India: Second India Infrastructure Project Financing Facility

Transcription

1 Completion Report Project Number: Numbers: 2586, 2717, and 2822 September 2014 India: Second India Infrastructure Project Financing Facility This document is being disclosed to the public in accordance with ADB s Public Communications Policy 2011.

2 CURRENCY EQUIVALENTS Currency unit Indian rupee/s (Re/Rs) At Appraisal At Project Completion 24 July May 2014 Rs1.00 = $ $ $1.00 = Rs48.42 Rs59.84 ABBREVIATIONS ADB Asian Development Bank AIIFI Accelerating Infrastructure Investment Facility in India CPS country partnership strategy ESMU environmental and social safeguard management unit ESSF environmental and social safeguard framework GDP gross domestic product IIFC (UK) India Infrastructure Finance Company (UK) Limited IIFCL India Infrastructure Finance Company Limited IIPFF India Infrastructure Project Financing Facility IRMF integrated risk management framework LIBOR London interbank offered rate MFF multitranche financing facility NBFC-IFC nonbanking financial company infrastructure finance company PFR periodic financing request PMU project management unit PPP public private partnership RBI Reserve Bank of India SIFTI Scheme for Financing Viable Infrastructure Projects SPV special purpose vehicle TA technical assistance

3 NOTES (i) (ii) (iii) The fiscal year (FY) of the India Infrastructure Finance Company Limited (IIFCL) and the Government of India begins on 1 April and ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2013 ends on 31 March In this report, $ refers to US dollars. In consultation with SPD and OSFMD, one facility completion report has been prepared for the multitranche financing facility for the Second India Infrastructure Project Financing Facility to replace individual completion reports for each tranche for evaluation purposes. Vice-President W. Zhang, Operations 1 Director General H. Kim, South Asia Department (SARD) Director B. Carrasco, Public Management, Financial Sector and Trade Division, SARD Team leader Team members J. Romero-Torres, Financial Sector Specialist (Capital Markets and Infrastructure), SARD A. Bravo, Senior Operations Assistant, SARD P. Gutierrez, Project Analyst, SARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

4 CONTENTS Page BASIC DATA i I. BACKGROUND 1 A. History 1 B. Scope of Operations 2 C. Relationship with ADB and Other Lenders 2 D. Relevance of Design and Formulation 4 II. IMPLEMENTATION 5 A. Lending Policies 5 B. Characteristics of Subloans 6 C. Implementation and Internal Operations of Subprojects 6 D. Operational Performance 7 E. Financial Performance 8 F. Covenants 9 G. Performance of ADB and India Infrastructure Finance Company Limited 9 III. EVALUATION 10 A. Appraisal 10 B. Implementation 10 IV. ASSESSMENT AND RECOMMENDATIONS 11 A. Relevance 11 B. Effectiveness in Achieving Outcome 12 C. Efficiency in Achieving Outcome and Outputs 13 D. Preliminary Assessment of Sustainability 13 E. Impact 13 F. Overall Assessment 14 G. Lessons 14 H. Recommendations 15 APPENDIXES 1. Design and Monitoring Framework Summary of Key Revisions under the Scheme for Financing Viable Infrastructure Projects Subprojects Funded under the Second India Infrastructure Project Financing Facility Analysis on the Financial Performance of India Infrastructure Finance Company Limited during FY Assessment on Compliance of Undertakings Completed under s 2586, 2717, and Performance of Second India Infrastructure Project Financing Facility 41

5 i BASIC DATA A. Identification 1. Country 2. MFF Number 3. Title 4. Borrower 5. Name of Development Finance Institution 6. Amount of 7. Project Completion Report Number B. Data 1. Appraisal Date Started Date Completed 2. Negotiations ( 2586-PFR1) Date Started Date Completed ( 2717-PFR2) Date Started Date Completed ( 2822-PFR3) Date Started Date Completed 3. Date of Board Approval (IIPFF II) ( 2586-PFR1) ( 2717-PFR2) ( 2822-PFR3) 4. Date of ( 2586-PFR1) ( 2717-PFR2) ( 2822-PFR3) 5. Date of Effectiveness ( 2586-PFR1) In Actual Number of Extensions ( 2717-PFR2) In Actual Number of Extensions ( 2822-PFR3) In Actual Number of Extensions India M0037 Second India Infrastructure Project Financing Facility India Infrastructure Finance Company Limited India Infrastructure Finance Company Limited $700,000, July July October October November November November November November November December December December March March March March 2010 none 15 June April 2011 none 19 June April 2012 none

6 ii 6. Closing Date ( 2586-PFR1) In Actual Number of Extensions ( 2717-PFR2) In Actual Number of Extensions ( 2822-PFR3) In Actual Number of Extensions 7. Terms to the Borrower Interest Rate Maturity (years) Grace Period (years) Free Limit Repayment Terms 8. Terms of Relending (if any) 9. Interest Rate for Subloans Original Revised 10. Disbursements a. Dates ( 2586-PFR1) Initial Disbursement 18 May 2010 Effective Date 17 March December September 2011 none 31 December October 2012 none 14 December May 2014 none sum of LIBOR and 0.60% as provided by Section 3.02 of the loan regulations, less a credit of 0.40% as provided by Section 3.03 of the loan regulations 25 years 5 years None Payable semiannually on 15 June and 15 December of each year in accordance with Schedule 1 of the loan agreement n/a Market-based and adequate to cover all costs and risks associated with onlending, including any foreign exchange rate premium n/a Final Disbursement 14 September 2011 Original Closing Date 31 December 2014 Time Interval months Time Interval months ( 2717-PFR2) Initial Disbursement 13 July 2011 Final Disbursement 13 September 2012 Time Interval months Effective Date 8 April 2011 Original Closing Date 31 December 2014 Time Interval months ( 2822-PFR3) Initial Disbursement 19 July 2012 Final Disbursement 30 April 2014 Time Interval months Effective Date 24 April 2012 Original Closing Date 14 December 2014 Time Interval months

