ASIAN DEVELOPMENT BANK

Transcription

1 ASIAN DEVELOPMENT BANK PCR:IND PROJECT COMPLETION REPORT ON THE PRIVATE SECTOR INFRASTRUCTURE FACILITY (Loan Nos IND & 1481-IND) IN INDIA August 2003

2 CURRENCY EQUIVALENTS Currency Unit Indian rupee/s (Re/Rs) At Appraisal 16 September 1996 At Project Completion 16 May 2002 Re1.00 = $ $0.020 $1.00 = Rs35.50 Rs48.99 ABBREVIATIONS ADB - Asian Development Bank CAR - capital adequacy ratio DFI - development finance institution DSCR - debt-service recovery ratio ICICI - Industrial Credit and Investment Corporation of India IDBI - Industrial Development Bank of India IFCI - Industrial Financial Corporation of India JBIC - Japanese Bank for International Cooperation NPA - nonperforming asset NTP - New Telecom Policy PCR - project completion report PFI - participating financial institution PSIF - private-sector infrastructure facility RBI - Reserve Bank of India RRP - report and recommendation of the President SCICI - SCICI Limited NOTES (i) (ii) The fiscal year (FY) of the ICICI Bank Limited and IFCI ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g. FY2001 ends on 31 March In this report, $ refers to US dollars.

3 BASIC DATA CONTENTS Page (iii) I. BACKGROUND 1 A. History 1 B. Scope of Operations 1 C. Relationship with Asian Development Bank and Other Lenders 2 D. Relevance of Design and Formulation 3 E. Related Technical Assistance 3 II. IMPLEMENTATION 4 A. Lending Policies 4 B. Characteristics of Subloans 4 C. Implementation and Internal Operation of Subprojects 5 D. Operational Performance of ICICI and IFCI 6 E. Financial Performance of ICICI and IFCI 8 F. Financial Statements and Ratios 9 G. Covenants 10 H. Performance of the Asian Development Bank 10 III. EVALUATION 10 A. Loan Appraisal 10 B. Implementation 11 IV. ASSESSMENT AND RECOMMENDATIONS 12 A. Relevance 12 B. Efficacy in Achievement of Purpose 12 C. Efficiency in Achievement of Outputs and Purpose 12 D. Preliminary Assessment of Sustainability 12 E. Other Impacts 13 F. Overall Assessment 13 G. Lessons Learned 13 H. Recommendations 14 APPENDIXES 1. Subloans Approved Chronology of Main Events in Project Implementation Projected and Actual Disbursements Subproject Status Organization Structure of ICICI Organization Structure of IFCI Approvals and Disbursements by ICICI Portfolio Quality Analysis of ICICI Asset Mix of ICICI Approvals and Disbursements by IFCI IFCI Portfolio Quality 29

4 12. Balance Sheets of ICICI and ICICI Bank Income Statements of ICICI & ICICI Bank Cash Flow Statements of ICICI & ICICI Bank Ratio Analysis of ICICI Balance Sheets of IFCI Income Statements of IFCI Cash Flow Statements of IFCI Ratio Analysis of IFCI Status of Compliance with Major Loan Covenants by ICICI Status of Compliance with Major Loan Covenants by IFCI Assessment of Development and Poverty Reduction Impact 52

5 (iii) BASIC DATA A. Loan Identification 1. Country 2. Loan Numbers 3. Loan Title 4. Borrowers 5. Name of DFIs 6. Amount of Loan 7. Project Completion Report Number India 1480 & 1481-IND Private Sector Infrastructure Facility ICICI Bank Ltd (ICICI), and Industrial Finance Corporation of India (IFCI) ICICI and IFCI $250 million ($150 million to ICICI and $100 million to IFCI) PCR:IND 762 B. Loan Data 1. Appraisal Date Started Date Competed 31 July August Loan Negotiations Date Started Date Completed 27 September October Date of Board Approval 7 November Date of Loan Agreement 14 August Date of Loan Effectiveness In Loan Agreement Actual ICICI IFCI Number of Extensions 13 November September September 1997 None 6. Terminal Date for Commitments In Loan Agreement ICICI IFCI Actual ICICI IFCI Number of Extensions 24 September September July October 2000 None

6 (iv) 7. Closing Date In Loan Agreement ICICI IFCI Actual ICICI IFCI Number of Extensions 26 September September November May 2002 None 8. Terms to the Borrower - Interest Rate - Maturity - Grace Period Market-based loan window with lending spread of 40 basis points. 20 years 5 years 9. Terms of Relending At market rate 10. Disbursements a. Dates Initial Disbursement Final Disbursement Time Interval ICICI 29 October November years, 1 month IFCI 1 December December years Effective Date Original Closing Date Time Interval ICICI 25 September September years IFCI 26 September September years b. Amount ($ million) PFI ICICI IFCI Category Original Allocation Last Revised Allocation Net Amount Disbursed Undisbursed Balance Project Expenditure Project Expenditure Total C. Implementation Data 1. Number of Subloans 9

