Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) Report Number : ICRR0020243 1. Project Data Project ID Project Name P102771 IN: IIFCL - India Infras Finance Co Ltd Country Practice Area(Lead) India Finance & Markets L/C/TF Number(s) Closing Date (Original) Total Project Cost (USD) IBRD-76130,TF-96466 30-Sep-2015 1,196,598,000.00 Bank Approval Date Closing Date (Actual) 22-Sep-2009 30-Sep-2015 IBRD/IDA (USD) Grants (USD) Original Commitment 1,195,000,000.00 1,000,000.00 Revised Commitment 195,000,000.00 980,000.00 Actual 195,000,000.00 1,353,044.38 Sector(s) General finance sector(30%):General energy sector(25%):General transportation sector(25%):Capital markets(20%) Theme(s) Other Financial Sector Development(25%):Infrastructure services for private sector development(50%):Other Private Sector Development(25%) Prepared by Reviewed by ICR Review Coordinator Group Antonio M. Ollero George T. K. Pitman Christopher David Nelson IEGFP (Unit 3) PHPROJECTDATATBL Project ID Project Name P120582 IN: PPIAF: Business Plan for IIFCL ( P120582 ) Country Practice Area(Lead) India Finance & Markets L/C/TF Number(s) Closing Date (Original) Total Project Cost (USD) Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) 398,000.00 Bank Approval Date Closing Date (Actual) 30-Apr-2010 IBRD/IDA (USD) Grants (USD) Original Commitment 0.00 198,000.00 Revised Commitment 0.00 134,447.87 Actual 0.00 134,447.87 Sector(s) General finance sector(100%) Theme(s) Infrastructure services for private sector development(100%) PHPROJECTDATATBL Project ID Project Name P119297 IN: Cap Bldg of IIFCL ( P119297 ) Country Practice Area(Lead) India Finance & Markets L/C/TF Number(s) Closing Date (Original) Total Project Cost (USD) 1,200,000.00 Bank Approval Date Closing Date (Actual) 16-Mar-2010 IBRD/IDA (USD) Grants (USD) Original Commitment 0.00 0.00 Revised Commitment 0.00 0.00 Actual 0.00 0.00 Sector(s) Capital markets(20%):General finance sector(30%):General energy sector(25%):General transportation sector(25%) Theme(s) Infrastructure services for private sector development(50%):Other financial and private sector development(50%) Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) 2. Project Objectives and Components a. Objectives The Project Appraisal Document (PAD, page 8) and the Financial Agreement (FA, page 8) state that the development objective is: "to increase the availability of long-term financing for infrastructure public-private partnership (PPP) projects in India". The project was restructured in 2013 and the development objective was made more specific in the Amendment to the Financial Agreement: "to strengthen the India Infrastructure Finance Company Ltd.’s (IIFCL’s) capacity for infrastructure public-private partnership (PPP) financing through piloting new instruments and implementation approaches". b. Were the project objectives/key associated outcome targets revised during implementation? Yes Did the Board approve the revised objectives/key associated outcome targets? Yes Date of Board Approval 12-Dec-2013 c. Components The original project had two components: 1. Long-Term Finance for Infrastructure Projects (appraisal estimate IBRD US$1.2 billion; actual cost IBRD US$195.0 million). This component would provide long-term funds to the IIFCL for on-lending to infrastructure PPP projects and/or specific contracts. The IIFCL would provide the funding directly to developers during the construction stage of the infrastructure asset being built. The PPP projects to be funded would be selected based on eligibility criteria agreed upon in the project, including the adherence of the projects to the Bank's social and environmental safeguards and fiduciary principles and standards. 2. Capacity Building (appraisal estimate US$5.0 million; actual cost US$ $1.7 million). This component would provide technical assistance to help strengthen the IIFCL’s institutional capacity, in areas including business planning, financial product development, quality assurance, risk management, treasury operations, human resources management, and environmental and social safeguards. It would also support the implementation and monitoring of the project. The technical assistance would be extended to the IIFCL and to its two subsidiaries, the Infrastructure Debt Fund and the IIFCL Projects Limited (IPL). The restructured project had two components: 1. Long-Term Finance for Infrastructure Projects (estimated at US$195.0 million at restructuring; actual cost US$195.0 million). The restructuring cancelled US$1.0 billion from this component. Funds on-lent by the IIFL would continue to be provided, as before the restructuring, to developers during the construction stage; however, the focus of this direct financing would primarily be Category B and Category C sub-projects. The sectors where sub-projects might supported with direct financing included power transmission, solar power, roads, and port terminals. In addition to direct financing, this component would include, as a new instrument, post-construction refinancing, or take-out financing --- the reassignment to the IIFCL of a loan book from a commercial bank or lender to a PPP sub-project. The sectors where sub-projects might be supported with refinancing included roads and port terminals. Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) 2. Capacity Building (estimated at US$5 million at restructuring; actual cost US$ $1.7 million). The restructuring shifted the emphasis of the project to strengthening the IIFCL’s capacity for infrastructure PPP financing, within the context of a piloting and learning approach. As before the restructuring, this component would continue to support capacity building and project implementation, including on safeguards, procurement, and risk management. However, a particular emphasis would hence be placed on new product development and research to help spur innovations in infrastructure finance, including through the use of subordinated debt, the provision of credit enhancements, and the development of secondary markets. d. Comments on Project Cost, Financing, Borrower Contribution, and Dates Project Cost: The Level 1 restructuring reduced the project cost from US$1.2 billion to US$195.0 million. Financing: The lending instrument was a Financial Intermediary Loan (FIL). The original financing was US$1.2 billion. Following the restructuring, the IBRD cancelled US$1.0 billion of the original financing, leaving the IBRD line of credit at US$195.0 million for the first component of the project. The loan to IIFCL was guaranteed by the Republic of India. Grant funds for the second component of the project were provided mainly by the U.K. Department for International Development (DFID), US$1.4 million, under the DFID-WB Strategic Partnership for India III Trust Fund. Additional grants funds were provided by the Institutional Development Fund (IDF), US$0.5 million, the Public Private Infrastructure Advisory Facility (PPIAF), US$0.1 million, and the Subnational Technical Assistance (SNTA), US$0.1 million (ICR, Annex 2, pages 29-30). Borrower Contribution: Any contribution by the IIFCL to the project cost was not reported in the ICR (ICR, Annex 1, page 28). Dates: The Bank proposed a restructuring of the project in 2011, a year and a half after into project implementation. The restructuring was completed four years into project implementation, with the Bank’s Executive Board granting approval in 2013. The original closing date, September 2015, was not extended, as the two-year remaining life of the project after restructuring was deemed sufficient to allow full disbursement of the balance US$159.4 million of the project loan amount (US$195.0 million minus US$35.6 million disbursed before the restructuring). 