Innovations and Constraints in Financing Infrastructure Projects

1
Innovations and Constraints in Financing
Infrastructure Projects

• Ashok Wadhwa
• Ambit Corporate Finance Pte Ltd
• January 7, 2005

2
Overview

• Financing infrastructure
• Constraints
• Select Indian experience
• Potential solutions
• International experience

3
Financing infrastructure
4
Infrastructure to impact growth plan

• Sustainable growth depends upon availability of
  efficient infrastructure Economic Survey 2004
• Government recognises need for significant
  investments
• Governments focus shifting from direct
  involvement to regulatory and policy framework
• UPA gives major push by announcing significant
  investments in specific projects
• As on March 04, government has 568 projects with
  estimated cost of Rs 2,470 bn
• Private-public partnership key thrust area to
  generate adequate financing

5
Key implications

• Rising economic activity
• Outlook for infrastructure has improved
• Further liberalization in key sectors
• Reduce reliance on government funding

Drivers

• Increased FDI inflows in infrastructure
• Pressures on Government to reduce fiscal deficit
  / subsidies
• Higher liquidity and portfolio investments
• Higher private sector participation

Effects
Future Strategies

• Global players to invest in India
• Government to play role of facilitator
• Private participation has boosted confidence
• Innovative financing to attract investments

6
Financing needs are significant
FDI and Private flows in infrastructure
constituted only 5
7
Historical experience not satisfactory

• Projects relied entirely on subsidies /
  government funding
• Investment in infrastructure decreased to 3.7 of
  GDP in 2002-03 from 5.4 in 1993-94
• No regulatory framework or inter-government
  coordination (TRAI, TAMP active only recently)
• Disparities in regional growth leading to
  imbalance
• Concepts like securitization / CDO a recent
  phenomenon
• Select sectors (ports and telecom) experience
  much awaited success
• Fragmented tax decision making structure leading
  to multiple layers of tax
• Lack of timely information or industry data

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Shapers of Future Industry

• Private sector participation to drive growth
• Tap local liquidity to create attractive
  investment opportunities
• Attract and retain potentially large foreign
  investors
• Financial viability of projects to be ensured
• Cost and productivity improvements lead to lower
  cost overrun and timely completion
• Flexibility in innovatively financing projects
• Shift in responsibility
• Government key facilitator in providing amicable
  regulatory and business environment
• Corporatisation of projects to encourage private
  investors

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Constraints
10
Private finance avenues are limited
Private financial flows to developing countries
infrastructure
Infrastructure financing and total bank lending
Source Dealogic / World Bank
11
FDI and allocation discouraging
FDI Approvals / Inflow
FDI Allocation
Aug 1991 / Oct 2002
Infrastructure 5
Source CRISIL / NCEAR
12
Multitude of issues to be addressed

• Sources
• Uses
• Revenues
• Debt service
• Operating expense
• Opportunity cost
• Accelerated net benefits

• Operating efficiencies
• Credit rating
• Debt service coverage
• User fees
• Dedicated fees
• Government subsidies
• Public grants

Disentangling financial drivers and impacts is
key to discern the net gain
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Regulatory and policy is evolving

• Key policy framework slowly falling in place
• Banking sector reforms being implemented
• Telecom sector liberalised with Unified Access
  Service License regime since Oct 2003
• Electricity Act notified in June 2003 and SEBs
  revamped financially
• Private participation in ports made attractive
• Government agenda is to take proactive action
• Schemes with different names brought under single
  umbrella
• Overriding priority for last mile projects
• Setting up of investment commission and
  Inter-Institutional group
• Need for national policy on pricing and levy of
  taxes
• Deepening of the domestic capital markets

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Tax structure is being harmonised

• Government relies heavily on tax revenues
• Road related tax revenues accounted for 18 of
  GDP
• Only one third used for maintenance or
  reinvestment of roads, as against 90 in US or
  60 in Australia
• Multiplicity of taxes and levies at various
  administrative levels
• Substantial variation in levies across states
• Rationalisation of exemptions under Income-tax
  Act could hamper investment in infrastructure
• Interest exemption on ECBs not available
• Tax holiday for telecom

