government of India has taken several steps to promote the flow of long term funds (both domestic and off-shore) to the infrastructure sector, such as: setting up Infrastructure Debt Funds (IDF), raising the FII limits for infrastructure; and liberalising the External Commercial Borrowing (ECB) regime. Initiatives have been taken by the government and policy makers to help bridge the gap between actual and planned investments required for Infrastructure development, especially from the private sector. The following section highlights some of the steps taken. Infrastructure Debt Funds (IDFs) The Union Finance Minister in his Budget Speech for announced that Infrastructure Debt Funds (IDFs) would be introduced in order to accelerate and enhance the flow of long term debt in infrastructure projects to fund the government s ambitious programme of infrastructure development. To attract off-shore funds into IDFs, the Finance Minister also announced that withholding tax on interest payments on the borrowings by the IDFs would be reduced from 20 per cent to 5 per cent. Income of the IDFs was exempted from income tax. The framework for establishment of IDFs was announced by the Ministry of Finance in June, 2011: IDFs are allowed to be set up either as a non-banking financial company (NBFC) or as a mutual fund. The Reserve Bank of India issued the regulations for IDFs to be set up as a NBFC in November, 2011 and the Securities Exchange Board of India issued the regulations governing an IDF structured as a mutual fund in August IDFs are expected to provide long-term low-cost debt for infrastructure projects by tapping into sources of long tenure savings such as insurance and pension funds which have hitherto played a comparatively limited role in financing infrastructure in India. Further, the IDFs set up as NBFC will invest only in PPP projects which have successfully completed one year of commercial operation and are a party to a Tripartite Agreement 8 with the concessionaire and the Government authority sanctioning the project. Banks and NBFCs are eligible to sponsor IDFs subject to existing prudential limits set by RBI. The 8 IDF-NBFCs will enter into Tripartite Agreements to which, the Concessionaire, the Project Authority and IDF- NBFC shall be parties. Tripartite Agreement binds all the parties thereto to the terms and conditions of the other Agreements referred to therein also and which collectively provide, inter alia, for the following:- i. take over a portion of the debt of the Concessionaire availed from Senior Lenders, ii. a default by the Concessionaire, shall trigger the process for termination of the agreement between Project Authority and Concessionaire, iii. the Project Authority shall redeem the bonds issued by the Concessionaire which have been purchased by IDF-NBFC, from out of the termination payment as per the Tripartite Agreement and other Agreements referred to therein (compulsory buyout), iv. the fee payable by IDF-NBFC to the Project Authority as mutually agreed upon between the two. 10

12 restricted portfolio of investment by the IDF, the tripartite agreement and the concept of first loss of the sponsors enable IDFs to issue bonds with at least an AA rating. Although IDFs present an attractive option for domestic entities which wish to invest for the long term in comparatively secure instruments, the Government of India has made clear that IDFs are targeted at foreign investors such as pension funds, insurance companies and sovereign wealth funds. However, several of these potential investors have indicated that they would like to see a healthy uptake of the IDFs domestically before investing in Indian IDFs. The following IDFs have been signed since the launch of IDFs in India in mid- 2011: NBFC (route) The Memorandum of Understanding (MoU) for the first Infrastructure Debt Fund (IDF) was signed in March 2012 between ICICI Bank, Citibank, Bank of Baroda, and LIC (Life Insurance Corporation). The IDF is to be structured as a Non Banking Finance Company (NBFC). ICICI Bank (together with a wholly-owned subsidiary), Bank of Baroda, Citibank and LIC will hold 31per cent, 30 per cent, 29 per cent and 10 per cent shareholding, respectively in the IDF-NBFC. The IDF will seek to raise debt capital from domestic as well as foreign resources and will invest in infrastructure projects under the PPP model that have completed one year of operations. The IDF will expand and diversify the domestic and international sources of debt funding to meet the large financing needs of the infrastructure sector. IDBI along with a consortium of public sector banks has also launched an IDF structured as a NBFC with an initial equity of Rs crore which enables it to raise funds up to Rs. 26,000 crore. In May 2012, Life Insurance Corporation (LIC) and Infrastructure Leasing and Financial Services (IL&FS) agreed to set up a debt fund with a corpus of US$2bn to finance infrastructure. IL&FS Financial Services Ltd, the investment banking arm of IL&FS, plans to initially raise US$1bn from international as well as domestic investors for the fund. State-run LIC will contribute up to 10 per cent of the total corpus and the rest will be raised by IL&FS Financial Services in a phased manner. In November 2011, RBI allowed foreign investments in IDFs thus paving way for long term institutional investors that include sovereign wealth funds, multilateral agencies, pension funds, insurance and endowment funds and FIIs registered with SEBI. IDF-NBFCs can raise resources through issue of either rupee or dollar denominated bonds of minimum 5 year maturity. 11

