Indian Infrastructure

A Trillion Dollar Opportunity

5th PEVCAI ANNUAL CONVENTION
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www.deloitte.com/in

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Contents

ASSOCHAM
Foreword........3
Trillion Dollar Opportunity A Perspective ................................................................................................................... 4
Availability of finances ............................................................................................................................................ 8
Private sector investment ....................................................................................................................................... 9
Financing Trillion Dollar Investment Availability Aspect ........................................................................................... 10
Debt Financing ..................................................................................................................................................... 11
Commercial Banks ............................................................................................................................................... 11
Infrastructure Non-Banking Finance Companies (NBFCs) .................................................................................. 12
Insurance Companies .......................................................................................................................................... 12
Overseas Market: External Commercial Borrowing ............................................................................................. 13
Measures to enhance fund availability ................................................................................................................. 14
Bond market ......................................................................................................................................................... 14
Banking reforms ................................................................................................................................................... 15
Insurance reforms ................................................................................................................................................ 16
Recommendations for ECBs ................................................................................................................................ 18
Financing Trillion Dollar Investment Private Sector Investment .............................................................................. 19
Assessment of FY2013 Infrastructure Investment ............................................................................................... 20
What ails the infrastructure sector ....................................................................................................................... 20
Policy response to infrastructure issues .............................................................................................................. 21
Modifying the policy/regulatory framework ........................................................................................................... 22
Facilitating project clearances .............................................................................................................................. 25
New investment cycle on anvil ............................................................................................................................. 29
Equity Financing A Perspective ............................................................................................................................... 30
Global Infrastructure Investors market ................................................................................................................. 31
Infrastructure private equity in India ..................................................................................................................... 33
Going forward scenario ........................................................................................................................................ 35
Way Forward ............................................................................................................................................................ 37

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ASSOCHAM Foreword
India needs private equity more than ever to push forward the Infrastructure agenda.
But to be most effective, the right partnerships are critical to seize market
opportunities, open up new markets, and to share Market knowledge.
India could become the second largest economy in the world by 2050. The key
growth drivers are investments in infrastructure, domestic consumption, and a hub for
global outsourcing. This is further supported by growth oriented policies by the
government. The favourable environment has led to the growth of the private
equity market.
On the other hand, entrepreneurship has long been considered crucial for the economic development. An
important element of entrepreneurship is the willingness and ability to mobilize private capital from both
domestic and foreign sources thereby creating of new business that proposer and create jobs.
Private equity can not only help companies grow and raise productivity but at the same time, it can also
be a powerful driver of change by raising standards, fostering growth and promoting new opportunities for
business.
Private equity represents a modest share of the USD 1 trillion to be spent on infrastructure in 2012-17,
about half of which would come from private sector funds, compared with a target of one-third in the
previous five years.
This paper prepared by Deloitte and PEVCAI Teams, gives an overview of the Twelfth Plan financing
scenario and highlights the role of the Private Sector (and in turn of Private Equity as an asset class) in
driving the private investment into the infrastructure sector and further fuelling the growth of the Indian
economy.
I convey the Teams and the 5th PEVCAI Annual Convention my good wishes.

D. S. Rawat
Secretary General
ASSOCHAM.

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Deloitte Foreword
Achieving a sustained growth trajectory averaging at 9 percent entails robust
physical infrastructure i.e. electricity, roads, ports, irrigation, water supply and
sanitation and creation of such infrastructure required mobilization of funds for
financing such projects.
Notably, funding of domestic Infrastructure is in a period of flux. On both sides of the
equation supply and demand there are positive and negative influences
resulting from the economic slowdown as well as credit scarcity. While demand
remains strong from the users of finance, suppliers have traditionally gravitated towards quality projects
with little to differentiate.
In this context, ability to meet infrastructure investment target of USD 1 trillion (INR 65,000 billion) as
envisaged in the Twelfth Plan has two aspects to it. Firstly, availability of funds from sources from various
sources including budgetary support, internal generation and borrowings. Secondly, ability of private
sector to execute infrastructure projects and take up new investments under public-private partnership
model
Availability of finances for such huge investment would largely depend on the Government's ability to
successfully increase reliance on the bond market as an alternative source of financing to bank loans and
their ability to implement fiscal consolidation as a means of freeing up bank lending and reducing upward
pressure on interest rates.
Emphasis on private sector participation and policy / regulatory measures to attract private capital cannot
be undermined given the huge pressure on capital rationing and funding requirements. In order to
incentivise the large scale use of private sector participation in infrastructure, it would be useful to link the
Government funding to the effort of developing proj ects as PPP.
Further, there are credible reasons to believe that the Indian private equity market would make important
contribution in this endeavor. Our GDP continues on its upward trajectory, bringing continual increases in
new investment opportunities in the infrastructure which would be required to maintain the growth
momentum. Plenty of opportunities and long term potential in the infrastructure would keep attracting
private equity to invest in it.
We trust the report provides an ample background for helping identify practical solutions to address
concerns holding back investments in the infrastructure sector.
Kalpana Jain
Senior Director
Deloitte Touche Tohmatsu India Private Limited

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Trillion Dollar Opportunity
A Perspective
The rapid growth of the Indian economy in recent years has placed increasing stress on physical
infrastructure i.e. electricity, railways, roads, ports, irrigation, water supply and sanitation, all of which
already suffer from deficit in terms of capacities as well as efficiencies. The pattern of inclusive growth
averaging at 9 percent per year as conceived under the Twelfth Five Year Plan (2012-17) can be
achieved only if this infrastructure deficit is overcome and adequate investment takes place to support
higher growth and an improved quality of life for both urban and rural communities.
Based on projections provided in the Mid-Term Appraisal of the Twelfth Plan, in order to attain a 9 percent
real Gross Domestic Product (GDP) growth rate, infrastructure investment should be on average almost
10 percent of GDP during the Twelfth Plan. This translates into INR 41 lakh crore at 2006-07 prices (real
terms), as estimated by the Planning Commission of India. At an annual inflation rate of 5%, this
translates into an equivalent to INR 65 lakh crore in current prices.

Projected Investment in Infrastructure during the Twelfth Five Year Plan
Year FY13 FY14 FY15 FY16 FY17 Total Twelfth
Plan
GDP at FY07 Prices
(INR Billion)
68,825 75,019 81,771 89,131 97,152 411,900
Infrastructure
Investment as % of
GDP
9.00% 9.50% 9.90% 10.30% 10.70% 9.95%
Infrastructure
Investment (INR Billion
in current prices)
8,885 10,734 12,803 15,245 18,125 65,794

Source: Mid-Term Appraisal Twelfth Five Year Plan, Planning Commission
Note: WPI inflation used to convert to current prices; FY12 inflation based on Prime Minister Economic Advisory Council (PMEAC)
projection


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The sectoral allocation of infrastructure investment as a proportion of GDP stands highest at 2.9 percent
for energy sector (comprising electricity, renewable energy and oil & gas) followed by transport (railways,
MRTS, ports, airports, roads & bridges and storage) at 2.8 percent.

Sector-wise Investment Pattern: Eleventh and Twelfth Plan (INR Billion at current prices)

Eleventh Plan
(2007-12)
Twelfth Plan
(2012-17)
Private Sector
Participation Ratio
Sectors
INR
Billion
As % GDP
INR
Billion
As % GDP
Eleventh
Plan
Twelfth
Plan
A. Energy (1 to 3) 8,802 2.6% 23,242 2.9% 56% 61%
1.Electricity 7,285 2.2% 17,724 2.2% 43% 48%
2.Renewable Energy 892 0.3% 3,760 0.5% 88% 88%
3.Oil & Gas Pipelines 625 0.2% 1,757 0.2% 37% 48%
B. Transport & Storage
(4 to 9)
7,948 2.4% 22,446 2.8% 40% 56%
4.Raiways 2,012 0.6% 6,128 0.8% 5% 19%
5. MRTS 417 0.1% 1,466 0.2% 13% 42%
6.Ports 445 0.1% 2,335 0.3% 82% 87%
7.Airports 363 0.1% 1,035 0.1% 64% 80%
8.Roads & Bridges 4,531 1.3% 10,793 1.3% 20% 33%
9.Storage 179 0.1% 689 0.1% 55% 72%
10. Telecommunication 3,850 1.1% 11,140 1.4% 78% 92%
11. Irrigation 2,435 0.7% 5,953 0.8% 0% 0%
12. Water Supply &
Sanitation
1,208 0.4% 3,013 0.4% 0% 3%
12. Grand Total (1 to 12) 24,243 7.2% 65,795 8.2% 37% 48%

Source: Planning Commission.

