india: second india infrastructure project financing facility · 2014-10-02 · 2. summary of key...

Completion Report

Project Number: 41036 Loan 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.

CURRENCY EQUIVALENTS

Currency unit – Indian rupee/s (Re/Rs)

At Appraisal At Project Completion 24 July 2009 14 May 2014

Rs1.00 = $0.0207 $0.0167 $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

NOTES

(i) 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 2013.

(ii) In this report, “$” refers to US dollars.

(iii) 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 J. Romero-Torres, Financial Sector Specialist (Capital Markets and

Infrastructure), SARD Team members 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.

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. Loan 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 16 2. Summary of Key Revisions under the Scheme for Financing Viable Infrastructure

Projects 22 3. Subprojects Funded under the Second India Infrastructure Project Financing Facility 23 4. Analysis on the Financial Performance of India Infrastructure Finance Company Limited during FY2013 24 5. Assessment on Compliance of Undertakings Completed under Loan Agreements 2586, 2717, and 2822 26 7. Performance of Second India Infrastructure Project Financing Facility 41

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BASIC DATA

A. Loan Identification 1. Country 2. MFF Number 3. Loan Title 4. Borrower 5. Name of Development Finance Institution 6. Amount of Loan 7. Project Completion Report

Number

India M0037 Second India Infrastructure Project Financing Facility India Infrastructure Finance Company Limited India Infrastructure Finance Company Limited $700,000,000 1484

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations (Loan 2586-PFR1) – Date Started – Date Completed (Loan 2717-PFR2) – Date Started – Date Completed (Loan 2822-PFR3) – Date Started – Date Completed 3. Date of Board Approval

(IIPFF II) (Loan 2586-PFR1) (Loan 2717-PFR2) (Loan 2822-PFR3) 4. Date of Loan Agreement (Loan 2586-PFR1) (Loan 2717-PFR2) (Loan 2822-PFR3) 5. Date of Loan Effectiveness (Loan 2586-PFR1) – In Loan Agreement – Actual – Number of Extensions (Loan 2717-PFR2) – In Loan Agreement – Actual – Number of Extensions (Loan 2822-PFR3) – In Loan Agreement – Actual – Number of Extensions

20 July 2009 24 July 2009 6 October 2009 6 October 2009 29 November 2010 29 November 2010 11 November 2011 11 November 2011 17 November 2009 27 November 2009 7 December 2010 1 December 2011 22 December 2009 17 March 2011 21 March 2012 22 March 2010 17 March 2010 none 15 June 2011 8 April 2011 none 19 June 2012 24 April 2012 none

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6. Closing Date (Loan 2586-PFR1) – In Loan Agreement – Actual – Number of Extensions (Loan 2717-PFR2) – In Loan Agreement – Actual – Number of Extensions (Loan 2822-PFR3) – In Loan Agreement – 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

31 December 2014 14 September 2011 none 31 December 2014 23 October 2012 none 14 December 2014 14 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

10. Disbursements a. Dates

(Loan 2586-PFR1) Initial Disbursement 18 May 2010

Final Disbursement 14 September 2011

Time Interval 15.92 months

Effective Date 17 March 2010

Original Closing Date 31 December 2014


(Loan 2717-PFR2) Initial Disbursement

13 July 2011 Final Disbursement 13 September 2012


Effective Date 8 April 2011



(Loan 2822-PFR3) Initial Disbursement

19 July 2012 Final Disbursement

30 April 2014 Time Interval 21.42 months

Effective Date 24 April 2012



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b. Amount ($’000)

Subloan Original

Allocation Amount

Disbursed Sew Navayuga Barwani Tollways 25,687,269 25,687,269Coastal Gujarat Power Ltd. 257,515,435 257,515,435Himalayan Expressways Ltd. 11,042,999 11,042,999Badarpur Faridabad Tollway Ltd. 9,113,899 9,113,899Jal Yamuna Expressway 68,130,431 68,130,431Pune Solapur Expressway Pvt. Ltd. 19,031,135 19,031,135Soma Isolux Kishangarh-Beawar Tollway 31,109,754 31,109,754Soma Isolux Surat Hazira Tollway 23,461,032 23,461,032Dhule Palasner Tollways Ltd. 13,372,317 13,372,317Halol Godhra Shamlaji Tollways 8,919,675 8,919,675IRB Pathankot Amritsar Toll Road 26,112,891 26,112,891Rayalseema Expressway Pvt. Ltd. 43,080,580 43,080,580Navayuga Quazigund Expressway Pvt. Ltd. 18,540,577 18,540,577Simhapuri Expressway Ltd. 29,127,147 29,127,147Ashoka Sambalpur Baragarh Tollway Pvt. Ltd. 22,063,873 22,063,873Farakka Raiganj Highways Ltd. 9,911,306 9,911,306Baharampore Farakka Highways Ltd. 9,202,361 9,202,361Maharashtra Eastern Grid Power Transmission Co. Ltd. 40,587,710 40,587,710GVK Deoli Kota Expressway Pvt. Ltd. 17,958,022 17,958,022Jabalpur Transmission Co. Ltd. 16,031,587 16,031,587Total (US$ equivalent) 700,000,000 700,000,000Total (Rs) 35,916,201,100 35,916,201,100Note: Amounts are actual US dollar equivalent (rounded off).

C. Implementation Data

1. Number of Subloans 20

2. Sectoral Distribution of Subloans

Sector/ Subsector No. of Subprojects Actual ($)

Finance/ Infrastructure finance and Investment funds

20 700,000,000

Total 20 700,000,000

3. Project Performance Report Ratings

(Loan 2586-PFR1) Implementation Period

Ratings Development Objectives Implementation

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

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(Loan 2717-PFR2) Implementation Period

Ratings 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 2012 1.00000 (on track) Source: Historical PPR and E-Operations (Loan 2822-PFR3) Implementation Period

Ratings Development

Objectives Implementation

Progress From 1 January 2012 to 31 December 2012 1.00000 (on track) 1 January 2013 to 31 December 2013 1.00000 (on track) 1 January 2014 to 14 May 2014 1.00000 (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 Membersa

Fact-finding 18-29 May 2009 3 33 a, b c Appraisal 15-24 July 2009 3 27 a, b, c Negotiations 5-7 October 2009 5 15 a, b c, d, e Loan review 30 August – 3

September 2010 2 10 a, f

Consultation 20-24 October 2010 2 8 a, g Midterm Review 15-22 September 2011 2 14 a, g Annual Environmental and Social Safeguards Implementation Audit

5-13 November 2012 3 24 a, h, i

Project completion review 29 July-7 August 2013 2 20 a, j Loan review 18 October 2013 1 1 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 Loans (to some development finance institutions): Not applicable.

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 (2012–2017) 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 closure2

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 2012–2013. 2 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 2013. http://www.rbi.org.in

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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 financing4 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. 2006. Financial Support to Public Private Partnerships in Infrastructure. http://www.infrastructure.gov.in

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. 2007. 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. 2009. 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. 2013. 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).

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Table 1: ADB’s Loan and Guarantee Facilities to India Infrastructure Finance Company Limited

MFF ADB Board Approval Loan Amount

($ million) Rate of Interest Tenor(years)

IIPFF I Tranche 1 20 December 2007 300 6-month US dollar LIBOR + 20 bps 25.0 Tranche 2 24 February 2009 200 6-month US dollar LIBOR + 20 bps 25.0 IIPFF II Tranche 1 27 November 2009 210 6-month US dollar LIBOR + 20 bps 25.0 Tranche 2 7 December 2010 250 6-month US dollar LIBOR + 30 bps 25.0 Tranche 3 1 December 2011 240 6-month US dollar LIBOR + 40 bps 25.0 AIIFI Tranche 1 21 October 2013 400 6-month US dollar LIBOR + 40 bps 19.5

Guarantee ADB Board Approval Guarantee Amount Availability Partial credit guarantee 20 September 2013 Rs7,168 milliona 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 2011. IIPFF II was fully disbursed by IIFCL to fund 20 PPP subprojects in roads and power ahead of the target closing date of December 2014. 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 2014.

10. 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. 2012. 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.

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Table 2: India Infrastructure Finance Company Limited: Long-Term Borrowings with Other Lenders

(as of 31 March 2013) Lenders Loan Amount Rate of Interest Tenor/Date of RepaymentInternational 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)

Rs10.0 billion 9.36% 1 February 2027 (bullet repayment)

National Small Savings Schemes Fund

Rs15.0 billion 9.00% 31 March 2023 (bullet repayment)

LIBOR = London interbank offered rate. Source: India Infrastructure Finance Company Limited. 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 2009. 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. 2013. India: Financing Public–Private Partnerships in Infrastructure through Support to the India

Infrastructure Finance Company Limited Project: Restructuring. Washington, DC.

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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), 2009–2012 emphasized infrastructure development and the country operations business plans over this period focused on energy and transport.12 The CPS, 2013–2017 supports three strategic pillars—inclusive growth, environmental sustainability, and regional cooperation and integration, which were also central to the CPS, 2009–2012. The CPS, 2013–2017 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.13 16. 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.

II. IMPLEMENTATION

A. Lending Policies

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. 2009. Country Partnership Strategy: India, 2009–2012. Manila. ADB. 2008. Country Operations Business Plan: India, 2009. Manila.

13 ADB. 2013. Country Partnership Strategy: India, 2013–2017. Manila. 14 ADB. 2005. Innovation and Efficiency Initiative: Pilot Financing Instruments and Modalities. Manila. 15 ADB. 2014. Multitranche Financing Facility. Operations Manual. OM D14/BP. Manila (para. 8).

