Financing Infrastructure - IIFCL

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INFRASTRUCTURE FINANCE

A ROAD AHEAD


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CERTIFICATE

Ms. ))))))))))))))))))) a student of IV semester, M.B.A in this institute has prepared

the project report titled, Infrastructure Financing A Road Ahead - A study in

IndiaInfrastructure Finance Company Limited, New Delhi, In partial fulfillment

of the requirement of IV semester M.B.A Degree examination of 2009 .

Date:

(Director)

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GUIDE CERTIFICATE

The project report titled, Infrastructure Financing A Road Ahead - A study in

India Infrastructure Finance Company Ltd., New Delhi, is written by Ms.

student of IV semester, under my guidance. This report is submitted to University in

partial fulfillment of the requirement of IV semester M.B.A Degree examination of

2009.

Date: Prof.

Assistant

Professor

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ACKNOWLEDGEMENT

I would like to convey my gratitude to ______________________ for his

guidance and encouragement during the course of this project,

which has helped me in the successful completion of this project.

I am grateful to Mr. Amit Kumar (Accounts Manager), Mr.

Arun Kumar (Associate Vice President Accounts) who gave

me the opportunity to undertake this project.

I would also acknowledge how much I have learned from meeting

with industry experts ofIndia Infrastructure Finance CompanyLtd. who have given me updates on the latest industry trends.

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Table of Contents

Executive Summary

Chapter 1

Preface 9

Chapter 2

Infrastructure and Economic Growth

14

Chapter 3

Role of Government in Infrastructure Financing

18

Present Scenario

18

Emerging Scenario

21

Need for Private Sector Participation

21

Initiative by Government: NHAI

23

Initiates have been undertaken

24

Chapter 4India Infrastructure Finance Company Ltd.Revolutionary Idea28IIFCL at a Glance29

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Chapter 5

Infrastructure Financing: The Changing Perspective

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Advantages form Private Sector Participation

35

Financial and budgetary benefits for the State

36

Economic and social benefits

38

Technological benefits

42

The political benefits

43

Chapter 6

Financing of NHAI Projects

45

Constraints in Implementation of the NHDP

50

Major Initiatives by the Government for bridging the

Funding Gap56

Chapter 7

Future Funding Needs

61

Infrastructure Financing Options

65

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Major Financing Issues and Causes

68

Road Sector: Problems in Mobilising Resources

74

Potential Resources for National Highways and other Roads

76

Chapter 8

Recommendations

81

Chapter 9

Conclusion

87

References

88

Chapter 1

Preface

While the railways remain important for some bulk commodities

and in some passenger markets, India is increasingly dependent

upon road transport. Rail traffic continues to grow, but its share of

freight and passengers has been falling for many years. The

growth in road transport has been accelerating; during the 1990s,

the national vehicle fleet grew from 21.3 million to 48.4 million.

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Faster economic growth, especially in non-traditional sectors, and

higher personal incomes will undoubtedly continue the growth in

demand on the road network. However, unless major reforms as

well as investment are made, Indias road infrastructure will be an

impediment to economic growth and social development. The

Indian Tenth National Plan (2002-2007), projects a GDP growth

rate of 8% per annum and an industrial growth of 10% per annum

and identified transport infrastructure as a major constraint on

accelerated growth.

India has 3.5 million km of roads, which by international

comparisons, provides a relatively dense network. The major

issues in the sector are not primarily the length of the network but

its low capacity and poor quality.

During the 1990s, the national highway network expanded

from 33,700 km to 58,100 km9 and, though it constitutes

only 2% of the network, it carries about 45% of all road

traffic. Most of the network is still two lane, providing low

service standards and slow vehicle speeds.

At the other extreme, about 40% of villages are not

connected by all weather roads and have thus limited access

to economic and social infrastructure and opportunities.

Road maintenance throughout the network is dismal,

contributing to both poor pavement condition and the loss ofall-weather accessibility.

Therefore, India combines both the need to increase very

substantially the maintenance of a very large network and the

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need to provide a high quality highway system, sufficient to

support the development of a rapidly developing economy.

Highway Sector Financing Issues

Government expenditure on roads is significant, presuming 12% of

capital and 3% of total expenditure; but road maintenance is

grossly under-funded with only one third of needs being met. The

Union Government (GOI) recognizes the deficiencies in the road

network. The Tenth National Plan has assigned a high priority to

the National Highway Development Plan (NHDP) for the

construction of a Golden Quadrilateral of high capacity, high

quality highways, linking the four major cities, as well as similar

highways along North-South and East-West corridors. Very large

investments are also envisaged on State highways. The capital

funding needs are immense:

Over Rs.225,000 crore (US$50 billion) on highway

improvements in the period to 2011; and10

Substantial investment (about Rs. 70,000 crore or US$15.6

billion), through the Pradhan Mantri Gram Sadak Yojana

(PMGSY), to connect villages

In addition, annual expenditure of about Rs.7,000 crore is essential

to maintain the 170,000 km of National and State Highways and

further funding is required to maintain the urban networks and

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district and rural roads. All these expenditures have to be financed

within a constrained fiscal environment in which the combined GOI

and State Government deficits total about 9.5% of GDP. There are

major issues as to who will finance these expenditures and how

the financing will be structured.

It is not only the level of highway funding that is important but also

the means by which it is financed. The financing arrangements for

the highway sector have significant implications for overall

government expenditure, the role of private finance as well as

having major impacts on the efficiency of the transport sector and

thus indirectly for the efficiency of the entire economy.

Approaches to Highway Financing

The management and financing of roads is not a new issue. With

the growing transport dominance of the motor vehicle, roads andhighway finance has assumed major importance and a number of

approaches have been adopted.

Traditional- In this approach roads are treated much like public

goods and financed from general government revenue. There is

little connection between the costs of road provision and the taxes

or charges paid by road users (though fuel is often heavily taxedfor general revenue purposed), and no attempts at direct road

pricing.

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Commercial- In the commercial approach, governments deal with

roads as a business sector. Roads are treated as capital assets,

commercial accounting is applied and users are charged, either

directly or indirectly, for their use of the roads. Road transport

remains a source of general revenue, but taxes are designed to

minimize distortions to transport patterns or choices. In some

countries, road finance is being separated from general

government expenditures and road users are increasingly involved

in decision-making.

Indian- The traditional approach largely persists in India, although

a national and some state fuel cesses have been introduced, tolls

are increasingly applied and substantial private sector financing is

being sought. India may be early in a transitional stage between

the traditional and commercial approaches. Yet, the present

structure of financing contributes to the under-funding of road

maintenance, a distorted vehicle fleet, perverse incentives for

traffic allocation between road and rail, and substantial economiclosses.

The Purpose of the Report

This report is designed to provide information and advice to

the Indian Union and States Governments on the principles andpracticalities for establishing a sound and sustainable system of

highway financing.

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The report reviews the economic principles for establishing

efficient and equitable road user charges (road pricing), and

examines the potential mechanisms for charging road users.

Present road taxation in India is assessed in the light of these

consideration and the levels of highway funding required to

meet government objectives.

The report reviews the potential contribution of private

sector finance to the sector and assesses the present use of

private finance and the alternative possibilities for utilizing

the private sector in the financing and management of the

network.

The report also examines the need for an agenda of sector

reform which addresses both the financial and institutional

frameworks needed to achieve network sustainability and

public acceptance of higher user charges.

