S.B. Nayar

“Amidst constrained bank financing capacity, institutions like IIFCL have a greater role to play”

India Infrastructure Finance Company Limited (IIFCL) has been assuming a greater role and gaining importance in the infrastructure financing space over the past few years. Under the leadership of

S.B. Nayar, several sweeping changes in IIFCL’s scope of work have taken place. Successful interactions with the government have led to amendments in the policies governing IIFCL, thereby putting the company on a growth path. At a recent India Infrastructure conference, Nayar shared his views on the infrastructure financing scenario in the country with respect to public-private partnership (PPP) projects, recommendations of the Kelkar Committee to revitalise the PPP model, challenges before the sector and the road ahead…

As per the government’s estimate, India needs to spend $1 trillion on the infrastructure sector. Of this, 70 per cent needs to come from the private sector and the rest from overseas markets, due to the government’s limited finances. With the constrained financing capacity of banks, institutions like IIFCL have a greater role to play. Since foreign players will not take project risks, capital must come through domestic sources, by selling operational projects and recycling the capital. To ensure this, we must have a strong PPP regime. Also, by and large, people are willing to pay for service delivery. This is likely to make the PPP model far less risky in terms of revenue streams, than it was about 20 years ago.

Today, banks are grappling with issues such as drying up of capital, reaching sectoral caps, facing human resource constraints in terms of appraisal capabilities and an asset-liability mismatch. The Basel III norms, proposed to come into force by 2018-19, will prevent banks from taking exposure in projects during the concession phase and will also slow down the current level of bank funding. Unfortunately, we have not developed any alternative means of financing and development finance institutions (DFIs) have been converted into banks. This is where IIFCL’s role assumes importance. The company needs to scale up its sanctions, which stand far below those of its global counterparts. This calls for a change in the structure, as more equity is required from the government and other institutions. In order to utilise equity effectively, appropriate tweaks in the charter are required that will aid effective decision- making, so that IIFCL restricts itself to its core competency and core purpose. Further, since the Reserve Bank of India (RBI) is going to reduce sectoral caps for all companies including IIFCL, we cannot take more than 35 per cent of our exposure limit in any particular sector. Hence, we need more sector-specific institutions like the Power Finance Corporation and Rural Electrification Corporation.

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Considering the scale of infrastructure investment required, India definitely needs DFIs or DFI-like institutions. Countries like China, Korea, Germany and Brazil have DFIs. Since RBI has objections to IIFCL converting into a DFI, the company must be allowed to operate in a manner similar to DFIs so as to get funding from whatever sources that are available – overseas funding, the bond market as well as insurance and pension funds. As far as financial

closure is concerned, at present it takes about a year to tie up funds for a large project, due to which the cost goes up. Therefore, RBI must authorise three or four institutions to conduct appraisals. Thereafter, other lenders may be invited to participate in the consortium.

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With respect to PPPs, the model took off in a big way in the country and we currently have the largest number of operational PPP projects. However, three to four years ago, some issues started developing such as the lack of clarity in understanding the model, overaggressive bidding and lack of preparedness on the part of concessioning authorities. Also, the government, particularly state governments, treated PPP projects as off-balance-sheet items. Therefore, to reduce viability gap funding, they bid out projects in PPP mode, with disastrous results. To make matters worse, state governments did not follow contractual obligations, ignored the service provision aspect of the PPP model and did not treat the private player as a partner, making it difficult for the former to deal with the state agency. This was compounded by the fact that the lending appraisal quality of banks also deteriorated. All this led to waning investor interest and the failure of the PPP model. The Kelkar Committee was therefore constituted to address the aforementioned problems.

With respect to the recommendations of the committee, one of the major things which I championed when I was a  member was the renegotiation clause. My suggestion was to make renegotiation a part of the bidding itself, and understand what are the triggers for renegotiation and how it should take place. I think a bill is now being introduced regarding this. As far as other recommendations of the committee are concerned, some will come through executive action, and others through legislative action.

Recently, IIFCL introduced the partial credit guarantee enhancement scheme for the first time in the country, whereby the company provides partial credit guarantees to enhance the credit rating of bonds issued by infrastructure companies (to AA or higher) for the refinancing of existing loans. This, in turn, makes it possible for funds from insurance and pension players to flow in. The scheme is still at a nascent stage. But even then there is lot of hesitation on the part of pension and insurance authorities in the country to park their funds in infrastructure projects, unlike in the West where these players have developed individual appraisal capabilities and are very active players in infrastructure. Also, our government does not allow insurance and pension players to actively participate in funding infrastructure projects. The Life Insurance Corporation of India (LIC), for instance, is mandated to invest 15 per cent of the new premium in infrastructure. However, there is a counter rule by the Insurance Regulatory and Development Authority stating that the LIC cannot lend more than 25 per cent of the net owned funds to any project. Issues like this thus call for regulatory solutions.

Sector-wise performance reveals that the road sector has been showing maximum improvement, particularly since the past year. The National Highways Authority of India has been a champion of the PPP model and has brought out a new model – the hybrid annuity model – which should be quite successful. This is followed by ports and railways. In fact, IIFCL is undertaking the first railway section privatisation project, which it is expected to start soon.

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