private sector infrastructure facility at state level project · before the private sector...

Completion Report

Project Number: 34262 Loan Number: 1871 June 2009

India: Private Sector Infrastructure Facility at State Level Project

CURRENCY EQUIVALENTS

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

At Appraisal At Project Completion 20 November 2001 6 September 2007 Re1.00 = $0.02088 $0.02444 $1.00 = Rs47.9 Rs40.9

ABBREVIATIONS

ADB – Asian Development Bank AMTRCL – Ahmedabad Mehsana Toll Road Company Limited AMTRP – Ahmedabad Mehsana Toll Road Project BME – benefit monitoring and evaluation BOOT – build-own-operate-transfer DSCR – debt service coverage ratio Ecosmart – IL&FS Ecosmart Limited EIRR – economic internal rate of return EMMP – environmental management and monitoring plan EWCP – East-West Corridor Project FIRR – financial internal rate of return GRICL – Gujarat Toll Road Investment Company Limited IBRD – International Bank for Reconstruction and Development IL&FS – Infrastructure Leasing & Financial Services Limited IFIN – IL&FS Financial Services Limited IFRS – international financial reporting standards ITNL – IL&FS Transportation Networks Limited KfW – Kreditanstalt für Wiederaufbau km – kilometer LIC – Life Insurance Corporation of India mld – million liters per day NBFC – nonbanking financial company NCD – nonconvertible debenture NHAI – National Highways Authority of India NTADCL – New Tirupur Area Development Corporation Limited NTADP – New Tirupur Area Development Project O&M – operation and maintenance PAF – project affected family PCR – project completion report PPP – public–private partnership PSIF I – Private Sector Infrastructure Facility PSIF II – Private Sector Infrastructure Facility at State Level Project RBI – Reserve Bank of India RRP – report and recommendation of the President SEBI – Securities and Exchange Board of India SEZ – special economic zone SPV – special purpose vehicle TA – technical assistance USAID – United States Agency for International Development UTI – Unit Trust of India VHTRP – Vadodara Halol Toll Road Project WGEL – West Gujarat Expressway Limited WGEP – West Gujarat Expressway Project

NOTES

(i) The fiscal year (FY) of IL&FS ends on 31 March. FY before a calendar year

denotes the year in which the fiscal year ends, e.g., FY2009 ends on 31 March 2009.

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

Vice-President X. Zhao, Operations 1 Director General K. Senga, South Asia Department (SARD) Director T. Kondo, Country Director, India Resident Mission (INRM) Team leader S. Singh, Financial Officer, INRM Team members G. Mahajan, Environment Officer, INRM R. Pande, Associate Financial Analyst, INRM R. Swarankar, Resettlement and Social Development Officer,

INRM 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 1 C. Relationship with the Asian Development Bank and Other Lenders 1 D. Relevance of Design and Formulation 2 E. Related Technical Assistance 4

II. IMPLEMENTATION 4 A. Lending Policies 4 B. Characteristics of Subloans 4 C. Implementation and Internal Operation of Subprojects 6 D. Operational Performance of 9 Infrastructure Leasing & Financial Services Limited E. Financial Performance of 10 Infrastructure Leasing & Financial Services Limited F. Financial Statements and Ratios 10 G. Covenants 11 H. Performance of the Asian Development Bank 12

III. EVALUATION 13 A. Loan Appraisal 13 B. Implementation 14

IV. ASSESSMENT AND RECOMMENDATIONS 14 A. Evaluation Criteria 14 B. Relevance 15 C. Effectiveness in Achieving Outcome 15 D. Efficiency in Achieving Outcome and Outputs 15 E. Preliminary Assessment of Sustainability 15 F. Overall Assessment 16 G. Impact 16 H. Lessons 16 I. Recommendations 17

APPENDIXES 1. Project Framework 182. Eligibility Criteria, Access Criteria, and Continued Access Criteria 21

3. Technical Assistance Completion Report: Enhancing Private Sector Participation in Infrastructure Development at the State Level (India) (TA 3791- IND)

23

4. Overview of Subloans 265. Subproject Profiles 276. Financial Statements of IL&FS Limited 397. Status of Compliance with Key Loan Covenants 42

BASIC DATA A. Loan Identification 1. Country India 2. Loan Number 1871 3. Loan Title Private Sector Infrastructure Facility at State Level Project

4. Borrower Infrastructure Leasing & Financial Services Limited (IL&FS) (The Government of India

is the guarantor of the loan.) 5. Amount of Loan $100 million 6. Project Completion Report Number PCR: IND 1104

B. Loan Data 1. Appraisal Date Started 4 October 2001 Date Completed 5 October 2001 2. Loan Negotiations Date Started 10 November 2001 Date Completed 13 November 2001 3. Date of Board Approval 11 December 2001 4. Date of Loan Agreement 5 August 2002 5. Date of Loan Effectiveness In Loan Agreement 5 November 2002 Actual 21 October 2002

Number of Extensions None 6. Terminal Date for Commitments In Loan Agreement 21 October 2006

Actual 21 October 2006 Number of Extensions None

7. Closing Date In Loan Agreement 21 October 2007

Revised 6 September 2007 (The closing date was brought forward owing to partial cancellation of the loan in July 2007 and the lack of a subproject pipeline.)

Number of Extensions None 8. Terms to the Borrower

Interest Rate London interbank offered rate + 0.60% fixed spread

Maturity (number of years) 20 years, with last repayment date as 15 December 2027

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Grace Period (number of years) 5 years Free Limit Not specified

Repayment Terms Amortized in semiannual installments over 15 years.

9. Terms of Relending (if any) The ADB loan has been re-lent in rupees to

subborrowers at prevailing market rates as envisaged in the report and recommendation of the President. The ADB loan is to be hedged against foreign exchange risk by the participating financial institution.

10. Interest Rate for Subloans

Name of Subloan Original Interest

Rate (at approval) Revised Interest Rate (at project

completion review mission)

(% per year) 15.00

(nonconvertible debentures) Ahmedabad Mehsana Toll Road

Project 15.87 (deep discount bonds)

11.75 (IDBI Bank Ltd. prime lending

rate less 1.75)

New Tirupur Area Development Project

14.50 11.00

West Gujarat Expressway Project 12.50a 12.00 a 12.50% was applicable (payable monthly) until the commercial operations date and 12.00%

thereafter.

11. Disbursements

a. Dates

Initial Disbursement

21 October 2002

Final Disbursement

6 September 2007

Time Interval

5 years

Effective Date 21 October 2002

Original Closing Date

21 October 2007

Time Interval

5 years

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b. Amount ($ million)

Name Last of the Original Partial Revised Amount

Borrower Category Allocation Cancellations Allocation Disbursed

IL&FS Project Expenditure

100.00 49.6a 50.40 50.40

a This amount includes $25.2 million that was canceled on 9 November 2006 and $24.4 million that was canceled on 4 July 2007.

C. Implementation Data

1. Number of Subloans 3

2. Sectoral Distribution of Subloans

The Loan Agreement stipulated that the Borrower would finance at least two subprojects, preferably each in a different subsector and each in a different state. Against this, three subloans were disbursed in two different sectors: roads in Gujarat, and water supply and sanitation in Tamil Nadu.

3. Size of Subloans (actual) ($ million)

Range

Number of Subloans

Aggregate Amount

Up to 10 2 14.41 From 10 to 75a 1 34.99

Total 3 49.40b a This is the exposure limit of the Borrower for each subloan stipulated in the Loan Agreement. b This amount excludes front-end fees of $1.0 million.

4. Project Performance Report Ratingsa

Ratings

Implementation Period

Development Objectives

Implementation Progress

From December 2001 to May 2002 S S From June 2002 to August 2002 S U From September 2002 to December

2007 S S

S = satisfactory, U = unsatisfactory. a Ratings in the project performance report are arrived at by a method different from that for

project completion report ratings.

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D. Data on Asian Development Bank Missionsa

Name of Mission Date No. of Persons

No. of Person-

Days Specialization of Membersb

Fact-Finding Mission 16 April–3 May 2001

4 72 c, k ,m, m

Consultation Mission 3–17 August 2001 6 90 b, c, f, g, i, k

Appraisal Mission 4–5 October 2001 6 12 a, b, e, i, j, k

Inception Mission 1 October 2002 2 2 a, d

Contact/Consultation Mission

7–10 April 2003 3 3 k, l, m

Midterm Review Mission

4 March–15 April 2004

2 14 h, l

Review Mission 8 September 2004 1 1 h

Review Mission 4–7 October 2005 2 8 h, l

Involuntary Safeguard Review Mission

19–24 November 2006

4 24 f, f, h, l

Special Project Administration Mission

14 March–1 April 2008

4 24 d, f, h, l

Project Completion Review Missionc

10–18 December 2008

2 6 h, l

a The mission details provided here are based on the review of project files. b a = financial analyst, b = counsel, c = economist, d = control officer, e = programs officer, f = resettlement

specialist, g = environment specialist, h = financial officer, i = financial economist, j = resident representative, k = lead financial sector specialist, l = senior economist (financial sector), m = onward for other categories.

c Financial Officer Shalini Singh was the mission leader for the Project Completion Review Mission, which also included Senior Economist (Financial Sector) Tetsu Ito as mission advisor.

E. Related Loans

Item Loan No. Date of Signing of Loan Agreement

Amount

Infrastructure Leasing and Financial Services Limiteda

1282

6 January 1995 $15 million

a This is a private sector loan.

I. BACKGROUND A. History 1. Infrastructure Leasing & Financial Services Limited (IL&FS) was incorporated in 1987 under the Companies Act, 1956. It was promoted by the Central Bank of India, Housing Development Finance Corporation Limited, and Unit Trust of India (UTI). The shareholding of IL&FS has broadened over the years with the participation of institutional shareholders—State Bank of India, Life Insurance Corporation of India (LIC), ORIX Corporation–Japan, and Abu Dhabi Investment Authority. UTI sold its stake in IL&FS in 2006 to LIC. IL&FS was mandated to undertake the development and commercialization of infrastructure projects, and also provide financial services to facilitate such projects. IL&FS was first a deposit-taking nonbanking financial company (NBFC), and in 2004 converted to a non-deposit-taking NBFC. IL&FS has undertaken many businesses in infrastructure and financial services. IL&FS promoted a number of subsidiaries and associate companies for domiciling these businesses. In 2008, as a part of the reorganization of its businesses by lines of business operations, IL&FS transferred its financial services undertaking to its wholly owned subsidiary, IL&FS Financial Services Limited (IFIN)—also an NBFC—with effect from 1 April 2007. After restructuring, IL&FS transformed into a holding company1 and has written to Reserve Bank of India (RBI) for cancellation of its NBFC registration.2 B. Scope of Operations 2. IL&FS’s businesses, domiciled in various group companies, include development, financing, and implementation of infrastructure projects in sectors such as roads, bridges, water supply, area development, ports, power, and special economic zones (SEZs). Its businesses also span a wide range of financial services such as investment banking, broking, private equity, trusteeship, and securities services. As a group holding company, IL&FS provides the direction, oversight, and policy framework for the group companies. Its objective is to drive growth in each of its businesses while exploring group synergies and making optimal use of group resources. As a holding company, IL&FS will lend to and invest in group companies, and manage real estate assets. C. Relationship with the Asian Development Bank and Other Lenders 3. Asian Development Bank Operations with IL&FS. Before the Private Sector Infrastructure Facility at State Level Project (PSIF II), the Asian Development Bank (ADB) had provided a loan of $15 million to IL&FS in 1993.3 The loan was fully utilized to fund subloans and leases to industries, mainly for plant, machinery, and equipment to enhance industrial and manufacturing processes in India. 4. Funding Structure of IL&FS. Before 2001, IL&FS’s funding structure consisted mainly of bank borrowings. In subsequent years, borrowings from nonbanking sources increased substantially, with such sources accounting for about 81% of the total borrowings as of 30 September 2008. Currently, IL&FS’s borrowing mix comprises deposits, bank loans, 1 The ADB loan to IL&FS and the subloans under the ADB loan remain on IL&FS's books. 2 RBI had not responded as of the Project Completion Review Mission. 3 ADB. 1993. Report and Recommendation of the President to the Board of Directors on Proposed Private Sector

Facility in India. Manila.

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nonconvertible debentures, commercial paper, loans from bilateral and multilateral agencies, and subordinate debt. Funding from bilateral and multilateral agencies accounted for 15% of the total debt as of 30 September 2008, and for the entire foreign currency borrowing of IL&FS. 5. Other Development Partners. IL&FS has partnered with multilateral and bilateral organizations, such as the International Bank for Reconstruction and Development (IBRD), the United States Agency for International Development (USAID), and Kreditanstalt für Wiederaufbau (KfW), to implement projects and programs in the infrastructure sector and for debt market development. Since 2002, the borrowings from bilateral and multilateral agencies have included the ADB loan under PSIF II and €30.55 million from KfW. D. Relevance of Design and Formulation 6. Project Design. According to the project framework (Appendix 1), the expected impact of PSIF II was to support economic growth and poverty reduction. The expected outcome of PSIF II was enhanced private sector participation in infrastructure development in four selected states—Andhra Pradesh, Gujarat, Karnataka, and Madhya Pradesh. The outputs comprised relending by two participating financial institutions—IL&FS and Industrial Development Bank of India,4 now IDBI Bank Limited—in the four states, developing an enabling environment for private sector participation in infrastructure, strengthening the public–private interface, establishing an incentive structure for promoting private sector participation, and developing risk-reduction strategies. PSIF II included technical assistance (TA) to help the four selected states address identified constraints to greater private sector participation in infrastructure development and facilitate project development. 7. Rationale for the Loan. The report and recommendation of the President (RRP) for PSIF II noted that the anticipated demand for private infrastructure investments had not materialized as few infrastructure projects were reaching financial closure. The reasons cited for this were the slower pace of reforms, the unsuitability of governance structures for broad participation by the private sector in infrastructure, the need to strengthen the public–private interface, and the difficulty in disaggregating and allocating risks in the domestic capital market. These constraints were particularly pronounced at the state level. Therefore, PSIF II attempted to help Indian states address these constraints by providing a policy and operational framework for attracting private participation in infrastructure. Moreover, by focusing assistance on a few selected states, PSIF II sought to establish an appropriate incentive structure for other states to improve performance and pursue required reforms. 8. Consistency with ADB’s Strategy. PSIF II was consistent, at appraisal, with ADB’s country operational strategy, which sought to alleviate infrastructure bottlenecks and catalyze private investments in the energy, transport and communications, and urban and housing sectors. In its catalytic role, the creation of an environment conducive to private sector participation was emphasized. This included the regulatory framework, competitive mechanisms, and appropriate tariff-setting mechanisms, as well as risk-sharing and risk-mitigating measures. Further, a key feature of the country’s operational strategy was a shift in ADB activities towards support for comprehensive economic and structural reforms in selected states, since states in India have considerable autonomy and play a crucial role in the delivery of social services and provision of infrastructure. PSIF II continues to be consistent with ADB’s strategy, since

4 Industrial Development Bank of India withdrew from the Project in November 2003 and prepaid the outstanding

assistance on 17 January 2006.