7 iii b. Amount ($ 000) Subloan Original Allocation Amount Disbursed Sew Navayuga Barwani Tollways 25,687,269 25,687,269 Coastal Gujarat Power Ltd. 257,515, ,515,435 Himalayan Expressways Ltd. 11,042,999 11,042,999 Badarpur Faridabad Tollway Ltd. 9,113,899 9,113,899 Jal Yamuna Expressway 68,130,431 68,130,431 Pune Solapur Expressway Pvt. Ltd. 19,031,135 19,031,135 Soma Isolux Kishangarh-Beawar Tollway 31,109,754 31,109,754 Soma Isolux Surat Hazira Tollway 23,461,032 23,461,032 Dhule Palasner Tollways Ltd. 13,372,317 13,372,317 Halol Godhra Shamlaji Tollways 8,919,675 8,919,675 IRB Pathankot Amritsar Toll Road 26,112,891 26,112,891 Rayalseema Expressway Pvt. Ltd. 43,080,580 43,080,580 Navayuga Quazigund Expressway Pvt. Ltd. 18,540,577 18,540,577 Simhapuri Expressway Ltd. 29,127,147 29,127,147 Ashoka Sambalpur Baragarh Tollway Pvt. Ltd. 22,063,873 22,063,873 Farakka Raiganj Highways Ltd. 9,911,306 9,911,306 Baharampore Farakka Highways Ltd. 9,202,361 9,202,361 Maharashtra Eastern Grid Power Transmission Co. Ltd. 40,587,710 40,587,710 GVK Deoli Kota Expressway Pvt. Ltd. 17,958,022 17,958,022 Jabalpur Transmission Co. Ltd. 16,031,587 16,031,587 Total (US$ equivalent) 700,000, ,000,000 Total (Rs) 35,916,201,100 35,916,201,100 Note: Amounts are actual US dollar equivalent (rounded off). C. Implementation Data 1. Number of Subloans Sectoral Distribution of Subloans Sector/ Subsector No. of Subprojects Actual ($) Finance/ Infrastructure finance and ,000,000 Investment funds Total ,000, Project Performance Report Ratings ( 2586-PFR1) Ratings Development Objectives Implementation Implementation Period Progress From 30 November 2009 to 31 December 2009 S S From 1 January 2010 to 31 December 2010 S S Source: Historical Project Performance Report

8 iv ( 2717-PFR2) Ratings Implementation Period Development Objectives Implementation Progress From 1 January 2010 to 31 December 2010 S S 1 January 2011 to 31 December 2011 system does not reflect rating 1 January 2012 to 23 October (on track) Source: Historical PPR and E-Operations ( 2822-PFR3) Ratings Implementation Period Development Objectives Implementation Progress From 1 January 2012 to 31 December (on track) 1 January 2013 to 31 December (on track) 1 January 2014 to 14 May (on track) Source: e-operations D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person-Days Specialization of Members a Fact-finding May a, b c Appraisal July a, b, c Negotiations 5-7 October a, b c, d, e review 30 August a, f September 2010 Consultation October a, g Midterm Review September a, g Annual Environmental and 5-13 November a, h, i Social Safeguards Implementation Audit Project completion review 29 July-7 August a, j review 18 October c a a = financial sector specialist, b = economist, c = finance specialist, d = counsel, e = financial control specialist, f = financial markets development specialist, g = project officer, h = environment officer, i = project analyst, j = senior operations assistant E. Related s (to some development finance institutions): Not applicable.

9 I. BACKGROUND A. History 1. Accelerating infrastructure development is a key priority to sustain India s economic growth and poverty reduction agenda. 1 The Government of India projected that the investment requirements for infrastructure will almost double to $1 trillion in the 12th Five-Year Plan ( ) in order to attain a gross domestic product (GDP) growth rate of 9% per annum. As such, infrastructure investment should be on average almost 10% of GDP during the 12th plan. 2. Given the limited fiscal space and lack of capacity within the government to implement such an ambitious program, the government s strategy relies heavily on promoting investment through a combination of public resources and private participation including public private partnerships (PPPs) for funding financially viable infrastructure projects to bridge the financing gap estimated to exceed $300 billion. To achieve this, the private sector s share of infrastructure investment will have to rise from 38% in the 11th plan to about 50% in the 12th plan. 3. To scale up the development of infrastructure through PPPs, the government established the India Infrastructure Finance Company Limited (IIFCL) in 5 January 2006 as a wholly owned government entity to provide long-term financing for viable infrastructure projects through the Scheme for Financing Viable Infrastructure Projects (SIFTI). IIFCL started operations in April 2006 and was notified as a public financial institution in January 2009 under Section 4A of the Companies Act. IIFCL s operating paradigm is governed by SIFTI. Built into the scheme is a preference for PPP projects that are awarded to private companies selected through a competitive bidding process and bring them to financial closure 2 4. IIFCL has three wholly owned subsidiaries: India Infrastructure Finance Company (UK) Limited, IIFCL Projects Limited, and IIFCL Asset Management Company Limited. IIFC (UK) was incorporated, under the laws of England and Wales, to supplement its role and functions by utilizing part of India s foreign exchange reserves for the creation of infrastructure assets by lending to Indian companies implementing infrastructure projects, for meeting their capital expenditure outside India. IIFCL Projects Limited was incorporated to provide project advisory services (including project appraisal and syndication services), as well as product development services involving feasibility studies, project and financial structuring, and detailed business cases. IIFCL Asset Management Company Limited was incorporated as an asset management and trustee company to undertake the management of mutual funds and infrastructure debt funds through the mutual fund route. IIFCL is also a contributor, along with Infrastructure Development Finance Company and Citigroup, to the India Infrastructure Fund, which was constituted in 2007 to facilitate large-scale capital investments in infrastructure assets in India through a combination of long-term debt and equity capital raised in several tranches. 5. In 9 September 2013, IIFCL was registered by the Reserve Bank of India (RBI) as a nonbanking financial company infrastructure finance company (NBFC-IFC). As such, IIFCL is now regulated by the government (under SIFTI) as well as by RBI. 1 India ranked 85 out of 148 countries for its infrastructure in the World Economic Forum's Global Competitiveness Report for The harmonized master list of 29 infrastructure subsectors was notified by the Government of India on 27 March 2012 and was subsequently updated. Reserve Bank of India (RBI) gazette notifications dated 5 April 2013 and 9 May