Assuming 50 percent of the investment will be met by budgetary resources, the balance INR 32.5 lakh
crore needs to be met through debt and equity. Until recently infrastructure investment in India was
financed almost entirely by the public sector from the Government budgetary allocations and internal
resources of public sector infrastructure companies. However lately, the private sector has emerged as a
significant player in bringing in investment to build and operate infrastructure assets from roads to ports
and airports and to network industries such as telecom and power. Private investment constituted about
one third of infrastructure investment in the Eleventh Plan and this is projected at 50 percent for the
Twelfth Plan period. In these times of tight fiscal environment, private sector will need to play a greater

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role without which infrastructure development will not meet the growing demand and could fall far behind
current requirements impacting targeted GDP growth.
The public-private sector mix of investment varies across various infrastructure industries. For instance
private sector is expected to contribute more than 80 percent of total investment in the renewable energy,
telecom, ports and airports. These are the infrastructure industries where user charges can pay for the
investment. In case of roads, more than two thirds of the road network is in rural or in the less developed
and remote regions where low levels of development and industrial activity preclude high traffic volumes
necessary for commercial viability of toll roads. Hence, the contribution of the private sector is only one
third of total investment for this sector (INR 10,763 Billion) and the balance two third is to be made up by
public sector contribution.
The source of financing proposed infrastructure investment for Twelfth Plan is represented below.
Financing matrix of Infrastructure: Twelfth Plan (2012-17)














Source: Planning Commission.

Technically, there are two dimensions to above financing matrix for the Twelfth Plan. Firstly, availability of
funds form sources mentioned in the matrix including budgetary support, internal generation and
borrowings. Secondly, ability of private sector to execute infrastructure projects and take up new
investments under public-private partnership model.

Trillion Dollar Infrastructure
Investment Requirement
INR 65,000 billion
(2012-17)
Public Sector
Contribution
Private Sector
Contribution
INR 33,700
billion
INR 31,300
billion
Budgetary
Support
INR 16,143
billion
Internal
Generation
INR 6,869
billion
Borrowings
INR 10,693
billion
Internal
Generation
INR 9,630
billion
Borrowings
INR 21,670
billion

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Availability of finances
Of the three sources of public sector contribution mentioned in previous section, budgetary support for
infrastructure would depend on the fiscal space available to both Central and State Governments after
meeting contractual obligations like interest payments, wages and salaries and pensions. Besides,
Central Government has to contend with rising defence and security related expenditure which are driven
by threat perceptions and geostrategic considerations, subsi dies and massive expansion of programmes
aimed at social entitlements. Higher levels of internal generation of resources largely depend on the
extent of freedom and autonomy enjoyed by public sector undertakings involved in rendering
infrastructure services to run their undertakings on commercial considerations. Scope for borrowings
would mainly depend on Governments success in containing its fiscal deficit which would prevent
borrowings by the Government for financing revenue expenditure so that private sector investment is not
crowded out.
In terms of non-debt and debt sources, almost 50 percent contribution each from debt and non-debt
sources would be required. However, availability of debt is placed at INR 13,337 billion as against a
requirement of INR 32,363 billion leaving a funding gap of INR 19,025 billion to be addressed.

Debt source availability versus requirement (INR Billion)
Twelfth Plan (2012-17)
Debt requirement
Public Sector Borrowing 10,693
Private Sector Borrowing 21,670
Total Debt Requirement 32,363

Debt availability
Commercial Banks 7,435
IFC 3,844
ECB 549
Insurance Funds 1,507
Total Debt Availability 13,337

Debt Funding Gap 19,025

Source: Planning Commission.

Given the above gap in debt funding, the ability to meet infrastructure investment target of USD 1 trillion
(INR 65,000 billion) will critically depend on two factors. First, the Government's ability to successfully
increase reliance on the bond market as an alternative source of financing to bank loans and, second,
their ability to implement fiscal consolidation as a means of freeing up bank lending and reducing upward
pressure on interest rates.

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Further, India will need to borrow increasingly in the domestic market if it is to meet this target, since it has
limited fiscal space and faces ceilings in terms of instruments such as external commercial borrowings. It
faces a widening current account deficit - the latest figure reaching 4.9 percent of GDP (October-
December 2013) - that constrains its scope to expand domestic investment and its balance of payments
position. So far, banks have been the main providers of infrastructure financing. While this is not an
optimal arrangement, given the long-term financing required for infrastructure investment, banks have
been successful in financing greenfield projects. However, they now face a number of barriers to expand
lending to infrastructure, including concentration risk such as exposure limits to groups (infrastructure
companies) and sectors (e.g. power, roads) as well as to prevent build-up of asset liability mismatches in
the system.
Private sector investment
As established, nearly 50 percent of the Twelfth Plan target is expected to be contributed by the private
sector via public-private partnership (PPP) route.
PPP has emerged as the new success route in Indias attempts to build world-class infrastructure. As
planned infrastructure projects throw up funding and technological challenges, Governments are
increasingly turning to the private sector with PPP route emerging as the most favoured mechanism for
cooperation. It is not surprising then that the PPP concept has expanded across key infrastructure
segments ranging from roads and communications to power and airports. PPP in fact, could be the key to
policymakers attempts to create the requisite infrastructure for enabling double-digit GDP growth and
enhancing peoples welfare. Out of 50 percent to total infrastructure investments in India during the
Twelfth Plan, it will be no surprise if a large chunk of these investments are directed through the PPP
route.
However, achieving private sector investment target in the infrastructure sector during the Plan period is
challenging mainly due to delays in clearances and liquidity crunch faced by the players. Besides,
financial institutions are not willing to fund infrastructure projects. This results in developers facing liquidity
challenges. Therefore, instead of taking up new projects, developers are now focusing on completing
existing ones and addressing internal cash flow issues.
The paper details the aspects of availability of finances for the gigantic trillion dollar investment
projections and issues saddling the private sector investments in subsequent sections.




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Financing Trillion Dollar Investment
Availability Aspect
While infrastructure investment targets are ambitious, Indias domestic savings rate is very high and is
projected to grow. Much of the infrastructure investment need can be financed domestically. Still, such
high rates of infrastructure investment constitute over one-third of Indias financial savings and would
entail as much as 21 percent of the incremental financial savings being directed to infrastructure.

Savings and Infrastructure Investment Needs
Percent of GDP FY10 FY13 FY14 FY15 FY16 FY17
Infrastructure Investment 8.0 9.0 10.0 9.9 10.3 10.7
Gross Domestic Savings 33.7 37.8 40.6 42.9 45.5 48.2
Out of which financial savings 22.0 24.8 27.2 29.1 31.1 33.4
Incremental Infrastructure Investment 0.3 0.6 0.5 0.4 0.4 0.4
Incremental Financial Savings 2.8 4.1 2.4 1.9 2.6 2.3
Infrastructure Investment as % of Financial
Savings
34% 36% 35% 34% 33% 32%
Percentage share of incremental infrastructure in
incremental financial savings
21% 21% 20% 17%



Source: Mid-Term Appraisal Twelfth Five Year Plan, Reports submitted by Sub-Groups on Household Savings, Private Sector
Corporate Savings and Public Sector Savings for 9% p.a. real growth and 5% p.a. inflation scenario

Yet, it is not just the adequacy of domestic financial savings that matters. These savings have to be
intermediated into infrastructure to achieve these targets. During the first three years of Eleventh Plan, the
infrastructure funding requirement has broadly been met through the channels mentioned above in the
proportion described below:






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Sources of funds during first three years of Eleventh Pan

