Legal and Financial Structure of Project Finance in India - Essay Example

?Legal and Financial Structure of Project Finance and Associated Costs and Barriers in India Kaushal Kishore Academia-Research [17 March Legal and Financial Structure of Project Finance and Associated Costs and Barriers in India Abstract: This paper aims to explore possibilities and status of project financing and public-private-partnership programs in India. It examines the risks and barriers that may hinder investments in the potential Indian market, and further explains the structure of project finance. This study utilized the articles and reports of authentic journals and working papers published by educational, financial and environmental institutions. The findings suggest that perceptions of political and legal nature, corruption, and economic risk can hinder project finance and foreign investments in the Indian market. This paper further discusses several aspects of investment risks in India, and points out how investors can implement certain useful techniques. Finally, it offers some suggestions to overcome these challenges. Keywords: Investment, Project Finance, Investment in India, Public-Private-Partnership. Introduction: The long term financing of various types of infrastructure, industrial and public service projects are usually referred to project finance. In recent times, it has funded many large-scale natural resource projects as well as a number of high-profile corporate projects. However, similar type of financing scheme is recorded in the history of ancient Greece and Rome, the modern trend of project finance developed in last forty years. Basically this is an innovative and timely financing system. The non-recourse or limited recourse loans of project finance are mainly based upon the estimated cash flow of the project. “The key to project finance is in the precise forecasting of cash flows” (Ghersiy, 5). The assets, rights and interests of project secure the loan amount in such cases of debt. And repayment of loan exclusively depends on project’s cash flow. The balance sheet and creditworthiness of the project sponsors are secondary in it. Unlike conventional financing methods, project financing is unique. Since project financing enhances the values of some of these projects by permitting higher optimal leverage than with conventional financing (Shah & Thakor, 212). The borrowing party has limited liability in some risky and expensive projects. Such cases are secured by a surety from sponsors. Therefore this is also known as limited recourse financing. There are many huge industrial and infrastructural projects, as already carried out successfully for certain types of project i.e. infrastructure development, mining, highways, railways, pipelines, power stations, etc. By the end of previous millennium, the private share alone in infrastructure investment varied between the lows of 9% and 13% in Germany and France and the extreme highs of 47% and 71% in the US and Great Britain, respectively (Miller & Lessard, 67). In fact, the projects that require non-recourse project financing would require significant contractual framework (Singh, 19). Moreover, the securities and borrowings are designed to be serviced and redeemed exclusively from the cash flow in non-recourse project finance. Whereas, the project sponsors or government provide undertakings to an effect that coerce them to supplement the cash flow under assured limited conditions in limited recourse project finance. Generally, project financing is not designed for already running business rather for the large-scale innovative initiatives. Often it involves the creation of a legally independent project company financed with equity from one or more sponsoring firms and non-recourse debt for the purpose of investing in a capital asset (Esty, 213). The design of project finance is indicated in the following diagram. Figure: Project Finance Structure Source: The Institute for Public Private Partnership (Powell, 19) In present scenario, project financing emerged as an alternative to conventional financing over the world, especially in the developing countries like India. “Globally, private debt flows to developing nations are on the rise, driven by abundant liquidity, steady improvement in developing country credit quality, lower yields in developed nations, and expansion of investor interest in emerging market assets” (Valahu, 2). The availability of infrastructure facilities is imperative for developing countries to cope up with the global modernization. Most of the developing countries do not have sufficient financial resources at their disposal to allow them to finance all of their infrastructure projects. Hence these nations try to find sources of financing either in private sector or in the overseas public financing institutions. Consequently, many countries progressed and evolved successful course of action. According to the reports of studies huge regional concentration of public-private partnership projects have been formed primarily in Latin America, followed by Southeast Asia. India is one of the leading countries of this region, and a host of many of the project financing deals pertaining to entire Indian subcontinent. Project Finance in Indian Scenario: India is the largest democracy of the world. The nation has huge and diversified population. This is the world’s second most populous country. The area is seventh largest of the globe. The Indian democracy is well-established since her independence in 1947. Foreign direct investment (FDI) in India is recognized to be instrumental in her economic development of recent times. The governing policy and economic liberalisation of the nation has progressed in recent past. India realized that no sustainable economic development is possible without adequate infrastructure, and focused on improvement of quality as well as enhancing the quantity of