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infrastructure development is one of the five core areas under ADB’s recently approved long-term strategic framework 2008–2020 (Strategy 2020).5 9. Consistency with India’s Development Objectives. PSIF II was consistent with the Government’s priorities. The Government recognized that removal of infrastructure constraints and more investment would be essential to enabling the country to achieve faster and sustainable growth. This was reflected in the Ninth Five-Year Plan, which strongly emphasized the need for a more commercial approach to the provision of infrastructure by public sector units and the importance of significantly boosting private sector participation. PSIF II’s purpose continues to be relevant today. The Eleventh Five-Year Plan aims to achieve a sustainable average annual growth rate of 9%. Infrastructure inadequacies would constitute a significant constraint in realizing this development potential. To overcome this constraint, an ambitious program of infrastructure investment is being developed for the Eleventh Plan, which assumes that a significant percentage of this investment should come from the private sector. 10. Adequacy of Appraisal. A Reconnaissance Mission, concluded in March 2001, discussed the objectives, possible structure, scope, and features of PSIF II with potential participating financial institutions, reforming states, and the central Government. ADB’s intervention in the earlier Private Sector Infrastructure Facility (PSIF I) was focused on enhancing financial intermediation and the development of India’s domestic capital market, because at that time the supply of funds was considered the main constraint in view of the enormous potential for infrastructure investments. Although at the time of the Reconnaissance Mission PSIF I was 98% committed, the mission recognized that few bankable infrastructure projects were becoming available for financing. The mission identified several reasons for the lack of demand: (i) the slow progress of reforms, particularly at the state level; (ii) weak public–private interface; (iii) the lack of project development and financial engineering expertise at the state level; and (iv) the inability to unbundle and allocate risk because the capital market was underdeveloped. Therefore, the mission proposed an integrated approach to infrastructure development with partnering of key players in infrastructure that included the state governments and the national financial institutions. Three more loan processing missions—the Fact-Finding Mission, a consultation mission that was upgraded to a Pre-appraisal Mission, and an Appraisal Mission—were conducted between April 2001 and October 2001. Unlike PSIF I, PSIF II focused more on policy reforms, frameworks, and implementing mechanisms at the state level. Four progressive states that met the eligibility criteria (para. 11)—Gujarat, Andhra Pradesh, Karnataka, and Madhya Pradesh—were selected to demonstrate the importance of an enabling environment for private investments. The project also targeted a few infrastructure sectors requiring reform. 11. The appraisal appropriately identified the constraints to private sector participation in infrastructure. The project focused on the enabling environment of the states, and the Loan Agreement required the states to fulfill the eligibility criteria, satisfy the access criteria, and commit to the continued access criteria. These criteria are reproduced in Appendix 2. Further, the attached TA (para. 12) for the four selected states provided advice on improving the enabling environment. However, the project design, as well as the attached TA, did not emphasize sufficiently the states’ capacity to develop and structure infrastructure projects for private participation and establish a robust pipeline of subprojects. Addressing the states’ capacity constraints upfront, perhaps through a separate TA, would likely have reduced the time

5 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank 2008–2020.

Manila.

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required for bringing a potential subproject to readiness and increased the number of potential subprojects, thereby improving the subproject pipeline and loan utilization. E. Related Technical Assistance 12. PSIF II included a TA grant of $1.5 million to be provided to the four selected states to assist them in addressing specific constraints in the development of an enabling environment for private sector participation in infrastructure and to facilitate the processing of eligible projects for PSIF II financing. The TA final report, submitted with a delay in February 2005, included a policy matrix, which identified for major sectors in each state, the list of constraints that needed to be addressed. The TA completion report noted that there is more widespread recognition among various states of the benefits of an enabling policy and institutional framework for private sector participation. However, the TA was not successful in building a strong pipeline of projects, perhaps because it was not narrowly focused on this objective. The TA was rated successful by the TA completion report prepared in September 2006 (Appendix 3).

II. IMPLEMENTATION A. Lending Policies 13. IL&FS has maintained a consistent policy on infrastructure financing and public–private partnership (PPP) lending since 2001. After its transformation into a holding company, IL&FS lends to its subsidiaries, associates, and joint ventures. 6 IL&FS's lending would comprise existing exposures; and lending to new businesses being promoted, in order to provide comfort to counterparty banks in complex businesses. According to IL&FS management, the model of lending to new businesses would evolve based on the requirements of the environment and IL&FS’s own requirements. B. Characteristics of Subloans 14. Subloan Criteria. Subloans were to be provided to projects in the specified sectors:7 power, roads, urban mass transit, minor ports, telecommunications (only submarine optic fiber cable connection projects), airports, water supply and sanitation, information technology (only cyberparks primarily for private companies), and SEZs, in the four states selected at appraisal based on eligibility criteria (Andhra Pradesh, Gujarat, Karnataka, and Madhya Pradesh). In the event, sufficient subprojects were not available in the selected states, the RRP provided for the inclusion of other states that had demonstrated, to the satisfaction of ADB, their fulfillment of the eligibility criteria. The selected states and eligible states were to fulfill the access criteria and commit to the continued access criteria (para. 11). 15. The Loan Agreement stipulated that the Borrower would finance at least two subprojects, preferably each in a different subsector and each in a different state. The subproject company was to maintain at least 51% private sector ownership. Subloans were limited to 25% of the total project cost or the single exposure limit of the Borrower under applicable prudential regulations, whichever was lower, subject to a maximum of $75 million. The stipulated minimum maturity of the subloans was 10 years, including a grace period not exceeding 5 years. 6 Following the restructuring, lending to companies not in the group would be undertaken by IFIN. 7 The Loan Agreement further identified the type of projects to be funded in each of the specified sectors. For

instance, in the power subsector, the specified project would consist only of modernization or upgrading of existing private power plants, including generation, privately sponsored power distribution or transmission projects, or power distribution or transmission project that are being privatized.

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16. Loan Utilization. IL&FS cancelled $49.60 million ($25.162 million effective 16 November 2006 and $24.438 million effective 14 August 2007) and utilized $50.40 million of the $100 million loan facility. 17. Progress in the implementation of PSIF II was very slow, with only one project, Ahmedabad Mehsana Toll Road Project (AMTRP) in Gujarat, having been funded by the time of the midterm review in 2004. Further, the pipeline of projects in the selected states was insufficient to utilize the funds available under the facility.8 The reasons for the lack of projects included (i) ample liquidity in the system, resulting in competing sources of funds; (ii) the long period required for development of projects in sectors such as airports and SEZs; (iii) the need to improve government capacity in many states to structure a private sector project and take it to the stage of bankability; and (iv) the project company’s apprehension with respect to the procedural requirements of ADB subloans, especially social safeguard procedures. 18. Although ADB agreed during the midterm review mission to extend the scope of PSIF II to other states because of the insufficient pipeline in the selected states, the availability of potentially eligible subprojects was still limited. Two more subprojects, New Tirupur Area Development Project (NTADP) in Tamil Nadu and West Gujarat Expressway Project (WGEP) in Gujarat, were funded under PSIF II. IL&FS made concerted efforts to include two other pipeline subprojects, aggregating about $44 million, in the road sector in Andhra Pradesh and Rajasthan. However, these were not funded under the PSIF II because of (i) difficulties in meeting ADB’s guidelines, particularly on social safeguards; (ii) limited time to the closure of PSIF II; and (iii) the advanced stage of the potential subproject in the case of the road project in Rajasthan. ADB subsequently conducted several consultations with IL&FS, but learnt that no more eligible subprojects were in the pipeline that could be assisted under PSIF II. 19. Loan and Subloan Terms. The Government guaranteed the loan, which was made from ADB’s London interbank offered rate-based lending facility with a maturity of 20 years, including a grace period of 5 years. To facilitate prudent debt management, the loan carried conversion options for (i) a change of any portion of the loan currency to a currency approved by ADB, (ii) a change of interest rate basis on any portion of the principal amount from floating rate to fixed rate, and (iii) establishment of an interest rate cap or collar on any portion of the floating rate loan outstanding. The entire loan outstanding to IL&FS is currently in dollars and is on a floating rate basis. IL&FS reported that it has entered into swap agreements to hedge currency and interest rate risks. Since the maturity of the swaps is less than the term of the loan, IL&FS will be entering into further swaps on maturity of the outstanding swap arrangements. IL&FS noted that the cost of the ADB loan, including the cost of hedging, was competitive. 20. An overview of the three subloans is provided in Appendix 4. All the subloans were denominated in rupees. At appraisal, the rates of interest were market-determined. However, AMTRP and NTADP underwent debt restructuring and the terms of the subloans were revised as indicated in Appendix 4. The share of ADB funding in total subproject cost ranged from 9.18% to 15.30%. Thus the loan is estimated to have resulted in a leverage of 7 times.9

8 Industrial Development Bank of India withdrew from the facility and cancelled the unutilized loan amounting to

$91.74 million also primarily because of a lack of ready availability of bankable projects and the costs arising from the commitment charges under the Project.

9 The leverage has been calculated as the ratio of the project cost at appraisal to the ADB loan.

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21. Distribution of Subloans. IL&FS used the loan for three subprojects: AMTRP and WGEP in the road sector in Gujarat, and NTADP in the water supply and sanitation sector in Tamil Nadu. Tamil Nadu was included as an eligible state after the Midterm Review Mission recommended the expansion of the scope of the project to other eligible states. Thus, IL&FS met the loan agreement specification of financing at least two subprojects, each in a different subsector and each in a different state. 22. Purpose of Subprojects. AMTRP was one of the pioneering initiatives of the Gujarat government in developing state roads through PPPs. The subproject involved design, financing, development, construction, and operation and maintenance (O&M) of 51.6-kilometer (km) stretch of Ahmedabad Mehsana road on State Highway 41 on a build-own-operate-transfer (BOOT) basis. 23. NTADP is the first project in the urban water sector developed through a PPP in India. The purpose of NTADP was (i) design, construction, and O&M of a potable bulk water supply scheme with a capacity of 185 million liters per day (mld) (expandable to 250 mld) for Tirupur Municipality, nearby villages, and industries outside of Tirupur Municipality; (ii) supply and O&M of a water distribution system to industries outside Tirupur Municipality; (iii) design and augmentation of a water distribution system for Tirupur Municipality; (iv) design and construction of a sewage collection system for 60% of the wards in Tirupur Municipality; (v) design and construction of on-site sanitation facilities for economically weaker sections within Tirupur Municipality; and (vi) design, construction, and O&M of a sewage treatment plant and disposal system for Tirupur Municipality during the concession period. 24. WGEP is a PPP component of the East-West Corridor Project (EWCP), 10 with the National Highways Authority of India (NHAI) as a sponsoring authority. The brownfield component of the subproject aimed to widen the existing four-lane Gondal–Rajkot section (32 km), while the greenfield component consisted of widening the existing Jetpur Gondal section (26 km) and the Rajkot bypass section (10 km) on national highway NH-8B in Gujarat from two lanes to four lanes. The subproject scope covered design, financing, construction, and O&M on a build-own-transfer basis. C. Implementation and Internal Operation of Subprojects 25. The implementation and internal operations of the subprojects are summarized in paras. 26 to 38. Details are provided in Appendix 5. 26. Implementation. AMTRP was commissioned on 20 February 2003, 6 months ahead of schedule. The project was implemented at a cost of Rs3.1 billion, below the original estimate of Rs3.2 billion. The World Bank was involved in the entire process of project development, and financially supported the project through a credit line to IL&FS. ADB approved the project at a later stage of project implementation on 27 November 2002. 27. New Tirupur Area Development Corporation Limited (NTADCL), the project company of NTADP, implemented the water supply component ahead of schedule and started supplying water in April 2005. However, because of a delay in the completion of performance tests, commercial operations began in November 2006. The water supply component accounts for

10 The public sector part of EWCP was funded by ADB with NHAI as the Executing Agency. ADB. 2002. Report and

Recommendation of the President to the Board of Directors on a Proposed Loan to India for the East-West Corridor Project. Manila (Loan 1944-IND).

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about 85% of the project cost. Construction of the sewerage component was completed by NTADCL with some delay because of a change in the site of the project. However, the commissioning has been significantly delayed because Tirupur Municipality is yet to provide individual house service connections. The scheduled completion date of the sewerage component was October 2005. The low-cost sanitation facility, originally scheduled to be completed by October 2005, was completed in December 2008 at a cost of about Rs60 million (within the original estimate). The delay in construction was primarily because of a delay in the allocation of land by Tirupur Municipality. The project is expected to be implemented within the original estimated cost of Rs10,230 million. 28. The brownfield component of WGEP was commissioned on 28 October 2006 and the greenfield component on 16 May 2008. The company completed the project within the scheduled completion date of 17 March 2008, but the commissioning was delayed because of a delay in toll notification by NHAI. The project was completed at an estimated cost of Rs2,505 million, as against the originally proposed cost of Rs2,402 million. The cost overrun has been met by the sponsors through the subscription to the preference share capital of the company. 29. Operations. The original project company of AMTRP, Ahmedabad Mehsana Toll Road Company Limited (AMTRCL), incurred losses in the initial years of operations because traffic volume was less than expected. Lenders required operational restructuring through a merger of AMTRCL and Vadodra Halol Toll Road Company Limited 11 as a precondition for debt restructuring. Vadodra Halol Toll Road Company Limited and AMTRCL merged with the holding company Gujarat Toll Road Investment Company Limited (GRICL) effective October 2003. GRICL’s financial position improved in FY2008, and the company made a profit of Rs8.74 million in FY2008. The improvement in financials was in part because toll contracts were auctioned for the first time in the first quarter of FY2007. 30. NTADP’s water supply component has been technically performing up to expectations. More than 98% of industry clients have regularly paid tariffs, and Tirupur Municipality’s payment for bulk water supply has also been regular. However, the average demand from industry has grown from 35 mld to only 55 mld with peak demand reaching 80 mld, less than the projected demand of 100 mld. This has resulted in the company making financial losses. NTADCL recently completed a debt restructuring exercise with all the lenders. It is undertaking measures to boost demand that will help it achieve a financial turnaround. 31. The operations of West Gujarat Expressway Limited (WGEL), the project company of WGEP, have been profitable since the commissioning of the brownfield component in October 2006. The company made a profit before tax of Rs36.55 million in FY2008 and is current in debt servicing. 32. Enabling Environment of the States. The findings of the Midterm Review Mission, held in March–April 2004, indicated that the selected states had complied substantially with the continued access criteria, although the extent of fulfillment varied among the states and the various criteria.12 All the four states had a policy for private sector participation in infrastructure and had experience in drafting concession agreements and putting in place procurement norms. The TA consultants found that all the states have good environment safeguard laws, policies,

11 The Vadodra Halol Toll Road Project was the other pioneering initiative of Gujarat government in developing state

roads through PPP. 12 The Loan Agreement required the Midterm Review Mission to review the fulfillment of the continued access criteria.