The report is specifically concerned with the main highway network

(defined as the 170,000 km of National and State Highways) which

carries the great majority of vehicle-km. There is also a very large

network of rural roads which carry little motorized traffic but which

provides basic access for the rural population and facilitates the

administration of the country. These rural roads are crucial to the

social infrastructure of the country but their financing raises issues

outside the scope of this report. These roads generate majorbenefits but, in view of their low traffic levels, it would be

inconceivable to finance their construction and maintenance from

road users alone.

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Chapter 2

Infrastructure and Economic growth

What is infrastructure? In Webster dictionary, one of the definitions

of infrastructure is the resources required for an activity. According

to NATO, infrastructure is a term generally applicable to all fixed

and permanent installations, fabrications, or facilities for the

support and control of military forces. In civilian world the concept

of infrastructure was adapted but lost some of its contents. Many

authors believe that infrastructure refers to the foundation or

underlying framework of basic services, facilities and institutions

upon which the growth and development of an area, community,

or a system depend. Infrastructure can also be defined as the

physical framework through which goods and services are

provided to the public. As generally understood and accepted,

infrastructure facilities include any form of facility, whether in the

nature of a physical structure or a resource, commodity, or a

service, that is provided with an objective to be either directly used

or be ultimately used by a society or a section of society.

Infrastructure contributes to economic development both by

increasing productivity and by providing amenities that enhance

the quality of life. The infrastructure sector covers a wide spectrum

of facilities: transportation, power, ports, water supply, irrigation,

urban development, etc. the term Infrastructure facilities used in

general and wide meaning describes what could be more

appropriately termed as Public infrastructure facilities or Public

works.

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India has undergone a transformational change since early 1990s

in its economic development. The role of government has to

change now from being a provider to facilitator so that India can

achieve the required economic growth. At 7%, it will take over 30

years to be at par with some of the South-East Asian countries in

terms of GDP and at 8% it will take 25 years. So India has to target

and achieve 8%+ economic growth to achieve the real benefits of

the economic revolution. Although the precise linkage between

infrastructure and economic growth is difficult to estimate, the

World Development Report 1994 found that broadly infrastructure

capacity grows step by step with economic output; a 1 percent

increase in the stock of infrastructure is associated with a 1

percent rise in GDP across all the countries. Can Indias present

infrastructure, controlled and supported by government provide

the requisite economic targets? At the aggregate level, and at

current prices, total investment in infrastructure increased from

Rs. 60 billion (approx.) in 1980-81 to Rs. 290 billion (approx.) in1990-91 to Rs. 1070 billion (approx.) in 2000-01. It is estimated

that the total annual investment in infrastructure would increase to

Rs. 1800 billion in 2005-06. It is also estimated that total

investment in infrastructure would increase from a level of 7% of

GDP in 2000-01 to 8% in 2005-06. In future infrastructure in India,

at its current rate of growth in infrastructure is bound to create

roadblocks for the economic growth.

According to Dr. Manmohan Singh, Prime Minister of India, India

needs US $150 billion for infrastructure development, while

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Planning Commission has estimated than requirement is more than

US $150 billion to be competitive with other countries. Can Indian

government provide the requisite infrastructure? The PPI is a

necessity not an option for the economic development. But is it

feasible for private players when the output from these projects is

either sold for free (water) or sold to government bodies which are

not in position to pay for it because of their financial conditions

(power). IDP differs from other industrial projects in the sense that

they are high investment, high risk, and long gestation period

projects. In IDP not only are there greater risks due to the very size

of the project but also due to the very fact that generation of

revenues for the use of the facilities or services by the consumer

are highly uncertain. It is this characteristic that makes IDP more

risky than normal industrial ventures. In infrastructure

development there is little doubt that the facilities once developed

would be useful and used, but whether the users would actually

pay the commercial rates/charges required to make the project

viable, is always considered to be risky. Consequently, theimplementation of and investment in IDP call for a different

approach and perspective than that adopted for industrial

ventures. Development of infrastructure projects with private

participation requires distinct approach that has to be project

specific. This is because each project has its distinct investment

requirements, risk profile, user profile and gestation period.

Traditionally, the government or the public sector provided theinfrastructure services, the objective of which was not to make

profits; however that has resulted in making the public utilities

financially unviable and subsequently the quality of services, these

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utilities provided, has gone down. In order to sustain the economic

growth, India needs to develop new infrastructure facilities and

improve the existing facilities.

Infrastructure can well be dubbed as, if not the engine, the wheels

of growth. The adequacy of infrastructure can determine one

countrys success and anothers failure. Poor infrastructure is in

fact proving to be a major bottleneck to achieving high and

sustainable rates of growth in most developing countries. That

infrastructure is inexplicably interwined with economic growth is

amply manifest from an input-output matrix of an economy which

would show telecommunications, electricity and water being used

in the production process of nearly every sector, and transport as

an input in every commodity.

Empirical studies seek to quantify the link between infrastructure

and economic growth abound. For e.g. the NHDP has tremendous

beneficial spin offs for the economy. Some evidences are quotedhere:

The Golden Quadrilateral (GQ) project alone is likely to

generate requirement of cement of 3 to 4 million Metric

Tonne, and Steel of 2.5 to 3 lakh Metric Tonne. The project

will also generate employment of about 189 million man-

days. In 2002-03, about 2.5 lakh people are employed perday on this project.

Once completed, the GQ will result in saving of Rs. 8,000

crores (1999 prices) per year, according to a World Bank

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Report, through saving on fuel consumption, reduced wear

and tear of vehicles and faster transportation.

With the implementation of NHDP, cement industry has registered

a growth of 5.1 %, Steel industry a growth of 7.8% and Commercial

vehicles also shown a growth of 32% during April-September 2003.

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Chapter 3

Role of Government in Infrastructure Financing

Present Scenario

It would be appropriate to briefly touch upon the present scenario

of the Highway projects in India, which would reflect the true state

of affairs:

1. Construction Industry

The lack of well-developed highway contracting industry is the

most important factor, which came in way of upgradation of

highway system in the country. Professional management is now

picking up. Increasing use of modern tools of management viz

computer programming and cost control methods is to be

accelerated. The domestic contractors are still not geared up for

undertaking large size projects and were not exposed to

International Competitive Bidding (ICB).

2. Quality construction

A new concept of Quality Assurance has gained currency lately. It

is an important requirement of the day and this cannot be

achieved without adequate interest and a sense of commitment by

the engineers and contractors. However, we are still not in a

position to guarantee quality Highways. Often, the life of newly

constructed work is less than what obtains elsewhere in the world.

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3. Design Approach

The empirical method of pavement design adopted by the Highway

department has worked well for low traffic volume roads. The

increase in frequency of traffic is causing fatigue failure, which is

hardly covered in the present design approach. This calls for a

review of the present empirical design system and adoption of

more rational approach to cater the fatigue and rutting

phenomena as well.

4. Cost and Time Overruns

Cost and time overruns have been afflicting most of the projects.

The analysis of projects undertaken by the Ministry of Programme

Implementation has identified main reason for this as inability to

use right management technique or failure to apply the same inthe matter of implementation.

5. Externally aided Projects

Experience on the current large sized externally aided projects has

shown that in spite of improved tender documents and contract

conditions, the result have been far from satisfactory. It has been

experienced that either there are problems and delays in supply ofmaterials or there are problems and delays in obtaining statutory

permissions from the Department of Forest, Railway etc. and delay

in giving sites, drawing and other technical data that may be

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necessarily for performance of the contract. Decisions to be given

by the Government have been much delayed resulting in set back

to the progress of work.