infrastructure facilities of the nation. The economic development and reforms commenced in early nineties when present Prime Minister and well-known economist Dr. Manmohan Singh was the Finance Minister of India. He is more known for the initiatives of economic reforms and evolution of better trends to attract overseas investments. The government of India launched comprehensive banking sector reforms in 1991. That included interest rate decontrols, cuts in reserve and liquidity requirements, an overhaul of priority sector lending, deregulation of entry barriers, strengthening of prudential regulations, and capitalization and partial privatization of public sector banks (Shirai, 36). The foreign direct investment increased exponentially with gradual liberalization of the economy. The paradigm shifted and India became one of the most attractive investment destinations in the world. Consequently the domestic and overseas financing of projects increased drastically in India. Majority of these projects are infrastructure development, hydropower, mining projects, etc. According to the India Infrastructure Report of 1996, the physical framework of facilities through which goods and services are provided to the public is defined as infrastructure. Reserve Bank of India further defines it in the circular of Financing Infrastructure Projects and states, “Developing or developing and operating or developing, operating and maintaining an infrastructure facility in Energy, Logistics and Transportation, Telecom, Urban and Industrial Infrastructure, Agro Processing, Construction for storage of Agro Products, Schools and Hospitals, Pipelines for Oil, Petroleum and Gas, Water and Sanitation” (RBI, 3). Both of the physical and social infrastructure services are included in this definition. Project finance in Indian scenario is defined as a creation of a legally-independent project company or joint venture. The investment of project finance is rapidly growing here, and now it became one of the most important financing vehicles for investments for power plants, toll roads, mines, pipelines and telecommunications systems. The keen efforts of government of India to economic reforms stimulated infrastructure development in the rural areas and to boost the economy. The introduction of flexible and sustainable policies attracts global financiers and stake owners. The increasing interest of global community and details of investment in these sectors are explained in the following display graphs. Source: Friends of the Earth Source: Friends of the Earth (Chan-Fishel) Source: Friends of the Earth Government of India proposed to double the electricity generation capacity of the country, and disclosed the plan of 162 new hydropower projects, in 2003, through National Hydroelectric Power Corporation (NHPC). And by the end of 2003, financial institutions from Sweden, Norway, the United Kingdom, Canada, Japan and Germany had provided loans to NHPC. Skandinaviska Enskilda Banken, Credit Commercial de France, HSBC, the Nordic Investment Bank, the Export Development Corporation, the Japan Bank for International Cooperation, ABN Amro, ANZ, Barclays, Emirates, Natwest, Standard Chartered, Sumitomo and a syndicate headed by Deutsche Bank extended loans that amounted to slightly more than 10 percent of NHPC’s assets (Schneider, 1). Infrastructure services strengthen many facets of economy and social movements. Similarly the impact of infrastructure failure is widespread across the entire community. An unfailing infrastructure network became more vital in present highly competitive global market. India urgently needs a stronger industrial support to make use of the ever increasing unemployed workforce. The infrastructure building can easily avail positive employment platforms in construction industry. “Nowadays, more and more major construction projects involve project finance, which doesn’t simply mean ‘financing of a project’; rather, it is a mix of financial and business engineering” (Vasilescu, et. al. 80). Greater part of such infrastructure finance tends to have a long term maturity. Sometimes it is between 5 years to 50 years that indicates the duration of construction and life of the core asset being created. A hydro-power project for example may take as long as 5 years to construct but once constructed it could have a life of as long as 100 years or longer (Mor, 4). In India, the new concept of public–private–partnerships (PPP) becomes obvious to develop public infrastructure and utility. The definitions of public-private partnership vary, even though most of them share certain characteristics. The public-private partnership (PPP) always concerns the cooperation of two or more parties, and one of these parties is a public character and each of the parties is principal. The relationship is long-term, stable and based on mutual benefits. Each participant transfers material or non-material resources into the partnership. Risk and responsibility are distributed among all in partnership (Akintoye, 11). Above all, the model of public-private partnership is good, being founded on the benefits of both the private and the public sectors (Hodge and Greve, 28). Public sector was the main provider of infrastructure due to legal rigidity in India. But it was not able to generate the required investment. Later government revised the policies and regulations to enhance private sector participation in infrastructure development including through PPPs. The effort was dedicated to strengthen the capacity at all levels to promote PPPs, and to enable them to arrange the bridging of enormous deficit in infrastructure financing for long-term funds. As thus substantial increase has been recorded in such projects. India has seen a rapid increase in private investment in infrastructure since 2003 (Harris, 2). The detail of the increasing order is recorded in the following figure. Source: PricewaterhouseCoopers 2007 (PPIAF, 2) Since the inception of financing projects India progressed smoothly. Today, the vibrant sectors of economy are energy, road infrastructure, railways, water resources, communication and ports. During the Eleventh Five Year Plan (2007-2012), Planning Commission of India has estimated that the total investment in infrastructure has to increase from 4.5% to around 7.5% of the GDP. It has projected investments over US$ 320 billion at 2005-06 prices that has been revised in May 2007 to US$384 billion at 2005-06 prices (GoI, 1). The following graph and table explore the strength of Indian investment market. Table: Infrastructure Investment in the Eleventh Five Year Plan Source: Planning Commission, Govt. of India Despite sufficient economic growth, the energy sector of India is under capacity. Power generation, transmission and distribution are far below expectation. This sector represents potential revenue pools and addressed adequately in 11th five year plan. The national growth of infrastructure public-private partnerships (PPPs) is remarkable. The domestic markets managed well and offered better terms to overseas stake owners since it became accustomed to PPP model. At the same time other areas of possible concerns developed such as the rising interest rates and reduced liquidity. Now PPPs are more exposed to interest rate volatility. In the past few decades, the need for financing infrastructure projects in many countries throughout the world has been growing more rapidly than the sources of funding (Gil & Beckman, 52). Attractive Features of Project Finance: The critical importance of project finance is proved, especially in the cases of emerging economies. It focuses on the link between infrastructure investment and economic growth. Private sector interest in such financing appears to be like the next goldmine that is consistent with existing pledge of sustainability. Recently, financing prospect became commercially more attractive, particularly in infrastructure, energy and public utility sectors. Whereas there were little evidences of involvement of private sector in joint venture public private endeavors. Today, private sector prefers project financing due to numerous attractive features of this financing trend. These attractive features of project finance are as under: 1. The lenders finance the project. Here creditworthiness of project is the main issue, instead of the borrower. 2. The source of debt repayment is project cash flow—revenues and earnings of the running project. 3. The limited liability of the borrowing party makes it safe and less risky. 4. The project assets and rights are used as security for the financing. 5. The project financing reduces the cost of agency conflicts inside project companies. Legal and Financial Structure: The structure of project finance is complex. It involves a number of equity investors, generally they are known as sponsors, along with a syndicate of banks. Hence such financing is possible in certain specific conditions. The project must be capable of producing sufficient funds to pay the debt interests along with the operating cost. As thus the financial model of the project plays major role in the assessment of its economic feasibility. The output of financial model is used in dealing with the project. It can determine the maximum amount of debt limitation, based upon the debt repayment profile. The assessment of financial viability of a project is necessary to evaluate its viability. It ensures that the debt service coverage ratio (DSCR) must remain within the predetermined level. It is used to determine the return and to measure the riskiness of a project. Determination of interest rate on debt depends on it. In some cases of infrastructure and power plant projects with strong off-take agreements the DSCR is lower than other cases. “The financial assessment of a project forms part of an investor’s ‘due diligence’, or the overall process of investigation into the details of a proposed investment” (UNEP, 40). Different aspects of the due diligence process includes evaluation of the capacity of managing team to carry out the project, through investigation of the technology involved, and ongoing supervision of the post-financing accomplishment of the project. However, the focus on the financial assessment process remains at pre-financing stage. The main steps in the financial evaluation process are development of a project model, analysis of financial indicators, sensitivity analysis, and risk assessment and mitigation (UNEP, 40). After the modifications and evolutions that commenced in 1991, non-recourse project financing increased in India. The partnership of public and private capital is no longer remained a form of monopoly. More precisely, this type of cooperation cannot be realized without legal regulations, since this type of financing requires a precise definition of the responsibilities, rights and obligations of the participants from both the public and the private sectors, especially those tied to safety, quality and user fee level i.e. profitability (Benkovic et. al., 314). The proceeding of project finance normally begins with the evolution of financial model and a memorandum of understanding (MOU) describing a bilateral or multilateral agreement between the parties. The document expresses a convergence of will between the parties to carry out particular project. It further demonstrates the proposed common lines of action. The parties mention an arbitration clause since they don’t want litigations and lengthy judicial practice of Indian courts. In fact, provision of arbitration is a quasi-judicial arrangement that is governed by the Arbitration and Conciliation Act. This documentation is often used as a legal commitment. The seriousness of cases largely depends on the exact wording of MOUs. It has the binding power of a contract as a matter of law. The maturity