8

and procedures. However, the progress in adopting a progressive policy on social safeguard measures that would comply with the standards of multilateral agencies was limited. 33. Tamil Nadu was subsequently included as an eligible state after a mission fielded in September 2004 found that the Tamil Nadu government was committed to the PPP approach. This was demonstrated by projects developed and implemented through joint ventures with financial institutions, which were dedicated to infrastructure sectors such as roads and urban services. Moreover, the state also committed itself to the continued access criteria under the PSIF II. IL&FS found that the policy environment in the states of Gujarat and Tamil Nadu, where the subprojects are located, is conducive to undertaking infrastructure projects following a PPP format. 34. Financial Viability. Both AMTRP and NTADP made losses in the initial years of operation because demand was much lower than estimated, and NTADP continues to do so. The project companies of both the projects underwent debt restructuring, after which the companies have been regular in debt servicing. The project company of AMTRP showed a financial turnaround in FY2008, while NTADP’s financial turnaround may be possible with the measures to boost demand. NTADCL is meeting the deficit in debt servicing out of a debt service reserve fund created in terms of the loan covenants. In contrast to these two projects, WGEP included a brownfield component (commissioned before the commissioning of the entire project) that has been profitable since commissioning. WGEP has been regular in debt servicing. The Project Completion Review Mission could not obtain data on the economic internal rate of return (EIRR) at appraisal and at present, or on the current financial internal rate of return (FIRR). IL&FS mentioned that the EIRR is generally not computed by banks and financial institutions, which usually rely on the FIRR. 35. Environmental Safeguards. The project was under environmental category B, and incorporated good environmental practices. During appraisal, IL&FS’s organizational setup, and its environmental policy and operational procedures for its infrastructure business, were assessed as satisfactory. For all three subprojects, IL&FS (i) prepared environmental assessment reports, including environmental management and monitoring plans (EMMPs) that were approved by ADB; (ii) obtained applicable statutory environmental approvals; (iii) ensured that EMMPs were part of contract documents wherever applicable; (iv) reviewed implementation of EMMPs through periodic site visits of the designated monitoring agency—IL&FS Ecosmart Limited (Ecosmart), which is a subsidiary of IL&FS; and (v) undertook random monitoring of environmental parameters and internal project progress reporting systems. IL&FS will continue to monitor implementation of the relevant part of EMMPs during the O&M phase. However, its reporting on the implementation of EMMPs to ADB has been observed to be weak. ADB could perhaps have addressed this issue if it had allocated more resources to strengthen the supervision of environmental aspects of the project. In accordance with its environment policy, IL&FS also conducted environmental audits for AMTRP and NTADP every year from 2002 to 2008, and implemented corrective actions based on these audit findings, as well its internal review processes. IL&FS recently extended the scope of its environmental policy from projects developed by IL&FS to all companies that are its subsidiaries or associates. As such, WGEP will also be subjected to an environmental audit from FY2010. Overall, the environmental safeguards for the project have been implemented adequately. 36. Social Safeguards. All the three subprojects required land acquisition and had project-affected families (PAFs), though none of the PAFs was identified as indigenous people. AMTRCL developed the AMTRP resettlement plan with World Bank assistance. As per the RRP, the resettlement plan met the requirements of ADB’s Involuntary Resettlement Policy (1995).

9

Implementation of the plan started in October 2000 and was closed in October 2003. During the Special Project Administration Mission held in 2008, ADB retroactively supported its closure. 37. In the case of NTADP, IL&FS had submitted a resettlement plan to ADB in July 2004. The subproject was approved in July 2005 and in the intervening period IL&FS addressed the concerns raised by ADB about the plan. Subsequently, an Involuntary Social Safeguard Review Mission in November 2006 recommended several measures to ensure compliance with ADB’s Involuntary Resettlement Policy, including preparation of a revised resettlement plan. The implementation of the revised resettlement plan started from 15 December 2007, with Ecosmart as the implementing agency. The revised resettlement plan was expected to close by June 2008, but the closure has been delayed in part because of complex apportionment issues related to land acquisition being faced by many of the PAFs. As suggested by the ADB mission in 2006, Ecosmart has been providing legal assistance to PAFs with apportionment issues to help them file petitions in the court. Payments will be made to these PAFs on receipt of a court order establishing title. Further, disbursement under the old age assistance has been substantially completed. Table A5.5, Appendix 5, provides the status of resettlement plan implementation as of 31 March 2009. The resettlement plan is now expected to be closed on 30 June 2009. One of the other activities under the resettlement plan was the return of unutilized land, originally meant for a sewage treatment plant, leased from the Tamil Nadu government. The land had been mortgaged to the lenders and the mortgage has to be canceled. According to IL&FS, the land is expected to be released by June 2009. 38. WGEP was the PPP component of the ADB-funded EWCP (footnote 10), which is being administered by the Transport Division. NHAI, as the Executing Agency for the EWCP, had prepared the resettlement plan for the entire project in accordance with ADB guidelines. The Transport Division conducted regular reviews during implementation of the resettlement plan for the EWCP (including WGEP). NHAI has confirmed that implementation of the plan has been completed. The resettlement plan implementing agency for NHAI, a nongovernment organization, has submitted the completion report for the entire EWCP. The resettlement aspects of WGEP will be included as part of the entire corridor in the project completion report of EWCP. D. Operational Performance of Infrastructure Leasing & Financial Services Limited 1. Organization, Management, and Staffing 39. IL&FS is a professionally managed company, supervised by a board of directors comprising nominees of LIC, ORIX Corporation–Japan, and Abu Dhabi Investment Authority; and other professionals from the public and private sectors, as well as from the banking and finance industry. The organizational structure of IL&FS and the group has changed with businesses domiciled according to lines of business operations and the consequent transformation of IL&FS into a holding company (para. 1). The number of employees of IL&FS increased from 167 in FY2004 to 240 in FY2006, and subsequently decreased to 167 in FY2008 because of the transfer of some employees to group companies pursuant to the reorganization of businesses in FY2007 and FY2008. A set of key functions is retained with the holding company that includes oversight of treasury, resources, credit, risk, accounting, human resources, and legal. For all the critical companies, IL&FS carries out oversight through Board representation. Further, the chief executive officers of key group companies are employees of IL&FS, which ensures that IL&FS’s policies are followed.

10

2. Personnel Administration 40. IL&FS has well-structured employee policies and offers competitive compensation packages to its employees. IL&FS’s professional staff, totaling about 70, has a professional background in areas such as management, accounting, law, and engineering. 3. Lending Operations 41. IL&FS has been mandated to implement infrastructure projects on a commercial basis without recourse to budgetary allocations. IL&FS has been engaged in creating and developing a framework to enable such commercialization. IL&FS has developed a policy and operational framework for infrastructure financing that takes into account various risks, such as political, technology, environmental, social, commercial, procurement, and O&M. The risks are identified and risk mitigation is achieved through a comprehensive contractual framework and an institutional structure that limits the exposure of any single institution. IL&FS also has a corporate environmental and social policy under which all projects developed and promoted by it are expected to follow best practices to deal with safeguard issues. IL&FS is one of the few institutions in India that has good capacity in environmental and social safeguards.

4. Other Operations 42. In infrastructure sectors such as surface transport, water supply, and area development, IL&FS has adopted multiple roles including project conceptualization, project development, financing, sponsorship, project management, and project implementation. IL&FS has also been involved in other sectors for project financing, project syndication, and project advisory services. Further, as a holding company, IL&FS invests in group companies; manages real estate assets; and provides direction, oversight, and a policy framework to the group companies (para. 2). E. Financial Performance of Infrastructure Leasing & Financial Services Limited 43. IL&FS’s outstanding loans and advances increased from Rs22 billion in 2002 to Rs52 billion in 2006 and then decreased slightly to Rs47 billion in 2007. With the transfer of its investment banking assets to its subsidiary, its loans and advances stood at Rs14 billion in 2008. The share of infrastructure financing in the gross loans and advances has varied, decreasing from 29% in 2002 to 14% in 2004 and then increasing to 21% in 2007. However, this share increased to 72% in 2008 after the restructuring. IL&FS’s asset quality has improved during the review period; the net nonperforming assets decreased between 2002 and 2004, and subsequently stood at 0. IL&FS follows prudential norms prescribed by the RBI for income recognition, asset classification, and debt provisioning. F. Financial Statements and Ratios 44. Balance Sheets. IL&FS’s assets grew from Rs42 billion in 2002 to Rs88 billion in 2007, representing a compound annual growth rate of 16%. In 2008, as a result of the transfer of the assets and liabilities of its financial services undertaking to IFIN, effective 1 April 2007, IL&FS’s total assets were Rs55 billion. As a holding company, IL&FS’s loans and investments are in group companies and in real estate. A significant portion of IL&FS’s debt comprises short-term borrowings (about 52% as of 30 September 2008). However, IL&FS plans to increase its share of long-term borrowings to match the maturity profile of the assets it owns as a holding company (Appendix 6, Table A6.1).

11

45. Income Statements. IL&FS’s income rose consistently from 2002 to 2007 on the back of increased fund-based income, primarily interest and investment income. In line with the increase in income, its profits also increased in 2003–2007. After the demerger of its financial services undertaking, the fund-based income decreased from Rs11.2 billion in FY2007 to Rs4.3 billion in FY2008. However, in FY2008, income of Rs3.2 billion for SEZ development (included under fee-based income) contributed to the total income, and the profits after tax were higher at Rs4.8 billion compared to the previous year’s figure of Rs4.1 billion. As a holding company, IL&FS’s major sources of income are interest on loans, dividends from group companies, income from real estate, and income from the dilution of strategic investments. Given the current financial and economic crisis, IL&FS stated that it plans to be selective in its lending and new projects, manage credit quality, and control establishment costs (Appendix 6, Table A6.2). 46. Key Ratios. IL&FS's capital adequacy ratio for 2002–2007, calculated as per RBI norms, was 11.76–18.04%, higher than the applicable minimum threshold stipulated by RBI for a deposit-taking NBFC for 2002–2003 and for a systemically important non-deposit-taking NBFC for 2007. IL&FS converted to a non-deposit-taking NBFC in January 2004, and since there was initially no stipulation of a minimum capital adequacy ratio under RBI guidelines for non-deposit-taking NBFCs (footnote 13), IL&FS management adopted a minimum threshold of 10%. Following its transformation into a holding company and application to RBI for cancellation of its NBFC registration, IL&FS had not reported its capital adequacy ratio for 2008 as of the Project Completion Review Mission. However, its debt–equity ratio declined from 5.28 to 1.73 after the reorganization (Appendix 6, Table A6.3). G. Covenants 47. A statement describing the status of compliance with covenants is in Appendix 7. IL&FS is generally in compliance with the covenants, subject to the following observations:

(i) Reporting on implementation of EMMPs. IL&FS’s reporting on the implementation of the EMMPs of subprojects was not regular, even though reporting on environmental safeguards was part of the format of periodic progress reports to be submitted by IL&FS.

(ii) Issuance of marketable securities. The subloan financing criteria require that each subloan finances the issuance of marketable securities. IL&FS is in compliance with respect to AMTRP and WGEP. However, NTADP's subloans are still pending conversion into securities in the form of nonconvertible debentures. However, this requirement may not be very useful in the current scenario, as the secondary market for corporate debt is illiquid; and the cost of issuing securities, which include payment of stamp duty, may far outweigh the benefits.

(iii) Prudential norms. IL&FS complied with RBI's prudential norms applicable to it, first as a deposit-taking NBFC (until 6 January 2004) and then as a non-deposit-taking NBFC.13 Therefore, it was in compliance with clause 3(b) of Schedule 2 of the Loan Agreement until 2007.14 Pursuant to the recent reorganization and transformation of IL&FS into a holding company, IL&FS has applied to RBI for cancellation of its non-deposit-taking NBFC registration. RBI has not yet approved the deregistration of

13 According to RBI guidelines, capital adequacy requirements were initially not applicable to a non-deposit-taking

NBFC, but became applicable to systemically important non-deposit-taking NBFCs from 1 April 2007. 14 Clause 3(b) of Schedule 2 of the Loan Agreement states “compliance with all applicable prudential rules,

regulations and guidelines established by the RBI (i) on capital adequacy and supervisory practices, including but not limited to, maintenance of a capital adequacy ratio of at least 9% as amended from time to time; and (ii) regarding, inter alia, recognition of income, classification of assets and debt provisioning.”

12

IL&FS as an NBFC. However, IL&FS had not submitted the capital adequacy ratio for 2008 to ADB under clause 3(b) of Schedule 2, as of the Project Completion Review Mission. ADB had informed IL&FS that, pending RBI's decision in the matter, clause 3(b) of Schedule 2 continues to apply; and, as such, submission of the capital adequacy ratio remains pending with IL&FS for compliance.15 IL&FS had earlier apprised ADB about the risk management practices adopted by it as a holding company. IL&FS maintains a direct line of sight over the group companies and retains oversight of key functions, such as treasury, resources, credit, risk, accounting, human resources, and legal. Further, it has adopted three parameters with threshold levels for the holding company: (i) the debt to net worth ratio is not to exceed 2.5 times; (ii) the ratio of total investments to net worth is not to exceed 1.5 times; and (iii) the debt service coverage ratio is to be maintained at a minimum of 1.33 times. ADB asked IL&FS about preparing statements and parameters on a consolidated basis. IL&FS stated that it has started preparing consolidated financial statements under International Financial Reporting Standards (IFRS) and expects to have these in place by FY2011.