10 2 B. Scope of Operations 6. Lending operations. IIFCL was incorporated as a special purpose vehicle (SPV) to fund commercially viable infrastructure projects, as defined under the SIFTI. 3 The projects are implemented through a project company set up on a nonrecourse basis, i.e., those set up as SPVs or those that are units of larger corporate entities but whose cash flows can be ring-fenced. IIFCL funds viable infrastructure projects through (i) long-term debt by direct lending to project companies; (ii) refinancing to banks and financial institutions; (iii) takeout financing 4 implemented through a tripartite financing agreement between IIFCL, the identified lender, and the borrower; (iv) subordinate debt; (v) credit enhancement in the form of guarantees (on pilot basis); and (vi) any other mode approved by the government.. IIFCL s risk exposure is required to be less than that of the lead bank in the project i.e. total lending to any project may not exceed 20% of the total project cost, subject to its exposure being less than that of the lead financier. In case of takeout financing, direct lending to the project may not exceed 10% of the project cost. Total lending including takeout financing by IIFCL may not exceed 30% of the total project cost. To be eligible for funding under SIFTI, the project must be implemented by a public sector company, a private sector company selected under a PPP initiative, or any private sector company. 7. Funding operations. Apart from equity investments by the government, IIFCL raises long-term debt from the open market. This debt can be any or all of the following: (i) Indian rupee debt raised from the market through suitable instruments created for the purpose; IIFCL would ordinarily raise the debt of maturity to 10 years and beyond; (ii) debt from bilateral or multilateral institutions; and (iii) foreign currency debt, including that incurred through external commercial borrowings raised with the government s prior approval. In consultation with the Department of Economic Affairs, IIFCL can raise funds as and when required, from domestic and overseas markets on the strength of government guarantees. Subsequently, a government guarantee has been provided on a case-by-case basis. C. Relationship with ADB and Other Lenders 8. Relationship with ADB. ADB provided three multitranche financing facilities (MFFs) to IIFCL with a combined total amount of $1.9 billion: (i) the India Infrastructure Project Financing Facility (IIPFF I) for $500 million, 5 (ii) the Second India Infrastructure Project Financing Facility (IIPFF II) for $700 million, 6 and (iii) the Accelerating Infrastructure Investment Facility in India (AIIFI) for $700 million. 7 These MFFs are part of ADB s support to mainstream PPPs in India (Table 1). 3 Viable projects include those that will become viable after receiving viability gap funding under a government scheme. The Government of India launched the Viability Gap Fund in 2005 to attract private investment into infrastructure projects that are economically justified but not commercially viable on user fees alone. Secretariat for PPP & Infrastructure Financial Support to Public Private Partnerships in Infrastructure. 4 IIFCL formulated a Takeout Finance Scheme for Financing Viable Infrastructure Project, which came into effect in April 2010.Takeout financing is an accepted international practice of releasing long-term funds for financing infrastructure projects. It can be used to effectively address asset-liability mismatch of commercial banks arising out of financing infrastructure projects and also to free up capital for financing new projects. 5 ADB Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility for the India Infrastructure Project Financing Facility. Manila (MFF 0017-IND, approved 14 December, $500 million). 6 ADB Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility for the Second India Infrastructure Project Financing Facility. Manila (MFF 0037-IND, approved 31 December, $700 million). 7 ADB Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility for the Accelerating Infrastructure Investment Facility in India. Manila (MFF 0077-IND, approved 27 September, $700 million).