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6. Contract Documents

The contract documents have been in vogue are one-sided

favouring the Government which in certain cases may not be

maintainable under the law and result in claims being won by

contractors. The use of FIDIC conditions of contract for works of

highway project is not common. These are being adopted in major

projects like externally aided projects, but not in domestic projects.

7. Undertaking of Contractual Rights

It has to be admitted that neither the contractors nor the highway

department engineers are fully knowledgeable or aware of their

rights and liabilities under the contract. The fundamental principle

of performance is that both the hands to meet with each other so

that the work for which the contract is signed can be completed. It

has been seen that in highway contracts that are executed by the

Government departments, the engineer feels that they have

entered into the relationship of a master and a servant. With this

in mind, in Government departments engineers sometime do notpay much attention to their obligations, duties and responsibilities,

which are essential inputs for successful and timely performance of

the contract.

8. Lack of Excellence

It has been observed that majority of engineers of the highway

departments, are not fully conversant with latest and appropriatetechnical developments in modern methods of design.

Construction and management and for understandable reasons,

have not maintained pace with the furious standards of result and

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profit oriented workmanship and efficiency of the independent

professional consultants.

Emerging Scenario

With advanced technology and fully mechanized construction of

highways coupled with stringent quality control standards highway

construction work has become highly complex and requires very

high degree of planning and monitoring in addition to execution o

the work with heavy construction equipment requiring construction

management skills of a very high order. Since highway

construction has become highly capital intensive and fiscal

resources being always short, there is an urgent need to have a

consortium of entrepreneurs comprising of skilled contractors,

professional consultants and financiers for highway projects.

Need for Private Sector Participation

The National Highway system suffers from various deficiencies of

capacity constraints, payment crust, geometric features and safety

features. About 19,000 Km of National Highways has

single/intermediate lane carriageway, which need to be widened to

two-way carriageway as per NH standard.

It has been assessed at the time of formulation of Tenth Five

Year Plan that removal of deficiencies on existing highwaysnetwork will require huge resources to the tune of Rs. 1,65,000

crores. While government is providing increasing budgetary

allocations for projects in highway sector and has taken major

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upgradation initiatives in high density corridors, it has not been

possible to allocate sufficient funds matching the need due to

competing demands from other sectors.

In flow of private sector funds thus, is expected to bridge the gap

of demand and supply to some extent.

The nation has been losing Rs. 15,000 crores per annum due to

congestion and other bad functional conditions of roads leading to

avoidable excessive consumption of fuel and increase in vehicle

operating costs (wear & tear).

The investment could come from domestic or foreign firms opting

for Build, Operate and Transfer (BOT) concept. Improvement in

credit rating of the country due to impressive economic growth

could induce confidence in foreign investors and could further

encourage foreign direct investment, provided level playing fields;

all-round transparency in actions and some fiscal/tax concessionshas to be guaranteed.

Hence, private investment is now inevitable in the Road sector to

provide additional road capacity to match the demand and price

these facilities. Therefore, there is an urgent need to tap new

avenues of financing for improvement to countrys road network.

Legislation by the Government of India

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Road sector has been declared as an industry to facilitate

commercial borrowing.

The Government has amended the National Highways Act,

1956 to provide for the legal framework for private sector

participation. Under the amended Act, it is possible to:

o Assign to the private entrepreneur responsibility for

implementation and operation of projects for specified

period given by an agreement with the Government.

o Authorize the entrepreneur to collect and retain the

users fee (toll).

o Authorize entrepreneur to regulate traffic on BOT road.

o Punish any person encroaching and misusing the

highway developed by the entrepreneur.

Initiative by Government: National Highway Authority of

India (NHAI)

In 1988 the National Highway Authority of India Act was enacted

by the Parliament, which provided for the setting up of a

central Authority for the Development, maintenance and

management of National Highways vested to it. The authority

became operational in 1995 with the appointment of a full time

Chairman and Members.

NHAI is an autonomous organisation under the Ministry of Surface Transport has been entrusted with task of executing externally

aided projects as well as implementation of private sector

participation in the National Highways. Among its other functions is

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to develop wayside amenities on National Highways. The NHAI

provided with a capital of Rs. 7 billion (US$ 234 million) to leverage

funds for Road Development from the capital market.

The mandate of NHAI under the Act is briefly as under:

Develop, maintain and manage National Highways vested in

it by the government.

Collect fees on National highways, regulate and control the

plying of vehicles on National highways for its proper

management.

Develop and provide consultancy and construction services

in India and abroad and carry on research activities in

relation to the development, maintenance and management

of Highways or any other facilities thereat.

Advice the Central Government on matters relating to

highways.

Assist on such terms and conditions as may be mutually

agreed upon, any State Government in the formulation and

implementation of schemes for highway development.

Initiatives Taken by Government to Encourage Private

Participation

In view of the budgetary constraints and in order to bring in new

management techniques as well as latest technological inputs, to

improve the efficiency, productivity and to bring-in

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competitiveness in providing highways services to the road user,

the scope for private sector participation, both domestic and

foreign, in the road development programme is quite large.

Following Initiatives have been undertaken:

Policy

The government has adopted the following policy measures

in order to encourage Private Sector Participation. The major

extracts are as follows:

Amendment in the National Highway Act, 1956 to provide for

the building, maintenance, management and operation of

the National Highways by private agencies for stipulated

periods, and authorize the levy of fees to cover their costs

and generate reasonable rates of return.

Declaration of the road sector as an industry.

Provision of capital subsidy up to 40 percent of project cost

to make projects viable.

Duty free import of high capacity and modern construction

equipment.

100 per cent tax exemption in any consecutive 10 years out

of 20 year of operations.

Provision of encumbrance free site for work, i.e., the

Government shall meet all expenses relating to acquisition of

land and other pre-construction activities.

Foreign Direct Investment up to 100 per cent in road sector.

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Easier External Commercial Borrowing norms.

Higher concession period up to 30 years in specific cases.

Right to collect and retain toll. Four lane sections (both, budgetary as well as privately

funded) to be tolled.

o Toll in perpetuity.

Revision of fee linked to Wholesale Price Index (WPI).

Risk sharing:

o Private sector to be compensated for Force Majeure.

o NHAI to provide short-term credit for temporary shortfall in revenue due to reduced traffic diversion.

o Foreign exchange risk sharing pattern being worked

out.

Detailed Guidelines for BOT projects issued.

o Emphasis on transparency, competitiveness and fair

contract conditions.

Tax/Fiscal Concessions

The government has introduced various tax and fiscal concessions

in order to encourage Private Participation. These are broadly

classified as follows:

Concessions available for enterprise undertaking any

project

Under section 80(1)(A), corporations operating infrastructure

facilities have been offered:

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o 100% deduction in profits for the tax purposes.

o Such deduction to run for a continuous 10 out of 20

fiscal years at the assessees choice.

Reduction in the rate of import duty in respect of specified

construction plant and equipment.

Concessions available for Lenders/Investors

As an incentive to financial institutions to provide finance for

the infrastructure projects, deduction upto 40% of their

income derived from financing of these investments is

available provided the amount is kept in a special reserve.

Exemption for infrastructure funds from Income Tax on the

incomes from dividend, interest on long term capital gains of

such funds or companies from investments in the form of

shares or long term finance in any enterprise set up to

develop, maintain and operate an infrastructure facility.

Subscription to equity shares or debentures issued by a

public company formed and registered in India and the issue

is wholly and exclusively for the purpose of developing,

maintaining and operating and infrastructure facility, will be

eligible for deduction equal to 20% of the tax payable by the

subscriber. In case of such investment, the limit of

Rs.60,000/- per year under Section 88 has been raised to Rs.