3. Relevance of Objectives & Design a. Relevance of Objectives The original project development objective is relevant to the current Country Partnership Strategy (CPS), current development priorities, and current country conditions in India. The overarching objective of the CPS for FY 2013-17 is to support poverty reduction and shared prosperity in India. The objective is conditioned on rapid economic growth, with the CPS envisioning GDP growing, in the base case, at an annual real rate of 8.2 percent during the period. The CPS considers infrastructure investment as a vital platform for economic growth (CPS, page 18), as infrastructure needs are massive (the infrastructure gap remains one of the most significant impediments to both economic growth and poverty reduction). In particular, an estimated 300 million people are not connected to the national electric grid and one third of the rural population lacks access to an all-weather road. The financing needed to address the infrastructure gap, however, is inadequate and the shortfall is made even more serious by the fact that the gross domestic saving rate has declined significantly in recent years. Channeling the available domestic savings into infrastructure finance, therefore, becomes even more critical to achieving the targets in infrastructure investment. In this regard, mobilizing financing for PPPs, especially through innovative structures and through government support, is necessary to attract investors to infrastructure projects (CPS, page 28). India’s 12th Five-Year Plan, 2013-17, also considers infrastructure to be a priority for country’s development program. India's infrastructure needs are very large, the investment requirements of which are estimated by the Plan to top US$1 trillion over the period 2013-17. The Plan envisions these investment requirements to be financed roughly by an equal contribution of public and private investments, including through PPPs. The Plan considers PPPs a strategic means to achieve priorities across a broad range of sectors: in energy, to develop electricity exchanges, improve the transmission network, and advance the use of renewable energy sources; in road transport, to develop national highways and rural roads that better link the northeast and the special category states to the rest of the country; and in ports, to upgrade Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) capacity and improve connectivity. The revised project development objective remains relevant to the current Country Partnership Strategy (CPS), current development priorities, and current country conditions in India (reckoned at the Project closing date, 2015). Rating Revised Rating High High b. Relevance of Design The original planned activities and components were consistent with the original project development objective. The original Results Framework was logical. The extension of a US$2.0 billion IBRD financial intermediary loan to the IIFCL for on-lending to infrastructure PPP developers would have provided a significant source of long-term financing for infrastructure PPP projects in India. The Government viewed the IIFCL as the key institution in the country that would catalyze long-term financing for infrastructure PPPs at the national and state levels, essentially by providing the longer tenor financing that was ordinarily not offered by banks and other financial institutions. The long-term funding from the IIFCL would serve to close the gap in debt finance for infrastructure projects in India. Moreover, the IIFCL's participation in financial consortia, organized for the purpose of funding infrastructure PPP projects, would help complement the activity of other private commercial sources, thus "crowding-in" private investment in the sector. The use of financial consortia would also increase the aggregate financing made to PPP projects to multiples of the original IIFCL contribution: the leverage ratio expected of the IBRD lending through the IIFCL was five-to-one, at the minimum (PAD, page 12). In addition, the technical assistance to be extended to the IIFCL in the original project would help strengthen the central role in infrastructure PPP financing envisioned by the Government for the IIFCL. The revised planned activities and components were consistent with the revised project development objective. The revised Results Framework was logical. The subsequent restructuring of the project, some four years into implementation, would change the project development objective and the first component of the project in a substantive way. The cancellation of US$1.0 billion of the project loan (which would be instead be allocated to other infrastructure projects in the India program) would reduce the on-lending program through IIFCL. The causal chain from components and activities to objectives remained logical in the revised project development objective. To strengthen the IIFCL’s capacity for infrastructure PPP financing through piloting new instruments and implementation approaches, the project would retain US$195.0 million in the first component for financing by the IIFCL of PPP-based infrastructure projects and contracts. The revised project development objective, however, reflected a piloting and learning approach on financial, safeguards and fiduciary matters. The revised focus would be on direct financing, which would allow for more ready projects, and on take-out financing, which would involve a re-assignment, post-construction stage, of a loan book from a commercial bank lender to the IIFCL. Take-out financing would allow the PPP project developer access to longer-term funding at a lower cost, reflecting the lower post-construction risk of the PPP project, and would also allow the bank lender more head room against lending limits. More importantly, the restructuring would place enhanced reliance on the IIFCL’s safeguards and fiduciary capacity. Rating Revised Rating Substantial Substantial 4. Achievement of Objectives (Efficacy) PHEFFICACYTBL Objective 1 Objective The degree of achievement of the original objective --- to increase the availability of long-term financing for infrastructure PPP projects in India --- is assessed as Negligible. Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) Rationale Any conclusion that the original objective was achieved because the original project outcomes were exceeded is the artifact of the poor design of the monitoring and evaluation (M&E) of the project. The outcomes, defined in terms of the sector and outside the scope of Bank financing, were indeed successfully exceeded: more PPP projects achieved closure through long-term debt financing from the IIFCL than targeted, and more private capital (long term debt and equity) were made available to infrastructure projects than targeted. Yet, the project faltered: only one PPP project was financed, and only US$35.6 million of the US$1.2 billion loan funds were disbursed four years into the six-year implementation period of the project. Outputs • The number and percentage of eligible infrastructure projects that received Bank funding support through the IIFCL: Only one infrastructure project had received Bank funding support by the project restructuring date (December 2013). This was a major shortfall, compared to the original target of 30 by the project closing date (September 2015). • Value and percentage of the line of credit disbursed through the IIFCL to selected infrastructure projects: Only US$35.6 million had been disbursed through the IIFCL by the project restructuring date. Again, this was a major shortfall, compared to the original target of US$1.2 billion by the project closing date. • The number of training and capacity building events held in the areas of treasury, credit origination and review, risk management, information technology, human resource management, environment and social safeguards compliance and audit, asset and liability management, legal, accounting, and procurement and procurement supervision: The ICR did not report on this output. • The number of IIFCL staff who participated in training and capacity building events: The ICR did not report on this output. • Establishment of new procedures policies and frameworks for quality assurance (ISO 9000), human resource management, and procurement compliance: The ICR did not report on this output • Adoption by the IIFCL Board of an enhanced Environmental and Social Safeguards Framework (ESSF) and improving IIFCL’s capacity to manage safeguards: An ESSF had not been adopted, and a functioning Environmental and Social Management Unit (ESMU) had not been set up by the project restructuring date. • Number of new products developed and introduced: The ICR did not report on this output. Outcomes • Increase in the number of PPPs achieving closure through long-term debt financing from the IIFCL over the life of the project: 233 PPPs in India had achieved financial closure through partial long-term debt financing from IIFCL by the project restructuring date. The target was 150 PPPs by the project closing date. This was an outstanding achievement by IIFCL, but could not be attributable to the project. • Increase in the amount of private capital, including long-term debt and equity, available for infrastructure projects over the life of the project: US$85.7 billion in private capital had been made available to infrastructure projects in India by the project restructuring date. The target was US$52.0 billion by the Project closing date. Again, this was an outstanding achievement by India, but could not be attributable to the project either. Rating Negligible Revised Objective The degree of achievement of the revised objective --- to strengthen IIFCL’s capacity for infrastructure PPP financing through piloting new instruments and implementation approaches is assessed as Modest. Revised Rationale The project exceeded its revised outcomes for PPP project size and for take-out financing. However, the restructured project was essentially an institutional capacity building undertaking, albeit in infrastructure PPP financing. In this regard, the revised project merits only a Modest rating for efficacy because the outcomes fell short of the target "strong" assessment for safeguards management capacity and for fiduciary management capacity. Institutional capacity deficiencies in both areas had severely constrained implementation of the original project. Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) Outputs • Number of infrastructure projects that received Bank funding support through IIFCL: Nine infrastructure projects received Bank funding support by the project closing date, equal to the target. • Percentage of the loan disbursed through the IIFCL to selected infrastructure subprojects: A hundred percent of the project loan amount, or US$195 million, was disbursed. • Percentage of projects under take-out (financing) that benefit from at least 50 basis points cost efficiency: All sub-projects under take-out financing had benefitted from at least 50 basis points cost efficiency, a 100 percent outcome, versus a target of 60 percent. • Increase in the amount of private capital available for infrastructure projects: US$99.42 billion in private capital were made available to infrastructure projects in India by the project closing date, in excess of the target of US$85.0 billion. • Size of the IIFCL’s safeguards team (regular staff): The IIFCL safeguards team had a staff of four by the project closing date, one short of the target of five. • Number of IIFCL person-days participated in training and capacity-building events: 166 person-days were expended on training and capacity building activities, a little under the target of 200 person-days. • Development and implementation of an integrated planning (IPL) business plan: The business plan was approved by the IIFCL Board of Directors in July 2015. The plan was under implementation by the project closing date. • Implementation of an Integrated Risk Management System (IRMS): The system was approved in August 2015. The full implementation of the system is likely to be completed in fiscal year 2016. • Implementation of a human resource strategy and policy manual: The strategy was implemented in August 2015, before the project closing date. • Safeguards approach to take-out financing adopted and implemented by IIFCL: A safeguards diligence exercise was completed, on a prior-review basis, for a road take-out financing project, and another, on a post-review basis, for a port project. The output was short of target, as the plan was to complete two safeguards diligence exercises, both on a post review basis. • Procurement approach adopted and implemented by IIFCL: The procurement plan was adopted before the project closing date. Outcomes • Total size of projects (project costs) supported by the IIFCL under the Project: PPP projects worth US$1.6 billion were supported by IIFCL under the project by the time the last loan funds were disbursed in June 2015. The target was to support PPP projects worth US$650 million. • Cumulative amount of take-out financing provided by the IIFCL: The IIFCL provided takeout financing in the amount of US$1.7 billion. The target for take-out financing was US$1.7 billion. • The IIFCL’s safeguards management capacity is enhanced: The IIFCL’s safeguards management capacity was judged "moderately satisfactory". The target was for a "strong" safeguards management capacity. • The IIFCL’s fiduciary management capacity is enhanced: The IIFCL’s fiduciary management capacity was considered "sufficient" but only for Category B and Category C project requirements. The target was for a "strong" fiduciary management capacity. Revised Rating Modest 5. Efficiency Neither the PAD, nor the restructuring document, nor the ICR presented a formal assessment of the economic return or the financial return of the original project, at appraisal or at