11 3 Table 1: ADB s and Guarantee Facilities to India Infrastructure Finance Company Limited Amount ($ million) Rate of Interest Tenor (years) MFF ADB Board Approval IIPFF I Tranche 1 20 December month US dollar LIBOR + 20 bps 25.0 Tranche 2 24 February month US dollar LIBOR + 20 bps 25.0 IIPFF II Tranche 1 27 November month US dollar LIBOR + 20 bps 25.0 Tranche 2 7 December month US dollar LIBOR + 30 bps 25.0 Tranche 3 1 December month US dollar LIBOR + 40 bps 25.0 AIIFI Tranche 1 21 October month US dollar LIBOR + 40 bps 19.5 Guarantee ADB Board Approval Guarantee Amount Availability Partial credit guarantee 20 September 2013 Rs7,168 million a 3 years ADB = Asian Development Bank, AIIFI = Accelerating Infrastructure Investment Facility in India, bps = basis points, IIPFF = India Infrastructure Project Financing Facility, LIBOR = London interbank offered rate, MFF = multitranche financing facility. a Principal plus interest; ADB guarantee will not exceed 50% of the participating financial institutions exposure. Source: Asian Development Bank. 9. IIPFF I was fully disbursed by IIFCL to fund 30 PPP subprojects, including two major international airports the Delhi International Airport and Mumbai International Airport. It was financially closed on 26 August IIPFF II was fully disbursed by IIFCL to fund 20 PPP subprojects in roads and power ahead of the target closing date of December On the other hand, AIIFI is still under implementation and aims to support PPP through (i) direct onlending, in the form of both senior and subordinate debt to subprojects in line with IIFCL s mandate; and (ii) takeout financing (footnote 4). AIIFI also broadens the scope from previous MFFs to include renewable and clean energy projects and initiatives in the lagging states of India. About $94 million has been disbursed under AIIFI tranche 1 since it became effective on 21 February Moreover, ADB provided a partial credit guarantee facility to eligible domestic financial institutions providing credit enhancements for infrastructure project bonds in India. ADB is supporting IIFCL by providing a backstop guarantee facility of up to 50% of IIFCL s underlying project risk to cover four to five projects in the pilot phase. 8 IIFCL and ADB had discussions and meetings with stakeholders, including project developers, bond investors, rating agencies, regulators, banks, and financial institutions, to promote this product. Pilot transactions may be undertaken to support credit enhancements of two proposed project bond issues. 9 IIFCL and ADB, with assistance from Ernst & Young (India), organized a road show in Delhi and Mumbai in May 2014 to assess the market s appetite for ADB credit enhancement of project bonds facility and identify potential transactions. 11. Relationship with other lenders. Table 2 provides a summary of IIFCL s long-term borrowings from other multilateral and financing institutions. 8 ADB Report and Recommendation of the President to the Board of Directors: Proposed Guarantee Facility for the Credit Enhancement of Project Bonds in India. Manila (Investment 7360-IND, approved 20 September, $128 million). 9 Discussions between IIFCL and ADB are ongoing for the use of ADB partial credit guarantee to support proposed project bond issues, including the GMR Jadcherla Expressways and Vadodara Bharuch Tollways.

12 4 Table 2: India Infrastructure Finance Company Limited: Long-Term Borrowings with Other Lenders (as of 31 March 2013) Lenders Amount Rate of Interest Tenor/Date of Repayment International Bank for Reconstruction and Development $1.195 billion 6-month US dollar LIBOR + variable spread 20 years / 15 April 2037 KfW (loan 1) 16.6 million 0.75% 30 years / 30 June 2050 KfW (loan 2) 33.4 million 4.99% 5 years / 30 June 2020 Life Insurance Corporation of India (tranche 1) Rs10.0 billion 8.56% 10 years/ 1 August 2022 Life Insurance Corporation of India (tranche 2) National Small Savings Schemes Fund LIBOR = London interbank offered rate. Source: India Infrastructure Finance Company Limited. Rs10.0 billion 9.36% 1 February 2027 (bullet repayment) Rs15.0 billion 9.00% 31 March 2023 (bullet repayment) 12. The International Bank for Reconstruction and Development initially provided a line of credit of $1.195 billion to IIFCL that was approved and became effective in November It was restructured in September 2013 due to slow loan utilization, with a disbursement of only about $23 million for a transmission project. 10 With a view to further diversify its sources of long-term funds, IIFCL also signed a financing contract agreement of 200 million with the European Investment Bank on 31 March 2014, which will be used to finance renewable energy, energy efficiency, and other projects that will lead to reduced carbon dioxide emissions. IIFCL also raises long-term resources from the domestic market through a mix of instruments comprising taxable bonds, tax-free bonds, tax-saving infrastructure bonds, and long-term loans from Life Insurance Corporation of India and National Small Savings Schemes Fund. D. Relevance of Design and Formulation 13. India s 12th Five-Year Plan estimated total infrastructure investment requirements at $1 trillion to attain a GDP growth of 9% per annum. Infrastructure investment in India was financed almost entirely by the public sector from the government budgetary allocations and internal resources of public sector infrastructure companies. Private investment constituted around 38% in the 11th plan and this is projected to increase to 50% in the 12th plan. The PPP model is increasingly seen as a means of harnessing private sector investment and seeking operational efficiencies in the provision of public assets and services in India. Government initiatives to enable PPPs included (i) setting up a PPP appraisal committee to streamline appraisal and approval of projects; (ii) establishment of transparent and competitive bidding processes through model bidding documents; and (iii) extending financing support through development funds, viability gap funding, and user charge reforms. In supporting government initiatives for infrastructure development, ADB s continued financial intermediation loan to IIFCL remains important in mobilizing financing for infrastructure projects developed through PPPs. IIFCL was set up to prioritize PPP projects that are implemented by private sector companies selected through a competitive bidding process and bring them to financial closure. 14. The lack of depth in domestic capital markets for raising long-term capital for infrastructure projects is also a major challenge constrained by the absence of benchmark rates and the lack of regulatory reforms for insurance companies and pension funds to mobilize savings to fund infrastructure projects. As such, commercial banks have been the major source 10 World Bank India: Financing Public Private Partnerships in Infrastructure through Support to the India Infrastructure Finance Company Limited Project: Restructuring. Washington, DC.