Source: Infrastructure.gov.in

It is evident that budgetary support constituted ~45 percent of the total infrastructure spending followed by
debt from Commercial banks, Non Banking Financial Companies (NBFCs), Insurance Companies and the
external sources constituting ~41 percent of the funding while the balance 14 percent was through Equity
and Foreign Direct Investment (FDI).
Debt Financing
Until the mid-2000s, there was no major demand from the financial system to fund infrastructure
investment due to fairly low quantum (around 3-5% of GDP). This was financed largely by budgetary
allocations and internal resources of public sector enterprises engaged in infrastructure. In the Eleventh
Plan, however, infrastructure spending picked up substantially with an important role played by the private
sector and greater recourse to the financial system. Most of the debt financing came from banks, NBFCs,
and external commercial borrowing (ECB), followed by insurance companies.
Commercial Banks
The financial system was able to respond to the rapidly rising demand for credit by infrastructure
companies largely because banks stepped up lending by unwinding their excess investments in the
Government securities maintained as Statutory Liquidity Ratio. Until the end of the Eleventh Plan, it is
estimated that banks were able to provide about half the debt finance needs of infrastructure investment.
However, this rapid growth in bank credit to infrastructure has resulted in a greater concentration of risks
in banks, asset liability mismatch and reaching exposure ceiling limits of the sector. Banks have prudential
exposure caps for infrastructure sector lending as a whole, as well as for individual sub-sectors.
According to the information available, most of the banks have almost reached the prudential caps for
power sector and other sectors like roads may not be far behind.
45%
14%
6%
4%
10%
21%
Budgetary support Equity/FDI ECBs Insurance NBFCs Commercial Banks

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Going forward, credit growth will be determined mainly by retained earnings and increase in banks
capital. However, as most of the infrastructure lending is by public sector banks (PSBs), raising capital
can only take place if equity capital base is enhanced by the Government diluting it s shareholding or
infusing capital into the PSBs. In the projections described below, infrastructure credit growth is assumed
to be determined only by retained earnings. Assuming that retained earnings grow at 20 percent per
annum for PSBs, and at 25 percent per annum for private banks, and infrastructure credit is estimated to
rise to 15 percent of total credit, then the net incremental bank credit to infrastructure over the Twelfth
Plan is estimated at INR 7.4 lakh crore.

Infrastructure Non-Banking Finance Companies (NBFCs)
NBFCs also increased their lending sharply as the credit demand for power and roads expanded. The
major Infrastructure Finance Companies (IFCs) which could be considered for estimating infrastructure
finance are Power Finance Corporation (PFC), Rural Electrification Corporation Limited (REC), IDFC
Limited, India Infrastructure Finance Company Limited (IIFCL), L&T Infrastructure Finance Company
Limited and IFCI Ltd.
Going forward, high historical growth rates observed in the past may not be feasible since NBFCs would
need to take up further capital raising exercise to be able to lend significant amounts. Hence, for the
purpose of estimation the growth rate for FY11-17 is assumed at ~20 percent per annum which is at the
same levels as commercial banks.
Insurance Companies
Life insurance companies are required to invest up to 15 percent of their Life Fund in infrastructure and
housing. Although the Asset Under Management of life insurers in the Life Fund increased at a compound
annual growth rate (CAGR) of 16.31 percent p.a., the share of infrastructure investments during the same
period increased only marginally at a CAGR of ~1.25 percent p.a. Insurance penetration is estimated to
continue to rise, with the insurance premium growing from the current approximate 4 percent of GDP to
6.4 percent of GDP by the end of the Twelfth Plan. Investment in infrastructure by the insurance sector is
projected based on the past few years average investment by insurance companies (about 63 percent of
premium income) after deducting commissions and expenses, and the infrastructure investment as a
share of the total insurance investment flows (of 6.2 percent). Although there is much greater scope for
channelizing insurance funds for infrastructure (which needs long-term funding) there are various
regulatory constraints in the sector precluding this.


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Overseas Market: External Commercial Borrowing
Infrastructure companies have tapped external credit market, however the share of infrastructure
investments in overall ECB borrowings has gradually come down. The estimates of the external
borrowings during Twelfth Plan are based on the past five year averages (FY07-11) of the actual external
borrowings.

Total Debt availability projections
Commercial Banks- Projections (INR billion)
FY12 FY13 FY14 FY15 FY16 FY17 Total
Gross Bank Credit
Outstanding
58,874 70,567 84,581 101,378 121,511 145,642
Yearly availability of funds 988 1,192 1,436 1,731 2,086 7,435

NBFCs- Projections (INR billion)
FY11 FY12 FY13 FY14 FY15 FY16 FY17
Credit (Infrastructure) total
outstanding
2,176 2,608 3,126 3,747 4,492 5,384 6,453
Credit (Infrastructure)
yearly growth
518 620 744 892 1,069 3,844

Insurance- Projections (INR billion)
FY11 FY12 FY13 FY14 FY15 FY16 FY17
GDP Projections 78,779 90,163 103,191 118,102 135,168 154,700 177,054
Premium % of GDP 4.10% 4.40% 4.70% 5.10% 5.50% 5.90% 6.40%
Total premium 3,229 3,967 4,850 6,023 7,434 9,127 11,331
Total Investment 2,045 2,512 3,072 3,815 4,708 5,781 7,177
Infrastructure Investment 125 154 188 234 289 354 440 1,507
Sources: IRDA; Subgroup Household Sector Savings


ECB- Projections (INR billion)
Total Borrowing 549

Total Debt Funding Available (INR billion) 13,337
Source: Planning Commission


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Measures to enhance fund availability
As observed, there is expected to be a shortfall in the available resources vis-a-vis requirement under
different growth scenarios. Total funding gap is estimated at INR 19,025 billion. Certain focus areas could
be:
Broad areas of reforms to enhance fund availability
Supplementing/widening the channels of
infrastructure funding

Regulatory reforms for Insurance companies and
Pension Funds so that more savings through these
important channels gets mobilized into infrastructure.
Reforms which ensure higher ECB and other forms of
foreign capital inflows.
Development of financial products and
markets

Increase depth and width of the financial market.
Reforms in the area of development of newer financial
products for infrastructure financing such that a wider
variety of investor is attracted.
Creation of a growth enabling eco-system

Regulatory changes addressing replacement of
committed but unutilized debt capital extended by the
commercial banks with other forms of financing.
Development of a frame work that reduces the market
risk in infrastructure financing and asset liability
mismatch of banks.
Give commercial banks more flexibility to churn their
portfolio of Infrastructure assets at shorter tenors by
way of increasing asset classes.
Revitalising the market for takeout financing,
refinancing and securitisation.

Having the focus areas mentioned above as guiding principles, the following section describes some
regulatory, policy and financial stimuli required in the immediate to the medium term.
Bond market
In many countries across the world, long-term bonds form a major share of infrastructure finance.
However, the Indian corporate bond market is less than 5 percent of GDP. International bonds can
provide access to term financing (can be up to 30 year plus tenor) to an extent not available in the bank
market. However, Indian companies (even with high ratings) have been unable to tap the international
bond markets for funding their long term investments in the infrastructure sector.
Some measures that need to be undertaken for the deepening the corporate bond markets in India may

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include: (a) Financial: Implement uniform stamp duty across States; (b) Regulatory: (i) Allow banks and
domestic financial institutions to provide credit enhancement for the infrastructure bonds; (ii) Develop
regulatory framework for multi-asset collateralised debt obligations (CDOs) and (c) Creating robust market
infrastructure: (i) Establish an integrated trading and settlement system (like Negotiated Dealing System
(NDS) order matching system for G-Secs) and (ii) Move from a Delivery Versus Payment (DVP) I to DVP
III system for corporate bonds.
One of the reasons for lack of investor appetite for long term infrastructure bonds is withholding tax. While
a reduction in withholding taxes payable for overseas borrowing by infrastructure funds has already been
announced, the same withholding tax cap needs to be in place for infrastructure investments (with tenor
exceeding 7 years) made either through IFCs or directly in the infrastructure companies.
Also, Municipal bond market (Munis) in India has remained underdeveloped and relatively untapped.
There have been exceptions in the past, for example, municipal bonds were issued by Municipal
Corporation of Ahmedabad (INR 1 Billion in 1998). It is estimated that there is a potential of USD 270
billion being generated through Munis provided the Municipal Bond Market is tapped properly.
This would, however, also require critical pre-conditions like transparency of corporate governance within
Municipal Corporations, levy and collection of appropriate user charges, innovative project structuring,
supporting tax regime, better framework for security creation and enforcement is equally or more critical.
This together with the PPP model could drive urban infrastructure and spur a new growth area. Like PPP
was well appreciated and important development of the Eleventh Plan, Munis and urban infrastructure
growth could be the most important theme of the Twelfth Plan.