of parties and their mutual understanding is legally binding. There are numerous other contracts and documentations needed in project finance. The contracts can base load production at a project and provide a known source of revenue to help in need. The credit quality of the off-taker can deteriorate, and contracts can be subject to litigation, as a low cost producer, the project should remain competitive and generate attractive cash flow even if the contract relationships disappear (Lupoff, 3). BOT is one of the recent innovative schemes in project finance. In fact, limited recourse financing is available for the Build-Operate-Transfer (BOT) schemes. Successfully hundreds on such projects have been carried out in India. In addition to that DB, DBB, BOLT, BOOST etc. are other limited duration projects. It is imperative for the sponsors of such projects to create a Special Purpose Vehicle/Entity (SPV). In case of infrastructure projects most of the SPV’s are formed under the Companies Act 1956. As thus they are legally independent from the parent companies. The formation of SPV simply minimizes the risk, and save sponsors’ balance sheet from high project leverage. The implementation and operation of the project are main aim to incorporate SPV’s. It is different from a subsidiary. There are two or three equity sponsors in most of the SPV. The bankers insist on sponsors contribution and expects equity contribution of 15 -30% of the project cost. All of the project sponsors take an equity stake in the SPV and the highest share of equity stake is 51%. The SPV is a focused entity with a limited purpose of cash flow protection that further restricts additional debt issuances. Electricity generation projects are often implemented in India by Energy Services Companies (ESCOs). These are structured through Special Purpose Vehicle (SPV) setup by investors or individual end-users or industrial companies. These projects are example of non-recourse project finance, in which sponsors establish SPV with the objective to own and operate a cogeneration system. Assets of the company are represented by the co-generator facilities, and investment return is assured by two revenue streams. First is heat sales to end-user companies i.e. normally 10-20%, and the other is electricity sales to the grid i.e. 80-90%. It is normally based on a preferential feed-in tariff established by electric utilities as an incentive (IFC, 1). Despite favorable policies and support rendered by the central and state governments, many of the renewable power options remain risky and extra expensive. The solar power projects are expected to achieve grid parity in the coming years, although, that is a distant dream. Today the cost of solar power generation exceeds the conventional and other renewable energy. In addition to these there are other risks involved in solar power projects. The solar technology is at a nascent stage in India. Therefore such projects are considerably risky. The BOT projects involve more risk than the other design-build (DB) and design-build-operate (DBO) projects. The involvement of private sector in financing is one of the major causes to risk exposure. The risk is less in more segmented projects. The DBO and DB projects are less risky due to direct funding system. The following table describes the risks involved in infrastructure projects. Table: Risk Involved in Infrastructure Projects (Kreydieh, 24) Central to understanding any finance and investment decision is risk and return (Justice, 3). Financial institutions indeed want to make an appropriate return in respective proportion, where more risk means a greater return will be expected. The project finance concerns with minimizing dangers and risks that can have a negative impact on the performance of project. The core components of this area are the timely accomplishment of project within budget, total capacity utilization of project in operation, to generate sufficient revenue for the maintenance and repayment, and to prevent the premature end of the project. The first step of risk minimization requires identification and analysis of risky areas. The second step is the allocation of risks among the parties. The last step involves the creation of mechanisms in order to mitigate the risks. The project sponsors by and large prepare a feasibility report, and carefully review the report. Sometimes they engage independent expert consultants. Some risks are analyzed during development of financial model. The identified and analyzed risks are allocated by the parties within the framework of contractual negotiation. The project financiers attempt to allocate uncontrolled risks and ensure fixing such risks with each party. As a common rule of practice private sector seek commercial risks and state sector manages political risks. In fact, every project is different. So it is not possible to compile a complete list of risks and barriers to place them in priority order. A substantial risk for one project may be quite simple question for another. The project finance deals with one or the other type of work and it is further associated with numerous sector. For example we access two projects, one is the electricity generation project and the other is a highway construction. In fact the legal issues associated with financing both of the projects are one and same, but the laws and directive principles for the construction, operation and maintenance of a power plant and a toll-road are different from each other. In case of power plant, the Electricity Act. is being treated as directive law. At the other hand the railway line construction depends on the laws mentioned in Indian Railways Act. The legal issues are governed by the lending institutions provide debt to a special purpose vehicle set-up for the project and mentioned in the MoU. However as this structure does not provide recourse to the developer’s balance sheet, lending