13 5 of finance for infrastructure projects in India. However, the rapid growth in bank credit to infrastructure financing has resulted in banks having high concentration risks, asset and liability mismatches in their balance sheets, and reaching exposure ceiling limits of the sector. In response, the government enhanced the role of IIFCL in providing refinancing to banks to continue lending to infrastructure and thus assure private sector sponsors that project financing will not dry up on liquidity concerns. In the absence of a large volume of long-tenor funding in the domestic market and a credible financing partner, ADB s continued assistance to IIFCL remains crucial in closing infrastructure gaps in India. In FY2013, IIFCL has participated in 233 successful financial closure transactions sanctioning about Rs319 billion ($5.3 billion) with a total project cost of about Rs3.33 trillion ($55.5 billion). Thus, IIFCL has achieved a leverage ratio of close to 10.5 times its sanctions. 15. ADB s financial intermediation loan to IIFCL complements ADB s sector strategy and parallel initiatives in PPP and capital markets all of which contribute to an enabling environment for long-term financing for infrastructure development. 11 The ADB India country partnership strategy (CPS), emphasized infrastructure development and the country operations business plans over this period focused on energy and transport. 12 The CPS, supports three strategic pillars inclusive growth, environmental sustainability, and regional cooperation and integration, which were also central to the CPS, The CPS, supports the role of financial intermediaries and introduction of financial structures that encourage private sector participation in challenging sectors, provide long-term funding for infrastructure projects, and support the PPP modality With regard to the design and implementation of IIPFF II, using the MFF modality is well suited for PPP as subprojects are typically developed in a phased manner based on project implementation requirements, which can involve long gestation periods. 14 The MFF modality provides IIFCL with the flexibility to release financing in line with subproject readiness based on the achievement of phased benchmarks, including finalization of risk sharing arrangements, readiness of engineering and procurement contracts, and phased released of equity by subproject promoters. Disbursements of a subproject can take place in multiple tranches through time-slicing. 15 Also, the design of IIPFF II ensures project readiness in meeting ADB s environmental and social safeguard criteria for subprojects. The due diligence process for determining compliance with required environmental and social safeguard norms is a process requiring extensive review of documentation, consultation, and site visits. The subprojects are funded under IIPFF only after environmental and social safeguards have been evaluated and certified as compliant by ADB. The performance of earlier tranches served as an indicator to guide the financing of subsequent tranches. The design and monitoring framework is in Appendix 1. A. Lending Policies II. IMPLEMENTATION 17. IIFCL s policy role and operating conditions are governed by SIFTI, which contains certain broad controlling principles with which IIFCL is required to comply. SIFTI outlines the 11 ADB s ongoing TA projects provide crucial support in mainstreaming PPPs through the establishment of PPP cells in selected states and central line ministries and capacity building support for PPP project preparation, appraisal and evaluation skills, building a PPP database, and refining the PPP policy and regulatory framework. 12 ADB Country Partnership Strategy: India, Manila. ADB Country Operations Business Plan: India, Manila. 13 ADB Country Partnership Strategy: India, Manila. 14 ADB Innovation and Efficiency Initiative: Pilot Financing Instruments and Modalities. Manila. 15 ADB Multitranche Financing Facility. Operations Manual. OM D14/BP. Manila (para. 8).

14 6 broad terms in relation to: (i) eligible institutions implementing infrastructure projects; (ii) eligible sectors; (iii)) total lending for non-ppp projects; (iv) lending to project SPVs; (v) the tenor for IIFCL s lending; (vi) disbursement of loans; and (vii) appraisal. Appendix 2 provides a summary of key revisions to SIFTI and those pending before the SIFTI Empowered Committee for approval are in Appendix IIFCL s mandate is to extend financial support to long-term infrastructure projects in consortium with banks and other funding institutions. SIFTI provides the details of the definitions, eligibility criteria, appraisal, monitoring mechanisms, and lending terms for subprojects. In this regard, the subproject project and subborrower selection and approval procedures under IIPFF II were aligned with SIFTI, which included appraisal of the subproject by the designated specialized appraisal agency for technical, economic, and commercial viability, and review and acceptance of the results of the appraisal by the lead bank in the consortium. B. Characteristics of Subloans 19. Subloans were extended under IIPFF II to a range of subprojects subject to submission of a periodic financing request by IIFCL and execution of related loan and guarantee agreements. Projects awarded to private sector companies that were selected through a transparent and open competitive bidding process for development financing, construction, operation, and maintenance through PPP were accorded priority under SIFTI, which also received corresponding sublending priority by ADB under IIPFF II. IIFCL submitted to ADB a list of subprojects identified for financing under IIPFF II, including possible replacements for subprojects not in compliance with ADB requirements. While IIPFF II provided only $700 million, it has catalyzed investments of about $9.1 billion (based on total project costs estimated at Rs548.5 billion) from the private sector for financing 20 subprojects, of which 17 were road projects and 3 were power projects All subprojects funded under IIPFF II were PPP projects. (Appendix 3). C. Implementation and Internal Operations of Subprojects 20. Each subproject satisfied the selection criteria set out in SIFTI, including appraisal for technical, financial, economic, and commercial viability. Each subproject sanctioned by IIFCL was reviewed and approved by ADB prior to disbursement. Each sub-borrower was (i) selected following ADB s Procurement Guidelines (2013, as amended from time to time); (ii) financially sound and able to raise resources, to complete and operate the subproject successfully; (iii) not in default on any prior loan to any participating member of the consortium, including IIFCL; (iv) able to provide security as required by the consortium of lenders; (v) maintaining appropriate financial records of income and expenditure to the satisfaction of ADB and IIFCL; and (vi) in compliance with ADB and national safeguard requirements. 21. Project management and reporting. A project management unit (PMU) supervised the day-to-day implementation of ADB s lending program, including IIPFF II, and was responsible for the identification, screening, selection, and monitoring of subprojects to ensure compliance with ADB requirements, including the environmental and social safeguard framework (ESSF). The PMU maintained a separate record for works, goods, and services financed out of the ADB loan proceeds and for all expenditures incurred under IIPFF II and the subprojects, whether out of loan proceeds or from other sources, and recorded in a transparent manner all funds 16 SIFTI (Revised) can also be accessed at IIFCL website.