7 (v) 2. Sectoral Distribution of Subloans Amount in $ Subloan Sector Number of Subloans Amount Power Ports Roads Telecommunications ,723,296 23,562,623 6,481,269 75,731,011 Total 9 212,498, Size of Subloans (actual) Amount in $ Range Number of Subloans Amount Up to $5 million 1 3,206,729 Over $5 million-$10 million 3 24,090,673 Over $10 million-$25 million 2 37,625,546 Over $25 million-$50 million 1 30,423,110 Over $50 million Total ,152, ,498, Project Performance Report Ratings Name of Institution ICICI IFCI Implementation Period Jan 1999 to Dec 2000 Jan 2001 to Feb 2001 Mar 2001 to May 2001 Jun 2001 to Feb 2003 Jan 1999 to Dec 2000 Jan 2001 to Jun 2002 Jul 2002 to Dec 2002 Ratings Development Implementation Objectives Progress S HS S S S HS S S S S PS HS = highly satisfactory, PS = partly satisfactory, S = satisfactory. Refer to note below on project performance ratings. D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person-Days HS S PS Specialization of Members a Consultation 8-10 Mar b,c,d Fact-Finding 23 Apr-6 May I,d Appraisal 31 Jul-11 Aug b,d,i,j,o Contact Jan I,d,j Review (1) 7-11 Dec i,k Review (2) Sep b,h Review (3) PCR 6-20 Dec April b,e i a a = engineer; b = financial analyst/economist; c = counsel; d = economist; e = energy specialist; f = control officer; g = programs officer; h = environment specialist; i = investment officer; j = manager, Financial Sector and Industry Division (West), k = associate project analyst; l - staff consultant, m- auditor, o-resident representative, India Resident Mission. b PCR was prepared by Davendra Mittal, Investment Officer, and assisted by Michael Gomes, Senior Administrative Assistant, India Resident Mission. Note: Timely submission of annual accounts for FY2000 resulted in an upgrade from S to HS from March 2001 to May However, a delay in utilization of funds resulted in a downgrade back to S beginning June Para 45 refers to IFCI s poor financial performance resulting in a downgrade from S to PS beginning July 2002.

8 I. BACKGROUND A. History 1. Industrial Credit and Investment Corporation of India (ICICI) was incorporated in 1955 as a development financial institution (DFI), providing medium- and long-term financing to Indian corporations. In order to keep pace with the changing market environment, ICICI has evolved into a diversified financial services group whose businesses include investment banking, mutual funds, commercial banking, and investor services. ICICI diversified its business directly, as well as through a number of acquisitions, subsidiaries, and affiliates. In FY1999, ICICI was listed on the New York Stock Exchange In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger between ICICI and two of its wholly-owned retail finance subsidiaries: ICICI Personal Financial Services Limited and ICICI Capital Services Limited. Shareholders of ICICI and ICICI Bank approved the merger in January 2002, the High Court of Gujarat at Ahmedabad approved it in March 2002, and the High Court of Judicature at Bombay and the Reserve Bank of India (RBI) in April The merger became effective on 3 May 2002, with the appointed date of the merger being 30 March As a result, ICICI group's finance and banking operations, both wholesale and retail, have been integrated into a single entity. As of 31 March 2003, domestic and foreign institutional investors owned around 60% of the share capital of ICICI Bank; American Depository Receipt holders another 26%; and the public, nonresident Indians and overseas corporate bodies 14%. 3. Industrial Finance Corporation of India Ltd. (IFCI) was established in 1948 under an Act of Parliament as the first DFI in India to provide medium- and long-term finance for the industrial sector. IFCI was converted to a public limited company in 1993, and its name changed to IFCI Ltd. By 31 March 2003, banks, institutions, insurance companies, and mutual funds owned a combined 67% of IFCI s shares, with government-owned Industrial Development Bank of India (IDBI) holding 32%. The public, nonresident Indians, and overseas corporate bodies owned the remaining 33% SCICI Limited (SCICI) was incorporated in December 1986 to develop the maritime and allied sectors. It later diversified into air and road transport, ports, telecommunications, and energy. SCICI, of which ICICI owned 19.9%, merged with ICICI on 1 April 1996 in order to eliminate overlap and boost efficiency. ICICI was the surviving institution. 4 B. Scope of Operations 5. Initially, ICICI was engaged in medium- and long-term corporate financing. In the early 1990s, ICICI diversified into investment banking, mutual fund operations, commercial banking, venture capital, investor services, Internet brokering, and insurance, either directly or through subsidiaries and affiliates. After converting into a universal bank, ICICI Bank shifted its focus to ADB PCR for Loan No. 778-IND. ADB PCR for Loan No IND, and ADB RRP for Urban Environment and Infrastructure Facility (Loan No. 1720). ADB. RRP for Housing Finance Facility (Loan No. 1761) for details on history of ICICI. ADB Board paper No. R on Loan Nos IND, 1480-IND, 1720-IND and 1761-IND : ICICI Limited-Change in Scope of Project Implementation. ADB PCR for Loan 975-IND. IFCI s history. ADB Pursuant to the merger of SCICI with ICICI, ADB cancelled the loan to SCICI.