restructuring.The ICR stated that data were not available that would allow any formal efficiency evaluation of the project. The ICR also claimed that a formal efficiency assessment would, in any case, be quite complex for a financial intermediary loan and a capacity building operation that consisted of widely diverse infrastructure and technical assistance projects. The ICR assessed the pre-restructuring efficiency rating of the original project as Negligible. No formal evidence was offered for this rating other than the statement that benefits were low and costs, including for management and implementation support, were high, thus earning the Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) pre-structuring project a Negligible efficiency rating that was "self-evident". Post-restructuring, the ICR attempted to present economic rates of return, but for a limited set of PPP projects rather than for the complete revised project, and as estimated by the implementing agency, the IIFCL, rather than as formally determined by the Bank. For two "clearly successful" (out of a total nine) PPP projects financed by the operation, the IIFCL estimated that the financial rates of return of the PPP projects ranged from 17 to 24 percent. Based on these, the ICR estimated the corresponding economic rates of return as ranging from 25 to 30 percent. The ICR reasoned that, one, that the two projects complied with Bank safeguards standards (which would have reduced economic costs, under a formal cost-benefit analysis) and, that two, the project developers paid the two percent tax on corporate profits in fulfillment of their Corporate Social Responsibility (CSR) obligation (which would have raised economic benefits). The ICR judged the capacity building operation to have been financially efficient, in the sense that the IIFCL had successfully lowered its cost of fund as a result of the operation. Thanks to the Procurement Department and to the Environment and Social Management Unit (EMSU), both of which had been established and organized under the project, the IIFCL gained access to more low-cost funds from other multilateral and bilateral financial institutions. The ICR argued that IIFC’s annual savings from lower interest costs (10 basis points on long term credit lines of US$2.3 billion, or $2.3 million annually) exceeded the one-time cost of US$2.0 million expanded for capacity building. Efficiency Rating Modest a. If available, enter the Economic Rate of Return (ERR) and/or Financial Rate of Return (FRR) at appraisal and the re-estimated value at evaluation: Rate Available? Point value (%) *Coverage/Scope (%) 0 Appraisal 0 Not Applicable 20.00 ICR Estimate  25.00 Not Applicable * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome The outcome for the original project is rated Highly Unsatisfactory. The original objective --- to increase long-term financing for infrastructure PPP projects in India --- is highly relevant to the infrastructure needs and the growth objectives of India, as expressed in the country's Five Year Plan, 2013-17, and in the Bank's CPS for India, 2013-17. The original project design is substantially relevant to the project development objective. Implementation of the original project stalled, however, as PPP projects in IIFCL's pipeline failed to meet Bank environmental and social safeguards requirements, making the projects ineligible for Bank financing. The efficacy of the original project is rated Negligible, with only one PPP project financed and only US$35.6 million of the loan funds disbursed before the restructuring, or four years into the six-year life of the project. The efficiency of the original project is also rated Negligible. Because there were severe shortcomings in the achievement of its objective and in its efficiency (i.e., it is rated Negligible on two criteria, efficacy and efficiency, and High/Substantial on the third, relevance), the original project is rated Highly Unsatisfactory. The outcome for the restructured project is rated Moderately Unsatisfactory. The revised objective --- to strengthen IIFCL's capacity for infrastructure PPP financing through piloting new instruments and implementation approaches --- remained highly relevant to the country's Five Year Plan and the Bank's CPS. The revised project design was substantially relevant to the revised project development objective. The revised project was completed. The efficacy of the revised roject is rated Modest. The efficiency of the revised Project is rated Modest. Because there were significant shortcomings in its achievement of its objectives and in its efficiency (i.e., it is rated Modest on two criteria, efficacy and efficiency, and High/Substantial on the third, relevance), the restructured project is rated Moderately Unsatisfactory. Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) The overall outcome rating for the project is Moderately Unsatisfactory. This rating was determined as the weighted average of the outcome rating for the original Project (18 percent weight, based on disbursements, before restructuring, of US$35.6 million out of the total Project loan amount of US$195.0 million) and that for the restructured Project (82 percent weight, on disbursements of US$159.4 million, after restructuring). a. Outcome Rating Moderately Unsatisfactory 7. Rationale for Risk to Development Outcome Rating There are strong reasons to believe that the project’s development objective --- the strengthening of IIFCL’s capacity for infrastructure PPP financing through piloting new instruments and implementation approaches --- will be carried through and maintained beyond the life of the project. One, the IIFCL is well on its way to establishing itself as a credible institution (ICR, pages 21-22), The IIFCL has built a rapidly growing and profitable portfolio of PPP investments. The institution's financial position is stronger than before the project: total assets have increased at an average annual rate of more than 16 percent; equity has more than quadrupled; provisions, as a percentage of assets have tripled; and profitability has jumped appreciably. The Government is strongly committed to the centrality of IIFCL’s role in infrastructure PPP finance --- as the catalyst for the long-term financing of infrastructure projects. The amount of institutional capacity that has been built up is supportive of this role. Two, take-out financing, introduced as a new instrument under the project, has become widely accepted in Indian infrastructure finance (ICR, page 22). The IIFCL may provide more financial support to the sector using this instrument. The IIFCL has innovated with interest rate rebates to motivate compliance with environmental and socials safeguards requirements. And three, there continues to be a strong demand for infrastructure finance and infrastructure PPPs in India. Financial closings in the Indian project finance market were US$55 billion in 2010, or 26 percent of the world project finance market, and topped US$11 billion in 2014. Nonetheless, there remain significant risks that may well weaken IIFCL’s capacity for infrastructure PPP financing going forward. First, because the IIFCL works with financial consortia, the