70,000/-.

Availability of Long Term Finance

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The Government of India and Reserve Bank of India have decided

to establish an Infrastructure Development Finance Company

(IDFC), with an authorized capital of Rs. 5,000 crores. The IDFC will

be a direct lender, refinancing institution and provide financial

guarantees for the infrastructure projects.

Government Support

The government will carry out all preparatory works for the

projects identified for private investment and meet the cost of

following items:

Detailed feasibility Study.

Land for right-of-way and enroute facilities.

Relocation of utility services, resettlement and rehabilitation

of the affected establishment.

Environmental clearances- not necessary for existing routes.

Land acquisition procedures streamlined.

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Chapter 4

IIFCL

India Infrastructure Finance

Company Limited

A Revolutionary Idea

Indian government has approved plans to set up a new company(a special purpose vehicle or SPV) to undertake financing ofinfrastructure projects including viable private projects seekingfinancial closure. For 2005-06, the extent of guarantee to beprovided by the government will not exceed Rs.100 billion ($2.2billion).

The new company, India Infrastructure Finance Company Ltd(IIFCL), would be a 100 percent state-owned entity that will fundinfrastructure projects through long-term debt raised from themarket apart from equity resources.

The IIFCL would finance up to 20 percent of the commerciallyviable project costs. The independently appraised projects forviability could include those sponsored by any entity whetherpublic sector, private sector or public private partnerships.

The Prime Ministers Office (PMO) is set to initiate measures to givea push to both domestic and foreign funding for infrastructure. Thisis because efforts to beef up infrastructure funding have notgathered the desired pace. The PM has convened a meeting ofcore infrastructure sector ministers, industry representatives, bothdomestic and international, and states, on October 7 to review the

progress of various existing funding models for core sectorprojects.

The idea is to ascertain whether the current government policieswere sufficient to encourage private participation in infrastructureprojects, the sources said. The viability gap funding (VGF), enabled

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by government incentives to lending agencies is one extant modelto induce confidence in private players looking at financinginfrastructure projects.Recently, the government had set up a special purpose vehicle

(SPV) - India Infrastructure Finance Company Ltd (IIFCL) - for part-funding of select infrastructure projects. IIFCL is supposed to act inconjunction with the VGF model.Incorporated as 100 per cent government-owned company, IIFCL isyet to establish itself. Sources said the finance ministry hasproposed changes in the structure of the SPV to facilitate fundingof infrastructure projects. A Cabinet note prepared by the ministryhas proposed that IIFCL be exempted from rules and regulationsapplicable to other banks and non-banking companies (NBFCs).

The Planning Commission is learnt to have supported both theproposals at a meeting held here recently. The government willrequire huge funds for infrastructure development to achieve thetargeted 12 per cent growth in manufacturing and 3.9 per centgrowth in agriculture.

IIFCL AT A GLANCE

Setting up IIFCL

India Infrastructure Finance Company Limited (IIFCL) was incorporated on January

5, 2006 under the Companies Act 1956 as a wholly Government owned Company.

The authorized capital of the Company is Rs. 1,000 crore of which, paid up capital,

at present, is Rs. 300 crore. Besides, the borrowing programme of the Company

would have sovereign support, wherever required.

The importance of infrastructure for rapid economic development cannot be

overstated. The most glaring deficit in India is the infrastructure deficit Investment

in infrastructure will continue to be funded through the Budget. However, there are

many infrastructure projects that are financially viable but, in the current situation,face difficulties in raising resources. I propose that such projects may be funded

through a financial Special Purpose Vehicle. The SPV will lend funds,

especially debt of longer-term maturity, directly to the eligible projects to

supplement other loans from banks and finance.

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VISION of IIFCL

Provide innovative financing solutions to prompt and develop world classinfrastructure in India

MISSION of IIFCL

Adopt best practices in financing infrastructure and develop core competencies in

facilitating infrastructure development, develop a team of highly engaged employees

to deliver services in a professional manner and to the satisfaction of all

stakeholders.

OBJECTIVE of IIFCL

The basic objective of IIFCL is to provide long term fund for infrastructure projects

and thus has to play a developmental role for infrastructure financing in the country.

To achieve this objective Company requires persons with key skills of credit /

project Appraisal, Resource mobilization, Treasury/Fund Management, Risk

Management, Human Resource Management and with legal background.

Funding through IIFCL

IIFCL funds commercially viable infrastructure projects in the country in

accordance with the SIFTI. Broadly IIFCL will fund such projects by way

of:

Long Term Debt

Refinance to banks and financial institutions for loans with tenor of morethan 10 years, granted by them.

Any other method approved by Government of India

Some other salient features of financing and development include:

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Loans assistance from IIFCL ordinarily shall not exceed 20 percent of the

project cost;

A project awarded to a private sector company through competitive bidding

for development, financing and construction through Public Private

Partnership(PPP) shall have overriding priority under SIFTI. A PPP project

has been defined as a project based on a contract or concession agreement

between a government or a statutory entity on one side and a private sector

company on the other side, for delivering an infrastructure service on

payment of user charges.

IIFCL would rely on project appraisal by the lead bank and not normally

subject the project to an independent appraisal

Financial assistance from IIFCL would be available for eligible projects in

the following sectors:

Roads & bridges, railways, seaports, airports, inland waterways, other

transportation projects;

Power;

Urban transport, water supply, sewerage, solid waste management and other

physical infrastructure in urban areas;

Gas pipelines

Infrastructure projects in special economic zones

International convention centers, other tourism related infrastructure; and

Other infrastructure projects, as may be determined from time to time.

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Chapter 5

Infrastructure Financing: The ChangingPerspective

Historically, infrastructure projects have been public works funded

by public funds, usually either tax revenues or proceeds from

government bonds (McCutcheon, 1998). From the early 1950s to

the 1990s, in India, the government was the only provider of the

infrastructure facilities. The government had a monopoly as the

provider of the public services like electricity, water, andtransportation.

In the developing countries, due to the monopoly, the spread in

the coverage was very slow. An estimated 1.2 billion people in the

developing world have no access to electricity, more than 1 billion

lack accesses to clean water, and nearly 1.2 billion lack adequate

sanitation. Moreover, inefficiency has been high. Technical

inefficiencies in roads, railways, power, and water alone caused

losses estimated at $55 billion a year in the early 1990s

equivalent to 1% of the GDP of all developing countries, a quarter

of their annual investment in infrastructure, and twice the annual

development finance for infrastructure in the developing world

(World Development Report 1994, p.11). Developed countries have

a strong tax base provided by their stable economy, but public

funds raised from taxation in developing countries are inadequate

to finance these projects due to their low tax base, caused by their

low level of commercial and industrial investments.

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At present the developing countries are faced with a situation

where the demand of infrastructure development is high with little

funding or no money to finance these projects. This has led to

many countries, both developed and developing, to re-adopt

private finance for the procurement of publicly funded

infrastructure projects. But these investments are considered too

costly for private sector participation because of the large initial

capital outlay, the slow rate of return, and the risk that the project

may never be profitable (McCutcheon, 1998). These inefficiencies

led the governments to look for an alternate way of funding the

infrastructure requirements of the nation. In doing so,

governments also reexamined their own role and are seeking to

transform itmoving away from being the exclusive financiers,

managers, and operators of infrastructure to being facilitators and

regulators of services provided by private firms. This all led to the

reforms in the direction of liberalization and privatization of the

infrastructure development. Only a few countries took the

initiatives in this direction. According to the World Banks PrivateParticipation in Infrastructure (PPI) Project Database, 26 developing

countries awarded 72 infrastructure projects with private

participation in 198489, attracting almost $19 billion in

investment commitments. In the 1990s the trend turned into a

wave that swept the developing world, with 132 low- and middle-

income countries pursuing private participation in infrastructure

57 of them in three of the sectors covered here or in all four(transport, energy, telecommunications, and water and sewerage).

