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."