Emerging Options in Urban
Infrastructure Financing
a presentation by
Pankaj Jain
Chairman and Managing Director
Housing and Urban Development Corporation Ltd
at CITYSCAPES 2002
Global Convention on Agenda for Urban
Infrastructure Reforms
Organised by
FICCI
Delhi
21st October, 2002
Urban Infrastructure Scenario
in India
Urban Population
Coverage (%)
Availability Deficiency
Protected Water Supply 84 16
Sewerage & Sanitation 46 54
Latrine 69 31
Refuse Collection/ Disposal 72 28
Electrification 75 25
1991 Census
Urban Infrastructure Scenario
in India
• According to estimates of the Rakesh Mohan
Committee total requirement for urban infrastructure
development covering backlog, new investments and
O&M costs for the next ten years is Rs. 2,50,000
Crores (US$ 57 Billion)
• The ninth Plan identified only around Rs. 12000
Crores. With anticipated growth in Tenth plan
providing additional funds of Rs.13,000 Crores, the
total expected plan outlay comes to Rs. 25,000 Crores
(US$ 5.7 Billion).
• Funds for UI development fall short by more than 10
times the requirement
The Vicious Circle
Low Level of
Infrastructure
Low Service
Low Level
Investments
Low
Equilibrium
Cycle
Low
Low Maintenance
Collection/
Recovery
Low Capacity
to Pay
Major Concerns in Urban Infrastructure
Sector
• Insufficient financial and managerial resources with
Urban Local Bodies / parastatals / utilities
• Institutional delinquencies and high administrative
overheads
• Inadequate coverage and service level
• Low quality of service and lack of consumer
orientation
• High non-revenue component
– wastage
– pilferage
– unaccounted-for losses
– free riders
• Inefficient operation and maintenance
• Poor monitoring and cost recovery
• Unsustainable resource management practices
• High capital and maintenance costs
Issues Involved in Infrastructure Financing:
Financial Institution‟s Perspective
ISSUES:
• Asset liability mismatch - short term borrowing vs.
longterm funding.
• Large volume of resources for capital intensive projects
• Lock-up of funds in specific large projects.
• High risk involved in greenfield ventures
• Non-uniformity in appraisal, guidelines and documentation
requirements
• Lack of tangible security and partial or nil recourse basis
of funding projects.
• Norms restricting exposure to individual agencies.
RISKS:
• Political risks & Implementation risks.
• Risks of default by borrowing agency
• Risks of prepayment in falling interest rate scenario
• Foreign Exchange Risks and currency fluctuations
Alternatives in service delivery and innovations in
resource mobilisation explored by Financial Institutions
Risks in Infrastructure Projects
• Market Uncertainties Operational Risks
– Varying Demand - Tariff and cost recovery
– Fluctuating Prices / Land
value
• Procedural Hurdles Political Risks
– Land acquisition - Policy Changes
– Land transactions
– Development permissions - Conflicting political
/ Operational permits interests
• Construction Risks Judicial interventions
– Price escalation & cost - Court orders / directives
over-runs
– Time over-runs - Regulatory Authority
– Labour unrests
Need for Alternative Models
• Government / local administration/ public agencies /
parastatals are unable to meet the increasing demand of
infrastructure and services
• In view of physical and financial resource constraints and
concerns of equitable distribution, supply has not been
keeping pace with demand.
• Need for alternative models involving:
– Commercialisation to ensure cost recovery &
sustainability
– Privatisation to bring in finance, technology &
management capacity
– Community participation to ensure responsiveness and
sense of ownership / involvement
– Alternative Guarantee mechanisms and Securities
– Regulatory authorities to ensure integration and co-
ordination
Need for Alternative Securities for Urban
Infrastructure Financing
• Mortgages not viable as securities in UI projects
• Non-availability of government guarantees due to limits
prescribed by RBI
• “Letters of comfort” not legally acceptable security
option
• Bank guarantees/ Corporate Guarantees/ Personal
Guarantees are limited and the projects are capital
intensive.