13 Mutual Fund (route) In May 2012, Infrastructure Development Finance Company (IDFC) received the Securities and Exchange Board of India (SEBI) s approval to set up an infrastructure debt fund through the mutual fund route. The IDFC will have a minimum tenor of five years and not greater than 15 years from the date of allotment of units. The investment objective of the scheme is to seek to generate income and capital appreciation by investing primarily in a portfolio of infrastructure debt instruments. The corpus under the IDF will be invested in debt securities, bank loans and securitized debt instruments. FII (Foreign Institutional Investor) limits A number of measures have been taken to increase FII investment in the infrastructure sector. The Finance Minister in his Budget ( ) speech had announced the increase of FII investments in listed non-convertible debentures and bonds issued by core sector 9 companies by US$20 bn. Until this time, the limit for such investment was US$15 bn in corporate debt, with an additional limit of US$5 bn in bonds with a residual maturity of over five years. Following the budget, this additional limit has been raised to US$25 bn in March 2012, taking the maximum limit of FII investment in bonds and non-convertible debentures issued by infrastructure companies to US$40 bn. This ceiling of US$25bn has sub-categorised as: 1. US$10bn investment in IDFs; 2. US$5bn for FII investments in long term infrastructure bonds with a residual maturity of one year and subject to a lock-in of similar period; 3. US$3bn available for QFI (Qualified Foreign Investors)investments in a mutual fund debt scheme that also invests in schemes of infrastructure companies; and 4. The remaining of the total ceiling (US$7bn) is available in FII investments in long term infrastructure bonds that have a residual maturity of three years and are also subject to a lock-in period of three years. In June 2012, the Ministry of Finance further relaxed the lock-in period and the residual maturity to one year and allowed FIIs to trade amongst themselves during the lock-in period. These measures are likely to boost efforts to reach the Government of India s private funding target. Foreign Direct Investment and infrastructure development To facilitate infrastructure financing, 100 per cent FDI is allowed under the automatic route 10 in sectors such as mining, power, civil aviation sector, 9 As per Ministry of Finance, core sectors include: crude oil, petroleum refinery products, coal, electricity, cement and finished steel 10 FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which require approval of the government: Activities/items that require an Industrial Licence Proposals in which the foreign collaborator has an existing venture/tie up in India in the same field 12

14 construction and development projects, industrial parks, the petroleum and natural gas sector, telecommunications and special economic zones. FDI is also allowed through the Government approval route 11 in various sectors such as civil aviation sector, (domestic airlines beyond 49 per cent), existing airports (beyond 74 per cent to 100 per cent); and other companies investing in infrastructure/services sector (except telecom). ECB (External Commercial Borrowing) Liberalisation& Rationalisation of ECB policies The Reserve Bank liberalised the ECB policy relating to the infrastructure sector in September Under this dispensation, the direct foreign equity holder (holding minimum 25 per cent of the paid-up capital) and indirect foreign equity holder (holding at least 51 per cent of the paid-up capital) are permitted to provide credit enhancement for the domestic debt raised by Indian companies engaged exclusively in the development of infrastructure and infrastructure finance companies without prior approval from the Reserve Bank. The existing ECB policy has also been reviewed to allow Indian companies in the infrastructure sector to import capital goods by accessing short-term credit in the nature of bridge finance subject to certain conditions. Although the refinancing of rupee loans by ECB is generally not permitted, Indian companies in the infrastructure sector are now allowed to utilise 25 per cent of fresh ECBs to refinance rupee loans from the domestic banking system, under the government approval route, subject to certain conditions specified by the Reserve Bank. Corporates implementing infrastructure projects were eligible to avail of ECB up to US$500mn in a financial year under the automatic route until September 2011, when this limit was raised to US$750mn. Infrastructure Finance Companies (IFCs) i.e. Non Banking Financial Companies (NBFCs) categorized as IFCs by the Reserve Bank, are permitted to avail of ECBs, including the outstanding ECBs, up to 50 per cent of their owned funds, for lending on to the infrastructure sector as defined under the ECB policy, subject to their complying with certain conditions. In addition to this, the rate of withholding tax on interest payments on ECBs has also been reduced from 20 per cent to 5 per cent for three years. Considering their specific needs, Indian companies which are in the infrastructure sector have also recently been allowed to access ECBs in Proposals for acquisition of shares in an existing Indian company in some cases All proposals falling outside notified sector policy/caps or under sectors in which FDI is not permitted 11 All activities which are not covered under the automatic route, require prior Government approval. Areas/sectors/activities hitherto not open to FDI/NRI investment shall continue to be so unless otherwise notified by Government. 13

15 offshore renminbi, under the approval route, subject to an annual cap of US$1bn. In view of the increasing capital requirements for the power sector, the Union Finance Minister announced further liberalisation of the ECBs for refinancing of rupee debt for the power sector in his Budget speech. Power companies are now able to raise ECBs to refinance their rupee debt up to a maximum limit of 40 per cent, provided the remaining 60 per cent of the ECB raised is utilised for investment in a new project. Viability Gap Funding Viability Gap Funding (VGF) was introduced in 2006, and provides federal government grants up to 20 per cent of the total capital cost to PPP projects undertaken by any central ministry, state government, statutory entity, or local body. The scheme aims to provide upfront capital grants to PPP projects to enable the financing of commercially unviable projects. The level of the grant is the net present value of the gap between the project cost and estimated revenue generation over the concession period, based on a user fee that is to be levied in a pre-determined manner. Viability Gap Funding under the Scheme for support to PPP in infrastructure is an important instrument for attracting private investment into the sector. This year the list of sub-sectors eligible for VGF under this scheme has been expanded to oil and gas pipelines and fixed networks for telecommunications. India Infrastructure Finance Company Limited India Infrastructure Finance Company Limited (IIFCL) was set up in 2006 by the Indian government to provide long-term loans to infrastructure projects. IIFCL is involved both in direct lending to project companies and refinancing banks and other financial institutions. It was converted to an NBFC in 2011 and its capital base was also enhanced from US$444mn to US$1.78bn. Relaxation in takeout financing scheme of IIFCL To ease access of credit to infrastructure projects, IIFCL has put in place a structure for credit enhancement and takeout finance 12. A consortium for direct lending and grant of in-principle approval to developers before the submission of bids for PPP projects has also been created. Credit Enhancement: IIFCL is presently undertaking pilot transactions under its Credit Enhancement initiative 13. Under this scheme IIFCL provides partial credit 12 Take-out financing is a means for banks to offload their long-term advances to a third party, which will enable the former to better leverage its capital. Under this, funding is provided for infrastructure projects of years by banks, which after a certain period can be off-loaded to a second party, preventing possible assetliability mismatch 13 Source: 14