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Select Indian Experience
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Recent Indian experience

• Cochin International Airport
• First private airport in India commenced in 1993
  and operational since 1999
• Kerala Govt holds 37 and rest by banks,
  institutions and public
• Fee of Rs 500 levied per passenger
• Profitable since 2002-03 and profit of Rs 211 mn
  in 2003-04
• 8 maiden dividend in 2004

• National Highway Authority of India
• AAA Credit rating and raised over Rs 70 bn in
  debt through bonds
• Line of credit from LIC for Rs 6 bn interest at
  1 over 18 year Govt treasury with duration of
  over 25 years
• Investment in NHAI Bonds exempt from capital
  gains
• Backed by Govt at fee of 0.25 pa

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Recent Indian experience

• Rajiv Gandhi Container Terminal
• Operation of terminal with revenue sharing of
  33.3
• Build International Transshipment Terminal at
  cost of Rs 211 bn
• Payment of Rs 350 mn over 5 years
• Govt budgetary support for rail / road
  connectivity / dredging at Rs 93 bn
• Operate terminal for 8 ½ years and new terminal
  for 30 years

• CES Onyx Pvt Ltd
• Part of Vivendi Group
• Contract for collection of 1,100 tonnes garbage
  in Chennai covering two million people per day
• 7 year contract worth Rs 270 mn per annum
• Also managing water distribution and industrial
  toxic management

Considerations

• Gives strategic hold to Dubai Ports International
• Connectivity with Far East ports - Hong Kong
• Attract transshipment business from Sri Lanka

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Potential solutions
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Financing needs to get innovative
Key Objectives

• Use existing financial resources more effectively
• Specify and quantify the benefits and revenues to
  stakeholders
• Detailed risk assessment and allocation of risk
  amongst stakeholders
• Supplement, not replace, traditional financing

Benefits

• Public benefits realised sooner
• Inflation of costs can be curbed
• Matches payment to useful life of projects
• Large projects relatively cheaper due to
  economies of scale lower unit material and
  start-up costs

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Create a climate for financing
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Possible option - variations
Government
Multilateral Agencies (World Bank / IFC / ADB)
Subsidies / Grants
Guarantees / Risk insurance / funding
Project
Equity
Project Sponsor
Syndicated funding
Export Credit Agencies
Commercial Banks
Guarantees / credit enhancement
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Financing considerations

• Average maturity
• Average tenure of 7-10 years lesser maturity
  puts pressure on price charged / levies
• Bank lending rate
• Bank lending rate higher for infrastructure 200
  basis points
• Spreads typically lower than sovereign bonds
• Type of instrument
• Bond issuance provides flexibility
• project types
• issue size
• seniority
• tradability
• back-weighted repayment structure
• US 4 bn of bond issuance in 2002-03 by emerging
  markets
• Credit rating investment grade

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International experience
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US Federal Highway Administration

• Initiative from 1994 to introduce flexibility in
  financial characteristics of Federal-aid highway
  program
• Overriding objectives
• Increase investment
• Accelerate projects
• Improve utility of existing financing
  opportunities
• Lay the groundwork for long-term programmatic
  changes
• Characteristics of initiative
• Accomplish through a State-driven process
• Not seeking commitment of new Federal funds
• Various models evaluated and tested
• Flexible match - Value of private contribution
  offsets state share
• Reimbursement of bond financing costs
• Tapered match - State funding higher during
  initial period
• Partial conversion of advance construction -
  States may obligate funds for advance
  construction n a phased fashion

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Green Financing - Netherlands

• Environment friendly instruments issued by Dutch
  Govt
• Ensures sustainable housing, wind turbines and
  organic farms
• Lower interest rates for the company but
  reasonable return for the investors
• Dutch Govt promoting the program in developing
  countries
• Major project requirements
• Provide significant and immediate environmental
  benefit
• Provide a financial return
• Variations include, providing subsidies and
  fiscal incentives

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Conclusion
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A Look to the Future

• We need the courage of innovation from the
  stakeholders, and we must find in ourselves the
  willingness to trust the new course long enough
  to harvest the benefits.