• Negative lien could be considered only as a transient
security instrument
• Escrow accounts enhance transparency of the cash-
flows and ensures sufficient balance for immediate
repayments. However involves administrative costs and
monitoring is difficult.
• Need for alternative security mechanisms and partial or
non-recourse financing.
Budget 2002-03 – Incentives for
Infrastructure Sector
• Urban Reform Incentive Fund of Rs. 500
crores contribution to help urban local
bodies in implementing reform agenda.
• Proposed City Challenge Fund to enhance
the credit worthiness of urban local bodies
• Pooled Finance Mechanism and
enhancement of municipal tax-free bonds
from Rs 200 crores to Rs 500 crores to
facilitate resource mobilisation
• Infrastructure Equity Fund of Rs. 1000 crores
for encouragement to projects would help
support taking up infrastructure projects
Urban Reform Incentive Fund
• Urban Reform Incentive Fund of Rs. 500 crores
contribution to help States and urban local bodies in
implementing reform agenda
– Revision of Rent Control Laws
– Repeal of Urban Land Ceiling & Regulation Act
– Rationalisation of Stamp Duty
– Revision of Building Bye-Laws
– Revision of Municipal Laws in line with Model Legislation
– Simplification of procedure for permitting conversion of
land for non-agriculture purposes
– Levying realistic user charges
– Initiation of Public-Private-Partnerships in civic services
Action being taken to enter into Memorandum of
Agreement with the State Governments for
implementing the reform agenda in a phased manner.
City Challenge Fund
• City Challenge Fund –a city-level economic
reform program to enhance the credit worthiness
of urban local bodies on a competitive basis.
• Incentive based grant facility for meeting
transition costs of implementing institutional
systems of municipal management and service
delivery.
• Funds to be provided on a competitive and
demand-driven basis, subject to strict criteria for
eligibility and award, detailed on-site assessment,
clear disbursement milestones and strict
monitoring.
• Independent professional groups for the
assessment and monitoring of the plans.
• MoUD&PA to operationalise CCF by end of 2002
Infrastructure Equity Fund
• Infrastructure Equity Fund of Rs. 1000
crores to be set up under IDFC for
facilitating investments into projects.
• Institutional mechanism for co-ordinating
debt financing by FI‟s and Banks of
infrastructure projects above Rs. 250
Crores
• IDFC to co-ordinate in association with
IDBI and ICICI involved in debt financing.
Tax-free Municipal Bonds
• Budget has enhanced the limit of municipal tax-
free bonds from Rs 200 crores to Rs 500 crores
Problems faced by ULBs in raising Municipal Bonds:
• Since bonds are raised within a short period
whereas their utilisation may involve 2-3 years,
the States/agencies tend to fall into debt trap
• On account of the dire financial position, Credit
Rating of ULBs need to be enhanced to enable
raising funds at lower costs.
• Smaller Towns and cities unable to access the
capital market on account of inadequate
capacity and high transaction costs.
Pooled Finance Mechanism
• Pooled Finance Mechanism to facilitate resource
mobilisation by Urban local bodies
OBJECTIVES:
• Credit enhancement, creating Structure for Pooled
Financing, provide technical and capacity support, and
leverage urban reforms.
• Facilitate smaller towns and cities to access capital
markets
• Effective reduction in transaction cost owing to
economies of scale.
• Incorporating Special Purpose Vehicle for pooling
projects of various ULBs under a single umbrella.
• Liabilities and obligations for the loans to remain with the
repective towns.
• During 2001-02, Ahmedabad Municipal Corporation raised
Rs. 100 crore and Hyderabad Municipal Corporation
raised Rs. 82.50 crore.
Innovative Resource
Avenues in
UI Financing
Consortium financing /
Group lending
• For capital intensive projects and greenfield ventures
beyond lending capacity of single financial institution
• Pooling of resources for funding the project.
• Ensures sharing of the risks involved.
