IDFC, established in 1997, is today one of India's leading financiers of infrastructure projects. As on December 31, 2011, IDFC's loan book across all infrastructure sectors was over 489 billion ($9.8 billion) and till date the company has provided financial assistance totalling around 130 billion (approximately $2.6 billion) to more than 50 highway projects in India. Of the projects financed in the recent past, the following two projects are notable for their size, complexity and financialstructuring. Sanjay Grewal, Group Head - Project Finance, IDFC

Conceptualised in the mid- 1990s, this integrated PPP infrastructure project comprises a 54-km access controlled, grade-separated ring road (with links and interchanges with other important arterial roads) around the periphery of India's IT hub, an 111-km expressway between Bangalore and the neighbouring city of Mysore, and well-planned townships along the expressway and at the interchanges. The Government of Karnataka, through a Framework Agreement and Toll Concession Agreement signed in 1997, has granted the concession for this project to a group which is majority owned by the promoters of Bharat Forge, a diversified engineering group.

Bangalore-Mysore Infrastructure Corridor
The concession period for the road components of the BMIC project is 40 years (including a construction period of 10 years). The investment in the project is recovered through a combination of the tolls and development rights in the townships. The following schematic describes the various entities involved in the project.

Considering the overall size of the BMIC project, Nandi Infrastructure Corridor Enterprise (NICE), the project development company, is adopting a stage-wise approach and has set up a separate SPV, Nandi Economic Corridor Enterprises Ltd (NECE), for undertaking Stage-1 of the BMIC project. A tripartite agreement was executed by NICE, NECE and GoK assigning the rights for development of the Stage-1 in favour of NECE.

In Stage-1 of the project, the entire ring road with links/interchanges, 13 km of the expressway and about 1,800 hectares of modern townships would be developed. While the ring road is largely complete and is being tolled since December 2008, the expressway and townships are now beginning to be developed. Land for the project is being acquired by GoK using the land acquisition procedures under the Karnataka Industrial Areas Development Board (KIADB) Act.

The total investment in Stage-1 would amount to about 24.5 billion (approximately $550 million). IDFC was mandated by the sponsors to raise 16,500 million (approximately $365 million) of project finance debt for the project. According to Sanjay Grewal, Group Head - Project Finance at IDFC, "While structuring the project financing for the project, which has a tenor of 14.5 years, IDFC had to take into account the changing road transportation and urban development patterns that would be triggered by this project for which specialised studies were undertaken. The loan structure is such that the exposure of the lenders to real estate sector risk is low."

In addition to servicing the debt, the project also needs to generate internal accruals for investment in the remaining stages of the project. The loan has been structured in such a manner that a significant portion of the loan can be serviced through the toll revenues itself. Any surpluses will be used for an accelerated pay down of the debt in a pre-defined manner before reinvesting in the subsequent phases. These provisions are operationalised through the Escrow accounts through which all the cash flows of the project are to be routed.

The state government has established a dedicated authority to plan and regulate the development of the project. The project concession also envisages a mass transit system and other urban infrastructure like water/wastewater and power infrastructure along the corridor at a later date. The well-planned townships would cater of industrial, commercial, corporate and residential uses and help decongest the city. This project gives Bangalore an opportunity to continue its growth in a well-planned and systematic manner.

This project is an example of a project conceptualised and driven entirely by the state government. States in India have been actively pursuing the PPP route for developing their highway networks. The states of Gujarat, Andhra Pradesh, Karnataka, Maharashtra and Madhya Pradesh have the early entrants in this field. More recently, other states like Punjab, Haryana and Bihar have also started bidding out PPP projects.

NH-1A between Jammu and Udhampur
The NH-1A is the lifeline of Jammu & Kashmir. The highway traverses through the difficult terrain of the Himalayan mountain range. There was an urgent need to upgrade this landslide and accident-prone two-lane highway to a modern four-laned highway with divided carriageways that facilitates safe and speedy travel. The Government of India took the decision to develop this stretch through PPP.

After following a competitive bidding process, one 65-km stretch of the highway costing 24 billion ($530 million), between Jammu and Udhampur, was awarded by the National Highway Authority of India to Shapoorji Pallonji & Company Ltd (SPCL), a large Indian construction company, on BOT (Annuity) structure for a concession period of 20 years (including the construction period of three years). On completing the construction of the project, NHAI would pay an annuity of approximately $45 million semiannually to SP Jammu Udhampur Highway Pvt. Ltd (the SPV developing the project).

The project has many technical challenges including building new tunnels totalling almost 3 km, 59 major and minor bridges, 12 underpasses, 20 km of new road alignments and 17 km of service roads, all in mountainous terrain. SPCL has awarded a fixed-price, fixed-time EPC contract to Afcons Infrastructure Ltd. Afcons has considerable experience in constructing bridges and in tunneling in mountainous regions and is handling a large construction contract for the Indian Railways in J&K.

According to Sanjay Grewal, Group Head - Project Finance at IDFC, "The key risk in such a project is the risk of construction delays. The support from the sponsors to fund cost overruns and an appropriate repayment moratorium of two years, adequately addresses this risk for the lenders."

IDFC, and Standard Chartered Bank, as the joint Mandated Lead Arrangers, have achieved financial closure for a 21,600 million (about $480 million) project finance loan for the project. The debt is a combination of foreign currency ($350 million) and local currency (INR, equivalent to $130 million) loans. Standard Chartered Bank has underwritten the USD component, while IDFC has underwritten the INR portion. The USD loan has a bullet repayment at the end of 6.5 years and this exposes the project to a potential refinance risk. However, this risk has been mitigated by using innovative financial structures and instruments. The refinance risk is also mitigated by a welldeveloped bond refinancing market in India, in which such projects, post-construction, attract many investors due to the strong credit rating of NHAI. The doorto- door tenor of the INR project finance loan facility is 18 years.

Given that the project's construction costs and revenue would be rupee, while 73 per cent of the debt is in dollar, there was also a foreign currency risk that had to be addressed. The risk during the construction period is from an appreciation of the Rupee, while post-construction, the risk is from a weakening of the Rupee. An additional uncertainty was that the interest payments during the construction phase cant be predicted accurately because the construction and drawdown of the loans can be affected by delays. These risks have been addressed through appropriate hedging. An additional benefit of having a large part of the loan in USD is that instruments are readily available for hedging the interest rate of USD LIBOR-linked loans, whereas presently in India, INR loans can be hedged only with considerable difficulty. Thus, the sponsors are able to reduce the interest rate risk on a majority of the debt

The lenders have a Substitution Right granted by NHAI under the concession agreement and a tripartite substitution agreement, which can be used by the lenders to appoint a substitute in place of the concessionaire in the event of a default to the lenders. In addition, all cash flows of the project are escrowed and are utilised in a pre-defined sequence of priorities. In the event that NHAI seeks to terminate the concession, it is required to pay the termination payments into the escrow account.

Sanjay Grewal further added, "Indian financial regulations prohibit foreign currency borrowings with maturities shorter than 5 years. At the same time, the pool of longer tenor USD loans available to Indian companies for infrastructure projects is much more restricted. Hence, innovative structuring was required to balance these constraints. The combination of foreign currency and INR debt helps the sponsors to lower the financing costs and enhances returns from investment. The structure innovatively addresses the cost over-run risk, refinance risk, foreign exchange risk and interest rate risk."