H. Performance of the Asian Development Bank 48. ADB conducted regular review missions and participated in tripartite review meetings with IL&FS and the Department of Economic Affairs to review the performance of commitments and disbursements. Overall, ADB’s performance was satisfactory. 49. ADB responded to the slow progress in implementation of the loan by making necessary changes in implementation arrangements to facilitate better utilization. For instance, the facility was opened to other eligible states after the midterm review. In the case of WGEP, the subproject was approved for funding even though it was sponsored by NHAI—a central Government agency. However, IL&FS believes loan utilization could have been improved if (i) the approval process of ADB had been favorable with respect to financing NHAI projects, including the road project in Andhra Pradesh,16 under implementation by IL&FS through special purpose vehicles; (ii) the subloan financing criteria had covered special purpose vehicles where the holding of the state or central government was 50%, instead of 49% or less; and (iii) infrastructure projects, whose viability was in question because of short loan tenors, had been eligible for refinancing with long-term ADB subloans. However, IL&FS did not find any issues in loan utilization once ADB approved the subprojects. 50. ADB also contributed to the mitigation of social safeguard risks, particularly in the case of the NTADP project. The Involuntary Social Safeguard Review Mission in November 2006 resulted in a revised resettlement plan that updated the list of PAFs, thereby increasing the coverage; and increased the rehabilitation assistance in accordance with the replacement value. Further, in accordance with the mission’s recommendations, the implementing agency provided legal assistance to a large number of PAFs without clear titles, thereby enabling them to avail themselves of the rehabilitation assistance.

15 During the editing of the project completion report, IL&FS sent a letter informing ADB of the capital adequacy ratio

of IL&FS consolidated with two of its subsidiaries. This is under ADB's consideration and may require further review and discussions.

16 However, the road project in Andhra Pradesh had difficulties in meeting the social safeguard requirements of ADB.

13

III. EVALUATION A. Loan Appraisal 1. Distribution of Subloans 51. The actual distribution of the subloans just met the distribution criteria specified in the loan agreement—at least two subprojects, preferably each in a different subsector and each in a different state. However, at appraisal four selected states were targeted and the pipeline of likely projects indicated in the RRP included sectors such as roads, ports, water supply, SEZs, cyberparks, and airports. However, subprojects in only two sectors—roads and water supply—and two states, of which only one was among the 4 targeted states, were funded. This data points toward an unrealistic pipeline of subprojects and highlights the remaining constraints in making available bankable subprojects in the selected states within the specified time frame (para. 17). Separate TA to address the capacity constraints of states in developing and structuring projects (para. 11) and a greater emphasis of the related TA grant of PSIF II in developing the project pipeline (para. 12) would perhaps have helped in better achieving the project outcomes in the selected states. 52. Nevertheless, one of the subprojects was in the urban water sector. This was the first such project in a sector that has difficulty attracting private investment, given the issues of cost recovery and appropriate allocation of risks. This subproject could serve as a basis for structuring other projects in the PPP format in the water sector. 2. Covenants 53. IL&FS has generally complied with most of the covenants, although some areas require timely or better compliance (para. 47). Further, following the transformation of IL&FS to a holding company, IL&FS had not submitted its capital adequacy ratio for 2008 under clause 3(b) of Schedule 2 of the Loan Agreement, as of the Project Completion Review Mission. ADB has informed IL&FS that until RBI approves the deregistration of IL&FS as an NBFC, IL&FS must comply with the provisions of the aforesaid clause. 3. Quality of Appraisal 54. ADB adequately assessed the general economic situation and recognized that a key constraint to private sector infrastructure financing was that few bankable infrastructure projects were becoming available for financing. Further, the mission adequately analyzed the reasons for the lack of availability of projects, particularly at the state level. The project design accordingly included an emphasis on the enabling environment of the selected states. However, the design did not sufficiently emphasize the capacity constraints of the states in developing and structuring infrastructure projects (para. 11). Also, the pipeline of potential subprojects was not realistically appraised. Among the 16 projects listed for likely financing under PSIF II during 2002–2003 in the RRP, only one project—AMTRP—was financed. Further, given the long development period required for projects in some of the sectors, such as airports and SEZs, the design could have considered a longer implementation period. In addition, PSIF II could have been opened to other eligible states at an earlier stage, rather than after the Midterm Review Mission. This would have allowed earlier involvement and a longer time for the development of subprojects in these states; this might have enabled the road subproject in Rajasthan to have been financed (para. 18).

14

B. Implementation 55. The constraints in project development and private sector participation not addressed by the project design (paras. 11, 17–18) resulted in a weak pipeline and partial utilization of the loan. Only two of the subprojects under the loan, NTADP and AMTRP, were sponsored by the state governments, and in both these subprojects IL&FS partnered with the state government in the subproject companies to develop and implement the projects on a BOOT basis. ADB’s TA17 for mainstreaming PPPs at the state level aims to achieve an increase in the number of bankable projects being offered by the states on a competitive bidding basis by strengthening PPP cells at the Department of Economic Affairs and selected entities at the state level, and by institutionalizing PPP skills in the various entities so that they can better catalyze and manage PPPs. 56. All three subprojects were implemented with little or no cost and time overruns on the part of the subproject companies. However, apart from WGEL, which had a brownfield component and was profitable from the time of the commissioning of this component, the other subprojects—NTADP and AMTRP—did not make profits in the initial years of operation and required debt restructuring. In both these subprojects, for various reasons the actual demand was lower than estimated (Appendix 5), pointing to the importance of the demand risk factor in the success of projects wherein the demand risk is borne by the project. This risk might have been mitigated (i) through better and more realistic demand analysis and forecasts at appraisal, particularly in the case of AMTRP; or (ii) structuring of the projects as annuity-based projects.

IV. ASSESSMENT AND RECOMMENDATIONS A. Evaluation Criteria 57. The four core criteria and subcriteria adopted for assessment are as follows:

(i) Relevance: (a) adequacy of assessment of problems, opportunities, and

lessons at the time of approval; (b) consistency of the project’s impact, outcome, and outputs with the government’s development strategy; and (c) choice of modality, instruments, and design.

(ii) Effectiveness: (a) achievement of outcome of the project as defined in the

design and monitoring framework, (b) loan utilization and catalytic role of the loan, and (c) contribution of the subprojects to above achievements.

(iii) Efficiency: (a) subprojects’ contribution to productivity gains, and (b) subloans’

repayment performance.18

(iv) Sustainability: (a) financial viability of subprojects, (b) availability of adequate demand for project’s services or products, (c) use of revolving fund for additional subprojects, and (d) presence of appropriate policy and institutional environment to expand activities supported under the project.

17 ADB. 2006. Technical Assistance to India for Mainstreaming Public–Private Partnerships at State Level. Manila (TA

4890-IND). 18 These subcriteria were adopted in the absence of information on the EIRR and value for money.

15

B. Relevance 58. The loan is rated “relevant.” The expected outcome was consistent with the Government’s priorities and ADB’s country operational strategy. The assessment of problems and issues at the time of approval was generally adequate (para. 10). The design of the project focused on developing an enabling environment in the states and partnering of the state governments with financial institutions. Further, IL&FS, with its experience in developing and facilitating projects, was an appropriate choice as the institution could partner with the state governments in the subproject companies to develop the subprojects. However, the design did not sufficiently emphasize the capacity of the states in developing and structuring projects, resulting in a weak pipeline of projects. C. Effectiveness in Achieving Outcome 59. The loan is rated “less effective.” The project completion review mission could not obtain data on the increase in private investments in infrastructure in all the selected states during the project implementation period. However, the utilization of the loan itself was relatively low at 50%. Nevertheless, the ADB loan resulted in additional resource mobilization of about 6 times (para. 20), which is higher than 3 times envisaged in the RRP. Under the loan, only three subprojects were funded, covering two states (only one of which was among the four original selected states) and two sectors. However, the two subprojects at the state level were pioneering initiatives of the state governments in the respective sectors and are expected to have a demonstration effect. D. Efficiency in Achieving Outcome and Outputs 60. The loan is rated “less efficient.” The subprojects are assessed to have contributed to productivity gains. The road subprojects improved connectivity, contributed to economic activity, and reduced travel time; the water subproject improved the supply and quality of water, resulting in a reduction in the cost of dyeing for the knit-wear industry and an increase in export competitiveness. However, the lower-than-expected demand for the Tirupur water supply project implies that the cost per beneficiary is higher than anticipated. Further, two of the three subprojects were not profitable in the initial years of operation and required debt restructuring to maintain debt servicing, pointing to a lack of efficiency in credit allocation. E. Preliminary Assessment of Sustainability 61. The loan is rated “likely” to be sustainable. The road subprojects are likely to be financially viable, with WGEP and AMTRP currently profitable. NTADP was the first PPP project in the water sector, and therefore has a less robust revenue model as compared to the road sector. It is currently incurring losses. However, NTADP is in the initial years of operation and a turnaround may be possible if the measures to boost demand (Appendix 5) take effect. With respect to the expansion of activities supported under PSIF II, the requirement for infrastructure development in the country is huge. Although the supply of bankable PPP projects has been a constraint in the past, both at the central and state government level, the focus on making bankable PPP projects available is increasing (para. 63). IL&FS has experience in project development and partnering with the state governments on PPP projects. After its transformation into a holding company, IL&FS will continue to lend to group companies that include project special purpose vehicles. Therefore, it appears that IL&FS will continue to be in a position to use the revolving fund created under the loan, as well as expand activities supported under the loan.

16

F. Overall Assessment 62. The overall rating reflects weighted averages of the individual ratings for the four criteria. The range for the individual criterion ratings is in whole numbers from 0 to 3, in increasing order of performance. Overall, the loan is rated “partly successful,” as shown in the table.

Overall Performance Assessment Criteria Weight (%) Rating Value Weighted Rating Relevance 20 2 0.4 Effectiveness 30 1 0.3 Efficiency 30 1 0.3 Sustainability 20 2 0.4

Overalla 1.4 a Highly successful ≥ 2.7; successful (S) 2.7 > S ≥ 1.6; partly successful (PS) 1.6 > PS ≥ 0.8; unsuccessful < 0.8. Source: Project Completion Review Mission, Asian Development Bank. G. Impact 63. The ADB loan mobilized additional financing for the subprojects, and the subprojects improved access to infrastructure services, supported increased economic activity, and generated employment. In addition, progress has continued in the PPP space in recent years. ADB has continued its engagement with the Government in support of its initiatives to set up (i) a PPP nodal division at the Ministry of Finance, (ii) the India Infrastructure Project Development Fund, (iii) viability gap funding schemes, (iv) a panel of PPP transaction advisers, and (v) the India Infrastructure Finance Company Limited. ADB has adopted several measures to assist the Government, such as (i) TA grants to assist 15 state governments and 6 central line ministries in developing their awareness and capacities for PPP project development, appraisal, and monitoring; (ii) TA to develop replicable PPP projects across infrastructure sectors with bankable structures, which will leverage ADB funds with the India Infrastructure Project Development Fund; and (iii) a sovereign loan to India Infrastructure Finance Company Limited. The ADB and government initiatives have seen a good response with additional states requesting assistance in mainstreaming PPP. Moreover, a pipeline of PPP project concepts for development has emerged. H. Lessons 64. The pipeline of eligible subprojects was weak. In addition, the subprojects at the state level funded under the loan were developed by IL&FS in partnership with the state governments. This points towards a need to develop the capacities of the state governments in developing and structuring projects, and to offer those projects on a competitive bidding basis. 65. IL&FS’s social safeguard capacity was a critical factor in the successful financing of two of the subprojects—AMTRP and NTADP. ADB must ensure that the financial intermediary that it partners with for infrastructure projects has adequate capacity with respect to safeguards and, if required, ADB should take steps to enhance the capacity. 66. Some of the pipeline subprojects could not be financed because of difficulties in complying with ADB’s social safeguard requirements, and the advanced stage of subproject progress. ADB’s involvement at an early stage of subproject development may have facilitated compliance with ADB’s social safeguard requirements, as well as timely completion of

17

resettlement plan implementation. Moreover, during most of PSIF II implementation the India Resident Mission did not have a designated social safeguard resource, resulting in a longer ADB response time on social safeguard issues under PSIF II. This added to difficulties in financing potential subprojects. 67. IL&FS’s experience suggests that the role of the sponsoring authority—the central or state government or other statutory authority initiating or bidding out the project—is essential for successful implementation of PPP projects. The sponsoring authority’s role should include sound rehabilitation and resettlement policies, providing land free from encumbrances and encroachments, expeditious assistance in shifting of utilities, and equitable distribution of risks of the project. At the time of PSIF II, there was a lack of model concession agreements that incorporate these features in many sectors other than the road sector. Further, the social safeguard policies and practices of the sponsoring authorities are, in many cases, not completely aligned with ADB's requirements, especially with respect to compensation requirements for affected persons. As a result, the project company has difficulty ensuring compliance with ADB's social safeguard norms since the land is typically acquired by the sponsoring authority. 68. The demand risk factor is important in the success of projects in which the demand risk is borne by the project. It is important to mitigate this risk through a realistic demand analysis and forecasts at appraisal or structuring the projects as an annuity-based project. I. Recommendations 69. While the Government had policies to attract private sector participation in infrastructure at the time of the approval of PSIF II, only over the last few years has the Government shown its preference for PPPs as the mode of financing infrastructure. ADB's engagement with the Government in promoting PPPs has been deepening, with several initiatives on mainstreaming PPPs and sovereign lending to India Infrastructure Finance Company Limited (para. 63). ADB's initiatives include a TA (footnote 17), which aims to institutionalize PPP skills at the state level. The lack of a pipeline of eligible subprojects under PSIF II suggests that ADB may continue its interventions in the PPP space that assist in creating a shelf of bankable PPP projects at the state level. Further, many of the PPP projects are in the road sector, and ADB's focus should be to develop replicable PPP structures in sectors such as urban and water supply, which are considered difficult sectors for attracting private investment. In addition to continuing to provide finance through India Infrastructure Finance Company Limited to address financial constraints in infrastructure, ADB may also consider nonsovereign loans (without Government guarantees) in difficult sectors, which will build confidence with respect to the bankability of the projects and assist in catalyzing additional competitive financing.