16 guarantee to enhance the ratings of the project bond issue thereby enabling the channelling of long term funds from largely untapped sources, such as insurance companies and pension funds towards infrastructure sector. Asian Development Bank (ADB) is participating in this endeavour by committing to support IIFCL by providing backstop guarantee facility up to 50% of IIFCL's underlying risk. The credit enhancement scheme will help project developers to raise funds at a reasonable rate from the bond market and consequently help to develop the corporate bond market in India. Takeout financing: Under the takeout financing scheme, loans given by banks to infrastructure projects are taken out of their books by IIFCL. This helps banks in avoiding an asset-liability mismatch and also frees up their funds to be loaned to new projects. The government has also relaxed rules related to the timing of the takeout. While for road projects, the takeout can happen anytime after the commercial operation date (COD), it has been relaxed to six months for projects in other sectors. Under existing norms, takeout financing can only be done one year after the scheduled COD of the project. The pricing mechanism of the recently announced IIFCL takeout finance scheme is now based on the credit rating of the project and is declared upfront Another development is that the developer can now approach IIFCL for takeout financing whereas in the earlier scheme, only banks could exercise such an option. Further, instead of paying commission to IIFCL, lenders will now be compensated up to a certain percentage of interest gain accruing to the borrower under the takeout finance scheme. Interest rates charged by IIFCL have become non-discretionary and transparent. Credit Default Swaps (CDS) In November 2011, the Reserve Bank of India (RBI) permitted CDS on unlisted but rated bonds from infrastructure companies and unlisted/unrated bonds issued by the Special Purpose Vehicles (SPVs) and set up by infrastructure companies. The RBI believes that these measures will provide a much needed stimulus to bonds issued by infrastructure companies. The RBI has followed a calibrated approach, focusing on product safety and systemic stability issues, and so introduced a plain vanilla CDS which could be easily understood by the market. CDS has been designed to limit excessive leverage and build-up in risk positions and at the same time to ensure credit risk mitigation. Securitisation To facilitate the securitisation of loans, the Reserve Bank issued guidelines on Securitisation of Standard Assets in September 2011, which are applicable to all categories of loans including infrastructure loans. The circular contains guidelines on true sale criteria, credit enhancement, provision of credit enhancement facilities, provision of liquidity facilities, provision of underwriting facilities, provision of services, prudential norms for investment in securities issued by SPVs, accounting treatment of the securitisation transactions and making disclosures. 15

17 Corporate bonds The Reserve Bank issued guidelines on repos in corporate bonds to make the market more active, effective from 1 March 2010,. Further, all entities regulated by Reserve Bank of India must report corporate trades on the Fixed Income Money Market and Derivative Association (FIMMDA)-developed platform, enabling transparency and thereby facilitating better price discovery. To ensure smooth settlement in the secondary market, the RBI has permitted clearing houses of the exchanges to have a funds account with RBI to facilitate Delivery versus Payments (DvP-I) based settlement of trades. Primary dealers have been permitted higher exposure limits for corporates to enable better market making. As mentioned above, CDS on corporate bonds have been introduced to facilitate the hedging of the credit risk associated with corporate bonds. The RBI has been following a calibrated approach to opening of the debt market to foreign investors, and has made progress in this regard. A separate limit of US$25bn has been provided for investment by FIIs in long-term infrastructure bonds. Bank financing A significant share (around 55 per cent) of the financing in the 11 th Five Year ( ) Plan period was provided by banks. The following are some of the steps taken to further enhance bank financing in infrastructure. Permitted to invest in unrated bonds: In order to encourage banks to increase the flow of credit to the infrastructure sector, banks are allowed to invest in unrated bonds of companies engaged in infrastructure activities within the ceiling of 10 per cent for unlisted non SLR securities Asset-liability management in the context of infrastructure financing: In order to meet the long term financing requirements of infrastructure projects and address asset liability management issue, banks are permitted to enter into takeout financing arrangements with IDFC or other financial institutions. Banks have also been allowed to issue long term bonds with a minimum maturity of five years to the extent of their exposure of residual maturity of more than five years to the infrastructure sector. Financing promoter s equity: Banks are free to extend finance to fund a promoter s equity in cases where the proposal involves the acquisition of a share in an existing company engaged in the implementation or operation of an infrastructure project in India, subject to certain conditions. Relaxation from capital markets exposure: To encourage lending by banks to infrastructure, the promoter s shares in the SPV of an infrastructure project pledged to the lending bank is permitted to be excluded from the bank s capital market exposure. 16