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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 2.16

18. 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. http://www.iifcl.org/Content/sifty.aspx

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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, 1956.

22. 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 well-qualified head to manage the unit) by end of 2104. 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 Performance19

24. 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 2013. 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.

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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 2013.20 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 7030. 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. http://www.iifcl.org/Content/org_chart.aspx

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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 5.

30. 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 2013. 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. 2007. Technical Assistance to India for Capacity Development for India Infrastructure Finance Company

Limited. Manila (TA 7030-IND, approved 14 December along with Loan 2404-IND for $500,000).

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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. Loan 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 Loan 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 2013.23

35. 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. 2013. Environmental and Social Safeguards Framework. http://www.iifcl.org/Content/ESMU.aspx 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.

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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 2013–2014, 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

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options through its public and private sector operations. The MFF modality is well suited for PPPs as subprojects are typically developed in a phased manner based on project implementation requirements and project readiness (para. 15). The disbursement of a subproject can take place through multiple tranches with the introduction of time-slicing in the MFF, which provides flexibility for IIFCL to properly and cost-effectively plan the disbursements.

B. Effectiveness in Achieving Outcome 42. Outcome: Increased private sector participation in infrastructure projects, particularly through public–private partnerships. IIPFF II is considered highly effective in catalyzing much-needed infrastructure investments in India. IIPFF II provided IIFCL a credit line of $700 million and it has catalyzed and leveraged investments in infrastructure of about $9.1 billion (based on total project costs estimated at Rs548.5 billion) from the private sector for financing 20 subprojects under a PPP modality. While it is difficult to ascertain the impact of IIPFII in the overall infrastructure investment during the 11th plan, a total investment of Rs27 trillion was made toward infrastructure development. This investment at 7.22% of GDP (average) represents a significant shift from the 5% of GDP (average) invested during the 10th plan.24 Overall, the share of private investment in the total investment in infrastructure in India rose from 22% in the 10th plan (2002–2007) to 38% in the 11th plan (2007–2012). Catalyzing resources is an integral part of IIFCL’s operations, IIFCL’s involvement through provision of long term resources enable private sector project sponsors to commit debt and equity as a strong government-backed entity would typically be having a longer-term exposure to the project than other lenders or financiers.

43. Output 1: Long-term funding for IIFCL to provide long-term financing to subprojects developed through public–private partnerships. IIPFF II provided IIFCL with crucial long-term funding resource for mobilizing direct lending to 20 PPP subprojects. In FY2013, IIFCL approved a total of 299 infrastructure projects for a total amount of Rs518,870 million, an increase of 28% from previous year’s direct lending sanctions. Given IIFCL’s mandate of providing support to infrastructure projects, with priority for PPP modality, financial assistance was approved for 219 PPP projects, representing 83% of its gross direct lending amount. The average tenor of project loans funded by IIFCL is between 12 to 15 years. IIFCL’s funding cost is also lower compared to banks (i.e., about 9.6% per annum whereas the average bank lending rate is about 10.5% per annum); however, as part of a lending consortium, the interest rate charged by IIFCL is linked to the interest rate of the lead bank (as per SIFTI guidelines).

44. Output 2: Financing of 14 infrastructure subprojects as provided in the framework financing agreement. The full utilization of IIPFF II catalyzed private investment of about $9.1 billion for financing 20 PPP projects, including 17 roads and highways spanning about 1,750 kilometers, a 4,000 MW power generation project, and two power transmission lines.

45. Output 3: Improved institutional capacity of the IIFCL in areas of governance framework, including risk management systems, and implementation of updated ESSF. With ADB TA support, IIFCL adopted the risk management framework prepared by CRISIL Risk Infrastructure Solutions effective 1 April 2009, which is used for assessing credit risks of project proposals prior to IIFCL board approval. Under this framework, IIFCL constituted an operational level risk management committee for approving risk policies and methodologies for (i) measuring and monitoring risks and (ii) reviewing asset and liability management position and risk premium to be charged. To improve risk management practices, the World Bank

24 Deloitte. 2013. Funding the Infrastructure Investment Gap. New Delhi.

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provided enhanced support in this area, which enabled the completion of a more comprehensive IRMF (para. 25) that was tested, implemented, and rolled out by IIFCL in Q4 2013 and will be completed by November 2014. The coordinated efforts of ADB, Japan Bank for International Cooperation, German development cooperation through KfW, and the World Bank yielded results with IIFCL having put in place qualified staff, who are able to undertake subproject risk assessments and credit appraisal, and safeguard assessments. An updated ESSF was implemented and due diligence reports prepared by the ESMU adequately addressed safeguard concerns.

C. Efficiency in Achieving Outcome and Outputs 46. IIPFF II is efficient in achieving the outcome and outputs, as specified in its design and monitoring framework. IIPFF II was processed during the aftermath of the global financial crisis when liquidity in the international and domestic financial markets was tight and investor interest in long-dated instruments was low. In this situation, access to long-term financing through IIPFF II was crucial in ensuring financial closures were achieved on the subprojects. IIPFF II catalyzed investments of around $9.1 billion from the private sector financing 20 subprojects under a PPP modality and thus, enabled IIFCL to leverage 13 times its own resources from the private sector. While IIPFF II did not lead to direct reduction of borrowing costs for the specific subprojects, it provided IIFCL the opportunity to use its refinancing and takeout financing scheme to facilitate incremental lending to the infrastructure sector by addressing banks’ exposure and asset-liability mismatch constraints to enable banks to continue financing projects and sustain investor interest in PPP.

47. During loan appraisal, no financial and economic analyses on the subprojects were conducted on IIPFF II as the facility was of a financial intermediary loan in nature. No change in scope was required during implementation. ADB was efficient in disbursing the facility ahead of the original project completion date.

D. Preliminary Assessment of Sustainability 48. IIFCL substantially increased its lending portfolio and pursued an aggressive growth strategy backed by its competitive strengths, which included (i) strong government support, (ii) well-developed relationships with banks and financial institutions, (iii) strong financials and good asset quality, and (iv) an experienced management team and highly qualified staff. Notwithstanding, IIFCL’s operating environment in infrastructure financing currently faces challenges constrained by (i) the continued weakness of the Indian economy (with the slowdown in GDP growth and continued high level of inflation); and (ii) sector-specific problems in the road and power sectors, such as implementation delays resulting in cost overruns, loss of revenues, and weakened financial risk profile of project developers. As such, IIFCL will depend on its ability to compete effectively and use its resources efficiently to avoid adverse impact on its operation, financial, and growth prospects. The infrastructure development industry in India is still relatively at an early stage of development and is linked to the growth of the economy. Infrastructure financing remains huge and additional resources to meet the large volume of longer-tenor financing requirements from multilateral development banks are still in large demand. As such, ADB’s intervention to IIFCL remains likely sustainable in the medium term.

E. Impact 49. IIPFF II contributed to the expected impact of improved overall availability and reliability of physical infrastructure in India and was therefore rated significant. IIPFF II partly financed the construction and expansion of around 1,750 kilometers of road and energy production of 4,000 MW with combined total investment costs of $9.1 billion. Given the size of IIPFF II or of total

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ADB MFF intervention, it is not sufficient to measure its contribution or impact on achieving target GDP growth of 9% per annum (as a performance indicator). However, IIPFF II catalyzed and leveraged private investments that directly contributed to the total investment of Rs27 trillion ($447 billion) that was made toward infrastructure development under the 11th plan.

50. On the economic impact of IIPFF II, poverty reduction is likely to stem from the effect of increased infrastructure on GDP growth, domestic and foreign investment, and employment. The impact will be spread across India with subprojects financed in states with comparatively lower income per capita (such as Uttar Pradesh and Orissa), and states with higher income per capita (such as Gujarat and Maharashtra). It will also serve to strengthen service delivery and private sector development given the important role of infrastructure as a reason to attract foreign direct investments and synergies between infrastructure and service delivery. Investment in infrastructure improves environmental conditions, which have an impact on improved livelihoods, better health, and reducing vulnerability of the poor.

F. Overall Assessment 51. Catalyzing supplementary resources is an integral part of IIFCL’s operations. By providing long-term resources, IIFCL’s involvement has a significant catalytic effect. Private sector project sponsors will be more likely to commit debt and equity because a strong government-backed entity would typically have longer-term exposure to the project than other lenders. ADB’s support to IIFCL is critical in mobilizing private sector investment and improving project financing, thereby improving the enabling environment for implementing PPP-type initiatives in India. This resulted in the mainstreaming of PPP activity in India across states and sectors and helped in laying the foundation for IIFCL to become the apex institution in carrying out the PPP agenda of the government. IIPFF II catalyzed investments of around $9.1 billion (based on total project costs estimated at Rs548.5 billion) to finance 20 infrastructure projects in the road and power sectors in India, which were all financed under a PPP modality and implemented in full compliance with national and ADB safeguard policies and regulations. As such, it widely contributed to the intended impact of improving overall availability and reliability of physical infrastructure in India. Overall, IIPFF’s assessment is considered (i) highly relevant, (ii) highly effective, (iii) efficient, and (iv) likely to be sustainable and is therefore considered a successful project.