18 Appendix 1

PROJECT FRAMEWORK Design Summary

Performance Indicators/Targets

Monitoring Mechanisms

Assumptions and Risks

Goal • Economic growth • Poverty Reduction

• Increased investment

in infrastructure • Mobilized financing for

infrastructure • Promoted sectoral

policy reforms - monitored separately

for each of the four target selected states

• Generate increased employment in infrastructure

• Improved access to infrastructure services

• Government reports • Reports of Indian

financial institutions • Studies conducted by

bilateral and multilateral organizations

• Asian Development Bank (ADB) review missions

• State government

reports • Studies conducted by

bilateral and multilateral organizations

• Macroeconomy

remains stable and economic reforms are sustained

• Government policies

are oriented towards reducing the incidence of poverty

Purpose • Enhance private sector

participation in infrastructure development in four target selected states

• Increased private

investments in infrastructure in the four selected states during the 5 years of project implementation

• Additional resources

mobilized of at least $1 billion ($600 million from ADB loans plus about $400 million from cofinancing) for assisted infrastructure projects

• State government

reports • Participating financial

institutions (PFIs) reports.

• Project completion reports

• ADB review missions

• Environment

remains conducive to private investments

Outputs/Components

• Relending by two

participating financial institutions in four target selected states

• Major output

milestones monitored separately by target dates for each of the four target selected states

- utilization of two ADB loans of $100 million each

- average loan size

• Reports by

participating financial institutions

• ADB review missions • Reports of PFIs

• Selected four states

cooperate and coordinate with PFIs

• Reforms agenda are pursued by selected state governments

Appendix 1 19

Design Summary




of $30–40 million - total number of

loans - types of projects in

identified infrastructure sectors

• Enabling environment for private sector participation in infrastructure developed

• Enabling legislation and regulatory frameworks for specified sectors established

• Environmental and involuntary resettlement policies and guidelines developed

• ADB review missions and technical assistance (TA) Consultants reports

• Potential delay in passage of legislation due to consensus-building process

• Public–private

interface strengthened

• Institution of

transparent systems and processes in dealing with the private sector, such as in the conduct of international competitive bidding procedures and use of model concession agreements, among others

• Dispute resolution

mechanism established

• Criteria for awarding

BOT projects established

• One-stop facility for

seeking approvals, licenses established


and TA Consultants reports

• Incentive structure for

promoting private sector participation established

• Impact on selected

states in terms of increased private investment and indication of interest from other Indian states


and TA Consultants reports

• Reports by PFIs • ADB review missions • TA Consultants

reports

• Risk reduction

strategies developed

• Financial instruments

and procedures for

20 Appendix 1

Design Summary




raising funds developed

• Procedures for

mitigating risks developed

Activities for Outputs/Components

• Relending to private

sector infrastructure projects in the four target selected states by two PFIs,namely IL&FS and IDBI

• Schedule of major

activities for each of the above milestones will be monitored separately by target dates for each of the four target selected states.

• Reports by PFIs • ADB review missions • TA Consultants reports

• Selected states fulfill

specified Access Criteria

• Selected states fulfill the Continued Access Criteria

• Selected states pursue sectoral policy reforms

• Selected states cooperate closely with TA Consultants

• TA Consultants recommendations are pursued and internalized

• Close coordination between state governments, PFIs, and private sector infrastructure project sponsors

Source: ADB. 2001. Report and Recommendation of the President to the Board of Directors on Proposed Loans to Infrastructure Leasing and Financial Services Limited and Industrial Development Bank of India and Proposed Technical Assistance Grant to India for the Private Sector Infrastructure Facility at the State Level Project. Manila.

Appendix 2 21

ELIGIBILITY CRITERIA, ACCESS CRITERIA, AND CONTINUED ACCESS CRITERIA A. Eligibility Criteria for State Selection 1. The eligibility criteria were formulated to select the four states at appraisal and subsequently include other states as "eligible states", if so required. The criteria that the states had to fulfill are as follows:

(i) a commitment to economic and infrastructure sectoral policy reforms;

(ii) capacity to undertake reforms;

(iii) provide an enabling environment for private sector participation; (iv) progress of reforms on sectoral issues; and

(v) economic potential.

B. Access Criteria to Private Sector Infrastructure Facility at State Level Project

Financing 2. The access criteria to the Private Sector Infrastructure Facility at State Level Project (PSIF II) were identified to ensure commitment to sustained support for private sector participation and development of the enabling environment. The access criteria are as follows:

(i) adoption of an overall development policy setting the terms and conditions for private sector participation in infrastructure development;

(ii) establishment of an institutional framework to facilitate private sector participation

in infrastructure that provides a formal mandate to deal with the private sector on matters concerning private sector participation in infrastructure;

(iii) establishment of a formal Government-supported organizational structure that

will serve as a one-stop facility for securing approvals, licenses, and clearances for private infrastructure projects;

(iv) promulgation of guidelines regarding Government priorities and plans for

infrastructure development and specification of private sector projects for development;

(v) enunciation of Government sectoral policies for individual infrastructure sectors

under the Project; (vi) undertaking to assess need for regulatory frameworks in target infrastructure

sectors with a view to specifying such target infrastructure sectors for which regulatory frameworks are to be established;

(vii) adoption of policy for transparency in the awarding of bids and concessions for

individual projects;

22 Appendix 2

(viii) commitment to draft model concession agreements and indicative standard terms for granting concessions to private sector sponsors in various infrastructure sectors;

(ix) undertaking to review existing rules and procedures for conduct of competitive

bidding with a view to considering rules and procedures that meet best international commercial practices and to define rules for dealing with unsolicited bids for award of infrastructure projects;

(x) undertaking to rationalize incentive framework for private sector participation in

infrastructure projects; (xi) formal statement of plan to designate state dispute resolution mechanism, and

define rules and procedures for resolving disputes; and (xii) statement of intent to formally adopt state policies on environment, resettlement,

and other social safeguards that arise in the implementation of infrastructure projects.

C. Continued Access Criteria to the Private Sector Infrastructure Facility at State

Level Project 3. The continued access criteria to the Private Sector Infrastructure Facility at State Level Project (PSIF II) benchmark progress of state policy reforms in developing the enabling environment for private sector participation. The continued access criteria are as follows:

(i) enactment of an infrastructure development policy that defines the terms and conditions for private sector participation;

(ii) establishment of regulatory frameworks in specified infrastructure sectors within

two years of the Effective Date; (iii) adoption of standard concession agreements for private sector projects in

defined infrastructure sectors; (iv) adoption, satisfactory to the Asian Development Bank, of competitive bidding

procedures for bidding and awarding of infrastructure projects under defined rules and procedures according to best international commercial practices;

(v) designation of a state-level dispute resolution mechanism for the speedy

resolution of disputes relating to private infrastructure projects; (vi) adoption of formal state policies concerning environment, resettlement, and

social safeguards for the implementation of infrastructure projects; and (vii) review, satisfactory to ADB, of utilization of allocated line of credit to the state,

and availability of infrastructure projects for financing.

26 Appendix 4

OVERVIEW OF SUBLOANS

Particulars AMTRP NTADP WGEP Date of ADB subloan approval 27 November

2002 12 July 2005

10 October

2006 Form of debt Deep Discount

Bonds (Rs100 million), NCDs (Rs200 million)

Loans (pending conversion to

NCDs)

Subordinate Debt – rupee

Total subloan amount approved by ADB ($ million)

5.117 36.018 7.872

Total subloan amount approved by ADB (Rs million)

300 1565 360

Total amount disbursed by ADB ($ million) 6.372 34.985 8.043 Total amount disbursed by ADB – Rs million equivalent

296.45 1,565.00 344.40

Total amount disbursed by IL&FS to subborrowers (Rs million)

300 2,465 (senior debt: 1,800,

subordinate debt: 665)

360

Interest rate at approval (%) NCD – 15.00%

p.a. DDB – 15.865%

p.a.

14.50% p.a. 12.50% p.a. payable

monthly till the date of

commercial operations and

12.00% p.a. thereafter.

Interest rate at project completion review mission (%)

11.75% p.a. (IDBI PLR less

1.75%)

11% p.a. Same as above

Maturity (including grace period) of subloan at approval

Approximately 15 years

Senior debt: approximately 12

years Subordinate

debt: approximately 20

years


Maturity (including grace period) of subloan after revisions (if any) till the Project Completion Review Mission


Senior debt: Approximately 18

years Subordinate

debt: approximately 27

years

Same as above

Project cost at approval (Rs million) 3,230.50 10,230.00 2,402.00 ADB share in project cost (%) 9.18 15.30 14.34

ADB = Asian Development Bank; AMTRP = Ahmedabad Mehsana Toll Road Project; IDBI = Industrial Development Bank of India (now, IDBI Bank); IL&FS = Infrastructure Leasing & Financial Services Limited; NCD = nonconvertible debenture; NTADP = New Tirupur Area Development Project; p.a. = per annum; WGEP = West Gujarat Expressway Project. Sources: Asian Development Bank and Infrastructure Leasing & Financial Services Limited.

Appendix 5 27

SUBPROJECT PROFILES A. Gujarat Road and Infrastructure Company Limited

1. Company and Project 1. The Ahmedabad Mehsana Toll Road Project (AMTRP) was initially domiciled in a special purpose vehicle called Ahmedabad Mehsana Toll Road Company Limited (AMTRL), set up by the Gujarat government and the Infrastructure Leasing & Financial Services Limited (IL&FS), to develop and implement the proposed project on a build-own-operate-transfer (BOOT) basis. The shareholders of AMTRL were the Gujarat Road and Infrastructure Company Limited (GRICL) (formerly Gujarat Toll Road Investment Company Limited), with 50% shareholding, and Larsen & Tubro Holdings Limited, with the remaining 50%. GRICL is owned by IL&FS Transportation Networks Limited (ITNL)—a subsidiary of IL&FS—with 83.61% holding, and the Gujarat government with the balance holding. AMTRL has since merged with GRICL (para. 9). 2. AMTRP, together with Vadodara Halol Toll Road Project (VHTRP), was the pioneering initiative of the Gujarat government in developing state roads through public–private partnerships (PPPs). The concession agreement on AMTRP was signed between Gujarat government and AMTRL on 12 May 1999. The original concession period is 30 years. The concession guarantees a return of 20% on the project cost. The deficits in return in any year are added back to the project cost and are reckoned for calculating the return in the next year. The concession period would be extended, by 2 years at a time, till the outstanding project cost and returns are recovered. The scope of AMTRP includes design, financing, development, construction, and operation and maintenance (O&M) of the 51.6 kilometer (km) stretch of Ahmedabad Mehsana road on State Highway 41 on a BOOT basis. Through AMTRP, the existing 2 lane carriageway was to be strengthened and widened to a 2-lane dual carriageway with service road construction of two additional lanes. The construction contractor and O&M contractor—Larsen & Toubro Limited—was selected through international competitive bidding. 3. The estimated total project cost was Rs3.23 billion, of which Rs2.74 billion was to be financed by debt. The World Bank was involved in the entire process of project development and financially supported AMTRP for meeting a part of the project cost through a credit line to IL&FS. The Asian Development Bank (ADB) approved this subproject on 27 November 2002 at a later stage of project implementation. AMTRP was commissioned on 20 February 2003, 6 months ahead of schedule. The actual total project cost was Rs3.1 billion, which was within the estimated cost of Rs3.2 billion. The project was financed by equity of Rs764 million and the balance by debt. The senior debt originally carried an interest rate of about 15.0%–15.8% per annum. The debt was subsequently restructured (para. 9) with effect from 1 April 2004 and the rate of interest was reduced to 10% per annum with a reset every 3 years. Subsequently, the reset was revised annually and the interest rate, based on IDBI Bank Limited's prime lending rate less 1.75%, is currently 11.75% per annum. The senior debt is repayable in 96 equal monthly installments commencing 1 April 2006. The subproject company has no subordinate debt.

2. Details of Subloans 4. ADB approved the subloan to AMTRL on 27 November 2002 in the form of deep discount bonds of Rs100 million and nonconvertible debentures (NCDs) of Rs200 million. IL&FS drew down the loan, amounting to the equivalent of Rs100 million, towards deep discount bonds on 19 December 2002 and disbursed the amount to AMTRL on 30 June 2003 towards

28 Appendix 5

subscription of the bonds. An additional loan amount equivalent to Rs196.45 million was drawn down on 24 September 2003 as reimbursement of the disbursement already made to AMTRL towards subscription of NCDs. 5. The deep discount bonds are redeemable at the end of 15 years from the date of subscription. The NCDs have a tenor of 15 years, with repayments in 5 equal installments commencing at the end of 11 years from the date of subscription. For both deep discount bonds and NCDs, IL&FS has a put option at the end of 10 years. 6. Subloan to AMTRL (now, GRICL) was transferred to IL&FS Transportation Networks Limited (ITNL) on 3 August 2007 and the proceeds realized. Pending investment of the proceeds in long-term marketable securities issued by a qualified project, IL&FS invested the proceeds in specified government securities, in accordance with the loan agreement. Subsequent to becoming a holding company, IL&FS bought back the investment sold to ITNL on 12 September 2008.

3. Operational Performance 7. The technical performance of the project is satisfactory. The toll collection in the initial years of operation was, however, suboptimal. The traffic was lower than anticipated, at about 55% of the expected figure, partly because of the use of an alternate toll-free service road that runs parallel to the toll road. IL&FS subsequently addressed the issue and this led to an increase in traffic. The toll rates are notified by the Gujarat government in terms of the concession agreement. In the first quarter of FY2007, GRICL started auctioning the tolling contracts in respect of AMTRP for the first time to the highest bidder1 by inviting “offer for collection of user fee” from interested parties for a period of one year. This helped in the improvement of toll revenue. From June 2008, GRICL has been collecting the toll on its own. 8. The average daily traffic and average daily toll collections were as follows.

Table A5.1: Operational Performance of the Subproject Fiscal Year

Average Daily Traffic (no. of tollable vehicles)

Average Daily Toll Collection (Rs million)

FY2004 11,178 0.61 FY2005 11,773 0.63 FY2006 12,800 0.74 FY2007 13,361 0.83 FY2008 14,285 1.01

Source: Infrastructure Leasing & Financial Services Limited.

4. Financial Performance 9. The financial internal rate of return (FIRR) at appraisal was 24.13% and the minimum debt service coverage ratio (DSCR) with and without debt service reserve was 2.02 and 1.52 respectively. However, in the initial years of operation, AMTRL was unable to meet its debt service obligations fully. In order to ensure its long-term viability, the company approached the lenders for debt restructuring in September 2003, including lowering the cost of debt. The lenders required operational restructuring by way of a merger of AMTRL and the Vadodra Halol 1 Although the toll rates are as per the concession agreement, the bidding was to ensure maximization of toll

revenue through minimization of collection costs.