Infrastructure Debt Fund and long-term resources: Government may facilitate Infrastructure Debt
Funds (IDF) through Mutual Fund route and NBFC route, and allow IIFCL to provide refinancing and
takeout finance to IFCs.

New Financial Instruments: Create a single regulatory window for clearing innovative debt products
typically in the mezzanine space. For instance, products such as Rupee denominated convertible bonds
or Optional Convertible Debentures (OCD) can help develop the corporate debt market .
Banking reforms
As on date, sectoral lending limits have been reached, increasing the systemic risks to the banking
system. There is an urgent need to develop take out financing schemes to ameliorate stress. Some of the
suggestions to adopt this are as under:

Allow commercial banks to reduce burden of Infrastructure debt financing: Like infrastructure
NBFCs, banks to be allowed to raise infrastructure bonds which qualify for exemption of Income tax under
Section 80CCF with an exemption limit to INR 100,000.
Refinancing Scheme with matching tenor needs to be devised. Current IIFCL scheme has only 10 year

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tenor and other restrictions making it unattractive for banks.

Provide banks more flexibility to churn their infrastructure loan portfolio: Since the sectoral cap for
lending to infrastructure has been reached, this prevents the banks from granting fresh sanctions. To this
extent, large lenders such as SBI need to start quoting two way quotes and create market in the
infrastructure receivables space.
Regulatory framework for multi-asset CDOs allowing securitization to happen needs to be implemented.
While there were early adopters like ICICI Bank and Citibank, almost all transactions in the market are
privately placed. Lack of appropriate legislation/legal clarity and unclear accounting treatment exacerbate
the situation.

Need for banks to raise more capital: In order to be able to fund a growing economy, public sector
banks need to raise further capital, especially if infrastructure lending by banks is to be kept intact for the
Twelfth Plan. According to an independent study carried out by IDFC in February 2011, diluting
Government stakes in all major PSBs to 51 percent by raising capital in 2013 could yield INR 1.45 lakh
crore more funds to lend to infrastructure from commercial banks. For example, the dilution of the
Government stakes to 51 percent in two major NBFCs viz. REC and PFC, 67 percent and 73.72 percent
held by the Government (Quarter Ending June 2011), works out to about INR 7,994 crore at current prices
which may result in additional increase in lending assets of IFCs by ~ INR 53,300 crore.

Possible capital raising by PFC and REC:
Government Holding as
on 30th June 2011
Market Cap As on 30th
June 2011 (INR Crore)
Equity dilution (%) Potential
Capital
Raised (INR
Crore)
PFC 73.72% 18,300 22.72% 4,158
REC 66.80% 24,286 15.80% 3,837
Total 7,995
Source: IDFC
Insurance reforms
Since infrastructure financing is long term in nature, the depository profile of insurance companies is more
in tune with the funding requirement of the sector. Banks, as discussed, face asset liability mismatch
issues because their depository base is short term against long term nature of infrastructure loans assets.
Similarly, pension funds are key investors in long term infrastructure bonds. In India both had jointly
contributed around 5 per cent to the total investment in infrastructure in the Eleventh Plan.
Insurance/Pension funds have the ability to invest for longer terms, these institutions are restricted by
their respective regulatory bodies (IRDA and PFRDA) which limit their exposure to the infrastructure
sector even when they have sufficient funds available to invest.

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Some suggestions to increase investments in infrastructure from these insurance companies are
described below:
The IRDA (Investment) Regulations 2000, as amended from time to time, stipulate that not less than 75
percent of debt instruments excluding Government and Other approved Securities shall have a rating of
AAA or equivalent rating for long term instruments and not less than P1+ or equivalent for short term
instruments.
This limit may be changed to not less than 50 percent in AAA rated and AA+ rated debt instruments
may be incorporated, which would increase of better availability of insurance funds for debt instruments.
The tenor of investments in infrastructure related facilities may be revised to not less than 5 years from
the present not less than 10 years to enable insurance companies to invest in brown field infrastructure
companies/projects and also to enable the life insurance companies to fund the take-out finance
arrangements.
Insurance company investments into the special purpose vehicles (SPVs) of infrastructure projects,
debentures of private limited companies and non-dividend track record companies in infrastructure need
to be included with in the ambit of approved investments thereby providing flexibility of funding options
for infrastructure projects.
For higher investment by the life insurance companies in infrastructure projects, the exposure can be
considered for revision to 20 per cent of the total project cost from current level of 15% of project equi ty
as being done by IIFCL.


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Recommendations for ECBs
Recently, take-out financing arrangement has been permitted through ECB, under the approval route, for
refinancing of Rupee loans availed from domestic banks by eligible borrowers in the port, airport, roads
including bridges and power sectors for development of new projects. However there is a need to simplify
the process for take-out financing/refinancing Rupee loans through ECBs for infrastructure companies.
Current timelines to engage foreign lenders for takeout are limited making it difficult for foreign lenders to
come to an agreement at the initial stage itself and assume the execution risk at the time of take out.
This condition of entering into tri-partite agreement may be dispensed away with and an amount for such
take-out financing through ECB automatic route could be declared on an annual basis.
There is a need to relax the all-in-price ceiling for ECBs (i.e. 500 basis points over the 6 month Libor) for
infrastructure projects with average maturity exceeding 7 years. The interest rate ceilings set by RBI on
ECBs put constraints in availing foreign currency loans for domestic infrastructure projects.
Relaxation of the ECB ceiling of USD 500 million per annum per company for automatic route will help
make ECB stable source of financing and ensure increased ECB funding. This may be increased to USD
1 billion for Infrastructure financing.
International Investments: To facilitate flow of funds from the international market with flexible but
prudent regulatory framework, following measures could be considered:
Bringing IFCs in the infrastructure sector under the automatic route in line with other corporate.
Exempting withholding tax on interest and other payments to ECBs by infrastructure sect or, including
IFCs.
Allowing, within a certain limit, Indian corporates in the infrastructure sector, including IFCs to issue
Rupee denominated bonds in the international market.

Impact of suggested measures on availability of non-budgetary funds (INR billion)
Particulars Funds Estimated Additional Funds Funds estimated (revised)
Commercial Banks 7,435 1,450 8,885
NBFCs 3,844 533 4,377
Insurance 1,507 4,522 6,030
ECBs 549 - 549
Total 13,337 6,505 19,843
Source: Planning Commission.

To conclude, concrete policy and regulatory measures need to be undertaken. Some of the most
important include measures taken to increase the breadth and the depth of the corporate bond markets in
India, higher involvement of insurance and pension fund companies in infrastructure funding, and
providing an environment that is attractive to foreign investors.


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Financing Trillion Dollar Investment
Private Sector Investment
The Twelfth Plan has identified the crucial challenge of immediate reversal of growth deceleration with
revival of investment sentiments. The plan has emphasised for an action plan to address implementation
constraints in infrastructure which are holding up large projects.
Share of Private Sector Investment
Sector Share in USD 1 trillion infrastructure
in investment in Twelfth Plan
Share of private investment
Electricity 27% 48%
Roads and bridges 17% 34%
Telecom 17% 92%
Railways 9% 20%
Irrigation 9% 0%
Renewable energy 6% 88%
Water supply and sanitation 5% 2%
Ports including Inland Water
Ways
4% 87%
Oil and Gas pipelines 3% 48%
Metro Rail Transport 2% 42%
Airports 2% 80%
Storage 1% 72%
Source: Planning Commission 2012.
The share of private investment in the total investment in infrastructure rose from 22 percent in the Tenth
Plan (2002-2007) to 38 percent in the Eleventh Plan. The Eleventh Plan succeeded in raising investment
in infrastructure from 6.2 percent of GDP in FY08 to about 7 percent in FY12. The Twelfth Plan aimed to
raise it further to 9 percent by FY17. There is special emphasis on electricity generation with 27 percent of
the planned investment expected to be directed towards this sector.
The Eleventh Plan added 55 Giga Watts (GW) of generation capacity which, though short of the target,
was more than twice the capacity added in the Tenth Plan. The Twelfth Plan aims to add another 88 GW.
There is an additional investment of USD 57 billion for renewable energy (additional 30 GW of renewable
energy) of which private sector is expected to contribute as much as 88 percent. Compared to the last
plan period there is doubling of investment share targeted at the port sector (including inland waterway)