institutions require rock-solid agreements for revenues from the projects (Ahuja, 52). The purpose here is the analysis of common risks of most of the projects along with possible solution avenues. The risks are categorized according to the phases of the project, because nature and allocation of risks and barriers usually change between different phases. The issues of design and construction phase, operation phase, or either phase. Risk allocation of completion phase is vital to any project, since it carries some of the most difficult risks and barriers. In addition to accomplishment on time and within budget, technical issues and labour problems pose difficulties at this stage that cause delays or increase the cost. The implementation of certain mechanisms can minimize it. Successful performers obtain completion guarantee that bounds the sponsors to pay all debts and liquidated damages in case of delay. They further ensure significant financial interest of sponsors so that they remain committed. They develop the project under fixed-price, fixed-time turnkey contracts and engage sound contractors with performance bonds or third party guarantee. Moreover they engage independent experts to confirm that the work progresses as planned. Operation phase risks primarily concern mining project, railways, power station, and toll roads. There are insufficient inputs to produce an adequate return in such cases. Such risks mainly arise due to insufficient reserves for mine, fewer passengers for railway, fuel crisis for power station or fewer vehicles for toll road. Most of these resource risks are minimized by accurate inputs based on experts’ study. The detailed study of expert engineer reveals the reserves for mining project. Reliable survey reports and other empirical evidences estimate public users and number of passengers who will use railway or toll road. Long term supply contracts for inputs minimize the shortage or fluctuation of cost in certain cases like fuel supply. Contract agreements guarantee that there will be a minimum level of inputs or certain number of vehicles on the toll road. Operating risks have an effect on the cash-flow of the project. The increase in operating cost influences quantity and quality of planned output over the project life. It includes the experience level and operator resources, shortage of skilled labour, etc. The employment of sound operators with performance security by performance bonds can minimize such risks. The risk in business and fiscal uncertainty are other real sources of risks that can cause severe losses. Other factors of risk and barriers are political, economic, social and legal that may lead to further losses. The largest risk of investment in India is the complexity in dealing with bureaucracy, political interferences, and poor infrastructure along with corruption and insufficient judicial system. Lawsuits and disputes sometimes arise due to the land ownership. Change of land use is another big problem in Indian scenario. Bureaucratic risk comes in the form of red tape issues in India (Leggett, 1). The political masters tampered the fairness of Indian bureaucracy in last 3-4 decades, therefore businessmen often complain of economic crimes. Political instability also causes a risk in Indian scenario. This is a negative perception that emanates from intergovernmental relationship and actions of state and central governments. It further refers to the changes in political institutions stemming from government changes. Investment observers are worried about it. Political events actually cause losses in Southeast Asia. The topsy-turvy politics of India indicates the cultural and religion diversity. As thus, political issues cover the potential internal and external conflicts. The union government was dominant ever since the inception of project financing trends in India. In the wake of growing strength of regional parties, they are no longer silent like the past. It has given rise to this decentralization trend within different infrastructure sectors. At the moment the state governments are playing an ever increasing significant role, and a complex bureaucratic system developed that foreign company find difficult to understand (Heymann, 6). All of these political issues collectively slowed the process of infrastructure development in India. Investments in infrastructure have a long-term horizon, and as such the need for political continuity and stability is a vital concern. This implies that investment in infrastructure is highly political in nature. Investors are hesitant to make long-term commitments for fear of government intervention and breaches of contractual obligations. Corruption and poor legal system are other precarious factors. Electoral finance is increasingly expensive. Here, elections are not state-financed. The politics-business corruption remains enough strong that in turn leads to poor legal system. Companies employing more than a particular number of workers need the permission to lay off workers. The corrupt government officials often withhold permission. The legal system of India is notoriously slow and lengthy. Disputes often take decades to resolve, therefore, many foreign investors build in clauses allowing for international arbitration. Economic factors refer to an important change in the Indian economic structure. It produces many-fold changes in the expected return of investments in projects. The macroeconomic factors are major risk factors. Other economic risks arise from the potential changes in fundamental economic policy goals such as fiscal, monetary or international. There are three macroeconomic factors in India—inflation, interest rates, and fiscal stance of the government. Economic risks often overlap with political risks because both deal with policy of the Indian government. Although, there are political and economic risks in Indian economy, the rate of economic