Appendix 5 29

Toll Road Limited (the project company of VHTRP) that was also making losses, as a precondition for debt restructuring. Vadodra Halol Toll Road Limited and AMTRL merged with the holding company, Gujarat Toll Road Investment Company Limited—later renamed as GRICL—based on the Gujarat High Court Order dated 18 May 2005 retrospectively from 1 October 2003. The debt restructuring also included contributions by Gujarat government and IL&FS to GRICL in the form of noncumulative convertible preference shares of Rs300 million each, further loans by IL&FS to GRICL of Rs200 million, and an irrevocable and revolving letter of credit to GRICL for an amount of Rs1,000 million for meeting deficits in lenders’ debt servicing. After restructuring, the debt of both AMTRP and VHTRP has been serviced regularly by GRICL, although GRICL had to resort to the letter of credit facility for debt servicing in the initial years. 10. GRICL’s financial position improved in FY2007, and the company made profits in FY2008, as shown below. For the 6 month period ended 30 September 2008, the provisional figure for profit after tax is Rs39.24 million. The auctioning of toll contracts mentioned above, partly contributed to the turnaround. The total cost of the project recoverable by the concessionaire after taking into account the deficits in the guaranteed return in terms of the concession agreement (para. 2) is Rs7,637.80 million as of 31 March 2008.

Table A5.2: Financial Performance of the Subproject (Rs million)

Item FY2004a FY2005 FY2006 FY2007 FY2008 Toll revenue 223.67 326.97 375.82 469.96 614.24 Other income 3.00 6.04 11.91 3.95 7.35 Total income 226.67 333.01 387.73 473.91 621.59 Operating expenses 70.91 89.25 106.41 95.20 104.19 Interest 279.36 357.75 381.98 331.41 355.59 Depreciation 51.61 77.18 77.69 90.98 152.78 Profit or (Loss) before tax (175.21) (191.17) (178.35) (43.72) 9.02 Profit after tax (171.22) (193.24) (191.21) (44.02) 8.74

( ) = negative. a The figures for FY2004 reflects the merged financials of the Ahmedabad Mehsana Toll Road Company Limited

and the Vadodra Halol Toll Road Limited with effect from 1 October 2003. Source: Infrastructure Leasing & Financial Services Limited.

5. Environmental Safeguard 11. IL&FS prepared an environmental assessment report including an environmental management and monitoring plan (EMMP) that was approved by ADB in November 2002. The contract document for the civil works included the environmental safeguard requirements. IL&FS reviewed the implementation of the EMMP during the construction period and continued to do so during the O&M phase in early 2003. IL&FS carried this out through its designated environmental monitoring agency—IL&FS Ecosmart Limited (Ecosmart), a subsidiary of IL&FS—and yearly environmental audits during 2002–2008, which were mandated by its environmental policy. During construction, IL&FS ensured that good environmental practices were followed such as sprinkling of water for dust suppression, locating hot mix plants and construction camp sites away from habitation, usage of personal protective equipment by the labor force, and compensatory plantation. However, its reporting on the implementation of EMMP to ADB has been observed to be weak. Since the traffic volume was less than the volume observed during the environmental assessment, the environmental monitoring of parameters such as ambient air quality and noise levels were deferred. With increased traffic

30 Appendix 5

volume since 2007–2008, these parameters are being monitored, and have been reported to be within regulatory limits. IL&FS implemented corrective actions based on these monitoring results, audit findings, and its internal review process. Overall, the environmental safeguards for the subproject have been implemented adequately.

6. Social Safeguard 12. AMTRP developed the resettlement plan with World Bank assistance, and started its implementation in April 2001.2 As per the RRP, the resettlement plan met ADB’s Involuntary Resettlement Policy (1995) requirements. AMTRP used multiple methods to calculate the replacement value of the acquired lands.3 Extensive consultations were held with the project affected families (PAFs) to arrive at replacement value and the PAFs were offered about 5 times the government compensation as rehabilitation assistance upon withdrawal of the court case for higher compensation. Only 10 PAFs availed of this offer and 67 PAFs decided to pursue the court cases for higher compensation against the Gujarat government. Following the World Bank’s advice, AMTRP closed implementation of the resettlement plan against all the 67 PAFs with one month’s notice. A Special Project Administration Mission held by ADB in March–April 2008 verified that AMTRL had not set aside the top-up compensation offered under the resettlement plan, pointing to the fact that the Gujarat government was fully responsible for any follow-on actions consequent upon the court decisions. The Mission was generally satisfied with the entire process of resettlement plan implementation except that IL&FS did not consult with ADB on the closure of the resettlement plan at the time the decision was made, and did not see any need to further revise the plan.

7. Other Impacts 13. The subproject employed 136 persons directly or indirectly. Further, as a result of the subproject, accessibility to the industrial areas of Chhatral and Kalol has improved, and commercial activities along the subproject road have increased. The road has also facilitated access to Nirma University located at Adalaj. B. New Tirupur Area Development Company Limited

1. Company and Project 14. The New Tirupur Area Development Corporation Limited (NTADCL) is a special purpose vehicle promoted by the Tamil Nadu Water Investment Company Limited, an investment vehicle of IL&FS (53.85% equity holding) and Tamil Nadu government (46.15% equity holding). The shareholders of NTADCL consist of the Tamil Nadu Water Investment Company Limited (32.54%), private entities (56.61%) and central government held insurance companies (10.85%). NTADCL was incorporated on 24 February 1995 to set up water supply and sewage treatment facilities for industrial and domestic consumers at Tirupur, Tamil Nadu on a BOOT basis. 15. The New Tirupur Area Development Project is the first project in the urban water sector developed under PPP in India. The concession agreement was signed between NTADCL and the Tamil Nadu government on 11 February 2000. The scope of the project was (i) design and

2 ADB accepted the resettlement plan prior to the subproject approval on 27 November 2002. 3 The methods included (i) enquiries about the value of neighboring land of similar fertility; (ii) enquiries with real

estate brokers; (iii) actual cash flow from the land; (iv) the public registration rate prevailing during the last 3 years; and (v) consultations with affected persons, local people, and other stakeholders.

Appendix 5 31

construction of a raw water intake and water treatment plant, and O&M of a 185 million liters per day (mld) (expandable to 250 mld) potable bulk water supply scheme to (a) Tirupur Municipality, (b) nearby town and village panchayats, and villages within the Tirupur local planning area, and (c) industries located outside Tirupur Municipality;4 (ii) supply and O&M of a water distribution system to industries located outside Tirupur Municipality during the concession period; (iii) design and augmentation of water distribution system for Tirupur Municipality; (iv) design and construction of sewage collection system for 60% of the wards in Tirupur Municipality; (v) design and construction of on-site sanitation facilities for economically weaker sections within Tirupur Municipality; and (vi) design, construction, and O&M of a sewage treatment plant, with a proposed capacity of 15 mld, and a disposal system for Tirupur Municipality during the concession period. 16. The concession period is for 33 years from financial closure. The financial closure of the project was achieved on 22 March 2002. In the event that the project investment and a return of 20% on the investment is not recovered within the concession period, then the concession period would be extended by two years at a time to a maximum of 38 years from financial closure. At the end of the concession period, NTADCL is required to transfer the facility to Tamil Nadu government without any cost. 17. The project cost, as estimated by IDBI Bank Limited (the lead lender) in November 2001 was Rs10,230 million. The water supply component accounts for about 85% of the total project cost. The project cost was to be financed as shown below.

Table A5.3: Means of Finance (Rs million)

Item Amount Equity 3,227 Subordinated debt 865 Rupee term loans 6,138 Total 10,230

Source: Infrastructure Leasing & Financial Services Limited. 18. The water supply component was implemented ahead of schedule and commenced supply of water in April 2005. However, due to a delay in completion of performance tests, commercial operations commenced on 1 November 2006. The construction activities of the sewerage component were completed by NTADCL with some delay in November 2006 due to a change in the site of the project, against the scheduled completion date of October 2005. However, the commissioning has been further delayed since Tirupur Municipality is yet to provide individual house service connections. The construction of a low cost sanitation facility is still underway. The project is expected to be implemented at the original estimated cost of Rs10,230 million. The project cost incurred as of 30 September 2008 was Rs10,227 million comprising the water supply project cost of Rs8,651.50 million and sewerage project cost of Rs1,575.50 million.

2. Details of Subloans 19. ADB approved IL&FS’s request to extend subloans to NTADCL comprising senior debt of Rs900 million and subordinate debt of Rs665 million on 12 July 2005. The senior debt was

4 Of the project’s installed capacity of 185 million liters per day (mld) of water, the allocation of water supply as per

the concession agreement is as follows: 115 mld for industry and 70 mld for domestic purposes.

32 Appendix 5

originally repayable by NTADCL in 36 equal quarterly installments (9 years) commencing 1 June 2007 and ending 1 March 2016, with a tenor of approximately 12 years. The subordinate debt was originally repayable by NTADCL in 16 equal semiannual installments, with a moratorium of 12 years (tenor of 20 years). The interest on the subloans in the form of senior debt and subordinate debt was 4% over the Bank of India’s prime lending rate. The rate of interest worked out to 15.50%, based on the prime lending rate prevailing prior to the debt restructuring. IL&FS drew down the loan towards senior and subordinate debt during the period August 2005 to December 2006. The disbursements were obtained as reimbursements against loans already advanced to NTADCL. 20. The subproject is financed by 19 senior lenders and 2 subordinate lenders. In a preemptive attempt to sustain the economics of the project, NTADCL approached the lenders with a debt restructuring proposal in December 2006. The proposal was finalized by IDBI Bank Limited, the lead institution, and approved by the lenders. The debt restructuring was effective as of 1 November 2006. Following restructuring, the senior as well as the subordinate debt carry an interest rate of 11% per annum. The senior debt is repayable over a 11-year period in equal monthly installments commencing 1 April 2011 and ending 1 March 2022. The subordinate debt is repayable over an 11-year period in equal monthly installments commencing 1 October 2020 and ending 1 September 2031. 21. The subloans to NTADCL are pending conversion into securities in the form of NCDs. As per the Loan Agreement, subloans are to be converted into marketable securities within 6 months of the start of commercial operations. IL&FS, in its letter dated 20 July 2007, mentioned that the conversion of the subloan into marketable securities had been delayed in part because of the debt restructuring exercise, and requested ADB for an exemption from the conversion. The debt restructuring exercise has since been completed and the review mission conducted in March–April 2008 requested IL&FS to explore the possibility of conversion again while reassessing its costs and benefits.

3. Operational Performance 22. During the review mission conducted in March–April 2008, NTADCL explained that its water supply system was the first fully automated, world class water supply and distribution system in operation in India. The water supply system has been technically performing to expectation as evidenced by key reported quality parameters within acceptable limits and no quality complaints from the consumers during the past several months. 23. More than 98% of industry clients have regularly paid tariffs, and Tirupur Municipality’s payment for bulk water supply has also been regular. However, the average demand from industry was initially 35 mld growing to 55 mld, with peak demand reaching 80 mld (demand in April 2008 was 48.37 mld), against an expected demand of 100 mld based on the off-take agreements executed with industry. The main reason for lower-than-expected off-take is an order of the Madras High Court directing closure of the processing units in Tirupur during the weekends until installation of the effluent treatment system. Other problems during the initial phase of operation included exceptional heavy monsoons leading to surplus ground water in Tirupur, and lower exports due to appreciation of the rupee against US dollar, and currently the recession in the US.

Appendix 5 33

4. Financial Performance 24. The FIRR at appraisal was 21.30%. However, as a result of poor demand, NTADCL has been incurring losses, as shown below. For FY2008, the water supply revenue of Rs768 million is approximately 68% of the budgeted revenue. However, the operating cost of Rs430 million is also about 67% of the budgeted cost. The deficit in interest servicing is met by NTADCL from its debt service reserve fund created in terms of the loan covenants. As per the loan covenants, Tamil Nadu government and IL&FS are required to create a debt service reserve fund of Rs650 million, to be funded by way of a grant of Rs500 million from the Tamil Nadu government and an undertaking letter of Rs150 million from IL&FS. The debt service reserve fund, funded to the tune of Rs550 million (Tamil Nadu government—Rs500 million, and IL&FS—Rs 50 million), has been utilized by NTADCL to meet deficits in lender debt servicing. NTADCL is regular in its debt servicing.


Item

1 November 2006–31 March 2007

1 April 2007–31 March 2008

1 April 2008–30 September 2008

(audited) (audited) (provisional) Total income 240 799 406 Expenditure 174 430 223 Interest 347 534a 315b

Depreciation 184 441 220 Profit or (Loss) after tax (465) (606) (353)

( ) = negative. a Includes adjustments for excess payment of Rs82.8 million for the period 1 November 2006 to 31 March 2007 on

account of debt restructuring. b The interest cost is higher since interest credits from some lenders consequent to debt restructuring are still

pending. Source: Infrastructure Leasing & Financial Services Limited. 25. NTADCL expects an increase in water consumption on account of (i) expected lifting of the high court order on weekend closure; and (ii) initiatives of NTADCL to improve water off-take, including provision of piped supply of water to industries within Tirupur Municipality, identification of new bulk customers in surrounding areas, expansion to new geographical areas, and improving the enforcement of ground water extraction regulation. Moreover, NTADCL expects an increase in revenues from Tirupur Municipality once the sewerage component starts commercial operations. Although the FIRR of the subproject is likely to be much lower than projected at appraisal, it is expected that the financial position will improve in the coming years due to the above factors.

5. Environmental Safeguard 26. IL&FS prepared an environmental assessment report including an EMMP that was approved by ADB in July 2005. The contract document for the civil works included the environmental safeguard requirements. IL&FS, through its designated environmental monitoring agency—Ecosmart—and annual environmental audits during 2002–2008 mandated as per its environmental policy, reviewed implementation of the EMMP during the construction period. IL&FS ensured that good environmental practices were followed such as sprinkling of water for dust suppression, usage of personal protective equipment by the labor force, etc. The environmental monitoring included quality of ambient air and noise levels at the work sites that were reported to be within regulatory norms. IL&FS also implemented corrective actions based

34 Appendix 5

on these audit findings, and its internal review process. However, its reporting on the implementation of the EMMP to ADB has been observed to be weak. IL&FS will continue to monitor implementation of the EMMP during the O&M phase. Overall, the environmental safeguards for the subproject have been implemented adequately.

