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Means of Financing Projects – Loans, Bonds, PPP, SPV Structure

Infrastructure projects use diverse financing mechanisms depending on project size, sponsor strength, and market conditions.

1. Term Loans from Banks

Characteristics

  • Most common financing method in India (70-80% of projects)
  • Provided by commercial banks and DFIs
  • Tenure: 10-18 years
  • Floating rate: MCLR + 2-3%
  • Secured: First charge on project assets

Syndication

Large projects require loan syndication (multiple banks):

Example:

  • Total Debt: ₹2,000 crore
  • Lead Arranger: State Bank of India (₹500 crore)
  • Participants: ICICI (₹400 crore), HDFC (₹300 crore), Axis (₹300 crore), Others (₹500 crore)

Advantages: Risk diversification, larger loan size Disadvantages: Coordination challenges, higher documentation cost

2. Bonds (Debt Capital Markets)

Types

A. Infrastructure Bonds (Tax-Free)

  • Issued by NHAI, IRFC, PFC, REC
  • Tax benefit: Interest income exempt from tax (earlier, now discontinued for new bonds)
  • Tenure: 10-15 years
  • Coupon: 7-8% (lower than bank loans due to tax benefit)
  • Investors: Retail investors, HNIs

B. Corporate Bonds

  • Issued by infrastructure companies (SPVs rare)
  • Rating: AA or above
  • Coupon: 9-11%

C. Masala Bonds (Rupee-denominated offshore bonds)

  • Issued abroad but denominated in INR
  • Issuer: Indian companies
  • Investor base: Foreign institutional investors
  • Example: HDFC issued ₹3,000 crore Masala Bonds in London

Advantages:

  • Longer tenure (15-20 years vs 10-18 for bank loans)
  • Fixed rate (certainty)
  • Diversification from banks

Disadvantages:

  • Requires credit rating (AA+)
  • Higher transaction costs
  • Strict RBI/SEBI regulations

3. Public-Private Partnership (PPP) Models

PPP = Collaboration between government and private sector to develop infrastructure.

PPP Models

A. Build-Operate-Transfer (BOT)

  • Private party builds, operates for concession period (15-30 years), transfers to government
  • Revenue: User charges (tolls)
  • Example: Most toll roads in India

B. Build-Own-Operate (BOO)

  • Private party owns asset permanently
  • Example: Power plants, ports

C. Build-Operate-Lease-Transfer (BOLT)

  • Private party leases to government/operator
  • Government pays lease rental

D. Annuity-Based

  • Government pays fixed annuity to private developer
  • User doesn't pay (roads are free)
  • Example: Some national highways

E. Hybrid Annuity Model (HAM)

  • 40% paid by government during construction (annuity)
  • 60% recovered through toll/user charges
  • Most popular currently for highways

4. Special Purpose Vehicle (SPV) Structure

Why SPV?

  • Ring-fences project from sponsor's other businesses
  • Bankruptcy remote: If SPV fails, doesn't affect sponsor
  • Off-balance sheet for sponsor
  • Lenders have direct control over project assets

SPV Structure Diagram

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Example:

  • Sponsors: Tata Power (51%), ADB (25%), IFC (24%)
  • SPV: "Gujarat Solar One Pvt Ltd"
  • Purpose: 100 MW solar plant in Gujarat

5. Takeout Finance

Concept: Long-term lender "takes out" (refinances) short-term construction lender after project completion.

Parties:

  • Construction Lender: Bank (10-12% rate, higher risk)
  • Takeout Lender: Insurance company, pension fund (8-9% rate, lower risk post-construction)

Advantage: SPV gets lower interest rate after construction

6. Project Development Funds (PDFs)

  • Specialized infrastructure funds (IIFCL, NIIF)
  • Provide long-tenure, low-cost finance
  • Subordinated debt or equity

Example: National Investment and Infrastructure Fund (NIIF) - ₹40,000 crore corpus

7. Multilateral/Bilateral Lending

Providers: World Bank, ADB, IFC, JICA, KfW

Features:

  • Lower interest (6-8% in foreign currency)
  • Long tenure (20-25 years)
  • Grace period (5-7 years)

Example: Delhi Metro - JICA loan at 1.5% for 30 years

Challenge: Forex risk (if loan in USD/EUR)

8. External Commercial Borrowings (ECB)

  • Foreign currency loans from overseas lenders
  • Approval: RBI
  • Cost: LIBOR/SOFR + 2-4%
  • Risk: Currency depreciation

Summary

  • Term loans most common (70-80% projects)
  • Bonds offer longer tenure, fixed rates
  • PPP models: BOT, BOO, HAM (40:60 government:private)
  • SPV structure ring-fences project, enables off-balance sheet financing
  • Takeout finance refinances post-construction at lower rates
  • Multilateral lending (ADB, World Bank) offers cheapest long-term finance

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