G. Lessons 52. Project-related matters. The success of IIPFF II draws important lessons of building and maintaining strong partnerships during project implementation, not only with the government and IIFCL but also with development partners, banks and financial institutions, project sponsors, and other stakeholders. Building awareness, continuous dialogue, and strengthening safeguard practices of IIFCL and banks/ and financial institutions are crucial to ensure effective project implementation and disbursements. With continuous support from development partners, IIFCL will build on integrating safeguard measures to minimize subproject risks through (i) continued training to enhance capacity of its ESMU and consortium partners; (ii) regular updates of its ESSF to align with the requirements of development partners; and (iii) leading the advocacy with banks and financial institutions through workshops and dissemination. IIFCL conducted consultation workshops for banks and financial institutions on the ESSF approach for addressing safeguard issues when financing infrastructure PPP projects. The extensive coordination and collaboration with other development partners such as the World Bank, Japan Bank for International Cooperation, and German development cooperation through KfW to develop a common ESSF is an important lesson in achieving successful project implementation.

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53. ADB financial sector operations in India. The limited fiscal space for government guarantees, including to IIFCL, emphasizes the need for innovation and well-structured ADB interventions in the financial sector and infrastructure financing, including public nonsovereign operations, for ADB to remain relevant to changes and financial market developments in India. It is becoming apparent that domestic capital market reforms are important to address the issue of long-term capital and provide opportunities for insurance, pension, provident, and mutual funds to finance infrastructure development in India.

H. Recommendations 54. Strengthening of IIFCL’s credit and risk management, portfolio monitoring. IIFCL has strong asset quality in its portfolio; however, the company is in a strong growth trajectory and pursues aggressive growth strategies by diversifying into challenging infrastructure sectors (such as power generation) and introducing more complex and innovative financial products and structures. It is crucial for IIFCL to be vigilant in strengthening its internal credit and risk management capacities, policies, and processes and to proactively manage its portfolio to avoid asset erosion and maintain its competitive advantage. Similarly, it is also critical that ADB monitors not only the performance of the facility and the subprojects, but keep abreast of the developments in the infrastructure sector and any ongoing and future plans of IIFCL.

55. Emphasis on safeguards during project appraisal and implementation. Emphasis on strengthening safeguards is an important aspect that IIFCL should continuously improve on during project appraisal. Given the technical assistance support provided to IIFCL by ADB and other donors, the environmental and social due diligence required for direct financing subprojects under category B and C are of good quality and are delegated directly to IIFCL. However, the level of due diligence and monitoring should vary according to the nature and safeguard impact of subprojects under review, particularly for category A subprojects. IIFCL should undertake not only its own due diligence but should oversee and monitor the implementation of the mitigation proposed and should conduct annual third party audits, as necessary, instead of relying on lead bank(s). A useful way forward is for the responsibility for ESSF for similar future facilities and environment due diligence for category B projects to be delegated to the FI (in this case, IIFCL), whereas for projects with higher safeguard complexity (category A), ADB safeguard specialists should undertake primary review and provide opportunities for on-the-job training of FI staff.

56. Potential opportunities for IIFCL to effectively use its balance sheet to address the growing asset–liability mismatch of Indian banks and catalyze supplementary resources for infrastructure. While IIFCL may benefit from further ADB assistance, IIFCL may have to transition from its existing role of a direct lender and/or cofinancier to that of a catalyst mobilizing supplementary resources for infrastructure financing in India. IIFCL follows the lead bank in the lending consortium with respect to credit terms; however, its risk profile and appetite is different from banks. IIFCL should leverage its balance sheet to address the huge buildup of asset–liability mismatch in the Indian banking sector by providing more refinancing and takeout and assume credit risks in projects at early stages (e.g., greenfield projects) and sell the same to banks once the projects come onstream and start generating revenues. Moreover, IIFCL is expected to start providing guarantees for bonds issued by private infrastructure companies (besides its direct lending operations) with pilot support from ADB’s guarantee facility for providing credit enhancement to project bonds (footnote 9). This will enable mobilization of insurance and pension funds (including retail and mutual funds) to build the domestic capital markets.

Appendix 1

16

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

Achievement of Targets

Impact Improved overall availability and reliability of physical infrastructure

(i) Reduction in peak and average energy deficit (2007 baseline: 124,568 MW; 2012 investment target: $134 billion) (iii) Widening of national highways in line with National Highways Development Project (2007 baseline: 66,590 km; 2012 investment target: $63 billion) (iii) Achieving targeted GDP growth of 9% per annum

International and domestic business climate surveys Annual reports on infrastructure availability including Planning Commission studies Economic Survey of India, industry reports, and relevant government publications

Assumptions Continued priority accorded to infrastructure development Continued priority accorded to financial sector development Increased efficiency of infrastructure investment Strong government commitment to IIFCL Risks Dilution of government commitment to infrastructure and PPP Modification of IIFCL's Scheme (SIFTI)

Achieved. (i) In FY2012, the peak load demand was 130,006 MW against availability of 116,191 MW, which resulted in a 10.6% deficit. Peak load deficit was 9% in FY2013. (ii) In FY2012, the total length of national highways in India expanded from a baseline of 66,590 km to 76,818 km as of 30 June 2013. (iii) GDP growth target is not an accurate performance target or indicator to measure the impact of IIPFF II and consequently was not used in the evaluation. As a proxy indicator, the share of GDP going into infrastructure investment has increased from 5% in 2007 to 7% during 2009-2010 and 8% in 2011 2012.

Outcome Increased private sector participation in infrastructure projects, particularly through

(i) Private investment in infrastructure to reach 30% of overall infrastructure investment during the 11th

Planning Commission reports Economic Survey of India

Assumption Government policy encouraging PPPs continues Risks

Achieved. (i) The share of private investment in the total investment in infrastructure rose from 22

Appendix 1

17

Design Summary





PPP

Five-Year Plan (baseline: 17% of infrastructure investment from private sector in 2007) (ii) Increased leveraging of private sector resources (baseline: IIFCL's financing currently leverages seven times its own resources from the private sector)

Relevant government publications

Dilution of government commitment to infrastructure and PPP Deepening of global economic and financial crisis

percent in the 10th plan to 38 percent in the 11th plan. This has been projected to increase to almost 50% under the 12th plan. (ii) Under IIPFF II, IIFCL catalyzed complementary resources and leveraged 13 times its own resources from the private sector.

Outputs 1. Long-term funding

for IIFCL to provide long-term financing to subprojects developed through PPPs

(i) Reduction in asset and liability tenor gap during FY2009–FY2013 (baseline: 25% duration gap in 10-, 15-, and 20-year maturities) (ii) Increased duration of financing provided by IIFCL for subprojects during FY2009–FY2013 (iii) Full utilization of IIPFF II ($700 million; FY2013)

Quarterly, semiannual, and annual reports of IIFCL including its board of directors' semiannual reports ADB review mission reports including midterm review documents, and analysis of IIFCL's duration gap

Assumptions IIFCL’s long-term lending mandate continues IIFCL undertakes structured borrowing program based on risk-return considerations and subproject financing requirements Risks The government amends IIFCL’s Scheme de-emphasizing long-term lending mandate IIFCL’s portfolio quality deteriorates leading to shortening of its lending terms Regulatory and policy risks leading to above

Achieved (i) As per RBI guidelines, IIFCL is required to map its asset liability maturity over the following periods:

- 0-1 month - 1-2 months - 2-3 months - 3-6 months - 6-12 months - 1-3 years - 3-5 years - Over 5 years

Report on maturity pattern of assets and liabilities are disclosed in the annual report of IIFCL.

The average tenor of IIFCL’s long term borrowing is over 15 years. On the other hand, the average tenor of project loans stands in the

Appendix 1

18

Design Summary





range of 12-15 years.

(ii) IIFCL follows the lending terms of the lead bank(s), as per mandate under SIFTI. Nonetheless, the government has approved IIFCL to offer loans with tenor longer than the other lenders, in case of PPP projects approved by the PPP Appraisal Committee and/or the Empowered Committee/Institution, which have provision of compulsory buyback by the authority on termination and remain sole lender, if necessary, after lenders are paid out. (iii) IIPFF II of $700 million was fully utilized in April 2014 (and financially closed in May 2014) ahead of the original closing date of December 2014.

2. Financing of 14

infrastructure subprojects as provided in the framework financing agreement

(i) Catalyzing private sector investment of around $7.7 billion for financial closure of 14 identified subprojects by FY2013 (ii) 700 km of roads built; 3,200 MW of power

IIFCL's annual reports, IPPMS data, and PMU progress reports Investment bank reports of IIFCL bond issuances IIFCL's annual reports

Assumptions Rating assessments and reviews are rigorous and conducted on time IIFCL is committed to be rated by international rating agencies

Achieved. IIPFF II catalyzed private investment of around $9.1 billion for financing 20 PPP projects, including (i) 17 roads and highways spanning about 1,750 kilometers, (ii) a 4,000 MW power generation project;

Appendix 1

19

Design Summary





generation capacity brought online

IIFCL website which provides related information on the amendments of the Scheme

The mandate of IIFCL, as supported by the government, is committed to supporting PPP project financing Risk Change in government's priority and commitment in supporting PPP initiatives

and (iii) two power transmission lines.