18 Issuance of guarantee: Banks are permitted to issue guarantees favouring other lending institutions in respect of infrastructure projects, provided the bank issuing the guarantee takes a funded share in the project at least to the extent of 5 per cent of the project cost and undertakes normal credit appraisal, monitoring and follow up of the project. 17

19 IV. Status of recommendations In 2010 the City of London and Execution Noble published a position paper Indian Infrastructure: going beyond the soundbytes. One of the key aspects of the paper was tabulating the recommendations 14 made by government and multilateral agencies on steps needed for infrastructure development in India. The various recommendations made have been revisited and the status of the respective proposals in 2012 (July) are listed in the table below. Table 5: Recommendation table Note: NA: No action, PI: Partial implementation, FI: Full implementation Sr. No. Key recommendations Status 2010 Status 2012 Our Comments 1 Finalising Model Concession agreements (MCAs) for relevant sectors (e.g. roads, ports). [MCAs are generally used to standardise the precise policy and regulatory framework under which infrastructure is developed.] PI FI MCAs have been placed for all sectors (viz. roads, ports, railways and airports). In September 2011, the government came out with a draft National Public Private Partnership (PPP) policy with a view to improve transparency and promote infrastructure sector projects. 2 Streamlining approval processes and expeditious awarding of contracts. [Private infrastructure projects such as roads and power projects in India require a large number of clearances from central, state and local bodies before commencement of work or commercial operations.] PI PI Little progress has been made on this front, particularly with reference to transportation infrastructure. There are no defined time limits for each stage of processing, as well as the overall approval process. Multiple approvals are required from different ministries on a sequential basis, which is time consuming; it can add almost up to one year to the pre-tendering process. Several processes, such as ministerial approvals, do not have defined timelines. Despite several plans to introduce single window clearance mechanisms, there have not been visible improvements. The government has recently announced the formation of an 'Investment Tracking System' for major infrastructure projects of above 1000 cores in the private sector and under PPP. 14 Please refer to the bibliography for the reports that have been referred to for the purpose of collating in Table 5 18

20 Sr. No. Key recommendations Status 2010 Status 2012 Our Comments 3 Accelerating land acquisitions. [Land acquisition is a big challenge, with most tracts of land in India lacking clear title deeds, and growing opposition from farmers against the use of land for industrial purposes.] NA PI The UPA government tabled the Land Acquisition, Rehabilitation and Resettlement Bill, 2011 in parliament. It met with opposition from various party leaders including the Commerce Minister Anand Sharma. The Standing Committee has provided its report on the Bill and the revised Bill is planned to be tabled in the Parliament in the Monsoon session of Meanwhile Prime Minister Manmohan Singh approved changes in the land transfer policy for government owned land which would allow all cases of land transfer from ministries to statutory authorities or PSUs. He has also relaxed all cases of land transfer on lease or rent or licence to a concessionaire which have been appraised through the Public Private Partnership Approval Committee (PPPAC) route and approved by the finance minister or by the ministers concerned or by the Cabinet, depending upon the value of the project. This will help pave the way for fast-tracking pending infrastructure projects and also reduce the approval periods of newer projects. 4 Improved coordination sought between the centre and the states NA NA Although a number of training sessions and discussions have taken place, many states are still not acting in a supportive manner towards centre-sponsored projects. 5 Creation of special PPP unit(s) PI PI Though a separate PPP unit has been created in the Ministry of Finance and in the respective states, their capacities are limited for designing new projects. 6 Creation of a long-term bond market PI PI A number of steps have been taken to enhance the corporate bond market. Please refer to section III point number ix for the major developments in the corporate bond market within the remit of infrastructure. 19

21 Sr. No. 7 Key recommendations Viability Gap Funding (VGF). [Viability Gap Funding means a onetime/deferred government grant, provided with the objective of making a project commercially viable for private participation.] Status 2010 PI Status 2012 FI Our Comments With the creation of a uniform definition for infrastructure, the Government has included additional sub-sectors under the Scheme for financial support to Public Private Partnerships in Infrastructure under the Viability Gap Funding Scheme. To enhance the financial viability of competitively bid PPP infrastructure projects which do not pass the standard thresholds of financial returns, VGF grant up to 20 per cent of capital costs is provided by the Central Government to projects undertaken by any Central Ministry, State Government, statutory entity or local body. An additional grant of up to 20 per cent of the project costs can be provided by the sponsoring authority. 8 Creation of India Infrastructure Finance Company (IIFCL) and enhancement of its lending capabilities further. [IIFCL is a Government owned company which renders long-term financial assistance to Indian infrastructure projects.] FI FI Since its establishment in 2006, IIFCL has been involved in direct financing to companies and refinancing banks. Recently IIFCL has launched a US$1bn infrastructure debt fund. Of the total fund size, US$500mn will be raised from the domestic market while remaining will be from the overseas market. See separate section in preceding chapter. 9 Relax ECB guidelines and regulations for infrastructure sector - borrowers and lenders. [The RBI through its ECB policy restricts sector-wise ECB funds flow and the overall costs of these funds.] PI FI See separate section in preceding chapter 10 Provide tax holidays/ abolish Minimum Alternate Tax (MAT) applicability to infrastructure companies. [MAT is the minimum tax that Indian companies have to pay even if they are being covered by a tax holiday.] NA NA There has been no progress on the MAT. 11 Tax benefit for investors in infrastructure SPVs for sale of investments or dividend distribution. [In India, long-term capital gain on the sale of a listed equity is exempt from taxation.] NA FI The Finance Minister during his budget speech for announced the elimination of the cascading effect of DDT (Dividend Distribution Tax), thus benefiting infrastructure companies that operate out of a SPV model. 20