15 7 received from the government, ADB, and other sources. 17 Project monitoring was reviewed at three levels: (i) by IIFCL through the PMU (quarterly), (ii) by IIFCL s board of directors (semiannually), and (iii) by ADB (annually). Every project was reviewed annually and a status report was put up to the IIFCL board. Reviews were also carried out in case of significant developments in a project and as part of the preparation process for the availability of follow-on tranches under IIPFF II. IIFCL generally complied with ADB reporting requirements, including submission of annual audited financial statements that were prepared in accordance with the financial reporting framework prescribed under the Companies Act, Safeguards. IIFCL s safeguard capacity improved from its initial years of operations in financing PPP projects, having received substantial support and capacity building from donors (mainly the ADB and the World Bank) in developing its ESSF and establishing an environmental and social safeguard management unit (ESMU). IIFCL s safeguards capacity has considerably improved leading to (i) the adoption and re-disclosure of IIFCL of an enhanced ESSF in 2010 (as one of the conditions precedent in the loan agreement for IIPFF II ); 18 (ii) the establishment and adoption of management information systems in 2010 for effective management of environmental and social safeguards; (iii) the conduct of training and awareness programs for the stakeholders on environmental and social aspects of PPP-based infrastructure projects; and (iv) the mainstreaming of ESSF into IIFCL s credit review process and post-approval monitoring of subprojects. 23. The ESMU monitored compliance with (i) the environmental and social safeguards prescribed by ADB and other development partners, and (ii) environmental impact assessment procedures and other government laws and policies throughout the project cycle. The ESMU consisted of two regular safeguard staff members and two external consultants handling ADB subloans. Currently, the chief general manager of IIFCL oversees the functions of the ESMU, which is expected to increase to seven staff members (including the appointment of a wellqualified head to manage the unit) by end of However, adequacy and sustainability of qualified staff performing the project management and safeguards functions is becoming a concern. The staffing of ESMU is only adequate for ADB sub-loans (about 55 subprojects), but the unit is also tasked with responsibilities for other externally aided loans (e.g., World Bank, KfW), which have increased the unit s workload, and thus affecting IIFCL s overall project monitoring and supervision of safeguard requirements. IIFCL should speed up the process of full staffing for the ESMU and hiring a qualified professional as its head to become more effective. D. Operational Performance Liquidity and funding. IIFCL has a diversified and strong funding profile with access to (i) long-term funding at competitive rates given the government guarantees on a large portion of 17 IIFCL submitted its consolidated audited financial statements, which included funds received from ADB. In addition, a separate statement of subprojects was issued and an audit opinion provided thereon on the adequate use of loan proceeds, which included a listing of subproject beneficiaries for the loan facility. 18 IIFCL updated its 2008 ESSF in October 2010 to reflect the changes made in ADB s Safeguard Policy Statement (2009). The 2013 update incorporated changes in the national safeguard policies to align it with requirements of other development partners. IIFCL uploaded the revised ESSF in its website in July The enhanced ESSF ensured compliance with ADB and the World Bank's environmental assessment process, which includes (i) public consultations and disclosure, (ii) subproject screening and categorization, and (iii) environmental safeguard implementation mechanism such as annual environmental audits. The enhanced ESSF also ensured compliance with involuntary resettlement principles in terms of payment of compensation, assistance to affected people during transition period, income restoration mechanism, and mitigation process related to impacts on tribal populations. 19 Based on IIFCL s FY2013 annual report, publicly available information (including credit rating reports from ICRA, Fitch Ratings, and Standard & Poor s), and discussions with IIFCL management and staff.

16 8 its existing borrowings, mainly from institutions that run the nationalized insurance and saving scheme; (ii) long-term funds through low-cost tax-free bonds and infrastructure bonds; (iii) central bank s foreign currency reserves; and (iii) loans from multilateral agencies. More than 70% of IIFCL s borrowings are guaranteed by the government resulting in low cost of funds as well as good liquidity profile as these funds are raised for long tenure. 25. Management and systems. Since its inception in 2006, IIFCL s operations improved noticeably, establishing in-house expertise on financing, accounting, auditing, human resources, legal issues, and environmental and social safeguards. Both the ADB and the World Bank mobilized grant support for capacity development in IIFCL with respect to resource management, development of integrated risk management system, a management information system, and development of ESSF. To enhance its capabilities in the complex business of infrastructure lending and effectively manage its lending portfolio, IIFCL identified the need to implement an integrated risk management framework (IRMF), which was rolled out in the fourth quarter (Q4) of The IRMF included areas on (i) governance structure, policies and processes and organizational structure, (ii) risk identification, (iii) risk measurement, (iv) risk control, (v) reporting and management information system, (vi) risk appetite framework, (vii) risk adjusted measures and stress testing; and (viii) risk management training. IIFCL also established its own credit policy, which provided the necessary guidelines to cover advances extended to borrowers under the provisions of SIFTI (revised) and guidelines of RBI and in handling credit-related matters. A revised organizational chart is accessible in IIFCL s website. 21 E. Financial Performance 26. During FY2010 to FY2013, IIFCL s credit portfolio grew at a cumulative average growth rate of 35% on the back of strong infrastructure funding requirements. In FY2013, IIFCL had an outstanding portfolio of Rs241,520 million, of which (i) direct lending accounted for 72%, (ii) refinancing exposures for 18%, and (iii) takeout financing and other loans for 10%. IIFCL approved 299 infrastructure projects for Rs518,870 million, an increase of 28% from last year s direct lending sanctions. Given IIFCL s mandate to support infrastructure projects, financial assistance was approved for 219 PPP projects and were largely concentrated in roads and power, which were experiencing a challenging operating environment as a result of the slowdown in Indian economy and sector-specific problems (e.g., delays in project implementation, weakened financial risk profile of project developers). 27. Twenty-one loan accounts with a total principal outstanding amount of Rs28,204 million were restructured and eight accounts with a cumulative principal amount of Rs2,362 million have been declared as nonperforming or substandard assets. However, IIFCL had provisions for loan assets (including nonperforming assets and restructured loans) in the statement of profit and loss for FY2013, in accordance with RBI norms and guidelines. Though IIFCL s reported gross nonperforming asset percentage remained low at 1% in FY2013, a large proportion of IIFCL s exposures are under implementation, thus a repayment track record is yet to be established. Risks are being mitigated with government support to IIFCL, incremental focus on takeout financing and refinancing, and a cautious approach to new lending exposures. Asset quality and solvency indicators could get lumpy in case of slippages given the large loan size of infrastructure projects and could have material impact on IIFCL s profitability. 20 In 2012, IIFCL developed an internal credit risk policy framework (IRMF) based on the credit risk management system developed by CRISIL Risk Infrastructure Solutions supported under ADB TA To improve risk management practices, IIFCL worked alongside Deloitte in finalizing the IRMF, under TA support provided by the World Bank, to strengthen IIFCL s credit, operations, and market risk management (including treasury operations). 21 India Infrastructure Finance Company Ltd. Organisation Chart.