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with further increase in private participation.
The scale of private investment would require a significant reinforcement of an enabling policy and
regulatory environment. Even though the planned investment in infrastructure is on track but going by the
last plan performance on targeted investment, the pre-requisite is to provide a conducive business
environment which protects domestic and foreign investor interest. The Eleventh Plan achieved 93
percent of targeted investment because of performance of only few sectors like electricity, telecom and oil
and gas pipelines. But critical segments of infrastructure, i.e. roads, railways and ports, have under -
achieved their target mainly because of the lack of private investment.
Assessment of FY2013 Infrastructure Investment
Total investment across all infrastructure sectors in 2012-13 was INR 534,645 crore, the least since 2010-
11, mainly due to less than satisfactory performance in electricity, roads and bridges. This raises
concerns over the Governments ambitious target to attract investment of INR 65 lakh crore (at current
prices) into the infrastructure sector during the Twelfth Five-Year Plan.
In 2012-13 GDP grew at a decadal low of 5 percent, impacting infrastructure spending and 2013-14 is not
expected to be any better as overall economic sentiment is poor. Prime Minister Dr. Manmohan Singh
had earlier stated he expected economic growth in 2013-14 at 5 percent, similar to that in 2012-13.

Infrastructure investment shortfalls (INR Billion)
Sector 2011-12 (A) 2012-13 (P) 2012-13 (E) Shortfall
Electricity 1,904 2,134 1,768 17%
Non-conventional power sector 281 282 257 9%
Roads & Bridges 1,301 1,401 1,077 23%
Urban Infrastructure (Water Supply & Sanitation) 257 340 312 8%
Ports 168 183 125 32%
Total 3,913 4,343 3,540 18%
Source: Planning Commission.
We have analysed below the factors leading to poor private sector appetite for investment in sectors like
power, roads, and ports followed by measures which have been initiated by the Government to revive the
infrastructure investments in these sectors.
What ails the infrastructure sector
The infrastructure sector has been lagging for the last few years. This has led to slowdown in economic
growth and infrastructure investments. While there are multiple issues that have plagued the sector, t hese
problems are interconnected with one issue leading to another. In other words, there has been a domino
effect which has led to the present state of affairs. Main issues are:
Policy paralysis: The troubles for the sector started with the policy paralysis that led to delays in

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statutory approvals and related clearances like land acquisition, environmental and forest.
Project viability takes a hit: With projects getting delayed due to lack of clearances (leading to cost and
time overruns), viability of projects was adversely impacted. This led to deterioration in the financial
strengths of infrastructure companies.
Demand slowdown: Apart from supply side issues mentioned above, slowdown in the economy led to
demand side issues with lower than anticipated traffic growth and low demand for power over past few
quarters. The slowdown also impacted Government spending, further hurting infrastructure companies.
Other issues: In addition to the above, there were other factors that impacted infrastructure projects. For
example, power projects had faced paucity of domestic coal as domestic coal production hit speed
bumps. To exacerbate the situation, imported coal prices increased (change in reference rate for
Indonesian coal) throwing viability of many power projects haywire. Road projects saw aggressive bidding
with developers promising to pay hefty premiums to win projects. However, many of these projects later
failed to achieve financial closure due to lenders shying away from funding these unviable projects.
Issues with dispute resolution framework: All these issues led to developers either walking away from
projects (termination of road projects citing delay in clearances) or knocking the Government doors for
relief (for tariff revision for power projects or premium restructuring for road projects). However, this
resulted in protracted arbitration which exposed the absence of adequate dispute resolution framework to
deal with complex issues facing the sector.
All these issues have resulted in a situation where new projects were not being initiated, under
construction projects started witnessing slow execution and operational projects started becoming
distressed. Consequently, infrastructure players bore the brunt with falling profits/ballooning losses
resulting in a situation of financial distress. Due to this deterioration in financial matrices, infrastructure
companies have shifted their focus to survival from growth. Fresh capital expenditure (capex) plans are
being deferred time and again, impacting every player in the infrastructure value chain.
Policy response to infrastructure issues
The Government seems to be adopting a three-pronged approach to solve the sector ills. First, the
Government is considering modifying regulatory framework. It is also framing dispute resolution
mechanisms to deal with the dynamic nature of infrastructure projects. Second, as far as existing projects
are concerned, it is trying to get projects moving by speeding up clearances and removing execution
bottlenecks. Lastly, the Government is looking at reinvigorating the capex cycle by awarding new projects.
We analyse these measures in detail below for each of the sectors i.e. roads/highways, power and ports.

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Modifying the policy/regulatory framework
Roads/Highways Sector
As mentioned, the major issues that have impacted road development in India in the last 2-3 years are the
aggressive bidding for projects by developers and the delay in receiving environment/forest clearances
and land acquisition.

Premium restructuring: Many road projects awarded over FY12 had attracted aggressive bids from
developers, who had promised to pay substantial premium to National Highway Authority of India (NHAI)
for winning these projects. With the economy slowing down and project timelines getting stretched due to
delays in clearances, many projects failed to achieve financial closure. Recently, the Cabinet Committee
on Economic Affairs (CCEA) has approved premium restructuring for all projects awarded on premium
basis. Projects will be evaluated on a case-by-case basis to ascertain their eligibility for premium
restructuring. An expert panel under Mr. R Rangarajan (Economic Advisor to the Prime Minister) with
representatives from Finance and Surface Transport Ministries, will be set up to finalise guidelines for the
same. This move is positive for the roads industry since it will resolve the impasse in which road projects
have been stuck for the past two years.

Amendments in the prequalification criteria: Over the last few years, some road projects have seen a
large number of players getting prequalified to bid for projects. Certain projects have seen close to 100
players being prequalified. As a result of the large number of players getting prequalified, many projects
have seen aggressive bidding while many of these projects have later been unable to achieve financial
closure. As a response, the following changes have been suggested in the prequalification criteria for
road projects: making technical/financial criteria more stringent, focus on financial closure as bid
qualification, barring players with non-performing assets (NPA) etc.

Amendments in the Model Concession Agreement (MCA): With the changing economic scenario,
Government felt the need to amend current MCA which provides regulatory framework for the roads
sector. Following changes have been suggested in the MCA: (a) Fulfilment of authoritys Condition
Precedents (CP) before appointed date; (b) Status of CPs during bidding process provision of likely
timeframe required for fulfilment of CPs and penalty for non-fulfilment; (c) Increasing the penalty for delay
in land acquisition - The rate of penalty is to be enhanced to INR 100 (from INR 50) per 1,000 sq. mt. for
each day of delay; (d) Presence of State Support Agreement (SSA) - NHAI will ensure execution of the
SSA before the bidding process; (e) Compensation for delay in toll hike notification. (Source: Edelweiss
Research, Feedback Report)
In the Union Budget FY14, it was announced that a regulatory authority for the roads/hi ghway sector
would be set up. This independent body would primarily look at the current challenges being faced by the
sector such as financial stress, construction risk and contract management issues.
There have been other key policy initiatives that have been taken in the recent past for the development

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of the sector:
Companies enjoy 100 percent tax exemption in road projects for five years and 30 percent relief
for the next five years. Companies are also granted a capital of up to 40 percent of the total
project cost to enhance viability.
Infrastructure finance companies such as India Infrastructure Finance Company Limited (IIFCL),
National Highway Authority of India (NHAI), Housing and Urban Development Corporation
(HUDCO), Power Finance Corporation (PFC) etc. have been allowed to issue tax free bonds to a
total of USD 9.2 billion in FY14.
Interest payments on borrowings for infrastructure are now subject to a lower withholding tax of 5
per cent vis--vis 20 per cent earlier.

Power Sector
One of the biggest issues being faced by power developers is the inadequate domestic coal supply and
volatility in the cost of imported coal. The uncertainty on the fuel cost front has thrown developers
calculations haywire since many PPAs do not have adequate provision of fuel cost pass through.
This has put the profitability of many existing power plants at risk while also significantly raising concerns
about under development power projects. In addition, this has had a negative impact on new capex plans
in the power sector with the viability of power projects coming under a serious cloud.
Compensatory tariff: As far as existing power projects facing losses are concerned, the Government is
in the process of giving compensatory tariff e.g. Tata Powers Mundra and Adani Powers Mundra and
Tiroda plants. Additionally, the Government is working to step up domestic coal production by fast
tracking clearances.