22 Sr. No Key recommendations Creation of an independent regulatory body for all infrastructure investments. Dispute resolution fora and/or independent regulators sought. Harmonising the definition of infrastructure across ministries and departments Status 2010 NA NA Status 2012 PI FI Our Comments Although a few sectors have improved their dispute handling mechanisms (power through Central Electricity Regulatory Commission (CERC) and Telecom Regulatory Authority of India (TRAI), there is a need for clear and defined dispute resolution mechanisms and for appellate bodies. A uniform definition of infrastructure was approved by the Government (Cabinet Committee on Infrastructure and Competition Committee of India) in March Creation of Infrastructure Non- Banking Financial Companies (NBFCs). [A dedicated investment vehicle for financing infrastructure, as banks are hitting sector and group exposure limits.] NA FI Completed. 15 Utilising foreign exchange reserves for infrastructure creation. [Indian forex reserves have grown to US$278bn and are amongst the top five countries worldwide.] FI FI In March 2010, the IIFCL chairman stated in press that it would be utilising US$500mn in April 2010 to March 2011 for lending to the infrastructure sector. 21

23 V. Key remaining challenges for infrastructure financing in India 1. Funding gap According to the estimates by the Planning Commission in March 2010, the funding gap in the infrastructure sector during the last two years of the Eleventh Five Year Plan ( ) is in the range of Rs.1, bn, which is around 18 per cent of the total estimated requirement (Table 5). The slowdown in the economy experienced since early 2010 has further aggravated this funding gap in the infrastructure sector during the Eleventh Plan. Given the gloomy global economic scenario and eurozone debt crisis, accessing external resources by way of ECBs has become increasingly difficult and this increases the funding gap. Table 5: Funding gap in infrastructure finance during (Rs. crore) As per existing pattern, # as per Including IIFCL, $ including FDI. Source: Planning Commission (2010), Conference on Building Infrastructure: Challenges and Opportunities Financing of Infrastructure, March Bank financing Banks are the predominant institutions which can appraise and take on construction risk; other investors will be reluctant to enter unless the project is complete, starts operations and revenue visibility begins. Although a number of steps have been undertaken by the government to enable investments from non-banking sources, investors are still unable to get consistent returns at par to the risk undertaken. Risk Mitigant Institution best suited to addressing these risks ALM mismatch Refinancing IIFCL Prudential Exposure limits Take out financing IIFCL, IFC or other multilaterals Securitisation 22

24 Asset liability mismatch of commercial banks Nearly 55 per cent of infrastructure financing is sourced through banks in India. However commercial banks ability to extend long term loans to the infrastructure sector is limited; this is because by doing so the banks run the risk of serious asset-liability mismatches. The main sources of funds for Indian banks are savings deposits and term deposits, whose maturity profile ranges from less than six months to five years. Exposure limits Many of the banks have reached their exposure limits 15 for sector lending and lending to a single borrower. For example in the case of the power sector, debt financing constitutes per cent of the project costs. Being a non-priority sector for bank financing, the power sector is unlikely to get further debts from banks and financial institutions due to the substantial increase in the funding requirement and the prudential lending requirements for the priority sector issued by the RBI. 3. Savings not effectively invested in infrastructure India has a saving rate of about 35 per cent, perhaps amongst the highest in the world. However, nearly one-third of the savings are in physical assets. The rest of the available savings are not channelled into infrastructure due to the lack of effective long term savings instruments. 4. Status of IDFs and challenges While progress has been made (see Section III), if IDFs are to become optimal instruments for financing among global investors some changes are needed. From a foreign investor s view, the guidelines are mainly aimed at helping to refinance existing projects, and may well not assist in the financing of new projects. Challenges include: Withholding tax (WHT) is charged on the repatriation of income from equity or debt. In his budget speech for , the Finance Minster announced a reduction in WHT on interest payments on the borrowings by IDFs to 5 per cent from 20 per cent, and exempted the income of IDFs from income tax. Foreign investors, however, will be able to avail the lower withholding tax benefit only if they invest in IDFs formed via NBFC route (not available under the mutual fund route). Many investors, since they bear the credit risk, would like bottom-up 16 investments, which is not possible through the mutual fund route. 15 Exposure limits for non-priority sector lending is decided by the boards of individual banks/fis. 16 Bottom-Up Investing: An investment approach that de-emphasizes the significance of economic and market cycles. This approach focuses on the analysis of individual stocks. In bottom-up investing, therefore, the investor focuses his or her attention on a specific company rather than on the industry in which that company operates or on the economy as a whole. 23