ability of the IIFCL to provide infrastructure financing depends on the ability of India’s financial institutions to constitute themselves into, and to act as members of, capable financial consortia. This, in turn, depends on not only the overall state of the economy but, more specifically, on the health of the country’s banking and financial sector. This may well constitute a significant risk (the likelihood, moderate, but the impact, high) to the development outcome, considering the well-known structural weaknesses in India’s banking system (ICR, page 22). And second, despite some convergence, differences remain --- between the Bank and the Government, and between the Government and IIFCL --- on safeguards standards. Even if the Bank were not to provide lending in the future for the IIFCL’s infrastructure financing program, the non-adherence to Bank safeguards standards may well engender questions about the environmental and social integrity of the IIFCL’s infrastructure financing operations (ICR, page 22). The Bank safeguards standards are well recognized as international standards, and the inability of IIFCL to adopt them in line with the Government's requirements for future operations will imperil the sustainability of the development outcome (the likelihood, significant, and the impact, also significant). a. Risk to Development Outcome Rating Substantial 8. Assessment of Bank Performance a. Quality-at-Entry The original project represented a well-intentioned effort by the Bank to support India with a significant financial assistance for its infrastructure PPP projects. However, the project suffered from serious flaws at entry. The Bank acceded to the request of the Government, submitted late during project preparation, to double the project loan amount from US$600.0 million to US$1.2 billion. The decision would turn the project into an oversized financial intermediary loan operation, to be implemented by a relatively new institution, in the complex business of infrastructure PPPs. The ICR suggests that the Bank and the Government were probably motivated by the need to support India with a substantial external resource inflow at the time of the Global Financial Crisis of 2008-09 (ICR, page 23). If this were indeed the case, it would have been more appropriate to provide India with some form of fast-disbursing assistance rather with a complex PPP finance operation. Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) The Bank overestimated the size of the pipeline of PPP projects that could be financed under the project. The Bank examined the global pipeline of PPP project in India, and, using a variety of analytic and forecasting approaches, determined that the pipeline had a large aggregate debt requirement in the range of US$40-70 billion over the five-year period 2007-12. Imputing a conservative share for the IIFCL, the Bank readily concluded that the pipeline was robust enough to absorb the US$1.2 billion line of credit proposed for the project. The Bank reported conducting a rapid environmental and social risk assessment of a sample of projects in the pipeline and finding significant risks in many projects (PAD, page 29). To its credit, the Bank correctly warned that the PPP projects would have to adhere to environmental and social eligibility standards to qualify for Bank financing (PAD, page 64). However, the Bank fell short of reducing the size of the pipeline to only that feasible set of PPP projects that met Bank safeguards standards. The Bank underestimated the extent to which environmental and social safeguards policies and practices differed between the Bank and the Government, between the Government and the the IIFCL, and between the IIFCL and PPP project developers. The Bank also underestimated the extent to which these gaps in standards could be readily resolved and addressed with the risk mitigation measures defined under the original project. Certain features of PPP financing --- more critically, the fractional share that the IIFCL undertook of a PPP project financing and the "last mile financier" role that the IIFCL assumed in the project financing cycle --- rendered the IIFCL's intervention on safeguards as well as fiduciary matters ineffectual, as any end-cycle action represented a retrofitting of Bank requirements onto a PPP project that had already been procured (see Section 11a and 11b). Moreover, the Bank neglected to consider how much access it had, or the IIFCL had, to information on the safeguards and procurement practices of PPP project developers, and how much leverage it could exert, or the IIFCL could exert, on PPP project developers to meet Bank safeguards and fiduciary policies. Quality-at-Entry Rating Unsatisfactory b. Quality of supervision The Bank exerted its "best effort" to make the project work, but was bogged down on restructuring issues. The Bank implementation support staff rightly issued early warning signals. During the first year of the project, the supervision reports, except possibly the first, provided candid assessments of problems besetting the project. The second supervision report (issued within the first year of the project) downgraded the implementation progress to Moderately Unsatisfactory and pointed to safeguards and procurement issues as slowing the loan uptake. The Bank staff was proactive in seeking a solution to the problems. By the third supervision report (less than one and a half years into implementation), the Bank staff had presented a major two-step restructuring proposal that included a significant downsizing of the project. The restructuring, however, took much longer to complete than expected (two and a half years rather than six months). The Government's and the IIFCL's responsibility for the delay is well documented (see Section 9a and 9b). But, the Bank also struggled with difficult restructuring issues. The issue raised by the IIFCL on the front-end fee was practically without precedent in the Bank and had potential implications for other Bank borrowers. Discussions within the Bank on this issue was extensive and involved many parties. In addition, preparation of the restructuring documents for the Bank’s Executive Board took six months to complete. Quality of Supervision Rating Moderately Satisfactory Overall Bank Performance Rating Unsatisfactory 9. Assessment of Borrower Performance a. Government Performance The Government was correct to direct the project toward its objectives. It placed rightful emphasis on the development of infrastructure financing in the country as the broader goal, and, therefore, on the institutional strengthening of the IIFCL as a driver of that development. The emphasis on the institutional development of the IIFCL was particularly crucial in the restructured project. Nonetheless, the Government bears some responsibility for a material flaw in the design of the original project --- its size. The government requested a doubling of the original loan, already oversized for the complex business of infrastructure PPPs, late in the project preparation stage. Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) The Government, more importantly, exerted considerable effort to move the implementation of the project forward. It highlighted problems with the project at an early stage and persisted, along with the Bank, to find solutions to vexing project implementation issues. In this regard, discussions in the Tripartite Policy Meetings were always of high quality and counterpart funds were never lacking. Nevertheless, the Government also bears some responsibility for snags in the effort to restructure the project. The Department of Economic Affairs (DEA) rejected the proposal, first made by the Bank in June 2011, to restructure the project early on. Negotiations with the Bank on the terms of the restructuring took another two years. Government Performance Rating Moderately Satisfactory b. Implementing Agency Performance As the Borrower and the Implementing Agency, the IIFCL bears responsibility for the difficulties in project implementation. The IIFCL was a relatively novice institution at the onset, taking on the heavy task of driving the development of infrastructure PPP financing in India. It was a new entity with a short operating history, having been established only in 2006, a year before the approval of the Project Concept Note and three years before the approval of the project. The founding Chairman and Managing Director retired in early 2010, necessitating a change in management six months after the effectiveness of the project. The organization suffered from institutional resource shortages, principally in terms of the skills of the staff, and even in their number. And, the IIFCL also faced a steep learning curve in working with the Bank and a diverse set of international institutions (including, on recipient-executed trust funds), and even with private sector PPP project developers. The IIFCL faced considerable challenges complying with loan covenants. Meeting the terms of the legal agreement on the ESSF proved especially difficult. An enhanced framework was due nine months after loan signing, but was only delivered a few months before project closing. Even then, there remained residual issues pertaining to public disclosures. The IIFCL failed to adequately address multiple safeguard issues which arose during project implementation. In fact, some remained outstanding at project closing. Action plans, especially safeguards capacity building plans, were generally poorly implemented. Supervision reports on sub-projects were missing. And there were shortfalls with disclosure requirements. Generally, the IIFCL could have pushed PPP project developers harder to resolve safeguard problems. The IIFCL raised, during the restructuring of the project, the issue of a refund on the front-end fee already paid on the full amount of the original project loan (i.e. the front-end fee paid on the cancelled portion of the loan would have to be refunded). Internal discussions within the Bank on this issue, coupled with negotiations with the Government, would snag the early restructuring of the project. Implementing Agency Performance Rating Moderately Unsatisfactory Overall Borrower Performance Rating Moderately Unsatisfactory 10. M&E Design, Implementation, & Utilization a. M&E Design The choice of outcome indicators under the original M&E plan for the project was flawed: the indicators were not directly relatable to the project. The first outcome indicator was the number of PPPs achieving closure through long-term debt financing from the IIFCL; the second, the amount of private capital, including long-term debt and equity, made available to infrastructure projects. While both indicators were ostensibly measures of the overall success of PPP financing in India, neither could be attributed directly to the project. The second could not even be attributed directly to IIFCL. The outcomes fell obviously outside the purview of the Bank-financed operation and any conceptual link to the project was weak and difficult to judge, according to the ICR (ICR, pages 14 and 16). Moreover, this poor choice of outcome indicators Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) could lead to a perverse conclusion on the true outcome of the project: the project could fail to support any infrastructure PPP project or to disburse any IBRD loan amount, and yet the project development objective could be deemed to have been successfully achieved if the number of PPP projects in the country and the amount of PPP private capital financing in the economy met targets. The redefinition of outcome indicators under the revised M&E plan for the restructured project represented an significant improvement over the poor specification of the original outcome indicators. The attribution of outcomes to the project and to the IIFCL was clear and direct. The first outcome indicator was the total size of the PPP projects supported by the IIFCL under the project. The second outcome was the cumulative amount of take-out financing provided by the IIFCL. In both cases, the outcome indicators measured the leveraged effects of the project and reflected the intended catalytic role of the IIFCL in financing infrastructure PPP projects. In addition, new outcome indicators were introduced to measure the enhancement in the IIFCL's institutional capacity relative to safeguards management and to fiduciary management, two of the bottlenecks to the implementation of the original project. The only shortcoming in the use of these indicators was the rather inexplicitly-defined basis for the assignment of ratings. b. M&E Implementation The M&E was implemented generally according to plan, although with some reporting deficiencies related to the capacity building component of the project. The IIFCL tracked changes in output and outcome indicators defined in the results framework, prepared internal monthly and quarterly reports, and submitted semi-annual reports to the Bank. Data collection for project monitoring was integrated into the IIFCL's administration system. Six supervision reports were prepared during the implementation of the original project. Another five supervision reports were prepared after the restructuring and during the implementation of the revised project. The pre-restructuring supervision timed the Development Outcome (DO) and the Implementation Progress (IP) rating downgrades correctly. The findings would help move the restructuring initiative forward. Nonetheless, the ICR notes two deficiencies with the supervision reports. One, the re-restructuring supervision reports were not able to track and report on four of the seven original output indicators for capacity building. Two, the supervision reports were not able to track disbursements on two of the four trust funds used to finance capacity building. The mid-term review of the project was slightly behind schedule (three years and eight months into a six-year project). Nonetheless, it played an important role in the strategic restructuring of the project, as the restructuring was undertaken under the auspices of the mid-term review. The third activity in the M&E plan, an impact evaluation of the project at completion, is yet to be implemented. The purpose of this evaluation will be to determine the project's contribution toward spurring long-term private investment in infrastructure in India. c. M&E Utilization The M&E findings