6. Social Safeguard 27. IL&FS submitted a resettlement plan to ADB in July 2004. The subproject was approved in July 2005 and in the intervening period IL&FS addressed the concerns raised by ADB. Subsequently, an involuntary social safeguard review mission in November 2006 recommended several measures to ensure compliance with ADB’s Involuntary Resettlement Policy including preparation of a revised resettlement plan. The revised resettlement plan was finalized by Ecosmart in November 2007 and uploaded on ADB’s website. It was also made available in the local language to affected persons. The implementation of the revised resettlement plan commenced from 15 December 2007, with Ecosmart as the implementing agency. 28. The number of PAFs as per the revised resettlement plan was 89. This number increased to 102 in 2008 as it included (i) new claimants who approached the implementing agency after a newspaper advertisement was released on 14 March 2008 as part of public disclosure, and (ii) inheritors of the heads of households who had died in the interim. The revised resettlement plan was expected to close by June 2008, but the closure has been delayed in part due to complex apportionment issues related to land acquisition being faced by many of the PAFs. Ecosmart has been providing legal assistance to PAFs on apportionment issues, as suggested by the ADB mission in 2006, in order to help them file petitions in the court. Payments will be made to these PAFs on receipt of the court order. A snapshot of the status, as of 31st March 2009, of various entitlement categories is shown in the table below.

Table A5.5: Snapshot of Resettlement Plan implementation Status

Serial Number

Entitlement Category Target Completed

1. Old Age Assistance 23 21 2. Income Generation Scheme 3 1 3. Rehabilitation Assistance for Land - Project-affected families (PAFs) with clear title who

accepted the offer 19 11

- PAFs with apportionment issues who came forward to have the issues resolved

40 0a

- PAFs with apportionment issues who did not come forward to have the issues resolved

22b 0

- PAFs who did not respond to company's efforts 12 0 - PAFs who donated land 6 - Untraceable PAFs 3

a The apportionment issues have been resolved for all 40 project-affected families (PAFs), and petitions filed in the court. Payments will be made on receipt of the court order establishing the title.

b Out of the 22 PAFs, 16 have filed cases in the court for seeking enhanced compensation. Source: IL&FS Ecosmart Limited. 29. During the resettlement plan implementation period, letters were sent twice—in June 2008 and December 2008—to those PAFs who had not accepted the company's rehabilitation offer, with a request to approach the company to avail of assistance. The resettlement plan is now expected to be closed on 30 June 2009 after another letter has been sent out by registered

Appendix 5 35

post to all PAFs to give them a final notice to avail of the benefits of the resettlement plan before the closure date. PAFs that come forward by the closing date for their entitlements but do not yet have clear titles will be paid compensation subsequently upon establishment of titles. However, no further legal assistance will be extended by the company after the closing date. In May 2009, IL&FS submitted a comprehensive monitoring report as of 31 March 2009, which has been uploaded on the ADB website and will also be made available in the local language at the office of NTADCL for PAFs' reference. 30. Another project activity under the resettlement plan was the return of the original land meant for construction of the sewage treatment plant to Tamil Nadu government from whom the land had been leased. NTADCL constructed the sewage treatment plant on an alternate site because of the objections of a school located near the original land. The original land, which has remained unutilized, was mortgaged to the lenders. NTADCL has to release the charge on the land before the land can be returned to the government. According to IL&FS, the land is expected to be released by June 2009. Ecosmart has, however, treated the families on this land as PAFs and extended the entitlements to these families.

7. Other Impacts 31. The economic growth of Tirupur town and the local planning area is critically dependent on the knitwear industry. NTADCL supplies water to the industrial units on a continuous basis. Further, NTADCL has been able to demonstrate the consistency of its water in terms of chlorine, mineral content, etc, as per the prescribed norms of the dyeing and knitwear industry. This has made a significant contribution to reducing the cost of dyeing for the knitwear industry and has increased export competitiveness. Tirupur’s knitwear industry now largely uses the processed water supplied by NTADCL. This is also expected to conserve the scarce ground water resources, which the industry was previously relying on. The significant investment by NTADCL in water and sanitation infrastructure is expected to catalyze further industrial investment in the Tirupur region, contributing to growth and competitiveness and thereby employment generation in the region. The subproject has also helped to provide potable water to the Tirupur municipality area. The sewerage project, when commissioned, is expected to improve sanitation facilities and prevent degradation of the environment. C. West Gujarat Expressway Limited

1. Company and Project 32. West Gujarat Expressway Limited (WGEL) is a special purpose vehicle promoted by IL&FS with a 51% stake, and IL&FS Transportation Networks Limited (a subsidiary of IL&FS) with the balance holding. The subproject is a PPP component of the East-West Corridor Project (EWCP), with the National Highway Authority of India (NHAI) as a sponsoring authority.5 The concession agreement for the project was executed between NHAI and WGEL on 22 March 2005. The concession period is for 20 years including a construction period of 30 months. The project was awarded to WGEL based on the lowest grant or negative grant amount quoted pursuant to a competitive bidding process among international contractors and developers. The total grant to be paid by NHAI to WGEL is Rs400 million, comprising Rs180 million as equity support during the construction period and Rs220 million in the first two years of operations as

5 The public sector part of EWCP was funded by ADB, with NHAI as the executing agency. ADB. 2002. Report and

Recommendation of the President to the Board of Directors on a Proposed Loan to India for the East-West Corridor Project. Manila (Loan 1944-IND).

36 Appendix 5

O&M support. The total grant payable by IL&FS to NHAI during the period of operations is Rs2,800 million, commencing from the 4th year of operations and ending in the 12th year. 33. The brownfield component of the subproject aimed at improvement of the existing 4-lane Gondal-Rajkot section (32 km). The greenfield component consisted of widening the existing Jetpur Gondal section (26 km) and the Rajkot bypass section (10 km) on national highway NH-8B in Gujarat from 2 lanes to 4 lanes. The subproject scope covered design, engineering, financing, procurement, construction, improvement and O&M on a build-own-transfer basis. 34. The project cost at appraisal was estimated at Rs2,402 million, to be financed as shown below. The subordinate loan was provided by IL&FS, while the senior debt was provided by eight banks. The senior debt carries an interest rate of 9% per annum and is repayable in 40 structured quarterly installments commencing FY2010 and ending FY2019. The subordinate loan carries an interest rate of 12.50% per annum. The loan’s first installment of Rs36 million is repayable on 31 March 2011; the balance outstanding is repayable in 36 equal quarterly installments commencing on 30 June 2011. The project was completed within the scheduled completion date of 17 March 2008. However, the commissioning was delayed due to a delay in toll notification by NHAI and the project was finally commissioned on 16 May 2008. The project cost is expected to be about Rs2,504 million, against the original estimate of Rs2,402 million. The cost overrun has been met by the promoters by way of subscription to the preference share capital of the company in the amount of Rs200 million.

Table A5.6: Proposed Means of Financing at Appraisal

(Rs million) Item Amount Equity 200 Grant from NHAI 180 Subordinate debt 360 Senior debt 1,662 Total 2,402

NHAI = National Highways Authority of India. Source: Infrastructure Leasing & Financial Services Limited.

2. Subloan details

35. ADB approved IL&FS’s request for $8.043 million to extend a subloan to WGEL for financing a subordinate loan of Rs360 million on 10 October 2006. IL&FS drew down the loan amounting to Rs344.4 million towards subordinate debt between December 2006 and September 2007. The disbursements were obtained as reimbursements against loans already advanced to WGEL. WGEL allotted NCDs to IL&FS totalling Rs360 million on 26 June 2007.

3. Operational Performance 36. The brownfield component of the project was completed and commissioned on 28 October 2006, and the entire project including the greenfield component was commissioned on 16 May 2008 as mentioned before. Toll collection for the brownfield component started in October 2006. From full commissioning of the project on 16 May 2008 till 30 November 2008, the average traffic per day was 14,770 vehicles and the average toll collections per day were Rs0.69 million, against an estimate of Rs1.25 million. The project has recently been fully commissioned and IL&FS expects the toll revenue to improve.

Appendix 5 37

4. Financial Performance 37. WGEL has been making profits since the commissioning of the brownfield component, as shown below and is regular in its debt servicing. The FIRR and average DSCR at appraisal were 13.29% and 1.77 times respectively as per the subproject evaluation form. The project completion review mission could not obtain the current revised FIRR and DSCR.


Item

28 October 2006–31 March 2007

FY2008

Toll revenue 64.12 121.05 Other income 0.56 9.54 Total income 64.68 130.59 Operating expenses 14.02 37.85 Interest 7.93 18.68 Depreciation 7.45 37.52 Profit or (Loss) before tax 35.28 36.55 Tax 11.90 12.63 Profit or (Loss) after tax 23.38 23.92


5. Environmental Safeguard 38. IL&FS prepared an environmental assessment report including an EMMP that was approved by ADB in October 2006. The contract document for the civil works included the environmental safeguard requirements. IL&FS, through its designated environmental monitoring agency—Ecosmart—reviewed implementation of the EMMP during the construction period. IL&FS ensured that corrective actions were taken based on its internal review process. However, its reporting to ADB on the implementation of the EMMP has been observed to be weak. IL&FS will continue to monitor implementation of the EMMP during the O&M phase. Overall, the environmental safeguards for the subproject have been implemented adequately. IL&FS recently extended the scope of its environmental policy from projects developed by IL&FS to all companies that are its subsidiaries or associates. Consequently, this subproject will now be subjected to an environmental audit from FY2010.

6. Social Safeguard 39. As mentioned earlier, West Gujarat Expressway Project (WGEP) was the PPP component of EWCP, with NHAI as a sponsoring authority. The public sector part of the PPP was funded by ADB, with NHAI as the Executing Agency (footnote 5). EWCP is being administered by the Transport Division. NHAI prepared the resettlement plan for the entire project, in accordance with ADB guidelines. During implementation of the project’s resettlement plan, the Transport Division conducted regular reviews (including WGEP). NHAI has confirmed that implementation of the resettlement plan has been completed. In addition, the resettlement plan’s implementing agency for NHAI, a nongovernment organization, has submitted the completion report for the entire EWCP. The report includes some aspects for the WGEP section separately, but does not separately cover details on all the parameters. The resettlement aspects of WGEP will be included as part of the entire corridor in the project completion report for EWCP.

38 Appendix 5

7. Other Impacts 40. The project generated employment, direct and indirect, for more than 450 persons during the implementation stage, and provides direct or indirect employment for about 150 persons after the commissioning. 41. The subproject road is an important arterial road in the region and the development of the road will contribute to the economic development of Gujarat and neighboring states by improving connectivity. The region comprises several towns, such as Gondal, Jetpur, Junagadh, Porbandar, Rajkot, Virpur, and Wankaner. Jetpur is known for its cotton textiles and apparel, and the improvement in the subproject road is expected to enhance the town’s access to intra-region and inter-region markets and trading centers. Virpur and Junagadh are pilgrimage and tourism destinations in the region and thus the subproject will enhance the tourism sector.

Item 2002 2003 2004 2005 2006 2007 2008 Net Worth 6,376 6,814 7,252 7,336 8,120 17,100 20,874 Equity capital 1,072 1,072 1,072 1,072 1,072 1,078 1,094 Preference share capital 520 520 520 70 70 0 0Reserves and surplus 4,783 5,221 5,660 6,194 6,978 16,023 19,780 Loans 28,724 30,874 41,049 43,662 59,761 57,868 24,049 Secured 19,067 25,422 28,635 26,226 37,220 38,637 17,717 Unsecured 9,657 5,453 12,414 17,436 22,541 19,231 6,333 Subordinated Debt 2,671 2,675 2,675 3,675 2,775 3,772 2,901 Current Liabilities and Provisions 2,989 3,915 5,569 7,029 9,692 9,099 6,991 Other Liabilities 1,110 814 457 288 163 0 0Total Liabilities 41,870 45,092 57,002 61,989 80,511 87,840 54,815

Fixed Assets including Leased Assets (net) 6,676 5,585 4,527 5,071 4,538 9,503 8,886 Investmentsa 8,767 12,960 13,824 16,857 17,124 20,601 16,017 Long-term trade investmentsb 2,397 2,887 3,043 3,483 4,839 15,652 14,946 Non-trade investments 6,370 10,073 10,927 13,374 12,286 4,950 1,071 Current investment 39 1,043 3,417 5,283 3,415 2,044 0 Long-term investment 6,331 9,030 7,510 8,092 8,871 2,906 1,071 Current Assets, Loans, and Advances (net) 26,427 26,546 38,651 40,061 58,849 57,239 19,434 Sundry debtors 470 819 419 296 302 675 176 Cash and bank balances 633 1,120 2,142 1,885 4,896 4,353 217 Other current assets 3,594 2,757 2,591 1,465 2,087 5,683 5,041 Loans and advances 21,730 21,849 33,499 36,415 51,563 46,529 13,999 For financing of infrastructure assets 6,342 4,914 4,901 6,245 10,146 9,733 10,073 Other loans and advances 15,509 17,136 29,286 30,441 41,550 36,817 3,939 Less Bad debts (nonperforming assets) written off 121 201 689 271 133 21 13 Other Assets (including net deferred tax asset) 0 0 0 0 0 496 10,478c

Total Assets 41,870 45,092 57,002 61,989 80,511 87,840 54,815 a The investment figure is net of provisions for FY2002, FY2003, and FY2004. b These investments are strategic in nature and are mainly in the nature of seed capital of new businesses. The figure for FY2004 includes current investment of Rs12 million.c This includes 10,000 million of shares of IL&FS Financial Services Limited receivable pursuant to the scheme of arrangement. Sources: Infrastructure Leasing & Financial Services Limited annual reports.

FINANCIAL STATEMENTS OF INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITEDTable A6.1: Balance Sheet of Infrastructure Leasing & Financial Services Limited

(Rs million)

Appendix 6 39

Item 2002 2003 2004 2005 2006 2007 2008 Income 5,224 5,370 5,709 5,852 7,347 12,521 8,812 Fund-based income 3,659 4,796 5,217 5,329 6,259 11,191 4,290 Fee-based income 1,371 413 338 235 646 797 3,429 Miscellaneous income 194 160 154 289 442 533 1,093 Expenditure 3,672 3,750 3,907 3,803 4,968 6,469 2,862 Interest and finance charges 3,123 3,232 3,339 3,156 4,005 5,185 2,060 Operating expenses (administrative and general expenses) 549 518 568 646 962 1,284 802 Amount set aside/written off for nonperforming assets 52 94 139 95 31 18 11 Amount set aside for investment valuation 46 18 17 20 40 105 20 Provisions and contingencies and prior period adjustments ---------(excluding taxes)a 1 140 360 350 450 700 500 Profit before Depreciation and Tax 1,453 1,368 1,285 1,585 1,858 5,229 5,419 Depreciation 516 471 394 303 248 212 124 Profit before Tax 937 896 891 1,282 1,610 5,018 5,295 Provision for tax (income tax and wealth tax) 131 134 70 260 390 887 499 Profit after Tax 807 762 821 1,022 1,220 4,131 4,796 Dividend (including tax on dividend) 281 324 382 389 436 495 1,076 a Prior period adjustments include prior period impact of change in lease accounting appearing in FY2002 and FY2003. Sources: Infrastructure Leasing & Financial Services Limited annual reports.