25 IDFs as mutual funds should be allowed to raise resources through both INR and US dollar denominated units in the same way that the NBFCs IDFs can, to attract overseas investments. Guidelines need to provide clarity on foreign fund managers and advisors setting up infrastructure funds. Many international investors would prefer this route as they would the benefit of having a common fund manager for both diversification and also for managing the accounts. In order to attract long term financing, insurance companies should be given the authority to invest in a range of different quality of paper including AA+. 5. Absence of a vibrant corporate bond market An active bond market can increase the flow of long-term funds and reduce reliance on banks. The Indian corporate bond market, though one of the largest in Asia, is still at an early stage of development. Despite the numerous of initiatives taken by the RBI, SEBI and Government of India the Indian corporate bond market is still underdeveloped. A combination of institutional, regulatory and legal factors have held back the development of the corporate bond market in India. Some of the factors that make bonds a more expensive way of financing debt are: banks prefer loan financing as they do not have to mark to market loans unlike bonds, there is an absence of strong bankruptcy laws, a limited investor base, and a limited number of issuers. 6. Takeout financing Takeout financing does not take in to account equitable distribution of risk and benefits. On the sidelines of a banking summit in Mumbai in March 2012, a senior member of the Indian Banks Association (IBA) said that, the current profit margin structure does not encourage banks to enter into takeout financing. "There are some fundamental flaws in the present model - when a bank extends loans for a particular project and takes the risk for the first five to six years, why would it then transfer the account to another bank, when the going becomes smoother? 17 " According to banking experts at the summit, banks are less likely to opt for takeout financing route to spread their risks in infrastructure financing in the next 12 months as the risk outlook is negative for this segment now. The lack of a strong and viable project pipeline is another reason for banks not opting for takeout financing. 17 Source: 24

26 7. Limits on insurance and pension funds Indian insurance and pension funds are constrained by their obligation to invest a substantial portion of their funds in government securities. This limits the direct investment of these institutions in the infrastructure sector. A large role in funding has to be the insurance and pension funds, which have the necessary ALM profile to take on these exposures. However, restrictions in their exposure norms inter alia prevent larger exposures. Some of the statutory investment guidelines restricting insurance companies are: i. Minimum credit ratings for debt instruments ii. Minimum dividend payment record of seven years for equity. The new investment guidelines issued by IRDA in 2008 expand the scope of infrastructure, aligning it with the RBI definition, but have also made conditions more stringent, such as: i. 75per cent of all debt instruments in an insurance company s portfolio (excluding SLR and other approved securities) have to be AAA ii. Approved category of investments include ABS with underlying infrastructure assets, and corporate debt with minimum AA ratings (typical non-recourse project finance ratings are BBB). Risk averseness of public insurance companies: In general public insurance companies hold majority of their investment in portfolio in SLR securities much more than their minimum stipulated limits. In order to meet their infrastructure and social sector targets, public insurance companies invest more in publically listed company papers leaving little for infrastructure project funding. 8. Financial viability of projects A large part of the infrastructure sector in India (irrigation, water supply, urban sanitisation, and state road transportation) is not suitable for commercialisation for numerous regulatory, political and legal reasons. Due to this, the government is not in a position to levy sufficient user charges on the provision of these services. The insufficiency of viable user charges on such infrastructure projects negatively affects the servicing of infrastructure loans for such projects. 9. Credit Default Swaps (CDS) CDS were launched in November 2011 for corporate bonds in India. Since the launch there has not been much uptake and only two deals have been signed. This is mainly due to lack of clarity on the necessary documentation, valuation and pricing and board approvals in public sector banks. CDS can be written for unlisted but rated bonds of infrastructure companies. Unlisted/unrated bonds issued by the SPVs set up by infrastructure companies are also eligible as reference obligations. CDS 25

27 could act as good hedging instruments for bonds by infrastructure companies due to the high risk associated with projects and long gestation periods. The public sector banks have not yet shown much interest in CDS, this is evident from the lack of CDS deals among nationalised banks since its launch. Another reason for the poor response could be the aversion to derivatives products among public sector banks due to limited knowledge and exposure of working with derivatives. 10. Approvals and litigation Land is the most contentious issue in infrastructure projects. Infrastructure projects require several procedural approvals including getting clear land acquisition titles and environmental clearances. There is a possibility that the Land Acquisition Bill will be tabled in the Lower House of Parliament during the monsoon session 2012 (July/August). However, according to news sources, the central government has revised the Bill and overruled a key recommendation of the parliamentary panel that had earlier proposed that land could not be acquired for any for-profit enterprise. The central government, whose role was formerly limited to social sector projects, has widened the ambit of "public purpose" in the reworked Bill. This would now enable it to buy land for the production of goods and services, for social and physical infrastructure, and for human development projects, thus indicating that land can be acquired for industrialisation and urbanisation. The proposed changes to the Bill will need the concurrence of all Ministries concerned. This could cause the central government trouble, given how politically sensitive the issue of land acquisition is, coupled with the challenges of coalition politics. In July 2012, Prime Minister Manmohan Singh relaxed land transfer policy of government owned lands thus paving the way for fast-tracking pending infrastructure projects and also reduce the approval periods of newer projects (refer to point 3 on Table 5). Other than land, the long gestation periods raises other challenges: legal issues often surface and the lengthy timelines for resolving legal issues pose a major hurdle for investors in infrastructure projects. Unless, immediate steps are taken to address the above challenges, there is a strong possibility that India will only achieve about $650bn of the $1tn target, and that number could fall further if the government fails to improve corporate sentiment with some key policy decisions over the next three to six months. 26