In 19902001 developing countries transferred to the private

sector the operating risk for almost 2,500 infrastructure projects,

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attracting investment commitments of more than $750 billion.

Those projects were implemented under schemes ranging from

management contracts to divestitures to Greenfield facilities under

build-operate-own (BOO) contracts, build-operate-transfer (BOT)

contracts, or merchant facilities.

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Advantages form Private Sector Participation

A Partnership that provides services of the highest quality

at the lowest cost to the public

At the outset, it is fundamental to observe that reliance upon

public-private partnership for the provision of public services and

infrastructure represents a solution offering a considerable number

advantage, yet one which remains difficult to implement and fully

accompany throughout its duration. Public-private partnership set-

ups are, by their very nature, partnerships built between public

authorities and private-sector firms/investors in the overall aim of

designing, planning, financing, building and operating

infrastructure projects, which are usually developed through more

conventional market mechanisms, such as public procurement

procedures.

Public-private partnership does not only signify reliance upon the

private sector for financing capital investment projects on the

basis of revenue streams to be generated by the future facility, but

also incorporates the use of private-sector skill and managerial

expertise in building and operating public service projects more

efficiently throughout the project life cycle. In this respect, the core

of a public-private partnership encompasses more the notion of

service provision than simply infrastructure financing and

construction. This observation leads to describing the basicadvantages associated with the introduction of a public-private

partnership approach, along with the implications of such an

approach in terms of the public authoritys role.

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Financial and Budgetary benefits for the State

Easing budgetary constraints

By making it possible to employ private-sector financing, public-

private partnership enables developing some projects at little or

even no expense on the part of the public authority (albeit with the

need in most instances for a certain level of project subsidization).

The cost of service provision can often be transferred onto users

(e.g. road tolls, water bills) by charging rates close to real costs,

provided an adequate user acceptance campaign has been

conducted beforehand a task expected of the public authority.

Some financially-profitable projects serve to generate new

resources by means of sharing profits between operator and public

authority (e.g. tolls, taxes, etc.). Projects can thereby be developed

without increasing debt exposure or overextending the national

budget. Public resources are then available for meeting other

policy objectives, such as education or health. As a result, a

countrys image or even its financial rating gets upgraded,which in turn makes capital markets less expensive to access and

foreign investment easier to attract.

Value for money issues

In addition to easing budgetary constraints, the use of effective

public-private partnership set-ups provided they have been

applied to well-suited projects allowsoptimizing project impacts while raising profitability for a given

level of investment, in comparison with a basic public procurement

contract. Such advantages are manifested in the following aspects:

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better coordination and greater synergy between the phases

of design, construction and operations, under the condition

that a sole tender be held for all three phases together;

an innovative design, the application of reengineering

principles and efficient management techniques;

emphasis placed on the quality of service offered to the user-

customer;

an approach aimed at minimizing total project costs

throughout the entire project life cycle (capital investment +

maintenance + operations);

a more effective use of capital, coupled with the generation

of complementary revenue.

Optimal allocation and transfer of part of the risks onto the private

sector

Public-private partnership-type projects almost always comprise a

high level of risk, due to: the magnitude of the financial stakes

involved, uncertainties over construction and operating costs, and

revenue-related uncertainties. A partnership-based project

organization relies upon a balanced allocation of these risks (once

they have been properly identified) and enables transferring a

certain portion of them onto the private operator when said

operator is better able to shoulder them than the public authority.

In return, the public authority can significantly reduce its risk

exposure (even though certain risks must remain on theauthoritys side), while overseeing project optimization efforts.

The analysis, mitigation and allocation of a projects risks will be

discussed in Chapter II-B further on.

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A realistic evaluation and control of costs

A public-private partnership set-up enables public authorities to

better evaluate a projects actual cost. A precise and realistic

assessment of costs is of fundamental

importance to project sponsors with respect to attracting financing,

both on the equity and borrowing side. Public-private partnership

also enables preventing against

most types of cost overruns encountered all too often in major

infrastructure projects. Indeed, by conferring a broad range of

responsibilities upon the private public-private partnership partner,

it becomes possible to avoid underestimating actual projectrelated

costs early on in the process and, at the same time, to tighten cost

(and schedule) controls by virtue of the bond developed between

project builder, financial sponsor and operator. This actual cost

then serves as a benchmark for all subsequent improvements to

the quality and efficiency of other public services.

Economic and social benefits

Should the primary concern of actors appear exclusively oriented

towards financial considerations, the momentum of a public-

private partnership project may eventually stall. Of critical

importance herein is for the economic and social benefits to

remain at the core of the projects rationale, first and foremostbecause the project (to be financed in large part from operating

revenue) must be designed from the standpoint of obtaining the

best service at the most competitive price in meeting the needs of

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the largest customer base. A public-private partnerships

underlying principle stems from the fact that the public authority

remains responsible for service provided to the public, without

necessarily being responsible for the corresponding investment. By

means of the public private partnership set-up, the public authority

is therefore relieved of all investment related obligations and able

to concentrate on service quality control, while the private

operator seeks to optimize its capital outlay in its provision of

service at this specified level of quality. Furthermore, by extension

the user becomes a customer, and the operator is thus in a

situation of having to optimize the quality of service offered.

A streamlined construction schedule and reliable project

implementation able to enhance economic development

Whenever a project is deemed beneficial to society, a public-

private partnership set-up allows speeding up both implementation

and construction. In this respect,

it depends to a much lesser extent on budgetary resources, acondition which often leads to project postponement; it then

incorporates a more political dimension. This accelerated

construction schedule, in turn, makes it possible to realize benefits

more quickly for both the private company and the politicians

backing such projects. This perspective remains valid regardless of

the level of development of the countries which implement public-

private partnership projects.

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Modernization of the economy and indirect benefits

By accelerating project implementation, these types of project set-

ups help stimulate economic modernization as well: infrastructure

gets built and new technologies introduced more quickly. Given

their service quality-oriented implementation, projects

(construction + operations) are better able to respond to demand

and adapt fast to changes in demand, thereby giving rise to a

more dynamic modernization of the economy. Sizable indirect

benefits for the countrys overall economic development are

engendered as a result.

Access to financial markets, combined with the development of

local financial markets

Reliance upon private-sector financing also displays a decisively

beneficial impact from a macroeconomic standpoint for developing

countries. Such initiatives allow improving access to international

financial markets, by means of: attracting international capital;

strengthening the countrys image in the capital markets, andutilizing well-renowned operators enjoying special access to these

markets. In the long run, this reliance also enables developing a

local financial market. Complex project configurations imply a

number of financing sources and often act to catalyze the local

market, which is then led to modernize (or evolve) and adapt.

Social benefits: improvements in services to local residentsBy refocusing the role of the public authority, in enabling it to

better identify its expenses and in scaling back budget allocations,

major public-private partnership projects allow better earmarking

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resources for financing the unprofitable portion of a projects

public service provision. Yet, for the most part, financial resources

are freed up for other public services not compatible with the

public-private partnership framework (health, education, social

welfare, etc.). As such, local public agencies are able to channel

resources and energy into their social service missions.