Standard bidding documents: On the issue of future power plants, the Government has revised the
bidding framework by coming up with a new Standard Bidding Document (SBD) for the power sector. It
has recently cleared the proposal of tweaking the SBD for Case-II thermal power plants and that for Case-
I plants is expected shortly. The new SBD for Case-II projects addresses the risk associated with fuel
price volatility and fuel availability as fuel cost has been made a pass through. At the same time, clarity
has been brought in the termination and other generic provisions in the contract. Bidding is to be based
on single parameter capacity charges as compared to a levellised (including capacity plus variable
charges) tariff earlier, bringing in more objectivity in the bidding framework. The capacity charge would be
linked to depreciation and loan repayment as well as to the inflation index. This decision is expected to
speed up the process of awarding the proposed Ultra Mega Power Projects (UMPPs) at Bedabahal,
Odisha and Cheyyur, Tamil Nadu. It is expected to kick-start investment of ~INR 400 billion in the power
sector.

Financial restructuring of State Distribution Companies: While the Electricity Act 2003 envisaged

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separation of interlinked activities of SEBs and making them individually self -sustaining entities, the
situation, especially of distribution entities, has not improved meaningfully over the years. State
Governments, entirely responsible for the distribution sector, have failed to keep pace and the situation
has gone from bad to worse. Realising the importance of the distribution sector in the power value chain,
the Government in September 2012 decided to intervene by rolling out a scheme to restructure State
discoms keeping in mind Shunglu Committees recommendations. The scheme entails measures to be
taken by State Discoms and State Governments for achieving financial turnaround by restructuring the
debt with support via a transitional finance mechanism by the Government. Key feature of the scheme is
converting 50 percent of outstanding short-term liabilities into bonds to be taken over by respective State
Governments and the balance 50 percent to be rescheduled by lenders with adequate moratorium of at
least three years backed by State Government guarantees.

Tariff hikes: Recent tariff hikes and offer of State Government support would revive confidence of
developers. Some states have been granted steep tariff hikes in recent years in order to reduce the
widening gap between their average cost of supply (ACS) and average revenue required (ARR) on power
supply. Discoms have also been asked to strictly follow planned reduction in aggregate technical and
commercial (AT&C) losses in the system. While AT&C losses have improved marginally, much more
needs to be done to lower them further. (Source: Edelweiss Research, Feedback Report)
To promote investment and for the development of power sector, the Government announced various
measures in the Union Budget for FY14, key ones of which are:
Government to reintroduce generation based incentives for wind power projects to boost
capacity addition in the sector for which USD 147.3 million is to be allocated to the Ministry of
New and Renewable Energy.
To reduce dependency on imported coal, a Public Private Partnership policy framework is to be
devised with Coal India Limited to increase coal production.
Low-interestbearing funds to be provided from National Clean Energy Fund (NCEF) to Indian
Renewable Energy Development Agency Ltd (IREDA) for on-lending to viable renewable energy
projects.
The total plan outlay for the power sector for FY14 is estimated at USD 1. 6 billion, a significant 27
percent higher than the revised estimate of USD 1.5 billion for FY13.
During FY13, Government liberalized FDI policy for power exchanges by allowing FDI investment
up to 49 percent.

Port Sector
Regulatory framework for major ports has been amended to anchor developer interest.
Existing norms for port tariffs are governed by a complex formula based on return on capital and
implemented by the Government-appointed, but largely autonomous, Tariff Authority for Major Ports

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(TAMP). These rules were widely seen as restrictive, hampering growth and therefore putting off
investors.
Global port operators with substantial investments in India such as PSA International, APM Terminals and
DP World have repeatedly expressed their grievances at what they see as a crippling tariff structure.
Port tariff reforms are under way in India and guidelines for determining tariffs are expected to lean
increasingly towards market-based mechanisms. The Ministry of Shipping has already announced that
projects approved under the PPP mode from April 2014 will not be bound by previous regulations. The
Twelfth Plan envisages INR 1.07 crores of new investment for the development of non-major ports out of
which INR 1.05 crores is expected to come through the PPP route.
Facilitating project clearances
Measures discussed above largely relate to regulatory/policy and are more relevant f or future projects. In
addition, to ensure that existing infrastructure projects that have been stalled get requisite clearances fast,
the Government has established with an institutional mechanism in the Cabinet Secretariat called the
Project Monitoring Group (PMG) which will be headed by an Additional Secretary. This cell will work to
revive ~330 stalled infrastructure projects which have a total investment size of ~ INR 16,000 billion.
The working group would evolve a protocol for resolving problem areas, while the sub-groups will try to
settle specific issues. Various ministries (like roads, railways, environment and forest, coal, shipping,
telecom, commerce, mines, civil aviation etc.) have been asked to assign a nodal officer of the rank of
Joint Secretary or above to co-ordinate with the cell. The sub-groups on coal and environment are slated
to meet every week - given the plethora of affected projects. PMG has been vested with powers to deal
with different ministries and departments at central, state and local body levels to get the projects fast-
tracked. The cell will coordinate with the Cabinet Committee on Investment (CCI) to ensure speedy
clearance for projects. (Source: Edelweiss Research, Feedback Report)
The success of these initiatives could be a make or break for the infrastructure sector.

Roads/Highways Sector
The PMG has secured environment clearance for eleven infrastructure projects worth ~INR 150 billion.
The details for roads projects are as below:
Projects that have received environmental clearances
Project Segment Location Cost (INR
billion)
Cuttack Angul road project Road Odisha 11.2
BSCPL Aurung Tollway Road Chhattisgarh 12.3
Source: Government documents, News articles, Edelweiss Report
Apart from the projects listed above, the Cabinet Committee of Infrastructure (CCI)/Project Monitoring
Group (PMG) has also discussed clearances for other projects on a case-by-case basis. The projects
discussed and the actions taken are summarised below:

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Other projects looked at by CCI/PMG:
Project Cost (INR
Billion)
Issue Decision taken
Sasan project (Reliance
power)
200 Stage II clearance for
Chhatrashal block
The developer needs to submit compliance
of stage I conditions to Ministry of
Environment and Forest (MOEF); thereafter
stage II clearance will be granted
L&T Hyderabad Metro Rail 164 Permission for
quarrying
The company is in the process of obtaining
clearances; matter to be taken up with the
state government.
Nigrie project (Jaiprakash
Power Ventures)
100 Diversion of forest
land for railway siding
Company is yet to identify land for
compensatory afforestation and further
approvals would be granted only after the
developer does so.
GMR Kishangarh
Ahmedabad expressway
77 Premium
restructuring
Premium restructuring to be considered.
JAS Infrastructure and Power 74 MOEF clearance Geological report for the captive coal block is
yet to be prepared. Thereafter, mining plan
will be approved and developer can
approach MOEF for clearance
Athena Chhattisgarh Power 62 Fuel supply Fuel Supply Agreement (FSA) to be signed
Tori-I power plant (Essar
Power)
97 MOEF clearance Proposal pending with Jharkhand state
government; to be send to MOEF for forest
clearance
IOCL project- New marketing
terminal at Eastern sector
refinery, Paradeep
2 Approval of DPR for
railway siding
Required approval given
Delhi Airport Aerocity Security clearance Security clearance given
Jindal India Thermal Power,
Angul, Odisha
Fuel supply Linkage recommended to ministry of coal for
Phase II of the project
Source: Government documents, News articles, Edelweiss Report

Power Sector
The CCI has cleared 18 power projects with a generation capacity of 15.6 GW and involving an
investment of INR 838 billion (banks have lent INR 133 billion to these projects already). The CCI has
asked Coal India to sign fuel supply agreements (FSAs) for all these projects.
Power projects for which FSAs have been approved
Project Generation capacity (MW) Investment (INR Billion)
Maruti Clean Coal and Power Limited 300 15
TRN Energy 600 28
Korba West Power 600 29
DB Power 1,200 58
Jhabua Power 600 30