3. Improved

institutional capacity of IIFCL in areas of (i) governance framework, including risk management systems; and (ii) implementation of updated ESSF

(i) Development and adoption of integrated risk management system and installation of risk management tools including software and hardware, deal documentation formats, pricing tools, and risk appraisal templates by end of December 2009 (completion of system installation) (ii) IIFCL continues to be rated annually by international credit-rating agencies during the loan period (iii) Updated ESSF implementation commences in 2009, and the updated ESSF is fully adopted and implemented by FY2010

IIFCL asset–liability management data ADB's review missions including midterm review documents Rating agencies’ reports IPPMS data and PMU's progress reports Consultant reports IIFCL's compliance certificates for subprojects IIFCL PMU's quarterly progress reports, and board of directors' semiannual reports

Assumptions High quality consultant reports prepared on time IIFCL staff are able to adapt to the new risk management and pricing systems Rigorous and timely reviews conducted Timely availability of required documents from subborrowers Risks Trained staff may leave IIFCL Staff capability may decline in the absence of continuous training Counterpart staff from IIFCL and subborrowers are not made available on time for the ESSF Delay in obtaining the

Achieved (i) IIFCL adopted the risk assessment model developed by CRISIL in 1 April 2009, which is used for assessing credit risks and internal risk rating of project proposals. The World Bank provided enhanced support in this area, which enabled the completion of a more comprehensive integrated risk management framework (IRMF) developed by Deloitte Touche Tohmatsu (India) covering: (a) integrated risk management policy, (b) credit risk management policy, (c) market risk management policy, and (d) operational risk management policy. IRMF was rolled out by IIFCL in Q4 2013. A review was undertaken by KPMG in

Appendix 1

20

Design Summary





required documents from subborrowers Nonavailability of qualified staff and resources

July 2014 to monitor the implementation of Deloitte’s recommendations and certain gaps have been appointed and full implementation is expected by November 2014. (ii) The international rating of IIFCL has been reaffirmed as BBB- by Standard & Poors, which is equal to the sovereign rating of India since 2010 and reaffirmed in the succeeding years. (iii) IIFCL updated its 2008 ESSF in October 2010 to align with ADB’s Safeguard Policy Statement (2009). During 2013, IIFCL updated the ESSF to incorporate changes in the national safeguard policies and to align it with requirements of other development partners. IIFCL uploaded the revised ESSF in its website in July 2013.

Appendix 1

21

Activities Inputs Part A: Preparatory Activities 1.1 Identify and finalize subproject pipeline to be financed by ADB's funds (March 2009)—completed. 1.2 Update common ESSF (August 2009). 1.3 Augmentation of staff resources and capacity in IIFCL's PMU to conduct environmental and social safeguards

due diligence of subprojects (December 2009). 1.4 Commence due diligence of subprojects (March 2009). Part B: Additional capacity development (Q2 2010) 2.1 Strengthen capacity building for credit risk management and appraisal, and operating procedures (July 2010).

2.1.1 Adopt operating guidelines and manuals, and strengthen capacity for IIFCL resource management and project risk assessment (December 2009) including − adoption of credit risk assessment processes, − implementation of internal controls, − development of pricing tools and risk appraisal templates, − implementation of internal rating system and rating migration, and − installation of resource management system (program software and hardware).

2.1.2 Adopt operating guidelines for − accounting policies, − human resource policies, − board procedures, − loan pricing based on project risk appraisal, and legal procedures.

Part C: Tranche release progress and reporting (continues to 2014) 3.1 PFR1 for the first tranche of $210 million was signed and submitted in FY2009. 3.2 Indicate first tranche disbursement requirements (Q3 2009). 3.3 Fully utilize the first tranche of $210 million by the end of FY2010. 3.4 Submit PFR for the second tranche of $250 million for tranche release no later than 31 March 2011. 3.5 Submit PFR for the third tranche of $240 million for tranche release no later than 31 March 2014. 3.6 Fully utilize the second and third tranches no later than 31 December 2014.

ADB $700 million − First tranche of

$210 million − Second tranche of

$250 million − Third tranche of

$240 million Government/IIFCL Counterpart staff Office accommodation and transport Administrative services Facilitation for meetings Obtaining necessary information from sub-borrowers and/or lead syndicators Participation in tripartite meetings

ADB = Asian Development Bank, ESSF = environmental and social safeguards framework, GDP = gross domestic product, IIFCL = India Infrastructure Finance Company Limited, IPPMS = investment program performance management system, km = kilometer, MW = megawatt, PFR = periodic financing request, PMU = project management unit, PPP = public–private partnership, Q = quarter, RBI = Reserve Bank of India.

Appendix 2

22

SUMMARY OF KEY REVISIONS UNDER THE SCHEME FOR FINANCING VIABLE INFRASTRUCTURE PROJECTS

1. Government of India has approved IIFCL to offer loan with tenor longer than the other

lenders in case of PPP projects approved by Public Private Partnership Appraisal Committee (PPPAC)/Empowered Committee/Insitution(EC/EI) which have provision of compulsory buyback by the authority on termination and remain sole lender, if necessary, after other lenders are paid out.

2. Modifications have been carried out in the takeout finance scheme, which include: 1

- IIFCL is allowed to remain as Sole Lender in case of PPP projects approved by PPPAC/EC/EI which have provision of compulsory buyback by the authority on termination.

- IIFCL is allowed to offer sanction at Pre-Bid Stage in PPP infrastructure projects approved by PPPAC/EC/EI.

- Takeout immediately after Commercial Operation Date (COD) for power transmission projects approved by PPPAC/EC/EI allowed in addition to road annuity projects.

- Provisional COD may also be considered for takeout. - Tenor of takeout finance should not exceed 85% of the concession period subject to

residual period of at least 2 years. - Borrower may remit either takeout fee or pre-payment fees.

3. IIFCL is allowed to undertake credit enhancement of up to 20% of Total Project Cost without

any backstop guarantor.

4. Other revisions/ modification placed before Empowered Committee for approval

IIFCL has also initiated the process of seeking approval from the Empowered Committee for following modifications/ revisions:

- Adoption of “List of sub-sectors for Infrastructure Lending” for NBFCs as per RBI circular as eligible sectors for financing by IIFCL. Further list of eligible sectors in SIFTI may be amended concurrently as and when RBI amends the “List of sub-sectors for Infrastructure Lending” for NBFCs on on-going basis automatically.

- Inclusion of four sectors (namely, communication- mobile telephony services/ companies providing cellular services, mining, Exploration and Refining) in the SIFTI for IIFC (UK) Ltd in line with expansion of the existing definition for infrastructure sector for the purpose of External Commercial Borrowings (ECB) by RBI. Further, changes made by RBI relating to the definition of infrastructure for the purpose of ECB in the Harmonized Master List of infrastructure may be updated from time to time.

- To consider non PPP projects in the renewable energy sector for subordinate debt financing by IIFCL.

- Financing of offshore energy assets by IIFC (UK) which will help Indian companies to enable them to secure energy supplies for India.

Source: IIFCL. Note: The updated SIFTI can be referred at www.iifcl.org.

1 Modified Takeout Finance Scheme. http://www.iifcl.org/Content/mtfc.aspx

Appendix 3

23

SUBPROJECTS FUNDED UNDER THE SECOND INDIA INFRASTRUCTURE PROJECT FINANCING FACILITY Item No.

Subborrower Facility Total Disbursed

($)

Total Project Cost (Rs)

Equity

(Rs)

Foreign Borrowing

(Rs)

Domestic Borrowing

(Rs)

Total Borrowing

(Rs)

1 Sew Navayuga Barwani Tollways 25,687,269 7,820,000,000 2,346,000,000 - 5,474,000,000 5,474,000,000

2 Coastal Gujarat Power Ltd. 257,515,435 170,240,000,000 42,670,000,000 69,070,000,000 58,500,000,000 127,570,000,0003 Himalayan Expressways Ltd. 11,042,999 4,748,000,000 2,350,900,000 - 2,397,000,000 2,397,000,000

4 Badarpur Faridabad Tollway Ltd. 9,113,899 5,720,000,000 1,720,000,000 - 4,000,000,000 4,000,000,000

5 Jal Yamuna Expressway 68,130,431 97,392,900,000 22,500,000,000 - 74,892,900,000 74,892,900,000

6 Pune Solapur Expressway Pvt. Ltd. 19,031,135 13,710,000,000 4,120,000,000 - 9,590,000,000 9,590,000,000

7 Soma Isolux Kishangarh-Beawar Tollway 31,109,754 13,046,400,000 3,266,400,000 - 9,780,000,000 9,780,000,000

8 Soma Isolux Surat Hazira Tollway 23,461,032 24,186,500,000 6,046,500,000 - 18,140,000,000 18,140,000,000

9 Dhule Palasner Tollways Ltd. 13,372,317 14,200,000,000 3,550,000,000 - 10,650,000,000 10,650,000,00010 Halol Godhra Shamlaji Tollways 8,919,675 13,050,000,000 2,610,000,000 - 10,440,000,000 10,440,000,000

11 IRB Pathankot Amritsar Toll Road 26,112,891 14,450,000,000 5,210,000,000 - 9,240,000,000 9,240,000,000

12 Rayalseema Expressway Pvt. Ltd. 43,080,580 16,360,000,000 9,330,000,000 -

7,030,000,000

7,030,000,000

13 Navayuga Quazigund Expressway Pvt. Ltd. 18,540,577 24,141,500,000 4,831,500,000 - 19,310,000,000 19,310,000,000

14 Simhapuri Expressway Ltd. 29,127,147 25,500,000,000 5,100,000,000 - 20,400,000,000 20,400,000,000

15 Ashoka Sambalpur Baragarh Tollway Pvt. Ltd. 22,063,873 11,421,800,000 2,321,800,000 - 8,100,000,000 8,100,000,000

16 Farakka Raiganj Highways Ltd. 9,911,306 13,784,400,000 6,616,500,000 - 7,167,900,000 7,167,900,000

17 Baharampore Farakka Highways Ltd. 9,202,361 11,691,100,000 6,079,400,000 - 5,611,700,000 5,611,700,000

18 Maharashtra Eastern Grid Power Transmission Co. Ltd. 40,587,710 47,150,000,000 14,150,000,000 - 33,000,000,000 33,000,000,000