17 9 28. Nevertheless, IIFCL s continued profitability is supported by its low funding costs largely from government-guaranteed borrowings, low operating costs, higher net margins from its lending operations, and regular equity infusions from the government. The government injected around Rs5 billion to IIFCL s balance sheet, bringing its paid-up capital to Rs29 billion as of 31 March 2013 and maintaining its capital structure at a prudent level. Total capital adequacy ratio and Tier 1 capital of IIFCL for FY2013 are 19% and 18.8%, respectively. IIFCL plays a strategic role as a policy instrument for the government in promoting long-term infrastructure financing, thereby benefiting from government ownership and support. IIFCL s credit rating reflects the sovereign rating of BBB rating from Standard & Poor s and Fitch Ratings, and AAA domestic rating. A summary of IIFCL s financial statements and key ratios from FY2010 to FY2013 is in Appendix 4. F. Covenants 29. IIFCL satisfactorily disclosed information pertaining to ESSF, changes to IIFCL s operations and policies, and revisions to SIFTI on the company s website. An auditor s certificate on the use of loan proceeds for FY2013 was submitted to ADB in October 2013 confirming IIFCL s compliance with financial loan covenants. To date, there are no arrears in repayment of IIFCL s current debt obligation. A detailed assessment of the loan agreement covenants is in Appendix On 9 September 2013, IIFCL was registered by RBI as an NBFC-IFC, which meant being formally under the purview and supervision of RBI and required complying with (i) capital adequacy ratio of 12% (with minimum tier 1 capital of 10%); (ii) income recognition, asset classification, and provision norms prescribed for NBFC-IFC; and (iii) reporting and disclosure requirements, including onsite inspection by RBI as and when required. G. Performance of ADB and India Infrastructure Finance Company Limited 31. ADB assisted IIFCL in formulating its safeguard policy and framework in consultation with development partners during its initial years of operations. During the implementation of both IIPFF I and II, delays in the approvals and disbursements of subprojects resulted from lack of staff and capacity within IIFCL on safeguard assessments. To address the shortcomings, ADB provided support through capacity building technical assistance (TA), which included provision of a safeguard consultant and separate training to help build ESMU staff capacity to handle the ESSF review, adoption, and monitoring of the subprojects. 22 Capacity building yielded substantive results with IIFCL now having specialized staff and capacity on these aspects. IIFCL also revised and updated the ESSF in July 2013 to reflect recent legislative and regulatory changes pertaining to environmental and social safeguard policies of development partners. ADB conducted (i) a midterm review mission for IIPFF II in October 2011; (ii) an annual environmental and social safeguards implementation audit in November 2012; (iii) a consultation mission in May June 2013 to appraise the performance and implementation of IIPFF II, as part of the due diligence required for the processing of a third MFF investment program for IIFCL; and (iv) a loan review in October ADB and IIFCL have been working together in partnership and trust; this approach enhanced the project s performance. ADB performance was satisfactory, particularly in achieving its target disbursements and providing a client-oriented approach to doing business. 32. The strong commitment and ownership from IIFCL (and the government) in the 22 ADB Technical Assistance to India for Capacity Development for India Infrastructure Finance Company Limited. Manila (TA 7030-IND, approved 14 December along with 2404-IND for $500,000).