9 2 retail lending evident from the significant increase in retail assets although it is still involved in infrastructure financing. On 31 March 2003, retail assets accounted for 18% of its total portfolio. 6. IFCI is engaged in medium- and long-term finance for industrial development. Over the years, the term industry has been widened to include infrastructure, road construction, amusement parks, cultural centers, travel and transport facilities, and the film and entertainment industry. IFCI assists research and development, as well as the commercialization of new technology, through its subsidiary IFCI Venture Capital Funds Ltd. It also provides merchant banking, consulting, and other services through its subsidiary IFCI Financial Services Ltd. Services have expanded in response to market changes and the competitive environment, that emerged during the 1990s. 7. ICICI and IFCI offer loans, as well as primary and secondary market instruments, in local and foreign currencies. As of 31 March 2003, ICICI s outstanding gross loans in local and foreign currencies were Rs479,243 million and Rs92,124 million equivalent respectively. About 84% of total loan assistance was denominated in rupees. By 31 March 2002, IFCI s outstanding loans in local and foreign currencies were Rs118,527 million and Rs35,670 million equivalent respectively, with 77% of total loans in the local currency. IFCI and ICICI fund their foreign currency needs through commercial borrowing, as well as multilateral and bilateral lines of credit from various international agencies. ICICI Bank also mobilizes foreign currency deposits, mainly in tenors of 1 to 3 years. C. Relationship with ADB and Other Lenders 8. ICICI has a long-standing association with ADB. The first line of credit for $100 million was extended to ICICI in to augment ICICI s foreign exchange resources and enhance private sector financing. The loan was closed in July 1991 and rated satisfactory. Another line of credit 6 for $120 million was given to ICICI in FY1996 to modernize production facilities at medium-sized industries. The loan was closed in February 1995 and rated partially successful. ICICI is currently participating in the Urban and Environment Infrastructure Facility 7 and the Second Housing Finance Project 8. IFCI had received a line of credit for $150 million to modernize production facilities at medium-sized industry, against which $ million was disbursed 9. The loan was repaid in full in February 2001 and has been rated satisfactory. 9. ICICI has an ongoing relationship with major international lenders such as the World Bank, the Japanese Bank for International Cooperation, Kreditanstalt für Wiederaufbau, and DEG-German Investment and Development Company. Their lines of credit were used for various purposes, including infrastructure projects, green-field and brown-field industrial projects, and industrial pollution control. IFCI has an existing relationship with Kreditanstalt für Wiederaufbau, from which it has obtained a line of credit for project finance. 10. Following financial sector reforms, DFIs access to cheap financing including budgetary support, as well as RBI and government-guaranteed bonds has tailed off. Previously, DFI bond issues qualified as eligible instruments for banks in meeting statutory liquidity ratio requirements, although that permission was subsequently withdrawn. DFIs have since been turning to the Indian bond market, through private placements and public issues, to meet their ADB Loan 778-IND: for $100 million. ADB Loan 1072-IND: for $120 million. ADB Loan 1720-IND: Urban and Environment Infrastructure Facility for $80 million. ADB Loan 1761-IND: Housing Finance II Project for $80 million. ADB Loan 975-IND: for $150 million.

10 3 local currency requirements. IFCI s credit rating was also downgraded, making its bonds more expensive. ICICI Bank has been increasingly raising money through fixed deposits to lower its funding costs. IFCI has also been mobilizing funds through retail fixed deposits, although on a smaller scale. D. Relevance of Design and Formulation 11. The private-sector infrastructure facility (PSIF) was conceived at a time when the Government felt that the existing infrastructure was inadequate to satisfy the needs of economic development and population growth. With the fiscal deficit estimated at 8% of gross domestic product and the debt burden growing, the Government realized its limitations in meeting infrastructure requirements and so it decided to liberalize the various sub-sectors within the infrastructure sector and create an enabling environment for private sector participation. Besides, with the expectation of limited increase in bilateral/ multilateral funding for infrastructure, it was felt that financing infrastructure will require mobilizing domestic resources which in turn could be sustained by efficient and properly functioning banking sector and capital market. 12. ADB approved the PSIF in October 1996 with these factors in mind. 10 The PSIF envisaged three loans, totaling $300 million, to three financial institutions viz. ICICI ($150 million), IFCI ($100 million) and SCICI ($50 million) for on lending to private sector infrastructure projects in power, telecommunications, roads, and ports. The institutions were identified based on their capacity for, and experience in, long-term lending; their access to domestic and international capital markets; and their investment banking expertise. PSIF also envisaged a project development facility, totaling $10 million, ($5 million to ICICI, $3 million to IFCI and $2 million to SCICI), to be carved out of the loans to each financial institution and used for capacity building, project preparation, and implementation. At the institutions request, ADB agreed they would undertake their own capacity-building by: (i) strengthening their infrastructure groups; (ii) organizing and participating in various training programs, conferences, and seminars; (iii) working on various mandates, in close co-ordination with international banks, advisors, and consultants, and (iv) providing assistance to the government on policy issues. In view of the above, the $10 million originally intended for capacity building was reallocated to subproject financing. 13. ADB s operational strategy in India focuses on economic growth and efficiency by supporting increased private investment in infrastructure. With infrastructure bottlenecks severely hampering growth, the strategy prioritized assistance for energy, transport, communications, and urban infrastructure. The PSIF would attract private capital through longterm debt financing and a policy dialogue that would establish the right regulatory framework. Moreover, the PSIF was expected to bolster government initiatives to promote private-sector participation in infrastructure development. E. Related Technical Assistance 14. The PSIF did not envisage any related technical assistance (TA). 10 ADB Loans No. 1480/1481/1482-IND: Private Sector Infrastructure Facility for $300 million.