• Needs rationalisation and standardisation of appraisal
procedures, lending guidelines and legal documentation
of the constituent financial institutions
• Need for pari passu charge on the escrow account as
security to the partner institutions.
• Desirable to provide a single window facility based on
tripartite or joint agreements with the borrowing agency.
Takeout Financing
Transfer of Fees / • Liabilities of primary
Loan Commitment lender on project
Accounts Charges absolved at the end
of a specified period
• Partner institution
Primary Partner Institution transfers pertinent
Lender loan accounts to its
own books, in lieu of
an agreed fee or
commitment charge.
Outstanding Loan Amt.
(Principal + Interest) • Both parties bear the
5 years 10 years project risks after the
take-out based on a
non-recourse
structure.
TENURE OF LOAN • pari passu charge on
(15 years) the escrow account
as security option.
Securitisation of receivables
• Conversion of future cash receivables into financial or
debt instruments tradable in capital market
• Role of SPV as intermediary:
– assumes the entire credit risk on the securitised receivables of
selected outstanding loan portfolio
– Insulates the lender from bankruptcy & insolvency risks
– repackages the receivables into pass-through certificates of
manageable lots for onward trading in the secondary market.
– Principal and interest components of the repayments are
passed on to the security owner.
• Merits to Investor:
– Continuous cash flow on Securitised instruments over the life of
the loan and principal “depletes” over time.
• Advantages to Lending Institution:
– reduces the locking up of funds in a few projects.
– facilitates reduction in borrowings
– ensures better asset-liability management.
– provides efficient exit option for the financial institutions to
transfer the risks of default and prepayment
Securitisation of Receivables
Loan
Lending
Institution Borrower
Repayments
Outstanding
Loan Pass Through
Portfolio Certificates
SPV Investors
Fees
Periodic Cash Flows
Sub-ordinate (Mezzanine)
Debt Financing
• Quasi Equity Instrument with Flexible maturity
and payment terms
• Interest rates could be higher than normal loan
with longer tenor
• Could repay the loan after meeting all secured
debt obligations
• Loan could be considered as deemed equity
for a specific period granting the borrower
better financial leverage
• Option for Debt to be converted to equity at a
later date
Cashflow Financing
• Institutional funding to be tailor-
made to suit the cash-flow/ financial
requirements at various stages of
the project
• Lenders could estimate cash-flow
over life-time of the project to
assess the Individual Debt
Packages and the rates of interest
Project Initialisation Fund/
Project Initiative Fund /
Project Development Fund
• PIF/PDF for creation of well structured projects
– Technically viable
– Financially feasible and bankable
– Environmentally sustainable
• HUDCO would fund 100% of the formulation cost upto a
maximum of Rs. 5 Crores per project and Rs. 50 crores per
year.
• HUDCO has already assited
– Feasibility study for alternate alignment of National Highway
connecting Jammu and Srinagar with support of Rs. 2.3 Crores
– Preparation of detailed design and Bid documents etc. for the
Sports Stadia at Hyderabad for the 7th National Games 2002.
Financial assistance of Rs. 2.5 Crores provided to the Sports
Authority of AP
Emerging State Level Initiatives for
Financing Urban Infrastructure
• State Level Urban Development Funds like TNUDF
& MUDF in Tamilnadu Maharashtra, for
facilitating private sector participation bringing in
commercial orientation, improving financial
management , assisting ULBs accessing capital
markets.
• State level urban development Finance
Corporations formed
– APUFIDCO - TUFIDCO
– KUDFC - KUIDFC
– Gujarat Municipal Finance Board
• Tax intercept concept introduced in Madhya
Pradesh by setting apart a fund for debt servicing
of urban local bodies.
FDI in Infrastructure
• Foreign Direct Investment(FDI) possible through:
– Financial Collaborations
– Joint Ventures / Technical Collaborations
– Capital Markets via Global Depository Receipts (GDRs / Euro
issues)
– Private Placements or Preferential Allotments
• In India, FDI upto 100% permitted in airports (beyond
74% with approval) and Mass Rapid Transit Systems.