19 GVK Deoli Kota Expressway Pvt. Ltd.

17,958,022 8,234,500,000 1,646,900,000 - 6,587,600,000 6,587,600,000

20 Jabalpur Transmission Co. Ltd. 16,031,587 11,680,000,000 2,920,000,000 - 8,760,000,000 8,760,000,000 TOTAL 700,000,000 548,527,100,000

Appendix 4

24

ANALYSIS ON THE FINANCIAL PERFORMANCE OF INDIA INFRASTRUCTURE FINANCE COMPANY LIMITED DURING FY2013

1. Income Statement. As of 31 March 2013, IIFCL’s stand-alone financials reported a 79% increase in net profit of Rs10,470 million compared to Rs5,860 million in the previous year. Total revenues were up by 29% from Rs25,450 million to Rs32,870 million on account of increased amount of infrastructure loans. Expenditures grew by 18% in FY2013 due to increased finance costs and provision for loan assets. Prior to the registration of IIFCL as a nonbanking financial company—infrastructure finance company (NBFC-IFC) on 9 September 2013, the company voluntarily adopted prudential norms for income recognition, asset classification, and provisioning applicable to NBFCs as per Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms Directions 2007. As such, IIFCL’s net profit ending FY2013 was stated lower by Rs392.07 million and was shown as provision for loan assets in the profit and loss accounts. Overall, IIFCL’s profitability improved, with return on assets of 3.32% in FY2013 compared with 2.2% from the previous year. The increase is also on account of dividend received from its subsidiary company, IIFC (UK). IIFCL has been raising debt primarily through long-term unsecured loans by issuing bonds guaranteed by the government.

2. Balance Sheet. IIFCL’s stand-alone balance sheet as of FY2013 grew substantially by 26% on account of increased loan assets and transfers to special reserve as mandated under Income Tax Act, 1961 by companies providing long-term infrastructure financing. As of 31 March 2013, IIFCL’s total credit portfolio was Rs241,520 million of which 18% was refinancing loans to Power Finance Corporation, Rural Electrification Company, and Infrastructure Development Finance Company, 10% in the form of takeout financing, and 72% from direct lending to project companies. IIFCL’s exposure in direct lending was mostly in the power and road sectors under PPP modality. Gross nonperforming assets increased slightly from nil to 1% as of 31 March 2013, and while considered low, IIFCL’s loan portfolio has a concentrated exposure to the infrastructure sector. IIFCL’s direct lending are mostly in the road and power sector and a large proportion of IIFCL’s exposures are under construction stage and thus are exposed to project completion risks.

3. As a wholly owned government subsidiary, IIFCL received regular equity infusions and in FY2013, the government further infused capital of around Rs5.0 billion toward the paid-up capital of IIFCL, taking the total paid-up capital to Rs33.0 billion as of 31 March 2013. IIFCL’s net worth increased from Rs25.8 billion in FY2011 to Rs48.58 billion in FY2013. IIFCL will continue to have adequate capitalization as continued support from the government is expected. Apart from equity, IIFCL’s operations rely on long-term debt for funding raised from the market through bonds and debt from financial institutions. The government issued unconditional and irrevocable guarantees for IIFCL's earlier-rated debt instruments, which cover the full and timely payment of principal and all interest accrued. The government extended guarantees to 76.3% of IIFCL’s borrowings as of 31 March 2013.

4. IIFCL faced challenges in maintaining asset quality given its direct lending exposure in the power and road sectors, which are exposed to construction and execution risks and delays in project implementation. Also, the unhedged foreign currency borrowings of IIFCL accounting for about 26% of its net worth in FY2013 and the depreciation of the Indian rupee against the dollar and euro (decline of close to 18% against the US dollar and 24% against the euro) in the same financial year has likely concerns on the profitability of IIFCL, i.e., a large part of IIFCL’s foreign currency liabilities are due for repayment in 2019 and 2020. As such, ability to IIFCL to manage its foreign currency risks would be critical over its future earnings profile.

Appendix 4

25

Table 1: Summary of Key Financials of India Infrastructure Finance Company Limited

(in Rs million)

Income Statement FY2013 FY2012 FY2011 FY2010 FY2009 Total revenue 32,874 25,445 19,519 15,856 6,349 Total expenses 19,394 16,319 15,062 13,483 4,851 Provision for standard loan assets - 470 - - - Profit before tax 15,143 8,660 4,460 2,373 1,505 Tax expense 4,673 2,800 2,960 841 499 Net profit 10,470 5,860 2,960 1,538 1,006 Balance Sheet Current assets 157,321 93,612 95,176 107,788 110,384 Long-term loans and advances 178,386 180,371 141,410 97,457 49,151 Total assets 352,067 279,271 241,072 209,701 161,177 Long-term borrowings 181,135 208,420 198,720 184,744 144,194 Share capital 25,000 20,000 18,000 10,000 Cash Flow Statement Net cash from operations (41,003) (18,827) (9,383) (133,338) (22,784) Net cash from investing 1,454 (206) (40) (1,446) (1,266) Net cash from financing 42,396 15,541 13,368 34,321 109,539 Key Ratios Gross Non-performing assets (%) 1.0 - - - - Debt equity ratio (x) 6.81 6.43 8.15 8.85 10.06 Credit to borrowing ratio 0.85 0.87 0.71 0.71 0.34 Return on assets (%) 2.94 2.25 1.31 0.83 0.98 Debt service coverage ratio (x) 1.79 1.55 1.30 1.19 1.35 Interest coverage ratio (x) 1.84 1.57 1.32 1.19 1.35 Note: IIFCL’s computation on net cash from operations differs from the audited financial statement due to modification of presentation commencing FY2012. All other figures remain the same. It may be observed that under the cash flow from operating activities in the annual audited statements of IIFCL, towards lending of funds, addition to investments and increase in other bank balance (mainly on fixed deposits) are not outflow obligations of IIFCL. These items are not expense for IIFCL but are in nature of long term investments/advances. However, these are adjusted against the cash inflow from operations as per the Indian GAAP on Cash Flow Statements. If these items are not considered under cash flow from operations and instead booked under cash flow from investments, it would make the net cash flow from operations positive. Source: India Infrastructure Finance Company Limited Annual Report FY2013, FY2012, FY2011, FY2010, FY2009.

Appendix 5

26

ASSESSMENT ON COMPLIANCE OF UNDERTAKINGS COMPLETED UNDER LOAN AGREEMENTS 2586, 2717, AND 2822

Item/Source

Loan Agreement

Loan Covenants

Status

Assessment/ Recommendations

Loan Agreement, Article III, Description of Project; Use of Proceeds of the Loan, section 3.03

Loan Agreements 2586, 2717, and 2822

Whenever the Borrower proposes to make a Subloan, the Borrower shall, before requesting a withdrawal, submit to ADB an application for approval of such Subloan in accordance with the approval procedure set out in paragraph 6 of Schedule 3 to this loan agreement. Such application shall be in a form satisfactory to ADB and shall contain a description and appraisal of the Qualified Project, the terms and conditions of the proposed Subloan, and such other information as ADB shall reasonably request.

Complied with. Before requesting for a withdrawal, IIFCL submits ESDDR in accordance with the approval procedure. Only after receiving ADB’s approval, IIFCL submits withdrawal application.

Confirmed.

Loan Agreement, Article III Description of Project; Use of Proceeds of the Loan

– Section 3.05 (Loan Agreements 2586 and 2717) – Section 3.06 (Loan Agreement 2822)

Withdrawals from the loan account may be made for reimbursement of reasonable expenditures incurred under the Project before the Effective Date, but not earlier than 12 months before the date of the Loan Agreement, subject to a maximum amount equivalent to 20% of the Loan amount, provided (i) such expenditures shall have been incurred in full compliance with ADB's Procurement Guidelines, and safeguards policies, and (ii) suitable provisions shall be included in the existing Subloan agreements to reflect the provisions of Article IV of the Loan Agreement.

Complied with. IIFCL confirms that claims submitted to ADB for reimbursement of expenditure incurred under the project before the Loan Effective Date is within the cap of 20% of the loan amount.

Confirmed.

Loan Agreement, Article IV Subloans


Subloan agreements shall include provisions stated in Sections 4.01–4.03 of the Loan Agreement.

Complied with. Confirmed.

Loan Agreement, Article V, Particular Covenants, Section 5.02


The Borrower shall, at all times, make adequate provision to protect itself against any loss resulting from changes in the rate of exchange between Indian Rupees and the currency or currencies in which the Borrower's outstanding money obligations will have to be met.

Complied with. IIFCL’s hedging strategy has taken into account all currency risk & market risks and accordingly, enters into composite hedge for

Confirmed.

Appendix 5

27

Item/Source

Loan

Agreement

Loan Covenants

Status


maximum period of 10 years as market is not available beyond that.



The Borrower shall not make a Subloan to any Qualified Enterprise unless such Qualified Enterprise has at its disposal, or has made appropriate arrangements to obtain as and when required, all local currency funds, including adequate working capital, and other resources which are required by such Qualified Enterprise for carrying out its Qualified Project in respect of which the Subloan is to be made.

Complied with. Each subproject undergoes IIFCL’s prudent examination of its accounts including its funding source, ensuring a 1.0 debt service coverage ratio for each sub borrower.