11 4 II. IMPLEMENTATION A. Lending Policies 15. ICICI s lending policies have evolved with the deregulation of the financial sector. In order to create a diverse asset base, it has started focusing on areas such as corporate and structured finance. To reduce risk, focus has shifted from pure asset-backed lending to cashflow-based financing, enhanced security structures, proper allocation of risk, and other risk mitigation measures. After its transformation into a universal bank, ICICI Bank has increased its focus on retail finance (refer para 5), with extensive use of information technology to develop its retail franchise. 16. IFCI s appraisal methods are based on sound financial and commercial principles. During PSIF implementation, however, IFCI s financial performance was hurt by sluggish economic growth, lower tariffs, the removal of non tariff barriers, and depressed capital markets. As a result, a significant portion of its portfolio turned into non-performing assets (NPAs). IFCI has sketched out a medium- to long-term strategic plan in which it has consciously decided to reduce project finance which is currently more than 90% of total assets by diversifying into short-term products and fee-based activities. This decision was taken based on the recommendations of the working group appointed by the Government, which cited the limited availability of long-term finance for lending for infrastructure projects. Based on recommendations from private consultants, IFCI has decided to position itself as a midcorporate service provider and has created separate groups to monitor health of large assets, identify and manage risk in credit proposals, refinance loans pertaining to good assets, and generate new business. B. Characteristics of Subloans 17. The PSIF envisaged the financial institutions on lending to private sector infrastructure projects in four sub sectors: power, telecommunications, roads, and ports. In the power sector, the PSIF was expected to focus on projects not exceeding 500 megawatts capacity in states that were undertaking restructuring measures with priority to be accorded to power plants that would benefit a large number of users than single users, and for telecommunications, the PSIF would finance services outside the metropolitan areas. In the case of roads, the PSIF would finance bypasses, flyovers, road widening, interchanges, and certain state expressways all of which might be opened to the private sector on a build-operate-transfer basis. In the port sector, the PSIF would finance facilities for ship repair, dry docks, warehousing, storage, and cargo handling for lease and operation by the private sector. In this sector, the PSIF would also finance privatization of existing public port and terminal facilities, as well as the setting up of private ones. 18. It was stipulated that 30% of an individual subproject or $75 million whichever is lower might be financed under the PSIF, subject to sectoral limitations that might be stipulated by the Government. The participating financial institutions were, however, permitted to jointly finance subprojects, provided total financing did not exceed the limitations for individual subprojects. Notwithstanding the range of exposure, each institution was required to finance at least two infrastructure subprojects, preferably in different sub sectors. 19. The ICICI component of the PSIF was fully utilized by the closing date. In the case of IFCI, withdrawal applications were put on hold in December 2000 because IFCI had not complied with financial covenants since March It became apparent that IFCI was unlikely

12 5 to meet financial covenants by the loan closing date and, due to financial problems, IFCI had decided to restrict its exposure to high-risk infrastructure projects. ADB therefore decided to cancel the undisbursed component of $37.5 million at IFCI s request, effective 16 May Nine subprojects were financed in the four subsectors (Appendix 1). 11 Through the PSIF, ICICI financed three power projects, two telecom projects, and one road project, while IFCI financed four power projects and one port project. Out of the power subprojects financed by the PFIs, two were common. However, it was ensured that the aggregate financing of both the PFIs in the two subprojects was within the stipulated limit of 30% of the project cost. 20. The five power sector subprojects are all generation projects, located in states that have already initiated or are in the process of initiating reforms viz.: Andhra Pradesh, Himachal Pradesh, Karnataka, and Tamil Nadu. A state electricity regulatory commission has already been constituted in each of these states and tariff orders issued by all of them. The unbundling and corporatization of state electricity boards have already begun in Karnataka and Andhra Pradesh. Three of the five subprojects are thermal power plants, using fuels such as naphtha/ natural gas, lignite, and corex gas (a byproduct of steel production). The remaining two are hydropower projects. The corex gas power plant was a cogeneration project, with some power used for captive consumption and the balance sold to the state electricity board. 21. Both of the approved telecom subprojects were intended to provide services in nonmetropolitan areas. One of the subprojects would provide fixed-line telephone services in Rajasthan, and the other subproject would provide mobile services in Haryana, Kerala, and western Uttar Pradesh. The highway subproject involved construction of a 30-kilometer bypass road in the state of Karnataka, while the port subloan envisaged building a commercial port in Mundra, Gujarat. 22. The nine subprojects were dispersed throughout the country. Subloans varied from $3 million for a power project to $67 million for a telecom project. The PSIF catalyzed investment of $2.05 billion, of which promoters contributed $679 million (33% of the project cost). ADB contributed 10% of the project cost, with the remaining 57% came from other loans. C. Implementation and Internal Operation of Subprojects 23. The main events in project implementation are furnished in Appendix 2. PSIF implementation was smooth, except for the fact that IFCI did not comply with financial covenants after March 2000 (para 19). The report and recommendation of the President (RRP) did not estimate an implementation or drawdown schedule. Annual data on projected and actual disbursements of the loan are given in Appendix All the nine subprojects financed under PSIF have already commenced commercial operations and are operating satisfactorily (Appendix 4). None of the subprojects has as on date fallen in arrears. 25. Four subprojects faced problems during implementation. The completion of one of the subprojects in power sector was delayed by nearly two years for a number of reasons, including technical problems with the engineering, procurement, and construction contractor and disputes between the initial project sponsors. One project sponsor eventually left the venture and sold its stake to the other project sponsor and financial institutions. Another subproject in the power 11. ADB approved 6 subprojects for ICICI and 5 subprojects for IFCI. However, 2 of those subprojects were the same, so the total number of subprojects approved was reduced to 9 from 11.