growth regularly increasing at the rate of 4-10 percent per year. The implementation of Integrated Financial Management Information Systems (IFMIS) is an effective way to settle numerous problems associated with projects in developing countries as well as in conflict and post-conflict situations. The IFMIS provides a critical financial management solution. The totally functional IFMIS can improve control by providing real-time financial information to administer programs effectively, manage resources properly, and formulate budgets. Sound IFMIS systems, coupled with the adoption of centralized treasury operations, can not only help developing country governments gain effective control over their finances, but also enhance transparency and accountability, reducing political discretion and acting as a deterrent to corruption and fraud. (USAID, 9) The Equator Principles provide a set of financial industry benchmarks for determining, assessing and managing social and environmental risk in project financing. Equator Principles Financial Institutions (EPFIs) are committed to providing loans to projects where the borrower comply with the respective social and environmental policies and procedures that implement the equator principles. Today the banking sector controls more than 80% of global project finance volume, and most of them have adopted the Equator Principles (TCG, 9). Cost and Barriers: As a common observation the size of project finance and infrastructure projects are large. It costs a great deal of money, however, there are certain exceptions to this rule, for example a kilometer of road or a mega-watt of power could cost as much as US$ 1.0 mn and consequently amounts of US$ 200.0 to US$ 250.0 mn (Rs.9.00 bn to Rs.12.00 bn) could be required per project (Mor, 4). Underdeveloped pension and long-term debt markets restricted the tenure of project finance in India. Most of the available debt has short term maturity, whereas infrastructure projects require a longer repayment period. This constraint leads to front loading of tariffs during the initial years of the project cycle with a view to ensuring repayment of debt. Apart from affecting the users, this handicap also affects the competitiveness of infrastructure projects (ADB, 38). The project financing is capital intensive that involves multiple risks to financiers. A combination of higher capital investment and lower operating costs simply implies that preliminary financing costs are very large proportions of the total costs. The project financing involves a complicated and diverse mix of economic and contractual arrangements. The contractor may be responsible for bringing a project to mechanical completion according to the design and specifications. Under an engineering, procurement, and construction contract, the contractor accepts full responsibility for delivering operational facility. If the contractor fails to meet its obligations, it may be required to pay compensation to the project sponsors, in the form of liquidated damages (LDs). Delay LDs, payable when the contractor fails to meet certain milestone dates, normally cover additional interest costs arising from the delay and may compensate equity investors for lost income and fixed costs incurred (Ruster, 1). Maintenance of the project is significant, it is provided by the hard facility manager. Generally it extends for the duration of the contract, although, life cycle costs remain the responsibility of the project company. Periodic life cycle reviews by an independent engineer also facilitate early planning of future expenditure, so that cash can been retained in the project ahead of major maintenance (Monnier, 8). Raising sufficient equity finance leans to be the most challenging aspect of project financing, since equity usually bears the high level of operational, financial and market risk. In addition to risks, cost and barriers are the main impediments of investment. A financier cannot ignore certain factors such as political, legal, economic confiscation before making a decision to invest in India. Disputed issues at these sources might lead to investors’ aversion to invest in Indian projects. There are numerous other types of barriers associated with project finance. The technical, political, social, environmental and operational barriers are a few to name. Today project finance is successful in terms of cost and barrier in certain sectors i.e. electricity, road construction, communication, and some other public utility sectors of India. In addition to numerous benefits of project finance in emerging markets, the failures of several high-profile projects and financial difficulties led to rethink the risks involved in it. Financing high-profile infrastructure projects not only requires lenders to commit for long maturities, but also makes them particularly exposed to the risk of political interference by the government (Sorge, 92). The cost of project finance remains a major concern for lenders. Economic and political barriers are the major challenge for finance managers and market regulators. Credit analysis evolved and segmentation tools were implemented in order to classify not only borrowers but also the object of the loans in different categories. In this process of evolution, project finance emerged and further tends to form a banking business. Effective cost measurement stands at the heart of the newly emerged forms of financing. Above all, the Indian government is dedicated to improve the nation and her infrastructure they welcome the investment from private sector and foreign financing institutions. “Work Cited” Ahuja, Dushyant. “Financing Solar Projects in India.” Solar Power. Energetica India (2010) May-Jun. 51-52. Akintoye, A. Beck, M. Hardcastle, C. Public Private Partnerships: Managing Risks and Opportunities. London: Blackwell Publishing Company. 2003. 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