Confirmed.



The Borrower shall maintain records and accounts adequate to record the progress of each Qualified Project (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, the operations and financial condition of the Borrower, as part of the records and accounts referred to in Section 7.03 of the Loan Regulations.

Complied with. IIFCL maintains details of Lenders’ Independent Engineer(LIE) reports on the status of its subprojects, wherein its financial and physical progress are monitored against target projections, compliance on environmental and social safeguards, any issues with consortium banks and other observations are noted. Sample site project reports and independent engineer’s reports were presented to ADB team. Three levels of audit

Confirmed.

Appendix 5

28

Item/Source

Loan

Agreement

Loan Covenants

Status


are practiced by IIFCL: (i) internal audit, (ii) statutory audit done by an independent auditor appointed by the Comptroller and Auditor General (CAG), and (iii) auditing done by the CAG of India applicable to central public sector enterprise.

Loan Agreement, Article V, Particular Covenants, Section 5.05.


(a) The Borrower shall furnish to ADB all such reports and information as ADB shall reasonably request concerning the Qualified Enterprises, the Qualified Projects, and the Subloans as part of the reports and information referred to in Section 7.04(a) of the Loan Regulations.

(b) The Borrower shall include information on the execution of

the Qualified Projects and their costs as part of the report referred to in Section 7.04(d) of the Loan Regulations.

Complied with. IIFCL maintains in its records Lenders Independent Engineer’s (LIE) reports and inspection reports for each subproject. Further, IIFCL participates along with other consortium members in the visits to validate and document project status. All such records have been made available to ADB.

Confirmed.


Loan Agreement 2586

(a) The Borrower shall have its accounts and financial statements (balance sheet, statement of income and expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience, and terms of reference are acceptable to ADB, and shall, promptly after their preparation but in any event not later than 6 months after

Complied with. IIFCL’s audited balance sheet, profit & loss account for FYE 31 March 2013 had been submitted.

Confirmed.

Appendix 5

29

Item/Source

Loan

Agreement

Loan Covenants

Status


the close of the fiscal year to which they relate, furnish to ADB (i) certified copies of such audited accounts and financial statements, and (ii) the report of the auditors relating thereto (including the auditors' opinion on the use of the loan proceeds and compliance with the financial covenants of the loan agreement), all in the English language. The Borrower shall furnish to ADB such further information concerning such accounts and financial statements and the audit thereof as ADB shall, from time to time, reasonably request.

The auditor’s opinion on the use of the loan proceeds and compliance with the financial covenants of the loan agreement for FYE 31 March 2013 had been submitted.

Loan Agreements 2717 and 2822

(a) The Borrower shall have its accounts and related financial statements (balance sheet, statement of income and expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; and shall,) promptly after their preparation but in any event not later than 6 months after the end of each related fiscal year, promptly furnish to ADB (i) certified copies of such audited accounts and financial statements and (ii) the report of the auditors relating thereto (including the auditors’ opinion on the use of the loan proceeds and imprest fund procedures if used, and compliance with the financial covenants of this Loan Agreement), all in the English language. The Borrower shall furnish to ADB such other information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request.

Complied with. IIFCL’s audited balance sheet, profit & loss account for FYE 31 March 2012 and 2013 had been submitted. The auditor’s opinion on the use of the loan proceeds and compliance with the financial covenants of the loan agreement for FYE 31 March 2012 and 2013 had been submitted.

Confirmed.


(b) The Borrower shall enable ADB, upon ADB's request, to discuss the Borrower's financial statements and its financial affairs from time to time with the auditors appointed by the Borrower pursuant to Section 5.06(a) hereabove, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only in the presence of an authorized officer of the Borrower.

Complied with. Same as above.

Confirmed.

Loan Loan 3. The Borrower shall cause Qualified Enterprises to: (a) Complied with. Confirmed.

Appendix 5

30

Item/Source

Loan

Agreement

Loan Covenants

Status


Agreement, Schedule 2: Part B. Procurement for Goods and Works; Selection of Consulting Services, paras. 3–4

Agreements 2586, 2717, and 2822

adopt, to the extent possible, internationally-competitive bidding procedures when the amount of the investment is unusually large and economy and efficiency can be gained by following such procedures; and (b) ensure that the Goods and Works to be financed by Subloans shall be purchased at a reasonable price, account also being taken of relevant factors such as time of delivery, efficiency and reliability of goods, and their suitability for the Qualified Project and, in the case of consulting services, of their quality and the competence of the parties rendering them.

4. For build-operate-transfer projects and their variants, if the Qualified Enterprise or engineering, procurement, and construction contractor is selected through competitive bidding among international entities in accordance with procedures acceptable to ADB, such Qualified Enterprise or contractor may apply its own procedures for procurement provided that such procurement is for Goods and Works, and consulting services supplied from, or produced in, ADB member countries. To this end, the Qualified Enterprise shall ensure that the amount of procurement of Goods, Works, and consulting services from member countries of ADB is at least equal to the size of the Subloan for the Qualified Project.

This is built into IIFCL’s “Scheme for Financing Viable Infrastructure Project”. Overriding priority is given to PPP projects that are awarded to SPVs selected through a competitive bidding process. Projects will be eligible for direct lending by IIFCL and will also receive an overriding priority.

Loan Agreement, Schedule 2: Part C. Industrial or Intellectual Property Rights, paras. 5–6


5. (a) The Borrower shall cause Qualified Enterprises to ensure that all Goods and Works procured (including, without limitation, all computer hardware, software and systems, whether separately procured or incorporated within other goods and services procured) do not violate or infringe any industrial property or intellectual property right or claim of any third party. (b) The Borrower shall cause Qualified Enterprises to ensure that all contracts for the procurement of Goods and Works contain appropriate representations, warranties and, if appropriate, indemnities from the contractor or supplier

Complied with. The Qualified Enterprise is expected to follow all the national laws including law relating to intellectual property rights. IIFCL has not entered into any contracts with consultants funded by

Confirmed.

Appendix 5

31

Item/Source

Loan

Agreement

Loan Covenants

Status


with respect to the matters referred to in subparagraph (a) of this paragraph.

6. The Borrower shall cause Qualified Enterprises to ensure

that all ADB-financed contracts with consultants contain appropriate representations, warranties and, if appropriate, indemnities from the consultants to ensure that the consulting services provided do not violate or infringe any industrial property or intellectual property rights or claim of any third party.

ADB.

Loan Agreement, Schedule 3, Execution of Project; Financial Matters: Implementation Arrangements, paras. 1–4

Loan Agreements 2586 and 2717

1. The Borrower, as the Project Executing Agency, shall ensure that the PMU established under IIPFF I shall continue as the PMU under the project to monitor the screening and selection of Qualified Projects in consultation with the consortium of lenders, and also the day-to-day implementation. The PMU shall also be responsible for ensuring that all Qualified Projects are in compliance with the ESSF and applicable national and state policies, laws and regulations relating to environment, resettlement, and indigenous people.

Complied with. The PMU established under IIPFF I continued as the PMU to monitor the implementation of the subprojects financed under IIPFF II. Mr. Sanjeev Ghai, Chief General Manager and the PMU head was assisted by Mr. S.K. Sharma, Deputy General Manager, Ms. Ruchi Malik, Manager (Environment Safe guards) and Mr. Krupasindhu Guru, Manager (Social Safeguards). The functions of the PMU were found satisfactory. ESMU established in February 2010 under Tranche I of IPFF II continued to ensure

Confirmed.

Appendix 5

32

Item/Source

Loan

Agreement

Loan Covenants

Status


compliance of subprojects with ESSF.

Loan Agreement 2822

1. The Borrower, as the Project Executing Agency, shall ensure that the PMU established under IIPFF-1 shall continue as the PMU under the Project to monitor the screening and selection of Qualified Projects in consultation with the consortium of lenders, and also the day-to-day implementation. The PMU shall also be responsible for ensuring that all Qualified Projects are in compliance with the ESSF and applicable national and state level policies, laws and regulations relating to environment, resettlement, and indigenous peoples, and for ensuring that the Project is implemented in accordance with the detailed arrangements set forth in the FAM. Any subsequent change to the FAM shall become effective only after approval of such change by the Borrower and ADB. In the event of any discrepancy between the FAM and this Loan Agreement, the provisions of this Loan Agreement shall prevail.

Complied with. IIFCL submits Due Diligence Report (DDR) for each subprojects mentioning the compliance with ESSF and applicable national and state level policies, laws and regulations relating to environment, resettlement and indigenous peoples. ADB review the DDRs and convey its approval after satisfying that the subproject complied all the requisite requirements.

Confirmed.


2. The PMU shall be comprised of specialist staff with expertise in risk management and project advisory work. A senior officer, reporting directly to the chairman and managing director of the Borrower, shall be appointed for ensuring compliance with ESSF. The PMU shall also have a dedicated financial/accounting officer to monitor project accounts and process claims. The Borrower shall also be responsible for developing and implementing an investment program performance monitoring system.

3. The Borrower shall further develop and maintain the

capacity of the PMU staff to perform the responsibilities of the PMU, including developing and maintaining specialist capacity and expertise to conduct and implement

Complied with. Please see above

Confirmed.

Appendix 5

33

Item/Source

Loan

Agreement

Loan Covenants

Status


environmental and social safeguards due diligence by (a) developing and training existing staff with such capacity and expertise, and/or (b) engaging staff or consultants with such capacity or expertise.