Furthermore, some of the case studies developed in Parts III and IV

of this book reveal that public-private partnership set-ups can

provide highly-innovative solutions for accommodating the less

well-off population segments (e.g. water supply in La Paz or Manila,

waste services in Caracas).

Sights set on sustainable and environmentally-compatible

development

As opposed to a commonly-held misconception, involvement of the

private sector (within the scope of a public-private partnership)

may actually enhance the environmental aspects associated with a

development project, from two vantage points. First of all, thecreation and expansion of environmental services (primarily

sewerage and waste removal/treatment) has become a

fundamental component of any sustainable development program.

The infrastructure needed to operate such services requires sizable

capital investment, and collection functions (as regards waste)

must be run under flexible conditions. In this vein, a public-private

partnership approach allows creating these services more quicklyand efficiently at a considerably lower cost for public-sector

budgets. The second positive environmental impact of public-

private partnership pertains to the involvement, across the entire

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range of public services, of major international corporations with

access to the most up-to-date and environment-friendly

technologies. These corporate groups are increasingly cognizant of

environment-related needs (noise control, air pollution mitigation)

and have considerable experiencing adapting to the strictest of

regulatory systems found throughout the world. Moreover, they

are capable of innovating and tailoring their service provision to

changes in environmental demands. Building a partnership

between public authority and private operators enables designing

solutions better adapted to reconciling service quality demands,

the economic profiles of both users and the public authority, and

environmental imperatives.

Refocusing the role of the State on its regulatory functions

By relieving the public authority of its role of service operator, the

public-private partnership gives the authority the opportunity to

pursue its regulatory mission

exclusively, which may consist of more accurately identifyingpublic service demands and their corresponding costs. In this

manner, the authority is in a position to effectively assess the

optimal level of service provision desired by the society, along with

the associated cost, in order to reach an appropriate tradeoff

between economic and social efficiency. Public-private partnership

set-ups also make it possible to determine users ability to pay

threshold as well as the amount of subsidies necessary to maintainunprofitable services deemed of public interest: the aim herein is

to optimize financing of such services or at least to initiate a

critical examination of this topic.

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Technological benefits

Public-private project partnerships serve to attract high-level

experts who have already acquired broad international experience:

builders, operators, along with specialists and consultants in the

engineering, finance and legal fields. While this highlevel expertise

is naturally exhibited by the private partner, it must also be

accessible for the public authority, either in-house or through

retained advisers. The resultant transfer in technology or know-

how turns out to be significant from several points of view:

construction and operating systems (the most modern

techniques can be proposed in a way that has been adapted

to meet local conditions);

project and operations management;

financial engineering;

institutional engineering;

etc.

This transfer in technology and know-how exerts an impact not

only on local firms, whether directly involved in the project or not

(by means of benchmarking

for industry-wide standards), but also on the administrative

agencies responsible for monitoring the project, local financial

institutions and other context-specific actors. Another important

factor pertains to the training of local personnel. Within a

partnership involving an international consortium, foreign firms will

first seek to rely upon local personnel which it can train at the

outset of the project, therefore leaving on site just a minimum

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number of foreign office executive staff beyond the transition

phase.

The political benefits

A new role for the public authority

The political benefits also prove to be significant. By refocusing

public authority action on its regulatory missions, a public-private

partnership strategy transforms the authoritys role from a service

owner/operator into a regulator and controller. This newfound role

then provides the opportunity for promoting efficient demand

oriented services of social benefit. The public authority comes out

a winner by virtue of providing a better quality of service, while

concentrating its resources on social welfare issues. In addition,

the introduction of a public-private partnership allows rethinking

the breakdown of public vs. private roles outside the confines of a

purely dualistic mindset. This political advantage, however, maybackfire if the public-private partnership is not applied under

adequate conditions and if the State has not procured the means

for: establishing its objectives realistically, preparing its agencies

and institutions for the successful implementation of public-private

partnership formulae, and in particular conducting effective

regulatory action.

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Allocation and not abdication

Although the term privatization sometimes gets abusively used in

public-private partnership cases, keep in mind that a public-private

partnership is not a privatization

program. Rather, it serves to attract private investors without

abdicating public service missions to the benefit of private

concerns. In sum, the public-private partnership can be defined as

the delegation of a public service provision to a private operator

for a given period of time. In no way does it alter the public

sectors ownership rights to the service infrastructure (as those

facilities existing prior to the concessionary contract as well as

those built during the concession return under public authority

possession upon contract expiration). The authority maintains both

its role of shaping public service missions and its regulatory

oversight. Moreover, this process is indeed reversible, either at the

end of the stipulated contract period or (in exceptional cases of

serious conflict) during the contracts execution. The public private

partnership approach thereby allows retaining the publicessence of these services while steadfastly refuting all accusations

of selling off national public assets (or service activities) to

foreign interests or third parties.

Project stability

The social and economic advantages described above exert

obvious impacts on a countrys economic, hence political, stability.For one thing, contracts are signed for periods exceeding the

terms of elected officials. As a result, the public services

considered tend to be less sensitive to both direct and indirect

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electoral effects. The parameters of maintenance and quality of

service are less likely to be subjected to uncertainty, and projects

will be required to display a tangible socioeconomic value in order

to be selected. Secondly, by enhancing the quality of public

services without drastically increasing fiscal pressures, public-

private partnership projects are able to instill economic well-being

in addition to social stability. Here again, any hasty introduction of

a public-private partnership-type partnership must be avoided:

taking the time necessary to prepare both the population and local

administration and to plan out the transition periods is crucial to

ensure not only acceptance of the notion that one should pay for

service (at least in part), but also an appropriate regulatory

framework to prevent against abusive practices.

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Chapter 6

Financing of NHAI Projects

For implementation of NHDP Phase I and Phase II, the main source

of finance of NHAI is the fuel cess . The present rate of cess is

Re.2.00 per litre on both petrol and diesel. A part of this cess is

allocated to NHAI to fund the NHDP. The share of NHDP is

leveraged to borrow additional funds from the domestic market

through bonds that qualify for capital gains tax exemption.

Besides, Government has also negotiated loans from World Bank

(US$1,965 million), Asian Development Bank (US$1,605 million)

and Japan Bank of International Cooperation (JBIC) (Jap. Yen 32,060

million) for financing various projects under NHDP. These loans

from the multilateral institutions are passed on to NHAI by the

Government partly in the form of grants and partly as loans. NHAI

also negotiated a direct loan of US$165 million from Asian

Development Bank for one of its projects. The funds provided to

NHAI, including the borrowings from the market, are utilized for

meeting the expenditure on the projects as well as for servicing

and repayment of borrowings from the domestic market.

For providing adequate funds to the Authority for implementation

of the projects entrusted to it, Government has levied Cess on the

consumption of diesel and petrol. The proceeds of the cess are

distributed as per the guidelines given in the CRF Act, 2000. In

addition to the cess, Government also provides budgetary support

by the way of grant and loan for the projects which are executed

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with the assistance of multilateral funding agencies like World

Bank/ADB and JBIC.

Under the National Highway Authority of India, NHAI with the

consent of Central Govt., can borrow money from any source by

issue of bonds, dividends or such other instruments as it may

deem fit for discharging its functions. NHAI leverage its cess

receipts for borrowing money from the market to finance its

projects. It is also one of the agencies, which are authorized to

issue Capital gain Tax Exemption Bonds under Section 54 EC of the

Income Tax Act.

NHAI does the financing of its projects as follows:

Through budgetary allocations from the Government of

India.