• FDI upto 100 % permitted in
– Integrated township development including housing,
commercial premises, hotels, resorts
– City and regional urban infrastructure facilities
– Manufacture of building materials
– Development of Land with allied infrastructure as
part of integrated township development
Special Economic Zones
• Proposal to set up Special Economic Zones (SEZ) in
various parts of country as duty-free zones for
industrial, service and trade operations to attract
foreign investment and facilitate expeditious
development.
• The policy envisages the treatment of SEZs as priority
areas in provision of infrastructure, convergence in
statutory clearances, exemption from duties and levies
as well as liberal regulations.
• SEZs industrial townships would open new
opportunities for integrated provision of infrastructure
facilities.
Increased emphasis on
Commercialisation and
Private Sector Participation
in Urban Infrastructure
Commercialisation to Privatisation
• It is essential to ensure cost recovery and sustainability of projects
through appropriate user pay instruments
• Need for unbundling of projects to facilitate private participation
Illustrative List of Potential Unbundling Packages
• WATER SUPPLY
– Water resource management & Development of source
– Treatment of water and bulk supply -Water Purchase Agreement
– Distribution / Operation and Maintenance (O&M)
– Billing / Collection
• SANITATION
– Sewerage network (collection system)
– Pumping Stations(Installation and O&M)
– Disposal system - Through taxes (on the basis of water consumed)
Commercialisation to Privatisation:
Illustrative List of Potential Unbundling Packages
SOLID WASTE MANAGEMENT
• Collection
• Separation and treatment
• Distribution of by-products (scrap material, manure,
fuel pellets & bio-gas)
URBAN TRANSPORT
• Development of urban mass transit systems
• Operation and maintenance of urban mass transit
systems
• Development and maintenance of terminals
• Operation of bus and intermediate public transport
(IPT) systems
• Construction and maintenance of toll bridges
• Construction and maintenance of parking facilities
Some Innovative „User pay‟ Instruments to
ensure cost recovery
Infrastructure Type Innovative user pay Instruments
• Water Supply - Advance registration charges, Connection
charges, Enhancement of water tariff, Water
benefit tax/water tax, Betterment charges,
Development charges, Utilization from other
sources such as octroi, property tax, sale of
plots etc. and Charges from water Kiosks
• Sewerage - Connection Charges, Sewerage Cess Tax,
Conservancy Tax, Sale of Renewable waste,
Sale of Sludge and Sale of Nutrient rich
wastewater.
• Solid waste - Collection Charges, Cess, Sale of Renewable
waste, and Fines for dumping waste.
• Roads/Fly-overs/ - Toll Tax, Land as a Resource and Advertising
Bridges
• Airports/Rly. Stations/ - Surcharge on tickets,using land as resource,
Bus Terminals Toll Tax, User, Charges for transportation
terminals and advertising rights.
Private Sector Participation in Urban Infrastructure
The need for Private
Sector Participation to
bring in:
• ADDITIONAL RESOURCES
• STATE-OF-THE-ART
TECHNOLOGIES
• EXPERTISE IN PROJECT
MANAGEMENT / O&M
Privatisation experience in India in
Solid Waste Management
• ENBEE Infrastructure
Ltd. on BOO basis in
Nagpur
• M/s Excel Industries –
Bio-degradation of solid
waste in
– Vijayawada, Calcutta,
Mumbai, Bhopal,
Bangalore, Gwalior,
Cochin & Calicut
• M/s CELCO in
Hyderabad
• Common hospital waste
treatment plant by GJ
Multiclave in Hyderabad
• Compost plant by IVR
Enviro at Tiruppur
Privatisation experience in Transportation
• Pali Bye-pass, Rajasthan - TCI
Infrastructure Ltd
• Coimbatore Bye-pass (L & T)
• Karur Bridge on BOT basis by
East Coast Constns &
Infrastructure Pvt. Ltd.