4. The board of directors of the Borrower shall provide policy

direction and strategic oversight for the Project. Loan Agreement, Schedule 3, Execution of Project; Financial Matters: Selection Criteria, para. 5


(a) Each Qualified Enterprise and Qualified Project shall satisfy, at all times, the subborrower and subproject selection criteria as set out in the Scheme, which includes, inter alia, appraisal by a specialized and designated appraisal agency for technical, economic, and financial viability, and review and acceptance of the results of the appraisal by the lead bank.

(b) Without limitation to paragraph 5(a) above, each Qualified Enterprise shall: (i) be selected in accordance with ADB’s Procurement

Guidelines; (ii) have adequate resources and financial capability to

raise resources to complete and operate the relevant Qualified Project successfully;

(iii) not be in default on any prior loan from the Borrower or from any of the participating members of the consortium of lenders;

(iv) be able to provide security as required by the consortium of lenders;

(v) maintain appropriate financial records of income and expenditure to the satisfaction of the Borrower and ADB; and

(vi) comply and cause each Qualified Project to comply with ADB's policies and procedures and national and state policies, laws and regulations relating to environment, resettlement, and indigenous peoples.

Complied with. The Scheme defines the sub borrower and subproject selection criteria, appraisal and monitoring mechanisms, and lending terms for projects which include inter alia, appraisal by the lead bank for technical economic, and commercial viability. A review of the subprojects eligibility criteria, including financial and economic viability, and positive development impacts, has also been made by IIFCL. ADB has found these subprojects as eligible for financing.

Confirmed.

Loan Agreement, Schedule 3,

Loan Agreement 2586

6. Without limitation to Section 3.03 of the Loan Agreement, the Borrower shall ensure that all Qualified Projects are submitted to ADB for prior review and approval. In order to

Complied with. IIFCL has submitted

Confirmed.

Appendix 5

34

Item/Source

Loan

Agreement

Loan Covenants

Status


Execution of Project; Financial Matters: Approval Procedure, paras. 6–7

– With reference made to ADB’s Safeguard Policy Statement in para. 6 (b) of Loan Agreements 2717 and 2822

prepare and process each Qualified Project, the Borrower shall:

(a) review the preliminary designs and cost estimates as

approved by the lending consortium;

(b) review and update the ESSF for environmental assessment, involuntary resettlement, and indigenous peoples to ensure consistency with the applicable country legal frameworks;

(c) review and ascertain compliance with the ESSF and

submit the review reports to ADB together with other relevant safeguard documents; and

(d) submit the safeguards compliance certificate to ADB.

7. If any noncompliance is found during ADB’s review of the documents, ADB shall request a corrective action plan, which shall be prepared by the Borrower and submitted to ADB for approval.

project information memoranda for 20 subprojects proposed for financing under Tranches I, II and III of IIPFF II. Out of these, 15 subprojects were fully endorsed and 5 were partially approved by ADB for financing. The eligible subprojects were reviewed and ascertained for compliance with ESSF and necessary safeguard compliance certificates were submitted. Corrective action plans for each of the 5 partially approved subprojects have been relayed to IIFCL and the respective balances to fully commit the subprojects will be given upon complete compliance of the safeguard requirements.

Loan Agreement, Schedule 3, Execution of Project; Financial Matters: Environment,

Loan Agreements 2717 and 2822 – With reference made to

8. The Borrower shall implement the environmental management system framework as set out in the ESSF in accordance with its terms. The Borrower shall ensure that each Qualified Project is: (a) implemented and undertaken in accordance with the terms and conditions of the ESSF acceptable to ADB; and (b) is in compliance with applicable environmental laws, rules, regulations, and policies of India and the relevant states, and ADB’s Safeguard Policy

Complied with. The ESSF has been updated in July 2013 to ensure its consistency with ADB’s SPS (2009). Subprojects are assessed for

Confirmed.

Appendix 5

35

Item/Source

Loan

Agreement

Loan Covenants

Status


Resettlement, and Indigenous Peoples, paras. 8–13

ADB’s Environment Policy (2002) instead of ADB’s Safeguard Policy Statement in paras. 8, 9 of Loan Agreement 2586

Statement. The Borrower shall ensure that for each Qualified Project, environmental assessments, as applicable, such as: the initial environmental examination, the environmental impact assessment, and the environment management plan, or an environmental audit including a corrective action plan, if required, are submitted to ADB for prior approval, before it approves the Qualified Project.

9. The Borrower shall cause each Qualified Enterprise to

ensure that the Qualified Project is undertaken in compliance with applicable environmental laws, rules, regulations, and policies of India and the relevant state, ADB’s Safeguard Policy Statement, and the terms of the ESSF.

compliance with ESSF before approval for ADB financing. Most of the subprojects funded under IIPFF I and IIPFF II have been visited by ADB and IIFCL staff to ensure their compliance with ESSF.


10. The Borrower shall cause each Qualified Enterprise to ensure that all necessary mitigation measures shall have been undertaken to mitigate any adverse environmental impacts associated with the Qualified Project.

11. The Borrower shall implement the social safeguards

framework as set out in the ESSF in accordance with its terms. The Borrower shall ensure that each Qualified Project, which involves land acquisition and has resettlement impacts, (a) is implemented and undertaken in accordance with the terms and conditions of the ESSF acceptable to ADB; and (b) the resettlement plan is submitted to ADB for approval, before it approves the Qualified Project. The Borrower shall also ensure that adequate numbers of staff are trained and deployed to fully implement and comply with the ESSF.

Complied with. Please see above.

Confirmed.

Loan Agreements 2717 and 2822 – With reference

12. The Borrower shall cause each Qualified Enterprise to ensure that each Qualified Project, which involves land acquisition and has resettlement impacts: (a) is undertaken in compliance with all the applicable laws, rules, regulations, and policies of India, and the relevant state(s), and ADB’s Safeguard Policy Statement, and the terms of the ESSF, (b) all land and rights-of-way required for a

Complied with. Please see above.

Confirmed.

Appendix 5

36

Item/Source

Loan

Agreement

Loan Covenants

Status


made to ADB’s Involuntary Resettlement Policy (1995) instead of ADB’s Safeguard Policy Statement in paras. 12, 13 of Loan Agreement 2586

Qualified Project are obtained in a timely manner, (c) the provisions of the resettlement plans are implemented in accordance with their terms, (d) all compensation and resettlement assistance is given to the affected persons prior to their dispossession and displacement and commencement of civil works, (e) resettlement plans are updated upon completion of the detailed design and submitted to ADB for approval prior to commencement of civil works, (f) adequate staff and resources are committed to supervising and monitoring implementation of the resettlement plans, and (g) experienced and qualified external experts or qualified non-government organizations acceptable to ADB and the Borrower are engaged by the Qualified Enterprise to monitor and evaluate results of implementation of resettlement plans, and the reports are forwarded to ADB and the Borrower as required under the ESSF.

13. The Borrower shall cause each Qualified Enterprise to

ensure that Qualified Projects do not adversely affect vulnerable groups, such as indigenous peoples, and, in the event of any impact or their involvement, the Borrower shall cause each Qualified Enterprise to implement the social safeguards framework as set out in the ESSF in accordance with its terms to ensure compliance with ADB’s Safeguard Policy Statement (2009) and the terms of the ESSF.

Loan Agreement, Schedule 3, Execution of Project; Financial Matters: Financial

– para. 14 (Loan Agreements 2586 and 2717) – para. 15 (Loan Agreement 2822)

The Borrower shall ensure that:

(a) it complies, at all times, with the prudential norms, as made applicable to it by the Guarantor, including capital adequacy, income recognition, classification, and provisioning of nonperforming assets;

(b) it maintains a debt service coverage ratio (DSCR) of at

least 1.0, and it has no arrears in repayment of its current debt obligations; and

Complied with. IIFCL has adopted prudential norms relating to asset classification, income recognition, etc., prescribed by the Reserve Bank of India for NBFC-IFC. RBI

The review of submitted AFS for FYE 2013 noted that PYRD & Associates’ audit certificate lacked specific opinion on IIFCL’s computed DSCR for

Appendix 5

37

Item/Source

Loan

Agreement

Loan Covenants

Status


(c) the onlending rates to Qualified Enterprises are market-

based and adequate to cover all costs and risks associated with on lending, including any foreign exchange risk premium.

issued Certificate of Registration on 09/09/2013 permitting IIFCL to carry on the business of an NBFC-ND-IFCL. Accordingly, IIFCL classifies its assets as non-performing following the 180 days default norms. IIFCL has made necessary provisioning in respect of its loan book as per RBI requirements. IIFCL confirms that: (i) it maintains a DSCR

of at least 1:0, and has no arrears in repayment of its current debt obligations; and

(ii) the onlending rates to Qualified Enterprises are market based and adequate to cover all costs and risks associated with on lending, including any foreign exchange risk premium.

year ended 31 March 2013. Instead, published DSCR in IIFCL’s Standalone Audited Financial Results for the Six Months/Year ended 31 March 2013 posted in IIFCL’s website was relied upon. Since the covenant requires IIFCL to maintain a DSCR of at least 1.0, it was requested that IIFCL’s auditors specifically give an opinion on a computation for audit certificate next due under Loan 2822.

Loan Agreement, Schedule 3,

– Loan Agreement 2586 does not

The Borrower shall develop and maintain the capacity of ESMU staff to perform the responsibilities of the ESMU at a level that is commensurate with the overall operations of the Borrower

Complied with. Since its inception,

Confirmed.