A certain percentage of amounts are fixed every year in the unionbudget of India for the infrastructure development. The said

amount includes the sum allocated for the development of roads in

India.

Cess

Government of India introduced a Cess on both Petrol and Diesel.

This amount at that time (at 1999 prices) came to a total ofapproximately Rs. 2,000 crores per annum. Further, Parliament

decreed that the fund so collected were to be put aside in a

Central Road Fund (CRF) for exclusive utilization for the

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development of a modern road network. Today, The Cess

contributes between Rs 5 to 6 Thousands crores per annum

towards NHDP.

Loan assistance from International Funding Agencies.

Loan assistance is available from multilateral development

agencies like Asian Development Bank and World Bank or Other

overseas lending agencies like Japanese Bank of International Co -

Operation.

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Market Borrowing

NHAI proposes to tap the market by securities cess receipts

Private Sector Participation

Major policy initiatives have been taken by the Government to

attract foreign as well as domestic private investments. To

promote involvement of the private sector in construction and

maintenance of National Highways, Some Projects are offered on

Build Operate and Transfer (BOT) and Annuity basis to private

agencies.

The following table shows the procurement of financial resources

for the road development in India:

Total cost Rs. 54,000 Crores US$ 13.2 BillionLikely sources Rs. Cr. (on 1999

prices)

US$ Billion (1999

prices)Cess on Petrol and

Diesel 20,000 4.90

External assistance 20,000 4.90Market borrowings 10,000 2.40Private Sector

Participation4,000 1.00

The financing plans of Phase-I, Phase-II and Phase-III (Part-A) as

approved by the Government are as under:

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Phase I (Rs. In crores at1999 prices)

Particulars Projected (for 6359

Km)

Actuals/Tied-up as

on 30/4/05Cess/Market

Borrowings

18,846 20,341#

External Assistance 7,862 7,862*Share of Private

Sector

3,592 3,644

Total (excluding

IDC and escalation)

30,300 31,514

# Cess (Rs. 10,933 crores), Market Borrowings (Rs. 7,054 crores), & 8 BOT/Annuity

Projects-476 km (Rs. 2,354 crores).

*Loan executed wit World Bank US$ 1345 million, ADB US$ 665 million and JBIC Japanese

Yen 32060 million.

Phase II (Rs. In crores at 2002

prices)

Particulars For 6195

Km

For 507 Km

(Gujarat

Packages)

Total (6702

Km)

Cess/Market

Borrowings

22715 705 23420

External Assistance# 6022 1587 7609BOT (Share of Private

Sector)*

3094 216 3310

Sub-Total (excluding

IDC and Escalation.)

31831 2508 34339

Interest During

Construction (IDC)

5332 65 5397

Total (excluding

Escalation)

37163 2573 39736

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# Loan tied up with ADB for East-West corridor in Gujarat US$ 320 million, Sector 1 loan

US$ 400 million, Sector II Loan US$ 400 million and with World Bank (Lucknow-

Muzzafarpur) US$ 620 million.

* BOT 1142 Km and Annuity 1037 Km.

Phase III (A) (Rs. In crores

at 2004 prices)

Particulars Projected (For 4000 Km)Budgetary Support 10,000BOT (Share of Private Sector) 12,000 Total (excluding IDC and

Escalation)

22,000

{The funds approved by the government and the funds actually

received during the last 5 years are as per the details given in the

status report of NHAI, May 2005.}

Central Road Fund

In recognition of the need of funds for road infrastructure, the

Union Budget for 1998-99 had provided for the levy of additional

excise duty and additional custom duty of Rs. 1 per litre of petrol.

Subsequently, in the Union Budget of 1999-2000, an additional

duty of Rs. 1 per litre of high speed diesel was levied. In 2003-04,

an additional levy of cess of Rs.0.50 per litre was levied on petrol

and high speed diesel. The revenue from the cess would be used

to finance all categories of roads. This fund has been given the

statutory status by Central Road Fund Act 2000.

An allocation of Rs. 5361 crores has been made under the CRF for

2004-05 as follows:

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(Rs. In

crores)

Grants to state government and Union territories for state

roads

868

Grants to States and Union territories for roads of inter-

state connectivity and economic importance.

96

National Highways 1848Rural Roads 2148Railways 401

Total 5361

The funds earmarked for NH are being allocated to the NHAI

for the NHDP.

The funds for State Roads are disbursed to the states for

development of state highways and major district roads.

A total of 272 works for improvement of state roads involving

expenditure of Rs. 589.14 crore have been sanctioned from

the CRF for 2004-05 till 30th November 2004.

The Government is planning to raise the Cess on Petrol and

Diesel to Rs. 2 a litre from Rs. 1.50 a litre.

Constraints in Implementation of the National

Highway Development Program (NHDP)

The following are the problems that were encountered during the

execution of the PFI for development of road infrastructure:

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Involvement of political leaders

Many times, political leaders lead agitations against projects on

the pretext of representing social causes without understanding

the engineering and the legal position. The work has to be

suspended and the concessionaire has to then convince the leader,

through a series of negotiations, which in most cases serves only

vested interest and very little public interest.

Traffic discipline

The concession agreements envisage proper traffic movements

and devolve the responsibility for traffic management to the

concessionaire albeit without the state government support. The

concessionaire is not vested with the power to initiate legal action

against traffic offenders. Support from the police also does not

come forth as envisaged in the split of the contract.

Illegal encroachments

The concession agreements envisage upkeep of the right of way.The concessionaire does not have the legal power to enforce the

eviction of illegal encroachments. Even if intimation is given to

police authorities in writing, they register a non-cognizable

report and not a first information report because of the present

legal framework, moreover on timely action can be initiated to

clear encroachments.

Multiple agencies

There are many agencies involved in project implementation

NHAI, concessionaire, lenders, contractors etc. each party has its

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own engineers to supervise the work on their behalf, which leads

to:

Duplication of the supervision exercise, which could be

easily dispensed with.

Increase in project cost due to fee and reimbursement of

allowances of all supervising agencies.

Unnecessary trouble for the construction executives as they

have to deal with so many monitoring agencies.

Conflicts in cases were the reports of any two agencies differ

from each other.

Ego clashes amongst the engineers and supervising

authorities.

Too many Auditors

There are many auditors involved in a BOT project such as

statutory auditors, lenders auditors, NHAI auditors and investors

auditors. This leads to duplication of work and increase in the

project cost.

Responsibilities of loan syndicate lead manager

Big projects envisage the appointment of an agency that

syndicates the loan and the lead manager charges a fee. He

should also be made responsible for timely arrangement of funds.

Problems at NHAI

Decision-making: Since no time frame is allotted to the governing

body it provides for an opportunity for certain officials to test the

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urgency of the concessionaire and the potential for exploitation at

the hands of certain non-upright officials. There are penal clauses

for delay on the part of the concessionaire. Ironically, there is no

penal clause for any delay on the part of the employer in delivering

timely decision.

Secondly, payments for the work done should be released strictly

as per schedule. Though the contract provides for levying of

interest for delay in the release of due payments, this only

addresses the financial side of the problem and does not help the

project, which suffers from delays.

Decentralization of decision-making

Most decisions are referred by the project implementation units to

the headquarters. PIUs also seek recommendation of independent

engineers and local offices before it could be forwarded to the HQ.

Each decision takes months along with the communication, which

further add to delays.

Land Acquisition

There has been inordinate delay in acquisition of land in some

States mostly due to procedural formalities, court cases and low-

level cooperation from the State Govt. officials. There have been

delays in disbursement of compensation by the Competent

Authority to the affected landowners, although NHAI deposits the

compensation amount determined by the competent authority wellin advance. As on 31.5.2005, 42% of land in Tamil Nadu and 28%

land in Maharashtra are yet to be acquired.