28 VI. Investing in Indian infrastructure: global investors perspectives Global investors are hesitant to invest in infrastructure projects due to: slowing economic growth: deteriorating macro economic factors: high inflation and increasing fiscal deficit: land acquisition and environmental clearance issues: uncertainty in the regulatory environment; rupee volatility; failure to implement economic and financial reforms; and taxation issues: provisions to tax indirect investments has only added to the woes of foreign investors. According to a speech by H.R. Khan, Deputy Governor of RBI in December 2011, the extent of foreign participation both through debt and equity in the financing of India's infrastructure has been of the order of around 8 to 10 per cent in the recent past. Apart from the FDI limits prescribed by the Ministry of Finance for investment in the various infrastructure related industries (power, ports, aviation, et cetera), India has also allowed Qualified Foreign Investors (QFI) to invest in Indian equity. Under this major initiative, they can invest in infrastructure debt up to a ceiling of $3bn, outside of the total long term corporate infrastructure limits of $25bn.. Although lock-in periods for FIIs investments in corporate bonds have been progressively reduced, the residual lock-ins are still perceived to be too onerous for FIIs who are typically focused on short dated papers. Thus there is a need to create an environment for long term investor group (insurance, pension and hedge funds). Multilateral Development Banks might use their large resource base to leverage private investments, rather than funding public sector funded projects. They could also be used to leverage foreign funds for infrastructure. 27

29 VII. Conclusion Since 2010, a number of enabling steps have been taken by the government and policy makers to support infrastructure development and financing. These are summarised below; Finalising Model Concession agreements (MCAs for all sectors (roads, ports, railways and airports). The Viability Gap Funding Scheme launched by the government has been fully implemented. Infrastructure Debt Funds (IDFs) have been established to accelerate and enhance the flow of long term debt in infrastructure projects. Withholding tax on interest payments on the borrowings by the IDFs was be reduced from 20per cent to 5per cent and the income of IDFs was exempted from income tax. The Reserve Bank of India permitted CDS on unlisted but rated bonds of infrastructure companies and unlisted/unrated bonds issued by the SPVs set up by infrastructure companies. External Commercial Borrowings or ECB limits were increased to USD 750mn from USD 500mn for corporates implementing infrastructure projects. The Finance Minister, during his budget speech for announced the elimination of the cascading effect of DDT (Dividend Distribution Tax), thus benefiting infrastructure companies that operate out of a SPV model. A uniform definition of infrastructure was approved by the Government (Cabinet Committee on infrastructure and Competition Committee of India) in March Increases to the limit on FII investment in listed non-convertible debentures and bonds issued by core segment companies by US$20 bn. IIFCL started a pilot credit enhancement scheme providing partial credit guarantees to enhance the ratings of infrastructure project bonds thus assisting in enhancing the investor base (insurance and pension funds). ADB will support this scheme by providing backstop guarantee facility of up to 50 per cent of IIFCL s underlying risk. However, the task ahead remains immense. If the financial targets of the proposed 12 th Five Year Plan are to be achieved, the following steps are needed: resolving the current impasse on The Land Acquisition, Rehabilitation and Resettlement Bill (2011) and creating a robust and fair process, a single window clearance approach for approval of infrastructure projects, speeding up environmental and other regulatory clearances, creating steady supply of bankable projects, developing long term debt financing, creating favourable taxation policies for infrastructure projects, including for foreign investment, increasing transparency and accountability in the tendering and administration of projects, 28

30 speedy dispute settlement The above actions will pave the way for increasing domestic private sector and international infrastructure investments thus enabling the projections of the 12 th Five Year Plan, to be turned in to a reality. 29

31 Appendix I: Sources referred to by the City of London paper, Indian infrastructure: going beyond the soundbytes (2010) 1. Facilitating Public Private Partnership for Accelerated Infrastructure Development in India, December 2006, Asian Development Bank 2. Approach to Regulation of Infrastructure, Planning Commission, Government of India, 15 September Private Participation in Infrastructure, Secretariat for the Committee on Infrastructure, June The Report of the Committee on Infrastructure Financing, May India: Building capacities for Public Private Partnerships, The World Bank, June India leads developing nations in private sector investment, Gridlines, PPIAF, March Public Private Partnerships- Creating an Enabling Environment for State Projects, CII, July Financing Private Infrastructure: Lessons from India, Montek S. Ahluwalia 9. CII s Blueprint for speeding up Infrastructure projects, United News of India, August Institutional Capacity and Governance for PPP Projects in India, Ashwin Mahalingam and Vikram Kapur, The Indian PPP Experience at the State Level, Shailesh Pathak and Ashwin Mahalingam, April 12. Approach to Regulation of Infrastructure, Planning Commission, Government of India, 15 September Background Paper- Indian Infrastructure Summit 2009, Deloitte 14. India has a good pipeline of projects, Dr. M.S. Kapadia, Projects monitor, May Public-Private Partnership in India Infrastructure Development: Issues and Options, L Lakshmanan, RBI Occasional Papers, Summer Overview of GoI s initiatives to encourage PPPs, Govind Mohan, Director (Infrastructure), Department of Economic Affairs, Ministry of Finance, Government of India 17. Presentation at the ICRIER Silver Jubilee Seminar, Rajiv B Lall, MD & CEO, IDFC, Nov Report and Recommendations of the Committee on Launch of Dedicated Infrastructure Funds (DIF s) by Mutual Funds, SEBI, 23 July The future of private infrastructure, Jose A Gomez-Ibanez, Dominique Lorrain and Meg Osius, April 2004, Taubman Center for State and Local Government, Kennedy School of Government, Harvard University 20. India lead developing nations in private sector investment, Gridlines, PPIAF, march RBI relaxes rules relating to ECBs, Ashurst LLP, December Financing the boom in public-private partnerships in Indian infrastructure, Gridlines, PPIAF, December Indian Roads: on the right track, Ashurst Insight, December The trouble with public-private partnerships, Trusted Sources, 30 January