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Tirodha Phase I, Maharashtra, Adani Power 800 40
GMR Kamalanga Energy 1,050 60
Lanco Babandh Power 660 35
Talwandi Power 2,000 100
Haldia Energy 600 34
Prayagraj power 1,980 95
Mejia TPP (Unit-VIII) DBC power project 500 25
Raghunathpur TPP DBC Power Project 600 30
DB Power Ltd. II 600 32
RKM Powergen 1,440 90
Corporate Power 540 47
Lanco Amarkantak 1,320 77
Abhijeet MADC Nagpur Energy 246 14
Total 15,636 838
Source: Government documents, News articles, Edelweiss Report

Apart from these projects, as per a CCI directive, Coal India has offered supplies to 8,240 MW power
projects that do not feature in the list of entities with which Coal India had to sign FSAs as per the
presidential directive, but are commissioned and need immediate coal linkage to start power generation.
The total investments in these projects were ~INR 437 billion.
Additional power projects which will get fuel supplies
Project Developer Generation Capacity (MW)
Lalitpur Power Project, Uttar Pradesh Bajaj Hindustan 1,980
Kawai Project, Rajasthan Adani Power 1,320
Chhattisgarh Project GMR 1,370
Singrauli Project, Madhya Pradesh Essar Power 1,200
Malibrahmani Project, Angul, Odisha Monnet Power 1,050
Tirodha Phase II, Maharashtra Adani Power 1,320
Source: Government documents, News articles, Edelweiss Report
Following CCI intervention, a couple of power projects have seen progress. NTPCs North Karanpura
project has taken off after the CCI resolved the dispute with Coal India over the site of coal reserves and
restored the coal linkage. Following this, NTPC has already applied for the renewal of the time-barred
environmental clearance. Similarly, Lancos Babandh project has obtained the first-stage environment
clearance from the Centre. It is expected to secure the second stage approval (forest clearance) soon.



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Port Sector
In the Union Budget FY14, it was announced that two new major ports will be established at Sagar, West
Bengal and in Andhra Pradesh to add 100 million tonnes of capacity and a new outer harbour will be
developed in the VOC port of Thoothukkudi, Tamil Nadu through PPP at an estimat ed cost of INR 7,500
crores. The PMG has secured environment clearance for couple of ports as below:
Projects that have received environmental clearances
Project Segment Location Cost (INR
billion)
Development of Haldia dock-II (North) Port West Bengal 8.2
Development of Haldia dock-II (South) Port West Bengal 8.9
Source: Government documents, News articles, Edelweiss Report


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New investment cycle on anvil
Apart from taking steps to amend the regulatory framework and speed up clearances, the Government is
also trying to bring projects to the bidding table. It hopes to award these projects and thereby give a fresh
lease of life to the moribund capex cycle in the country.
Some of the projects on which the Government is focusing are listed below:
Road projects like the Eastern Peripheral Expressway, Delhi-Meerut Expressway, Mumbai-Vadodara
Expressway.
Power projects like the UMPPs at Cheyyur and Bedabahal and power transmission projects.
Port project in Durgarajapatnam, Andhra Pradesh.
Railway projects like the Mumbai elevated rail corridor, locomotive projects, Dedicated Freight Corridor
project.
Airport projects like the Navi Mumbai Airport, O&M contracts on PPP basis. (Source: Edelweiss
Research, Feedback Report)
The Governments focus on reviving project award is a step in the right direction. Many of the projects
targeted are large ticket projects and may need a lot of Government intervention with regards to getting
clearances/land acquisition in place or for setting up of regulatory framework (like in case of expressways)
before the bidding starts. To this extent, we believe it may be a while before project award actually
happens. Still, the Governments effort to bring these projects to the bidding table is a definite positive.
In a bid to ramp up investor sentiment, in June 2013, the Government of India set an investment target of
INR 1.15 lakh crore in PPP projects across infrastructure sectors in rail, port and power in the next six
months. The proposals include Mumbai elevated rail corri dor (INR 30,000 crore), two international airports
in Bhubneshwar and Imphal (INR 20,000 crore) and power and Transmission projects (INR 40,000 crore).
A steering group is being formed to monitor the award and implementation of projects on priority basis.
Besides airports and Mumbai's elevated rail corridor projects, the group will also monitor two Locomotive
projects (INR 5,000 crore), accelerating E-DFC (Eastern-Dedicated Freight Corridor) (INR 10,000 crore)
and port projects (INR 10,000 crore)






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Equity Financing
A Perspective
As India opened up infrastructure for private sector participation in it s Eleventh Plan, a large pool of
Indian infrastructure companies participated. The increasing investment from private players, attracted
Private Equity funds to start up India infrastructure focussed funds to reap the benefit of the India growth
story.

FDI in infrastructure over past few years (INR billion)
Sector FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Foreign Direct
Investment
300 313 299 245 367 329 95
Source: Economic Survey
However, as discussed earlier the issues around project implementation has subdued/eroded equity
internal rate of return (IRR) for Private Equity. This has resulted in reduced investment activities in past
few years. The equity investment, including FDI, during the first three years of the Elevent h Plan was
approximately 14 percent of the total investments made towards Infrastructure whereas the overall debt
contribution was 41 percent (implying a debt equity ratio of 2.93:1).

Equity (including FDI) availability estimates for Twelfth Plan (INR billion)
Sector FY2013 FY2014 FY2015 FY2016 FY2017 Total
Equity (Foreign
Direct Investment
/Equity)
616 736 880 1,054 1,265 4,554
Source: Planning Commission
Equity funding will be a key constraint going forward, possibly even bigger than debt funding. A large part
of equity investments rely on foreign investments with domestic investment institutions not too keen at
primary level for taking equity in Infrastructure projects. Regulatory changes which will make projects
commercially attractive are needed to draw adequate equity capital to infrastructure sectors. The private
equity market in India has to be analysed in juxtaposition with the global infrastructure investor market as
it is largely driven by the global market trends.


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Global Infrastructure Investors market
A recent survey by Deloitte LLP, UK of infrastructure investors across continents reveals that the
infrastructure asset class has successfully weathered the economic storm, with many investors citing that
their investments have been resilient during the financial crisis. Approximately 70 percent of investors
stated that their investments are currently achieving or exceeding target internal rates of return (IRR) .
Following their experience of the downturn, investors are bullish about the sectors prospects, with the
majority stating a clear focus on investment in core infrastructure assets located in the safe haven
geography of Western Europe.
A number of overarching market characteristics and trends across the infrastructure investors landscape
emerged from this survey as defining the sector today:
Funds are performing well against IRR targets. This bodes well for the sector and indicates that
confidence has returned to the infrastructure market following the financial crisis.
Increasing focus on asset management to deliver returns. Increased focus on asset management,
and in particular, pro-actively managing leverage. Encouragingly, a majority are expecting their investee
companies to increase capex investment over the next few years, as this is often viewed as an easier
strategy to drive IRR performance than Merger and Acquisition (M&A) activity.




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Lack of supply. Market is characterised by "deal-hungry" infrastructure investors who have significant
capital at their disposal but who are continually hitting a "road block" in terms of finding the right asset to
invest in. This lack of supply of assets is driven by the fact that many of the large disposal programmes
announced by major European Utilities and Governments have not commenced, as they focus on more
immediate priorities.

Regulatory risk remains the key concern. High on the topical agenda, regulation is seen by the
investors as the key risk, both from an investment and asset management perspective. What was once
seen as a key attraction for investing in infrastructure assets is increasingly being treated with trepidation.

Focus on 'tried and tested'. - the majority of investors have maintained their focus on core infrastructure
assets which demonstrate essential characteristics, such as high barriers to entry and monopolistic
features, often combined with the business being regulated and/or offering long-term contractual
protection of revenues. In addition, although there is clear appetite to invest in jurisdictions outside of
Europe (particularly due to the Eurozone crisis), in terms of actual deals completed, Western Europe
continues to be the preferred jurisdiction for most investment managers.
Globally, following their experience during the downturn, almost all of the investors interviewed stated that
they have a resolute focus on investing in core infrastructure assets over the next two years, which
continues the trend seen earlier.
Regulated utility and transport assets continue to be highly attractive investments. At the same time there
are clear concerns with regards to the regulatory environment, number of funds pointing to the impending
tariff reductions.
As with the findings in the survey, Western Europe continues to attract the strongest investment focus by
the vast majority of investors. However, increasingly, there is more appetite to deploy capital outside of
Europe, with the exception of India and China. Former darlings of the global economy, these jurisdictions
appear to have become increasingly less attractive to investors as their high economic growth of recent
years has slowed.










