INFRASTRUCTURE
 
A, B, C OF CORE FINANCING  

What does Infrastructure financing involve?  
   
Infrastructure projects like power, telecom, ports, airports and expressways often involve huge outlay of funds which may not be available with the government. Second the funds are required for a very long tenure say 10-20 years since the projects have long construction periods and need to run for a very long time horizon in order to recover a decent return on investment.  

In India, the financial sector, i.e. the banks and financial institutions can generally raise funds for 5-7 years only. Hence, they would be hesitant to deploy such funds for longer period and face problems at the time of paying their own liabilities.  

Further, since a lot of these projects would be run on commercial basis for the first time, there are several uncertainties at each level construction, operation, revenue collection, etc. Due to these peculiar problems, appraisal and financing of infrastructure projects requires special skills and structures.  

How are these problems being addressed?  

Over the last six-seven years, financial institutions have taken the lead in understanding the dynamics of infrastructure financing. They have managed to identify the risks at each stage of these projects, and they have looked at evolving adequate safeguards to alleviate these risks.  

While lenders have sharpened their loan structuring skills they have also evolved several concepts which provide more security to lenders and are expected to attract more funds into the sector. The major concepts are cash flow financing, usage of government guarantees to induce private financing, concept of escrow mechanism to ensure that lenders get first charge on a project's cash flows and new concepts like take out financing and subordinate debt financing.  

What is cash flow financing?  

In cash flow financing, the lenders estimate the cash flows of a project over its lifetime to see what kind of debt burdens it can support and at what rates. Then, the amount of debt, financing rate and the way of repayments can be tailored to fit the cash flows of the project. This helps both the lender and the project promoter.  

What is an escrow mechanism?  

The escrow mechanisms have been developed in case of independent power projects (IPP) which are built by private parties out of private funds and supply electricity to the state electricity boards (SEBs). Essentially, it ensures that out of the SEBs' revenues, the debt obligations of the financing institutions will be paid first of all.  

This is done by having some identified revenues being passed through a separate account called the escrow account to which the lenders also have a right to appropriate the funds in case the SEB defaults in making payments. By having the power to be assigned those funds in case of default gives an added comfort to the lender and allows the IPP to raise financial assistance.  

However, escrowable amounts are limited in each SEB and once these funds are appropriated the SEB may not have much assured revenue flows for its other expenses.  

What is take-out Financing?  

One, of the major problems of financing infrastructure projects is that while requirements are for long periods, Indian banks and financial institutions can traditionally lend funds only for say 5-7 years.  

Take out financing allows banks to finance 15-year projects through 5-7 year money. In India, the Industrial Development Finance Corporation (IDFC) offers this facility to banks and Institution. It offers to take out the loans from the bank's books after an initial period, say 5 years. IDFC can then keep the loan in its own book, or lend it to another bank, for say another 5 years. While the project promoter has got the loan for 15 years, through this mechanism, banks can participate in loans on a part-to-part basis.  

In another variant, the take-out financier could offer a refinance facility to the original lender at the end of five years instead of taking out the loan from its books.  

What is subordinated debt financing?  

Institutions have also talked about funding infrastructure project through a quasi-equity-instrument called subordinated debt-which may have flexible maturity and payment terms.  

In this case the borrower gets money which have a longer tenor, and has the comfort of paying it after he has met the secured debt obligations. The payment terms can also be made flexible. Such loans could even be converted to equity at a later date, if desired.  

Six banks commit to IDFC for `Take-Out' finance  
   
Under its "Take Out" finance route, Infrastructure Development Finance Corporation (IDFC) is to channelise short term deposits of the banks to the infrastructure sector which has a gestation period of over ten years. While banks would finance a project for its first few years IDFC would take over the financing after four to five years, depending on the agreement signed between it and the banks. Six public sector banks including State Bank of India have made Commitments to IDFC to finance projects under its "Take Out" finance route.  

UTI joins hands with Australian firm for infrastructure Fund  
   
Unit Trust of India has joined hands with a $ 1170 billion Australian mutual fund in a joint venture to raise funds-some $ 500 million from overseas markets for investment in various infrastructure projects in India.  

The fund would be named UTI-AMP Infrastructure Fund. The proceeds would be invested in projects relating to roads, ports, airports and power plants.  

NTPC's installed capacity rises to 17735 mw  
   
National Thermal Power Corporation has added a capacity of 940 mw  during 1998-99 after which the total installed capacity of the Corporation has risen to 17,735 mw.   

During 1998-99 NTPC achieved a net turnover of Rs. 14,022 crore (an increase of 10% over the preceding year.  

The provisional (after tax) profit for the year is Rs 2511.87 crore an increase of 14.3 percent over the previous year.  

Rs. 68 cr power plant in Andamans  
   
A 20 mw power plant estimated to cost Rs. 68 crore is being set up by three private sector companies in Andaman & Nicobar islands, the third such plant to be set up in A & N territory. The power tariff structure has not yet been fixed,.  

The State Bank of India (SBI) has sanctioned 60 per cent of the Rs.50 crore loan component.  

Andaman Island's demand for power is not met fully. There are currently only two power plants of 12.5 mw capacity each in the territory.  

14 new national highways covering 11 states  
   
The government on July 8 declared 14 new national highways (NHs) totalling 2,411 kms. and covering 11 states.  

The total length of NHs in the country, which stood at 49,585 km has now stands at 51,996 km, crossing 50,000 km mark.  

The additional NHs will help provide better connectivity to ports, coastal areas and tourist centres, besides opening up backward areas.  

The state-wise length of new NHs is as under..  
  

New NH No. Length (km) State
81 100  Bihar/W.Bengal
82 130 Bihar
83 130 Bihar
84 60 Bihar
85 95 Bihar
86 360  UP/MP 
87 83  UP
88 115  HP
89 300 Rajasthan 
152 40 Assam
212  250 Kerala/Karnataka
213  130  Kerala 
214  270  Andhra Pradesh
215 348 Orissa