were instrumental in the strategic restructuring of the project. Both the findings of the supervision reports and the mid-term review helped shape the elements and terms of the restructuring of the project. M&E Quality Rating Modest 11. Other Issues a. Safeguards The implementation of the project stalled largely due to the inability of candidate PPP projects in IIFCL's pipeline to hurdle Bank Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) environmental and social safeguard standards and thus be eligible for Bank financing under the project. Environmental and social safeguard issues appear to have been mentioned adequately at appraisal. The project was classified as a Category FI under OP/BP 4.01 (Environmental Assessment) and triggered two other environmental and social safeguard policies, OP/BP 4.12 (Involuntary Resettlement) and OP/BP 4.10 (Indigenous Peoples). The applicability of other environmental safeguard policies would be determined at the sub-project level. To address the issues, the Bank stated that the project would have adequate safeguards in place, including broad advertisement to attract international and national competitors and a thorough review by the Bank of all documents related to the selection of the PPP concessionaires. The implementation of the PPP operations would be closely supervised and monitored by the Bank. The procedure to qualify potential concessionaires under each sub-project proposed for Bank financing would be reviewed by the Bank to ensure full transparency of the process. If the process, including how the list of prequalified bidders was derived, was not satisfactory to the Bank, the Bank would reserve the right not to finance the sub-projects and would use its remedial measures as appropriate. Mitigation measures at appraisal were anchored on time-bound plans for: an Environmental and Social Safeguards Management Unit (EMU), to be established within six months from the signing of the loan agreement; an Environmental and Social Safeguards Framework (ESSF), consistent with Bank policies, to be adopted and disclosed within nine months; and, a Management Information Tracking System (MIS), to be established within 12 months (PAD, page 29). The IIFCL staff were to be trained to mainstream the ESSF into the organization's credit review and post-sanction monitoring processes. And stakeholders were to be made aware of, and trained in, the environmental and social aspects of PPP projects. Safeguards standards were more difficult to enforce and mitigation measures more difficult to apply, however, during project implementation, owing in large part to the nature of the IIFCL's role in the PPP project financing itself, particularly for environmental Category A projects. PPP projects proposed for financing were already procured, obviating any role for the IIFCL in other than the end of the project cycle. The IIFCL was not a lead financier in these Category A projects, but a minor financing partner that provided funding for only a fraction of the overall project cost. Thus, its leverage on PPP project developers was limited. The IIFCL also functioned as the "last mile financier" in the large consortia of financiers for these Category A projects; it acted as the last entrant in the financing cycle. Thus, its access to PPP project information and documentation was scarce and its intervention in project activities was belated. It did not help any that the IIFCL repeatedly delayed the disclosure of its ESSF, a loan covenant. The restructuring forwarded a sharper delineation of the implementation arrangements for safeguards (restructuring document, pages 17- 21). The ESSF was to be updated. Bank prior review of safeguards were to continue for any Category A projects. The environment and social due diligence (ESSD) would be a key focus for Category B and Category C direct financing projects and would be delegated to the IIFCL, in consideration of the substantive capacity enhance undertaken over the years for its EMSU. Take-out financing would not lead to any direct safeguards impacts, although residual risks could not be ruled out. In which case, the Bank and IIFCL would report on compliance, during the construction stage, with applicable national laws. More significantly, the revised project introduced a financial incentive for PPP project developers to comply with Bank safeguards standards --- the IIFCL provided an interest rate rebate, initially of 25 basis points, and subsequently of 50 basis points, to PPP project developers that met the Bank standards. Implementation of the safeguards standards continued to bedevil the project, however, even after the restructuring. The ICR reports that: only two of the nine PPP projects financed under the operation had met environmental and social safeguards requirements; the loan covenant on the ESSF would be met only very late in the project's lifetime (in July 2015) and, even then, compliance would not be as envisaged in the restructuring document; the interest rate rebate incentive found limited success; and, the overall safeguard rating was Unsatisfactory, dragging down the overall rating of the project (ICR, page 20). b. Fiduciary Compliance Issues with compliance with Bank procurement standards were resolved with the resort to risk-based procurement. Procurement issues were adequately covered at the appraisal. Standard Bank procurement policies were to be followed. The risk matrix noted that relevant procurement information might not be readily available during project implementation. Suspension of disbursements would be a risk mitigation measure. Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) Compliance with procurement standards arose as an issue early during project implementation. As in the case of safeguards, issues of compliance stemmed from the IIFCL's role as a financial consortium member and as a "last mile financier" in PPP project finance. As a minor member in a financial consortium, the IIFCL had little leverage to force Bank procurement requirements on PPP project developers when other members in the consortium, including the lead bank, often had little interest in the Bank standards themselves. As a "last mile financier", the IIFCL entered the project financing cycle well after concessions had been awarded, making it impossible for the Bank to evaluate the procurement processes employed. Contracts between a PPP project developer and the developer's subcontractors and suppliers were agreements between private parties and were proprietary information, giving the Bank little formal right to access the contract information. Moreover, and despite efforts by the Bank and the Government to gain access to procurement information, differences between Bank's and Government's procurement practices complicated the imposition of procurement standards on PPP project developers. The problem was addressed shortly before restructuring by an innovative solution --- making the IIFCL a pilot for a prospective new Bank policy on risk-based procurement in financial intermediary loan operations. The ICR reports that the Bank was comfortable with IIFCL's due diligence on procurement in view of IIFCL's strengthened institutional capacity, a confidence