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Environment and Forest Clearances

There have been considerable delays in getting the forest

clearance. Besides the conditions stipulated by the Central

Government (MOEF) in the first stage clearance (in-principle

approval), the State forest departments impose additional

conditions which are, at times, unreasonable and difficult to meet.

Demands have been made for staff quarters, wireless systems,

vehicles etc. without apparent justification. The demand for

compensatory afforestation also varies greatly from state to state

from two times to as much as twelve times.

The Government of U.P. imposes an additional conditional for

providing a dedicated strip of 10 m for plantation all along the

highway. Such a condition is very difficult to meet and creates

problems in the implementation of works.

The Net Present Value (NPV) of the diverted forest land is

demanded even for the road side lands belonging to PWD/NHAI

(notified as protected forest for management purposes). Demandof NPV alone will have a financial implication of about Rs 1100

crore for the North-South and East-West Corridor taking the lowest

NPV rate of Rs 5.80 lakh per ha.

In a few projects widening involves diversion of small strip of land

in the wildlife areas(National Park/Sanctuary). The application for

forest clearance in such cases is to be first submitted to theNational Board of Wildlife. Approval of the Board is required at

various stages, including the very first step of undertaking survey

and investigation for preparation of Detailed Project Report. The

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process of approval at each stage takes a long time as the Board

meets only once in three months. Moreover, there remains an

uncertainty with regard to whether the projects on such

alignments would receive final approval.

Clearance of Railways for ROB designs

Under NHDP Phases-I&II and other projects about 229 (84 on GQ

alone) Rail Over-Bridges (ROB)/Rail Under-Bridges (RUB) have to

be constructed. Approvals have to be obtained from Railways for

the following:

General Agreement Drawing (GAD) submitted by NHAI.

Permission of the Commissioner of Railway Safety (CRS) for

shifting of level crossing.

Approval of detailed designs and drawings of sub structures

and super structures submitted by NHAI after proof checking

by consultants.

Approval of drawings for temporary arrangement.

CRS sanction for super structures.

Obtaining the above clearances/approval from the Railways

involves coordination with several departments within Railways

and it takes a long time to get the necessary approvals. Also, in

the packages where ROBs are being constructed by the Railways

themselves, progress has not been satisfactory.

Shifting of Utilities

Utilities of different type e.g. electric lines, water pipelines, sewer

lines, telecommunication lines have to be relocated with the

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assistance of concerned utilities owning agencies. Shifting of

utilities, especially water-pipe-lines, takes considerable time.

Moreover, relocation of utilities can only be taken up after

acquisition of land.

Local Law and Order problems

In many states works have been affected because of adverse Law

and Order conditions and activities of anti-social groups. Law and

order was a serious issue in Bihar and Jharkhand affecting the

progress of work on NH-2 where work was completely paralyzed

and camps of contractors were attacked. In pursuance of orders of

High Court of Bihar, the Government of Bihar tightened the

security for NHDP projects and progress of works improved

considerably thereafter.

Stoppage of work by the local population demanding additional

underpasses/bypasses, flyover etc. is also frequent.

Poor performance by some contractors

Performance by some contractors has been very poor. Cash flow

problems have been one of the major reasons for poor

performance. Termination of such contracts often results in long

drawn litigation and further delays in the works.

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Major Initiatives by the Government for bridging

the Funding Gap

Taking cognizance of the advantages that PPP offers in terms of

cost saving, access to specialized expertise and proprietary

technology, sharing of risks with the private sector and the ability

to take up a larger shelf of infrastructure investments, Government

of India is actively encouraging them. To expedite the PPP projects

in the Central sector, the need for streamlining the appraisal

process was felt and accordingly an appraisal mechanism has been

notified including the setting up of the PPP Appraisal Committee

that will be responsible for the appraisal of PPP projects in the

Central sector. To accelerate and increase PPPs in infrastructure,

two major initiatives have been taken by the Government:

(a) Provision of viability gap funding; and

(b) Setting up of a SPV, India Infrastructure Finance

Company Limited (IIFCL) to meet the long term

financing requirements of potential investors.

The Viability gap funding will normally be in the form of a

capital grant at the stage of project construction, not exceeding 20

per cent of the total project cost. In order to be eligible for funding

under this viability gap support scheme, the PPP must be

implemented by an entity with at least 51 per cent private equity.

Although a provision of Rs.1,500 crore for viability gap funding

for infrastructure projects was made in the Budget, projects are yet

to be sanctioned under the scheme.

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Viability Gap Funding (VGF) For Infrastructure

Infrastructure projects have long gestation periods and, in most

cases, are not financially viable on their own. It may not be

possible to fund the very large investment requirements of these

projects fully from the budgetary resources of the government of

India alone. In order to remove this shortcoming and to bring in

private sector resources and techno-managerial efficiencies, the

Govt. is promoting Public Private Partnerships (PPP) in

infrastructure development through a special facility envisaging

support to PPP projects through viability gap funding. Primarily,

this facility is meant to reduce capital cost of the projects by

capital enhancement, and to make them viable and attractive for

private investments through supplementary grant funding.

Provisions for this facility is made on year-to-year basis.

Criteria

The criteria for eligibility for funding are:

The project must be implemented, i.e. constructed, maintained

and operated during the project term, by an entity with at least 40

per cent private equity.

The project must belong to one of the following sectors:

Roads, railways, seaports, airports;

Power;

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Water supply, sewerage and solid waste disposal in urban

areas and International convention centers.

The projects should have been vetted/ endorsed by the

concerned line ministries in the Government of India

All central projects should have received requisite

Government approval at the appropriate level.

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How VGF is done

Viability gap funding can take various forms, including but not

limited to capital grant, subordinated loans, O&H support grants of

interest subsidy. A mix of capital and revenue support may also be

considered.

The funding is to be disbursed contingent on agreed milestones,

preferably physical, and performance levels being achieved, as

detailed in funding agreements.

The funding is to be provided in installments, preferably in the

form of annuities, and with at least 15 per cent of the funding to be

disbursed only after the project is fully functional.

In the first year of the facility, funding is to be allocated to projects

on first come first served basis subject to meeting the eligibility

criteria.

The operationalisation of the IIFCL.

India Infrastructure Finance Company Limited (IIFCL) was

incorporated on January 5, 2006 with a paid up capital of

Rs.10 croreand an

authorized capital of Rs. 1,000 crore.

Apart from its equity, IIFCL will be funded through long term debt

raised from the open market. To enable the company to do so, the

Government may extend a guarantee for repayment of principal

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and interest. The extent of guarantee provided by Government of

India in the first year of operations is expected at around

Rs.10,000 crore. The setting up of IIFCL as a wholly owned

Government company redeems the promise made in the Budget

Speech for 2005-06. There were many infrastructure projects

which were financially viable but, in the current situation, faced

difficulties in raising resources. It was proposed that such projects

in specified sectors- roads, ports, airports and tourism be funded

through a financial SPV. The SPV would lend funds, especially debt

of longer term maturity, directly to the eligible projects to

supplement other loans from banks and financial institutions

Government will communicate the borrowing limit to the SPV at

the beginning of each fiscal year. For 2005-06, the borrowing limit

was fixed at Rs.10,000 crore. IIFCL is the SPV created. In keeping

with the Budget announcement, the company would render

financial assistance through:

Direct lending to eligible projects

Ref