13 6 sector, although completed on schedule, had a cost overrun of $16 million comprising of $8 million for equipment to change fuel from naphtha to natural gas, and the rest to cover increases in interest payments during construction, finance charges, and contingency. Besides, the subproject faced implementation problems including lack of infrastructure for transporting heavy equipment to the site. Another subproject in the power sector got delayed for a year because a downturn in capital markets which delayed its initial public offering and floods, which destroyed roads leading to the project site. Project costs rose from Rs12,630 million at the time of approval to Rs16,120 million (FY2002 estimates). The subproject in the road sector was completed on schedule, but costs exceeded the original budget by Rs165 million because of additional earth and pavement work. 26. The PSIF was used to subscribe to debentures issued by the various subprojects. At the time of approval of various sub-projects, it was ensured that the estimated financial internal rate of return was always more than the cost of the capital. The various subprojects FIRRs at the time of approval ranged from 12.6% to 24.9%. The FIRR for power subprojects on completion would have remained the same as the tariffs of all the generating plants financed were based on cost plus approach. The FIRR of the telecom subprojects would have been adversely affected due to reduced subscribers and lower tariffs. In the case of road sector, the FIRR would have dropped due to traffic being lower than the projected levels. All subprojects complied with environmental regulations applicable to the states where they were located and the country. 27. SCICI merged with ICICI on 1 April 1996, with ICICI the surviving institution (para 4). The PSIF was approved in November 1996 while the merger of SCICI with ICICI though effective 1 April 1996 was concluded subsequent to PSIF approval. As SCICI was no longer a legal entity, transferring the $50 million SCICI loan to ICICI would have required fresh Board approval. Meanwhile, ADB also revised its loan charges effective 1 January 2000, introducing a front-end fee and increasing the lending spread. Both the Government and ICICI refused to avail of the loan at the higher charges and as a result ADB decided to cancel the SCICI loan in November Sluggish economic growth and other factors affected the performance of the industrial sector, which in turn hampered the performance of IFCI, whose financial parameters failed to comply with ADB loan covenants. India Resident Mission (INRM) held a number of discussions with IFCI and the Government on the feasibility of a possible turnaround by IFCI to meet financial covenants and its ability to fully utilize the loan by the closing date. IFCI decided to limit its exposure to high-risk infrastructure projects with long repayment periods. This decision, coupled with the fact that it was unlikely to comply with financial covenants such as capital adequacy and debt-equity ratios, led ADB to cancel the un-disbursed component of $37.5 million at IFCI s request, effective 16 May D. Operational Performance of ICICI and IFCI 1. Organization, Management and Staffing 29. ICICI is a professionally managed organization. Its board of directors consists of professionals, full-time directors, and a government nominee. The managing director & chief executive officer manage day-to-day operations with the support of the joint managing directors,

14 7 executive directors, and a pool of competent professionals from various disciplines. 12 Bank has its head office in Mumbai and 540 branches across the country. ICICI 30. After transforming into a universal bank, ICICI s organizational structure was revamped (Appendix 5). It now has five groups: retail banking, wholesale banking, a corporate center, international banking, and project finance and special asset management. As of 31 March 2003, ICICI Bank had 10,617 employees, 4,274 of whom were officers trained in accountancy, management, engineering, law, computers, economics, or banking. 31. IFCI, like ICICI, is professionally managed. Its board consists of professionals from diverse fields, as well as representatives of shareholders such as IDBI, Life Insurance Corporation, and State Bank of India. The chairman and managing director head the day-to-day operations, with the support of the executive directors and experienced professionals. IFCI has its headquarters in New Delhi and eleven regional offices During PSIF implementation, IFCI had hired private consultants to examine strategic options and draw up its business plan (para 16). Based on their recommendations, IFCI has reorganized into operational departments covering management of large assets, credit coordination, asset recovery, corporate advisory services, treasury, foreign exchange, and resources. These new groups are supported in turn by service departments such as corporate accounts, legal services, information technology, economic research, and human resources (Appendix 6). As of 31 January 2003, IFCI had 858 employees, 524 of whom were officers trained in accountancy, management, engineering, law, computers, economics, or banking. 2. Personnel Administration 33. Training is important for both the PFIs to meet challenges in the financial sector. Particularly important is overall competency development of executives and staff. ICICI has built strong capabilities in training and development, with training and leadership programs at a dedicated training facility. ICICI Bank also uses the best available training programs and personnel, both Indian and foreign, to build skills and capabilities on a global standard. IFCI has integrated training with its business strategy. An analysis of needs across the organization determines a comprehensive training plan for each year, which is then approved by the board of directors. 34. ICICI Bank undertakes campus and lateral recruitment. ICICI Bank encourages employees to work in different departments, enriching their knowledge and experience, giving them a broader view of the organization, and ensuring that the bank finds the best uses for them. Salaries are at market levels, helping attract talented professionals. ICICI Bank has a good relationship with its employees. 35. IFCI s recruitment is based on manpower assessment. For specialized disciplines such as infrastructure, risk management, economics, foreign exchange, information technology, and legal affairs, recruitment is done laterally. Government directives reportedly govern staff salaries, which are not market related. IFCI has a good relationship with its employees and their union ADB Refer PCRs for 778 IND (ICICI Ltd.) and ADB PCR for Loan No IND for details on organization structure and management of ICICI. ADB Refer PCR for Loan No. 975 IND for details on organization structure and management of IFCI.