32 25. Economic Challenges for the New Government, Suggestions for Policy Formulations, June 2009, Observer Research Foundation 26. Scheme and Guidelines for India Infrastructure Project Development Fund, Department of Economic Affairs, Ministry of Finance, Government of India 27. Construction Federation of India (CFI) wish list, 22 February 2010, NBM & CW 28. Financing transport infrastructure and services in India, 15 January 2009, S. Sriraman and Sunando Roy, Development Research Group, Department of Economic Analysis and Policy, RBI, Mumbai 29. The Great Indian Highway Story, January 2010, Infrastructure Today 30. Project Preparation, The Cinderella of Private Sector Participation, India Infrastructure Report Infrastructure in India- A vast land of construction opportunity, November 2008, PricewaterhouseCoopers 32. Sustain the infrastructure investments- Interview with Mr Amrit Pandurangi, February 2008, Business Line 33. Vinayak Chatterjee s (Chairman, Feedback Ventures) Business standard INFRATALK column Government of India: Union Budget and Economic Surveys (www.indiabudget.nic.in) 35. Liberalisation of ECB Policy for the Infrastructure Sector, 3 March 2010, PricewaterhouseCoopers 36. PPP India Database, Department of Economic Affairs, Ministry of Finance, Government of India (www.pppindiadatabase.com) 37. India Infrastructure Reports, (http://3inetwork.org) 38. Non major Ports- A new investment destination, April 2008, Sandeep Mehta, Assocham 39. The Private Participation in Infrastructure (PPI) Project Database 40. Foreign Equity miniscule in public-private projects, 25 December 2009, Business line 41. Private Equity in Indian Infrastructure, Assocham and Ernst & Young 42. Indian Ports: Capacity constraints and requirement for the future- An investor s perspective, April 2008, Shyam Sundar, IDFC PE 43. Five culprits - Infrastructure Development in India - 5 Fundamental Issues, 2009, Hemant Bhattbhatt, Deloitte 44. Govt admits delays in 140 projects, 10 March 2010, zeenews.com 45. Govt may let FIs guarantee infrastructure bonds, 11 March 2010, Economic Times 46. The 2009 Preqin Infrastructure Review 47. Mainstreaming PPPs at the State Level, Review & Plans, June 2008, Govt of Gujarat 48. Financing Infrastructure: Addressing constraints and challenges, June 2006, The World Bank 49. PPP Project Financing- Challenges and Options, February 2009, Dr S D Nanda, IIFCL 50. Infrastructure challenges in South Asia: The Role of Public-Private Partnerships, September 2007, Geethanjali Nataraj 51. Standardisation of PPP Contract provisions in India, Consultation Document for consultation with Public Sector Bodies, December 2009, Partnerships UK PLC 31

33 Appendix II: Infrascope 2011 Asia Pacific Rankings The Infrascope index comprises 19 indicators, of which 15 are qualitative and four quantitative. Data for the quantitative indicators are drawn from the World Bank and the Private Participation in Infrastructure Advisory Facility (PPIAF) data base and from the Economist Intelligence Unit s Risk Briefing service. Gaps in the quantitative data have been filled by estimates. The scoring of qualitative indicators was informed by a range of primary sources (legal texts, government web sites, press reports and interviews), secondary reports and data sources adjusted by the Economist Intelligence Unit. The main sources used in the index are the Economist Intelligence Unit, the World Bank and Transparency International. The overall results of the 2011 Asia Infrascope show country rankings as based on the weighted sum of the six category scores. The index scores countries on a scale of 0 to 100, where 100 represent the ideal environment for PPP projects. The categories and their associated indicators Rankings Legal and regulatory framework Consistency and quality of PPP guidelines Effective PPP selection and decision making Fairness/openness of bids, contract changes Dispute-resolution mechanisms Operational maturity Public capacity to plan and oversee PPPs Methods and criteria for awarding PPP Regulators risk-allocation record Experience in electricity, transport and water concessions Quality of electricity, transport and water concessions Investment Climate Political distortion Business Environment Political will Institutional framework Quality of institutional designs PPP contract, hold-up and expatriation risk Financial facilities Government payment risk Capital market: private infrastructure Marketable debt Government support for low-income users Sub-national adjustment factor Sub-national adjustment Rank Place Points 1 Australia UK Korea, Rep Gujarat State India Japan China Philippines Indonesia Thailand Bangladesh Pakistan Kazakhstan Vietnam Mongolia 23.3 Papua New 16 Guinea

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