Appendix 5

38

Item/Source

Loan

Agreement

Loan Covenants

Status


Execution of Project; Financial Matters: Institutional Matters

contain this provision – paras. 15, 16 (Loan Agreement 2717) – paras. 16, 17 (Loan Agreement 2822)

from time to time, including developing and maintaining specialist capacity and expertise to conduct and implement environmental and social safeguards due diligence by (a) developing and training existing staff with such capacity and expertise, and /or (b) engaging staff or consultants with such capacity and expertise, The Borrower shall (a) implement the recommendations set out in the Human Resources Assessment in accordance with the procedures described therein, and (b) update ADB on the status of implementation of the Human Resources Assessment in each quarterly progress report provided to ADB.

IIFCL has kept on updating the skills of its Safeguard Team & other Executives by deputing them on trainings etc. conducted by ADB, Euromoney, Indian Institute of Management, Ahmedabad and other reputed institutions both in India and abroad. The Board of IIFCL in its 59th meeting held on 8th January 2013 has in- principle accepted the HR manual prepared by Aon-Hewitt and referred the same to a sub-committee to implement the HR Policy Manual of IIFCL in phased manner. Accordingly, three meetings of the sub-committee were held and the sub-committee in its 3rd meeting held on 18th Dec.2013 has agreed to the implementation of HR strategy manual and recommended to take it further in phased manner to the Board for

Appendix 5

39

Item/Source

Loan

Agreement

Loan Covenants

Status


approval with minor modifications.

Loan Agreement, Schedule 3, Execution of Project; Financial Matters: Governance; Anticorruption

– para. 15 (Loan Agreement 2586) – para. 17 (Loan Agreement 2717) – para. 18 (Loan Agreement 2822)

The Borrower shall ensure that accountability and transparency are maintained in its operations through stakeholder meetings and publication of progress reports throughout the duration of the Project, and internal procedures and controls are instituted, maintained, and complied with to prevent any corrupt, fraudulent, collusive, or coercive practices and to ensure conformity with ADB's Anticorruption Policy (1998, as amended to date). The Borrower shall ensure that all contracts financed by ADB in connection with the subprojects specify the right of ADB to review and examine the records and accounts of the sub borrowers, suppliers, and contractors as they relate to the subprojects. The Borrower shall ensure that its annual report to its board of directors, and ADB includes a report upon and discussion of the implementation of its Corporate Governance Framework. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to examine and review any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Qualified Projects.

Complied with. IIFCL has satisfactorily disclosed all the information pertaining to ESSF, changes of company’s operations and policies on IIFCL’s website. IIFCL has conducted 5 stakeholders workshops to create and enhance public awareness on IIFCL

Confirmed.

Loan Agreement, Schedule 3, Execution of Project; Financial Matters: Performance Monitoring and Evaluation

– para. 17 (Loan Agreement 2586) – para. 18 (Loan Agreement 2717) – para. 19 (Loan Agreement 2822)

Within 6 months of the Effective Date, the Borrower shall establish baseline data for select indicators under the investment program performance monitoring system acceptable to ADB. Thereafter, the Borrower shall conduct annual surveys and shall update ADB on implementation progress against each indicator, in the quarterly progress reports. Without limiting the generality of Section 7.04 of the Loan Regulations, the Borrower shall submit to ADB the quarterly progress reports and a completion report within 3 months of the completion of all subprojects.

Complied with. Confirmed.

Loan Agreement,

– para. 18 (Loan

The Borrower shall review the performance of the Project through the PMU on a quarterly basis, which shall be

Complied with.

Confirmed.

Appendix 5

40

Item/Source

Loan

Agreement

Loan Covenants

Status


Schedule 3, Execution of Project; Financial Matters: Project Review

Agreement 2586) – para. 19 (Loan Agreement 2717) – para. 20 (Loan Agreement 2822)

completed by the tenth day of the month following the quarterly review. The board of directors of the Borrower shall review the performance semi-annually and shall forward semi-annual progress reports to ADB by the tenth day of the month following the semi-annual review. ADB shall review quarterly and semi-annual progress reports and shall undertake annual review missions and tripartite reviews chaired by the Guarantor. In addition, a midterm review shall be conducted by ADB and the Borrower in the financial year 2011–2012.

The Progress Report up to 31 March 2014 has been submitted by IIFCL to ADB. Tripartite meetings were held twice in 2013 which were chaired by the Guarantor.

Appendix 6

41

PERFORMANCE OF SECOND INDIA INFRASTRUCTURE PROJECT FINANCING FACILITY

Item No.

Subborrower 2586

Disbursed $ Amount

2717 Disbursed $ Amount


Facility Total

Disbursed

Total Project Cost

Rs Amount

Total Km Road

Financed MW Category Physical

Performance Status

1 Sew Navayuga Barwani Tollways

25,406,895 280,374 - 25,687,269 7,820,000,000 82.80 B COD on 04/04/2011

Toll is being collected and it is almost as per projection. The account is regular.

2 Coastal Gujarat Power Ltd.

135,329,819 88,673,919 33,511,697 257,515,435 170,240,000,000 4000 A COD Unit No.1-07/03/2012 Unit No.2-30/07/2012 Unit No.3-27/10/2012 Unit No.4-21/01/2013 Unit No.5-21/03/2013

The account is regular

3 Himalayan Expressways Ltd.

11,042,999 - - 11,042,999 4,748,000,000 27.60 B COD, Prepaid

The Company has prepaid the loan.

4 Badarpur Faridabad Tollway Ltd.

14,769,084 221,496 - 9,113,899 5,720,000,000 4.40 B COD 30/11/2010

The toll collection is lower than the projection. However, the Company is remitting the interest with 1-2 month delay but

Appendix 6

42

Item No.

Subborrower 2586

Disbursed $ Amount



Facility Total

Disbursed

Total Project Cost

Rs Amount

Total Km Road


Performance Status

the account is regular.

5 Jal Yamuna Expressway

23,451,203 38,802,547 - 68,130,431 97,392,900,000 164.00 B COD 07/08/2012

The toll collection is lower than the projection but the Company is remitting the interest regularly. The account is standard.

6 Pune Solapur Expressway Pvt. Ltd.

- 13,435,405 5,595,730 19,031,135 13,710,000,000 110.00 B COD 04/02/2013

The toll collection is lower than the projection but the Company is remitting the interest regularly. The account is standard

7 Soma Isolux Kishangarh-Beawar Tollway

- 25,469,297 5,640,457 31,109,754 13,046,400,000 132.91 B Up to March 14, 98%

The project is under implementation.

8 Soma Isolux Surat Hazira Tollway

- 10,527,597 12,933,435 23,461,032 24,186,500,000 93.55 B Up to March 14, 78%.

The project is under implementation

9 Dhule Palasner Tollways Ltd.

- 9,535,637 3,836,680 13,372,317 14,200,000,000 97.50 B COD 23/01/2012


10 Halol Godhra Shamlaji Tollways

- 7,366,238 1,553,437 8,919,675 13,050,000,000 166.23 B COD 04/04/2012


Appendix 6

43

Item No.

Subborrower 2586

Disbursed $ Amount



Facility Total

Disbursed

Total Project Cost

Rs Amount

Total Km Road


Performance Status

11 IRB Pathankot Amritsar Toll Road

- 13,948,528 12,164,363 26,112,891 14,450,000,000 102.42 B Up to March 14, 97.23%


12 Rayalseema Expressway Pvt. Ltd.

- 22,091,966 20,988,614 43,080,580 16,360,000,000 188.75 B Up to March 14, 84.86%


13 Navayuga Quazigund Expressway Pvt. Ltd.

- 8,906,623 9,633,954 18,540,577 24,141,500,000 15.35 B Up to Feb.14, 37.67%


14 Simhapuri Expressway Ltd.

- 10,740,374 18,386,773 29,127,147 25,500,000,000 183.62 B Up to Feb. 14, 48.69%


15 Ashoka Sambalpur Baragarh Tollway Pvt. Ltd.

- - 22,063,873 22,063,873 11,421,800,000 88.00 B Up to April 14, 88%


16 Farakka Raiganj Highways Ltd.

- - 9,911,306 9,911,306 13,784,400,000 103.00 B Up to March 14, 75.00%


17 Baharampore Farakka Highways Ltd.

- - 9,202,361 9,202,361 11,691,100,000 103.27 B PCOD, 15.05.2014

Toll collection starts from 15.05.2014 and it is too early to comment on profitability.

18 Maharashtra Eastern Grid Power Transmission Co. Ltd.

- - 40,587,710 40,587,710 47,150,000,000 B Up to Dec.13, Foundation- 99.87% Earthing- 71.50% Erection- 99.50% Stringing- 95.65%


Appendix 6

44

Item No.

Subborrower 2586

Disbursed $ Amount



Facility Total

Disbursed

Total Project Cost

Rs Amount

Total Km Road


Performance Status

19 GVK Deoli Kota Expressway Pvt. Ltd.

- - 17,958,022 17,958,022 8,234,500,000 83.04 B Up to March 14, 87.00%


20 Jabalpur Transmission Co. Ltd.

- - 16,031,587 16,031,587 11,680,000,000 B Up to Feb.14 Foundation- 78% Erection- 73% Stringing- 40%


TOTAL 210,000,000 250,000,000 240,000,000 700,000,000 548,527,100,000 1,746.44 4000 1. For the projects which are under implementation stage, no Profit & Loss is required to be prepared only Balance sheet is prepared. 2. In case of post COD projects, the time available for preparing the Profit & Loss account and Balance Sheet for the FY ending March 31, 2014 is till Sep.2014. The required statement would be sent thereafter.

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