15 8 3. Lending Operations 36. Both the PFIs have established systems to appraise and monitor projects thanks to their long relationships with industry and proven competence in project financing. Over the years, both institutions have developed considerable expertise in risk management, structuring and syndicating large projects, and churning their portfolios. The institutions project appraisals include analyses of the promoters background, as well as technical, commercial, marketing, social, environmental, and finance factors. Both ICICI s and IFCI s loan monitoring procedures have matured over more than four decades in project finance. ICICI Bank offers loan products with varying repayment period ranging from upto 1 year for short-term loans for AAA-rated companies to almost 15 years for infrastructure projects. IFCI s loans are medium to long-term ones, with repayment periods depending on project requirements. 4. Other Operations 37. ICICI has identified retail banking as a key engine of growth, and moving into that business segment has helped it diversify its portfolio and build a low-cost, stable resource base. ICICI Bank has positioned itself as a retail finance supermarket, with a product range that includes merchant banking, corporate advisory, securities trading, brokerage, Internet trading, mortgage finance, insurance, venture capital, and information technology funds. 38. IFCI has tried to focus on financial services too, while retaining its focus on project finance. These services include equipment financing, leasing, procurement and credit, supplier s credit, buyer s credit, and leasing/hire purchase. IFCI has also become active in merchant banking, with services including project counseling, project appraisal, credit syndication, corporate counseling for financial reconstruction and rehabilitation, technology finance, risk/ venture capital, and mergers and acquisitions. E. Financial Performance of ICICI and IFCI 39. ICICI s loan portfolio increased from Rs289,084 million in March 1998 to Rs492,548 million in March 2001, with a compounded annual growth of 19% over the 3-year period. Data on ICICI s approvals and disbursements is given in Appendix 7. ICICI classifies all credit exposure into NPAs and performing assets, according to RBI guidelines. Asset quality remains satisfactory, with net NPAs falling from 7.7% of total assets in March 1998 to 5.1% in March 2001 (Appendix 8). ICICI Bank s loan portfolio stood at Rs532,794 million in March An analysis of the asset portfolio indicates the shift in focus from project finance to corporate and retail finance (Appendix 9), which can be attributed to the bank s change in business strategy. Asset quality remains satisfactory, with net NPAs at 4.9% of total assets in March ICICI Bank has set up a special assets management group to manage large NPAs and other large accounts that require close watch. 40. IFCI s performance deteriorated markedly from FY1998 to FY IFCI s loan portfolio shrank from Rs164,233 million in March 1998 to Rs147,516 million in March 2002, largely because of prepayments from existing borrowers and IFCI s decision to reduce fresh lending to high-risk, long-term infrastructure projects. Data on approvals and disbursements made by IFCI is furnished in Appendix IFCI s financial results for FY2003 were not available during the preparation of the project completion report.

16 9 41. IFCI classifies all credit as per RBI guidelines. The ratio of NPAs to total assets remained high, rising from 21.5% in March 1998 to 22.2% in March 2002 (Appendix 11). IFCI set aside provisions for its NPAs, but values remained high in percentage terms because of the continuous shrinkage in the size of the total outstanding loan portfolio. Following recommendations from private-sector consultants, IFCI set up an asset restructuring company to segregate its NPAs and ensure proper attention to them. The NPAs have been divided into 3 categories and an internal team for managing NPAs has been formed comprising of 3 groups with each group being assigned the responsibility of managing one category of NPAs. F. Financial Statements and Ratios 42. Financial statements for both ICICI (for the period 1998 to 2001) and ICICI Bank (for the period FY2002 to FY2003) are presented in Appendixes 12 to 14. ICICI s asset portfolio has grown consistently (para 42), funded mainly by bonds and accretion to reserves. ICICI s share capital has increased from Rs4,760 million in March 1998 to Rs7,854 million in March In March 2002, ICICI merged with ICICI Bank by trading one share in ICICI Bank for every two shares of ICICI. ICICI Bank s share capital of Rs6,126 million as of 31 March 2003, therefore, cannot be compared with that of ICICI. ICICI Bank has placed more emphasis on corporate and retail assets than on project finance. Similarly, an analysis of the liability profile shows borrowings gradually being replaced by deposits. As of 31 March 2003, deposits constituted 45% of total liabilities. 43. ICICI s interest income increased substantially from Rs37,810 million in FY1998 to Rs60,579 million in FY2001, with total income showing compounded annual growth of 17% over that period. ICICI s profitability declined in FY2001, however, because of provisions and writeoffs totaling Rs8,313 million. Its profits for FY2002 were primarily that of ICICI Bank, as that statement accounted for only 2 days of ICICI profits (the appointed date of the merger of ICICI with ICICI Bank being 30 March 2002). FY2003 income statements indicate the consolidated profitability of ICICI and ICICI Bank. 44. ICICI/ICICI Bank s capital adequacy ratio (CAR) has been consistently higher than the norms stipulated by RBI. As of 31 March 2003, ICICI Bank s CAR was 11.1% (Appendix 15). Its debt-service coverage ratio (DSCR) has been consistently higher than the ADB covenant of 1.1. Its return on net worth had been declining before its conversion into a bank, indicating that its margins had been under pressure. 45. IFCI s financial statements from FY1998 to FY2002 are in Appendixes 16 to 18. IFCI, which had more than 90% of its portfolio in project finance, saw its financial performance suffer because a significant portion of its portfolio turned into NPAs in the face of sluggish economic growth, depressed capital markets, reduction in tariffs, and the removal of non-tariff barriers (paras 40 & 41). IFCI s share capital increased from Rs3,536 million in March 1998 to Rs6,387 million in March IFCI increased its capital during FY2000 through a one-for-one rights issue to existing shareholders. IFCI s preference share capital increased from Rs1,000 million in March 1998 to Rs4,293 million in March IFCI s income from lending operations declined from Rs20,621 million in FY1998 to Rs16,067 million in FY2002. IFCI s profitability deteriorated significantly, with earnings dropping from a profit of Rs3,705 million in FY1998 to a loss of Rs8847 million in FY2002. IFCI s adverse financial position can be attributed to rising NPAs, resulting into lower income; stiffer and higher provisioning requirements by RBI; and pressure on margins from lower interest rates.