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From an investment perspective please indicate the level of focus Companies will have on the
following markets over the next two years (5 being very high and 1 being very low)

Source: Deloitte Report 2013

Infrastructure private equity in India
As mentioned, private equity firms have shied away from Indian roads, ports and power projects in the
last few years as the credit profiles of many companies have deteriorated amid delays in project
approvals or access to fuel for power plants. Moreover, the infrastructure sector has suffered due to
inadequate political momentum and experienced investments almost completely dry up with ongoing
regulatory uncertainty compounding this problem. Nevertheless, in the absence of mature bond market
and bank reluctance to lending, more equity is needed to fund infrastructure development in India.
Key challenges for private equity in infrastructure currently are as below.
Policy/Regulatory issue. Regulatory uncertainties pertaining to these sectors e.g. changes in model
concession agreement, pre-qualification criteria for bidding etc. in road sector, compensatory tariff/fuel
pass through, restructuring of state utilities etc. in power sector and tariff reforms in port sector, have
taken its toll by driving away the private equity investors.
Concern about returns. A previous wave of private equity investment in Indian infrastructure was often
in early stage projects, many of which were bogged down by delays, eroding prospects for returns. This is
particularly true of investments made during the boom years of 2004 through 2007, which are now
reaching maturity. Their performance is causing concern among Limited Partners (LPs).
High leverage. Due to high gearing of most of the infrastructure companies, assets are under distress in
view of repayment burdens which further worsens the project profitability.
Expectations mismatch over asset valuations. Despite the trend towards more realistic valuations
given that majority of infrastructure assets are in distress, developers/promoters tend to reference
0
1
2
3
4
5
Central/Eastern Europe India/China North America Western Europe
2007 2010 2013

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valuations to a good market situation.
Macroeconomic environment. India's performance on macroeconomic factors including GDP growth,
inflation and other economic factors were disappointing throughout 2013 resulting in increased concerns
to the private investors. While the policy framework remains uncertain and continues to deter investment,
Government reforms embarked on towards the end of 2013 is expected to dispel these concerns.
Although these issues create certain cause for concern, we have reason to believe that the fundamentals
of the Indian private equity market are sound. The Limited Partners (LPs) and General Partners (GPs) still
believe in the long-term potential of private equity in India and in India's growth story. While the economy
may have slowed down, GDP continues on its upward trajectory, bringing continual increases in new
investment opportunities in the infrastructure which would be required to maintain the growth momentum.

Sector-wise FDI equity investment in FY2014 (April-October 2013) (INR Billion)
Rank Sector 2011-12 2012-13 2013-14 (Apr-Oct)
1 Service Sector 246 263 79
2 Construction: Townships, Housing,
Built-up
Infrastructure
152 72 42
3 Telecommunication 90 16 1
4 IT 38 26 29
5 Pharma 146 60 59
6 Chemicals 184 15 25
7 Automobile 43 83 44
8 Power 76 29 18
9 Metallurgical Industries 83 78 14
10 Hotel/Tourism 47 177 9
Total 1,105 819 320
Source: DIPP


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Going forward scenario
Going by recent trend, private equity investment in Indian infrastructure is poised to pick up following a
lengthy dry patch as debt-stressed operators of toll roads and other projects come under pressure from
banks to offload assets to strengthen balance sheets.
Large private equity houses i.e. Kohlberg Kravis Roberts (KKR), the Blackstone Group and Macquarie
Group are looking at buying completed projects, a relatively safe bet, tempted by valuation expectations
that have reportedly fallen significantly over the past two years.
The Central/State Governments have taken initiatives to clear up the regulatory as well as clearance
hurdles stalling infrastructure investment. These measures are aimed at reviving the new investment
cycle in the infrastructure by addressing investor concerns such as bid document changes, premium
restructuring in the road sector, compensatory tariff, bidding criteria changes in power sector, etc. This is
expected to result in multiple opportunities in these sectors for the equity investors as well as addressing
some of their key concerns thereby attracting the new investment.
Fund Raising. Fund raising continued to be challenging, with infrastructure private equity firms closing on
USD 540 million of new commitments in Q2 2013. Though this is more than double the value of new
commitments raised during the previous quarter (USD 251 million), at an absolute level this remained
rather low, especially when compared with the monthly investment rate of USD 500 million to USD 600
million in the last few months. However, this is not expected to have a material impact on private equity
investments in the near to mid-term, as a large part of investments in India is made by global funds from
their global capital pools.
CDC, the UKs development finance institution, has announced a major new investment into Indian
infrastructure, bringing new capital to key sectors including roads, ports, social infrastructure and power.
CDC has committed USD 200 million to the India Infrastructure Fund 2 (IIF2) run by IDFC Alternatives
Limited. The commitment from CDC, which is its largest ever to an Indian investment fund, has helped
IIF2 reach a first close of USD 644 million, with the IDFC team targeting a total fund size of USD 1 billion
from a range of institutional investors. The fund will provide long-term, equity investment for both
construction and operating infrastructure projects across the country.
Everstones USD 250 million first close of Indospace Logistics Park Fund (managed by a joint venture
between Everstone Capital and Realterm Global) to build industrial warehousing was the largest fund
raised during Q2 2013. 75 percent of the eight new successful funds raised in Q2 2013 were raised by
GPs with prior experience.
Measures to enhance the equity availability. Additionally, certain measures on the policy/regulatory
need to be implemented to enhance the availability of equity funds e.g.
Increase the funding pool. Increased domestic funding for infrastructure needs to be facilitated by suitable
policy amendments (with prudential limits) which would enable greater participation in private equity from
domestic entities such as pension and provident funds, banks, insurance companies etc.
Listing of funds. Security and Exchange Board of India (SEBI) to facilitate listing of infrastructure funds.
Ability to list such funds would provide greater liquidity to the investors of such funds thereby making such

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vehicles more attractive to a larger set of investors.
Tax treatment for unlisted equity. Tax treatment on unlisted equity shares especially for approved
infrastructure sectors may be brought on par with listed shares. Most often each project is executed
through a SPV, which would typically be an unlisted entity. This move can also bring down the effective
cost for such projects.
Recently, enactment of Finance Act 2013, Consolidated Foreign Direct Investment (FDI) Policy effective
from April 2013, rationalization of investment routes and monitoring of foreign portfolio investments etc.,
would go a long way in facilitating flow of foreign funds in India.


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Way Forward
The imperative of rapid scaling up of the infrastructure capacity in the Government and private sector
(developers, contractors, consultants, financial intermediaries and investors) entails developing and
implementing projects of the required scale and within the tight time frames envisaged. The recent
initiatives on the part of the Government have begun to turnaround the story as far as the private
participation is concerned through project execution and planning new investments.
However, achieving private sector investment target in the infrastructure sector during the Plan period
would largely depend on the Governments ability to address the regulatory uncertainty and clearance
related issues going forward. This would reinstate confidence of the financial institutions in the
infrastructure projects improving their liquidity challenges.
Also, in order to incentivise the large scale use of private sector participation in infrastructure, it would be
useful to link the Government funding to the effort of developing projects as PPP. It would be necessary to
put in place a value for money framework acceptable to the Government and which would be used to
systematically benchmark bids from the private sector for each project.
Further, the ability to meet infrastructure investment target of USD 1 trillion (INR 65,000 billion) will
critically depend on successful reliance on an alternative source of financing to bank loans (i.e. bond
market) and implementation of fiscal consolidation as a means of freeing up bank lending and reducing
upward pressure on interest rates.
There are credible reasons to believe that the fundamentals of the Indian private equity market are sound.
Our GDP continues on its upward trajectory, bringing continual increases in new investment opportunities
in the infrastructure which would be required to maintain the growth momentum. Plenty of opportunities
and long term potential in the infrastructure would keep attracting private equity to invest in it.
Lastly, to implement an ambitious roadmap for the Twelfth Plan, improved standards of governance and
concerted political will would be required to take these targets and goals from inspirational statements to
actual development.



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