(Rs million)Table A6.2: Profit and Loss Account of Infrastructure Leasing & Financial Services Limited 40 A

ppendix 6

Item 2002 2003 2004 2005 2006 2007 2008Capital Adequacy Ratio (%) 18.04 17.03 14.50 13.20 11.76 12.18 a

Debt Equity Ratio (%) 4.64 5.41 6.57 6.52 7.78 5.28 1.73Return on average equity (%)b 14.24 12.55 12.61 14.60 15.93 41.86 35.22Return on average assets (%) 2.04 1.75 1.60 1.72 1.73 4.92 6.72Debt Service Coverage Ratio (%) 1.36 1.58 1.40 2.52 2.31 3.13 3.46Asset Cover (Times) 1.84 1.49 1.67 1.88 1.87 1.90 2.01Earnings per Share (Rs) 7.52 6.65 7.14 9.33 11.30 38.49 44.72Number of Employeesc 178 172 167 184 240 194 167Nonperforming Assets (NPAs) Gross NPA (Rs million) 490 807 1,058 764 500 343 0 Net NPA (Rs million)d 388 280 179 0 0 0 0 = not available.

b The computation of this figure excludes preference share capital and revaluation reserves in the denominator. c The number of employees have declined from 2006 to 2008 owing to reorganization of IL&FS's business.d Net nonperforming asset (NPA) is after adjustment of provision for general contingency.


Table A6.3: Key Ratios and Performance Indicators of Infrastructure Leasing & Financial Services Limited

a Subsequent to its transformation to a holding company, IL&FS has written to RBI for cancellation of its non-bank finance company registration and has stopped reporting the capital adequacy ratio.

Appendix 6 41

42 Appendix 7

STATUS OF COMPLIANCE WITH KEY LOAN COVENANTS Serial

No. Covenant Reference in

Loan Agreement

Status of compliance

IL&FS’ Eligibility Requirements 1. Except as ADB may otherwise

agree, IL&FS shall, at all times, continue to adhere to the following criteria, to the satisfaction of ADB, in order to allow ongoing participation by IL&FS in the Project:

Schedule 2, para. 3

(a) Ensure adequate deployment of financial and human resources for identification, evaluation and financing of infrastructure projects specified in para. 5 of this Schedule to the LA in the state (s);

(b) Compliance with all applicable

prudential rules, regulations and guidelines established by the RBI (i) on capital adequacy and supervisory practices, including but not limited to, maintenance of a capital adequacy ratio of at least 9% as amended from time to time; and (ii) regarding, inter alia, recognition of income, classification of assets and debt provisioning;

(c) Undertake its operations so as

to ensure that the consolidated internal cash generation for

Complied. Partially complied. Pursuant to its transformation to a holding company, IL&FS has written to RBI for cancellation of its non-deposit accepting NBFC registration. While RBI has not yet approved deregistration of IL&FS as an NBFC, IL&FS had not submitted its capital adequacy ratio under RBI norms applicable to NBFCs for 2008 as of the Project Completion Review Mission, and is, therefore, not in compliance with part (i) of this clause. IL&FS, however, confirmed that it follows RBI norms with respect to recognition of income, classification of assets and debt provisioning specified in part (ii) of this clause. Complied.

Appendix 7 43

Serial No.

Covenant Reference in Loan

Agreement


debt service for each fiscal year shall be at least 1.1 times the consolidated debt service requirements for that fiscal year; and

(d) Ensure compliance with insider

trading regulations of SEBI and adherence with the corporate governance standards as specified by SEBI.

Complied. IL&FS confirmed compliance with the insider trading regulations. Corporate governance standard as specified by SEBI is not applicable to IL&FS, as IL&FS is a closely held unlisted entity. However, IL&FS continued its compliance with the requirements of corporate governance standards of SEBI.

Implementation 2. IL&FS shall, with co-operation of the

states, undertake selected states and eligible state(s) in the development of individual QPs, including conceptualization and identification project development, financial structuring and advisory services. IL&FS shall coordinate with the appropriate Infrastructure Agencies of such states.

Schedule 2, para. 4

Complied.

Subloan Financing criteria 3. Without limitation to Section 2.06(d)

of this Loan Agreement, the Borrower shall ensure that:

Schedule 2, para. 6

(a) the amount of each Subloan shall not exceed a maximum of 25 percent of the total project cost of the relevant Qualified Project or the single exposure limit of the Borrower under applicable RBI prudential regulations, whichever is lower, subject to a maximum of $75 million;

(b) each Subloan only finances

Complied. Partially complied.

44 Appendix 7

Serial No.


Agreement


the issuance of marketable securities: and

(c) in making Subloans, the

Borrower shall finance atleast two (2) Qualified Projects, preferably each in a different subsector and each in a different state.

Complied for two subprojects. However, NTADCL subloan is still pending conversion into securities. Complied.

BME 4. IL&FS shall monitor and evaluate the

benefits of QPs after the completion in accordance with a schedule agreed with ADB. Such benefit monitoring and evaluation procedures shall be in accordance with ADB’s project performance monitoring system (PPMS), including a computerized system for collecting and analyzing benefits data developed by ADB for financial intermediaries.

Schedule 2, para. 8

Complied. BME reports for the subprojects submitted by IL&FS, but with a delay.

Environmental 5. (a) For all QPs, IL&FS shall have

satisfied itself that the QP has complied with environmental standards prescribed by the environmental laws, rules and regulations of India and the relevant states, and environmental standards acceptable to ADB for environmental impact assessments and initial environmental examinations.

(b) IL&FS shall have satisfied itself

that all necessary mitigation measures acceptable to ADB shall have been taken to mitigate any adverse environmental impacts associated with a QP, including environmental safeguards and

Schedule 2, para. 9

Complied. Complied. However, reporting to ADB on the implementation of environmental management and monitoring plan has been weak.

Appendix 7 45

Serial No.


Agreement


equipment, and in-house capacity for pollution control and monitoring and where required, engagement of environmental experts to assist the concerned QE.

(c) IL&FS shall frame and adopt, or

have adopted, appropriate environmental policies and guidelines in accordance at a minimum with Indian laws and regulations. IL&FS shall also frame and adopt, or have adopted, environmental procedures acceptable to ADB.

Complied.

Resettlement 6. (a) IL&FS shall have satisfied itself

that all necessary measures shall be taken to mitigate any adverse social impacts associated with any QP. For any such QP, IL&FS shall have satisfied itself that, if required, a resettlement plan be prepared and submitted to ADB for review and approval, and that such a resettlement plan be satisfactory to ADB and in accordance with the Resettlement and Rehabilitation Action Plan for the Ahmedabad – Mehasana Toll Road Project as in the relevant Appendix of the report and recommendation of the President to the Board of Directors of ADB for this Project to be applied to all sub loans with land acquisition and resettlement, ADB’s Involuntary Resettlement Policy and ADB’s Handbook on Resettlement, 1998 as amended from time to time.

(b) IL&FS shall have satisfied itself

that mitigation measures for

Schedule 2, para. 10

Complied. Complied.

46 Appendix 7

Serial No.


Agreement


adverse social impacts associated with a QP include rehabilitation assistance in accordance with a Resettlement Plan as specified in Sec 10(a) of the Schedule to the LA, ADB’s Involuntary Resettlement Policy and ADB’s Handbook on Resettlement, 1998 as amended from time to time.

(c) (i) Unless ADB shall otherwise

agree, IL&FS shall have satisfied itself that the QEs do not award any civil works contract involving land acquisition under the Project, unless the QEs concerned shall have provided an updated resettlement plan in accordance with Section 10(a) of the Schedule to the LA (including a final census of affected persons, complete inventory of lost assets, revised budget and entitlement matrix, and other relevant details), based on the detailed project report for each QP that entails land acquisition and resettlement;

(ii) Unless ADB shall otherwise agree, IL&FS shall have satisfied itself that the QEs shall have paid compensation and provided rehabilitation assistance in accordance with the updated resettlement plan prior to obtaining possession and rights to the required land.

(d) IL&FS shall frame or adopt, or

Complied. Not complied for New Tirupur Area Development Project. Non-compliance was highlighted by the Involuntary Resettlement Safeguard Review Mission fielded in November 2006. The mission’s recommendations with respect to safeguard issues were, however, substantially complied with by IL&FS subsequently. Complied.

Appendix 7 47

Serial No.


Agreement


have adopted, appropriate resettlement policies and guidelines.

Financial Requirements & Reporting 7. IL&FS shall at all times make

adequate provision to protect itself against any loss resulting from changes in the rate of exchange between Rupees and the currency or currencies in which IL&FS’ outstanding money obligations will have to be met.

Section 5.02 Complied. IL&FS has hedged the exchange risk in respect of the loan outstanding through swap agreements. On maturity of the outstanding swaps, IL&FS will be entering into further swaps.

8. (a) IL&FS 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 six months after 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 hereto (including the auditors’ opinion on the use of the loan proceeds, the adequacy of IL&FS ‘s accounting and internal control procedures, the status of compliance with the covenants of the LA and compliance with ADB’s Loan Disbursement Handbook 2001 as amended from time to time, all in the English language. IL&FS shall furnish to ADB such further information

Section 5.06(a)

Complied.

48 Appendix 7

Serial No.


Agreement


concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request.

(b) In addition to the annual

audited financial statements referred to in Section 5.06 (a), IL&FS shall furnish to ADB:

(i) On or prior to 15

December of each year, a schedule indicating the projected disbursement of the proceeds of the Loan for each quarter of the next succeeding calendar year;

(ii) Within 6 months after the

end of each fiscal year, financial projections of its operations and capital expenditure programs (including income statements, balance sheets and cash-flow statements) for the ensuing 3 year period; and

(iii) Within 3 months after the

end of each semi-annual period of the fiscal year, unaudited financial statements of its performance and results of operations during each such semi-annual period.

(c) IL&FS shall enable ADB, upon

ADB’s request, to discuss IL&FS financial statements and its financial affairs from time to time with IL&FS auditors, and shall authorize and require any representative of such auditors

Section 5.06(b) Section 5.06 (c)

Complied. Complied. Complied. Complied.

Appendix 7 49

Serial No.


Agreement


to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only in the presence of any authorized office of IL&FS unless IL&FS shall otherwise agree.

Records Management and Requirements

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

Section 5.04 Complied.

10. Without limiting the generality of the foregoing and Sec 7.04 of the Loan Regulations, IL&FS shall submit to ADB (i) semi-annual reports, within six months after the execution of each QP, in such form and detail as ADB may reasonably request, covering, inter alia, the execution and costs of the QPs; and (ii) an annual report, within ninety (90) days of the close of the each fiscal year, on inter alia, the status and performance of each QP. Such reports shall be submitted in such form and in such detail and within such period as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the particular period under review, steps taken or proposed to be taken to remedy these problems, the status of trading of marketable securities issued by the QPs and the reapplication of proceeds from resale of the marketable securities, the

Section 5.05(b) Complied.

50 Appendix 7

Serial No.


Agreement


utilization of Project proceeds, the execution of QPs, the operation, management and financial performance of IL&FS, developments in the domestic debt market and a proposed program of activities and expected progress during the subsequent six month or annual period as the case may be.

11. IL&FS shall, within six months after the completion of each QP, prepare and furnish a completion report, in such form and with such detail as ADB may reasonably request, on the utilization of the proceeds of the Loan, the execution of the QP, its costs and any other relevant matter.

Section 5.05(d) Complied. IL&FS has been submitting progress reports on each of the QPs.

Others 12. Except as ADB and IL&FS may

otherwise agree: (a) If a Subloan or any part thereof

evidenced by marketable securities issued by a QE for a QP shall be sold, transferred, assigned, or otherwise disposed of by IL&FS, IL&FS may utilize the proceeds received from the sale, transfer, assignment or other disposition of any such marketable securities to purchase long-term marketable securities issued by a QE for completion of a QP in accordance with the terms of the LA, provided that the proceeds received shall be restricted to the face value of the Subloan or the actuals whichever is lower. For purposes only of reinvestment, until such purchase by IL&FS of long-term marketable securities, IL&FS shall deposit or invest the proceeds from such sale, transfer, assignment or other disposition of marketable securities only in (i)

Section 2.08 Complied.

Appendix 7 51

Serial No.


Agreement


securities which have been classified by the RBI as reserve –eligible securities for commercial banks; (ii) government-issued or government –backed securities; (iii) securities of prime commercial banks; (iv) AAA-rated securities; or (v) securities of QPs ADB has approved.

(b) In the event IL&FS is unable to

utilize the proceeds received from sale or other disposition of a Subloan evidenced by long-term securities as contemplated in Sec 2.08 (a) within a reasonable period but in any case, within 24 months of receipt of such proceeds, IL&FS shall promptly notify ADB and shall prepay to ADB in accordance with the Loan Regulations.

Not applicable.

13. IL&FS shall, promptly as required, take all action within its powers to maintain its corporate existence, to carry on its operations and to acquire, maintain and renew all rights, properties, powers, privileges and franchises which are necessary in the carrying out of the Project or in the conduct of its business.

Section 5.09(a) Complied.

14. Except as ADB may otherwise agree, IL&FS shall not sell, lease or otherwise dispose of any of its assets, except in the ordinary course of its business.

Section 5.09(c) Complied. IL&FS has undergone reorganization and has transformed into a holding company pursuant to approval of Mumbai High Court in April 2008 to the Scheme of Arrangement which interalia provided for transfer of the investment banking assets of IL&FS to its wholly owned subsidiary IL&FS Financial Services Limited with

52 Appendix 7

Serial No.


Agreement


effect from 1 April 2007. IL&FS has provided ADB with information requested by it in respect of the reorganization.

ADB = Asian Development Bank, AMTR = Ahmedabad Mehasana Toll Road, BME = benefit monitoring and evaluation, FY = fiscal year, GRICL = Gujarat Roads Infrastructure Corporation Limited, HY = half year, IL&FS = Infrastructure Leasing & Financial Services, LA = Loan Agreement, NBFC = nonbanking finance company, NTADCL = New Tirupur Area Development Corporation Limited, PPMS = project performance monitoring system, QE = qualified enterprise, QP = qualified project, RBI = Reserve Bank of India, SEBI = Securities and Exchange Board of India, WGEL = West Gujarat Expressway Limited.

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