17 IFCI has partly complied with ADB s financial covenants. IFCI s CAR has consistently fallen short of RBI norms since FY2000 and was 3.12% at the end of FY2002 (Appendix 19). Its DSCR, however, has been consistently higher than the ADB covenant of 1.1. G. Covenants 48. ICICI/ICICI Bank complied with most loan covenants except for some late or nonsubmission of reports (Appendix 20). As per ICICI s request in October 2000, ADB waived the loan covenant of submitting a long-form audit report, provided that the ICICI s annual report prepared in accordance with both the United States and India s generally accepted accounting principles was submitted together with (i) the audit project account; and (ii) a list of NPAs with names of borrowers and amounts in arrears, which was provided in the long-form audit report as supplementary information. 49. IFCI became non compliant with the loan covenant on CAR starting FY2000 (Appendix 21). During FY2001, IFCI appointed an expert committee to devise a turnaround strategy, specific components of which were implemented by IFCI. Major shareholders and the Government injected additional capital of Rs10 billion. However, as certain covenants such as CAR and debt-equity ratio remained to be complied with, ADB canceled the un-disbursed component of $37.5 million at IFCI s request, effective 16 May 2002 (para 19). During the early stages of implementation, IFCI did not submit semiannual progress reports or long-form audit reports. However, subsequent to the delegation of PSIF to INRM, it was ensured that IFCI submitted all reports as covenanted in the loan agreement. H. Performance of the Asian Development Bank 50. ADB s performance during project implementation was satisfactory. In ICICI s case, subprojects were approved and disbursements made at a fast pace allowing the loan to be closed in November 2001 rather than September 2002 as originally agreed. In the case of IFCI, due to the financial problems being faced by IFCI and long-term restructuring efforts being made, ADB approved no fresh commitments after October However, the project was moving smoothly until October 2000 with ADB approving five subprojects worth an amount aggregating $89.3 million. 51. Three review missions were fielded during the 5-year implementation period to evaluate the implementation. After the project was delegated to INRM in September 1999, ADB fielded two review missions for intensive follow-up and closer interaction. III. EVALUATION A. Loan Appraisal 1. Distribution of Sub loans 52. The PSIF s purpose was to facilitate private sector participation in Indian infrastructure, as private capital was critically required to augment public sector resources. It was expected that each participating financial institution would finance at least two infrastructure subprojects, preferably in different sub-sectors so as to disburse the benefits of the project and help the institutions in gaining wider exposure. Nine subprojects (footnote 10) in the four identified subsectors were financed in seven different states. ICICI financed three power projects, two telecom projects, and one road project while IFCI financed four power projects and one port

18 11 project. The distribution of the sub-loans reflects satisfactory achievement of the above purposes. 2. Covenants 53. The covenants included under the project were generally appropriate in the circumstances prevailing at the time of the appraisal. It maybe mentioned that subsequent to the merger of ICICI with ICICI Bank, certain changes have been made in the loan agreement relating to the covenants on financial parameters including replacing DSCR with interest coverage ratio, maintaining a debt equity ratio of not more than 12:1 and following RBI guidelines on CAR, asset liability management and supervisory policies including statutory liquidity ratios. ICICI has generally complied with the covenants except for the timely submission of the reports, which were submitted only after follow-up (para 48). IFCI was in compliance of the covenants till March 2000 when it ran into financial difficulties (para 49). 3. Quality of Appraisal 54. ADB s loan appraisal was generally thorough, including a comprehensive review of infrastructure sector, financial sector, institutional capabilities of the PFIs and appetite for such a loan. At the time of the appraisal, it was difficult to envisage the sluggishness of the economy, which eventually hurt IFCI s financial performance. The appraisal did not, however, properly assess IFCI management s dynamism, ability to react to market changes, or independent decision-making. Moreover, the appraisal did not consider the possibility of softening of interest rates and had considered the performance of the PFIs based on the continuation of a high interest rate scenario only. Also it was difficult to imagine the possibility of the merger between SCICI and ICICI, given that the appraisal was done in good faith and neither institution disclosed the merger plans. 55. Both the PFIs have credible appraisal and monitoring systems, which are sound and well established after more than four decades of project lending operations (para 36). Successful implementation of most of the subprojects reinforces their skills in identification, appraisal, and monitoring. B. Implementation 56. Implementation followed the intended milestones and achieved the intended objectives. In the case of ICICI, the sub-loan commitments were made well before the terminal date and the loan disbursed without delay. In the case of IFCI, part of the loan had to be cancelled despite the fact that the sub-loan commitments and disbursements were progressing well (para 49). 57. Both the PFIs have decades of experience in project finance and were well suited to appraise and monitor the PSIF. As required under the PSIF, both institutions set up dedicated units for infrastructure that were well equipped and had the required implementation expertise. 58. Some policy reforms took place in the four identified sub-sectors, the most significant of which was telecommunications. Reforms included a new telecommunications policy; the formation of Telecom Regulatory Authority of India; the effective end of an existing duopoly regime; and an option for existing players to shift to revenue sharing, which resulted in