• Kemptee-Kalamana Toll Road in
Nagpur
• Karur Bridge on BOT basis
• Faridabad Byepass
• NOIDA Toll Bridge Company
• Cochin International Airport
in Joint Sector by CIAL
• Bangalore Airport
• Ports – Pipavav, Positra, Adani,
Kakinada, Ennore, Cochin, Mumbai
State Govt. Initiatives to Facilitate
Private Participation
GUJARAT:
• Gujarat Infrastructure Development Board set up.
• Model BOT Law : Gujarat Infrastructure Development Act – 1999
– Gujarat the first State to formulate a separate act
– Draws from the model of overarching BOT regulation in
Philippines
• Authorises the Govt./agencies to enter into concession
agreements
• Provides a list of various forms of assistance to be provided
to the developer including exemption of taxes etc.
• Competitive bidding mandatory for ensuring transparency
• The concession agreement to prescribe the user fee to be
charged by the developer
State Govt. Initiatives to Facilitate
Private Participation
ANDHRA PRADESH
• Infrastructure Development Enabling Act (IDEA) adopted.
• Infrastructure Authority has been set up in Andhra Pradesh
Envisaged Roles of Infrastructure Authority:
– Conceptualisation/ identification/ Processing/ Prioritisation of
projects
– Mobilising public opinion
– Monitoring and approval of the bidding process
– Implementation of public private partnerships
– Preparation of project schedule/ Approval of TOR for
consultancy
– Budgeting and financial allocation
– Tariff fixing, user/abuser charges and cost recovery
– Expediting clearances and permits
– Supervision over implementation and project management
• Proposes a “Swiss Challenge Approach” for evaluating the single
bid projects.
Vicious Circle to Virtuous Cycle
High Level of
Infrastructure
High Service
Higher Level
Investments
High
Equilibrium
Cycle
Higher level
High Maintenance
Collection/
Recovery
Higher
Willingness
VS/ KS to Pay
HUDCO
Established In 1970 as a
Techno-financial Institution
(As a fully Owned Govt. of India Enterprise)
Urban Infrastructure Financing Window
Opened in 1989-90
HUDCO: PROGRAMMES
• URBAN INFRASTRUCTURE
– Land Acquisition
– Integrated Land Acquisition & Development
– City Level Urban Infrastructure
for Water Supply, Sanitation, Sewerage, Drainage, Solid
Waste Management,Transportation etc.
– Social Infrastructure Schemes
– Commercial Schemes
– UI Project Initialisation Funding
HUDCO: URBAN INFRASTRUCTURE FINANCING CROSSES Rs
20524 Cr. (US$ 4.2 B)
Type of Scheme No. Project Loan (US)
Cost Amt. (M$)
UTILITY INFRASTRUCTURE (Rs. in Crore)
– Water Supply 344 18689 7032 1465
– Sewerage, Drainage & Sanitation 71 2816 1777 370
– Low Cost Sanitation 1039 1559 560 117
– Solid Waste Management 18 637 330 69
– Transport Nagar/Terminals 27 2350 797 166
– Roads/Bridges 101 7147 4077 849
– Airports/Ports 8 850 725 151
– Area Development & IDSMT 133 13409 2068 431
SOCIAL INFRASTRUCTURE 128 3902 2593 540
ECONOMIC INFRASTRUCTURE 77 1660 770 160
TOTAL 1947 53057 20524 4276
(US$ 4.2 B)
Thank You
for your
kind attention
Partnering Co-operation for
Sustainable Human Settlements
Swiss Challenge Approach
• In case of unsolicited projects proposed suo
motu by private entrepreneurs / companies
or singular bids, the AP-IDEA stresses on the
need for evaluation of the merits of the
proposal to ensure fairness, impartiality and
cost effectiveness.
• Provision for Swiss Challenge approach,
where the claims, veracity and global
competitiveness of the proposal could be put
to open test by inviting competitive proposals
from other market players