18 10 successful implementation of the project resulted in (i) full disbursements well ahead of the target closing date; (ii) continuous improvement in the quality of its credit appraisal and risk management systems; (iii) updating of its ESSF to align with national development partners requirements; (iv) hiring of professional and experienced staff to handle project management and ESMU; (v) IIFCL s compliance with existing loan and project covenants; and (vi) the extent of IIFCL s engagement with ADB to partner with other initiatives (such as takeout finance and project bond guarantees) all of which led to an IIFCL performance rating of satisfactory. III. EVALUATION A. Appraisal 33. Distribution of subloans. IIFCL supported PPP projects, particularly with ADB interventions, under the MFF programs. IIPFF II, an MFF comprising three tranches, funded 20 PPP subprojects (i.e., 17 on roads and highways, 1 on power generation, and 2 on power transmission) following the subproject and sub-borrower selection criteria as defined by SIFTI and ADB. Individual loan proceeds under IIPFF II were disbursed in accordance with ADB s Disbursement Handbook (2012, as amended from time to time). Appendix 6 summarizes the disbursement performance status of IIPFF II. 34. Covenants. The covenants and other undertakings in place between IIFCL, the government, and ADB in relation to IIPFF II are satisfactory. ADB required IIFCL to update its ESSF to reflect changes in safeguard requirements for compliance under national law and with ADB requirements. The updated ESSF was approved by the board of IIFCL and subsequently uploaded in its website on 4 October Quality of appraisal. IIFCL extends financial assistance to a subproject as a participating lender in a consortium with banks and other funding institutions. While IIFCL was required to utilize the appraisal and due diligence of the lead bank(s), IIFCL has a credit policy in place to carry out its own due diligence appraisal to assess the viability of infrastructure projects by undertaking technical feasibility, bankability, and risk identification and mitigation measures. Also, an independent due diligence was carried out by IIFCL with respect to the promoters credentials and validation of the credit reports of the lead bank and other financial institutions. IIFCL submitted the project information memorandum (subproject feasibility study), subloan evaluation form, and safeguard due diligence report for each subproject mentioning the compliance with loan covenants, ESSF, applicable national and state policies, laws and regulations relating to environment, resettlement, and indigenous peoples. ADB reviewed all subproject documents and conveyed its approval after being satisfied that the subproject complied with all the requirements. B. Implementation 36. Overall, the implementation arrangements for IIPFF II were conducted in such a manner that (i) the subprojects and sub-borrowers were selected in accordance with SIFTI and ADB s agreed selection criteria, and following ADB s Procurement Guidelines (2012, as amended from time to time); (ii) the subprojects underwent comprehensive environmental and social safeguard due diligence and prepared the necessary ESSF and updates compliant with applicable ADB and national environmental and social safeguard policies and requirements; and (iii) the subprojects complied with financial management eligibility criteria, including the need to ensure 23 IIFCL Environmental and Social Safeguards Framework. The environmental and social safeguard audit reports and compliance matrix for IIPFF II are currently under preparation by IIFCL and will be disclosed in the ADB website upon receipt, review and approval by ADB safeguards team.

19 11 that legal agreements include appropriate provisions for subproject accounting, statutory audit, and submission of certified utilization certificates before each disbursement and report. 37. The lead bank was responsible for regular monitoring and evaluation of compliance with the agreed milestones. However, with the rollout by IIFCL of its IRMF (para. 25), monitoring and supervision were covered under the credit policy to (i) keep track of progress in project performance; (ii) ensure that terms and conditions stipulated at the time of sanction are being complied with; (iii) monitor whether the activity schedule is being executed in a timely manner and for cost overruns (if any); and (iv) assess the early signals of warning of slippages in project performance. Constant off-site surveillance was maintained through periodic progress reports by lenders independent engineers on project execution, status of availability of land and/or land acquisition, likely impediments in implementation, project progress, and overall environment implications. The off-site surveillance mechanism was substantiated by participation in meetings with the consortium of lenders and on-site project inspections. 38. While IIFCL conducted annual reviews of its lending portfolio to assess prepayment issues related to repayment (such as penalties, reset of interest rates and other material changes being effected in the projects after approval, restructuring, refinancing), there was no internal practice for re-rating or risk re-pricing of the subprojects and subloans. As IIFCL continuously evolves and ventures into more complex and innovative financing structures and diversifying into challenging sectors, it is imperative that IIFCL continuously strengthen its internal credit and risk management capacities, policies and processes, and portfolio monitoring to avoid the erosion of asset quality and maintain its competitive advantage in infrastructure financing. IV. ASSESSMENT AND RECOMMENDATIONS A. Relevance 39. IIPFF II is highly relevant in the context of India and ADB s country strategy. India s 12th Five-Year Plan estimated total infrastructure investment requirements at $1 trillion, of which 50% is expected from the private sector if the target is to be met. Against the backdrop of significant Indian rupee depreciation caused by the current account deficit that stood at 4.9% of GDP in , infrastructure investment requirements are estimated to rise above $1 trillion. The infrastructure funding gap during the 12th plan is likely to exceed estimates of $300 billion and this shortfall is projected to be sourced from the private sector through PPP. 40. Critical to India s growth strategy in the aftermath of the global financial crisis was the need for stimulus package as a counter-crisis measure. IIPFF II was processed and implemented during the time when liquidity in the international markets was tight and investor interest in long-term instruments was low. ADB s financial intermediation loan to IIFCL was crucial as (i) IIFCL was the only provider of long tenor funds in the syndicate lending for infrastructure projects; and (ii) IIFCL s participation successfully led to infrastructure projects reaching financial closures. In FY2013, IIFCL participated in 233 financial closure transactions sanctioning about Rs319 billion ($5.3 billion) with a total project cost of about Rs3.33 trillion ($55.5 billion). Thus, IIFCL achieved a leverage ratio of close to 10.5 times its own resources. 41. IIPFF II is part of the government s integrated PPP development strategy and draws on extensive ADB support for infrastructure development. IIFCL is well-positioned to finance PPP subprojects emerging from ongoing ADB support for mainstreaming PPP in India. The development of PPP subprojects by project developers and funding by a consortium of investors and lenders, including IIFCL, ensures deepening of project preparation and financial skills in the country. ADB is likewise uniquely placed to finance PPP subprojects by offering financing