19 12 significant private sector participation. Reforms have been initiated in the other sub-sectors but progress has been relatively slow 15. IV. ASSESSMENT AND RECOMMENDATIONS A. Relevance 59. The PSIF is relevant given ADB s and Government s continued belief that addressing structural weaknesses, particularly in infrastructure and public finances, is key to medium-term economic success. In key areas of the economy particularly power, roads, and transport investments have failed to keep pace with economic needs, impeding the transition to more sustainable, poverty reducing growth 16. Given the considerable resources that infrastructure projects require, and the significant drain on public finances of inefficient public infrastructure projects, the Government will need to promote greater private-sector involvement. Key to attracting private capital are a long-term framework and policy incentives for private initiative and investment; better policy coordination among government agencies; and enhanced availability of long-term domestic funding. The timing of the PSIF was appropriate because the Government had just opened infrastructure to private sector participation. B. Efficacy in Achievement of Purpose 60. The PSIF substantially achieved its immediate objective of promoting private sector participation in infrastructure by facilitating the growth of private financing. It has also been successful in channeling resources into infrastructure and raising institutional capacities for accelerating infrastructure development. However, it has been only partially successful in achieving its objective of developing an active secondary market for infrastructure securities. All the subprojects financed under the PSIF have issued debentures. India s existing secondary debt market is primarily for AA+ to AAA rated securities. As most of the subprojects under PSIF have just commenced commercial operations, they are still perceived as high-risk and unlikely to obtain such ratings. Nonetheless, ICICI has been able to sell the debentures of some assisted infrastructure projects 17 utilizing pass-through certificates issued by a special purpose vehicle configured as a trust. C. Efficiency in Achievement of Outputs and Purpose 61. All the subprojects were funded through debentures or other securities at market-related interest rates, and each of the subprojects is financially viable. There was considerable leverage of ADB funds, with ADB s investment of $212.5 million in nine subprojects catalyzing investments worth $2.05 billion. The loan was efficient in achieving its purpose. D. Preliminary Assessment of Sustainability 62. Considering that all the subprojects were implemented without subsidies and the projects are making reasonable financial returns, the PSIF appears sustainable and potential for Refer to RRP (Section III) relating to Loan Nos. 1871&72-IND: Private Sector Infrastructure Facility II approved in November Refer to RRP (Section III) relating to Loan Nos. 1871&/2-IND - Private Sector Infrastructure Facility II approved in November ICICI sold debentures in Jindal Tractabel Power Company Ltd. s project worth Rs650 million, and two tranches of Nandi Highway Developers Ltd. project debentures worth Rs324 million and Rs100 million.

20 13 similar funding is highly likely. This is substantiated by the fact that ADB has provided PSIF II 18 to two Indian financial institutions, with the focus on infrastructure projects in Gujarat, Madhya Pradesh, Karnataka, and Andhra Pradesh. 63. ICICI Bank s operations are based on commercial considerations, with professional appraisal and monitoring of credit proposals. Retail lending will drive ICICI s future growth, but the institution proposes continuing corporate lending/project finance on a smaller scale. IFCI, on the other hand, is going through financial restructuring (para 16) and would require handholding from the Government and major stakeholders until it turns around. E. Other Impacts 64. Apart from facilitating growth by removing impediments to infrastructure development, the PSIF also reduced poverty in terms of (i) freeing government funds for social spending, and (ii) directly and indirectly reducing poverty 19 (Appendix 22). F. Overall Assessment 65. The PSIF can be rated successful. Development objectives were almost fully achieved. ADB s investment of $212.5 million in nine subprojects catalyzed investments worth $2.05 billion. ICICI effectively identified six subprojects in three of four identified subsectors, with both commitments and disbursements made well within the envisaged timeframe. IFCI successfully identified five subprojects in two subsectors, although an undisbursed tranche of $37.5 million had to be cancelled (para 49). 66. The Government has not been able to generate the necessary private sector interest in infrastructure because of a poor enabling environment where (i) reforms are slow, (ii) governance structures are poor in quality, (iii) public/private interface is weak, and (iv) private sector s inability to un-bundle or allocate risk 20. G. Lessons Learned 67. The PSIF financed debentures for the subprojects, with the objective of developing an active secondary market for infrastructure securities. Most of the subprojects had not begun stable commercial operation, however, making the debt instruments unattractive investments (para 60). 68. India s long-term debt market remains underdeveloped and suffers from a number of impediments. It has few players; inadequate support infrastructure; very limited participation by long-term investors such as funds and insurance companies; and a weak secondary market, which leads to poor liquidity and the absence of a benchmark yield curve ADB Loan No IND : Private Sector Infrastructure Facility II to Infrastructure Leasing & Financial Services Ltd for $100 million approved in November 2001 and Loan 1871-IND: Private Sector Infrastructure Facility II to Industrial Development Bank of India (IDBI) for $100 million approved in November These are being reviewed in more detail in two sectors under ADB RETA 5947: Assessing the Impact of Transport and Energy Infrastructure on Poverty Reduction, for $800,000, approved on 25 October Refer to RRP (Section III) relating to Loan Nos & 72-IND: Private Sector Infrastructure Facility II approved in November 2000.