that was not misplaced following a favorable procurement review of several IIFCL PPP projects. Only one procurement issue arose following the revision of the procurement implementation arrangements in May 2013 and the restructuring of the project in November 2014. A possible irregularity in the procurement process for a take-out financing project triggered a downgrade of the procurement rating to Moderately Unsatisfactory. A determination by the Bank that the procurement result would have been the same if strict procurement processes had been followed restored the procurement rating to Satisfactory by the project closing date. c. Unintended impacts (Positive or Negative) No unintended impacts are cited by the ICR. d. Other No other issues are raised by the ICR. 12. Ratings Reason for Ratings ICR IEG Disagreements/Comment Outcome Moderately Unsatisfactory Moderately Unsatisfactory --- Risk to Development Outcome Substantial Substantial --- Bank Performance Unsatisfactory Unsatisfactory --- Borrower Performance Moderately Unsatisfactory Moderately Unsatisfactory --- Quality of ICR Modest --- Note When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate. 13. Lessons The first three lessons are drawn from the ICR (ICR, page 26), with some adaptation, and the last two, from IEG. One, the preparation of an infrastructure finance project requires both a conservative approach to project sizing and intensive effort on pipeline Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) assessment. It is particularly difficult, at the appraisal, to determine the quality of the infrastructure projects to be financed because detailed projects assessments are not readily available, including on safeguards and procurement issues. This calls for a conservative approach to project sizing. It also suggests that detailed pipeline analysis is needed. Testing the Bank's safeguards and fiduciary standards on a representative sample of projects is necessary. Two, in implementing an infrastructure finance project, the strategy should be: to start small, to build in incentives, and to innovate on implementation arrangements. Small low-risk projects allow an implementing agency to gain experience. Financial incentives help motivate project developers to consider Bank safeguards requirements and fiduciary standards. And new creative implementation approaches enable all parties to address bottlenecks. Three, investing upfront on capacity building is critical. Generous amounts of technical assistance, and of Bank staff time, are needed at the onset in support of institutional capacity development at the implementing agency, particularly for compliance with Bank requirements and for risk assessment and management. Four, some PPP financing schemes make the implementation of Bank safeguards and fiduciary standards inordinately difficult. A financial intermediary that takes a minor financial stake in a project exerts little leverage on the project developer. A financial intermediary that assumes a "last mile financier" function takes on a project for which procurement contracts have been bid and awarded. A "lead bank" role for the financial intermediary may obviate some of these difficulties, but offers little guarantee that other members of the financial consortium will necessarily conform to the lead bank's internal policies. And five, the persistence of differences between the Bank and borrower governments on safeguards and fiduciary policies, laws, regulations, standards and practices constitute a serious stumbling block to the design and implementation particularly of financial intermediary loan operations. Some convergence may have been achieved over time, but residual risks remain. 14. Assessment Recommended? No 15. Comments on Quality of ICR The ICR is comprehensive in its coverage of most aspects of project evaluation, rigorous in its analysis of the factors affecting project implementation and spurring project restructuring, and conservative in its assessment of project performance. The ratings are based on analysis and evidence. The evidence are more than the collection of output and outcome indicators specified in the PAD and the restructuring document. In fact, the ICR is quick to point out that the original outcome indicators --- the increase in the number of PPP projects achieving financial closure through partial long term debt financing from the IIFCL and the increase in the amount of private capital available for infrastructure projects --- were measures of sector rather project performance. This more nuanced information is used in judging the efficacy of the original project. However, there are some slippages on certain topics: One, the discussion of the relevance of the design of the project (ICR, page 14) has more to do with the quality at entry of the project than with the design of the project. That the Bank overestimated the project pipeline, underestimated the difficulties of working in a complex business area, misjudged its leverage (over the private sector participants), and misread the effectiveness of planned mitigation measures reflects the quality of entry of the project rather than the causal logic of inputs, outputs and outcomes in project design. Therefore, the ICR rating for this item pertains to Bank Performance rather than to Project Design. Consequently, the IEG re-analyzes the evidence for the Relevance of Design (Section 3.B) and assigns a suitable rating. Two, innovations undertaken in the restructured project are not emphasized enough in the main text of the report (ICR, page 17). Discussions on take-out financing (introduced as a new instrument), interest rate rebates (used to motivate compliance with Bank safeguards requirements), low-risk projects (to ease safeguards issues), and post-reviews (to place greater reliance on the IIFCL's safeguards and Independent Evaluation Group (IEG) Implementation Completion Report (ICR) Review IN: IIFCL - India Infras Finance Co Ltd (P102771) fiduciary capacity) are relegated to an annex in the report. The salient points of the innovations --- important because innovations were to be the focus of the restructured project --- could have been highlighted in the main text. Three, there are discrepancies with certain figures used in the report. On the third revised output indicator --- the percentage of projects under take-out financing that benefit from cost efficiency: the ICR notes that there are discrepancies between Attachment I of the Amendment to the Financial Agreement, which says the target cost efficiency is 25 basis points (ICR, page 9), and Attachment II, which says 75 basis points (ICR, page 9). Yet, the ICR Project Data Sheet uses 50 basis points (ICR, page v). On the financing of the capacity building component of the project: different parts of the ICR list different co-financiers and cite different financing amounts. The Project Data Sheet lists the Japan Policy and Human Resources Development Fund (PHRD) as a co-financier (ICR, page i), but the ICR Annex 1 does not (ICR, page 28). The ICR Annex 1 lists the Subnational Technical Assistance (SNTA) as a co-financier (ICR, page 28), but the Project Data Sheet does not (ICR, page i). a. Quality of ICR Rating Modest